A.
Definition and concept of taxation
G.R. No. 119286 October 13, 2004
PASEO REALTY & DEVELOPMENT CORPORATION, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and
COMMISSIONER OF INTERNAL REVENUE,respondents.
DECISION
TINGA, J.:
The changes in the reportorial requirements and payment schedules of
corporate income taxes from annual to quarterly have created problems,
especially on the matter of tax refunds.1 In this case, the Court is called to
resolve the question of whether alleged excess taxes paid by a corporation
during a taxable year should be refunded or credited against its tax
liabilities for the succeeding year.
Paseo Realty and Development Corporation, a domestic corporation
engaged in the lease of two (2) parcels of land at Paseo de Roxas in
Makati City, seeks a review of the Decision2 of the Court of Appeals
dismissing its petition for review of the resolution3 of the Court of Tax
Appeals (CTA) which, in turn, denied its claim for refund.
The factual antecedents4 are as follows:
On April 16, 1990, petitioner filed its Income Tax Return for the
calendar year 1989 declaring a gross income of ₱1,855,000.00,
deductions of ₱1,775,991.00, net income of ₱79,009.00, an
income tax due thereon in the amount of ₱27,653.00, prior year’s
excess credit of ₱146,026.00, and creditable taxes withheld in
1989 of ₱54,104.00 or a total tax credit of ₱200,130.00 and credit
balance of ₱172,477.00.
On November 14, 1991, petitioner filed with respondent a claim for
"the refund of excess creditable withholding and income taxes for
the years 1989 and 1990 in the aggregate amount of
₱147,036.15."
On December 27, 1991 alleging that the prescriptive period for
refunds for 1989 would expire on December 30, 1991 and that it
was necessary to interrupt the prescriptive period, petitioner filed
with the respondent Court of Tax Appeals a petition for review
praying for the refund of "₱54,104.00 representing creditable taxes
withheld from income payments of petitioner for the calendar year
ending December 31, 1989."
On February 25, 1992, respondent Commissioner filed an Answer
and by way of special and/or affirmative defenses averred the
following: a) the petition states no cause of action for failure to
allege the dates when the taxes sought to be refunded were paid;
b) petitioner’s claim for refund is still under investigation by
respondent Commissioner; c) the taxes claimed are deemed to
have been paid and collected in accordance with law and existing
pertinent rules and regulations; d) petitioner failed to allege that it
is entitled to the refund or deductions claimed; e) petitioner’s
contention that it has available tax credit for the current and prior
year is gratuitous and does not ipso facto warrant the refund; f)
petitioner failed to show that it has complied with the provision of
Section 230 in relation to Section 204 of the Tax Code.
After trial, the respondent Court rendered a decision ordering
respondent Commissioner "to refund in favor of petitioner the
amount of ₱54,104.00, representing excess creditable withholding
taxes paid for January to July1989."
Respondent Commissioner moved for reconsideration of the
decision, alleging that the ₱54,104.00 ordered to be refunded "has
already been included and is part and parcel of the ₱172,477.00
which petitioner automatically applied as tax credit for the
succeeding taxable year 1990."
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 In a resolution dated October 21, 1993 Respondent Court
reconsidered its decision of July 29, 1993 and dismissed the
petition for review, stating that it has "overlooked the fact that the
petitioner’s 1989 Corporate Income Tax Return (Exh. "A")
indicated that the amount of ₱54,104.00 subject of petitioner’s
claim for refund has already been included as part and parcel of
the ₱172,477.00 which the petitioner automatically applied as tax
credit for the succeeding taxable year 1990."
Petitioner filed a Motion for Reconsideration which was denied by
respondent Court on March 10, 1994.5
Petitioner filed a Petition for Review6 dated April 3, 1994 with the Court of
Appeals. Resolving the twin issues of whether petitioner is entitled to a
refund of ₱54,104.00 representing creditable taxes withheld in 1989 and
whether petitioner applied such creditable taxes withheld to its 1990
income tax liability, the appellate court held that petitioner is not entitled to
a refund because it had already elected to apply the total amount of
₱172,447.00, which includes the ₱54,104.00 refund claimed, against its
income tax liability for 1990. The appellate court elucidated on the reason
for its dismissal of petitioner’s claim for refund, thus:
In the instant case, it appears that when petitioner filed its income
tax return for the year 1989, it filled up the box stating that the total
amount of ₱172,477.00 shall be applied against its income tax
liabilities for the succeeding taxable year.
Petitioner did not specify in its return the amount to be refunded
and the amount to be applied as tax credit to the succeeding
taxable year, but merely marked an "x" to the box indicating "to be
applied as tax credit to the succeeding taxable year." Unlike what
petitioner had done when it filed its income tax return for the year
1988, it specifically stated that out of the ₱146,026.00 the entire
refundable amount, only ₱64,623.00 will be made available as tax
credit, while the amount of ₱81,403.00 will be refunded.
In its 1989 income tax return, petitioner filled up the box "to be
applied as tax credit to succeeding taxable year," which signified
that instead of refund, petitioner will apply the total amount of
₱172,447.00, which includes the amount of ₱54,104.00 sought to
be refunded, as tax credit for its tax liabilities in 1990. Thus, there
is really nothing left to be refunded to petitioner for the year 1989.
To grant petitioner’s claim for refund is tantamount to granting
twice the refund herein sought to be refunded, to the prejudice of
the Government.
The Court of Appeals denied petitioner’s Motion for
Reconsideration7 dated November 8, 1994 in its Resolution8dated
February 21, 1995 because the motion merely restated the grounds which
have already been considered and passed upon in its Decision.9
Petitioner thus filed the instant Petition for Review10 dated April 14, 1995
arguing that the evidence presented before the lower courts conclusively
shows that it did not apply the ₱54,104.00 to its 1990 income tax liability;
that the Decision subject of the instant petition is inconsistent with a final
decision11 of the Sixteenth Division of the appellate court in C.A.-G.R. Sp.
No. 32890 involving the same parties and subject matter; and that the
affirmation of the questioned Decision would lead to absurd results in the
manner of claiming refunds or in the application of prior years’ excess tax
credits.
The Office of the Solicitor General (OSG) filed a Comment12 dated May
16, 1996 on behalf of respondents asserting that the claimed refund of
₱54,104.00 was, by petitioner’s election in its Corporate Annual Income
Tax Return for 1989, to be applied against its tax liability for 1990. Not
having submitted its tax return for 1990 to show whether the said amount
was indeed applied against its tax liability for 1990, petitioner’s election in
its tax return stands. The OSG also contends that petitioner’s election to
apply its overpaid income tax as tax credit against its tax liabilities for the
succeeding taxable year is mandatory and irrevocable.
On September 2, 1997, petitioner filed a Reply13 dated August 31, 1996
insisting that the issue in this case is not whether the amount of
₱54,104.00 was included as tax credit to be applied against its 1990
income tax liability but whether the same amount was actually applied as
tax credit for 1990. Petitioner claims that there is no need to show that the
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amount of ₱54,104.00 had not been automatically applied against its 1990
income tax liability because the appellate court’s decision in C.A.-G.R. Sp.
No. 32890 clearly held that petitioner charged its 1990 income tax liability
against its tax credit for 1988 and not 1989. Petitioner also disputes the
OSG’s assertion that the taxpayer’s election as to the application of
excess taxes is irrevocable averring that there is nothing in the law that
prohibits a taxpayer from changing its mind especially if subsequent
events leave the latter no choice but to change its election.
The OSG filed a Rejoinder14 dated March 5, 1997 stating that petitioner’s
1988 tax return shows a prior year’s excess credit of ₱81,403.00,
creditable tax withheld of ₱92,750.00 and tax due of ₱27,127.00.
Petitioner indicated that the prior year’s excess credit of ₱81,403.00 was
to be refunded, while the remaining amount of ₱64,623.00 (₱92,750.00 -
₱27,127.00) shall be considered as tax credit for 1989. However, in its
1989 tax return, petitioner included the ₱81,403.00 which had already
been segregated for refund in the computation of its excess credit, and
specified that the full amount of ₱172,479.00* (₱81,403.00 + ₱64,623.00 +
₱54,104.00** - ₱27,653.00***) be considered as its tax credit for 1990.
Considering that it had obtained a favorable ruling for the refund of its
excess credit for 1988 in CA-G.R. SP. No. 32890, its remaining tax credit
for 1989 should be the excess credit to be applied against its 1990 tax
liability. In fine, the OSG argues that by its own election, petitioner can no
longer ask for a refund of its creditable taxes withheld in 1989 as the same
had been applied against its 1990 tax due.
In its Resolution15 dated July 16, 1997, the Court gave due course to the
petition and required the parties to simultaneously file their respective
memoranda within 30 days from notice. In compliance with this directive,
petitioner submitted its Memorandum16 dated September 18, 1997 in due
time, while the OSG filed its Memorandum17 dated April 27, 1998 only on
April 29, 1998 after several extensions.
The petition must be denied.
As a matter of principle, it is not advisable for this Court to set aside the
conclusion reached by an agency such as the CTA which is, by the very
nature of its functions, 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
its authority.18
This interdiction finds particular application in this case since the CTA,
after careful consideration of the merits of the Commissioner of Internal
Revenue’s motion for reconsideration, reconsidered its earlier decision
which ordered the latter to refund the amount of ₱54,104.00 to petitioner.
Its resolution cannot be successfully assailed based, as it is, on the
pertinent laws as applied to the facts.
Petitioner’s 1989 tax return indicates an aggregate creditable tax of
₱172,477.00, representing its 1988 excess credit of ₱146,026.00 and
1989 creditable tax of ₱54,104.00 less tax due for 1989, which it elected to
apply as tax credit for the succeeding taxable year.19 According to
petitioner, it successively utilized this amount when it obtained refunds in
CTA Case No. 4439 (C.A.-G.R. Sp. No. 32300) and CTA Case No. 4528
(C.A.-G.R. Sp. No. 32890), and applied its 1990 tax liability, leaving a
balance of ₱54,104.00, the amount subject of the instant claim for
refund.20Represented mathematically, petitioner accounts for its claim in
this wise:
₱172,477.00 Amount indicated in petitioner’s 1989 tax return to be applied as tax
credit for the succeeding taxable year
- 25,623.00 Claim for refund in CTA Case No. 4439 (C.A.-G.R. Sp. No. 32300)
₱146,854.00 Balance as of April 16, 1990
- 59,510.00 Claim for refund in CTA Case No. 4528 (C.A.-G.R. Sp. No. 32890)
₱87,344.00 Balance as of January 2, 1991
- 33,240.00 Income tax liability for calendar year 1990 applied as of April 15,
1991
₱54,104.00 Balance as of April 15, 1991 now subject of the instant claim for
refund21
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Other than its own bare allegations, however, petitioner offers no proof to
the effect that its creditable tax of ₱172,477.00 was applied as claimed
above. Instead, it anchors its assertion of entitlement to refund on an
alleged finding in C.A.-G.R. Sp. No. 3289022 involving the same parties to
the effect that petitioner charged its 1990 income tax liability to its tax
credit for 1988 and not its 1989 tax credit. Hence, its excess creditable
taxes withheld of ₱54,104.00 for 1989 was left untouched and may be
refunded.
Note should be taken, however, that nowhere in the case referred to by
petitioner did the Court of Appeals make a categorical determination that
petitioner’s tax liability for 1990 was applied against its 1988 tax credit.
The statement adverted to by petitioner was actually presented in the
appellate court’s decision in CA-G.R. Sp No. 32890 as part of petitioner’s
own narration of facts. The pertinent portion of the decision reads:
It would appear from petitioner’s submission as follows:
x x x since it has already applied to its prior year’s excess credit of
₱81,403.00 (which petitioner wanted refunded when it filed its
1988 Income Tax Return on April 14, 1989) the income tax liability
for 1988 of ₱28,127.00 and the income tax liability for 1989 of
₱27,653.00, leaving a balance refundable of ₱25,623.00 subject
of C.T.A. Case No. 4439, the ₱92,750.00 (₱64,623.00 plus
₱28,127.00, since this second amount was already applied to the
amount refundable of ₱81,403.00) should be the refundable
amount. But since the taxpayer again used part of it to satisfy its
income tax liability of ₱33,240.00 for 1990, the amount refundable
was ₱59,510.00, which is the amount prayed for in the claim for
refund and also in the petitioner (sic) for review.
That the present claim for refund already consolidates its claims
for refund for 1988, 1989, and 1990, when it filed a claim for
refund of ₱59,510.00 in this case (CTA Case No. 4528). Hence,
the present claim should be resolved together with the previous
claims.23
The confusion as to petitioner’s entitlement to a refund could altogether
have been avoided had it presented its tax return for 1990. Such return
would have shown whether petitioner actually applied its 1989 tax credit of
₱172,477.00, which includes the ₱54,104.00 creditable taxes withheld for
1989 subject of the instant claim for refund, against its 1990 tax liability as
it had elected in its 1989 return, or at least, whether petitioner’s tax credit
of ₱172,477.00 was applied to its approved refunds as it claims.
The return would also have shown whether there remained an excess
credit refundable to petitioner after deducting its tax liability for 1990. As it
is, we only have petitioner’s allegation that its tax due for 1990 was
₱33,240.00 and that this was applied against its remaining tax credits
using its own "first in, first out" method of computation.
It would have been different had petitioner not included the ₱54,104.00
creditable taxes for 1989 in the total amount it elected to apply against its
1990 tax liabilities. Then, all that would have been required of petitioner
are: proof that it filed a claim for refund within the two (2)-year prescriptive
period provided under Section 230 of the NIRC; evidence that the income
upon which the taxes were withheld was included in its return; and to
establish the fact of withholding by a copy of the statement (BIR Form No.
1743.1) issued by the payor24 to the payee showing the amount paid and
the amount of tax withheld therefrom. However, since petitioner opted to
apply its aggregate excess credits as tax credit for 1990, it was incumbent
upon it to present its tax return for 1990 to show that the claimed refund
had not been automatically credited and applied to its 1990 tax liabilities.
The grant of a refund is founded on the assumption that the tax return is
valid, i.e., that the facts stated therein are true and correct.25 Without the
tax return, it is error to grant a refund since it would be virtually impossible
to determine whether the proper taxes have been assessed and paid.
Why petitioner failed to present such a vital piece of evidence confounds
the Court. Petitioner could very well have attached a copy of its final
adjustment return for 1990 when it filed its claim for refund on November
13, 1991. Annex "B" of its Petition for Review26 dated December 26, 1991
filed with the CTA, in fact, states that its annual tax return for 1990 was
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submitted in support of its claim. Yet, petitioner’s tax return for 1990 is
nowhere to be found in the records of this case.
Had petitioner presented its 1990 tax return in refutation of respondent
Commissioner’s allegation that it did not present evidence to prove that its
claimed refund had already been automatically credited against its 1990
tax liability, the CTA would not have reconsidered its earlier Decision. As it
is, the absence of petitioner’s 1990 tax return was the principal basis of the
CTA’s Resolution reconsidering its earlier Decision to grant petitioner’s
claim for refund.
Petitioner could even still have attached a copy of its 1990 tax return to its
petition for review before the Court of Appeals. The appellate court, being
a trier of facts, is authorized to receive it in evidence and would likely have
taken it into account in its disposition of the petition.
In BPI-Family Savings Bank v. Court of Appeals,27 although petitioner
failed to present its 1990 tax return, it presented other evidence to prove
its claim that it did not apply and could not have applied the amount in
dispute as tax credit. Importantly, petitioner therein attached a copy of its
final adjustment return for 1990 to its motion for reconsideration before the
CTA buttressing its claim that it incurred a net loss and is thus entitled to
refund. Considering this fact, the Court held that there is no reason for the
BIR to withhold the tax refund.
In this case, petitioner’s failure to present sufficient evidence to prove its
claim for refund is fatal to its cause. After all, it is axiomatic that a claimant
has the burden of proof to establish the factual basis of his or her claim for
tax credit or refund. Tax refunds, like tax exemptions, are construed strictly
against the taxpayer.28
Section 69, Chapter IX, Title II of the National Internal Revenue Code of
the Philippines (NIRC) provides:
Sec. 69. Final Adjustment Return.—Every corporation liable to tax
under Section 24 shall file a final adjustment return covering the
total net income for the preceding calendar or fiscal year. If the
sum of the quarterly tax payments made during the said taxable
year is not equal to the total tax due on the entire taxable net
income of that year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may
be.
In case the corporation is entitled to a refund of the excess
estimated quarterly income taxes paid, the refundable
amount shown on its final adjustment return may be credited
against the estimated quarterly income tax liabilities for the
taxable quarters of the succeeding taxable year. [Emphasis
supplied]
Revenue Regulation No. 10-77 of the Bureau of Internal Revenue clarifies:
SEC. 7. Filing of final or adjustment return and final payment of
income tax. – A final or an adjustment return on B.I.R. Form No.
1702 covering the total taxable income of the corporation for the
preceding calendar or fiscal year shall be filed on or before the
15th day of the fourth month following the close of the calendar or
fiscal year. The return shall include all the items of gross income
and deductions for the taxable year. The amount of income tax to
be paid shall be the balance of the total income tax shown on the
final or adjustment return after deducting therefrom the total
quarterly income taxes paid during the preceding first three
quarters of the same calendar or fiscal year.
Any excess of the total quarterly payments over the actual income
tax computed and shown in the adjustment or final corporate
income tax return shall either (a) be refunded to the corporation, or
(b) may be credited against the estimated quarterly income tax
liabilities for the quarters of the succeeding taxable year. The
corporation must signify in its annual corporate adjustment return
its intention whether to request for refund of the overpaid income
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 tax or claim for automatic credit to be applied against its income
tax liabilities for the quarters of the succeeding taxable year by
filling up the appropriate box on the corporate tax return (B.I.R.
Form No. 1702). [Emphasis supplied]
As clearly shown from the above-quoted provisions, in case the
corporation is entitled to a refund of the excess estimated quarterly income
taxes paid, the refundable amount shown on its final adjustment return
may be credited against the estimated quarterly income tax liabilities for
the taxable quarters of the succeeding year. The carrying forward of any
excess or overpaid income tax for a given taxable year is limited to the
succeeding taxable year only.
In the recent case of AB Leasing and Finance Corporation v.
Commissioner of Internal Revenue,29 where the Court declared that "[T]he
carrying forward of any excess or overpaid income tax for a given taxable
year then is limited to the succeeding taxable year only," we ruled that
since the case involved a claim for refund of overpaid taxes for 1993,
petitioner could only have applied the 1993 excess tax credits to its 1994
income tax liabilities. To further carry-over to 1995 the 1993 excess tax
credits is violative of Section 69 of the NIRC.
In this case, petitioner included its 1988 excess credit of ₱146,026.00 in
the computation of its total excess credit for 1989. It indicated this amount,
plus the 1989 creditable taxes withheld of ₱54,104.00 or a total of
₱172,477.00, as its total excess credit to be applied as tax credit for 1990.
By its own disclosure, petitioner effectively combined its 1988 and 1989
tax credits and applied its 1990 tax due of ₱33,240.00 against the total,
and not against its creditable taxes for 1989 only as allowed by Section 69.
This is a clear admission that petitioner’s 1988 tax credit was incorrectly
and illegally applied against its 1990 tax liabilities.
Parenthetically, while a taxpayer is given the choice whether to claim for
refund or have its excess taxes applied as tax credit for the succeeding
taxable year, such election is not final. Prior verification and approval by
the Commissioner of Internal Revenue is required. The availment of the
remedy of tax credit is not absolute and mandatory. It does not confer an
absolute right on the taxpayer to avail of the tax credit scheme if it so
chooses. Neither does it impose a duty on the part of the government to sit
back and allow an important facet of tax collection to be at the sole control
and discretion of the taxpayer.30
Contrary to petitioner’s assertion however, the taxpayer’s election,
signified by the ticking of boxes in Item 10 of BIR Form No. 1702, is not a
mere technical exercise. It aids in the proper management of claims for
refund or tax credit by leading tax authorities to the direction they should
take in addressing the claim.
The amendment of Section 69 by what is now Section 76 of Republic Act
No. 842431 emphasizes that it is imperative to indicate in the tax return or
the final adjustment return whether a tax credit or refund is sought by
making the taxpayer’s choice irrevocable. Section 76 provides:
SEC. 76. Final Adjustment Return.—Every corporation liable to tax
under Section 27 shall file a final adjustment return covering the
total taxable income for the preceding calendar or fiscal year. If
the sum of the quarterly tax payments made during the said
taxable year is not equal to the total tax due on the entire taxable
income of that year, the corporation shall either:
(A) Pay the balance of the tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid,
as the case may be.
In case the corporation is entitled to a tax credit or refund of the
excess estimated quarterly income taxes paid, the excess amount
shown on its final adjustment return may be carried over and
credited against the estimated quarterly income tax liabilities for
the taxable quarters of the succeeding taxable years. Once the
option to carry-over and apply the excess quarterly income
tax against income tax due for the taxable quarters of the
succeeding taxable years has been made, such option shall
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 be considered irrevocable for that taxable period and no
application for cash refund or issuance of a tax credit
certificate shall be allowed therefore. [Emphasis supplied]

As clearly seen from this provision, the taxpayer is allowed three (3)
options if the sum of its quarterly tax payments made during the taxable
year is not equal to the total tax due for that year: (a) pay the balance of
the tax still due; (b) carry-over the excess credit; or (c) be credited or
refunded the amount paid. If the taxpayer has paid excess quarterly
income taxes, it may be entitled to a tax credit or refund as shown in its
final adjustment return which may be carried over and applied against the
estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable years. However, once the taxpayer has exercised the
option to carry-over and to apply the excess quarterly income tax against
income tax due for the taxable quarters of the succeeding taxable years,
such option is irrevocable for that taxable period and no application for
cash refund or issuance of a tax credit certificate shall be allowed.

Had this provision been in effect when the present claim for refund was
filed, petitioner’s excess credits for 1988 could have been properly applied
to its 1990 tax liabilities. Unfortunately for petitioner, this is not the case.

Taxation is a destructive power which interferes with the personal and

property rights of the people and takes from them a portion of their
property for the support of the government. And since taxes are what we
pay for civilized society, or are the lifeblood of the nation, the law frowns
against exemptions from taxation and statutes granting tax exemptions are
thus construed strictissimi juris against the taxpayer and liberally in favor
of the taxing authority. A claim of refund or exemption from tax payments
must be clearly shown and be based on language in the law too plain to be
mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the
exception.32

WHEREFORE, the instant petition is DENIED. The challenged decision of

the Court of Appeals is hereby AFFIRMED. No pronouncement as to
costs.

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B. Nature of taxation
G.R. No. 120082 September 11, 1996
MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner,
vs.
HON. FERDINAND J. MARCOS, in his capacity as the Presiding
Judge of the Regional Trial Court, Branch 20, Cebu City, THE CITY
OF CEBU, represented by its Mayor HON. TOMAS R. OSMEÑA, and
EUSTAQUIO B. CESA, respondents.
DAVIDE, JR., J.:
For review under Rule 45 of the Rules of Court on a pure question
of law are the decision of 22 March 19951of the Regional Trial
Court (RTC) of Cebu City, Branch 20, dismissing the petition for
declaratory relief in Civil Case No. CEB-16900 entitled "Mactan
Cebu International Airport Authority vs. City of Cebu", and its order
of 4, May 19952 denying the motion to reconsider the decision.
We resolved to give due course to this petition for its raises issues
dwelling on the scope of the taxing power of local government-
owned and controlled corporations.
The uncontradicted factual antecedents are summarized in the
instant petition as follows:
Petitioner Mactan Cebu International Airport Authority
(MCIAA) was created by virtue of Republic Act No. 6958,
mandated to "principally undertake the economical,
efficient and effective control, management and
supervision of the Mactan International Airport in the
Province of Cebu and the Lahug Airport in Cebu City, . . .
and such other Airports as may be established in the
Province of Cebu . . . (Sec. 3, RA 6958). It is also
mandated to:
a) encourage, promote and develop international and
domestic air traffic in the Central Visayas and Mindanao
regions as a means of making the regions centers of
international trade and tourism, and accelerating the
development of the means of transportation and
communication in the country; and
b) upgrade the services and facilities of the airports and to
formulate internationally acceptable standards of airport
accommodation and service.
Since the time of its creation, petitioner MCIAA enjoyed
the privilege of exemption from payment of realty taxes in
accordance with Section 14 of its Charter.
Sec. 14. Tax Exemptions. — The
authority shall be exempt from realty
taxes imposed by the National
Government or any of its political
subdivisions, agencies and
instrumentalities . . .
On October 11, 1994, however, Mr. Eustaquio B. Cesa,
Officer-in-Charge, Office of the Treasurer of the City of
Cebu, demanded payment for realty taxes on several
parcels of land belonging to the petitioner (Lot Nos. 913-
G, 743, 88 SWO, 948-A, 989-A, 474, 109(931), I-M, 918,
919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A),
located at Barrio Apas and Barrio Kasambagan, Lahug,
Cebu City, in the total amount of P2,229,078.79.
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Petitioner objected to such demand for payment as
baseless and unjustified, claiming in its favor the
aforecited Section 14 of RA 6958 which exempt it from
payment of realty taxes. It was also asserted that it is an
instrumentality of the government performing
governmental functions, citing section 133 of the Local
Government Code of 1991 which puts limitations on the
taxing powers of local government units:
Sec. 133. Common Limitations on the
Taxing Powers of Local Government
Units. — Unless otherwise provided
herein, the exercise of the taxing powers
of provinces, cities, municipalities, and
barangay shall not extend to the levy of
the following:
a) . . .
xxx xxx xxx
o) Taxes, fees or charges
of any kind on the
National Government, its
agencies and
instrumentalities, and
local government units.
(Emphasis supplied)
Respondent City refused to cancel and set aside
petitioner's realty tax account, insisting that the MCIAA is
a government-controlled corporation whose tax exemption
privilege has been withdrawn by virtue of Sections 193
and 234 of the Local Governmental Code that took effect
on January 1, 1992:
Sec. 193. Withdrawal of Tax Exemption Privilege. —
Unless otherwise provided in this Code, tax exemptions or
incentives granted to, or presently enjoyed by all persons
whether natural or juridical, including government-owned
or controlled corporations, except local water districts,
cooperatives duly registered under RA No. 6938, non-
stock, and non-profit hospitals and educational
institutions, are hereby withdrawn upon the effectivity of
this Code. (Emphasis supplied)
xxx xxx xxx
Sec. 234. Exemptions from Real Property taxes. — . . .
(a) . . .
xxx xxx xxx
(c) . . .
Except as provided herein, any exemption
from payment of real property tax
previously granted to, or presently
enjoyed by all persons, whether natural or
juridical, including government-owned or
controlled corporations are hereby
withdrawn upon the effectivity of this
Code.
As the City of Cebu was about to issue a warrant of levy
against the properties of petitioner, the latter was
compelled to pay its tax account "under protest" and
thereafter filed a Petition for Declaratory Relief with the
Regional Trial Court of Cebu, Branch 20, on December
29, 1994. MCIAA basically contended that the taxing
powers of local government units do not extend to the levy
of taxes or fees of any kind on an instrumentality of the
9|Page
 national government. Petitioner insisted that while it is
indeed a government-owned corporation, it nonetheless
stands on the same footing as an agency or
instrumentality of the national government. Petitioner
insisted that while it is indeed a government-owned
corporation, it nonetheless stands on the same footing as
an agency or instrumentality of the national government
by the very nature of its powers and functions.
Respondent City, however, asserted that MACIAA is not
an instrumentality of the government but merely a
government-owned corporation performing proprietary
functions As such, all exemptions previously granted to it
were deemed withdrawn by operation of law, as provided
under Sections 193 and 234 of the Local Government
Code when it took effect on January 1, 1992.3
The petition for declaratory relief was docketed as Civil Case No.
CEB-16900.
In its decision of 22 March 1995,4 the trial court dismissed the
petition in light of its findings, to wit:
A close reading of the New Local Government Code of
1991 or RA 7160 provides the express cancellation and
withdrawal of exemption of taxes by government owned
and controlled corporation per Sections after the effectivity
of said Code on January 1, 1992, to wit: [proceeds to
quote Sections 193 and 234]
Petitioners claimed that its real properties assessed by
respondent City Government of Cebu are exempted from
paying realty taxes in view of the exemption granted under
RA 6958 to pay the same (citing Section 14 of RA 6958).
However, RA 7160 expressly provides that "All general
and special laws, acts, city charters, decress [sic],
executive orders, proclamations and administrative
regulations, or part or parts thereof which are inconsistent
with any of the provisions of this Code are hereby
repealed or modified accordingly." ([f], Section 534, RA
7160).
With that repealing clause in RA 7160, it is safe to infer
and state that the tax exemption provided for in RA 6958
creating petitioner had been expressly repealed by the
provisions of the New Local Government Code of 1991.
So that petitioner in this case has to pay the assessed
realty tax of its properties effective after January 1, 1992
until the present.
This Court's ruling finds expression to give impetus and
meaning to the overall objectives of the New Local
Government Code of 1991, RA 7160. "It is hereby
declared the policy of the State that the territorial and
political subdivisions of the State shall enjoy genuine and
meaningful local autonomy to enable them to attain their
fullest development as self-reliant communities and make
them more effective partners in the attainment of national
goals. Towards this end, the State shall provide for a more
responsive and accountable local government structure
instituted through a system of decentralization whereby
local government units shall be given more powers,
authority, responsibilities, and resources. The process of
decentralization shall proceed from the national
government to the local government units. . . .5
Its motion for reconsideration having been denied by the trial court
in its 4 May 1995 order, the petitioner filed the instant petition
based on the following assignment of errors:
I RESPONDENT JUDGE ERRED IN
FAILING TO RULE THAT THE
PETITIONER IS VESTED WITH
10 | P a g e
 GOVERNMENT POWERS AND
FUNCTIONS WHICH PLACE IT IN THE
SAME CATEGORY AS AN
INSTRUMENTALITY OR AGENCY OF
THE GOVERNMENT.
II RESPONDENT JUDGE ERRED IN
RULING THAT PETITIONER IS LIABLE
TO PAY REAL PROPERTY TAXES TO
THE CITY OF CEBU.
Anent the first assigned error, the petitioner asserts that although
it is a government-owned or controlled corporation it is mandated
to perform functions in the same category as an instrumentality of
Government. An instrumentality of Government is one created to
perform governmental functions primarily to promote certain
aspects of the economic life of the people.6 Considering its task
"not merely to efficiently operate and manage the Mactan-Cebu
International Airport, but more importantly, to carry out the
Government policies of promoting and developing the Central
Visayas and Mindanao regions as centers of international trade
and tourism, and accelerating the development of the means of
transportation and communication in the country,"7and that it is an
attached agency of the Department of Transportation and
Communication (DOTC),8 the petitioner "may stand in [sic] the
same footing as an agency or instrumentality of the national
government." Hence, its tax exemption privilege under Section 14
of its Charter "cannot be considered withdrawn with the passage
of the Local Government Code of 1991 (hereinafter LGC) because
Section 133 thereof specifically states that the taxing powers of
local government units shall not extend to the levy of taxes of fees
or charges of any kind on the national government its agencies
and instrumentalities."
As to the second assigned error, the petitioner contends that being
an instrumentality of the National Government, respondent City of
Cebu has no power nor authority to impose realty taxes upon it in
accordance with the aforesaid Section 133 of the LGC, as
explained in Basco vs. Philippine Amusement and Gaming
Corporation;9
Local governments have no power to tax instrumentalities
of the National Government. PAGCOR is a government
owned or controlled corporation with an original character,
PD 1869. All its shares of stock are owned by the National
Government. . . .
PAGCOR has a dual role, to operate and regulate
gambling casinos. The latter joke is governmental, which
places it in the category of an agency or instrumentality of
the Government. Being an instrumentality of the
Government, PAGCOR should be and actually is exempt
from local taxes. Otherwise, its operation might be
burdened, impeded or subjected to control by a mere
Local government.
The states have no power by taxation or otherwise, to
retard, impede, burden or in any manner control the
operation of constitutional laws enacted by Congress to
carry into execution the powers vested in the federal
government. (McCulloch v. Maryland, 4 Wheat 316, 4 L
Ed. 579).
This doctrine emanates from the "supremacy" of the
National Government over local government.
Justice Holmes, speaking for the Supreme Court, make
references to the entire absence of power on the part of
the States to touch, in that way (taxation) at least, the
instrumentalities of the United States (Johnson v.
Maryland, 254 US 51) and it can be agreed that no state
or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from
consummating its federal responsibilities, or even to
seriously burden it in the accomplishment of them.
(Antieau Modern Constitutional Law, Vol. 2, p. 140)
11 | P a g e
 Otherwise mere creature of the State can defeat National
policies thru extermination of what local authorities may
perceive to be undesirable activities or enterprise using
the power to tax as "a toll for regulation" (U.S. v. Sanchez,
340 US 42). The power to tax which was called by Justice
Marshall as the "power to destroy" (McCulloch v.
Maryland, supra) cannot be allowed to defeat an
instrumentality or creation of the very entity which has the
inherent power to wield it. (Emphasis supplied)
It then concludes that the respondent Judge "cannot therefore
correctly say that the questioned provisions of the Code do not
contain any distinction between a governmental function as
against one performing merely proprietary ones such that the
exemption privilege withdrawn under the said Code would apply
to allgovernment corporations." For it is clear from Section 133, in
relation to Section 234, of the LGC that the legislature meant to
exclude instrumentalities of the national government from the
taxing power of the local government units.
In its comment respondent City of Cebu alleges that as local a
government unit and a political subdivision, it has the power to
impose, levy, assess, and collect taxes within its jurisdiction. Such
power is guaranteed by the Constitution10 and enhanced further by
the LGC. While it may be true that under its Charter the petitioner
was exempt from the payment of realty taxes,11 this exemption
was withdrawn by Section 234 of the LGC. In response to the
petitioner's claim that such exemption was not repealed because
being an instrumentality of the National Government, Section 133
of the LGC prohibits local government units from imposing taxes,
fees, or charges of any kind on it, respondent City of Cebu points
out that the petitioner is likewise a government-owned corporation,
and Section 234 thereof does not distinguish between
government-owned corporation, and Section 234 thereof does not
distinguish between government-owned corporation, and Section
234 thereof does not distinguish between government-owned or
controlled corporations performing governmental and purely
proprietary functions. Respondent city of Cebu urges this the
Manila International Airport Authority is a governmental-owned
corporation, 12 and to reject the application of Basco because it
was "promulgated . . . before the enactment and the singing into
law of R.A. No. 7160," and was not, therefore, decided "in the light
of the spirit and intention of the framers of the said law.
As a general rule, the power to tax is an incident of sovereignty
and is unlimited in its range, acknowledging in its very nature no
limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the
constituency who are to pay it. Nevertheless, effective limitations
thereon may be imposed by the people through their
Constitutions.13 Our Constitution, for instance, provides that the
rule of taxation shall be uniform and equitable and Congress shall
evolve a progressive system of taxation.14 So potent indeed is the
power that it was once opined that "the power to tax involves the
power to destroy."15 Verily, taxation is a destructive power which
interferes with the personal and property for the support of the
government. Accordingly, tax statutes must be construed strictly
against the government and liberally in favor of the taxpayer.16 But
since taxes are what we pay for civilized society,17 or are the
lifeblood of the nation, the law frowns against exemptions from
taxation and statutes granting tax exemptions are thus
construed strictissimi juris against the taxpayers and liberally in
favor of the taxing authority.18 A claim of exemption from tax
payment must be clearly shown and based on language in the law
too plain to be mistaken.19 Elsewise stated, taxation is the rule,
exemption therefrom is the exception.20 However, if the grantee of
the exemption is a political subdivision or instrumentality, the rigid
rule of construction does not apply because the practical effect of
the exemption is merely to reduce the amount of money that has
to be handled by the government in the course of its operations.21
The power to tax is primarily vested in the Congress; however, in
our jurisdiction, it may be exercised by local legislative bodies, no
longer merely by virtue of a valid delegation as before, but
pursuant to direct authority conferred by Section 5, Article X of the
Constitution.22 Under the latter, the exercise of the power may be
12 | P a g e
subject to such guidelines and limitations as the Congress may
provide which, however, must be consistent with the basic policy
of local autonomy.
There can be no question that under Section 14 of R.A. No. 6958
the petitioner is exempt from the payment of realty taxes imposed
by the National Government or any of its political subdivisions,
agencies, and instrumentalities. Nevertheless, since taxation is the
rule and exemption therefrom the exception, the exemption may
thus be withdrawn at the pleasure of the taxing authority. The only
exception to this rule is where the exemption was granted to
private parties based on material consideration of a mutual nature,
which then becomes contractual and is thus covered by the non-
impairment clause of the Constitution.23
The LGC, enacted pursuant to Section 3, Article X of the
constitution provides for the exercise by local government units of
their power to tax, the scope thereof or its limitations, and the
exemption from taxation.
Section 133 of the LGC prescribes the common limitations on the
taxing powers of local government units as follows:
Sec. 133. Common Limitations on the Taxing Power of
Local Government Units. — Unless otherwise provided
herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to
the levy of the following:
(a) Income tax, except when levied on banks and other financial
institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, "inheritance, gifts, legacies and other
acquisitions mortis causa, except as otherwise provided herein
(d) Customs duties, registration fees of vessels and wharfage on
wharves, tonnage dues, and all other kinds of customs fees
charges and dues except wharfage on wharves constructed and
maintained by the local government unit concerned:
(e) Taxes, fees and charges and other imposition upon goods
carried into or out of, or passing through, the territorial jurisdictions
of local government units in the guise or charges for wharfages,
tolls for bridges or otherwise, or other taxes, fees or charges in
any form whatsoever upon such goods or merchandise;
(f) Taxes fees or charges on agricultural and aquatic products
when sold by marginal farmers or fishermen;
(g) Taxes on business enterprise certified to be the Board of
Investment as pioneer or non-pioneer for a period of six (6) and
four (4) years, respectively from the date of registration;
(h) Excise taxes on articles enumerated under the National
Internal Revenue Code, as amended, and taxes, fees or charges
on petroleum products;
(i) Percentage or value added tax (VAT) on sales, barters or
exchanges or similar transactions on goods or services except as
otherwise provided herein;
(j) Taxes on the gross receipts of transportation contractor and
person engage in the transportation of passengers of freight by hire
and common carriers by air, land, or water, except as provided in
this code;
(k) Taxes on premiums paid by ways reinsurance or retrocession;
(l) Taxes, fees, or charges for the registration of motor vehicles
and for the issuance of all kinds of licenses or permits for the
driving of thereof, except, tricycles;
13 | P a g e
(m) Taxes, fees, or other charges on Philippine product actually owned and controlled corporations, except as provided therein. It
exported, except as otherwise provided herein; provides:

(n) Taxes, fees, or charges, on Countryside and Barangay Sec. 234. Exemptions from Real Property Tax. — The
Business Enterprise and Cooperatives duly registered under R.A. following are exempted from payment of the real property
No. 6810 and Republic Act Numbered Sixty nine hundred thirty- tax:
eight (R.A. No. 6938) otherwise known as the "Cooperative Code of
the Philippines; and (a) Real property owned by the Republic
of the Philippines or any of its political
(o) TAXES, FEES, OR CHARGES OF ANY KIND ON THE subdivisions except when the beneficial
NATIONAL GOVERNMENT, ITS AGENCIES AND use thereof had been granted, for
INSTRUMENTALITIES, AND LOCAL GOVERNMENT UNITS. reconsideration or otherwise, to a taxable
(emphasis supplied) person;

Needless to say the last item (item o) is pertinent in this case. The (b) Charitable institutions, churches,
"taxes, fees or charges" referred to are "of any kind", hence they parsonages or convents appurtenants
include all of these, unless otherwise provided by the LGC. The thereto, mosques nonprofits or religious
term "taxes" is well understood so as to need no further cemeteries and all lands, building and
elaboration, especially in the light of the above enumeration. The improvements actually, directly, and
term "fees" means charges fixed by law or Ordinance for the exclusively used for religious charitable or
regulation or inspection of business activity,24 while "charges" are educational purposes;
pecuniary liabilities such as rents or fees against person or
property.25 (c) All machineries and equipment that
are actually, directly and exclusively used
Among the "taxes" enumerated in the LGC is real property tax, by local water districts and government-
which is governed by Section 232. It reads as follows: owned or controlled corporations engaged
in the supply and distribution of water
Sec. 232. Power to Levy Real Property Tax. — A province and/or generation and transmission of
or city or a municipality within the Metropolitan Manila electric power;
Area may levy on an annual ad valorem tax on real
property such as land, building, machinery and other (d) All real property owned by duly
improvements not hereafter specifically exempted. registered cooperatives as provided for
under R.A. No. 6938; and;
Section 234 of LGC provides for the exemptions from payment of
real property taxes and withdraws previous exemptions therefrom (e) Machinery and equipment used for
granted to natural and juridical persons, including government pollution control and environmental
protection.

14 | P a g e
 Except as provided herein, any
exemptions from payment of real property
tax previously granted to or presently
enjoyed by, all persons whether natural or
juridical, including all government owned
or controlled corporations are hereby
withdrawn upon the effectivity of his
Code.
These exemptions are based on the ownership, character, and
use of the property. Thus;
(a) Ownership Exemptions. Exemptions
from real property taxes on the basis of
ownership are real properties owned by:
(i) the Republic, (ii) a province, (iii) a city,
(iv) a municipality, (v) a barangay, and (vi)
registered cooperatives.
(b) Character Exemptions. Exempted
from real property taxes on the basis of
their character are: (i) charitable
institutions, (ii) houses and temples of
prayer like churches, parsonages or
convents appurtenant thereto, mosques,
and (iii) non profit or religious cemeteries.
(c) Usage exemptions. Exempted from
real property taxes on the basis of the
actual, direct and exclusive use to which
they are devoted are: (i) all lands
buildings and improvements which are
actually, directed and exclusively used for
religious, charitable or educational
purpose; (ii) all machineries and
equipment actually, directly and
exclusively used or by local water districts
or by government-owned or controlled
corporations engaged in the supply and
distribution of water and/or generation
and transmission of electric power; and
(iii) all machinery and equipment used for
pollution control and environmental
protection.
To help provide a healthy environment in the midst of the
modernization of the country, all machinery and
equipment for pollution control and environmental
protection may not be taxed by local governments.
2. Other Exemptions Withdrawn. All other
exemptions previously granted to natural
or juridical persons including government-
owned or controlled corporations are
withdrawn upon the effectivity of the
Code.26
Section 193 of the LGC is the general provision on withdrawal of
tax exemption privileges. It provides:
Sec. 193. Withdrawal of Tax Exemption Privileges. —
Unless otherwise provided in this code, tax exemptions or
incentives granted to or presently enjoyed by all persons,
whether natural or juridical, including government-owned,
or controlled corporations, except local water districts,
cooperatives duly registered under R.A. 6938, non stock
and non profit hospitals and educational constitutions, are
hereby withdrawn upon the effectivity of this Code.
On the other hand, the LGC authorizes local government units to
grant tax exemption privileges. Thus, Section 192 thereof
provides:
Sec. 192. Authority to Grant Tax Exemption Privileges. —
Local government units may, through ordinances duly
15 | P a g e
 approved, grant tax exemptions, incentives or reliefs
under such terms and conditions as they may deem
necessary.
The foregoing sections of the LGC speaks of: (a) the limitations on
the taxing powers of local government units and the exceptions to
such limitations; and (b) the rule on tax exemptions and the
exceptions thereto. The use of exceptions of provisos in these
section, as shown by the following clauses:
(1) "unless otherwise provided herein" in
the opening paragraph of Section 133;
(2) "Unless otherwise provided in this
Code" in section 193;
(3) "not hereafter specifically exempted"
in Section 232; and
(4) "Except as provided herein" in the last
paragraph of Section 234
initially hampers a ready understanding of the sections. Note, too,
that the aforementioned clause in section 133 seems to be
inaccurately worded. Instead of the clause "unless otherwise
provided herein," with the "herein" to mean, of course, the section,
it should have used the clause "unless otherwise provided in this
Code." The former results in absurdity since the section itself
enumerates what are beyond the taxing powers of local
government units and, where exceptions were intended, the
exceptions were explicitly indicated in the text. For instance, in
item (a) which excepts the income taxes "when livied on banks
and other financial institutions", item (d) which excepts "wharfage
on wharves constructed and maintained by the local government
until concerned"; and item (1) which excepts taxes, fees, and
charges for the registration and issuance of license or permits for
the driving of "tricycles". It may also be observed that within the
body itself of the section, there are exceptions which can be found
only in other parts of the LGC, but the section interchangeably
uses therein the clause "except as otherwise provided herein" as
in items (c) and (i), or the clause "except as otherwise provided
herein" as in items (c) and (i), or the clause "excepts as provided
in this Code" in item (j). These clauses would be obviously
unnecessary or mere surplus-ages if the opening clause of the
section were" "Unless otherwise provided in this Code" instead of
"Unless otherwise provided herein". In any event, even if the latter
is used, since under Section 232 local government units have the
power to levy real property tax, except those exempted therefrom
under Section 234, then Section 232 must be deemed to qualify
Section 133.
Thus, reading together Section 133, 232 and 234 of the LGC, we
conclude that as a general rule, as laid down in Section 133 the
taxing powers of local government units cannot extend to the levy
of inter alia, "taxes, fees, and charges of any kind of the National
Government, its agencies and instrumentalties, and local
government units"; however, pursuant to Section 232, provinces,
cities, municipalities in the Metropolitan Manila Area may impose
the real property tax except on, inter alia, "real property owned by
the Republic of the Philippines or any of its political subdivisions
except when the beneficial used thereof has been granted, for
consideration or otherwise, to a taxable person", as provided in
item (a) of the first paragraph of Section 234.
As to tax exemptions or incentives granted to or presently enjoyed
by natural or juridical persons, including government-owned and
controlled corporations, Section 193 of the LGC prescribes the
general rule, viz., they are withdrawn upon the effectivity of the
LGC, except upon the effectivity of the LGC, except those granted
to local water districts, cooperatives duly registered under R.A.
No. 6938, non stock and non-profit hospitals and educational
institutions, and unless otherwise provided in the LGC. The latter
proviso could refer to Section 234, which enumerates the
properties exempt from real property tax. But the last paragraph of
Section 234 further qualifies the retention of the exemption in so
16 | P a g e
far as the real property taxes are concerned by limiting the
retention only to those enumerated there-in; all others not included
in the enumeration lost the privilege upon the effectivity of the
LGC. Moreover, even as the real property is owned by the
Republic of the Philippines, or any of its political subdivisions
covered by item (a) of the first paragraph of Section 234, the
exemption is withdrawn if the beneficial use of such property has
been granted to taxable person for consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew,
upon the effectivity of the LGC, exemptions from real property
taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided
in the said section, and the petitioner is, undoubtedly, a
government-owned corporation, it necessarily follows that its
exemption from such tax granted it in Section 14 of its charter,
R.A. No. 6958, has been withdrawn. Any claim to the contrary can
only be justified if the petitioner can seek refuge under any of the
exceptions provided in Section 234, but not under Section 133, as
it now asserts, since, as shown above, the said section is qualified
by Section 232 and 234.
In short, the petitioner can no longer invoke the general rule in
Section 133 that the taxing powers of the local government units
cannot extend to the levy of:
(o) taxes, fees, or charges of any kind on
the National Government, its agencies, or
instrumentalities, and local government
units.
I must show that the parcels of land in question, which are real
property, are any one of those enumerated in Section 234, either
by virtue of ownership, character, or use of the property. Most
likely, it could only be the first, but not under any explicit provision
of the said section, for one exists. In light of the petitioner's theory
that it is an "instrumentality of the Government", it could only be
within be first item of the first paragraph of the section by
expanding the scope of the terms Republic of the Philippines" to
embrace . . . . . . "instrumentalities" and "agencies" or expediency
we quote:
(a) real property owned by the Republic of
the Philippines, or any of the Philippines,
or any of its political subdivisions except
when the beneficial use thereof has been
granted, for consideration or otherwise, to
a taxable person.
This view does not persuade us. In the first place, the petitioner's
claim that it is an instrumentality of the Government is based on
Section 133(o), which expressly mentions the word
"instrumentalities"; and in the second place it fails to consider the
fact that the legislature used the phrase "National Government, its
agencies and instrumentalities" "in Section 133(o),but only the
phrase "Republic of the Philippines or any of its political
subdivision "in Section 234(a).
The terms "Republic of the Philippines" and "National
Government" are not interchangeable. The former is boarder and
synonymous with "Government of the Republic of the Philippines"
which the Administrative Code of the 1987 defines as the
"corporate governmental entity though which the functions of the
government are exercised through at the Philippines, including,
saves as the contrary appears from the context, the various arms
through which political authority is made effective in the
Philippines, whether pertaining to the autonomous reason, the
provincial, city, municipal or barangay subdivision or other forms
of local government."27 These autonomous regions, provincial,
city, municipal or barangay subdivisions" are the political
subdivision.28
On the other hand, "National Government" refers "to the entire
machinery of the central government, as distinguished from the
different forms of local Governments."29 The National Government
17 | P a g e
then is composed of the three great departments the executive,
the legislative and the judicial.30
An "agency" of the Government refers to "any of the various units
of the Government, including a department, bureau, office
instrumentality, or government-owned or controlled corporation, or
a local government or a distinct unit therein;"31 while an
"instrumentality" refers to "any agency of the National
Government, not integrated within the department framework,
vested with special functions or jurisdiction by law, endowed with
some if not all corporate powers, administering special funds, and
enjoying operational autonomy; usually through a charter. This
term includes regulatory agencies, chartered institutions and
government-owned and controlled corporations".32
If Section 234(a) intended to extend the exception therein to the
withdrawal of the exemption from payment of real property taxes
under the last sentence of the said section to the agencies and
instrumentalities of the National Government mentioned in Section
133(o), then it should have restated the wording of the latter. Yet,
it did not Moreover, that Congress did not wish to expand the
scope of the exemption in Section 234(a) to include real property
owned by other instrumentalities or agencies of the government
including government-owned and controlled corporations is further
borne out by the fact that the source of this exemption is Section
40(a) of P.D. No. 646, otherwise known as the Real Property Tax
Code, which reads:
Sec 40. Exemption from Real Property Tax. — The
exemption shall be as follows:
(a) Real property owned by the Republic of the
Philippines or any of its political subdivisions and
any government-owned or controlled corporations
so exempt by is charter: Provided, however, that
this exemption shall not apply to real property of
the above mentioned entities the beneficial use of
which has been granted, for consideration or
otherwise, to a taxable person.
Note that as a reproduced in Section 234(a), the phrase "and any
government-owned or controlled corporation so exempt by its
charter" was excluded. The justification for this restricted
exemption in Section 234(a) seems obvious: to limit further tax
exemption privileges, specially in light of the general provision on
withdrawal of exemption from payment of real property taxes in
the last paragraph of property taxes in the last paragraph of
Section 234. These policy considerations are consistent with the
State policy to ensure autonomy to local governments33 and the
objective of the LGC that they enjoy genuine and meaningful local
autonomy to enable them to attain their fullest development as
self-reliant communities and make them effective partners in the
attainment of national goals.34 The power to tax is the most
effective instrument to raise needed revenues to finance and
support myriad activities of local government units for the delivery
of basic services essential to the promotion of the general welfare
and the enhancement of peace, progress, and prosperity of the
people. It may also be relevant to recall that the original reasons
for the withdrawal of tax exemption privileges granted to
government-owned and controlled corporations and all other units
of government were that such privilege resulted in serious tax
base erosion and distortions in the tax treatment of similarly
situated enterprises, and there was a need for this entities to
share in the requirements of the development, fiscal or otherwise,
by paying the taxes and other charges due from them.35
The crucial issues then to be addressed are: (a) whether the
parcels of land in question belong to the Republic of the
Philippines whose beneficial use has been granted to the
petitioner, and (b) whether the petitioner is a "taxable person".
Section 15 of the petitioner's Charter provides:
Sec. 15. Transfer of Existing Facilities and Intangible
Assets. — All existing public airport facilities, runways,
18 | P a g e
 lands, buildings and other properties, movable or
immovable, belonging to or presently administered by the
airports, and all assets, powers, rights, interests and
privileges relating on airport works, or air operations,
including all equipment which are necessary for the
operations of air navigation, acrodrome control towers,
crash, fire, and rescue facilities are hereby transferred to
the Authority: Provided however, that the operations
control of all equipment necessary for the operation of
radio aids to air navigation, airways communication, the
approach control office, and the area control center shall
be retained by the Air Transportation Office. No
equipment, however, shall be removed by the Air
Transportation Office from Mactan without the
concurrence of the authority. The authority may assist in
the maintenance of the Air Transportation Office
equipment.
The "airports" referred to are the "Lahug Air Port" in Cebu City and
the "Mactan International AirPort in the Province of Cebu", 36 which
belonged to the Republic of the Philippines, then under the Air
Transportation Office (ATO).37
It may be reasonable to assume that the term "lands" refer to
"lands" in Cebu City then administered by the Lahug Air Port and
includes the parcels of land the respondent City of Cebu seeks to
levy on for real property taxes. This section involves a "transfer" of
the "lands" among other things, to the petitioner and not just the
transfer of the beneficial use thereof, with the ownership being
retained by the Republic of the Philippines.
This "transfer" is actually an absolute conveyance of the
ownership thereof because the petitioner's authorized capital stock
consists of, inter alia "the value of such real estate owned and/or
administered by the airports."38 Hence, the petitioner is now the
owner of the land in question and the exception in Section 234(c)
of the LGC is inapplicable.
Moreover, the petitioner cannot claim that it was never a "taxable
person" under its Charter. It was only exempted from the payment
of real property taxes. The grant of the privilege only in respect of
this tax is conclusive proof of the legislative intent to make it a
taxable person subject to all taxes, except real property tax.
Finally, even if the petitioner was originally not a taxable person
for purposes of real property tax, in light of the forgoing
disquisitions, it had already become even if it be conceded to be
an "agency" or "instrumentality" of the Government, a taxable
person for such purpose in view of the withdrawal in the last
paragraph of Section 234 of exemptions from the payment of real
property taxes, which, as earlier adverted to, applies to the
petitioner.
Accordingly, the position taken by the petitioner is untenable.
Reliance on Basco vs. Philippine Amusement and Gaming
Corporation39 is unavailing since it was decided before the
effectivity of the LGC. Besides, nothing can prevent Congress
from decreeing that even instrumentalities or agencies of the
government performing governmental functions may be subject to
tax. Where it is done precisely to fulfill a constitutional mandate
and national policy, no one can doubt its wisdom.
WHEREFORE, the instant petition is DENIED. The challenged
decision and order of the Regional Trial Court of Cebu, Branch 20,
in Civil Case No. CEB-16900 are AFFIRMED.
19 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-22814 August 28, 1968
PEPSI-COLA BOTTLING CO. OF THE PHILIPPINES, INC., plaintiff-
appellant,
vs.
CITY OF BUTUAN, MEMBERS OF THE MUNICIPAL BOARD,
THE CITY MAYOR and THE CITY TREASURER, all of the CITY OF
BUTUAN, defendants-appellees.
Sabido, Sabido and Associates for plaintiff-appellant.
The City Attorney of Butuan City for defendants-appellees.
CONCEPCION, C.J.:
Direct appeal to this Court, from a decision of the Court of First Instance of
Agusan, dismissing plaintiff's complaint, with costs.
Plaintiff, Pepsi-Cola Bottling Company of the Philippines, is a domestic
corporation with offices and principal place of business in Quezon City.
The defendants are the City of Butuan, its City Mayor, the members of its
municipal board and its City Treasurer. Plaintiff — seeks to recover the
sums paid by it to the City of Butuan — hereinafter referred to as the City
and collected by the latter, pursuant to its Municipal Ordinance No. 110, as
amended by Municipal Ordinance No. 122, both series of 1960, which
plaintiff assails as null and void, and to prevent the enforcement thereof.
Both parties submitted the case for decision in the lower court upon a
stipulation to the effect:
1. That plaintiff's warehouse in the City of Butuan serves as a
storage for its products the "Pepsi-Cola" soft drinks for sale to
customers in the City of Butuan and all the municipalities in the
Province of Agusan. These "Pepsi-Cola Cola" soft drinks are
bottled in Cebu City and shipped to the Butuan City warehouse of
plaintiff for distribution and sale in the City of Butuan and all
municipalities of Agusan. .
2. That on August 16, 1960, the City of Butuan enacted Ordinance
No. 110 which was subsequently amended by Ordinance No. 122
and effective November 28, 1960. A copy of Ordinance No. 110,
Series of 1960 and Ordinance No. 122 are incorporated herein as
Exhibits "A" and "B", respectively.
3. That Ordinance No. 110 as amended, imposes a tax on any
person, association, etc., of P0.10 per case of 24 bottles of Pepsi-
Cola and the plaintiff paid under protest the amount of P4,926.63
from August 16 to December 31, 1960 and the amount of
P9,250.40 from January 1 to July 30, 1961.
4. That the plaintiff filed the foregoing complaint for the recovery of
the total amount of P14,177.03 paid under protest and those that if
may later on pay until the termination of this case on the ground
that Ordinance No. 110 as amended of the City of Butuan is
illegal, that the tax imposed is excessive and that it is
unconstitutional.
5. That pursuant to Ordinance No. 110 as amended, the City
Treasurer of Butuan City, has prepared a form to be accomplished
by the plaintiff for the computation of the tax. A copy of the form is
enclosed herewith as Exhibit "C".
6. That the Profit and Loss Statement of the plaintiff for the period
from January 1, 1961 to July 30, 1961 of its warehouse in Butuan
City is incorporated herein as Exhibits "D" to "D-1" to "D-5". In this
Profit and Loss Statement, the defendants claim that the plaintiff is
not entitled to a depreciation of P3,052.63 but only P1,202.55 in
which case the profit of plaintiff will be increased from P1,254.44
to P3,104.52. The plaintiff differs only on the claim of depreciation
which the company claims to be P3,052.62. This is in accordance
20 | P a g e
 with the findings of the representative of the undersigned City
Attorney who verified the records of the plaintiff.
7. That beginning November 21, 1960, the price of Pepsi-Cola per
case of 24 bottles was increased to P1.92 which price is uniform
throughout the Philippines. Said increase was made due to the
increase in the production cost of its manufacture.
8. That the parties reserve the right to submit arguments on the
constitutionality and illegality of Ordinance No. 110, as amended
of the City of Butuan in their respective memoranda.
xxx xxx x x x1äwphï1.ñët
Section 1 of said Ordinance No. 110, as amended, states what products
are "liquors", within the purview thereof. Section 2 provides for the
payment by "any agent and/or consignee" of any dealer "engaged in
selling liquors, imported or local, in the City," of taxes at specified rates.
Section 3 prescribes a tax of P0.10 per case of 24 bottles of the soft drinks
and carbonated beverages therein named, and "all other soft drinks or
carbonated drinks." Section 3-A, defines the meaning of the term
"consignee or agent" for purposes of the ordinance. Section 4 provides
that said taxes "shall be paid at the end of every calendar month."
Pursuant to Section 5, the taxes "shall be based and computed from the
cargo manifest or bill of lading or any other record showing the number of
cases of soft drinks, liquors or all other soft drinks or carbonated drinks
received within the month." Sections 6, 7 and 8 specify the surcharge to
be added for failure to pay the taxes within the period prescribed and the
penalties imposable for "deliberate and willful refusal to pay the tax
mentioned in Sections 2 and 3" or for failure "to furnish the office of the
City Treasurer a copy of the bill of lading or cargo manifest or record of
soft drinks, liquors or carbonated drinks for sale in the City." Section 9
makes the ordinance applicable to soft drinks, liquors or carbonated drinks
"received outside" but "sold within" the City. Section 10 of the ordinance
provides that the revenue derived therefrom "shall be alloted as follows:
40% for Roads and Bridges Fund; 40% for the General Fund and 20% for
the School Fund."
Plaintiff maintains that the disputed ordinance is null and void because: (1)
it partakes of the nature of an import tax; (2) it amounts to double taxation;
(3) it is excessive, oppressive and confiscatory; (4) it is highly unjust and
discriminatory; and (5) section 2 of Republic Act No. 2264, upon the
authority of which it was enacted, is an unconstitutional delegation of
legislative powers.
The second and last objections are manifestly devoid of merit. Indeed —
independently of whether or not the tax in question, when considered in
relation to the sales tax prescribed by Acts of Congress, amounts to
double taxation, on which we need not and do not express any opinion -
double taxation, in general, is not forbidden by our fundamental law. We
have not adopted, as part thereof, the injunction against double taxation
found in the Constitution of the United States and of some States of the
Union.1 Then, again, the general principle against delegation of legislative
powers, in consequence of the theory of separation of powers 2 is subject
to one well-established exception, namely: legislative powers may be
delegated to local governments — to which said theory does not apply3 —
in respect of matters of local concern.
The third objection is, likewise, untenable. The tax of "P0.10 per case of
24 bottles," of soft drinks or carbonated drinks — in the production and
sale of which plaintiff is engaged — or less than P0.0042 per bottle, is
manifestly too small to be excessive, oppressive, or confiscatory.
The first and the fourth objections merit, however, serious consideration. In
this connection, it is noteworthy that the tax prescribed in section 3 of
Ordinance No. 110, as originally approved, was imposed upon dealers
"engaged in selling" soft drinks or carbonated drinks. Thus, it would seem
that the intent was then to levy a tax upon the sale of said merchandise.
As amended by Ordinance No. 122, the tax is, however, imposed only
upon "any agent and/or consignee of any person, association, partnership,
company or corporation engaged in selling ... soft drinks or carbonated
drinks." And, pursuant to section 3-A, which was inserted by said
Ordinance No. 122:
... — Definition of the Term Consignee or Agent. — For purposes
of this Ordinance, a consignee of agent shall mean any person,
21 | P a g e
 association, partnership, company or corporation who acts in the
place of another by authority from him or one entrusted with the
business of another or to whom is consigned or shipped no less
than 1,000 cases of hard liquors or soft drinks every month
for resale, either retail or wholesale.
As a consequence, merchants engaged in the sale of soft drink or
carbonated drinks, are not subject to the tax, unless they are agents
and/or consignees of another dealer, who, in the very nature of things,
must be one engaged in business outside the City. Besides, the tax would
not be applicable to such agent and/or consignee, if less than 1,000 cases
of soft drinks are consigned or shipped to him every month. When we
consider, also, that the tax "shall be based and computed from the cargo
manifest or bill of lading ... showing the number of cases" — not sold —
but "received" by the taxpayer, the intention to limit the application of the
ordinance to soft drinks and carbonated drinks brought into the City from
outside thereof becomes apparent. Viewed from this angle, the tax
partakes of the nature of an import duty, which is beyond defendant's
authority to impose by express provision of law.4
conditions substantially identical to those of the present; and (4) the
classification applies equally all those who belong to the same class. 7
These conditions are not fully met by the ordinance in question.8 Indeed, if
its purpose were merely to levy a burden upon the sale of soft drinks or
carbonated beverages, there is no reason why sales thereof by sealers
other than agents or consignees of producers or merchants established
outside the City of Butuan should be exempt from the tax.
WHEREFORE, the decision appealed from is hereby reversed, and
another one shall be entered annulling Ordinance No. 110, as amended by
Ordinance No. 122, and sentencing the City of Butuan to refund to plaintiff
herein the amounts collected from and paid under protest by the latter,
with interest thereon at the legal rate from the date of the promulgation of
this decision, in addition to the costs, and defendants herein are,
accordingly, restrained and prohibited permanently from enforcing said
Ordinance, as amended. It is so ordered.

Even however, if the burden in question were regarded as a tax on the

sale of said beverages, it would still be invalid, as discriminatory, and
hence, violative of the uniformity required by the Constitution and the law
therefor, since only sales by "agents or consignees" of outside dealers
would be subject to the tax. Sales by local dealers, not acting for or on
behalf of other merchants, regardless of the volume of their sales, and
even if the same exceeded those made by said agents or consignees of
producers or merchants established outside the City of Butuan, would
be exempt from the disputed tax.

It is true that the uniformity essential to the valid exercise of the power of
taxation does not require identity or equality under all circumstances, or
negate the authority to classify the objects of taxation.5 The classification
made in the exercise of this authority, to be valid, must, however, be
reasonable6 and this requirement is not deemed satisfied unless: (1) it is
based upon substantial distinctions which make real differences; (2) these
are germane to the purpose of the legislation or ordinance; (3) the
classification applies, not only to present conditions, but, also, to future

22 | P a g e
C. Characteristics of taxation
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-57767 January 31, 1984
ALBERTO S. SUNIO and ILOCOS COMMERCIAL
CORPORATION, petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION, NEMESIO
VALENTON, SANTOS DEL ROSARIO, VICENTE TAPUCOL, ANDRES
SOLIS, CRESCENCIO SOLLER, CECILIO LABUNI, SOTERO L.
TUMANG, in his capacity as Asst. Regional Director for Arbitration,
Regional Office No. 1, Ministry of Labor & Employment, and
AMBROSIO B. SISON, in his capacity as Acting Regional Sheriff,
Regional Office No. 1, Ministry of Labor & Employment, respondents.
Yolanda Bustamante for petitioners.
The Solicitor General for respondent NLRC.
Benjamin F. Baterina for private respondents,
MELENCIO-HERRERA, J.:
In this special civil action for certiorari and Prohibition with Preliminary
Injunction, petitioners Alberto Sunio and Ilocos Commercial Corporation
seek to set aside the Resolution of March 24, 1981 of the National Labor
Relations Commission (NLRC), which affirmed the Decision of the
Assistant Regional Director, dated November 5, 1979, in NLRC Case No.
RB-1-1228-78, directing petitioners and Cabugao Ice Plant Incorporated to
reinstate private respondents to their former position without loss of
seniority and privileges and to pay them backwages from February 1, 1978
to the date of their actual reinstatement.
The controversy arose from the following antecedents:
On July 30,1973, EM Ramos & Company, Inc. (EMRACO for brevity) and
Cabugao Ice Plant, Inc. (CIPI for short), sister corporations, sold an ice
plant to Rizal Development and Finance Corporation RDFC with a
mortgage on the same properties constituted by the latter in favor of the
former to secure the payment of the balance of the purchase price. 1
By virtue of that sale, EMRACO-CIPI terminated the services of all their
employees including private respondents herein, and paid them their
separation pay. RDFC hired its own own employees and operated the
plant.
On November 28, 1973, RDFC sold the ice plant to petitioner Ilocos
Commercial Corporation ICC headed by its President and General
Manager, petitioner Alberto S. Sunio. Petitioners also hired their own
employees as private respondents were no longer in the plant. The sale
was subject to the mortgage in favor of EMRACO-CIPI. Both RDFC-ICC
failed to pay the balance of the purchase price, as a consequence of
which, EMRACO-CIPI instituted extrajudicial foreclosure proceedings. The
properties were sold at public auction on August 30, 1974, the highest
bidders being EMRACO CIPI. On the same date, said companies obtained
an ex-parte Writ of Possession from the Court of First Instance of Ilocos
Sur in Civil Case No. 3026-V.
On the same date, August 30, 1974, EMRACO-CIPI sold the ice plant to
Nilo Villanueva, suspect to the right of redemption of RDFC. Nilo
Villanueva then re-hired private respondents.
On August 27, 1975, RDFC redeemed the ice plant. Because of the gate
to Nilo Villanueva, EMRACO-CIPI were unable to turn over possession to
RDFC and/or petitioners, prompting the latter to file a complaint for
23 | P a g e
recovery of possession against EMRACO-CIPI with the then Court of First
Instance of Ilocos Sur (Civil Case No. 81-KC). Nilo Villanueva intervened
Said Court ordered the issuance of a Writ of Preliminary Mandatory
Injunction placing RDFC in possession of the ice plant. EMPRACO-CIPI
and Villanueva appealed to the Court of Appeals (CA-GR No. 05880- SP
which upheld the questionee, Order. A Petition for certiorari with this Court
(L-46376) assailing that Resolution was denied for lack of merit or January
6, 1978.
On February 1, 1978, RDFC and petitioners finally obtains possession of
the ice plant by virtue of the Mandatory Injunction previously issued, which
ordered defendant "particularly Nilo C. Villanueva and his agents
representatives, or any person found in the premises to vacate and
surrender the property in litigation." 2 Petitioners did not re-employ private
respondents.
Private respondents filed complaints against petitioners for illegal
dismissal with the Regional Office, Ministry of Labor & Employment, San
Fernando, La Union.
On November 5, 1979, the Assistant Regional Director rendered a
decision the decretal portion of which reads:
IN VIEW OF THE FOREGOING CONSIDERATIONS,
respondents Cabugao Ice Plant, Inc., Ilocos Commercial
Corporation and/or Alberto Sunio, are hereby directed to
reinstate the complainants to their former positions without
loss of seniority privileges and to pay their backwages
from February 1, 1978 to the date when they are actually
reinstated
Petitioners appealed to the NLRC, which affirmed the Regional Director's
decision and dismissed the appeal for lack of merit on March 24, 1981
reasoning that when RDFC took possession of the property and private
respondents were terminated in 1973, the latter already had a vested right
to their security of tenure, and when they were rehired those rights
continued. 3
Petitioners are now before us assailing the Asst. Regional Director's
Decision, dated November 5, 1979, the Resolution of the NLRC, Second
Division, dated March 24, 1981, as well as the Writ of Execution issued
pursuant thereto dated July 14, 1981, for P156,720.80 representing
backwages. They raise as lone issue:
That respondent National Labor Relations Commission
and/or Asst. Regional Director Sotero Tumang acted in
excess of jurisdiction and/or with grave abuse of discretion
amounting to lack of jurisdiction in rendering the decision
and the resolution in NLRC Case No. RB-1-1228-78, and
in ordering the execution of said decision
We issued a Temporary Restraining Order to maintain the status quo,
resolved to give due course to the Petition, and required the parties to
submit their respective Briefs. Only petitioners have complied.
Did public respondents' act with grave abuse of on amounting to lack of
jurisdiction in ordering the reinstatement of private respondents and the
payment of their backwages?
Petitioners deny any employer-employee relationship with private
respondents arguing that no privity of contract exists between them, the
latter being the employees of Nilo Villanueva who re-hired them when he
took over the operation of the ice plant from CIPI; that private respondents
should go after Nilo Villanueva for whatever rights they may be entitled to,
or the CIPI which is still existing, that no succession of rights and
obligations took place between Villanueva and petitioners as the transfer
of possession was a consequence of the exercise of the right of
redemption; that the amount of backwages was determined without
petitioners being given a chance to be heard and that granting that
respondents are entitled to the reliefs adjudged, such award cannot be
enforced against petitioner Sunio, who was impleaded in the complaint as
the General Manager of ICC.
24 | P a g e
Public respondent, in its Comment, countered that the sale of a business
of 'a going concern does not ipso factoterminate employer-employee
relations when the successor-employer continues the business operation
of the predecessor-employer in an essentially unchanged manner. Private
respondents argue that the change of management or ownership of a
business entity is not one of the just causes for the termination of services
of employees under Article 283 of the Labor Code, as amended. Both
respondents additionally claim that petitioner Sunio, as the General
Manager of ICC and owner of one half (1/2) of its interest, is personally
liable for his malicious act of illegally dismissing private respondents, for
no ground exists to justify their termination.
We sustain petitioners.
It is true that the sale of a business of a going concern does not ipso
facto terminate the employer-employee relations insofar as the successor-
employer is concerned, and that change of ownership or management of
an establishment or company is not one of the just causes provided by law
for termination of employment. The situation here, however, was not one
of simple change of ownership. Of note is the fact that when, on July 30,
1973, EMRACO-CIPI sold the plant to RDFC, CIPI had terminated the
services of its employees, including herein private respondents, giving
them their separation pay which they had accepted. When RDFC took
over ownership and management, therefore, it hired its own employees,
not the private respondents, who were no longer there. RDFC
subsequently sold the property to petitioners on November 28, 1973. But
by reason of their failure to pay the balance of the purchase price,
EMRACO-CIPI foreclosed on the mortgage over the ice plant; the property
was sold at public auction to EMRACO-CIPI as the highest bidders, and
they eventually re-possessed the plant on August 30, 1974. During all the
period that RDFC and petitioners were operating the plant from July 30,
1973 to August 30, 1974, they had their own employees. CIPI-EMRACO
then sold the plant, also on August 30, 1974, to Nilo Villanueva, subject to
RDFC's right of redemption. Nilo Villanueva then rehired private
respondents as employees of the plant, also in 1974.
In 1975, RDFC redeemed the property and demanded possession but
EMRACO-CIPI and Nilo Villanueva resisted so that petitioners were
compelled to sue for recovery of possession, obtaining it, however, only in
1978.
Under those circumstances, it cannot be justifiably said that the plant
together with its staff and personnel moved from one ownership to
another. No succession of employment rights and obligations can be said
to have taken place between EMRACO-CIPI-Nilo Villanueva, on the one
hand, and petitioners on the other. Petitioners eventually acquired
possession by virtue of the exercise of their right of redemption and of a
Mandatory Injunction in their favor which ordered Nilo Villanueva and "any
person found in the premises" to vacate. What is more, when EMRACO-
CIPI sold the ice plant to RDFC in 1973, private respondents' employment
was terminated by EMRACO-CIPI and they were given their separation
pay, which they accepted. During the thirteen months, therefore, that
RDFC and petitioners were in possession and operating the plant up to
August, 1974, they hired their own employees, not the private
respondents. In fact, it may even be said that private respondents had
slept on their rights when they failed to contest such termination at the
time of sale, if they believed they had rights to protect. Further, Nilo
Villanueva rehired private respondents in August, 1974, subject to a
resolutory condition. That condition having arisen, the rights of private
respondents who claim under him mast be deemed to have also ceased.
Private respondents can neither successfully invoke security of tenure in
their favor. Their tenure should not be reckoned from 1967 because they
were already terminated in 1973. Private respondents were only rehired in
1974 by Nilo Villanueva. Petitioners took over by judicial process in 1978
so that private respondents had actually only four years of rehired
employment with Nilo Villanueva, during all of which period, petitioners
fought hard against Nilo Villanueva to recover possession of the plant.
Insofar as petitioners are concerned therefore, there was no tenurial
security to speak of that would entitle private respondents to reinstatement
and backwages. We come now to the personal liability of petitioner, Sunio,
who was made jointly and severally responsible with petitioner company
and CIPI for the payment of the backwages of private respondents. This is
reversible error. The Assistant Regional Director's Decision failed to
disclose the reason why he was made personally liable. Respondents,
however, alleged as grounds thereof, his being the owner of one-half (1/2)
25 | P a g e
interest of said corporation, and his alleged arbitrary dismissal of private
respondents. Petitioner Sunio was impleaded in the Complaint his capacity
as General Manager of petitioner corporation. where appears to be no
evidence on record that he acted maliciously or in bad faith in terminating
the services of private respondents. His act, therefore, was within the
scope of his authority and was a corporate act.

It is basic that a corporation is invested by law with a personality separate

and distinct from those of the persons composing it as well as from that of
any other legal entity to which it may be related. 4 Mere ownership by a
single stockholder or by another corporation of all or nearly all of the
capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personality. 5 Petitioner Sunio,
therefore, should not have been made personally answerable for the
payment of private respondents' back salaries.

WHEREFORE, the assailed Decision and Resolution, dated November 5,

1979 and March 24, 1981, respectively, and the consequent Writ of
Execution are hereby SET ASIDE and the Temporary Restraining Order
heretofore issued by this Court hereby made permanent. Public
respondents are hereby ordered to return to petitioners the latter's levied
properties in their possession. No costs.

26 | P a g e
D. Power of taxation compared with other powers On June 3, 1985, then President Ferdinand Marcos, exercising his
legislative powers, issued LOI No. 1465 which provided, among others, for
1. Police Power the imposition of a capital recovery component (CRC) on the domestic
sale of all grades of fertilizers in the Philippines.4 The LOI provides:
Republic of the Philippines
SUPREME COURT 3. The Administrator of the Fertilizer Pesticide Authority to include in its
Manila fertilizer pricing formula a capital contribution component of not less than
₱10 per bag. This capital contribution shall be collected until adequate
THIRD DIVISION capital is raised to make PPI viable. Such capital contribution shall be
applied by FPA to all domestic sales of fertilizers in the
Philippines.5 (Underscoring supplied)
G.R. No. 166006 March 14, 2008

PLANTERS PRODUCTS, INC., Petitioner,
vs.
FERTIPHIL CORPORATION, Respondent.
DECISION
REYES, R.T., J.:
THE Regional Trial Courts (RTC) have the authority and jurisdiction to
consider the constitutionality of statutes, executive orders, presidential
decrees and other issuances. The Constitution vests that power not only in
the Supreme Court but in all Regional Trial Courts.
The principle is relevant in this petition for review on certiorari of the
Decision1 of the Court of Appeals (CA) affirming with modification that of
the RTC in Makati City,2 finding petitioner Planters Products, Inc. (PPI)
liable to private respondent Fertiphil Corporation (Fertiphil) for the levies it
paid under Letter of Instruction (LOI) No. 1465.
The Facts
Petitioner PPI and private respondent Fertiphil are private corporations
incorporated under Philippine laws.3 They are both engaged in the
importation and distribution of fertilizers, pesticides and agricultural
chemicals.
Pursuant to the LOI, Fertiphil paid ₱10 for every bag of fertilizer it sold in
the domestic market to the Fertilizer and Pesticide Authority (FPA). FPA
then remitted the amount collected to the Far East Bank and Trust
Company, the depositary bank of PPI. Fertiphil paid ₱6,689,144 to FPA
from July 8, 1985 to January 24, 1986. 6
After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of
the ₱10 levy. With the return of democracy, Fertiphil demanded from PPI a
refund of the amounts it paid under LOI No. 1465, but PPI refused to
accede to the demand.7
Fertiphil filed a complaint for collection and damages8 against FPA and
PPI with the RTC in Makati. It questioned the constitutionality of LOI No.
1465 for being unjust, unreasonable, oppressive, invalid and an unlawful
imposition that amounted to a denial of due process of law.9 Fertiphil
alleged that the LOI solely favored PPI, a privately owned corporation,
which used the proceeds to maintain its monopoly of the fertilizer industry.
In its Answer,10 FPA, through the Solicitor General, countered that the
issuance of LOI No. 1465 was a valid exercise of the police power of the
State in ensuring the stability of the fertilizer industry in the country. It also
averred that Fertiphil did not sustain any damage from the LOI because
the burden imposed by the levy fell on the ultimate consumer, not the
seller.

27 | P a g e
 RTC Disposition
On November 20, 1991, the RTC rendered judgment in favor of Fertiphil,
disposing as follows:
WHEREFORE, in view of the foregoing, the Court hereby renders
judgment in favor of the plaintiff and against the defendant Planters
Product, Inc., ordering the latter to pay the former:
1) the sum of ₱6,698,144.00 with interest at 12% from the time of
judicial demand;
2) the sum of ₱100,000 as attorney’s fees;
3) the cost of suit.
SO ORDERED.11
Ruling that the imposition of the ₱10 CRC was an exercise of the State’s
inherent power of taxation, the RTC invalidated the levy for violating the
basic principle that taxes can only be levied for public purpose, viz.:
It is apparent that the imposition of ₱10 per fertilizer bag sold in the
country by LOI 1465 is purportedly in the exercise of the power of taxation.
It is a settled principle that the power of taxation by the state is plenary.
Comprehensive and supreme, the principal check upon its abuse resting in
the responsibility of the members of the legislature to their constituents.
However, there are two kinds of limitations on the power of taxation: the
inherent limitations and the constitutional limitations.
One of the inherent limitations is that a tax may be levied only for public
purposes:
The power to tax can be resorted to only for a constitutionally valid public
purpose. By the same token, taxes may not be levied for purely private
purposes, for building up of private fortunes, or for the redress of private
wrongs. They cannot be levied for the improvement of private property, or
for the benefit, and promotion of private enterprises, except where the aid
is incident to the public benefit. It is well-settled principle of constitutional
law that no general tax can be levied except for the purpose of raising
money which is to be expended for public use. Funds cannot be exacted
under the guise of taxation to promote a purpose that is not of public
interest. Without such limitation, the power to tax could be exercised or
employed as an authority to destroy the economy of the people. A tax,
however, is not held void on the ground of want of public interest unless
the want of such interest is clear. (71 Am. Jur. pp. 371-372)
In the case at bar, the plaintiff paid the amount of ₱6,698,144.00 to the
Fertilizer and Pesticide Authority pursuant to the ₱10 per bag of fertilizer
sold imposition under LOI 1465 which, in turn, remitted the amount to the
defendant Planters Products, Inc. thru the latter’s depository bank, Far
East Bank and Trust Co. Thus, by virtue of LOI 1465 the plaintiff, Fertiphil
Corporation, which is a private domestic corporation, became poorer by
the amount of ₱6,698,144.00 and the defendant, Planters Product, Inc.,
another private domestic corporation, became richer by the amount of
₱6,698,144.00.
Tested by the standards of constitutionality as set forth in the afore-quoted
jurisprudence, it is quite evident that LOI 1465 insofar as it imposes the
amount of ₱10 per fertilizer bag sold in the country and orders that the
said amount should go to the defendant Planters Product, Inc. is unlawful
because it violates the mandate that a tax can be levied only for a public
purpose and not to benefit, aid and promote a private enterprise such as
Planters Product, Inc.12
PPI moved for reconsideration but its motion was denied.13 PPI then filed a
notice of appeal with the RTC but it failed to pay the requisite appeal
docket fee. In a separate but related proceeding, this Court14 allowed the
appeal of PPI and remanded the case to the CA for proper disposition.
CA Decision
On November 28, 2003, the CA handed down its decision affirming with
modification that of the RTC, with the following fallo:
28 | P a g e
IN VIEW OF ALL THE FOREGOING, the decision appealed from is
hereby AFFIRMED, subject to the MODIFICATION that the award of
attorney’s fees is hereby DELETED.15
In affirming the RTC decision, the CA ruled that the lis mota of the
complaint for collection was the constitutionality of LOI No. 1465, thus:
The question then is whether it was proper for the trial court to exercise its
power to judicially determine the constitutionality of the subject statute in
the instant case.
As a rule, where the controversy can be settled on other grounds, the
courts will not resolve the constitutionality of a law (Lim v. Pacquing, 240
SCRA 649 [1995]). The policy of the courts is to avoid ruling on
constitutional questions and to presume that the acts of political
departments are valid, absent a clear and unmistakable showing to the
contrary.
However, the courts are not precluded from exercising such power when
the following requisites are obtaining in a controversy before it: First, there
must be before the court an actual case calling for the exercise of judicial
review. Second, the question must be ripe for adjudication. Third, the
person challenging the validity of the act must have standing to challenge.
Fourth, the question of constitutionality must have been raised at the
earliest opportunity; and lastly, the issue of constitutionality must be the
very lis mota of the case (Integrated Bar of the Philippines v. Zamora, 338
SCRA 81 [2000]).
Indisputably, the present case was primarily instituted for collection and
damages. However, a perusal of the complaint also reveals that the instant
action is founded on the claim that the levy imposed was an unlawful and
unconstitutional special assessment. Consequently, the requisite that the
constitutionality of the law in question be the very lis mota of the case is
present, making it proper for the trial court to rule on the constitutionality of
LOI 1465.16
The CA held that even on the assumption that LOI No. 1465 was issued
under the police power of the state, it is still unconstitutional because it did
not promote public welfare. The CA explained:
In declaring LOI 1465 unconstitutional, the trial court held that the levy
imposed under the said law was an invalid exercise of the State’s power of
taxation inasmuch as it violated the inherent and constitutional prescription
that taxes be levied only for public purposes. It reasoned out that the
amount collected under the levy was remitted to the depository bank of
PPI, which the latter used to advance its private interest.
On the other hand, appellant submits that the subject statute’s passage
was a valid exercise of police power. In addition, it disputes the court a
quo’s findings arguing that the collections under LOI 1465 was for the
benefit of Planters Foundation, Incorporated (PFI), a foundation created by
law to hold in trust for millions of farmers, the stock ownership of PPI.
Of the three fundamental powers of the State, the exercise of police power
has been characterized as the most essential, insistent and the least
limitable of powers, extending as it does to all the great public needs. It
may be exercised as long as the activity or the property sought to be
regulated has some relevance to public welfare (Constitutional Law, by
Isagani A. Cruz, p. 38, 1995 Edition).
Vast as the power is, however, it must be exercised within the limits set by
the Constitution, which requires the concurrence of a lawful subject and a
lawful method. Thus, our courts have laid down the test to determine the
validity of a police measure as follows: (1) the interests of the public
generally, as distinguished from those of a particular class, requires its
exercise; and (2) the means employed are reasonably necessary for the
accomplishment of the purpose and not unduly oppressive upon
individuals (National Development Company v. Philippine Veterans Bank,
192 SCRA 257 [1990]).
It is upon applying this established tests that We sustain the trial court’s
holding LOI 1465 unconstitutional. To be sure, ensuring the continued
supply and distribution of fertilizer in the country is an undertaking imbued
with public interest. However, the method by which LOI 1465 sought to
29 | P a g e
achieve this is by no means a measure that will promote the public
welfare. The government’s commitment to support the successful
rehabilitation and continued viability of PPI, a private corporation, is an
unmistakable attempt to mask the subject statute’s impartiality. There is no
way to treat the self-interest of a favored entity, like PPI, as identical with
the general interest of the country’s farmers or even the Filipino people in
general. Well to stress, substantive due process exacts fairness and equal
protection disallows distinction where none is needed. When a statute’s
public purpose is spoiled by private interest, the use of police power
becomes a travesty which must be struck down for being an arbitrary
exercise of government power. To rule in favor of appellant would
contravene the general principle that revenues derived from taxes cannot
be used for purely private purposes or for the exclusive benefit of private
individuals.17
The CA did not accept PPI’s claim that the levy imposed under LOI No.
1465 was for the benefit of Planters Foundation, Inc., a foundation created
to hold in trust the stock ownership of PPI. The CA stated:
Appellant next claims that the collections under LOI 1465 was for the
benefit of Planters Foundation, Incorporated (PFI), a foundation created by
law to hold in trust for millions of farmers, the stock ownership of PFI on
the strength of Letter of Undertaking (LOU) issued by then Prime Minister
Cesar Virata on April 18, 1985 and affirmed by the Secretary of Justice in
an Opinion dated October 12, 1987, to wit:
"2. Upon the effective date of this Letter of Undertaking, the Republic shall
cause FPA to include in its fertilizer pricing formula a capital recovery
component, the proceeds of which will be used initially for the purpose of
funding the unpaid portion of the outstanding capital stock of Planters
presently held in trust by Planters Foundation, Inc. (Planters Foundation),
which unpaid capital is estimated at approximately ₱206 million (subject to
validation by Planters and Planters Foundation) (such unpaid portion of
the outstanding capital stock of Planters being hereafter referred to as the
‘Unpaid Capital’), and subsequently for such capital increases as may be
required for the continuing viability of Planters.
The capital recovery component shall be in the minimum amount of ₱10
per bag, which will be added to the price of all domestic sales of fertilizer in
the Philippines by any importer and/or fertilizer mother company. In this
connection, the Republic hereby acknowledges that the advances by
Planters to Planters Foundation which were applied to the payment of the
Planters shares now held in trust by Planters Foundation, have been
assigned to, among others, the Creditors. Accordingly, the Republic,
through FPA, hereby agrees to deposit the proceeds of the capital
recovery component in the special trust account designated in the notice
dated April 2, 1985, addressed by counsel for the Creditors to Planters
Foundation. Such proceeds shall be deposited by FPA on or before the
15th day of each month.
The capital recovery component shall continue to be charged and
collected until payment in full of (a) the Unpaid Capital and/or (b) any
shortfall in the payment of the Subsidy Receivables, (c) any carrying cost
accruing from the date hereof on the amounts which may be outstanding
from time to time of the Unpaid Capital and/or the Subsidy Receivables
and (d) the capital increases contemplated in paragraph 2 hereof. For the
purpose of the foregoing clause (c), the ‘carrying cost’ shall be at such rate
as will represent the full and reasonable cost to Planters of servicing its
debts, taking into account both its peso and foreign currency-denominated
obligations." (Records, pp. 42-43)
Appellant’s proposition is open to question, to say the least. The LOU
issued by then Prime Minister Virata taken together with the Justice
Secretary’s Opinion does not preponderantly demonstrate that the
collections made were held in trust in favor of millions of farmers.
Unfortunately for appellant, in the absence of sufficient evidence to
establish its claims, this Court is constrained to rely on what is explicitly
provided in LOI 1465 – that one of the primary aims in imposing the levy is
to support the successful rehabilitation and continued viability of PPI. 18
PPI moved for reconsideration but its motion was denied.19 It then filed the
present petition with this Court.
Issues
30 | P a g e
Petitioner PPI raises four issues for Our consideration, viz.:
I
THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY
ATTACKED AND BE DECREED VIA A DEFAULT JUDGMENT IN A
CASE FILED FOR COLLECTION AND DAMAGES WHERE THE ISSUE
OF CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE
CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON
OR ENTITY WHICH HAS NO STANDING TO DO SO.
II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF
ASSURING THE FERTILIZER SUPPLY AND DISTRIBUTION IN THE
COUNTRY, AND FOR BENEFITING A FOUNDATION CREATED BY
LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCK
OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION
PURSUANT TO THE EXERCISE OF TAXATION AND POLICE POWER
FOR PUBLIC PURPOSES.
III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY
COMPONENT WAS REMITTED TO THE GOVERNMENT, AND BECAME
GOVERNMENT FUNDS PURSUANT TO AN EFFECTIVE AND VALIDLY
ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED RIGHTS
BY VIRTUE OF THE PRINCIPLE OF "OPERATIVE FACT" PRIOR TO
ANY DECLARATION OF UNCONSTITUTIONALITY OF LOI 1465.
IV
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT)
FINDS NO APPLICATION IN THE INSTANT CASE.20 (Underscoring
supplied)
Our Ruling
We shall first tackle the procedural issues of locus standi and the
jurisdiction of the RTC to resolve constitutional issues.
Fertiphil has locus standi because it suffered direct injury; doctrine of
standing is a mere procedural technicality which may be waived.
PPI argues that Fertiphil has no locus standi to question the
constitutionality of LOI No. 1465 because it does not have a "personal and
substantial interest in the case or will sustain direct injury as a result of its
enforcement."21 It asserts that Fertiphil did not suffer any damage from the
CRC imposition because "incidence of the levy fell on the ultimate
consumer or the farmers themselves, not on the seller fertilizer
company."22
We cannot agree. The doctrine of locus standi or the right of appearance
in a court of justice has been adequately discussed by this Court in a
catena of cases. Succinctly put, the doctrine requires a litigant to have a
material interest in the outcome of a case. In private suits, locus standi
requires a litigant to be a "real party in interest," which is defined as "the
party who stands to be benefited or injured by the judgment in the suit or
the party entitled to the avails of the suit."23
In public suits, this Court recognizes the difficulty of applying the doctrine
especially when plaintiff asserts a public right on behalf of the general
public because of conflicting public policy issues. 24 On one end, there is
the right of the ordinary citizen to petition the courts to be freed from
unlawful government intrusion and illegal official action. At the other end,
there is the public policy precluding excessive judicial interference in
official acts, which may unnecessarily hinder the delivery of basic public
services.
In this jurisdiction, We have adopted the "direct injury test" to determine
locus standi in public suits. In People v. Vera, 25 it was held that a person
who impugns the validity of a statute must have "a personal and
substantial interest in the case such that he has sustained, or will sustain
direct injury as a result." The "direct injury test" in public suits is similar to
the "real party in interest" rule for private suits under Section 2, Rule 3 of
the 1997 Rules of Civil Procedure.26
31 | P a g e
Recognizing that a strict application of the "direct injury" test may hamper
public interest, this Court relaxed the requirement in cases of
"transcendental importance" or with "far reaching implications." Being a
mere procedural technicality, it has also been held that locus standi may
be waived in the public interest.27
Whether or not the complaint for collection is characterized as a private or
public suit, Fertiphil has locus standi to file it. Fertiphil suffered a direct
injury from the enforcement of LOI No. 1465. It was required, and it did
pay, the ₱10 levy imposed for every bag of fertilizer sold on the domestic
market. It may be true that Fertiphil has passed some or all of the levy to
the ultimate consumer, but that does not disqualify it from attacking the
constitutionality of the LOI or from seeking a refund. As seller, it bore the
ultimate burden of paying the levy. It faced the possibility of severe
sanctions for failure to pay the levy. The fact of payment is sufficient injury
to Fertiphil.
Moreover, Fertiphil suffered harm from the enforcement of the LOI
because it was compelled to factor in its product the levy. The levy
certainly rendered the fertilizer products of Fertiphil and other domestic
sellers much more expensive. The harm to their business consists not only
in fewer clients because of the increased price, but also in adopting
alternative corporate strategies to meet the demands of LOI No. 1465.
Fertiphil and other fertilizer sellers may have shouldered all or part of the
levy just to be competitive in the market. The harm occasioned on the
business of Fertiphil is sufficient injury for purposes of locus standi.
Even assuming arguendo that there is no direct injury, We find that the
liberal policy consistently adopted by this Court on locus standi must
apply. The issues raised by Fertiphil are of paramount public importance. It
involves not only the constitutionality of a tax law but, more importantly,
the use of taxes for public purpose. Former President Marcos issued LOI
No. 1465 with the intention of rehabilitating an ailing private company. This
is clear from the text of the LOI. PPI is expressly named in the LOI as the
direct beneficiary of the levy. Worse, the levy was made dependent and
conditional upon PPI becoming financially viable. The LOI provided that
"the capital contribution shall be collected until adequate capital is raised
to make PPI viable."
The constitutionality of the levy is already in doubt on a plain reading of the
statute. It is Our constitutional duty to squarely resolve the issue as the
final arbiter of all justiciable controversies. The doctrine of standing, being
a mere procedural technicality, should be waived, if at all, to adequately
thresh out an important constitutional issue.
RTC may resolve constitutional issues; the constitutional issue was
adequately raised in the complaint; it is the lis mota of the case.
PPI insists that the RTC and the CA erred in ruling on the constitutionality
of the LOI. It asserts that the constitutionality of the LOI cannot be
collaterally attacked in a complaint for collection.28 Alternatively, the
resolution of the constitutional issue is not necessary for a determination of
the complaint for collection.29
Fertiphil counters that the constitutionality of the LOI was adequately
pleaded in its complaint. It claims that the constitutionality of LOI No. 1465
is the very lis mota of the case because the trial court cannot determine its
claim without resolving the issue.30
It is settled that the RTC has jurisdiction to resolve the constitutionality of a
statute, presidential decree or an executive order. This is clear from
Section 5, Article VIII of the 1987 Constitution, which provides:
SECTION 5. The Supreme Court shall have the following powers:
xxxx
(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the
law or the Rules of Court may provide, final judgments and orders of lower
courts in:
(a) All cases in which the constitutionality or validity of any treaty,
international or executive agreement, law, presidential decree,
proclamation, order, instruction, ordinance, or regulation is in question.
(Underscoring supplied)
32 | P a g e
In Mirasol v. Court of Appeals,31 this Court recognized the power of the
RTC to resolve constitutional issues, thus:
On the first issue. It is settled that Regional Trial Courts have the authority
and jurisdiction to consider the constitutionality of a statute, presidential
decree, or executive order. The Constitution vests the power of judicial
review or the power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction, ordinance, or regulation
not only in this Court, but in all Regional Trial Courts.32
In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign
Affairs,33 this Court reiterated:
There is no denying that regular courts have jurisdiction over cases
involving the validity or constitutionality of a rule or regulation issued by
administrative agencies. Such jurisdiction, however, is not limited to the
Court of Appeals or to this Court alone for even the regional trial courts
can take cognizance of actions assailing a specific rule or set of rules
promulgated by administrative bodies. Indeed, the Constitution vests the
power of judicial review or the power to declare a law, treaty, international
or executive agreement, presidential decree, order, instruction, ordinance,
or regulation in the courts, including the regional trial courts.34
Judicial review of official acts on the ground of unconstitutionality may be
sought or availed of through any of the actions cognizable by courts of
justice, not necessarily in a suit for declaratory relief. Such review may be
had in criminal actions, as in People v. Ferrer35 involving the
constitutionality of the now defunct Anti-Subversion law, or in ordinary
actions, as in Krivenko v. Register of Deeds36 involving the constitutionality
of laws prohibiting aliens from acquiring public lands. The constitutional
issue, however, (a) must be properly raised and presented in the case,
and (b) its resolution is necessary to a determination of the case, i.e., the
issue of constitutionality must be the very lis mota presented.37
Contrary to PPI’s claim, the constitutionality of LOI No. 1465 was properly
and adequately raised in the complaint for collection filed with the RTC.
The pertinent portions of the complaint allege:
6. The CRC of ₱10 per bag levied under LOI 1465 on domestic sales of all
grades of fertilizer in the Philippines, is unlawful, unjust, uncalled for,
unreasonable, inequitable and oppressive because:
xxxx
(c) It favors only one private domestic corporation, i.e., defendant PPPI,
and imposed at the expense and disadvantage of the other fertilizer
importers/distributors who were themselves in tight business situation and
were then exerting all efforts and maximizing management and marketing
skills to remain viable;
xxxx
(e) It was a glaring example of crony capitalism, a forced program through
which the PPI, having been presumptuously masqueraded as "the"
fertilizer industry itself, was the sole and anointed beneficiary;
7. The CRC was an unlawful; and unconstitutional special assessment and
its imposition is tantamount to illegal exaction amounting to a denial of due
process since the persons of entities which had to bear the burden of
paying the CRC derived no benefit therefrom; that on the contrary it was
used by PPI in trying to regain its former despicable monopoly of the
fertilizer industry to the detriment of other distributors and
importers.38 (Underscoring supplied)
The constitutionality of LOI No. 1465 is also the very lis mota of the
complaint for collection. Fertiphil filed the complaint to compel PPI to
refund the levies paid under the statute on the ground that the law
imposing the levy is unconstitutional. The thesis is that an unconstitutional
law is void. It has no legal effect. Being void, Fertiphil had no legal
obligation to pay the levy. Necessarily, all levies duly paid pursuant to an
unconstitutional law should be refunded under the civil code principle
against unjust enrichment. The refund is a mere consequence of the law
being declared unconstitutional. The RTC surely cannot order PPI to
refund Fertiphil if it does not declare the LOI unconstitutional. It is the
33 | P a g e
unconstitutionality of the LOI which triggers the refund. The issue of
constitutionality is the very lis mota of the complaint with the RTC.
The ₱10 levy under LOI No. 1465 is an exercise of the power of taxation.
At any rate, the Court holds that the RTC and the CA did not err in ruling
against the constitutionality of the LOI.
PPI insists that LOI No. 1465 is a valid exercise either of the police power
or the power of taxation. It claims that the LOI was implemented for the
purpose of assuring the fertilizer supply and distribution in the country and
for benefiting a foundation created by law to hold in trust for millions of
farmers their stock ownership in PPI.
Fertiphil counters that the LOI is unconstitutional because it was enacted
to give benefit to a private company. The levy was imposed to pay the
corporate debt of PPI. Fertiphil also argues that, even if the LOI is enacted
under the police power, it is still unconstitutional because it did not
promote the general welfare of the people or public interest.
Police power and the power of taxation are inherent powers of the State.
These powers are distinct and have different tests for validity. Police
power is the power of the State to enact legislation that may interfere with
personal liberty or property in order to promote the general welfare,39 while
the power of taxation is the power to levy taxes to be used for public
purpose. The main purpose of police power is the regulation of a behavior
or conduct, while taxation is revenue generation. The "lawful subjects" and
"lawful means" tests are used to determine the validity of a law enacted
under the police power.40 The power of taxation, on the other hand, is
circumscribed by inherent and constitutional limitations.
We agree with the RTC that the imposition of the levy was an exercise by
the State of its taxation power. While it is true that the power of taxation
can be used as an implement of police power,41 the primary purpose of the
levy is revenue generation. If the purpose is primarily revenue, or if
revenue is, at least, one of the real and substantial purposes, then the
exaction is properly called a tax.42
In Philippine Airlines, Inc. v. Edu,43 it was held that the imposition of a
vehicle registration fee is not an exercise by the State of its police power,
but of its taxation power, thus:
It is clear from the provisions of Section 73 of Commonwealth Act 123 and
Section 61 of the Land Transportation and Traffic Code that the legislative
intent and purpose behind the law requiring owners of vehicles to pay for
their registration is mainly to raise funds for the construction and
maintenance of highways and to a much lesser degree, pay for the
operating expenses of the administering agency. x x x Fees may be
properly regarded as taxes even though they also serve as an instrument
of regulation.
Taxation may be made the implement of the state's police power (Lutz v.
Araneta, 98 Phil. 148). If the purpose is primarily revenue, or if revenue is,
at least, one of the real and substantial purposes, then the exaction is
properly called a tax. Such is the case of motor vehicle registration fees.
The same provision appears as Section 59(b) in the Land Transportation
Code. It is patent therefrom that the legislators had in mind a regulatory
tax as the law refers to the imposition on the registration, operation or
ownership of a motor vehicle as a "tax or fee." x x x Simply put, if the
exaction under Rep. Act 4136 were merely a regulatory fee, the imposition
in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also
speaks of other "fees" such as the special permit fees for certain types of
motor vehicles (Sec. 10) and additional fees for change of registration
(Sec. 11). These are not to be understood as taxes because such fees are
very minimal to be revenue-raising. Thus, they are not mentioned by Sec.
59(b) of the Code as taxes like the motor vehicle registration fee and
chauffeurs’ license fee. Such fees are to go into the expenditures of the
Land Transportation Commission as provided for in the last proviso of Sec.
61.44 (Underscoring supplied)
The ₱10 levy under LOI No. 1465 is too excessive to serve a mere
regulatory purpose. The levy, no doubt, was a big burden on the seller or
the ultimate consumer. It increased the price of a bag of fertilizer by as
much as five percent.45 A plain reading of the LOI also supports the
conclusion that the levy was for revenue generation. The LOI expressly
34 | P a g e
provided that the levy was imposed "until adequate capital is raised to
make PPI viable."
Taxes are exacted only for a public purpose. The ₱10 levy is
unconstitutional because it was not for a public purpose. The levy was
imposed to give undue benefit to PPI.
An inherent limitation on the power of taxation is public purpose. Taxes are
exacted only for a public purpose. They cannot be used for purely private
purposes or for the exclusive benefit of private persons.46 The reason for
this is simple. The power to tax exists for the general welfare; hence,
implicit in its power is the limitation that it should be used only for a public
purpose. It would be a robbery for the State to tax its citizens and use the
funds generated for a private purpose. As an old United States case
bluntly put it: "To lay with one hand, the power of the government on the
property of the citizen, and with the other to bestow it upon favored
individuals to aid private enterprises and build up private fortunes, is
nonetheless a robbery because it is done under the forms of law and is
called taxation."47
The term "public purpose" is not defined. It is an elastic concept that can
be hammered to fit modern standards. Jurisprudence states that "public
purpose" should be given a broad interpretation. It does not only pertain to
those purposes which are traditionally viewed as essentially government
functions, such as building roads and delivery of basic services, but also
includes those purposes designed to promote social justice. Thus, public
money may now be used for the relocation of illegal settlers, low-cost
housing and urban or agrarian reform.
While the categories of what may constitute a public purpose are
continually expanding in light of the expansion of government functions,
the inherent requirement that taxes can only be exacted for a public
purpose still stands. Public purpose is the heart of a tax law. When a tax
law is only a mask to exact funds from the public when its true intent is to
give undue benefit and advantage to a private enterprise, that law will not
satisfy the requirement of "public purpose."
The purpose of a law is evident from its text or inferable from other
secondary sources. Here, We agree with the RTC and that CA that the
levy imposed under LOI No. 1465 was not for a public purpose.
First, the LOI expressly provided that the levy be imposed to benefit PPI, a
private company. The purpose is explicit from Clause 3 of the law, thus:
3. The Administrator of the Fertilizer Pesticide Authority to include in its
fertilizer pricing formula a capital contribution component of not less than
₱10 per bag. This capital contribution shall be collected until adequate
capital is raised to make PPI viable. Such capital contribution shall be
applied by FPA to all domestic sales of fertilizers in the
Philippines.48 (Underscoring supplied)
It is a basic rule of statutory construction that the text of a statute should
be given a literal meaning. In this case, the text of the LOI is plain that the
levy was imposed in order to raise capital for PPI. The framers of the LOI
did not even hide the insidious purpose of the law. They were cavalier
enough to name PPI as the ultimate beneficiary of the taxes levied under
the LOI. We find it utterly repulsive that a tax law would expressly name a
private company as the ultimate beneficiary of the taxes to be levied from
the public. This is a clear case of crony capitalism.
Second, the LOI provides that the imposition of the ₱10 levy was
conditional and dependent upon PPI becoming financially "viable." This
suggests that the levy was actually imposed to benefit PPI. The LOI
notably does not fix a maximum amount when PPI is deemed financially
"viable." Worse, the liability of Fertiphil and other domestic sellers of
fertilizer to pay the levy is made indefinite. They are required to
continuously pay the levy until adequate capital is raised for PPI.
Third, the RTC and the CA held that the levies paid under the LOI were
directly remitted and deposited by FPA to Far East Bank and Trust
Company, the depositary bank of PPI.49 This proves that PPI benefited
from the LOI. It is also proves that the main purpose of the law was to give
undue benefit and advantage to PPI.
35 | P a g e
Fourth, the levy was used to pay the corporate debts of PPI. A reading of
the Letter of Understanding50 dated May 18, 1985 signed by then Prime
Minister Cesar Virata reveals that PPI was in deep financial problem
because of its huge corporate debts. There were pending petitions for
rehabilitation against PPI before the Securities and Exchange
Commission. The government guaranteed payment of PPI’s debts to its
foreign creditors. To fund the payment, President Marcos issued LOI No.
1465. The pertinent portions of the letter of understanding read:
Republic of the Philippines
Office of the Prime Minister
Manila
LETTER OF UNDERTAKING
May 18, 1985
TO: THE BANKING AND FINANCIAL INSTITUTIONS
LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE "CREDITORS")
OF PLANTERS PRODUCTS, INC. ("PLANTERS")
Gentlemen:
This has reference to Planters which is the principal importer and
distributor of fertilizer, pesticides and agricultural chemicals in the
Philippines. As regards Planters, the Philippine Government confirms its
awareness of the following: (1) that Planters has outstanding obligations in
foreign currency and/or pesos, to the Creditors, (2) that Planters is
currently experiencing financial difficulties, and (3) that there are presently
pending with the Securities and Exchange Commission of the Philippines
a petition filed at Planters’ own behest for the suspension of payment of all
its obligations, and a separate petition filed by Manufacturers Hanover
Trust Company, Manila Offshore Branch for the appointment of a
rehabilitation receiver for Planters.
In connection with the foregoing, the Republic of the Philippines (the
"Republic") confirms that it considers and continues to consider Planters
as a major fertilizer distributor. Accordingly, for and in consideration of
your expressed willingness to consider and participate in the effort to
rehabilitate Planters, the Republic hereby manifests its full and unqualified
support of the successful rehabilitation and continuing viability of Planters,
and to that end, hereby binds and obligates itself to the creditors and
Planters, as follows:
xxxx
2. Upon the effective date of this Letter of Undertaking, the Republic shall
cause FPA to include in its fertilizer pricing formula a capital recovery
component, the proceeds of which will be used initially for the purpose of
funding the unpaid portion of the outstanding capital stock of Planters
presently held in trust by Planters Foundation, Inc. ("Planters
Foundation"), which unpaid capital is estimated at approximately ₱206
million (subject to validation by Planters and Planters Foundation) such
unpaid portion of the outstanding capital stock of Planters being hereafter
referred to as the "Unpaid Capital"), and subsequently for such capital
increases as may be required for the continuing viability of Planters.
xxxx
The capital recovery component shall continue to be charged and
collected until payment in full of (a) the Unpaid Capital and/or (b) any
shortfall in the payment of the Subsidy Receivables, (c) any carrying cost
accruing from the date hereof on the amounts which may be outstanding
from time to time of the Unpaid Capital and/or the Subsidy Receivables,
and (d) the capital increases contemplated in paragraph 2 hereof. For the
purpose of the foregoing clause (c), the "carrying cost" shall be at such
rate as will represent the full and reasonable cost to Planters of servicing
its debts, taking into account both its peso and foreign currency-
denominated obligations.
REPUBLIC OF THE PHILIPPINES
36 | P a g e
By:
(signed)
CESAR E. A. VIRATA
Prime Minister and Minister of Finance51
It is clear from the Letter of Understanding that the levy was imposed
precisely to pay the corporate debts of PPI. We cannot agree with PPI that
the levy was imposed to ensure the stability of the fertilizer industry in the
country. The letter of understanding and the plain text of the LOI clearly
indicate that the levy was exacted for the benefit of a private corporation.
All told, the RTC and the CA did not err in holding that the levy imposed
under LOI No. 1465 was not for a public purpose. LOI No. 1465 failed to
comply with the public purpose requirement for tax laws.
The LOI is still unconstitutional even if enacted under the police power; it
did not promote public interest.
Even if We consider LOI No. 1695 enacted under the police power of the
State, it would still be invalid for failing to comply with the test of "lawful
subjects" and "lawful means." Jurisprudence states the test as follows: (1)
the interest of the public generally, as distinguished from those of
particular class, requires its exercise; and (2) the means employed are
reasonably necessary for the accomplishment of the purpose and not
unduly oppressive upon individuals.52
For the same reasons as discussed, LOI No. 1695 is invalid because it did
not promote public interest. The law was enacted to give undue advantage
to a private corporation. We quote with approval the CA ratiocination on
this point, thus:
It is upon applying this established tests that We sustain the trial court’s
holding LOI 1465 unconstitutional.1awphil To be sure, ensuring the
continued supply and distribution of fertilizer in the country is an
undertaking imbued with public interest. However, the method by which
LOI 1465 sought to achieve this is by no means a measure that will
promote the public welfare. The government’s commitment to support the
successful rehabilitation and continued viability of PPI, a private
corporation, is an unmistakable attempt to mask the subject statute’s
impartiality. There is no way to treat the self-interest of a favored entity,
like PPI, as identical with the general interest of the country’s farmers or
even the Filipino people in general. Well to stress, substantive due
process exacts fairness and equal protection disallows distinction where
none is needed. When a statute’s public purpose is spoiled by private
interest, the use of police power becomes a travesty which must be struck
down for being an arbitrary exercise of government power.To rule in favor
of appellant would contravene the general principle that revenues derived
from taxes cannot be used for purely private purposes or for the exclusive
benefit of private individuals. (Underscoring supplied)
The general rule is that an unconstitutional law is void; the doctrine of
operative fact is inapplicable.
PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is
declared unconstitutional. It banks on the doctrine of operative fact, which
provides that an unconstitutional law has an effect before being declared
unconstitutional. PPI wants to retain the levies paid under LOI No. 1465
even if it is subsequently declared to be unconstitutional.
We cannot agree. It is settled that no question, issue or argument will be
entertained on appeal, unless it has been raised in the court a quo. 53 PPI
did not raise the applicability of the doctrine of operative fact with the RTC
and the CA. It cannot belatedly raise the issue with Us in order to extricate
itself from the dire effects of an unconstitutional law.
At any rate, We find the doctrine inapplicable. The general rule is that an
unconstitutional law is void. It produces no rights, imposes no duties and
affords no protection. It has no legal effect. It is, in legal contemplation,
inoperative as if it has not been passed.54 Being void, Fertiphil is not
required to pay the levy. All levies paid should be refunded in accordance
with the general civil code principle against unjust enrichment. The general
rule is supported by Article 7 of the Civil Code, which provides:
37 | P a g e
ART. 7. Laws are repealed only by subsequent ones, and their violation or
non-observance shall not be excused by disuse or custom or practice to
the contrary.

When the courts declare a law to be inconsistent with the Constitution, the
former shall be void and the latter shall govern.

The doctrine of operative fact, as an exception to the general rule, only

applies as a matter of equity and fair play.55It nullifies the effects of an
unconstitutional law by recognizing that the existence of a statute prior to a
determination of unconstitutionality is an operative fact and may have
consequences which cannot always be ignored. The past cannot always
be erased by a new judicial declaration.56

The doctrine is applicable when a declaration of unconstitutionality will

impose an undue burden on those who have relied on the invalid law.
Thus, it was applied to a criminal case when a declaration of
unconstitutionality would put the accused in double jeopardy57 or would put
in limbo the acts done by a municipality in reliance upon a law creating it. 58

Here, We do not find anything iniquitous in ordering PPI to refund the

amounts paid by Fertiphil under LOI No. 1465. It unduly benefited from the
levy. It was proven during the trial that the levies paid were remitted and
deposited to its bank account. Quite the reverse, it would be inequitable
and unjust not to order a refund. To do so would unjustly enrich PPI at the
expense of Fertiphil. Article 22 of the Civil Code explicitly provides that
"every person who, through an act of performance by another comes into
possession of something at the expense of the latter without just or legal
ground shall return the same to him." We cannot allow PPI to profit from
an unconstitutional law. Justice and equity dictate that PPI must refund the
amounts paid by Fertiphil.

WHEREFORE, the petition is DENIED. The Court of Appeals Decision

dated November 28, 2003 is AFFIRMED.

38 | P a g e
2. Power of eminent domain P4,116.00 representing the estimated amount equivalent to the assessed
value of the aforesaid portion.
Republic of the Philippines
SUPREME COURT Since 1963 up to 1977 inclusive, Francia failed to pay his real estate
Manila 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
THIRD DIVISION
tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for
the property.
G.R. No. L-67649 June 28, 1988
Francia was not present during the auction sale since he was in Iligan City
ENGRACIO FRANCIA, petitioner, at that time helping his uncle ship bananas.
vs.
INTERMEDIATE APPELLATE COURT and HO
On March 3, 1979, Francia received a notice of hearing of LRC Case No.
FERNANDEZ, respondents.
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
GUTIERREZ, JR., J.: 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
The petitioner invokes legal and equitable grounds to reverse the TCT No. 4739 (37795) by the Register of Deeds.
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 On March 20, 1979, Francia filed a complaint to annul the auction sale. He
allow him to recover a 203 square meter lot which was, sold at public later amended his complaint on January 24, 1980.
auction to Ho Fernandez and ordered titled in the latter's name.
On April 23, 1981, the lower court rendered a decision, the dispositive
The antecedent facts are as follows: portion of which reads:

Engracio Francia is the registered owner of a residential lot and a two- WHEREFORE, in view of the foregoing, judgment is
story house built upon it situated at Barrio San Isidro, now District of Sta. hereby rendered dismissing the amended complaint and
Clara, Pasay City, Metro Manila. The lot, with an area of about 328 square ordering:
meters, is described and covered by Transfer Certificate of Title No. 4739
(37795) of the Registry of Deeds of Pasay City. (a) The Register of Deeds of Pasay City
to issue a new Transfer Certificate of Title
On October 15, 1977, a 125 square meter portion of Francia's property in favor of the defendant Ho Fernandez
was expropriated by the Republic of the Philippines for the sum of over the parcel of land including the
improvements thereon, subject to

39 | P a g e
 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:
I
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.
40 | P a g e
 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
41 | P a g e
 ... [D]ue process of law to be followed in tax proceedings A. I just signed it because I was not able
must be established by proof and the general rule is that to read the same. It was just sent by mail
the purchaser of a tax title is bound to take upon himself carrier.
the burden of showing the regularity of all proceedings
leading up to the sale. (emphasis supplied) Q. So you admit that you received the
original of Exhibit I and you signed upon
There is no presumption of the regularity of any administrative action receipt thereof but you did not read the
which results in depriving a taxpayer of his property through a tax sale. contents of it?
(Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular Government, 19
Phil. 261). This is actually an exception to the rule that administrative A. Yes, sir, as I was in a hurry.
proceedings are presumed to be regular.
Q. After you received that original where
But even if the burden of proof lies with the purchaser to show that all legal did you place it?
prerequisites have been complied with, the petitioner can not, however,
deny that he did receive the notice for the auction sale. The records
A. I placed it in the usual place where I
sustain the lower court's finding that:
place my mails.

[T]he plaintiff claimed that it was illegal and irregular. He Petitioner, therefore, was notified about the auction sale. It was negligence
insisted that he was not properly notified of the auction
on his part when he ignored such notice. By his very own admission that
sale. Surprisingly, however, he admitted in his testimony
he received the notice, his now coming to court assailing the validity of the
that he received the letter dated November 21, 1977
auction sale loses its force.
(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 Petitioner's third assignment of grave error likewise lacks merit. As a
he went to Iligan City. As long as there was substantial general rule, gross inadequacy of price is not material (De Leon v.
compliance with the requirements of the notice, the Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance
validity of the auction sale can not be assailed ... . 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
We quote the following testimony of the petitioner on cross-examination, to
gives the owner the right to redeem as when a sale is made at public
wit:
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
Q. My question to you is this letter marked Court held:
as Exhibit I for Ho Fernandez notified you
that the property in question shall be sold
... [R]espondent treasurer now claims that the prices for
at public auction to the highest bidder on
which the lands were sold are unconscionable considering
December 5, 1977 pursuant to Sec. 74 of
the wide divergence between their assessed values and
PD 464. Will you tell the Court whether
the amounts for which they had been actually sold.
you received the original of this letter?

42 | P a g e
 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.
43 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-18994 June 29, 1963
MELECIO R. DOMINGO, as Commissioner of Internal
Revenue, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court
of First Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of
the late Walter Scott Price, respondents.
Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.
Benedicto and Martinez for respondents.
LABRADOR, J.:
This is a petition for certiorari and mandamus against the Judge of the
Court of First Instance of Leyte, Ron. Lorenzo C. Garlitos, presiding,
seeking to annul certain orders of the court and for an order in this Court
directing the respondent court below to execute the judgment in favor of
the Government against the estate of Walter Scott Price for internal
revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R.
No. L-14674, January 30, 1960, this Court declared as final and executory
the order for the payment by the estate of the estate and inheritance taxes,
charges and penalties, amounting to P40,058.55, issued by the Court of
First Instance of Leyte in, special proceedings No. 14 entitled "In the
matter of the Intestate Estate of the Late Walter Scott Price." In order to
enforce the claims against the estate the fiscal presented a petition dated
June 21, 1961, to the court below for the execution of the judgment. The
petition was, however, denied by the court which held that the execution is
not justifiable as the Government is indebted to the estate under
administration in the amount of P262,200. The orders of the court below
dated August 20, 1960 and September 28, 1960, respectively, are as
follows:
Atty. Benedicto submitted a copy of the contract between Mrs.
Simeona K. Price, Administratrix of the estate of her late husband
Walter Scott Price and Director Zoilo Castrillo of the Bureau of
Lands dated September 19, 1956 and acknowledged before
Notary Public Salvador V. Esguerra, legal adviser in Malacañang
to Executive Secretary De Leon dated December 14, 1956, the
note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo
dated August 2, 1958, directing the latter to pay to Mrs. Price the
sum ofP368,140.00, and an extract of page 765 of Republic Act
No. 2700 appropriating the sum of P262.200.00 for the payment to
the Leyte Cadastral Survey, Inc., represented by the administratrix
Simeona K. Price, as directed in the above note of the President.
Considering these facts, the Court orders that the payment of
inheritance taxes in the sum of P40,058.55 due the Collector of
Internal Revenue as ordered paid by this Court on July 5, 1960 in
accordance with the order of the Supreme Court promulgated July
30, 1960 in G.R. No. L-14674, be deducted from the amount of
P262,200.00 due and payable to the Administratrix Simeona K.
Price, in this estate, the balance to be paid by the Government to
her without further delay. (Order of August 20, 1960)
The Court has nothing further to add to its order dated August 20,
1960 and it orders that the payment of the claim of the Collector of
Internal Revenue be deferred until the Government shall have
paid its accounts to the administratrix herein amounting to
P262,200.00. It may not be amiss to repeat that it is only fair for
the Government, as a debtor, to its accounts to its citizens-
creditors before it can insist in the prompt payment of the latter's
account to it, specially taking into consideration that the amount
due to the Government draws interests while the credit due to the
present state does not accrue any interest. (Order of September
28, 1960)
44 | P a g e
The petition to set aside the above orders of the court below and for the
execution of the claim of the Government against the estate must be
denied for lack of merit. The ordinary procedure by which to settle claims
of indebtedness against the estate of a deceased person, as an
inheritance tax, is for the claimant to present a claim before the probate
court so that said court may order the administrator to pay the amount
thereof. To such effect is the decision of this Court in Aldamiz vs. Judge of
the Court of First Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949,
thus:
. . . a writ of execution is not the proper procedure allowed by the
Rules of Court for the payment of debts and expenses of
administration. The proper procedure is for the court to order the
sale of personal estate or the sale or mortgage of real property of
the deceased and all debts or expenses of administrator and with
the written notice to all the heirs legatees and devisees residing in
the Philippines, according to Rule 89, section 3, and Rule 90,
section 2. And when sale or mortgage of real estate is to be made,
the regulations contained in Rule 90, section 7, should be
complied with.1äwphï1.ñët
Execution may issue only where the devisees, legatees or heirs
have entered into possession of their respective portions in the
estate prior to settlement and payment of the debts and expenses
of administration and it is later ascertained that there are such
debts and expenses to be paid, in which case "the court having
jurisdiction of the estate may, by order for that purpose, after
hearing, settle the amount of their several liabilities, and order how
much and in what manner each person shall contribute, and
may issue execution if circumstances require" (Rule 89, section
6; see also Rule 74, Section 4; Emphasis supplied.) And this is not
the instant case.
The legal basis for such a procedure is the fact that in the testate or
intestate proceedings to settle the estate of a deceased person, the
properties belonging to the estate are under the jurisdiction of the court
and such jurisdiction continues until said properties have been distributed
among the heirs entitled thereto. During the pendency of the proceedings
all the estate is in custodia legis and the proper procedure is not to allow
the sheriff, in case of the court judgment, to seize the properties but to ask
the court for an order to require the administrator to pay the amount due
from the estate and required to be paid.
Another ground for denying the petition of the provincial fiscal is the fact
that the court having jurisdiction of the estate had found that the claim of
the estate against the Government has been recognized and an amount of
P262,200 has already been appropriated for the purpose by a
corresponding law (Rep. Act No. 2700). Under the above circumstances,
both the claim of the Government for inheritance taxes and the claim of the
intestate for services rendered have already become overdue and
demandable is well as fully liquidated. Compensation, therefore, takes
place by operation of law, in accordance with the provisions of Articles
1279 and 1290 of the Civil Code, and both debts are extinguished to the
concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279 are
present, compensation takes effect by operation of law, and
extinguished both debts to the concurrent amount, eventhough the
creditors and debtors are not aware of the compensation.
It is clear, therefore, that the petitioner has no clear right to execute the
judgment for taxes against the estate of the deceased Walter Scott Price.
Furthermore, the petition for certiorari and mandamus is not the proper
remedy for the petitioner. Appeal is the remedy.
The petition is, therefore, dismissed, without costs.
45 | P a g e
E. Purpose of taxation The disputed registration fees were imposed by the appellee,
Commissioner Romeo F. Elevate pursuant to Section 8, Republic Act No.
1. Revenue-raising 4136, otherwise known as the Land Transportation and Traffic Code.

2. non-revenue/special or regulatory The Philippine Airlines (PAL) is a corporation organized and existing under
the laws of the Philippines and engaged in the air transportation business
Republic of the Philippines under a legislative franchise, Act No. 42739, as amended by Republic Act
SUPREME COURT Nos. 25). and 269.1 Under its franchise, PAL is exempt from the payment
Manila of taxes. The pertinent provision of the franchise provides as follows:

EN BANC Section 13. In consideration of the franchise and rights

G.R. No. L- 41383 August 15, 1988
PHILIPPINE AIRLINES, INC., plaintiff-appellant,
vs.
ROMEO F. EDU in his capacity as Land Transportation
Commissioner, and UBALDO CARBONELL, in his capacity as
National Treasurer, defendants-appellants.
Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.
hereby granted, the grantee shall pay to the National
Government during the life of this franchise a tax of two
per cent of the gross revenue or gross earning derived by
the grantee from its operations under this franchise. Such
tax shall be due and payable quarterly and shall be in lieu
of all taxes of any kind, nature or description, levied,
established or collected by any municipal, provincial or
national automobiles, Provided, that if, after the audit of
the accounts of the grantee by the Commissioner of
Internal Revenue, a deficiency tax is shown to be due, the
deficiency tax shall be payable within the ten days from
the receipt of the assessment. The grantee shall pay the
tax on its real property in conformity with existing law.

GUTIERREZ, JR., J.:
What is the nature of motor vehicle registration fees? Are they taxes or
regulatory fees?
This question has been brought before this Court in the past. The parties
are, in effect, asking for a re-examination of the latest decision on this
issue.
This appeal was certified to us as one involving a pure question of law by
the Court of Appeals in a case where the then Court of First Instance of
Rizal dismissed the portion-about complaint for refund of registration fees
paid under protest.
On the strength of an opinion of the Secretary of Justice (Op. No. 307,
series of 1956) PAL has, since 1956, not been paying motor vehicle
registration fees.
Sometime in 1971, however, appellee Commissioner Romeo F. Elevate
issued a regulation requiring all tax exempt entities, among them PAL to
pay motor vehicle registration fees.
Despite PAL's protestations, the appellee refused to register the
appellant's motor vehicles unless the amounts imposed under Republic
Act 4136 were paid. The appellant thus paid, under protest, the amount of
P19,529.75 as registration fees of its motor vehicles.

46 | P a g e
After paying under protest, PAL through counsel, wrote a letter dated May
19,1971, to Commissioner Edu demanding a refund of the amounts paid,
invoking the ruling in Calalang v. Lorenzo (97 Phil. 212 [1951]) where it
was held that motor vehicle registration fees are in reality taxes from the
payment of which PAL is exempt by virtue of its legislative franchise.
Appellee Edu denied the request for refund basing his action on the
decision in Republic v. Philippine Rabbit Bus Lines, Inc., (32 SCRA 211,
March 30, 1970) to the effect that motor vehicle registration fees are
regulatory exceptional. and not revenue measures and, therefore, do not
come within the exemption granted to PAL? under its franchise. Hence,
PAL filed the complaint against Land Transportation Commissioner
Romeo F. Edu and National Treasurer Ubaldo Carbonell with the Court of
First Instance of Rizal, Branch 18 where it was docketed as Civil Case No.
Q-15862.
Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI
Carbonell in his capacity as National Treasurer, filed a motion to dismiss
alleging that the complaint states no cause of action. In support of the
motion to dismiss, defendants repatriation the ruling in Republic v.
Philippine Rabbit Bus Lines, Inc., (supra) that registration fees of motor
vehicles are not taxes, but regulatory fees imposed as an incident of the
exercise of the police power of the state. They contended that while Act
4271 exempts PAL from the payment of any tax except two per cent on its
gross revenue or earnings, it does not exempt the plaintiff from paying
regulatory fees, such as motor vehicle registration fees. The resolution of
the motion to dismiss was deferred by the Court until after trial on the
merits.
On April 24, 1973, the trial court rendered a decision dismissing the
appellant's complaint "moved by the later ruling laid down by the Supreme
Court in the case or Republic v. Philippine Rabbit Bus Lines, Inc., (supra)."
From this judgment, PAL appealed to the Court of Appeals which certified
the case to us.
Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines,
Inc. (supra) cited by PAL and Commissioner Romeo F. Edu respectively,
discuss the main points of contention in the case at bar.
Resolving the issue in the Philippine Rabbit case, this Court held:
"The registration fee which defendant-appellee had to pay
was imposed by Section 8 of the Revised Motor Vehicle
Law (Republic Act No. 587 [1950]). Its heading speaks of
"registration fees." The term is repeated four times in the
body thereof. Equally so, mention is made of the "fee for
registration." (Ibid., Subsection G) A subsection starts with
a categorical statement "No fees shall be charged."
(lbid.,Subsection H) The conclusion is difficult to resist
therefore that the Motor Vehicle Act requires the payment
not of a tax but of a registration fee under the police
power. Hence the incipient, of the section relied upon by
defendant-appellee under the Back Pay Law, It is not held
liable for a tax but for a registration fee. It therefore cannot
make use of a backpay certificate to meet such an
obligation.
Any vestige of any doubt as to the correctness of the
above conclusion should be dissipated by Republic Act
No. 5448. ([1968]. Section 3 thereof as to the imposition of
additional tax on privately-owned passenger automobiles,
motorcycles and scooters was amended by Republic Act
No. 5470 which is (sic) approved on May 30, 1969.) A
special science fund was thereby created and its title
expressly sets forth that a tax on privately-owned
passenger automobiles, motorcycles and scooters was
imposed. The rates thereof were provided for in its
Section 3 which clearly specifies the" Philippine
tax."(Cooley to be paid as distinguished from the
registration fee under the Motor Vehicle Act. There cannot
be any clearer expression therefore of the legislative will,
even on the assumption that the earlier legislation could
by subdivision the point be susceptible of the
interpretation that a tax rather than a fee was levied. What
is thus most apparent is that where the legislative body
relies on its authority to tax it expressly so states, and
47 | P a g e
 where it is enacting a regulatory measure, it is equally
exploded (at p. 22,1969
In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the
Court, on the other hand, held:
The charges prescribed by the Revised Motor Vehicle
Law for the registration of motor vehicles are in section 8
of that law called "fees". But the appellation is no
impediment to their being considered taxes if taxes they
really are. For not the name but the object of the charge
determines whether it is a tax or a fee. Geveia speaking,
taxes are for revenue, whereas fees are exceptional. for
purposes of regulation and inspection and are for that
reason limited in amount to what is necessary to cover the
cost of the services rendered in that connection. Hence, a
charge fixed by statute for the service to be person,-When
by an officer, where the charge has no relation to the
value of the services performed and where the amount
collected eventually finds its way into the treasury of the
branch of the government whose officer or officers
collected the chauffeur, is not a fee but a tax."(Cooley on
Taxation, Vol. 1, 4th ed., p. 110.)
From the data submitted in the court below, it appears that
the expenditures of the Motor Vehicle Office are but a
small portion—about 5 per centum—of the total
collections from motor vehicle registration fees. And as
proof that the money collected is not intended for the
expenditures of that office, the law itself provides that all
such money shall accrue to the funds for the construction
and maintenance of public roads, streets and bridges. It is
thus obvious that the fees are not collected for regulatory
purposes, that is to say, as an incident to the enforcement
of regulations governing the operation of motor vehicles
on public highways, for their express object is to provide
revenue with which the Government is to discharge one of
its principal functions—the construction and maintenance
of public highways for everybody's use. They are veritable
taxes, not merely fees.
As a matter of fact, the Revised Motor Vehicle Law itself
now regards those fees as taxes, for it provides that "no
other taxes or fees than those prescribed in this Act shall
be imposed," thus implying that the charges therein
imposed—though called fees—are of the category of
taxes. The provision is contained in section 70, of
subsection (b), of the law, as amended by section 17 of
Republic Act 587, which reads:
Sec. 70(b) No other taxes or fees than
those prescribed in this Act shall be
imposed for the registration or operation
or on the ownership of any motor vehicle,
or for the exercise of the profession of
chauffeur, by any municipal corporation,
the provisions of any city charter to the
contrary notwithstanding: Provided,
however, That any provincial board, city
or municipal council or board, or other
competent authority may exact and collect
such reasonable and equitable toll fees
for the use of such bridges and ferries,
within their respective jurisdiction, as may
be authorized and approved by the
Secretary of Public Works and
Communications, and also for the use of
such public roads, as may be authorized
by the President of the Philippines upon
the recommendation of the Secretary of
Public Works and Communications, but in
none of these cases, shall any toll fee."
be charged or collected until and unless
the approved schedule of tolls shall have
been posted levied, in a conspicuous
place at such toll station. (at pp. 213-214)
48 | P a g e
Motor vehicle registration fees were matters originally governed by the
Revised Motor Vehicle Law (Act 3992 [19511) as amended by
Commonwealth Act 123 and Republic Acts Nos. 587 and 1621.
Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known
as the Land Transportation Code, (as amended by Rep. Acts Nos. 5715
and 64-67, P.D. Nos. 382, 843, 896, 110.) and BP Blg. 43, 74 and 398).
Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act
3992 and remained unsegregated, by Rep. Act Nos. 587 and 1603) states:
Section 73. Disposal of moneys collected.—Twenty per
centum of the money collected under the provisions of this
Act shall accrue to the road and bridge funds of the
different provinces and chartered cities in proportion to the
centum shall during the next previous year and the
remaining eighty per centum shall be deposited in the
Philippine Treasury to create a special fund for the
construction and maintenance of national and provincial
roads and bridges. as well as the streets and bridges in
the chartered cities to be alloted by the Secretary of Public
Works and Communications for projects recommended by
the Director of Public Works in the different provinces and
chartered cities. ....
Presently, Sec. 61 of the Land Transportation and Traffic Code provides:
Sec. 61. Disposal of Mortgage. Collected—Monies
collected under the provisions of this Act shall be
deposited in a special trust account in the National
Treasury to constitute the Highway Special Fund, which
shall be apportioned and expended in accordance with the
provisions of the" Philippine Highway Act of 1935.
"Provided, however, That the amount necessary to
maintain and equip the Land Transportation Commission
but not to exceed twenty per cent of the total collection
during one year, shall be set aside for the purpose. (As
amended by RA 64-67, approved August 6, 1971).
It appears clear from the above provisions that the legislative intent and
purpose behind the law requiring owners of vehicles to pay for their
registration is mainly to raise funds for the construction and maintenance
of highways and to a much lesser degree, pay for the operating expenses
of the administering agency. On the other hand, the Philippine Rabbit case
mentions a presumption arising from the use of the term "fees," which
appears to have been favored by the legislature to distinguish fees from
other taxes such as those mentioned in Section 13 of Rep. Act 4136 which
reads:
Sec. 13. Payment of taxes upon registration.—No original
registration of motor vehicles subject to payment of taxes,
customs s duties or other charges shall be accepted
unless proof of payment of the taxes due thereon has
been presented to the Commission.
referring to taxes other than those imposed on the registration, operation
or ownership of a motor vehicle (Sec. 59, b, Rep. Act 4136, as amended).
Fees may be properly regarded as taxes even though they also serve as
an instrument of regulation, As stated by a former presiding judge of the
Court of Tax Appeals and writer on various aspects of taxpayers
It is possible for an exaction to be both tax arose.
regulation. License fees are changes. looked to as a
source of revenue as well as a means of regulation
(Sonzinky v. U.S., 300 U.S. 506) This is true, for example,
of automobile license fees. Isabela such case, the fees
may properly be regarded as taxes even though they also
serve as an instrument of regulation. If the purpose is
primarily revenue, or if revenue is at least one of the real
and substantial purposes, then the exaction is properly
called a tax. (1955 CCH Fed. tax Course, Par. 3101, citing
Cooley on Taxation (2nd Ed.) 592, 593; Calalang v.
Lorenzo. 97 Phil. 213-214) Lutz v. Araneta 98 Phil. 198.)
These exactions are sometimes called regulatory taxes.
(See Secs. 4701, 4711, 4741, 4801, 4811, 4851, and
4881, U.S. Internal Revenue Code of 1954, which classify
49 | P a g e
 taxes on tobacco and alcohol as regulatory taxes.) (Umali,
Reviewer in Taxation, 1980, pp. 12-13, citing Cooley on
Taxation, 2nd Edition, 591-593).
Indeed, taxation may be made the implement of the state's police power
(Lutz v. Araneta, 98 Phil. 148).
If the purpose is primarily revenue, or if revenue is, at least, one of the real
and substantial purposes, then the exaction is properly called a tax (Umali,
Id.) Such is the case of motor vehicle registration fees. The conclusions
become inescapable in view of Section 70(b) of Rep. Act 587 quoted in
the Calalang case. The same provision appears as Section 591-593). in
the Land Transportation code. It is patent therefrom that the legislators
had in mind a regulatory tax as the law refers to the imposition on the
registration, operation or ownership of a motor vehicle as a "tax or fee."
Though nowhere in Rep. Act 4136 does the law specifically state that the
imposition is a tax, Section 591-593). speaks of "taxes." or fees ... for the
registration or operation or on the ownership of any motor vehicle, or for
the exercise of the profession of chauffeur ..." making the intent to impose
a tax more apparent. Thus, even Rep. Act 5448 cited by the respondents,
speak of an "additional" tax," where the law could have referred to an
original tax and not one in addition to the tax already imposed on the
registration, operation, or ownership of a motor vehicle under Rep. Act
41383. Simply put, if the exaction under Rep. Act 4136 were merely a
regulatory fee, the imposition in Rep. Act 5448 need not be an "additional"
tax. Rep. Act 4136 also speaks of other "fees," such as the special permit
fees for certain types of motor vehicles (Sec. 10) and additional fees for
change of registration (Sec. 11). These are not to be understood as taxes
because such fees are very minimal to be revenue-raising. Thus, they are
not mentioned by Sec. 591-593). of the Code as taxes like the motor
vehicle registration fee and chauffers' license fee. Such fees are to go into
the expenditures of the Land Transportation Commission as provided for
in the last proviso of see. 61, aforequoted.
It is quite apparent that vehicle registration fees were originally simple
exceptional. intended only for rigidly purposes in the exercise of the
State's police powers. Over the years, however, as vehicular traffic
exploded in number and motor vehicles became absolute necessities
without which modem life as we know it would stand still, Congress found
the registration of vehicles a very convenient way of raising much needed
revenues. Without changing the earlier deputy. of registration payments as
"fees," their nature has become that of "taxes."
In view of the foregoing, we rule that motor vehicle registration fees as at
present exacted pursuant to the Land Transportation and Traffic Code are
actually taxes intended for additional revenues. of government even if one
fifth or less of the amount collected is set aside for the operating expenses
of the agency administering the program.
May the respondent administrative agency be required to refund the
amounts stated in the complaint of PAL?
The answer is NO.
The claim for refund is made for payments given in 1971. It is not clear
from the records as to what payments were made in succeeding years.
We have ruled that Section 24 of Rep. Act No. 5448 dated June 27, 1968,
repealed all earlier tax exemptions Of corporate taxpayers found in
legislative franchises similar to that invoked by PAL in this case.
In Radio Communications of the Philippines, Inc. v. Court of Tax
Appeals, et al. (G.R. No. 615)." July 11, 1985), this Court ruled:
Under its original franchise, Republic Act No. 21); enacted
in 1957, petitioner Radio Communications of the
Philippines, Inc., was subject to both the franchise tax and
income tax. In 1964, however, petitioner's franchise was
amended by Republic Act No. 41-42). to the effect that its
franchise tax of one and one-half percentum (1-1/2%) of
all gross receipts was provided as "in lieu of any and all
taxes of any kind, nature, or description levied,
established, or collected by any authority whatsoever,
municipal, provincial, or national from which taxes the
grantee is hereby expressly exempted." The issue raised
to this Court now is the validity of the respondent court's
50 | P a g e
decision which ruled that the exemption under Republic
Act No. 41-42). was repealed by Section 24 of Republic
Act No. 5448 dated June 27, 1968 which reads:
"(d) The provisions of existing special or
general laws to the contrary
notwithstanding, all corporate taxpayers
not specifically exempt under Sections 24
(c) (1) of this Code shall pay the rates
provided in this section. All corporations,
agencies, or instrumentalities owned or
controlled by the government, including
the Government Service Insurance
System and the Social Security System
but excluding educational institutions,
shall pay such rate of tax upon their
taxable net income as are imposed by this
section upon associations or corporations
engaged in a similar business or industry.
" or
An examination of Section 24 of the Tax Code as
amended shows clearly that the law intended all corporate
taxpayers to pay income tax as provided by the statute.
There can be no doubt as to the power of Congress to
repeal the earlier exemption it granted. Article XIV,
Section 8 of the 1935 Constitution and Article XIV, Section
5 of the Constitution as amended in 1973 expressly
provide that no franchise shall be granted to any
individual, firm, or corporation except under the condition
that it shall be subject to amendment, alteration, or repeal
by the legislature when the public interest so requires.
There is no question as to the public interest involved. The
country needs increased revenues. The repealing clause
is clear and unambiguous. There is a listing of entities
entitled to tax exemption. The petitioner is not covered by
the provision. Considering the foregoing, the Court
Resolved to DENY the petition for lack of merit. The
decision of the respondent court is affirmed.
Any registration fees collected between June 27, 1968 and April 9, 1979,
were correctly imposed because the tax exemption in the franchise of PAL
was repealed during the period. However, an amended franchise was
given to PAL in 1979. Section 13 of Presidential Decree No. 1590, now
provides:
In consideration of the franchise and rights hereby
granted, the grantee shall pay to the Philippine
Government during the lifetime of this franchise whichever
of subsections (a) and (b) hereunder will result in a lower
taxes.)
(a) The basic corporate income tax based
on the grantee's annual net taxable
income computed in accordance with the
provisions of the Internal Revenue Code;
(b) A franchise tax of two per cent (2%) of
the gross revenues. derived by the
grantees from all specific. without
distinction as to transport or nontransport
corporations; provided that with respect to
international airtransport service, only the
gross passengers, mail, and freight
revenues. from its outgoing flights shall be
subject to this law.
The tax paid by the grantee under either of the above
alternatives shall be in lieu of all other taxes, duties,
royalties, registration, license and other fees and charges
of any kind, nature or description imposed, levied,
established, assessed, or collected by any municipal, city,
provincial, or national authority or government, agency,
51 | P a g e
 now or in the future, including but not limited to the
following:

xxx xxx xxx

(5) All taxes, fees and other charges on the registration,

license, acquisition, and transfer of airtransport
equipment, motor vehicles, and all other personal or real
property of the gravitates (Pres. Decree 1590, 75 OG No.
15, 3259, April 9, 1979).

PAL's current franchise is clear and specific. It has removed the ambiguity
found in the earlier law. PAL is now exempt from the payment of any tax,
fee, or other charge on the registration and licensing of motor vehicles.
Such payments are already included in the basic tax or franchise tax
provided in Subsections (a) and (b) of Section 13, P.D. 1590, and may no
longer be exacted.

WHEREFORE, the petition is hereby partially GRANTED. The prayed for

refund of registration fees paid in 1971 is DENIED. The Land
Transportation Franchising and Regulatory Board (LTFRB) is enjoined
functions-the collecting any tax, fee, or other charge on the registration
and licensing of the petitioner's motor vehicles from April 9, 1979 as
provided in Presidential Decree No. 1590.

SO ORDERED.

52 | P a g e
G.R. No. 149110 April 9, 2003
NATIONAL POWER CORPORATION, petitioner,
vs.
CITY OF CABANATUAN, respondent.
PUNO, J.:
This is a petition for review1 of the Decision2 and the Resolution3 of the
Court of Appeals dated March 12, 2001 and July 10, 2001, respectively,
finding petitioner National Power Corporation (NPC) liable to pay franchise
tax to respondent City of Cabanatuan.
Petitioner is a government-owned and controlled corporation created
under Commonwealth Act No. 120, as amended.4 It is tasked to undertake
the "development of hydroelectric generations of power and the production
of electricity from nuclear, geothermal and other sources, as well as, the
transmission of electric power on a nationwide basis."5 Concomitant to its
mandated duty, petitioner has, among others, the power to construct,
operate and maintain power plants, auxiliary plants, power stations and
substations for the purpose of developing hydraulic power and supplying
such power to the inhabitants.6
For many years now, petitioner sells electric power to the residents of
Cabanatuan City, posting a gross income of P107,814,187.96 in
1992.7 Pursuant to section 37 of Ordinance No. 165-92,8 the respondent
assessed the petitioner a franchise tax amounting to P808,606.41,
representing 75% of 1% of the latter's gross receipts for the preceding
year.9
Petitioner, whose capital stock was subscribed and paid wholly by the
Philippine Government,10 refused to pay the tax assessment. It argued that
the respondent has no authority to impose tax on government entities.
Petitioner also contended that as a non-profit organization, it is exempted
from the payment of all forms of taxes, charges, duties or fees 11 in
accordance with sec. 13 of Rep. Act No. 6395, as amended, viz:
"Sec.13. Non-profit Character of the Corporation; Exemption from
all Taxes, Duties, Fees, Imposts and Other Charges by
Government and Governmental Instrumentalities.- The
Corporation shall be non-profit and shall devote all its return from
its capital investment, as well as excess revenues from its
operation, for expansion. To enable the Corporation to pay its
indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section one of this Act,
the Corporation is hereby exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges,
costs and service fees in any court or administrative proceedings
in which it may be a party, restrictions and duties to the Republic
of the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be
paid to the National Government, its provinces, cities,
municipalities and other government agencies and
instrumentalities;
(c) From all import duties, compensating taxes and advanced
sales tax, and wharfage fees on import of foreign goods required
for its operations and projects; and
(d) From all taxes, duties, fees, imposts, and all other charges
imposed by the Republic of the Philippines, its provinces, cities,
municipalities and other government agencies and
instrumentalities, on all petroleum products used by the
Corporation in the generation, transmission, utilization, and sale of
electric power."12
The respondent filed a collection suit in the Regional Trial Court of
Cabanatuan City, demanding that petitioner pay the assessed tax due,
plus a surcharge equivalent to 25% of the amount of tax, and 2% monthly
interest.13Respondent alleged that petitioner's exemption from local taxes
has been repealed by section 193 of Rep. Act No. 7160,14 which reads as
follows:
53 | P a g e
 "Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless
otherwise provided in this Code, tax exemptions or incentives
granted to, or presently enjoyed by all persons, whether natural or
juridical, including government owned or controlled corporations,
except local water districts, cooperatives duly registered under
R.A. No. 6938, non-stock and non-profit hospitals and educational
institutions, are hereby withdrawn upon the effectivity of this
Code."
On January 25, 1996, the trial court issued an Order 15 dismissing the case.
It ruled that the tax exemption privileges granted to petitioner subsist
despite the passage of Rep. Act No. 7160 for the following reasons: (1)
Rep. Act No. 6395 is a particular law and it may not be repealed by Rep.
Act No. 7160 which is a general law; (2) section 193 of Rep. Act No. 7160
is in the nature of an implied repeal which is not favored; and (3) local
governments have no power to tax instrumentalities of the national
government. Pertinent portion of the Order reads:
"The question of whether a particular law has been repealed or not
by a subsequent law is a matter of legislative intent. The
lawmakers may expressly repeal a law by incorporating therein
repealing provisions which expressly and specifically cite(s) the
particular law or laws, and portions thereof, that are intended to be
repealed. A declaration in a statute, usually in its repealing clause,
that a particular and specific law, identified by its number or title is
repealed is an express repeal; all others are implied repeal. Sec.
193 of R.A. No. 7160 is an implied repealing clause because it
fails to identify the act or acts that are intended to be repealed. It is
a well-settled rule of statutory construction that repeals of statutes
by implication are not favored. The presumption is against
inconsistency and repugnancy for the legislative is presumed to
know the existing laws on the subject and not to have enacted
inconsistent or conflicting statutes. It is also a well-settled rule that,
generally, general law does not repeal a special law unless it
clearly appears that the legislative has intended by the latter
general act to modify or repeal the earlier special law. Thus,
despite the passage of R.A. No. 7160 from which the questioned
Ordinance No. 165-92 was based, the tax exemption privileges of
defendant NPC remain.
Another point going against plaintiff in this case is the ruling of the
Supreme Court in the case of Basco vs. Philippine Amusement
and Gaming Corporation, 197 SCRA 52, where it was held that:
'Local governments have no power to tax instrumentalities
of the National Government. PAGCOR is a government
owned or controlled corporation with an original charter,
PD 1869. All of its shares of stocks are owned by the
National Government. xxx Being an instrumentality of the
government, PAGCOR should be and actually is exempt
from local taxes. Otherwise, its operation might be
burdened, impeded or subjected to control by mere local
government.'
Like PAGCOR, NPC, being a government owned and controlled
corporation with an original charter and its shares of stocks owned
by the National Government, is beyond the taxing power of the
Local Government. Corollary to this, it should be noted here that in
the NPC Charter's declaration of Policy, Congress declared that:
'xxx (2) the total electrification of the Philippines through the
development of power from all services to meet the needs of
industrial development and dispersal and needs of rural
electrification are primary objectives of the nations which shall be
pursued coordinately and supported by all instrumentalities and
agencies of the government, including its financial institutions.'
(underscoring supplied). To allow plaintiff to subject defendant to
its tax-ordinance would be to impede the avowed goal of this
government instrumentality.
Unlike the State, a city or municipality has no inherent power of
taxation. Its taxing power is limited to that which is provided for in
its charter or other statute. Any grant of taxing power is to be
construed strictly, with doubts resolved against its existence.
54 | P a g e
 From the existing law and the rulings of the Supreme Court itself,
it is very clear that the plaintiff could not impose the subject tax on
the defendant."16
On appeal, the Court of Appeals reversed the trial court's Order 17 on the
ground that section 193, in relation to sections 137 and 151 of the LGC,
expressly withdrew the exemptions granted to the petitioner.18 It ordered
the petitioner to pay the respondent city government the following: (a) the
sum of P808,606.41 representing the franchise tax due based on gross
receipts for the year 1992, (b) the tax due every year thereafter based in
the gross receipts earned by NPC, (c) in all cases, to pay a surcharge of
25% of the tax due and unpaid, and (d) the sum of P 10,000.00 as
litigation expense.19
On April 4, 2001, the petitioner filed a Motion for Reconsideration on the
Court of Appeal's Decision. This was denied by the appellate court, viz:
"The Court finds no merit in NPC's motion for reconsideration. Its
arguments reiterated therein that the taxing power of the province
under Art. 137 (sic) of the Local Government Code refers merely
to private persons or corporations in which category it (NPC) does
not belong, and that the LGC (RA 7160) which is a general law
may not impliedly repeal the NPC Charter which is a special law—
finds the answer in Section 193 of the LGC to the effect that 'tax
exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned
or controlled corporations except local water districts xxx are
hereby withdrawn.' The repeal is direct and unequivocal, not
implied.
IN VIEW WHEREOF, the motion for reconsideration is hereby
DENIED.
SO ORDERED."20
In this petition for review, petitioner raises the following issues:
"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING
THAT NPC, A PUBLIC NON-PROFIT CORPORATION, IS
LIABLE TO PAY A FRANCHISE TAX AS IT FAILED TO
CONSIDER THAT SECTION 137 OF THE LOCAL
GOVERNMENT CODE IN RELATION TO SECTION 131
APPLIES ONLY TO PRIVATE PERSONS OR CORPORATIONS
ENJOYING A FRANCHISE.
B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING
THAT NPC'S EXEMPTION FROM ALL FORMS OF TAXES HAS
BEEN REPEALED BY THE PROVISION OF THE LOCAL
GOVERNMENT CODE AS THE ENACTMENT OF A LATER
LEGISLATION, WHICH IS A GENERAL LAW, CANNOT BE
CONSTRUED TO HAVE REPEALED A SPECIAL LAW.
C. THE COURT OF APPEALS GRAVELY ERRED IN NOT
CONSIDERING THAT AN EXERCISE OF POLICE POWER
THROUGH TAX EXEMPTION SHOULD PREVAIL OVER THE
LOCAL GOVERNMENT CODE."21
It is beyond dispute that the respondent city government has the authority
to issue Ordinance No. 165-92 and impose an annual tax on "businesses
enjoying a franchise," pursuant to section 151 in relation to section 137 of
the LGC, viz:
"Sec. 137. Franchise Tax. - Notwithstanding any exemption
granted by any law or other special law, the province may impose
a tax on businesses enjoying a franchise, at a rate not exceeding
fifty percent (50%) of one percent (1%) of the gross annual
receipts for the preceding calendar year based on the incoming
receipt, or realized, within its territorial jurisdiction.
In the case of a newly started business, the tax shall not exceed
one-twentieth (1/20) of one percent (1%) of the capital investment.
In the succeeding calendar year, regardless of when the business
started to operate, the tax shall be based on the gross receipts for
the preceding calendar year, or any fraction thereof, as provided
herein." (emphasis supplied)
55 | P a g e
 x x x be channeled for expansion and improvement of its facilities and
Sec. 151. Scope of Taxing Powers.- Except as otherwise provided
in this Code, the city, may levy the taxes, fees, and charges which
the province or municipality may impose: Provided, however, That
the taxes, fees and charges levied and collected by highly
urbanized and independent component cities shall accrue to them
and distributed in accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the
maximum rates allowed for the province or municipality by not
more than fifty percent (50%) except the rates of professional and
amusement taxes."
Petitioner, however, submits that it is not liable to pay an annual franchise
tax to the respondent city government. It contends that sections 137 and
151 of the LGC in relation to section 131, limit the taxing power of the
respondent city government to private entities that are engaged in trade or
occupation for profit.22
Section 131 (m) of the LGC defines a "franchise" as "a right or privilege,
affected with public interest which is conferred upon private persons or
corporations, under such terms and conditions as the government and its
political subdivisions may impose in the interest of the public welfare,
security and safety." From the phraseology of this provision, the petitioner
claims that the word "private" modifies the terms "persons" and
"corporations." Hence, when the LGC uses the term "franchise," petitioner
submits that it should refer specifically to franchises granted to private
natural persons and to private corporations.23 Ergo, its charter should not
be considered a "franchise" for the purpose of imposing the franchise tax
in question.
On the other hand, section 131 (d) of the LGC defines "business" as "trade
or commercial activity regularly engaged in as means of livelihood or with
a view to profit." Petitioner claims that it is not engaged in an activity for
profit, in as much as its charter specifically provides that it is a "non-profit
organization." In any case, petitioner argues that the accumulation of profit
is merely incidental to its operation; all these profits are required by law to
services.24
Petitioner also alleges that it is an instrumentality of the National
Government,25 and as such, may not be taxed by the respondent city
government. It cites the doctrine in Basco vs. Philippine Amusement and
Gaming Corporation26where this Court held that local governments have
no power to tax instrumentalities of the National Government, viz:
"Local governments have no power to tax instrumentalities of the
National Government.
PAGCOR has a dual role, to operate and regulate gambling
casinos. The latter role is governmental, which places it in the
category of an agency or instrumentality of the Government. Being
an instrumentality of the Government, PAGCOR should be and
actually is exempt from local taxes. Otherwise, its operation might
be burdened, impeded or subjected to control by a mere local
government.
'The states have no power by taxation or otherwise, to
retard, impede, burden or in any manner control the
operation of constitutional laws enacted by Congress to
carry into execution the powers vested in the federal
government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L
Ed. 579)'
This doctrine emanates from the 'supremacy' of the National
Government over local governments.
'Justice Holmes, speaking for the Supreme Court, made
reference to the entire absence of power on the part of the
States to touch, in that way (taxation) at least, the
instrumentalities of the United States (Johnson v.
Maryland, 254 US 51) and it can be agreed that no state
or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from
56 | P a g e
 consummating its federal responsibilities, or even
seriously burden it from accomplishment of them.'
(Antieau, Modern Constitutional Law, Vol. 2, p. 140, italics
supplied)
Otherwise, mere creatures of the State can defeat National
policies thru extermination of what local authorities may perceive
to be undesirable activities or enterprise using the power to tax as
' a tool regulation' (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the
'power to destroy' (Mc Culloch v. Maryland, supra) cannot be
allowed to defeat an instrumentality or creation of the very entity
which has the inherent power to wield it."27
Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the
tax privileges of government-owned or controlled corporations, is in the
nature of an implied repeal. A special law, its charter cannot be amended
or modified impliedly by the local government code which is a general law.
Consequently, petitioner claims that its exemption from all taxes, fees or
charges under its charter subsists despite the passage of the LGC, viz:
"It is a well-settled rule of statutory construction that repeals of
statutes by implication are not favored and as much as possible,
effect must be given to all enactments of the legislature. Moreover,
it has to be conceded that the charter of the NPC constitutes a
special law. Republic Act No. 7160, is a general law. It is a basic
rule in statutory construction that the enactment of a later
legislation which is a general law cannot be construed to have
repealed a special law. Where there is a conflict between a
general law and a special statute, the special statute should
prevail since it evinces the legislative intent more clearly than the
general statute."28
Finally, petitioner submits that the charter of the NPC, being a valid
exercise of police power, should prevail over the LGC. It alleges that the
power of the local government to impose franchise tax is subordinate to
petitioner's exemption from taxation; "police power being the most
pervasive, the least limitable and most demanding of all powers, including
the power of taxation."29
The petition is without merit.
Taxes are the lifeblood of the government,30 for without taxes, the
government can neither exist nor endure. A principal attribute of
sovereignty,31 the exercise of taxing power derives its source from the very
existence of the state whose social contract with its citizens obliges it to
promote public interest and common good. The theory behind the exercise
of the power to tax emanates from necessity;32 without taxes, government
cannot fulfill its mandate of promoting the general welfare and well-being
of the people.
In recent years, the increasing social challenges of the times expanded the
scope of state activity, and taxation has become a tool to realize social
justice and the equitable distribution of wealth, economic progress and the
protection of local industries as well as public welfare and similar
objectives.33 Taxation assumes even greater significance with the
ratification of the 1987 Constitution. Thenceforth, the power to tax is no
longer vested exclusively on Congress; local legislative bodies are now
given direct authority to levy taxes, fees and other charges 34 pursuant to
Article X, section 5 of the 1987 Constitution, viz:
"Section 5.- Each Local Government unit shall have the power to
create its own sources of revenue, to levy taxes, fees and charges
subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such
taxes, fees and charges shall accrue exclusively to the Local
Governments."
This paradigm shift results from the realization that genuine development
can be achieved only by strengthening local autonomy and promoting
decentralization of governance. For a long time, the country's highly
centralized government structure has bred a culture of dependence among
local government leaders upon the national leadership. It has also
"dampened the spirit of initiative, innovation and imaginative resilience in
matters of local development on the part of local government
57 | P a g e
leaders."35 The only way to shatter this culture of dependence is to give
the LGUs a wider role in the delivery of basic services, and confer them
sufficient powers to generate their own sources for the purpose. To
achieve this goal, section 3 of Article X of the 1987 Constitution mandates
Congress to enact a local government code that will, consistent with the
basic policy of local autonomy, set the guidelines and limitations to this
grant of taxing powers, viz:
"Section 3. The Congress shall enact a local government code
which shall provide for a more responsive and accountable local
government structure instituted through a system of
decentralization with effective mechanisms of recall, initiative, and
referendum, allocate among the different local government units
their powers, responsibilities, and resources, and provide for the
qualifications, election, appointment and removal, term, salaries,
powers and functions and duties of local officials, and all other
matters relating to the organization and operation of the local
units."
To recall, prior to the enactment of the Rep. Act No. 7160,36 also known as
the Local Government Code of 1991 (LGC), various measures have been
enacted to promote local autonomy. These include the Barrio Charter of
1959,37 the Local Autonomy Act of 1959,38 the Decentralization Act of
196739 and the Local Government Code of 1983.40 Despite these
initiatives, however, the shackles of dependence on the national
government remained. Local government units were faced with the same
problems that hamper their capabilities to participate effectively in the
national development efforts, among which are: (a) inadequate tax base,
(b) lack of fiscal control over external sources of income, (c) limited
authority to prioritize and approve development projects, (d) heavy
dependence on external sources of income, and (e) limited supervisory
control over personnel of national line agencies.41
Considered as the most revolutionary piece of legislation on local
autonomy,42 the LGC effectively deals with the fiscal constraints faced by
LGUs. It widens the tax base of LGUs to include taxes which were
prohibited by previous laws such as the imposition of taxes on forest
products, forest concessionaires, mineral products, mining operations, and
the like. The LGC likewise provides enough flexibility to impose tax rates in
accordance with their needs and capabilities. It does not prescribe
graduated fixed rates but merely specifies the minimum and maximum tax
rates and leaves the determination of the actual rates to the
respective sanggunian.43
One of the most significant provisions of the LGC is the removal of the
blanket exclusion of instrumentalities and agencies of the national
government from the coverage of local taxation. Although as a general
rule, LGUs cannot impose taxes, fees or charges of any kind on the
National Government, its agencies and instrumentalities, this rule now
admits an exception, i.e., when specific provisions of the LGC authorize
the LGUs to impose taxes, fees or charges on the aforementioned
entities, viz:
"Section 133. Common Limitations on the Taxing Powers of the
Local Government Units.- Unless otherwise provided herein, the
exercise of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following:
x x x
(o) Taxes, fees, or charges of any kind on the National
Government, its agencies and instrumentalities, and local
government units." (emphasis supplied)
In view of the afore-quoted provision of the LGC, the doctrine in Basco vs.
Philippine Amusement and Gaming Corporation 44 relied upon by the
petitioner to support its claim no longer applies. To emphasize,
the Basco case was decided prior to the effectivity of the LGC, when no
law empowering the local government units to tax instrumentalities of the
National Government was in effect. However, as this Court ruled in the
case of Mactan Cebu International Airport Authority (MCIAA) vs.
Marcos,45 nothing prevents Congress from decreeing that even
instrumentalities or agencies of the government performing governmental
functions may be subject to tax.46 In enacting the LGC, Congress
exercised its prerogative to tax instrumentalities and agencies of
government as it sees fit. Thus, after reviewing the specific provisions of
58 | P a g e
the LGC, this Court held that MCIAA, although an instrumentality of the
national government, was subject to real property tax, viz:
"Thus, reading together sections 133, 232, and 234 of the LGC,
we conclude that as a general rule, as laid down in section 133,
the taxing power of local governments cannot extend to the levy
of inter alia, 'taxes, fees and charges of any kind on the national
government, its agencies and instrumentalities, and local
government units'; however, pursuant to section 232, provinces,
cities and municipalities in the Metropolitan Manila Area may
impose the real property tax except on, inter alia, 'real property
owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been
granted for consideration or otherwise, to a taxable person as
provided in the item (a) of the first paragraph of section 12.'"47
In the case at bar, section 151 in relation to section 137 of the LGC clearly
authorizes the respondent city government to impose on the petitioner the
franchise tax in question.
In its general signification, a franchise is a privilege conferred by
government authority, which does not belong to citizens of the country
generally as a matter of common right.48 In its specific sense, a franchise
may refer to a general or primary franchise, or to a special or secondary
franchise. The former relates to the right to exist as a corporation, by virtue
of duly approved articles of incorporation, or a charter pursuant to a
special law creating the corporation.49 The right under a primary or general
franchise is vested in the individuals who compose the corporation and not
in the corporation itself.50 On the other hand, the latter refers to the right or
privileges conferred upon an existing corporation such as the right to use
the streets of a municipality to lay pipes of tracks, erect poles or string
wires.51 The rights under a secondary or special franchise are vested in
the corporation and may ordinarily be conveyed or mortgaged under a
general power granted to a corporation to dispose of its property, except
such special or secondary franchises as are charged with a public use. 52
In section 131 (m) of the LGC, Congress unmistakably defined a franchise
in the sense of a secondary or special franchise. This is to avoid any
confusion when the word franchise is used in the context of taxation. As
commonly used, a franchise tax is "a tax on the privilege of transacting
business in the state and exercising corporate franchises granted by the
state."53 It is not levied on the corporation simply for existing as a
corporation, upon its property54 or its income,55 but on its exercise of the
rights or privileges granted to it by the government. Hence, a corporation
need not pay franchise tax from the time it ceased to do business and
exercise its franchise.56 It is within this context that the phrase "tax on
businesses enjoying a franchise" in section 137 of the LGC should be
interpreted and understood. Verily, to determine whether the petitioner is
covered by the franchise tax in question, the following requisites should
concur: (1) that petitioner has a "franchise" in the sense of a secondary or
special franchise; and (2) that it is exercising its rights or privileges under
this franchise within the territory of the respondent city government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as
amended by Rep. Act No. 7395, constitutes petitioner's primary and
secondary franchises. It serves as the petitioner's charter, defining its
composition, capitalization, the appointment and the specific duties of its
corporate officers, and its corporate life span.57 As its secondary franchise,
Commonwealth Act No. 120, as amended, vests the petitioner the
following powers which are not available to ordinary corporations, viz:
"x x x
(e) To conduct investigations and surveys for the development of
water power in any part of the Philippines;
(f) To take water from any public stream, river, creek, lake, spring
or waterfall in the Philippines, for the purposes specified in this
Act; to intercept and divert the flow of waters from lands of riparian
owners and from persons owning or interested in waters which are
or may be necessary for said purposes, upon payment of just
compensation therefor; to alter, straighten, obstruct or increase
the flow of water in streams or water channels intersecting or
connecting therewith or contiguous to its works or any part thereof:
Provided, That just compensation shall be paid to any person or
59 | P a g e
persons whose property is, directly or indirectly, adversely affected
or damaged thereby;
(g) To construct, operate and maintain power plants, auxiliary
plants, dams, reservoirs, pipes, mains, transmission lines, power
stations and substations, and other works for the purpose of
developing hydraulic power from any river, creek, lake, spring and
waterfall in the Philippines and supplying such power to the
inhabitants thereof; to acquire, construct, install, maintain, operate,
and improve gas, oil, or steam engines, and/or other prime
movers, generators and machinery in plants and/or auxiliary plants
for the production of electric power; to establish, develop, operate,
maintain and administer power and lighting systems for the
transmission and utilization of its power generation; to sell electric
power in bulk to (1) industrial enterprises, (2) city, municipal or
provincial systems and other government institutions, (3) electric
cooperatives, (4) franchise holders, and (5) real estate
subdivisions x x x;
(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage,
encumber and otherwise dispose of property incident to, or
necessary, convenient or proper to carry out the purposes for
which the Corporation was created: Provided, That in case a right
of way is necessary for its transmission lines, easement of right of
way shall only be sought: Provided, however, That in case the
property itself shall be acquired by purchase, the cost thereof shall
be the fair market value at the time of the taking of such property;
(i) To construct works across, or otherwise, any stream,
watercourse, canal, ditch, flume, street, avenue, highway or
railway of private and public ownership, as the location of said
works may require xxx;
(j) To exercise the right of eminent domain for the purpose of this
Act in the manner provided by law for instituting condemnation
proceedings by the national, provincial and municipal
governments;
x x x
(m) To cooperate with, and to coordinate its operations with those
of the National Electrification Administration and public service
entities;
(n) To exercise complete jurisdiction and control over watersheds
surrounding the reservoirs of plants and/or projects constructed or
proposed to be constructed by the Corporation. Upon
determination by the Corporation of the areas required for
watersheds for a specific project, the Bureau of Forestry, the
Reforestation Administration and the Bureau of Lands shall, upon
written advice by the Corporation, forthwith surrender jurisdiction
to the Corporation of all areas embraced within the watersheds,
subject to existing private rights, the needs of waterworks
systems, and the requirements of domestic water supply;
(o) In the prosecution and maintenance of its projects, the
Corporation shall adopt measures to prevent environmental
pollution and promote the conservation, development and
maximum utilization of natural resources xxx "58
With these powers, petitioner eventually had the monopoly in the
generation and distribution of electricity. This monopoly was strengthened
with the issuance of Pres. Decree No. 40,59 nationalizing the electric power
industry. Although Exec. Order No. 21560 thereafter allowed private sector
participation in the generation of electricity, the transmission of electricity
remains the monopoly of the petitioner.
Petitioner also fulfills the second requisite. It is operating within the
respondent city government's territorial jurisdiction pursuant to the powers
granted to it by Commonwealth Act No. 120, as amended. From its
operations in the City of Cabanatuan, petitioner realized a gross income of
P107,814,187.96 in 1992. Fulfilling both requisites, petitioner is, and ought
to be, subject of the franchise tax in question.
60 | P a g e
Petitioner, however, insists that it is excluded from the coverage of the
franchise tax simply because its stocks are wholly owned by the National
Government, and its charter characterized it as a "non-profit" organization.
These contentions must necessarily fail.
To stress, a franchise tax is imposed based not on the ownership but on
the exercise by the corporation of a privilege to do business. The taxable
entity is the corporation which exercises the franchise, and not the
individual stockholders. By virtue of its charter, petitioner was created as a
separate and distinct entity from the National Government. It can sue and
be sued under its own name,61 and can exercise all the powers of a
corporation under the Corporation Code.62
To be sure, the ownership by the National Government of its entire capital
stock does not necessarily imply that petitioner is not engaged in business.
Section 2 of Pres. Decree No. 202963 classifies government-owned or
controlled corporations (GOCCs) into those performing governmental
functions and those performing proprietary functions, viz:
"A government-owned or controlled corporation is a stock or a
non-stock corporation, whether performing governmental or
proprietary functions, which is directly chartered by special law or
if organized under the general corporation law is owned or
controlled by the government directly, or indirectly through a
parent corporation or subsidiary corporation, to the extent of at
least a majority of its outstanding voting capital stock x x x."
(emphases supplied)
Governmental functions are those pertaining to the administration of
government, and as such, are treated as absolute obligation on the part of
the state to perform while proprietary functions are those that are
undertaken only by way of advancing the general interest of society, and
are merely optional on the government.64 Included in the class of GOCCs
performing proprietary functions are "business-like" entities such as the
National Steel Corporation (NSC), the National Development Corporation
(NDC), the Social Security System (SSS), the Government Service
Insurance System (GSIS), and the National Water Sewerage Authority
(NAWASA),65 among others.
Petitioner was created to "undertake the development of hydroelectric
generation of power and the production of electricity from nuclear,
geothermal and other sources, as well as the transmission of electric
power on a nationwide basis."66 Pursuant to this mandate, petitioner
generates power and sells electricity in bulk. Certainly, these activities do
not partake of the sovereign functions of the government. They are purely
private and commercial undertakings, albeit imbued with public interest.
The public interest involved in its activities, however, does not distract from
the true nature of the petitioner as a commercial enterprise, in the same
league with similar public utilities like telephone and telegraph companies,
railroad companies, water supply and irrigation companies, gas, coal or
light companies, power plants, ice plant among others; all of which are
declared by this Court as ministrant or proprietary functions of government
aimed at advancing the general interest of society.67
A closer reading of its charter reveals that even the legislature treats the
character of the petitioner's enterprise as a "business," although it limits
petitioner's profits to twelve percent (12%), viz:68
"(n) When essential to the proper administration of its corporate
affairs or necessary for the proper transaction of its business or to
carry out the purposes for which it was organized, to contract
indebtedness and issue bonds subject to approval of the President
upon recommendation of the Secretary of Finance;
(o) To exercise such powers and do such things as may be
reasonably necessary to carry out the business and purposes for
which it was organized, or which, from time to time, may be
declared by the Board to be necessary, useful, incidental or
auxiliary to accomplish the said purpose xxx."(emphases supplied)
It is worthy to note that all other private franchise holders receiving at least
sixty percent (60%) of its electricity requirement from the petitioner are
likewise imposed the cap of twelve percent (12%) on profits.69 The main
difference is that the petitioner is mandated to devote "all its returns from
61 | P a g e
its capital investment, as well as excess revenues from its operation, for
expansion"70 while other franchise holders have the option to distribute
their profits to its stockholders by declaring dividends. We do not see why
this fact can be a source of difference in tax treatment. In both instances,
the taxable entity is the corporation, which exercises the franchise, and not
the individual stockholders.
We also do not find merit in the petitioner's contention that its tax
exemptions under its charter subsist despite the passage of the LGC.
As a rule, tax exemptions are construed strongly against the claimant.
Exemptions must be shown to exist clearly and categorically, and
supported by clear legal provisions.71 In the case at bar, the petitioner's
sole refuge is section 13 of Rep. Act No. 6395 exempting from, among
others, "all income taxes, franchise taxes and realty taxes to be paid to the
National Government, its provinces, cities, municipalities and other
government agencies and instrumentalities." However, section 193 of the
LGC withdrew, subject to limited exceptions, the sweeping tax privileges
previously enjoyed by private and public corporations. Contrary to the
contention of petitioner, section 193 of the LGC is an express, albeit
general, repeal of all statutes granting tax exemptions from local taxes. 72 It
reads:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless
otherwise provided in this Code, tax exemptions or incentives
granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit hospitals
and educational institutions, are hereby withdrawn upon the
effectivity of this Code." (emphases supplied)
It is a basic precept of statutory construction that the express mention of
one person, thing, act, or consequence excludes all others as expressed
in the familiar maxim expressio unius est exclusio alterius.73 Not being a
local water district, a cooperative registered under R.A. No. 6938, or a
non-stock and non-profit hospital or educational institution, petitioner
clearly does not belong to the exception. It is therefore incumbent upon the
petitioner to point to some provisions of the LGC that expressly grant it
exemption from local taxes.
But this would be an exercise in futility. Section 137 of the LGC clearly
states that the LGUs can impose franchise tax "notwithstanding any
exemption granted by any law or other special law." This particular
provision of the LGC does not admit any exception. In City Government of
San Pablo, Laguna v. Reyes,74 MERALCO's exemption from the payment
of franchise taxes was brought as an issue before this Court. The same
issue was involved in the subsequent case of Manila Electric Company v.
Province of Laguna.75 Ruling in favor of the local government in both
instances, we ruled that the franchise tax in question is imposable despite
any exemption enjoyed by MERALCO under special laws, viz:
"It is our view that petitioners correctly rely on provisions of
Sections 137 and 193 of the LGC to support their position that
MERALCO's tax exemption has been withdrawn. The explicit
language of section 137 which authorizes the province to impose
franchise tax 'notwithstanding any exemption granted by any law
or other special law' is all-encompassing and clear. The franchise
tax is imposable despite any exemption enjoyed under special
laws.
Section 193 buttresses the withdrawal of extant tax exemption
privileges. By stating that unless otherwise provided in this Code,
tax exemptions or incentives granted to or presently enjoyed by all
persons, whether natural or juridical, including government-owned
or controlled corporations except (1) local water districts, (2)
cooperatives duly registered under R.A. 6938, (3) non-stock and
non-profit hospitals and educational institutions, are withdrawn
upon the effectivity of this code, the obvious import is to limit the
exemptions to the three enumerated entities. It is a basic precept
of statutory construction that the express mention of one person,
thing, act, or consequence excludes all others as expressed in the
familiar maxim expressio unius est exclusio alterius. In the
absence of any provision of the Code to the contrary, and we find
no other provision in point, any existing tax exemption or incentive
62 | P a g e
 enjoyed by MERALCO under existing law was clearly intended to IN VIEW WHEREOF, the instant petition is DENIED and the assailed
be withdrawn. Decision and Resolution of the Court of Appeals dated March 12, 2001
and July 10, 2001, respectively, are hereby AFFIRMED.
Reading together sections 137 and 193 of the LGC, we conclude
that under the LGC the local government unit may now impose a
local tax at a rate not exceeding 50% of 1% of the gross annual
receipts for the preceding calendar based on the incoming
receipts realized within its territorial jurisdiction. The legislative
purpose to withdraw tax privileges enjoyed under existing law or
charter is clearly manifested by the language used on (sic)
Sections 137 and 193 categorically withdrawing such exemption
subject only to the exceptions enumerated. Since it would be not
only tedious and impractical to attempt to enumerate all the
existing statutes providing for special tax exemptions or privileges,
the LGC provided for an express, albeit general, withdrawal of
such exemptions or privileges. No more unequivocal language
could have been used."76(emphases supplied).

It is worth mentioning that section 192 of the LGC empowers the LGUs,
through ordinances duly approved, to grant tax exemptions, initiatives or
reliefs.77 But in enacting section 37 of Ordinance No. 165-92 which
imposes an annual franchise tax "notwithstanding any exemption granted
by law or other special law," the respondent city government clearly did not
intend to exempt the petitioner from the coverage thereof.

Doubtless, the power to tax is the most effective instrument to raise

needed revenues to finance and support myriad activities of the local
government units for the delivery of basic services essential to the
promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people. As this Court observed in
the Mactan case, "the original reasons for the withdrawal of tax exemption
privileges granted to government-owned or controlled corporations and all
other units of government were that such privilege resulted in serious tax
base erosion and distortions in the tax treatment of similarly situated
enterprises."78 With the added burden of devolution, it is even more
imperative for government entities to share in the requirements of
development, fiscal or otherwise, by paying taxes or other charges due
from them.

63 | P a g e
F. Principles of sound tax system respondent Algue as legitimate business expenses in its income tax
returns. The corollary issue is whether or not the appeal of the private
1. fiscal adequacy respondent from the decision of the Collector of Internal Revenue was
made on time and in accordance with law.
2. administrative feasibility
We deal first with the procedural question.
3. theoretical justice
The record shows that on January 14, 1965, the private respondent, a
domestic corporation engaged in engineering, construction and other allied
G. Theory and basis of taxation activities, received a letter from the petitioner assessing it in the total
amount of P83,183.85 as delinquency income taxes for the years 1958
1. Lifeblood theory and 1959.1 On January 18, 1965, Algue flied a letter of protest or request
for reconsideration, which letter was stamp received on the same day in
Republic of the Philippines the office of the petitioner. 2 On March 12, 1965, a warrant of distraint and
SUPREME COURT levy was presented to the private respondent, through its counsel, Atty.
Manila Alberto Guevara, Jr., who refused to receive it on the ground of the
pending protest. 3 A search of the protest in the dockets of the case
proved fruitless. Atty. Guevara produced his file copy and gave a photostat
FIRST DIVISION
to BIR agent Ramon Reyes, who deferred service of the warrant. 4 On
April 7, 1965, Atty. Guevara was finally informed that the BIR was not
G.R. No. L-28896 February 17, 1988 taking any action on the protest and it was only then that he accepted the
warrant of distraint and levy earlier sought to be served.5 Sixteen days
COMMISSIONER OF INTERNAL REVENUE, petitioner, later, on April 23, 1965, Algue filed a petition for review of the decision of
vs. the Commissioner of Internal Revenue with the Court of Tax Appeals.6
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
The above chronology shows that the petition was filed seasonably.
CRUZ, J.: According to Rep. Act No. 1125, the appeal may be made within thirty
days after receipt of the decision or ruling challenged.7 It is true that as a
Taxes are the lifeblood of the government and so should be collected rule the warrant of distraint and levy is "proof of the finality of the
without unnecessary hindrance On the other hand, such collection should assessment" 8 and renders hopeless a request for
be made in accordance with law as any arbitrariness will negate the very reconsideration," 9 being "tantamount to an outright denial thereof and
reason for government itself. It is therefore necessary to reconcile the makes the said request deemed rejected." 10 But there is a special
apparently conflicting interests of the authorities and the taxpayers so that circumstance in the case at bar that prevents application of this accepted
the real purpose of taxation, which is the promotion of the common good, doctrine.
may be achieved.
The proven fact is that four days after the private respondent received the
The main issue in this case is whether or not the Collector of Internal petitioner's notice of assessment, it filed its letter of protest. This was
Revenue correctly disallowed the P75,000.00 deduction claimed by private apparently not taken into account before the warrant of distraint and levy

64 | P a g e
was issued; indeed, such protest could not be located in the office of the
petitioner. It was only after Atty. Guevara gave the BIR a copy of the
protest that it was, if at all, considered by the tax authorities. During the
intervening period, the warrant was premature and could therefore not be
served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private
respondent was not pro forma and was based on strong legal
considerations. It thus had the effect of suspending on January 18, 1965,
when it was filed, the reglementary period which started on the date the
assessment was received, viz., January 14, 1965. The period started
running again only on April 7, 1965, when the private respondent was
definitely informed of the implied rejection of the said protest and the
warrant was finally served on it. Hence, when the appeal was filed on April
23, 1965, only 20 days of the reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was
properly disallowed because it was not an ordinary reasonable or
necessary business expense. The Court of Tax Appeals had seen it
differently. Agreeing with Algue, it held that the said amount had been
legitimately paid by the private respondent for actual services rendered.
The payment was in the form of promotional fees. These were collected by
the Payees for their work in the creation of the Vegetable Oil Investment
Corporation of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development Company.
Parenthetically, it may be observed that the petitioner had Originally
claimed these promotional fees to be personal holding company
income 12 but later conformed to the decision of the respondent court
rejecting this assertion.13 In fact, as the said court found, the amount was
earned through the joint efforts of the persons among whom it was
distributed It has been established that the Philippine Sugar Estate
Development Company had earlier appointed Algue as its agent,
authorizing it to sell its land, factories and oil manufacturing process.
Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel
Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of
the Vegetable Oil Investment Corporation, inducing other persons to invest
in it.14 Ultimately, after its incorporation largely through the promotion of
the said persons, this new corporation purchased the PSEDC
properties.15 For this sale, Algue received as agent a commission of
P126,000.00, and it was from this commission that the P75,000.00
promotional fees were paid to the aforenamed individuals.16
There is no dispute that the payees duly reported their respective shares
of the fees in their income tax returns and paid the corresponding taxes
thereon.17 The Court of Tax Appeals also found, after examining the
evidence, that no distribution of dividends was involved. 18
The petitioner claims that these payments are fictitious because most of
the payees are members of the same family in control of Algue. It is
argued that no indication was made as to how such payments were made,
whether by check or in cash, and there is not enough substantiation of
such payments. In short, the petitioner suggests a tax dodge, an attempt
to evade a legitimate assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private
respondent when its President, Alberto Guevara, and the accountant,
Cecilia V. de Jesus, testified that the payments were not made in one lump
sum but periodically and in different amounts as each payee's need
arose. 19 It should be remembered that this was a family corporation where
strict business procedures were not applied and immediate issuance of
receipts was not required. Even so, at the end of the year, when the books
were to be closed, each payee made an accounting of all of the fees
received by him or her, to make up the total of P75,000.00. 20 Admittedly,
everything seemed to be informal. This arrangement was understandable,
however, in view of the close relationship among the persons in the family
corporation.
We agree with the respondent court that the amount of the promotional
fees was not excessive. The total commission paid by the Philippine Sugar
Estate Development Co. to the private respondent was
P125,000.00. 21After deducting the said fees, Algue still had a balance of
P50,000.00 as clear profit from the transaction. The amount of P75,000.00
was 60% of the total commission. This was a reasonable proportion,
65 | P a g e
considering that it was the payees who did practically everything, from the
formation of the Vegetable Oil Investment Corporation to the actual
purchase by it of the Sugar Estate properties. This finding of the
respondent court is in accord with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing
net income there shall be allowed as deductions —
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses
paid or incurred during the taxable year in carrying on any
trade or business, including a reasonable allowance for
salaries or other compensation for personal services
actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among
the ordinary and necessary expenses paid or incurred in
carrying on any trade or business may be included a
reasonable allowance for salaries or other compensation
for personal services actually rendered. The test of
deductibility in the case of compensation payments is
whether they are reasonable and are, in fact, payments
purely for service. This test and deductibility in the case of
compensation payments is whether they are reasonable
and are, in fact, payments purely for service. This test and
its practical application may be further stated and
illustrated as follows:
Any amount paid in the form of compensation, but not in
fact as the purchase price of services, is not deductible.
(a) An ostensible salary paid by a corporation may be a
distribution of a dividend on stock. This is likely to occur in
the case of a corporation having few stockholders,
Practically all of whom draw salaries. If in such a case the
salaries are in excess of those ordinarily paid for similar
services, and the excessive payment correspond or bear
a close relationship to the stockholdings of the officers of
employees, it would seem likely that the salaries are not
paid wholly for services rendered, but the excessive
payments are a distribution of earnings upon the stock. . .
. (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the
regular employ of Algue nor were they its controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the
taxpayer to prove the validity of the claimed deduction. In the present
case, however, we find that the onus has been discharged satisfactorily.
The private respondent has proved that the payment of the fees was
necessary and reasonable in the light of the efforts exerted by the payees
in inducing investors and prominent businessmen to venture in an
experimental enterprise and involve themselves in a new business
requiring millions of pesos. This was no mean feat and should be, as it
was, sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without taxes,
the government would be paralyzed for lack of the motive power to
activate and operate it. Hence, despite the natural reluctance to surrender
part of one's hard earned income to the taxing authorities, every person
who is able to must contribute his share in the running of the government.
The government for its part, is expected to respond in the form of tangible
and intangible benefits intended to improve the lives of the people and
enhance their moral and material values. This symbiotic relationship is the
rationale of taxation and should dispel the erroneous notion that it is an
arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it
is a requirement in all democratic regimes that it be exercised reasonably
and in accordance with the prescribed procedure. If it is not, then the
taxpayer has a right to complain and the courts will then come to his
succor. For all the awesome power of the tax collector, he may still be
66 | P a g e
stopped in his tracks if the taxpayer can demonstrate, as it has here, that
the law has not been observed.

We hold that the appeal of the private respondent from the decision of the
petitioner was filed on time with the respondent court in accordance with
Rep. Act No. 1125. And we also find that the claimed deduction by the
private respondent was permitted under the Internal Revenue Code and
should therefore not have been disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is

AFFIRMED in toto, without costs.

67 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 180884 June 27, 2008
EMERLINDA S. TALENTO, in her capacity as the Provincial Treasurer of
the Province of Bataan, petitioner,
vs.
HON. REMIGIO M. ESCALADA, JR., Presiding Judge of the Regional
Trial Court of Bataan, Branch 3, and PETRON
CORPORATION, respondents.
DECISION
YNARES-SANTIAGO, J.:
The instant petition for certiorari under Rule 65 of the Rules of Court
assails the November 5, 2007 Order1 of the Regional Trial Court of
Bataan, Branch 3, in Civil Case No. 8801, granting the petition for the
issuance of a writ of preliminary injunction filed by private respondent
Petron Corporation (Petron) thereby enjoining petitioner Emerlinda S.
Talento, Provincial Treasurer of Bataan, and her representatives from
proceeding with the public auction of Petron's machineries and pieces of
equipment during the pendency of the latter's appeal from the revised
assessment of its properties.
The facts of the case are as follows:
On June 18, 2007, Petron received from the Provincial Assessor's Office
of Bataan a notice of revised assessment over its machineries and pieces
of equipment in Lamao, Limay, Bataan. Petron was given a period of 60
days within which to file an appeal with the Local Board of Assessment
Appeals (LBAA).2 Based on said revised assessment, petitioner Provincial
Treasurer of Bataan issued a notice informing Petron that as of June 30,
2007, its total liability is P1,731,025,403.06, 3 representing deficiency real
property tax due from 1994 up to the first and second quarters of 2007.
On August 17, 2007, Petron filed a petition4 with the LBAA (docketed as
LBAA Case No. 2007-01) contesting the revised assessment on the
grounds that the subject assessment pertained to properties that have
been previously declared; and that the assessment covered periods of
more than 10 years which is not allowed under the Local Government
Code (LGC). According to Petron, the possible valid assessment pursuant
to Section 222 of the LGC could only be for the years 1997 to 2006.
Petron further contended that the fair market value or replacement cost
used by petitioner included items which should be properly excluded; that
prompt payment of discounts were not considered in determining the fair
market value; and that the subject assessment should take effect a year
after or on January 1, 2008. In the same petition, Petron sought the
approval of a surety bond in the amount of P1,286,057,899.54.5
On August 22, 2007, Petron received from petitioner a final notice of
delinquent real property tax with a warning that the subject properties
would be levied and auctioned should Petron fail to settle the revised
assessment due.6
Consequently, Petron sent a letter7 to petitioner stating that in view of the
pendency of its appeal8 with the LBAA, any action by the Treasurer's
Office on the subject properties would be premature. However, petitioner
replied that only Petron's payment under protest shall bar the collection of
the realty taxes due,9 pursuant to Sections 231 and 252 of the LGC.
With the issuance of a Warrant of Levy10 against its machineries and
pieces of equipment, Petron filed on September 24, 2007, an urgent
motion to lift the final notice of delinquent real property tax and warrant of
levy with the LBAA. It argued that the issuance of the notice and warrant is
premature because an appeal has been filed with the LBAA, where it
posted a surety bond in the amount of P1,286,057,899.54.11
On October 3, 2007, Petron received a notice of sale of its properties
scheduled on October 17, 2007.12Consequently, on October 8, 2007,
Petron withdrew its motion to lift the final notice of delinquent real property
68 | P a g e
tax and warrant of levy with the LBAA.13 On even date, Petron filed with
the Regional Trial Court of Bataan the instant case (docketed as Civil
Case No. 8801) for prohibition with prayer for the issuance of a temporary
restraining order (TRO) and preliminary injunction. 14
On October 15, 2007, the trial court issued a TRO for 20 days enjoining
petitioner from proceeding with the public auction of Petron's
properties.15 Petitioner thereafter filed an urgent motion for the immediate
dissolution of the TRO, followed by a motion to dismiss Petron's petition
for prohibition.
On November 5, 2007, the trial court issued the assailed Order granting
Petron's petition for issuance of writ of preliminary injunction, subject to
Petron's posting of a P444,967,503.52 bond in addition to its previously
posted surety bond of P1,286,057,899.54, to complete the total amount
equivalent to the revised assessment of P1,731,025,403.06. The trial court
held that in scheduling the sale of the properties despite the pendency of
Petron's appeal and posting of the surety bond with the LBAA, petitioner
deprived Petron of the right to appeal. The dispositive portion thereof,
reads:
WHEREFORE, the writ of preliminary injunction prayed for by
plaintiff is hereby GRANTED and ISSUED, enjoining defendant
Treasurer, her agents, representatives, or anybody acting in her
behalf from proceeding with the scheduled public auction of
plaintiff's real properties, or any disposition thereof, pending the
determination of the merits of the main action, to be effective upon
posting by plaintiff to the Court of an injunction bond in the amount
of Four Hundred Forty Four Million Nine Hundred Sixty Seven
Thousand Five Hundred Three and 52/100 Pesos
(P444,967,503.52) and the approval thereof by the Court.
Defendant's Urgent Motion for the Immediate Dissolution of the
Temporary Restraining Order dated October 23, 2007 is hereby
DENIED.
SO ORDERED.16
From the said Order of the trial court, petitioner went directly to this Court
via the instant petition for certiorari under Rule 65 of the Rules of Court.
The question posed in this petition, i.e., whether the collection of taxes
may be suspended by reason of the filing of an appeal and posting of a
surety bond, is undoubtedly a pure question of law. Section 2(c) of Rule 41
of the Rules of Court provides:
SEC. 2. Modes of Appeal. -
(c) Appeal by certiorari. - In all cases when only questions of law
are raised or involved, the appeal shall be to the Supreme Court
by petition for review on certiorari under Rule 45. (Emphasis
supplied)
Thus, petitioner resorted to the erroneous remedy when she filed a petition
for certiorari under Rule 65, when the proper mode should have been a
petition for review on certiorari under Rule 45. Moreover, under Section 2,
Rule 45 of the same Rules, the period to file a petition for review is 15
days from notice of the order appealed from. In the instant case, petitioner
received the questioned order of the trial court on November 6, 2007,
hence, she had only up to November 21, 2007 to file the petition.
However, the same was filed only on January 4, 2008, or 43 days late.
Consequently, petitioner's failure to file an appeal within the reglementary
period rendered the order of the trial court final and executory.
The perfection of an appeal in the manner and within the period prescribed
by law is mandatory. Failure to conform to the rules regarding appeal will
render the judgment final and executory and beyond the power of the
Court's review. Jurisprudence mandates that when a decision becomes
final and executory, it becomes valid and binding upon the parties and
their successors in interest. Such decision or order can no longer be
disturbed or reopened no matter how erroneous it may have been.17
Petitioner's resort to a petition under Rule 65 is obviously a play to make
up for the loss of the right to file an appealvia a petition under Rule 45.
However, a special civil action under Rule 65 can not cure petitioner's
69 | P a g e
failure to timely file a petition for review on certiorari under Rule 45 of the
Rules of Court. Rule 65 is an independent action that cannot be availed of
as a substitute for the lost remedy of an ordinary appeal, including that
under Rule 45, especially if such loss or lapse was occasioned by one's
own neglect or error in the choice of remedies.18
Moreover, even if we assume that a petition under Rule 65 is the proper
remedy, the petition is still dismissible.
We note that no motion for reconsideration of the November 5, 2007 order
of the trial court was filed prior to the filing of the instant petition. The
settled rule is that a motion for reconsideration is a sine qua non condition
for the filing of a petition for certiorari. The purpose is to grant the public
respondent an opportunity to correct any actual or perceived error
attributed to it by the re-examination of the legal and factual circumstances
of the case. Petitioner's failure to file a motion for reconsideration deprived
the trial court of the opportunity to rectify an error unwittingly committed or
to vindicate itself of an act unfairly imputed. Besides, a motion for
reconsideration under the present circumstances is the plain, speedy and
adequate remedy to the adverse judgment of the trial court.19
Petitioner also blatantly disregarded the rule on hierarchy of courts.
Although the Supreme Court, Regional Trial Courts, and the Court of
Appeals have concurrent jurisdiction to issue writs of certiorari, prohibition,
mandamus, quo warranto, habeas corpus and injunction, such
concurrence does not give the petitioner unrestricted freedom of choice of
court forum. Recourse should have been made first with the Court of
Appeals and not directly to this Court.20
True, litigation is not a game of technicalities. It is equally true, however,
that every case must be presented in accordance with the prescribed
procedure to ensure an orderly and speedy administration of justice. 21 The
failure therefore of petitioner to comply with the settled procedural rules
justifies the dismissal of the present petition.
Finally, we find that the trial court correctly granted respondent's petition
for issuance of a writ of preliminary injunction. Section 3, Rule 58, of the
Rules of Court, provides:
SEC. 3. Grounds for issuance of preliminary injunction. - A
preliminary injunction may be granted by the court when it is
established:
(a) That the applicant is entitled to the relief demanded, and the
whole or part of such relief consists in restraining the commission
or continuance of the acts complained of, or in the performance of
an act or acts, either for a limited period or perpetually;
(b) That the commission, continuance or non-performance of the
act or acts complained of during the litigation would probably work
injustice to the applicant; or
(c) That a party, court, or agency or a person is doing, threatening,
or attempting to do, or is procuring or suffering to be done, some
act or acts probably in violation of the rights of the applicant
respecting the subject of the action or proceeding, and tending to
render the judgment ineffectual.
The requisites for the issuance of a writ of preliminary injunction are: (1)
the existence of a clear and unmistakable right that must be protected; and
(2) an urgent and paramount necessity for the writ to prevent serious
damage.22
The urgency and paramount necessity for the issuance of a writ of
injunction becomes relevant in the instant case considering that what is
being enjoined is the sale by public auction of the properties of Petron
amounting to at least P1.7 billion and which properties are vital to its
business operations. If at all, the repercussions and far-reaching
implications of the sale of these properties on the operations of Petron
merit the issuance of a writ of preliminary injunction in its favor.
We are not unaware of the doctrine that taxes are the lifeblood of the
government, without which it can not properly perform its functions; and
that appeal shall not suspend the collection of realty taxes. However, there
is an exception to the foregoing rule, i.e., where the taxpayer has shown a
clear and unmistakable right to refuse or to hold in abeyance the payment
70 | P a g e
of taxes. In the instant case, we note that respondent contested the
revised assessment on the following grounds: that the subject assessment
pertained to properties that have been previously declared; that the
assessment covered periods of more than 10 years which is not allowed
under the LGC; that the fair market value or replacement cost used by
petitioner included items which should be properly excluded; that prompt
payment of discounts were not considered in determining the fair market
value; and that the subject assessment should take effect a year after or
on January 1, 2008. To our mind, the resolution of these issues would
have a direct bearing on the assessment made by petitioner. Hence, it is
necessary that the issues must first be passed upon before the properties
of respondent is sold in public auction.
In addition to the fact that the issues raised by the respondent would have
a direct impact on the validity of the assessment made by the petitioner,
we also note that respondent has posted a surety bond equivalent to the
amount of the assessment due. The Rules of Procedure of the LBAA,
particularly Section 7, Rule V thereof, provides:
Section 7. Effect of Appeal on Collection of Taxes. - An appeal
shall not suspend the collection of the corresponding realty taxes
on the real property subject of the appeal as assessed by the
Provincial, City or Municipal Assessor, without prejudice to the
subsequent adjustment depending upon the outcome of the
appeal. An appeal may be entertained but the hearing thereof
shall be deferred until the corresponding taxes due on the real
property subject of the appeal shall have been paid under protest
or the petitioner shall have given a surety bond, subject to the
following conditions:
(1) the amount of the bond must not be less than the total realty
taxes and penalties due as assessed by the assessor nor more
than double said amount;
(2) the bond must be accompanied by a certification from the
Insurance Commissioner (a) that the surety is duly authorized to
issue such bond; (a) that the surety bond is approved by and
registered with said Commission; and (c) that the amount covered
by the surety bond is within the writing capacity of the surety
company; and
(3) the amount of the bond in excess of the surety company's
writing capacity, if any, must be covered by Reinsurance Binder, in
which case, a certification to this effect must likewise accompany
the surety bond.
Corollarily, Section 11 of Republic Act No. 9282,23 which amended
Republic Act No. 1125 (The Law Creating the Court of Tax Appeals)
provides:
Section 11. Who may Appeal; Mode of Appeal; Effect of Appeal; -
xxxx
No appeal taken to the Court of Appeals from the Collector of
Internal Revenue x x x shall suspend the payment, levy, distraint,
and/or sale of any property for the satisfaction of his tax liability as
provided by existing law. Provided, however, That when in the
opinion of the Court the collection by the aforementioned
government agencies may jeopardize the interest of the
Government and/or the taxpayer the Court at any stage of the
processing may suspend the collection and require the taxpayer
either to deposit the amount claimed or to file a surety bond for not
more than double the amount with the Court.
WHEREFORE, in view of all the foregoing, the instant petition
is DISMISSED.
71 | P a g e
2. Necessity theory The reinsurance contracts made the commencement of the reinsurers'
liability simultaneous with that of Philippine Guaranty Co., Inc. under the
original insurance. Philippine Guaranty Co., Inc. was required to keep a
Republic of the Philippines
register in Manila where the risks ceded to the foreign reinsurers where
SUPREME COURT
entered, and entry therein was binding upon the reinsurers. A
Manila
proportionate amount of taxes on insurance premiums not recovered from
the original assured were to be paid for by the foreign reinsurers. The
EN BANC foreign reinsurers further agreed, in consideration for managing or
administering their affairs in the Philippines, to compensate the Philippine
G.R. No. L-22074 April 30, 1965 Guaranty Co., Inc., in an amount equal to 5% of the reinsurance
premiums. Conflicts and/or differences between the parties under the
THE PHILIPPINE GUARANTY CO., INC., petitioner, reinsurance contracts were to be arbitrated in Manila. Philippine Guaranty
vs. Co., Inc. and Swiss Reinsurance Company stipulated that their contract
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF shall be construed by the laws of the Philippines.
TAX APPEALS, respondents.
Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co.,
Josue H. Gustilo and Ramirez and Ortigas for petitioner. Inc. ceded to the foreign reinsurers the following premiums:
Office of the Solicitor General and Attorney V.G. Saldajena for
respondents.
1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71
BENGZON, J.P., J.: 1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85

The Philippine Guaranty Co., Inc., a domestic insurance company, entered

Said premiums were excluded by Philippine Guaranty Co., Inc. from its
into reinsurance contracts, on various dates, with foreign insurance
gross income when it file its income tax returns for 1953 and 1954.
companies not doing business in the Philippines namely: Imperio
Furthermore, it did not withhold or pay tax on them. Consequently, per
Compañia de Seguros, La Union y El Fenix Español, Overseas Assurance
letter dated April 13, 1959, the Commissioner of Internal Revenue
Corp., Ltd., Socieded Anonima de Reaseguros Alianza, Tokio Marino &
assessed against Philippine Guaranty Co., Inc. withholding tax on the
Fire Insurance Co., Ltd., Union Assurance Society Ltd., Swiss
ceded reinsurance premiums, thus:
Reinsurance Company and Tariff Reinsurance Limited. Philippine
Guaranty Co., Inc., thereby agreed to cede to the foreign reinsurers a
portion of the premiums on insurance it has originally underwritten in the 1953
Philippines, in consideration for the assumption by the latter of liability on
an equivalent portion of the risks insured. Said reinsurrance contracts Gross premium per investigation . . . . . . . . . . P768,580.00
were signed by Philippine Guaranty Co., Inc. in Manila and by the foreign
reinsurers outside the Philippines, except the contract with Swiss Withholding tax due thereon at 24% . . . . . . . . P184,459.00
Reinsurance Company, which was signed by both parties in Switzerland.
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00

72 | P a g e
 Compromise for non-filing of withholding
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . .
1954
Gross premium per investigation . . . . . . . . . .
Withholding tax due thereon at 24% . . . . . . . .
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . .
Compromise for non-filing of withholding
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . .
Philippine Guaranty Co., Inc., protested the assessment on the ground
that reinsurance premiums ceded to foreign reinsurers not doing business
in the Philippines are not subject to withholding tax. Its protest was denied
and it appealed to the Court of Tax Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with this
dispositive portion:
IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner
Philippine Guaranty Co., Inc. is hereby ordered to pay to the
Commissioner of Internal Revenue the respective sums of
P202,192.00 and P173,153.00 or the total sum of P375,345.00 as
withholding income taxes for the years 1953 and 1954, plus the
statutory delinquency penalties thereon. With costs against
petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning the legality of the
100.00 Commissioner of Internal Revenue's assessment for withholding tax on
the reinsurance premiums ceded in 1953 and 1954 to the foreign
reinsurers.
P230,673.00
========== Petitioner maintain that the reinsurance premiums in question did not
constitute income from sources within the Philippines because the foreign
reinsurers did not engage in business in the Philippines, nor did they have
office here.
P780.880.68
P184,411.00 The reinsurance contracts, however, show that the transactions or
activities that constituted the undertaking to reinsure Philippine Guaranty
P184,411.00 Co., Inc. against loses arising from the original insurances in the
Philippines were performed in the Philippines. The liability of the foreign
reinsurers commenced simultaneously with the liability of Philippine
100.00
Guaranty Co., Inc. under the original insurances. Philippine Guaranty Co.,
Inc. kept in Manila a register of the risks ceded to the foreign reinsurers.
P234,364.00 Entries made in such register bound the foreign resinsurers, localizing in
========== the Philippines the actual cession of the risks and premiums and
assumption of the reinsurance undertaking by the foreign reinsurers.
Taxes on premiums imposed by Section 259 of the Tax Code for the
privilege of doing insurance business in the Philippines were payable by
the foreign reinsurers when the same were not recoverable from the
original assured. The foreign reinsurers paid Philippine Guaranty Co., Inc.
an amount equivalent to 5% of the ceded premiums, in consideration for
administration and management by the latter of the affairs of the former in
the Philippines in regard to their reinsurance activities here. Disputes and
differences between the parties were subject to arbitration in the City of
Manila. All the reinsurance contracts, except that with Swiss Reinsurance
Company, were signed by Philippine Guaranty Co., Inc. in the Philippines
and later signed by the foreign reinsurers abroad. Although the contract
between Philippine Guaranty Co., Inc. and Swiss Reinsurance Company
was signed by both parties in Switzerland, the same specifically provided
that its provision shall be construed according to the laws of the
Philippines, thereby manifesting a clear intention of the parties to subject
themselves to Philippine law.
73 | P a g e
Section 24 of the Tax Code subjects foreign corporations to tax on their
income from sources within the Philippines. The word "sources" has been
interpreted as the activity, property or service giving rise to the
income. 1 The reinsurance premiums were income created from the
undertaking of the foreign reinsurance companies to reinsure Philippine
Guaranty Co., Inc., against liability for loss under original insurances. Such
undertaking, as explained above, took place in the Philippines. These
insurance premiums, therefore, came from sources within the Philippines
and, hence, are subject to corporate income tax.
The foreign insurers' place of business should not be confused with their
place of activity. Business should not be continuity and progression of
transactions 2 while activity may consist of only a single transaction. An
activity may occur outside the place of business. Section 24 of the Tax
Code does not require a foreign corporation to engage in business in the
Philippines in subjecting its income to tax. It suffices that the activity
creating the income is performed or done in the Philippines. What is
controlling, therefore, is not the place of business but the place
of activity that created an income.
Petitioner further contends that the reinsurance premiums are not income
from sources within the Philippines because they are not specifically
mentioned in Section 37 of the Tax Code. Section 37 is not an all-inclusive
enumeration, for it merely directs that the kinds of income mentioned
therein should be treated as income from sources within the Philippines
but it does not require that other kinds of income should not be considered
likewise.1äwphï1.ñët
The power to tax is an attribute of sovereignty. It is a power emanating
from necessity. It is a necessary burden to preserve the State's
sovereignty and a means to give the citizenry an army to resist an
aggression, a navy to defend its shores from invasion, a corps of civil
servants to serve, public improvement designed for the enjoyment of the
citizenry and those which come within the State's territory, and facilities
and protection which a government is supposed to provide. Considering
that the reinsurance premiums in question were afforded protection by the
government and the recipient foreign reinsurers exercised rights and
privileges guaranteed by our laws, such reinsurance premiums and
reinsurers should share the burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith on the rulings
of the Commissioner of Internal Revenue requiring no withholding of the
tax due on the reinsurance premiums in question relieved it of the duty to
pay the corresponding withholding tax thereon. This defense of petitioner
may free if from the payment of surcharges or penalties imposed for failure
to pay the corresponding withholding tax, but it certainly would not
exculpate if from liability to pay such withholding tax The Government is
not estopped from collecting taxes by the mistakes or errors of its agents. 3
In respect to the question of whether or not reinsurance premiums ceded
to foreign reinsurers not doing business in the Philippines are subject to
withholding tax under Section 53 and 54 of the Tax Code, suffice it to state
that this question has already been answered in the affirmative
in Alexander Howden & Co., Ltd. vs. Collector of Internal Revenue, L-
19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be computed
from the amount actually remitted to the foreign reinsurers instead of from
the total amount ceded. And since it did not remit any amount to its foreign
insurers in 1953 and 1954, no withholding tax was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. — In the
case of foreign corporations subject to taxation under this Title not
engaged in trade or business within the Philippines and not having
any office or place of business therein, there shall be deducted
and withheld at the source in the same manner and upon the
same items as is provided in Section fifty-three a tax equal to
twenty-four per centum thereof, and such tax shall be returned
and paid in the same manner and subject to the same conditions
as provided in that section.
The applicable portion of Section 53 provides:
74 | P a g e
 (b) Nonresident aliens. — All persons, corporations and general amount of P375,345.00, as withholding tax for the years 1953 and 1954,
copartnerships (compañias colectivas), in what ever capacity respectively. If the amount of P375,345.00 is not paid within 30 days from
acting, including lessees or mortgagors of real or personal the date this judgement becomes final, there shall be collected a
property, trustees acting in any trust capacity, executors, surcharged of 5% on the amount unpaid, plus interest at the rate of 1% a
administrators, receivers, conservators, fiduciaries, employers, month from the date of delinquency to the date of payment, provided that
and all officers and employees of the Government of the the maximum amount that may be collected as interest shall not exceed
Philippines having the control, receipt, custody, disposal, or the amount corresponding to a period of three (3) years. With costs
payment of interest, dividends, rents, salaries, wages, premiums, againsts petitioner.
annuities, compensation, remunerations, emoluments, or other
fixed or determinable annual or periodical gains, profits, and
income of any nonresident alien individual, not engaged in trade or
business within the Philippines and not having any office or place
of business therein, shall (except in the case provided for in
subsection [a] of this section) deduct and withhold from such
annual or periodical gains, profits, and income a tax equal to
twelve per centum thereof: Provided That no deductions or
withholding shall be required in the case of dividends paid by a
foreign corporation unless (1) such corporation is engaged in trade
or business within the Philippines or has an office or place of
business therein, and (2) more than eighty-five per centum of the
gross income of such corporation for the three-year period ending
with the close of its taxable year preceding the declaration of such
dividends (or for such part of such period as the corporation has
been in existence)was derived from sources within the Philippines
as determined under the provisions of section thirty-
seven: Provided, further, That the Collector of Internal Revenue
may authorize such tax to be deducted and withheld from the
interest upon any securities the owners of which are not known to
the withholding agent.

The above-quoted provisions allow no deduction from the income therein

enumerated in determining the amount to be withheld. According, in
computing the withholding tax due on the reinsurance premium in
question, no deduction shall be recognized.

WHEREFORE, in affirming the decision appealed from, the Philippine

Guaranty Co., Inc. is hereby ordered to pay to the Commissioner of
Internal Revenue the sums of P202,192.00 and P173,153.00, or a total

75 | P a g e
3. Benefits-protection theory (symbiotic relationship) On September 30, 1946 the municipal board of Iloilo City enacted
Ordinance 86, imposing license tax fees as follows: (1) tenement house
4. jurisdiction over subject and objects (casa de vecindad), P25.00 annually; (2) tenement house, partly or wholly
engaged in or dedicated to business in the streets of J.M. Basa, Iznart and
H. Doctrines in taxation Aldeguer, P24.00 per apartment; (3) tenement house, partly or wholly
engaged in business in any other streets, P12.00 per apartment. The
1. prospectivity of tax laws validity and constitutionality of this ordinance were challenged by the
spouses Eusebio Villanueva and Remedies Sian Villanueva, owners of
2. imprescriptibility four tenement houses containing 34 apartments. This Court, in City of
Iloilo vs. Remedios Sian Villanueva and Eusebio Villanueva, L-12695,
3. double taxation
March 23, 1959, declared the ordinance ultra vires, "it not appearing that
a. strict sense the power to tax owners of tenement houses is one among those clearly
and expressly granted to the City of Iloilo by its Charter."
Republic of the Philippines
On January 15, 1960 the municipal board of Iloilo City, believing,
SUPREME COURT
obviously, that with the passage of Republic Act 2264, otherwise known as
Manila
the Local Autonomy Act, it had acquired the authority or power to enact an
ordinance similar to that previously declared by this Court as ultra vires,
EN BANC enacted Ordinance 11, series of 1960, hereunder quoted in full:

G.R. No. L-26521 December 28, 1968
EUSEBIO VILLANUEVA, ET AL., plaintiff-appellee,
vs.
CITY OF ILOILO, defendants-appellants.
Pelaez, Jalandoni and Jamir for plaintiff-appellees.
Assistant City Fiscal Vicente P. Gengos for defendant-appellant.
CASTRO, J.:
Appeal by the defendant City of Iloilo from the decision of the Court of First
Instance of Iloilo declaring illegal Ordinance 11, series of 1960, entitled,
"An Ordinance Imposing Municipal License Tax On Persons Engaged In
The Business Of Operating Tenement Houses," and ordering the City to
refund to the plaintiffs-appellees the sums of collected from them under
the said ordinance.
AN ORDINANCE IMPOSING MUNICIPAL LICENSE TAX ON
PERSONS ENGAGED IN THE BUSINESS OF OPERATING
TENEMENT HOUSES
Be it ordained by the Municipal Board of the City of Iloilo, pursuant
to the provisions of Republic Act No. 2264, otherwise known as
the Autonomy Law of Local Government, that:
Section 1. — A municipal license tax is hereby imposed on
tenement houses in accordance with the schedule of payment
herein provided.
Section 2. — Tenement house as contemplated in this ordinance
shall mean any building or dwelling for renting space divided into
separate apartments or accessorias.

76 | P a g e
 Section 3. — The municipal license tax provided in Section 1
hereof shall be as follows:
I. Tenement houses:
(a) Apartment house made of strong materials
(b) Apartment house made of mixed materials
II Rooming house of strong materials
Rooming house of mixed materials
III. Tenement house partly or wholly engaged in or dedicated to paying real estate taxes on his property.
business in the following streets: J.M. Basa, Iznart, Aldeguer, Guanco
and Ledesma from Plazoleto Gay to Valeria. St.
IV. Tenement house partly or wholly engaged in or dedicated to Iloilo, in the aforementioned court, praying that Ordinance 11, series of
business in any other street
V. Tenement houses at the streets surrounding the super market as of the rule as to uniformity of taxation and for depriving said plaintiffs of the
soon as said place is declared commercial
Section 4. — All ordinances or parts thereof inconsistent herewith
are hereby amended.
Section 5. — Any person found violating this ordinance shall be
punished with a fine note exceeding Two Hundred Pesos
(P200.00) or an imprisonment of not more than six (6) months or
both at the discretion of the Court.
Section 6 — This ordinance shall take effect upon approval.
ENACTED, January 15, 1960.
In Iloilo City, the appellees Eusebio Villanueva and Remedios S.
Villanueva are owners of five tenement houses, aggregately containing 43
apartments, while the other appellees and the same Remedios S.
Villanueva are owners of ten apartments. Each of the appellees'
apartments has a door leading to a street and is rented by either a Filipino
or Chinese merchant. The first floor is utilized as a store, while the second
floor is used as a dwelling of the owner of the store. Eusebio Villanueva
owns, likewise, apartment buildings for rent in Bacolod, Dumaguete City,
Baguio City and Quezon City, which cities, according to him, do not
imposeP20.00 peror
tenement door p.a.
apartment taxes.
P10.00 per door p.a.
By virtue of the ordinance in question, the appellant City collected from
spouses Eusebio
P10.00 perVillanueva
door p.a. and Remedios S. Villanueva, for the years
1960-1964, the sum of P5,824.30, and from the appellees Pio Sian
Melliza,P5.00
Teresita
per S. Topacio,
door p.a. and Remedios S. Villanueva, for the years
1960-1964, the sum of P1,317.00. Eusebio Villanueva has likewise been
On JulyP30.00 perand
11, 1962 doorApril
p.a.24, 1964, the plaintiffs-appellees filed a
complaint, and an amended complaint, respectively, against the City of
1960, beP12.00 per door
declared p.a.for being beyond the powers of the Municipal
"invalid
Council of the City of Iloilo to enact, and unconstitutional for being violative
P24.00 per
equal protection door p.a.
clause of the Constitution," and that the City be ordered to
refund the amounts collected from them under the said ordinance.
On March 30, 1966,1 the lower court rendered judgment declaring the
ordinance illegal on the grounds that (a) "Republic Act 2264 does not
empower cities to impose apartment taxes," (b) the same is "oppressive
and unreasonable," for the reason that it penalizes owners of tenement
houses who fail to pay the tax, (c) it constitutes not only double taxation,
but treble at that and (d) it violates the rule of uniformity of taxation.
The issues posed in this appeal are:
1. Is Ordinance 11, series of 1960, of the City of Iloilo, illegal
because it imposes double taxation?
77 | P a g e
2. Is the City of Iloilo empowered by the Local Autonomy Act to
impose tenement taxes?
3. Is Ordinance 11, series of 1960, oppressive and unreasonable
because it carries a penal clause?
4. Does Ordinance 11, series of 1960, violate the rule of uniformity
of taxation?
1. The pertinent provisions of the Local Autonomy Act are
hereunder quoted:
SEC. 2. Any provision of law to the contrary notwithstanding, all
chartered cities, municipalities and municipal districts shall have
authority to impose municipal license taxes or fees upon persons
engaged in any occupation or business, or exercising privileges in
chartered cities, municipalities or municipal districts by requiring
them to secure licences at rates fixed by the municipal board or
city council of the city, the municipal council of the municipality, or
the municipal district council of the municipal district; to collect
fees and charges for services rendered by the city, municipality or
municipal district; to regulate and impose reasonable fees for
services rendered in connection with any business, profession or
occupation being conducted within the city, municipality or
municipal district and otherwise to levy for public purposes, just
and uniform taxes, licenses or fees; Provided, That municipalities
and municipal districts shall, in no case, impose any percentage
tax on sales or other taxes in any form based thereon nor impose
taxes on articles subject to specific tax, except gasoline, under the
provisions of the National Internal Revenue Code; Provided,
however, That no city, municipality or municipal district may levy
or impose any of the following:
(a) Residence tax;
(b) Documentary stamp tax;
(c) Taxes on the business of persons engaged in the printing and
publication of any newspaper, magazine, review or bulletin
appearing at regular intervals and having fixed prices for for
subscription and sale, and which is not published primarily for the
purpose of publishing advertisements;
(d) Taxes on persons operating waterworks, irrigation and other
public utilities except electric light, heat and power;
(e) Taxes on forest products and forest concessions;
(f) Taxes on estates, inheritance, gifts, legacies, and other
acquisitions mortis causa;
(g) Taxes on income of any kind whatsoever;
(h) Taxes or fees for the registration of motor vehicles and for the
issuance of all kinds of licenses or permits for the driving thereof;
(i) Customs duties registration, wharfage dues on wharves owned
by the national government, tonnage, and all other kinds of
customs fees, charges and duties;
(j) Taxes of any kind on banks, insurance companies, and persons
paying franchise tax; and
(k) Taxes on premiums paid by owners of property who obtain
insurance directly with foreign insurance companies.
A tax ordinance shall go into effect on the fifteenth day after its
passage, unless the ordinance shall provide otherwise: Provided,
however, That the Secretary of Finance shall have authority to
suspend the effectivity of any ordinance within one hundred and
twenty days after its passage, if, in his opinion, the tax or fee
therein levied or imposed is unjust, excessive, oppressive, or
confiscatory, and when the said Secretary exercises this authority
the effectivity of such ordinance shall be suspended.
78 | P a g e
 In such event, the municipal board or city council in the case of
cities and the municipal council or municipal district council in the
case of municipalities or municipal districts may appeal the
decision of the Secretary of Finance to the court during the
pendency of which case the tax levied shall be considered as paid
under protest.
It is now settled that the aforequoted provisions of Republic Act 2264
confer on local governments broad taxing authority which extends to
almost "everything, excepting those which are mentioned therein,"
provided that the tax so levied is "for public purposes, just and uniform,"
and does not transgress any constitutional provision or is not repugnant to
a controlling statute.2 Thus, when a tax, levied under the authority of a city
or municipal ordinance, is not within the exceptions and limitations
aforementioned, the same comes within the ambit of the general rule,
pursuant to the rules of expressio unius est exclusio alterius, and exceptio
firmat regulum in casibus non excepti.
Does the tax imposed by the ordinance in question fall within any of the
exceptions provided for in section 2 of the Local Autonomy Act? For this
purpose, it is necessary to determine the true nature of the tax. The
appellees strongly maintain that it is a "property tax" or "real estate
tax,"3 and not a "tax on persons engaged in any occupation or business or
exercising privileges," or a license tax, or a privilege tax, or an excise
tax.4 Indeed, the title of the ordinance designates it as a "municipal license
tax on persons engaged in the business of operating tenement houses,"
while section 1 thereof states that a "municipal license tax is
hereby imposed on tenement houses." It is the phraseology of section 1
on which the appellees base their contention that the tax involved is a real
estate tax which, according to them, makes the ordinance ultra vires as it
imposes a levy "in excess of the one per centum real estate tax allowable
under Sec. 38 of the Iloilo City Charter, Com. Act 158."5.
It is our view, contrary to the appellees' contention, that the tax in question
is not a real estate tax. Obviously, the appellees confuse the tax with the
real estate tax within the meaning of the Assessment Law,6 which,
although not applicable to the City of Iloilo, has counterpart provisions in
the Iloilo City Charter.7 A real estate tax is a direct tax on the ownership of
lands and buildings or other improvements thereon, not specially
exempted,8 and is payable regardless of whether the property is used or
not, although the value may vary in accordance with such factor. 9 The tax
is usually single or indivisible, although the land and building or
improvements erected thereon are assessed separately, except when the
land and building or improvements belong to separate owners.10 It is a
fixed proportion11 of the assessed value of the property taxed, and
requires, therefore, the intervention of assessors.12 It is collected or
payable at appointed times,13 and it constitutes a superior lien on and is
enforceable against the property14 subject to such taxation, and not by
imprisonment of the owner.
The tax imposed by the ordinance in question does not possess the
aforestated attributes. It is not a tax on the land on which the tenement
houses are erected, although both land and tenement houses may belong
to the same owner. The tax is not a fixed proportion of the assessed value
of the tenement houses, and does not require the intervention of
assessors or appraisers. It is not payable at a designated time or date, and
is not enforceable against the tenement houses either by sale or distraint.
Clearly, therefore, the tax in question is not a real estate tax.
"The spirit, rather than the letter, or an ordinance determines the
construction thereof, and the court looks less to its words and more to the
context, subject-matter, consequence and effect. Accordingly, what is
within the spirit is within the ordinance although it is not within the letter
thereof, while that which is in the letter, although not within the spirit, is not
within the ordinance."15 It is within neither the letter nor the spirit of the
ordinance that an additional real estate tax is being imposed, otherwise
the subject-matter would have been not merely tenement houses. On the
contrary, it is plain from the context of the ordinance that the intention is to
impose a license tax on the operation of tenement houses, which is a form
of business or calling. The ordinance, in both its title and body, particularly
sections 1 and 3 thereof, designates the tax imposed as a "municipal
license tax" which, by itself, means an "imposition or exaction on the right
to use or dispose of property, to pursue a business, occupation, or calling,
or to exercise a privilege."16.
79 | P a g e
"The character of a tax is not to be fixed by any isolated words that
may beemployed in the statute creating it, but such words must be
taken in the connection in which they are used and the true
character is to be deduced from the nature and essence of the
subject."17 The subject-matter of the ordinance is tenement
houses whose nature and essence are expressly set forth in
section 2 which defines a tenement house as "any building or
dwelling for renting space divided into separate apartments or
accessorias." The Supreme Court, in City of Iloilo vs. Remedios
Sian Villanueva, et al., L-12695, March 23, 1959, adopted the
definition of a tenement house18 as "any house or building, or
portion thereof, which is rented, leased, or hired out to be
occupied, or is occupied, as the home or residence of three
families or more living independently of each other and doing their
cooking in the premises or by more than two families upon any
floor, so living and cooking, but having a common right in the halls,
stairways, yards, water-closets, or privies, or some of them."
Tenement houses, being necessarily offered for rent or lease by
their very nature and essence, therefore constitute a distinct
form of business or calling, similar to the hotel or motel business,
or the operation of lodging houses or boarding houses. This is
precisely one of the reasons why this Court, in the said case of
City of Iloilo vs. Remedios Sian Villanueva, et al., supra, declared
Ordinance 86 ultra vires, because, although the municipal board of
Iloilo City is empowered, under sec. 21, par. j of its Charter, "to
tax, fix the license fee for, and regulate hotels, restaurants,
refreshment parlors, cafes, lodging houses, boarding
houses, livery garages, public warehouses, pawnshops, theaters,
cinematographs," tenement houses, which constitute a different
business enterprise,19 are not mentioned in the aforestated section
of the City Charter of Iloilo. Thus, in the aforesaid case, this Court
explicitly said:.
"And it not appearing that the power to tax owners of tenement
houses is one among those clearly and expressly granted to the
City of Iloilo by its Charter, the exercise of such power cannot be
assumed and hence the ordinance in question is ultra vires insofar
as it taxes a tenement house such as those belonging to
defendants." .
The lower court has interchangeably denominated the tax in question as a
tenement tax or an apartment tax. Called by either name, it is not among
the exceptions listed in section 2 of the Local Autonomy Act. On the other
hand, the imposition by the ordinance of a license tax on persons engaged
in the business of operating tenement houses finds authority in section 2
of the Local Autonomy Act which provides that chartered cities have the
authority to impose municipal license taxes or fees upon persons engaged
in any occupation or business, or exercising privileges within their
respective territories, and "otherwise to levy for public purposes, just and
uniform taxes, licenses, or fees." .
2. The trial court condemned the ordinance as constituting "not only
double taxation but treble at that," because "buildings pay real estate taxes
and also income taxes as provided for in Sec. 182 (A) (3) (s) of the
National Internal Revenue Code, besides the tenement tax under the said
ordinance." Obviously, what the trial court refers to as "income taxes" are
the fixed taxes on business and occupation provided for in section 182,
Title V, of the National Internal Revenue Code, by virtue of which persons
engaged in "leasing or renting property, whether on their account as
principals or as owners of rental property or properties," are considered
"real estate dealers" and are taxed according to the amount of their annual
income.20.
While it is true that the plaintiffs-appellees are taxable under the aforesaid
provisions of the National Internal Revenue Code as real estate dealers,
and still taxable under the ordinance in question, the argument against
double taxation may not be invoked. The same tax may be imposed by the
national government as well as by the local government. There is nothing
inherently obnoxious in the exaction of license fees or taxes with respect
to the same occupation, calling or activity by both the State and a political
subdivision thereof.21.
The contention that the plaintiffs-appellees are doubly taxed because they
are paying the real estate taxes and the tenement tax imposed by the
ordinance in question, is also devoid of merit. It is a well-settled rule that a
license tax may be levied upon a business or occupation although the land
or property used in connection therewith is subject to property tax. The
State may collect an ad valorem tax on property used in a calling, and at
80 | P a g e
the same time impose a license tax on that calling, the imposition of the
latter kind of tax being in no sensea double tax.22.
"In order to constitute double taxation in the objectionable or
prohibited sense the same property must be taxed twice when it
should be taxed but once; both taxes must be imposed on the
same property or subject-matter, for the same purpose, by the
same State, Government, or taxing authority, within the same
jurisdiction or taxing district, during the same taxing period, and
they must be the same kind or character of tax."23 It has been
shown that a real estate tax and the tenement tax imposed by the
ordinance, although imposed by the sametaxing authority, are not
of the same kind or character.
At all events, there is no constitutional prohibition against double taxation
in the Philippines.24 It is something not favored, but is permissible,
provided some other constitutional requirement is not thereby violated,
such as the requirement that taxes must be uniform."25.
3. The appellant City takes exception to the conclusion of the lower court
that the ordinance is not only oppressive because it "carries a penal
clause of a fine of P200.00 or imprisonment of 6 months or both, if the
owner or owners of the tenement buildings divided into apartments do not
pay the tenement or apartment tax fixed in said ordinance," but also
unconstitutional as it subjects the owners of tenement houses to criminal
prosecution for non-payment of an obligation which is purely sum of
money." The lower court apparently had in mind, when it made the above
ruling, the provision of the Constitution that "no person shall be imprisoned
for a debt or non-payment of a poll tax."26 It is elementary, however, that "a
tax is not a debt in the sense of an obligation incurred by contract, express
or implied, and therefore is not within the meaning of constitutional or
statutory provisions abolishing or prohibiting imprisonment for debt, and a
statute or ordinance which punishes the non-payment thereof by fine or
imprisonment is not, in conflict with that prohibition."27 Nor is the tax in
question a poll tax, for the latter is a tax of a fixed amount upon all
persons, or upon all persons of a certain class, resident within a specified
territory, without regard to their property or the occupations in which they
may be engaged.28 Therefore, the tax in question is not oppressive in the
manner the lower court puts it. On the other hand, the charter of Iloilo
City29 empowers its municipal board to "fix penalties for violations of
ordinances, which shall not exceed a fine of two hundred pesos or six
months' imprisonment, or both such fine and imprisonment for each
offense." In Punsalan, et al. vs. Mun. Board of Manila, supra, this Court
overruled the pronouncement of the lower court declaring illegal and void
an ordinance imposing an occupation tax on persons exercising various
professions in the City of Manilabecause it imposed a penalty of fine and
imprisonment for its violation.30.
4. The trial court brands the ordinance as violative of the rule of uniformity
of taxation.
"... because while the owners of the other buildings only pay real
estate tax and income taxes the ordinance imposes aside from
these two taxes an apartment or tenement tax. It should be noted
that in the assessment of real estate tax all parts of the building or
buildings are included so that the corresponding real estate tax
could be properly imposed. If aside from the real estate tax the
owner or owners of the tenement buildings should pay apartment
taxes as required in the ordinance then it will violate the rule of
uniformity of taxation.".
Complementing the above ruling of the lower court, the appellees argue
that there is "lack of uniformity" and "relative inequality," because "only the
taxpayers of the City of Iloilo are singled out to pay taxes on their
tenement houses, while citizens of other cities, where their councils do not
enact a similar tax ordinance, are permitted to escape such imposition." .
It is our view that both assertions are undeserving of extended attention.
This Court has already ruled that tenement houses constitute a distinct
class of property. It has likewise ruled that "taxes are uniform and equal
when imposed upon all property of the same class or character within the
taxing authority."31 The fact, therefore, that the owners of other classes of
buildings in the City of Iloilo do not pay the taxes imposed by the
ordinance in question is no argument at all against uniformity and equality
of the tax imposition. Neither is the rule of equality and uniformity violated
by the fact that tenement taxesare not imposed in other cities, for the
81 | P a g e
same rule does not require that taxes for the same purpose should be
imposed in different territorial subdivisions at the same time.32 So long as
the burden of the tax falls equally and impartially on all owners or
operators of tenement houses similarly classified or situated, equality and
uniformity of taxation is accomplished.33 The plaintiffs-appellees, as
owners of tenement houses in the City of Iloilo, have not shown that the
tax burden is not equally or uniformly distributed among them, to
overthrow the presumption that tax statutes are intended to operate
uniformly and equally.34.

5. The last important issue posed by the appellees is that since the
ordinance in the case at bar is a mere reproduction of Ordinance 86 of the
City of Iloilo which was declared by this Court in L-12695, supra, as ultra
vires, the decision in that case should be accorded the effect of res
judicata in the present case or should constitute estoppel by judgment. To
dispose of this contention, it suffices to say that there is no identity of
subject-matter in that case andthis case because the subject-matter in L-
12695 was an ordinance which dealt not only with tenement houses but
also warehouses, and the said ordinance was enacted pursuant to the
provisions of the City charter, while the ordinance in the case at bar was
enacted pursuant to the provisions of the Local Autonomy Act. There is
likewise no identity of cause of action in the two cases because the main
issue in L-12695 was whether the City of Iloilo had the power under its
charter to impose the tax levied by Ordinance 11, series of 1960, under
the Local Autonomy Act which took effect on June 19, 1959, and therefore
was not available for consideration in the decision in L-12695 which was
promulgated on March 23, 1959. Moreover, under the provisions of section
2 of the Local Autonomy Act, local governments may now tax any taxable
subject-matter or object not included in the enumeration of matters
removed from the taxing power of local governments.Prior to the
enactment of the Local Autonomy Act the taxes that could be legally levied
by local governments were only those specifically authorized by law, and
their power to tax was construed in strictissimi juris. 35.

ACCORDINGLY, the judgment a quo is reversed, and, the ordinance in

questionbeing valid, the complaint is hereby dismissed. No
pronouncement as to costs..

82 | P a g e
b. broad sense CONCEPCION, C.J.:p

Republic of the Philippines The above-entitled cases are jointly disposed of in this decision owing to
SUPREME COURT the common issue therein — namely, the extent of the taxing power of
Manila municipal corporations under section 2 of Republic Act No. 2264,
otherwise known as the Local Autonomy Act.
EN BANC
In L-20312, plaintiff San Miguel Brewery, Inc. — hereinafter referred to as
SMB — assails the validity of Ordinance No. 298, as amended by
Ordinance No. 300, both series of 1960, of the City of Cebu, providing that
"(t)here shall be collected on any sale or disposal of liquor or intoxicating
G.R. No. L-20312 February 26, 1972 beverages of any form in the City of Cebu by manufacturers and
wholesalers for purposes of a municipal tax the following rates: .
SAN MIGUEL BREWERY, INC., plaintiff-appellant,
vs. (a) On sales or disposal per bottle or container not
THE CITY OF CEBU, defendant-appellee. exceeding P.50, a tax of P.03;

G.R. No. L-20496 February 26, 1972
CEBU PORTLAND CEMENT COMPANY, plaintiff-appellant,
vs.
MUNICIPALITY OF NAGA, CEBU and THE MUNICIPAL TREASURER,
NAGA, CEBU, defendants-appellees.
Picazo and Agcaoili for plaintiff-appellant San Miguel Brewery, Inc.
Government Corporate Counsel Tomas P. Matic, Jr. and Assistant
Government Corporate Counsel Lorenzo R. Mosqueda for plaintiff-
appellant Cebu Portland Cement Company.
Eliseo Ynclino, Second Asst. City Fiscal and Quirico del Mar for
defendant-appellee The City of Cebu.
Ananias V. Maribao, 2nd Asst. Provincial Fiscal and Vicente Mendiola for
defendants-appellees Municipality of Naga, Cebu, etc.
(b) On sales or disposal per bottle or container over P.50,
but not exceeding P1, a tax of P.05;
(c) On sales or disposal per bottle or container over P1,
but not exceeding P2, a tax of P.15;
(d) On sales or disposal per bottle or container exceeding
P2, the amount of tax provided under schedule C, plus
P.10 per P1, or a fraction thereof.
PROVIDED, however, that manufacturers, who are at the
same time wholesalers of their own product, shall pay only
as manufacturers under the rates specified hereinabove.
Pursuant to said ordinance, the SMB which is engaged in the
manufacture, bottling, distribution and sale of beer throughout the
Philippines, including the defendant Cebu City, paid thereto, under protest,
on April 20, 1961, the sum of P29,874.69, the refund of which is prayed for
in the complaint herein, upon the ground that said ordinance is ultra vires,
for imposing a sales tax, which is allegedly beyond defendant's power to

83 | P a g e
levy, apart from resulting in illegal double taxation, since SMB already
pays the defendant a business license tax of P600 per annum. The Court
of First Instance of Manila having rendered judgment dismissing the
complaint, with costs, plaintiff seeks a review by record on appeal.
In L-20496, the Cebu Portland Cement Company — Cebu Portland for
short — seeks to annul Ordinance No. 22, series of 1959, of the
Municipality of Naga, Cebu, imposing upon "all cement factories,
corporations, or enterprises operating within" said municipality "an annual
municipal license tax, payable quarterly, graduated" according to the
"maximum annual output capacity" of the factory, as follows: P150 if the
capacity is not more than 10,000 bags of cement; P300, if over 10,000 but
not more than 20,000 bags; P450, if over 20,000 but not more than 30,000
bags; P600, if over 30,000 but not more than 40,000 bags; P750, if over
40,000 but not more than 50,000 bags; P900, if over 50,000 but not more
than 60,000 bags; and P75 for every 5,000 bags or fraction thereof in
excess of 60,000 bags.
Having failed to pay said tax for the years 1960 and 1961, and the
corresponding penalties therefor, 100,000 bags of cement of Cebu
Portland were placed under distraint and levy by the municipal treasurer of
Naga. This triggered the filing by Cebu Portland of two (2) actions, namely:
1) one to impugn the validity of the distraint and then the sale of said
100,000 bags of cement, both of which were, in due course, upheld by the
Court of First Instance of Manila, the decision of which was, on appeal,
affirmed by Us1; and 2) the present case, to annul said ordinance and
secure the refund of P44,000, subsequently paid under protest by Cebu
Portland, in partial satisfaction of its tax liability, which said plaintiff
contests as illegal upon the theory that it partakes of the nature of a
specific tax and that it is allegedly unjust, excessive, oppressive and
confiscatory. The defendants having obtained a favorable judgment in the
Court of First Instance of Manila, Cebu Portland appealed by record on
appeal.
Said section 2 of Republic Act No. 2264 reads as follows: .
"SEC. 2. Taxation. -- Any provision of law to the contrary
notwithstanding, all chartered cities, municipalities and
municipal districts shall have authority to impose
municipal license taxes or fees upon persons engaged in
any occupation or business, or exercising privileges in
chartered cities, municipalities or municipal districts by
requiring them to secure licenses at rates fixed by the
municipal board or city council of the city, the municipal
council of the municipality, or the municipal district council
of the municipal district; to collect fees and charges for
services rendered by the city, municipality or municipal
district; to regulate and impose reasonable fees for
services rendered in connection with any business,
profession or occupation being conducted within the city,
municipality or municipal district and otherwise to levy for
public purposes, just and uniform taxes, licenses or
fees: Provided, That municipalities and municipal districts
shall, in no case, impose any percentage tax on sales or
other taxes in any form based thereon nor impose taxes
on articles subject to specific tax, except gasoline, under
the provisions of the national internal revenue
code: Provided, however, That no city, municipality or
municipal district may levy or impose any of the following:
.
(a) Residence tax;
(b) Documentary stamp tax;
(c) Taxes on the business of persons engaged in the
printing and publication of any newspaper, magazine,
review or bulletin appearing at regular intervals and
having fixed prices for subscription and sale, and which is
not published primarily for the purpose of publishing
advertisements;
(d) Taxes on persons operating waterworks, irrigation and
other public utilities except electric light, heat and power;
(e) Taxes on forest products and forest concessions;
84 | P a g e
 (f) Taxes on estates, inheritances, gifts, legacies, and
other acquisitions mortis causa;
(g) Taxes on income of any kind whatsoever;
(h) Taxes or fees for the registration of motor vehicles and
for the issuance of all kinds of licenses or permits for the
driving thereof;
(i) Customs duties registration, wharfage on wharves
owned by the national government, tonnage, and all other
kinds of customs fees, charges and dues;
(j) Taxes of any kind on banks, insurance companies, and
persons paying franchise tax; and
(k) Taxes on premiums paid by owners of property who
obtain insurance directly with foreign insurance
companies." .
Referring to the above provision, this Court declared in Nin Bay Mining Co.
vs. Municipality of Roxas, Palawan,2 that "Republic Act No. 2264 confers
upon all chartered cities, municipalities and municipal districts the general
power to levy, not only taxes, but, also, municipal license taxes, subject to
specified exceptions, as well as service fees." Subsequently, Luzon Surety
Co., Inc. vs. City of Bacolod3 cited with approval the fact that this Court
had consistently upheld the "doctrine that the grant of the power to tax to
chartered cities under section 2 of the Local Autonomy Act is sufficiently
plenary to cover everything excepting those which are mentioned therein,
subject only to the limitation that the tax so levied is for public purposes,
just and uniform."4
Appellant in L-20312 questions the conclusions reached in the decision
appealed from, to the effect that the first proviso in the above-quoted
provision, prohibiting "municipalities and municipal districts" from imposing
"any percentage tax on sales or other taxes in any form based thereon,"
implies that cities, like appellee therein, are not subject to said restriction,
and that the contested ordinance is not invalid upon the ground of double
taxation.
We find no merit in this pretense, for: (a) double taxation is not prohibited
by the Constitution5; (b) there is double taxation when the same person is
taxed by the same jurisdiction for the same purpose,6 which is not the
case in L-20312, for the ordinance in question imposes a tax on the sale or
disposal of every "bottle or container" of "liquor intoxicating beverages,"
and, as such, is a typical tax or revenue measure, whereas the sum of
P600 it pays annually is for a "second-class wholesale liquor license,"
which is a license to engage in the business of wholesale liquor in Cebu
City, and, accordingly, constitutes a regulatory measure, in the exercise of
the police power;7 and (c) the authority of cities under the above -- quoted
section 2 of Rep. Act No. 2264, to impose a sales tax has already been
upheld in City of Bacolod vs. Gruet8 and Pepsi-Cola Bottling Co. of the
Philippines, Inc. vs. City of Butuan,9and We find no plausible reason to
depart from said view.
Neither is there any merit in the contention of Cebu Portland in L-20496, to
the effect that the tax involved therein partakes of the nature of a
percentage or sales tax or a specific tax, merely because the amount of
the tax is dependent upon the maximum annual capacity of the cement
factory subject thereto. Settled is the rule that a graduation of the tax
based upon the taxpayer's volume of business, when the same is
considered solely for purposes of classification, and there is no set ratio
between said volume and the amount of the tax, does not render the latter
invalid as a sales, percentage or specific tax. Thus, in Northern Philippines
Tobacco Corporation vs. Municipality of Agoo, La Union, 10 We held: .
The circumstance that the rate of tax payable under the
ordinance is made to some extent dependent on the
minimum and maximum quantity of tobacco redried per
quarter, does not transform said tax into a percentage or
sales or income tax and does not bring the case out of the
council's authorized sphere of action. It may be noted that,
as framed in the ordinance, the volume of business is
merely taken into account in classifying the taxpayer's
business according to its size or extent of operations, for
85 | P a g e
 the purpose of imposing the fixed graduated tax it has to the rates of imposable license fees, even in cases of
pay; and that there is no set ratio between the tax and the purely police power-measures.
amount of tobacco redried.
WHEREFORE, the decisions appealed from should be and are hereby
This criterion was, also, adhered to in Nin Bay Mining Co. vs. Municipality affirmed, with costs against plaintiffs-appellants San Miguel Brewery, Inc.
of Roxas, 11 Li Seng Giap vs. Municipality of Daet, 12 Standard-Vacuum Oil and Cebu Portland Cement Company. It is so ordered.
Co. vs. Antigua, 13 Shell Co. of P.I. vs. Vano, 14 Syjuco vs. Municipality of
Parañaque, 15 Marinduque Iron Mines Agents, Inc. vs. Municipal Council of
Hinabangan, 16 and Victorias Milling Co., Inc. vs. Municipality of
Victorias. 17

For the rest, Cebu Portland has not introduced any evidence in support of
its claim that the tax in question is excessive, oppressive, and
confiscatory. Hence, this objection cannot be sustained for: .

An ordinance carries with it the presumption of validity.

The question of reasonableness though is open to judicial
inquiry. Much should be left thus to the discretion of
municipal authorities. Courts will go slow in writing off an
ordinance as unreasonable unless the amount is so
excessive as to be prohibitive. A rule which has gained
acceptance is that factors relevant to such an inquiry are
the municipal conditions as a whole and the nature of the
business made subject to imposition." 18

In Northern Philippines Tobacco Corporation vs. Municipality of Agoo, 19 a

similar charge was disposed of in the following language: .

We find nothing in the record, however, to supports such

charge. Appellant has failed to present proof of the
existing municipal conditions and the nature of its
business, as well as other factors that would have been
relevant to the issue of the arbitrariness or
unreasonableness of the questioned rates. An increase in
the rate of tax alone would not support the claim that it is
oppressive, unjust and confiscatory; municipal
corporations are allowed much discretion in determining

86 | P a g e
G.R. No. 149636 June 8, 2005
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BANK OF COMMERCE, respondent.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of the Court of
Appeals (CA) in CA-G.R. SP No. 52706, affirming the ruling of the Court of
Tax Appeals (CTA)2 in CTA Case No. 5415.
The facts of the case are undisputed.
In 1994 and 1995, the respondent Bank of Commerce derived passive
income in the form of interests or discounts from its investments in
government securities and private commercial papers. On several
occasions during the said period, it paid 5% gross receipts tax on its
income, as reflected in its quarterly percentage tax returns. Included
therein were the respondent bank’s passive income from the said
investments amounting to ₱85,384,254.51, which had already been
subjected to a final tax of 20%.
Meanwhile, on January 30, 1996, the CTA rendered judgment in Asia
Bank Corporation v. Commissioner of Internal Revenue, CTA Case No.
4720, holding that the 20% final withholding tax on interest income from
banks does not form part of taxable gross receipts for Gross Receipts Tax
(GRT) purposes. The CTA relied on Section 4(e) of Revenue Regulations
(Rev. Reg.) No. 12-80.
Relying on the said decision, the respondent bank filed an administrative
claim for refund with the Commissioner of Internal Revenue on July 19,
1996. It claimed that it had overpaid its gross receipts tax for 1994 to 1995
by ₱853,842.54, computed as follows:
Gross receipts subjected to
Final Tax Derived from
Passive Investment ₱85,384,254.51
x 20%
20% Final Tax Withheld 17,076,850.90
at Source x 5%
₱ 853,842.54
Before the Commissioner could resolve the claim, the respondent bank
filed a petition for review with the CTA, lest it be barred by the mandatory
two-year prescriptive period under Section 230 of the Tax Code (now
Section 229 of the Tax Reform Act of 1997).
In his answer to the petition, the Commissioner interposed the following
special and affirmative defenses:
…
5. The alleged refundable/creditable gross receipts taxes were
collected and paid pursuant to law and pertinent BIR implementing
rules and regulations; hence, the same are not refundable.
Petitioner must prove that the income from which the
refundable/creditable taxes were paid from, were declared and
included in its gross income during the taxable year under review;
6. Petitioner’s allegation that it erroneously and excessively paid
its gross receipt tax during the year under review does not ipso
facto warrant the refund/credit. Petitioner must prove that the
exclusions claimed by it from its gross receipts must be an
allowable exclusion under the Tax Code and its pertinent
implementing Rules and Regulations. Moreover, it must be
supported by evidence;
87 | P a g e
 7. Petitioner must likewise prove that the alleged
refundable/creditable gross receipt taxes were neither
automatically applied as tax credit against its tax liability for the
succeeding quarter/s of the succeeding year nor included as
creditable taxes declared and applied to the succeeding taxable
year/s;
8. Claims for tax refund/credit are construed in strictissimi
juris against the taxpayer as it partakes the nature of an
exemption from tax and it is incumbent upon the petitioner to
prove that it is entitled thereto under the law. Failure on the part of
the petitioner to prove the same is fatal to its claim for tax
refund/credit;
9. Furthermore, petitioner must prove that it has complied with the
provision of Section 230 (now Section 229) of the Tax Code, as
amended.3
The CTA summarized the issues to be resolved as follows: whether or not
the final income tax withheld should form part of the gross receipts4 of the
taxpayer for GRT purposes; and whether or not the respondent bank was
entitled to a refund of ₱853,842.54.5
The respondent bank averred that for purposes of computing the 5% gross
receipts tax, the final withholding tax does not form part of gross
receipts.6 On the other hand, while the Commissioner conceded that the
Court defined "gross receipts" as "all receipts of taxpayers excluding those
which have been especially earmarked by law or regulation for the
government or some person other than the taxpayer" in CIR v. Manila
Jockey Club, Inc.,7 he claimed that such definition was applicable only to a
proprietor of an amusement place, not a banking institution which is an
entirely different entity altogether. As such, according to the
Commissioner, the ruling of the Court in Manila Jockey Club was
inapplicable.
In its Decision dated April 27, 1999, the CTA by a majority
decision8 partially granted the petition and ordered that the amount of
₱355,258.99 be refunded to the respondent bank. The fallo of the decision
reads:
WHEREFORE, in view of all the foregoing, respondent is
hereby ORDERED to REFUND in favor of petitioner Bank of Commerce
the amount of ₱355,258.99 representing validly proven erroneously
withheld taxes from interest income derived from its investments in
government securities for the years 1994 and 1995.9
In ruling for respondent bank, the CTA relied on the ruling of the Court
in Manila Jockey Club, and held that the term "gross receipts" excluded
those which had been especially earmarked by law or regulation for the
government or persons other than the taxpayer. The CTA also cited its
rulings in China Banking Corporation v. CIR10 and Equitable Banking
Corporation v. CIR.11
The CTA ratiocinated that the aforesaid amount of ₱355,258.99
represented the claim of the respondent bank, which was filed within the
two-year mandatory prescriptive period and was substantiated by material
and relevant evidence. The CTA applied Section 204(3) of the National
Internal Revenue Code (NIRC).12
The Commissioner then filed a petition for review under Rule 43 of the
Rules of Court before the CA, alleging that:
(1) There is no provision of law which excludes the 20% final
income tax withheld under Section 50(a) of the Tax Code in the
computation of the 5% gross receipts tax.
(2) The Tax Court erred in applying the ruling in Collector of
Internal Revenue vs. Manila Jockey Club (108 Phil. 821) in the
resolution of the legal issues involved in the instant case.13
The Commissioner reiterated his stand that the ruling of this Court
in Manila Jockey Club, which was affirmed in Visayan Cebu Terminal Co.,
Inc. v. Commissioner of Internal Revenue,14 is not decisive. He averred
that the factual milieu in the said case is different, involving as it did the
88 | P a g e
"wager fund." The Commissioner further pointed out that in Manila Jockey
Club, the Court ruled that the race track’s commission did not form part of
the gross receipts, and as such were not subjected to the 20% amusement
tax. On the other hand, the issue in Visayan Cebu Terminal was whether
or not the gross receipts corresponding to 28% of the total gross income of
the service contractor delivered to the Bureau of Customs formed part of
the gross receipts was subject to 3% of contractor’s tax under Section 191
of the Tax Code. It was further pointed out that the respondent bank, on
the other hand, was a banking institution and not a contractor. The
petitioner insisted that the term "gross receipts" is self-evident; it includes
all items of income of the respondent bank regardless of whether or not
the same were allocated or earmarked for a specific purpose, to
distinguish it from net receipts.
On August 14, 2001, the CA rendered judgment dismissing the petition.
Citing Sections 51 and 58(A) of the NIRC, Section 4(e) of Rev. Reg. No.
12-8015 and the ruling of this Court in Manila Jockey Club, the CA held that
the ₱17,076,850.90 representing the final withholding tax derived from
passive investments subjected to final tax should not be construed as
forming part of the gross receipts of the respondent bank upon which the
5% gross receipts tax should be imposed. The CA declared that the final
withholding tax in the amount of ₱17,768,509.00 was a trust fund for the
government; hence, does not form part of the respondent’s gross receipts.
The legal ownership of the amount had already been vested in the
government. Moreover, the CA declared, the respondent did not reap any
benefit from the said amount. As such, subjecting the said amount to the
5% gross receipts tax would result in double taxation. The appellate court
further cited CIR v. Tours Specialists, Inc.,16 and declared that the ruling of
the Court in Manila Jockey Club was decisive of the issue.
The Commissioner now assails the said decision before this Court,
contending that:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE 20% FINAL
WITHHOLDING TAX ON BANK’S INTEREST INCOME DOES NOT
FORM PART OF THE TAXABLE GROSS RECEIPTS IN COMPUTING
THE 5% GROSS RECEIPTS TAX (GRT, for brevity).17
The petitioner avers that the reliance by the CTA and the CA on Section
4(e) of Rev. Reg. No. 12-80 is misplaced; the said provision merely
authorizes the determination of the amount of gross receipts based on the
taxpayer’s method of accounting under then Section 37 (now Section 43)
of the Tax Code. The petitioner asserts that the said provision ceased to
exist as of October 15, 1984, when Rev. Reg. No. 17-84 took effect. The
petitioner further points out that under paragraphs 7(a) and (c) of Rev.
Reg. No. 17-84, interest income of financial institutions (including banks)
subject to withholding tax are included as part of the "gross receipts" upon
which the gross receipts tax is to be imposed. Citing the ruling of the CA
in Commissioner of Internal Revenue v. Asianbank Corporation18 (which
likewise cited Bank of America NT & SA v. Court of Appeals,19) the
petitioner posits that in computing the 5% gross receipts tax, the income
need not be actually received. For income to form part of the taxable gross
receipts, constructive receipt is enough. The petitioner is, likewise,
adamant in his claim that the final withholding tax from the respondent
bank’s income forms part of the taxable gross receipts for purposes of
computing the 5% of gross receipts tax. The petitioner posits that the
ruling of this Court in Manila Jockey Club is not decisive of the issue in this
case.
The petition is meritorious.
The issues in this case had been raised and resolved by this Court
in China Banking Corporation v. Court of Appeals,20 and CIR v. Solidbank
Corporation.21
Section 27(D)(1) of the Tax Code reads:
(D) Rates of Tax on Certain Passive Incomes. –
(1) Interest from Deposits and Yield or any other Monetary Benefit
from Deposit Substitutes and from Trust Funds and Similar
Arrangements, and Royalties. – A final tax at the rate of twenty percent
(20%) is hereby imposed upon the amount of interest on currency bank
deposit and yield or any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements received by domestic
corporations, and royalties, derived from sources within the
89 | P a g e
Philippines: Provided, however, That interest income derived by a
domestic corporation from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income tax at the rate of
seven and one-half percent (7½%) of such interest income.
On the other hand, Section 57(A)(B) of the Tax Code authorizes the
withholding of final tax on certain income creditable at source:
SEC. 57. Withholding of Tax at Source. –
(A) Withholding of Final Tax on Certain Incomes. – Subject to
rules and regulations, the Secretary of Finance may promulgate,
upon the recommendation of the Commissioner, requiring the
filing of income tax return by certain income payees, the tax
imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C),
24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1),
27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a),
28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4),
28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on
specified items of income shall be withheld by payor-corporation
and/or person and paid in the same manner and subject to the
same conditions as provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. – The Secretary of
Finance may, upon the recommendation of the Commissioner,
require the withholding of a tax on the items of income payable to
natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less
than one percent (1%) but not more than thirty-two percent (32%)
thereof, which shall be credited against the income tax liability of
the taxpayer for the taxable year.
The tax deducted and withheld by withholding agents under the said
provision shall be held as a special fund in trust for the government until
paid to the collecting officer.22
Section 121 (formerly Section 119) of the Tax Code provides that a tax on
gross receipts derived from sources within the Philippines by all banks and
non-bank financial intermediaries shall be computed in accordance with
the schedules therein:
(a) On interest, commissions and discounts from lending activities as well as incom
financial leasing, on the basis of remaining maturities of instruments from which su
receipts are derived:
Short-term maturity (not in excess of two (2) years)
Medium-term maturity (over two (2) years but not exceeding four (4) years)
Long-term maturity –
(1) Over four (4) years but not exceeding seven (7) years
(2) Over seven (7) years
(b) On dividends
(c) On royalties, rentals of property, real or personal, profits from exchange and
all other items treated as gross income under Section 32 of this Code
Provided, however, That in case the maturity period referred to in
paragraph (a) is shortened thru pre-termination, then the maturity period
shall be reckoned to end as of the date of pre-termination for purposes of
classifying the transaction as short, medium or long-term and the correct
rate of tax shall be applied accordingly.
Nothing in this Code shall preclude the Commissioner from imposing the
same tax herein provided on persons performing similar banking activities.
The Tax Code does not define "gross receipts." Absent any statutory
definition, the Bureau of Internal Revenue has applied the term in its plain
and ordinary meaning.23
90 | P a g e
In National City Bank v. CIR,24 the CTA held that gross receipts should be
interpreted as the whole amount received as interest, without deductions;
otherwise, if deductions were to be made from gross receipts, it would be
considered as "net receipts." The CTA changed course, however, when it
promulgated its decision in Asia Bank; it applied Section 4(e) of Rev. Reg.
No. 12-80 and the ruling of this Court in Manila Jockey Club, holding that
the 20% final withholding tax on the petitioner bank’s interest income
should not form part of its taxable gross receipts, since the final tax was
not actually received by the petitioner bank but went to the coffers of the
government.
The Court agrees with the contention of the petitioner that the appellate
court’s reliance on Rev. Reg. No. 12-80, the rulings of the CTA in Asia
Bank, and of this Court in Manila Jockey Club has no legal and factual
bases. Indeed, the Court ruled in China Banking Corporation v. Court of
Appeals25 that:
… In Far East Bank & Trust Co. v. Commissioner and Standard Chartered
Bank v. Commissioner, both promulgated on 16 November 2001, the tax
court ruled that the final withholding tax forms part of the bank’s gross
receipts in computing the gross receipts tax. The tax court held that
Section 4(e) of Revenue Regulations No. 12-80 did not prescribe the
computation of the amount of gross receipts but merely authorized "the
determination of the amount of gross receipts on the basis of the method
of accounting being used by the taxpayer."
The word "gross" must be used in its plain and ordinary meaning. It is
defined as "whole, entire, total, without deduction." A common definition is
"without deduction."26 "Gross" is also defined as "taking in the whole;
having no deduction or abatement; whole, total as opposed to a sum
consisting of separate or specified parts."27 Gross is the antithesis of
net.28 Indeed, in China Banking Corporation v. Court of Appeals,29 the
Court defined the term in this wise:
As commonly understood, the term "gross receipts" means the entire
receipts without any deduction. Deducting any amount from the gross
receipts changes the result, and the meaning, to net receipts. Any
deduction from gross receipts is inconsistent with a law that mandates a
tax on gross receipts, unless the law itself makes an exception. As
explained by the Supreme Court of Pennsylvania in Commonwealth of
Pennsylvania v. Koppers Company, Inc., -
Highly refined and technical tax concepts have been developed by the
accountant and legal technician primarily because of the impact of federal
income tax legislation. However, this in no way should affect or control the
normal usage of words in the construction of our statutes; and we see
nothing that would require us not to include the proceeds here in question
in the gross receipts allocation unless statutorily such inclusion is
prohibited. Under the ordinary basic methods of handling accounts, the
term gross receipts, in the absence of any statutory definition of the term,
must be taken to include the whole total gross receipts without any
deductions, x x x. [Citations omitted] (Emphasis supplied)"
Likewise, in Laclede Gas Co. v. City of St. Louis, the Supreme Court of
Missouri held:
The word "gross" appearing in the term "gross receipts," as used in the
ordinance, must have been and was there used as the direct antithesis of
the word "net." In its usual and ordinary meaning "gross receipts" of a
business is the whole and entire amount of the receipts without deduction,
x x x. On the contrary, "net receipts" usually are the receipts which remain
after deductions are made from the gross amount thereof of the expenses
and cost of doing business, including fixed charges and depreciation.
Gross receipts become net receipts after certain proper deductions are
made from the gross. And in the use of the words "gross receipts," the
instant ordinance, of course, precluded plaintiff from first deducting its
costs and expenses of doing business, etc., in arriving at the higher base
figure upon which it must pay the 5% tax under this ordinance. (Emphasis
supplied)
Absent a statutory definition, the term "gross receipts" is understood in its
plain and ordinary meaning. Words in a statute are taken in their usual and
familiar signification, with due regard to their general and popular use. The
Supreme Court of Hawaii held in Bishop Trust Company v. Burns that -
91 | P a g e
xxx It is fundamental that in construing or interpreting a statute, in order to
ascertain the intent of the legislature, the language used therein is to be
taken in the generally accepted and usual sense. Courts will presume that
the words in a statute were used to express their meaning in common
usage. This principle is equally applicable to a tax statute. [Citations
omitted] (Emphasis supplied)
The Court, likewise, declared that Section 121 of the Tax Code expressly
subjects interest income of banks to the gross receipts tax. "Such express
inclusion of interest income in taxable gross receipts creates
a presumption that the entire amount of the interest income, without any
deduction, is subject to the gross receipts tax. Indeed, there is a
presumption that receipts of a person engaging in business are subject to
the gross receipts tax. Such presumption may only be overcome by
pointing to a specific provision of law allowing such deduction of the final
withholding tax from the taxable gross receipts, failing which, the claim of
deduction has no leg to stand on. Moreover, where such an exception is
claimed, the statute is construed strictly in favor of the taxing authority.
The exemption must be clearly and unambiguously expressed in the
statute, and must be clearly established by the taxpayer claiming the right
thereto. Thus, taxation is the rule and the claimant must show that his
demand is within the letter as well as the spirit of the law."30
In this case, there is no law which allows the deduction of 20% final tax
from the respondent bank’s interest income for the computation of the 5%
gross receipts tax. On the other hand, Section 8(a)(c), Rev. Reg. No. 17-
84 provides that interest earned on Philippine bank deposits and yield from
deposit substitutes are included as part of the tax base upon which the
gross receipts tax is imposed. Such earned interest refers to the gross
interest without deduction since the regulations do not provide for any
such deduction. The gross interest, without deduction, is the amount the
borrower pays, and the income the lender earns, for the use by the
borrower of the lender’s money. The amount of the final tax plainly covers
for the interest earned and is consequently part of the taxable gross
receipt of the lender.31
The bare fact that the final withholding tax is a special trust fund belonging
to the government and that the respondent bank did not benefit from it
while in custody of the borrower does not justify its exclusion from the
computation of interest income. Such final withholding tax covers for the
respondent bank’s income and is the amount to be used to pay its tax
liability to the government. This tax, along with the creditable withholding
tax, constitutes payment which would extinguish the respondent bank’s
obligation to the government. The bank can only pay the money it owns, or
the money it is authorized to pay.32
In the same vein, the respondent bank’s reliance on Section 4(e) of Rev.
Reg. No. 12-80 and the ruling of the CTA in Asia Bank is misplaced. The
Court’s discussion in China Banking Corporation33 is instructive on this
score:
CBC also relies on the Tax Court’s ruling in Asia Bank that Section 4(e) of
Revenue Regulations No. 12-80 authorizes the exclusion of the final tax
from the bank’s taxable gross receipts. Section 4(e) provides that:
Sec. 4. x x x
(e) Gross receipts tax on banks, non-bank financial intermediaries,
financing companies, and other non-bank financial intermediaries not
performing quasi-banking functions. - The rates of taxes to be imposed on
the gross receipts of such financial institutions shall be based on all items
of income actually received. Mere accrual shall not be considered, but
once payment is received on such accrual or in cases of prepayment, then
the amount actually received shall be included in the tax base of such
financial institutions, as provided hereunder: x x x. (Emphasis supplied by
Tax Court)
Section 4(e) states that the gross receipts "shall be based on all items of
income actually received." The tax court in Asia Bank concluded that "it is
but logical to infer that the final tax, not having been received by petitioner
but instead went to the coffers of the government, should no longer form
part of its gross receipts for the purpose of computing the GRT."
The Tax Court erred glaringly in interpreting Section 4(e) of Revenue
Regulations No. 12-80. Income may be taxable either at the time of its
92 | P a g e
actual receipt or its accrual, depending on the accounting method of the
taxpayer. Section 4(e) merely provides for an exception to the rule, making
interest income taxable for gross receipts tax purposes only upon actual
receipt. Interest is accrued, and not actually received, when the interest is
due and demandable but the borrower has not actually paid and remitted
the interest, whether physically or constructively. Section 4(e) does not
exclude accrued interest income from gross receipts but
merely postpones its inclusion until actual payment of the interest to the
lending bank. This is clear when Section 4(e) states that "[m]ere accrual
shall not be considered, but once payment is received on such accrual or
in case of prepayment, then the amount actually received shall be included
in the tax base of such financial institutions x x x."
Actual receipt of interest income is not limited to physical receipt. Actual
receipt may either be physical receipt or constructive receipt. When the
depository bank withholds the final tax to pay the tax liability of the lending
bank, there is prior to the withholding a constructive receipt by the lending
bank of the amount withheld. From the amount constructively received by
the lending bank, the depository bank deducts the final withholding tax and
remits it to the government for the account of the lending bank. Thus, the
interest income actually received by the lending bank, both physically and
constructively, is the net interest plus the amount withheld as final tax.
The concept of a withholding tax on income obviously and
necessarily implies that the amount of the tax withheld comes from the
income earned by the taxpayer. Since the amount of the tax withheld
constitutes income earned by the taxpayer, then that amount manifestly
forms part of the taxpayer’s gross receipts. Because the amount withheld
belongs to the taxpayer, he can transfer its ownership to the government
in payment of his tax liability. The amount withheld indubitably comes from
income of the taxpayer, and thus forms part of his gross receipts.
The Court went on to explain in that case that far from supporting the
petitioner’s contention, its ruling in Manila Jockey Club, in fact even
buttressed the contention of the Commissioner. Thus:
CBC cites Collector of Internal Revenue v. Manila Jockey Club as
authority that the final withholding tax on interest income does not form
part of a bank’s gross receipts because the final tax is "earmarked by
regulation" for the government. CBC’s reliance on the Manila Jockey
Club is misplaced. In this case, the Court stated that Republic Act No. 309
and Executive Order No. 320 apportioned the total amount of the bets in
horse races as follows:
87 ½% as dividends to holders of winning tickets, 12 ½% as "commission"
of the Manila Jockey Club, of which ½% was assigned to the Board of
Races and 5% was distributed as prizes for owners of winning horses and
authorized bonuses for jockeys.
A subsequent law, Republic Act No. 1933 ("RA No. 1933"), amended the
sharing by ordering the distribution of the bets as follows:
Sec. 19. Distribution of receipts. – The total wager funds or gross receipts
from the sale of pari-mutuel tickets shall be apportioned as follows: eighty-
seven and one-half per centum shall be distributed in the form of dividends
among the holders of win, place and show horses, as the case may be, in
the regular races; six and one-half per centum shall be set aside as the
commission of the person, racetrack, racing club, or any other entity
conducting the races; five and one-half per centum shall be set aside for
the payment of stakes or prizes for win, place and show horses and
authorized bonuses for jockeys; and one-half per centum shall be paid to a
special fund to be used by the Games and Amusements Board to cover its
expenses and such other purposes authorized under this Act.
xxx.(Emphasis supplied)
Under the "distribution of receipts" expressly mandated in Section 19 of
RA No. 1933, the gross receipts "apportioned" to Manila Jockey Club
referred only to its own 6 ½% commission. There is no dispute that the 5
½% share of the horse-owners and jockeys, and the ½% share of the
Games and Amusements Board, do not form part of Manila Jockey Club’s
gross receipts. RA No. 1933 took effect on 22 June 1957, three years
before the Court decided Manila Jockey Club on 30 June 1960.
Even under the earlier law, Manila Jockey Club did not own the entire 12
½% commission. Manila Jockey Club owned, and could keep and use,
only 7% of the total bets. Manila Jockey Club merely held in trust the
93 | P a g e
balance of 5 ½% for the benefit of the Board of Races and the winning
horse-owners and jockeys, the real owners of the 5 1/2 % share.
The Court in Manila Jockey Club quoted with approval the following
Opinion of the Secretary of Justice made priorto RA No. 1933:
There is no question that the Manila Jockey Club, Inc. owns only 7-1/2%
[sic] of the bets registered by the Totalizer. This portion represents its
share or commission in the total amount of money it handles and goes to
the funds thereof as its own property which it may legally disburse for its
own purposes. The 5% [sic] does not belong to the club. It is merely held
in trust for distribution as prizes to the owners of winning horses. It is
destined for no other object than the payment of prizes and the club
cannot otherwise appropriate this portion without incurring liability to the
owners of winning horses. It can not be considered as an item of expense
because the sum used for the payment of prizes is not taken from the
funds of the club but from a certain portion of the total bets especially
earmarked for that purpose. (Emphasis supplied)
Consequently, the Court ruled that the 5 ½% balance of the commission,
not being owned by Manila Jockey Club, did not form part of its gross
receipts for purposes of the amusement tax. Manila Jockey Club correctly
paid the amusement tax based only on its own 7% commission under RA
No. 309 and Executive Order No. 320.
Manila Jockey Club does not support CBC’s contention but rather the
Commissioner’s position. The Court ruled in Manila Jockey Club that
receipts not owned by the Manila Jockey Club but merely held by it in trust
did not form part of Manila Jockey Club’s gross receipts. Conversely,
receipts owned by the Manila Jockey Club would form part of its gross
receipts.34
We reverse the ruling of the CA that subjecting the Final Withholding Tax
(FWT) to the 5% of gross receipts tax would result in double taxation.
In CIR v. Solidbank Corporation,35 we ruled, thus:
We have repeatedly said that the two taxes, subject of this litigation, are
different from each other. The basis of their imposition may be the same,
but their natures are different, thus leading us to a final point. Is there
double taxation?
The Court finds none.
Double taxation means taxing the same property twice when it should be
taxed only once; that is, "xxx taxing the same person twice by the same
jurisdiction for the same thing." It is obnoxious when the taxpayer is taxed
twice, when it should be but once. Otherwise described as "direct
duplicate taxation," the two taxes must be imposed on the same subject
matter, for the same purpose, by the same taxing authority, within the
same jurisdiction, during the same taxing period; and they must be of the
same kind or character.
First, the taxes herein are imposed on two different subject
matters. The subject matter of the FWT is the passive income
generated in the form of interest on deposits and yield on deposit
substitutes, while the subject matter of the GRT is the privilege of
engaging in the business of banking.
A tax based on receipts is a tax on business rather than on the
property; hence, it is an excise rather than a property tax. It is not
an income tax, unlike the FWT. In fact, we have already held that
one can be taxed for engaging in business and further taxed
differently for the income derived therefrom. Akin to our ruling
in Velilla v. Posadas, these two taxes are entirely distinct and are
assessed under different provisions.
Second, although both taxes are national in scope because they
are imposed by the same taxing authority – the national
government under the Tax Code – and operate within the same
Philippine jurisdiction for the same purpose of raising revenues,
the taxing periods they affect are different. The FWT is deducted
and withheld as soon as the income is earned, and is paid after
every calendar quarter in which it is earned. On the other hand,
94 | P a g e
 the GRT is neither deducted nor withheld, but is paid only after
every taxable quarter in which it is earned.

Third, these two taxes are of different kinds or characters. The

FWT is an income tax subject to withholding, while the GRT is a
percentage tax not subject to withholding.

In short, there is no double taxation, because there is no taxing twice, by

the same taxing authority, within the same jurisdiction, for the same
purpose, in different taxing periods, some of the property in the territory.
Subjecting interest income to a 20% FWT and including it in the
computation of the 5% GRT is clearly not double taxation.

IN LIGHT OF THE FOREGOING, the petition is GRANTED. The decision

of the Court of Appeals in CA-G.R. SP No. 52706 and that of the Court of
Tax Appeals in CTA Case No. 5415 are SET ASIDE and REVERSED. The
CTA is hereby ORDERED to DISMISS the petition of respondent Bank of
Commerce. No costs.

95 | P a g e
c. constitutionality of double taxation
d. modes of eliminating double taxation
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%."
96 | P a g e
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.
I has substantive dimensions as well which, as will be seen below, also
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
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)
97 | P a g e
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
98 | P a g e
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:

(a) Allowance of credit. — If the taxpayer chooses to have the benefits of this subpart, the tax imposed
(b) Tax on foreign corporations.— 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

(1) Non-resident corporation. — A foreign corporation not engaged in trade and business in the deemed to have been paid under sections 902 and 960. Such choice for any taxable year may be

Philippines, . . ., shall pay a tax equal to 35% of the gross income receipt during its taxable year from made or changed at any time before the expiration of the period prescribed for making a claim for

all sources within the Philippines, as . . . dividends . . . Provided, still further, that on dividends credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not be

received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the allowed against the tax imposed by section 531 (relating to the tax on accumulated earnings), against

dividends, which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the the additional tax imposed for the taxable year under section 1333 (relating to war loss recoveries) or

condition that the country in which the non-resident foreign corporation, is domiciled shall allow a under section 1351 (relating to recoveries of foreign expropriation losses), or against the personal

credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid holding company tax imposed by section 541.

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

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 (a) Citizens and domestic corporations. — In the case of a citizen of the United States
stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the and of a domestic corporation, the amount of any income, war profits, and excess
Philippines," applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In profits taxes paid or accrued during the taxable year to any foreign country or to any
other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall possession of the United States; and
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 xxx xxx xxx
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.
Sec. 902. — Credit for corporate stockholders in foreign corporation.

It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax
(A) Treatment of Taxes Paid by Foreign Corporation. — For purposes of this subject, a
credit for the dividend tax (20 percentage points) waived by the Philippines in making applicable the preferred
domestic corporation which owns at least 10 percent of the voting stock of a foreign
divided tax rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the
corporation from which itreceives dividends in any taxable year shall —
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
xxx xxx xxx
twenty (20) percentage points waived by the Philippines.

(2) to the extent such dividends are paid by such foreign corporation out of accumulated
2. The question arises: Did the US law comply with the above requirement? The relevant provisions of the US
profits [as defined in subsection (c) (1) (b)] of a year for which such foreign corporation is
Intemal Revenue Code ("Tax Code") are the following:
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
Sec. 901 — Taxes of foreign countries and possessions of United States.
corporation to any foreign country or to any possession of the United States on or with

99 | P a g e
 respect to such accumulated profits, which the amount of such dividends bears to the b. US law (Section 902, US Tax Code) grants to P&G-
amount of such accumulated profits. 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.

xxx xxx xxx

(c) Applicable Rules

The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate

(1) Accumulated profits defined. — For purposes of this section, the term "accumulated income taxalthough that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-

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
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.

(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 suchprofits or income.
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"
The Secretary or his delegate shall have full power to determine from the accumulated
by P&G-USA, are tax credits available or applicable against the US corporate income tax of P&G-
profits of what year or years such dividends were paid, treating dividends paid in the first
USA. These tax credits are allowed because of the US congressional desire to avoid or reduce double
20 days of any year as having been paid from the accumulated profits of the preceding
taxation of the same income stream. 9
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
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;
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:
shows the
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

100 | P a g e
 c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under
least equal to the amount of the dividend tax waived by the Philippine Government. Section 902, Tax Code, may be computed arithmetically as follows:

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. P65.00 — Dividends remittable to P&G-USA
x 35% — Regular Philippine corporate income tax rate - 9.75 — Dividend tax withheld at the reduced (15%) rate
——— ———
P35.00 — Paid to the BIR by P&G-Phil. as Philippine P55.25 — Dividends actually remitted to P&G-USA
corporate income tax.

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

P100.00 to the BIR
-35.00
———
P65.00 — Available for remittance as dividends to P&G-USA

Dividends actually
P65.00 — Dividends remittable to P&G-USA remitted by P&G-Phil.
x 35% — Regular Philippine dividend tax rate under Section 24 to P&G-USA P55.25
——— (b) (1), NIRC ——————— = ——— x P35.00 = P29.75 10
P22.75 — Regular dividend tax Amount of accumulated P65.00 ======
profits earned by
P65.00 — Dividends remittable to P&G-USA P&G-Phil. in excess
x 15% — Reduced dividend tax rate under Section 24 (b) (1), NIRC of income tax
———
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, 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
Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. government), Section 902, US Tax Code, specifically and clearly complies with the requirements of
Amount (a) is also the minimum amount of the "deemed paid" tax credit that US tax law shall allow if Section 24 (b) (1), NIRC.
P&G-USA is to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC.

101 | P a g e
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 ofPresidential 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 . . .
102 | P a g e
 (a) Citizen and Domestic Corporation. — In the case of a citizen of the Philippines and of NIRC to have paid a proportionate part of the US corporate income tax paid by its US subsidiary,
domestic corporation, the amount of net income, war profits or excess profits, taxes paid although such US tax was actually paid by the subsidiary and not by the Philippine parent.
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 government—e.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:
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.

(8) Taxes of foreign subsidiary. — For the purposes of this subsection a domestic III
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 1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case was the
proportion of any income, war-profits, or excess-profits taxes paid by such foreign regular thirty-five percent (35%) rate rather than the reduced rate of fifteen percent (15%), held that P&G-Phil. had
corporation to any foreign country, upon or with respect to the accumulated profits of such failed to prove that its parent, P&G-USA, had in fact been given by the US tax authorities a "deemed paid" tax
foreign corporation from which such dividends were paid, which the amount of such credit in the amount required by Section 24 (b) (1), NIRC.
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
We believe, in the first place, that we must distinguish between the legal question before this Court from questions
proportion of the tax against which credit is taken which the amount of such dividends
of administrative implementation arising after the legal question has been answered. The basic legal issue is of
bears to the amount of the entire net income of the domestic corporation in which such
course, this: which is the applicable dividend tax rate in the instant case: the regular thirty-five percent (35%) rate
dividends are included. The term"accumulated profits" when used in this subsection
or the reduced fifteen percent (15%) rate? The question of whether or not P&G-USA is in fact given by the US tax
reference to a foreign corporation, means the amount of its gains, profits, or income in
authorities a "deemed paid" tax credit in the required amount, relates to the administrative implementation of the
excess of the income, war-profits, and excess-profits taxes imposed upon or with respect
applicable reduced tax rate.
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
In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have
paid; treating dividends paid in the first sixty days of any year as having been paid from
actually been granted before the applicable dividend tax rate goes down from thirty-five percent (35%) to fifteen
the accumulated profits of the preceding year or years (unless to his satisfaction shown
percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that the
otherwise), and in other respects treating dividends as having been paid from the most
USA "shall allow a credit against the
recently accumulated gains, profits, or earnings. In the case of a foreign corporation, the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither statutory
income, war-profits, and excess-profits taxes of which are determined on the basis of an
provision nor revenue regulation issued by the Secretary of Finance requiring the actual grant of the "deemed paid"
accounting period of less than one year, the word "year" as used in this subsection shall
tax credit by the US Internal Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend
be construed to mean such accounting period. (Emphasis supplied)
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.
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

103 | P a g e
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 the Philippine dividend tax, at the rate
here applicable, was actually imposed and collected. 11
It is this practical or operating
circularity that is in fact avoided by our BIR when it issues rulings that the
tax laws of particular foreign jurisdictions (e.g., Republic of
Vanuatu 12Hongkong, 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 economyforemost 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.
104 | P a g e
The net effect upon the foreign investor may be shown arithmetically in the P55.25 — Amount received by P&G-USA net of RP and US
following manner: ====== taxes after Section 902 tax credit.

P65.00 — Dividends remittable to P&G-USA (please It will be seen that the "deemed paid" tax credit allowed by Section 902,
see page 392 above US Tax Code, could offset the US corporate income tax payable on the
- 9.75 — Reduced R.P. dividend tax withheld by P&G-Phil. 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
P55.25 — Dividends actually remitted to P&G-USA of the dividends remitted to P&G-USA net of Philippine taxes. In the
calculation of the Philippine Government, this should encourage additional
P55.25 investment or re-investment in the Philippines by P&G-USA.
x 46% — Maximum US corporate income tax rate
——— 3. It remains only to note that under the Philippines-United States
P25.415—US corporate tax payable by P&G-USA Convention "With Respect to Taxes on Income," 15the Philippines, by a
without tax credits 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
P25.415 parent corporations:
- 9.75 — US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code) Art 11. — Dividends
———
P15.66 — US corporate income tax payable after Section 901 xxx xxx xxx
——— tax credit.
(2) The rate of tax imposed by one of the Contracting States on
P55.25 dividends derived from sources within that Contracting State by a
- 15.66 resident of the other Contracting State shall not exceed —
———
P39.59 — Amount received by P&G-USA net of R.P. and U.S.
(a) 25 percent of the gross amount of the dividend; or
===== taxes without "deemed paid" tax credit.
(b) When the recipient is a corporation, 20 percent of the gross
P25.415 amount of the dividend if during the part of the paying
- 29.75 — "Deemed paid" tax credit under Section 902 US
corporation's taxable year which precedes the date of payment of
——— Tax Code (please see page 18 above)
the dividend and during the whole of its prior taxable year (if
any), at least 10 percent of the outstanding shares of the voting
- 0 - — US corporate income tax payable on dividends stock of the paying corporation was owned by the recipient
====== remitted by P&G-Phil. to P&G-USA after corporation.
Section 902 tax credit.
xxx xxx xxx

105 | P a g e
(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.

106 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 127105 June 25, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
S.C. JOHNSON AND SON, INC., and COURT OF
APPEALS, respondents.
GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of
Court seeking to set aside the decision of the Court of Appeals dated
November 7, 1996 in CA-GR SP No. 40802 affirming the decision of the
Court of Tax Appeals in CTA Case No. 5136.
The antecedent facts as found by the Court of Tax Appeals are not
disputed, to wit:
[Respondent], a domestic corporation organized and
operating under the Philippine laws, entered into a license
agreement with SC Johnson and Son, United States of
America (USA), a non-resident foreign corporation based
in the U.S.A. pursuant to which the [respondent] was
granted the right to use the trademark, patents and
technology owned by the latter including the right to
manufacture, package and distribute the products covered
by the Agreement and secure assistance in management,
marketing and production from SC Johnson and Son, U.
S. A.
The said License Agreement was duly registered with the
Technology Transfer Board of the Bureau of Patents,
Trade Marks and Technology Transfer under Certificate of
Registration No. 8064 (Exh. "A").
For the use of the trademark or technology, [respondent]
was obliged to pay SC Johnson and Son, USA royalties
based on a percentage of net sales and subjected the
same to 25% withholding tax on royalty payments which
[respondent] paid for the period covering July 1992 to May
1993 in the total amount of P1,603,443.00 (Exhs. "B" to
"L" and submarkings).
On October 29, 1993, [respondent] filed with the
International Tax Affairs Division (ITAD) of the BIR a claim
for refund of overpaid withholding tax on royalties arguing
that, "the antecedent facts attending [respondent's] case
fall squarely within the same circumstances under which
said MacGeorge and Gillete rulings were issued. Since
the agreement was approved by the Technology Transfer
Board, the preferential tax rate of 10% should apply to the
[respondent]. We therefore submit that royalties paid by
the [respondent] to SC Johnson and Son, USA is only
subject to 10% withholding tax pursuant to the most-
favored nation clause of the RP-US Tax Treaty [Article 13
Paragraph 2 (b) (iii)] in relation to the RP-West Germany
Tax Treaty [Article 12 (2) (b)]" (Petition for Review [filed
with the Court of Appeals], par. 12). [Respondent's] claim
for there fund of P963,266.00 was computed as follows:
Gross 25% 10%
Month/ Royalty Withholding Withholding
107 | P a g e
 Year Fee Tax Paid Tax Balance
——— ——— ——— ——— ———
July 1992 559,878 139,970 55,988 83,982
August 567,935 141,984 56,794 85,190
September 595,956 148,989 59,596 89,393
October 634,405 158,601 63,441 95,161
November 620,885 155,221 62,089 93,133
December 383,276 95,819 36,328 57,491
Jan 1993 602,451 170,630 68,245 102,368
February 565,845 141,461 56,585 84,877
March 547,253 136,813 54,725 82,088
April 660,810 165,203 66,081 99,122
May 603,076 150,769 60,308 90,461
———— ———— ———— ———
P6,421,770 P1,605,443 P642,177 P963,2661
======== ======== ======== ========
The Commissioner did not act on said claim for refund. Private respondent
S.C. Johnson & Son, Inc. (S.C. Johnson) then filed a petition for review
before the Court of Tax Appeals (CTA) where the case was docketed as
CTA Case No. 5136, to claim a refund of the overpaid withholding tax on
royalty payments from July 1992 to May 1993.
On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of
S.C. Johnson and ordered the Commissioner of Internal Revenue to issue
a tax credit certificate in the amount of P963,266.00 representing overpaid
withholding tax on royalty payments, beginning July, 1992 to May, 1993. 2
The Commissioner of Internal Revenue thus filed a petition for review with
the Court of Appeals which rendered the decision subject of this appeal on
November 7, 1996 finding no merit in the petition and affirming in toto the
CTA ruling.3
This petition for review was filed by the Commissioner of Internal Revenue
raising the following issue:
THE COURT OF APPEALS ERRED IN RULING THAT
SC JOHNSON AND SON, USA IS ENTITLED TO THE
"MOST FAVORED NATION" TAX RATE OF 10% ON
ROYALTIES AS PROVIDED IN THE RP-US TAX
TREATY IN RELATION TO THE RP-WEST GERMANY
TAX TREATY.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax
Treaty, which is known as the "most favored nation" clause, the lowest
rate of the Philippine tax at 10% may be imposed on royalties derived by a
resident of the United States from sources within the Philippines only if the
circumstances of the resident of the United States are similar to those of
the resident of West Germany. Since the RP-US Tax Treaty contains no
"matching credit" provision as that provided under Article 24 of the RP-
West Germany Tax Treaty, the tax on royalties under the RP-US Tax
Treaty is not paid under similar circumstances as those obtaining in the
RP-West Germany Tax Treaty. Even assuming that the phrase "paid
under similar circumstances" refers to the payment of royalties, and not
taxes, as held by the Court of Appeals, still, the "most favored nation"
clause cannot be invoked for the reason that when a tax treaty
contemplates circumstances attendant to the payment of a tax, or royalty
remittances for that matter, these must necessarily refer to circumstances
that are tax-related. Finally, petitioner argues that since S.C. Johnson's
invocation of the "most favored nation" clause is in the nature of a claim for
exemption from the application of the regular tax rate of 25% for royalties,
the provisions of the treaty must be construed strictly against it.
In its Comment, private respondent S.C. Johnson avers that the instant
petition should be denied (1) because it contains a defective certification
against forum shopping as required under SC Circular No. 28-91, that is,
the certification was not executed by the petitioner herself but by her
counsel; and (2) that the "most favored nation" clause under the RP-US
Tax Treaty refers to royalties paid under similar circumstances as those
royalties subject to tax in other treaties; that the phrase "paid under similar
circumstances" does not refer to payment of the tax but to the subject
matter of the tax, that is, royalties, because the "most favored nation"
clause is intended to allow the taxpayer in one state to avail of more liberal
provisions contained in another tax treaty wherein the country of residence
108 | P a g e
of such taxpayer is also a party thereto, subject to the basic condition that
the subject matter of taxation in that other tax treaty is the same as that in
the original tax treaty under which the taxpayer is liable; thus, the RP-US
Tax Treaty speaks of "royalties of the same kind paid under similar
circumstances". S.C. Johnson also contends that the Commissioner is
estopped from insisting on her interpretation that the phrase "paid under
similar circumstances" refers to the manner in which the tax is paid, for the
reason that said interpretation is embodied in Revenue Memorandum
Circular ("RMC") 39-92 which was already abandoned by the
Commissioner's predecessor in 1993; and was expressly revoked in BIR
Ruling No. 052-95 which stated that royalties paid to an American licensor
are subject only to 10% withholding tax pursuant to Art 13(2)(b)(iii) of the
RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. Said
ruling should be given retroactive effect except if such is prejudicial to the
taxpayer pursuant to Section 246 of the National Internal Revenue Code.
Petitioner filed Reply alleging that the fact that the certification against
forum shopping was signed by petitioner's counsel is not a fatal defect as
to warrant the dismissal of this petition since Circular No. 28-91 applies
only to original actions and not to appeals, as in the instant case.
Moreover, the requirement that the certification should be signed by
petitioner and not by counsel does not apply to petitioner who has only the
Office of the Solicitor General as statutory counsel. Petitioner reiterates
that even if the phrase "paid under similar circumstances" embodied in the
most favored nation clause of the RP-US Tax Treaty refers to the payment
of royalties and not taxes, still the presence or absence of a "matching
credit" provision in the said RP-US Tax Treaty would constitute a material
circumstance to such payment and would be determinative of the said
clause's application.1âwphi1.nêt
We address first the objection raised by private respondent that the
certification against forum shopping was not executed by the petitioner
herself but by her counsel, the Office of the Solicitor General (O.S.G.)
through one of its Solicitors, Atty. Tomas M. Navarro.
SC Circular No. 28-91 provides:
SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS FILED WITH
THE SUPREME COURT AND THE COURT OF APPEALS TO
PREVENT FORUM SHOPPING OR MULTIPLE FILING OF PETITIONS
AND COMPLAINTS
TO: xxx xxx xxx
The attention of the Court has been called to the filing of
multiple petitions and complaints involving the same
issues in the Supreme Court, the Court of Appeals or
other tribunals or agencies, with the result that said courts,
tribunals or agencies have to resolve the same issues.
(1) To avoid the foregoing, in every petition filed with the
Supreme Court or the Court of Appeals, the petitioner
aside from complying with pertinent provisions of the
Rules of Court and existing circulars, must certify under
oath to all of the following facts or undertakings: (a) he
has not theretofore commenced any other action or
proceeding involving the same issues in the Supreme
Court, the Court of Appeals, or any tribunal or
agency; . . .
(2) Any violation of this revised Circular will entail the
following sanctions: (a) it shall be a cause for the
summary dismissal of the multiple petitions or complaints;
...
The circular expressly requires that a certificate of non-forum shopping
should be attached to petitions filed before this Court and the Court of
Appeals. Petitioner's allegation that Circular No. 28-91 applies only to
original actions and not to appeals as in the instant case is not supported
by the text nor by the obvious intent of the Circular which is to prevent
multiple petitions that will result in the same issue being resolved by
different courts.
109 | P a g e
Anent the requirement that the party, not counsel, must certify under oath
that he has not commenced any other action involving the same issues in
this Court or the Court of Appeals or any other tribunal or agency, we are
inclined to accept petitioner's submission that since the OSG is the only
lawyer for the petitioner, which is a government agency mandated under
Section 35, Chapter 12, title III, Book IV of the 1987 Administrative
Code4 to be represented only by the Solicitor General, the certification
executed by the OSG in this case constitutes substantial compliance with
Circular No. 28-91.
With respect to the merits of this petition, the main point of contention in
this appeal is the interpretation of Article 13 (2) (b) (iii) of the RP-US Tax
Treaty regarding the rate of tax to be imposed by the Philippines upon
royalties received by a non-resident foreign corporation. The provision
states insofar as pertinent
that —
1) Royalties derived by a resident of one of the Contracting States
from sources within the other Contracting State may be taxed by both
Contracting States.
2) However, the tax imposed by that Contracting State shall not
exceed.
a) In the case of the United States, 15 percent of the gross
amount of the royalties, and
b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of the royalties;
(ii) 15 percent of the gross amount of the royalties, where the
royalties are paid by a corporation registered with the Philippine
Board of Investments and engaged in preferred areas of activities;
and
(iii) the lowest rate of Philippine tax that may be imposed on
royalties of the same kind paid under similar circumstances to a
resident of a third State.
xxx xxx xxx
(emphasis supplied)
Respondent S. C. Johnson and Son, Inc. claims that on the basis of the
quoted provision, it is entitled to the concessional tax rate of 10 percent on
royalties based on Article 12 (2) (b) of the RP-Germany Tax Treaty which
provides:
(2) However, such royalties may also be taxed in the Contracting State in
which they arise, and according to the law of that State, but the tax so
charged shall not exceed:
xxx xxx xxx
b) 10 percent of the gross amount of royalties arising from the use of, or
the right to use, any patent, trademark, design or model, plan, secret
formula or process, or from the use of or the right to use, industrial,
commercial, or scientific equipment, or for information concerning
industrial, commercial or scientific experience.
For as long as the transfer of technology, under Philippine
law, is subject to approval, the limitation of the tax rate
mentioned under b) shall, in the case of royalties arising in
the Republic of the Philippines, only apply if the contract
giving rise to such royalties has been approved by the
Philippine competent authorities.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax
credit of 20 percent of the gross amount of such royalties against German
income and corporation tax for the taxes payable in the Philippines on
such royalties where the tax rate is reduced to 10 or 15 percent under
such treaty. Article 24 of the RP-Germany Tax Treaty states —
110 | P a g e
1) Tax shall be determined in the case of a resident of the Federal
Republic of Germany as follows:
xxx xxx xxx
b) Subject to the provisions of German tax law regarding credit for foreign
tax, there shall be allowed as a credit against German income and
corporation tax payable in respect of the following items of income arising
in the Republic of the Philippines, the tax paid under the laws of the
Philippines in accordance with this Agreement on:
xxx xxx xxx
dd) royalties, as defined in paragraph 3 of Article 12;
xxx xxx xxx
c) For the purpose of the credit referred in subparagraph; b) the Philippine
tax shall be deemed to be
xxx xxx xxx
cc) in the case of royalties for which the tax is reduced to 10 or 15 per
cent according to paragraph 2 of Article 12, 20 percent of the gross
amount of such royalties.
xxx xxx xxx
According to petitioner, the taxes upon royalties under the RP-US Tax
Treaty are not paid under circumstances similar to those in the RP-West
Germany Tax Treaty since there is no provision for a 20 percent matching
credit in the former convention and private respondent cannot invoke the
concessional tax rate on the strength of the most favored nation clause in
the RP-US Tax Treaty. Petitioner's position is explained thus:
Under the foregoing provision of the RP-West Germany
Tax Treaty, the Philippine tax paid on income from
sources within the Philippines is allowed as a credit
against German income and corporation tax on the same
income. In the case of royalties for which the tax is
reduced to 10 or 15 percent according to paragraph 2 of
Article 12 of the RP-West Germany Tax Treaty, the credit
shall be 20% of the gross amount of such royalty. To
illustrate, the royalty income of a German resident from
sources within the Philippines arising from the use of, or
the right to use, any patent, trade mark, design or model,
plan, secret formula or process, is taxed at 10% of the
gross amount of said royalty under certain conditions. The
rate of 10% is imposed if credit against the German
income and corporation tax on said royalty is allowed in
favor of the German resident. That means the rate of 10%
is granted to the German taxpayer if he is similarly
granted a credit against the income and corporation tax of
West Germany. The clear intent of the "matching credit" is
to soften the impact of double taxation by different
jurisdictions.
The RP-US Tax Treaty contains no similar "matching
credit" as that provided under the RP-West Germany Tax
Treaty. Hence, the tax on royalties under the RP-US Tax
Treaty is not paid under similar circumstances as those
obtaining in the RP-West Germany Tax Treaty. Therefore,
the "most favored nation" clause in the RP-West Germany
Tax Treaty cannot be availed of in interpreting the
provisions of the RP-US Tax Treaty.5
The petition is meritorious.
We are unable to sustain the position of the Court of Tax Appeals, which
was upheld by the Court of Appeals, that the phrase "paid under similar
circumstances in Article 13 (2) (b), (iii) of the RP-US Tax Treaty should be
interpreted to refer to payment of royalty, and not to the payment of the
tax, for the reason that the phrase "paid under similar circumstances" is
followed by the phrase "to a resident of a third state". The respondent
court held that "Words are to be understood in the context in which they
are used", and since what is paid to a resident of a third state is not a tax
but a royalty "logic instructs" that the treaty provision in question should
refer to royalties of the same kind paid under similar circumstances.
The above construction is based principally on syntax or sentence
structure but fails to take into account the purpose animating the treaty
provisions in point. To begin with, we are not aware of any law or rule
pertinent to the payment of royalties, and none has been brought to our
111 | P a g e
attention, which provides for the payment of royalties under dissimilar
circumstances. The tax rates on royalties and the circumstances of
payment thereof are the same for all the recipients of such royalties and
there is no disparity based on nationality in the circumstances of such
payment.6On the other hand, a cursory reading of the various tax treaties
will show that there is no similarity in the provisions on relief from or
avoidance of double taxation7 as this is a matter of negotiation between
the contracting parties.8 As will be shown later, this dissimilarity is true
particularly in the treaties between the Philippines and the United States
and between the Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties which
the Philippines has entered into for the avoidance of double taxation.9 The
purpose of these international agreements is to reconcile the national
fiscal legislations of the contracting parties in order to help the taxpayer
avoid simultaneous taxation in two different jurisdictions. 10 More precisely,
the tax conventions are drafted with a view towards the elimination of
international juridical double taxation, which is defined as the imposition of
comparable taxes in two or more states on the same taxpayer in respect of
the same subject matter and for identical periods. 11 The apparent
rationale for doing away with double taxation is of encourage the free flow
of goods and services and the movement of capital, technology and
persons between countries, conditions deemed vital in creating robust and
dynamic economies. 12 Foreign investments will only thrive in a fairly
predictable and reasonable international investment climate and the
protection against double taxation is crucial in creating such a climate. 13
Double taxation usually takes place when a person is resident of a
contracting state and derives income from, or owns capital in, the other
contracting state and both states impose tax on that income or capital. In
order to eliminate double taxation, a tax treaty resorts to several methods.
First, it sets out the respective rights to tax of the state of source or situs
and of the state of residence with regard to certain classes of income or
capital. In some cases, an exclusive right to tax is conferred on one of the
contracting states; however, for other items of income or capital, both
states are given the right to tax, although the amount of tax that may be
imposed by the state of source is limited. 14
The second method for the elimination of double taxation applies
whenever the state of source is given a full or limited right to tax together
with the state of residence. In this case, the treaties make it incumbent
upon the state of residence to allow relief in order to avoid double taxation.
There are two methods of relief — the exemption method and the credit
method. In the exemption method, the income or capital which is taxable in
the state of source or situs is exempted in the state of residence, although
in some instances it may be taken into account in determining the rate of
tax applicable to the taxpayer's remaining income or capital. On the other
hand, in the credit method, although the income or capital which is taxed in
the state of source is still taxable in the state of residence, the tax paid in
the former is credited against the tax levied in the latter. The basic
difference between the two methods is that in the exemption method, the
focus is on the income or capital itself, whereas the credit method focuses
upon the tax. 15
In negotiating tax treaties, the underlying rationale for reducing the tax rate
is that the Philippines will give up a part of the tax in the expectation that
the tax given up for this particular investment is not taxed by the other
country. 16 Thus the petitioner correctly opined that the phrase "royalties
paid under similar circumstances" in the most favored nation clause of the
US-RP Tax Treaty necessarily contemplated "circumstances that are tax-
related".
In the case at bar, the state of source is the Philippines because the
royalties are paid for the right to use property or rights, i.e. trademarks,
patents and technology, located within the Philippines. 17 The United
States is the state of residence since the taxpayer, S. C. Johnson and
Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of
residence and the state of source are both permitted to tax the royalties,
with a restraint on the tax that may be collected by the state of
source. 18 Furthermore, the method employed to give relief from double
taxation is the allowance of a tax credit to citizens or residents of the
United States (in an appropriate amount based upon the taxes paid or
accrued to the Philippines) against the United States tax, but such amount
shall not exceed the limitations provided by United States law for the
taxable year. 19 Under Article 13 thereof, the Philippines may impose one
of three rates — 25 percent of the gross amount of the royalties; 15
112 | P a g e
percent when the royalties are paid by a corporation registered with the
Philippine Board of Investments and engaged in preferred areas of
activities; or the lowest rate of Philippine tax that may be imposed on
royalties of the same kind paid under similar circumstances to a resident of
a third state.
Given the purpose underlying tax treaties and the rationale for the most
favored nation clause, the concessional tax rate of 10 percent provided for
in the RP-Germany Tax Treaty should apply only if the taxes imposed
upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax
Treaty are paid under similar circumstances. This would mean that private
respondent must prove that the RP-US Tax Treaty grants similar tax reliefs
to residents of the United States in respect of the taxes imposable upon
royalties earned from sources within the Philippines as those allowed to
their German counterparts under the RP-Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain similar
provisions on tax crediting. Article 24 of the RP-Germany Tax
Treaty, supra, expressly allows crediting against German income and
corporation tax of 20% of the gross amount of royalties paid under the law
of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty,
which is the counterpart provision with respect to relief for double taxation,
does not provide for similar crediting of 20% of the gross amount of
royalties paid. Said Article 23 reads:
Article 23
Relief from double taxation
Double taxation of income shall be avoided in the
following manner:
1) In accordance with the provisions and
subject to the limitations of the law of the
United States (as it may be amended
from time to time without changing the
general principle thereof), the United
States shall allow to a citizen or resident
of the United States as a credit against
the United States tax the appropriate
amount of taxes paid or accrued to the
Philippines and, in the case of a United
States corporation owning at least 10
percent of the voting stock of a Philippine
corporation from which it receives
dividends in any taxable year, shall allow
credit for the appropriate amount of taxes
paid or accrued to the Philippines by the
Philippine corporation paying such
dividends with respect to the profits out of
which such dividends are paid. Such
appropriate amount shall be based upon
the amount of tax paid or accrued to the
Philippines, but the credit shall not exceed
the limitations (for the purpose of limiting
the credit to the United States tax on
income from sources within the
Philippines or on income from sources
outside the United States) provided by
United States law for the taxable year. . . .
The reason for construing the phrase "paid under similar circumstances"
as used in Article 13 (2) (b) (iii) of the RP-US Tax Treaty as referring to
taxes is anchored upon a logical reading of the text in the light of the
fundamental purpose of such treaty which is to grant an incentive to the
foreign investor by lowering the tax and at the same time crediting against
the domestic tax abroad a figure higher than what was collected in the
Philippines.
In one case, the Supreme Court pointed out that laws are not just mere
compositions, but have ends to be achieved and that the general purpose
is a more important aid to the meaning of a law than any rule which
grammar may lay down. 20 It is the duty of the courts to look to the object
to be accomplished, the evils to be remedied, or the purpose to be
subserved, and should give the law a reasonable or liberal construction
113 | P a g e
which will best effectuate its purpose. 21 The Vienna Convention on the
Law of Treaties states that a treaty shall be interpreted in good faith in
accordance with the ordinary meaning to be given to the terms of the
treaty in their context and in the light of its object and
purpose. 22
As stated earlier, the ultimate reason for avoiding double taxation is to
encourage foreign investors to invest in the Philippines — a crucial
economic goal for developing countries. 23 The goal of double taxation
conventions would be thwarted if such treaties did not provide for effective
measures to minimize, if not completely eliminate, the tax burden laid upon
the income or capital of the investor. Thus, if the rates of tax are lowered
by the state of source, in this case, by the Philippines, there should be a
concomitant commitment on the part of the state of residence to grant
some form of tax relief, whether this be in the form of a tax credit or
exemption. 24 Otherwise, the tax which could have been collected by the
Philippine government will simply be collected by another state, defeating
the object of the tax treaty since the tax burden imposed upon the investor
would remain unrelieved. If the state of residence does not grant some
form of tax relief to the investor, no benefit would redound to the
Philippines, i.e., increased investment resulting from a favorable tax
regime, should it impose a lower tax rate on the royalty earnings of the
investor, and it would be better to impose the regular rate rather than lose
much-needed revenues to another country.
At the same time, the intention behind the adoption of the provision on
"relief from double taxation" in the two tax treaties in question should be
considered in light of the purpose behind the most favored nation clause.
The purpose of a most favored nation clause is to grant to the contracting
party treatment not less favorable than that which has been or may be
granted to the "most favored" among other countries. 25 The most favored
nation clause is intended to establish the principle of equality of
international treatment by providing that the citizens or subjects of the
contracting nations may enjoy the privileges accorded by either party to
those of the most favored nation. 26 The essence of the principle is to allow
the taxpayer in one state to avail of more liberal provisions granted in
another tax treaty to which the country of residence of such taxpayer is
also a party provided that the subject matter of taxation, in this case
royalty income, is the same as that in the tax treaty under which the
taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12
(2) (b) of the RP-West Germany Tax Treaty, above-quoted, speaks of tax
on royalties for the use of trademark, patent, and technology. The
entitlement of the 10% rate by U.S. firms despite the absence of a
matching credit (20% for royalties) would derogate from the design behind
the most grant equality of international treatment since the tax burden laid
upon the income of the investor is not the same in the two countries. The
similarity in the circumstances of payment of taxes is a condition for the
enjoyment of most favored nation treatment precisely to underscore the
need for equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax Treaty
does not give a matching tax credit of 20 percent for the taxes paid to the
Philippines on royalties as allowed under the RP-West Germany Tax
Treaty, private respondent cannot be deemed entitled to the 10 percent
rate granted under the latter treaty for the reason that there is no payment
of taxes on royalties under similar circumstances.
It bears stress that tax refunds are in the nature of tax exemptions. As
such they are regarded as in derogation of sovereign authority and to be
construed strictissimi juris against the person or entity claiming the
exemption. 27 The burden of proof is upon him who claims the exemption
in his favor and he must be able to justify his claim by the clearest grant of
organic or statute law. 28 Private respondent is claiming for a refund of the
alleged overpayment of tax on royalties; however, there is nothing on
record to support a claim that the tax on royalties under the RP-US Tax
Treaty is paid under similar circumstances as the tax on royalties under
the RP-West Germany Tax Treaty.
WHEREFORE, for all the foregoing, the instant petition is GRANTED. The
decision dated May 7, 1996 of the Court of Tax Appeals and the decision
dated November 7, 1996 of the Court of Appeals are hereby SET ASIDE.
114 | P a g e
 Briefly, the facts of the case are summarized as follows:

4. Escape from taxation In 1974, Delfin Pacheco and his sister, Pelagia Pacheco,
were the owners of 27,169 square meters of real estate
a. shifting of tax burden
Identified as Lot. No. 1095, Malinta Estate, in the
1. ways of shifting tax burden Municipality of Polo (now Valenzuela), Province of
Bulacan (now Metro Manila) which is covered by Transfer
2. taxes that can be shifted. Certificate of Title No. T-4240 of the Bulacan land registry.

3. meaning of impact and incidence of taxation On April 3, 1974, the said co-owners leased to
Construction Components International Inc. the same
b. tax avoidance property and providing that during the existence or after
the term of this lease the lessor should he decide to sell
Republic of the Philippines the property leased shall first offer the same to the lessee
SUPREME COURT and the letter has the priority to buy under similar
Manila conditions (Exhibits A to A-5)

THIRD DIVISION On August 3, 1974, lessee Construction Components

International, Inc. assigned its rights and obligations under
G.R. No. L-69259 January 26, 1988 the contract of lease in favor of Hydro Pipes Philippines,
Inc. with the signed conformity and consent of lessors
Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-6
DELPHER TRADES CORPORATION, and DELPHIN inclusive)
PACHECO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES The contract of lease, as well as the assignment of lease
PHILIPPINES, INC., respondents. were annotated at he back of the title, as per stipulation of
the parties (Exhs. A to D-3 inclusive)

On January 3, 1976, a deed of exchange was executed

GUTIERREZ, JR., J.:
The petitioners question the decision of the Intermediate Appellate Court
which sustained the private respondent's contention that the deed of
exchange whereby Delfin Pacheco and Pelagia Pacheco conveyed a
parcel of land to Delpher Trades Corporation in exchange for 2,500 shares
of stock was actually a deed of sale which violated a right of first refusal
under a lease contract.
between lessors Delfin and Pelagia Pacheco and
defendant Delpher Trades Corporation whereby the
former conveyed to the latter the leased property (TCT
No.T-4240) together with another parcel of land also
located in Malinta Estate, Valenzuela, Metro Manila (TCT
No. 4273) for 2,500 shares of stock of defendant
corporation with a total value of P1,500,000.00 (Exhs. C to
C-5, inclusive) (pp. 44-45, Rollo)

115 | P a g e
On the ground that it was not given the first option to buy the leased
property pursuant to the proviso in the lease agreement, respondent Hydro
Pipes Philippines, Inc., filed an amended complaint for reconveyance of
Lot. No. 1095 in its favor under conditions similar to those whereby
Delpher Trades Corporation acquired the property from Pelagia Pacheco
and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the
plaintiff. The dispositive portion of the decision reads:
ACCORDINGLY, the judgment is hereby rendered
declaring the valid existence of the plaintiffs preferential
right to acquire the subject property (right of first refusal)
and ordering the defendants and all persons deriving
rights therefrom to convey the said property to plaintiff
who may offer to acquire the same at the rate of P14.00
per square meter, more or less, for Lot 1095 whose area
is 27,169 square meters only. Without pronouncement as
to attorney's fees and costs. (Appendix I; Rec., pp. 246-
247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)
The lower court's decision was affirmed on appeal by the Intermediate
Appellate Court.
The defendants-appellants, now the petitioners, filed a petition for
certiorari to review the appellate court's decision.
We initially denied the petition but upon motion for reconsideration, we set
aside the resolution denying the petition and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the
petitioners, in that:
1. Respondent Hydro Pipes Philippines, Inc, ("private
respondent") will acquire from petitioners a parcel
of industrial land consisting of 27,169 square meters or
2.7 hectares (located right after the Valenzuela, Bulacan
exit of the toll expressway) for only P14/sq. meter, or a
total of P380,366, although the prevailing value thereof is
approximately P300/sq. meter or P8.1 Million;
2. Private respondent is allowed to exercise its right of first
refusal even if there is no "sale" or transfer of actual
ownership interests by petitioners to third parties; and
3. Assuming arguendo that there has been a transfer of
actual ownership interests, private respondent will acquire
the land not under "similar conditions" by which it was
transferred to petitioner Delpher Trades Corporation, as
provided in the same contractual provision invoked by
private respondent. (pp. 251-252, Rollo)
The resolution of the case hinges on whether or not the "Deed of
Exchange" of the properties executed by the Pachecos on the one hand
and the Delpher Trades Corporation on the other was meant to be a
contract of sale which, in effect, prejudiced the private respondent's right
of first refusal over the leased property included in the "deed of exchange."
Eduardo Neria, a certified public accountant and son-in-law of the late
Pelagia Pacheco testified that Delpher Trades Corporation is a family
corporation; that the corporation was organized by the children of the two
spouses (spouses Pelagia Pacheco and Benjamin Hernandez and
spouses Delfin Pacheco and Pilar Angeles) who owned in common the
parcel of land leased to Hydro Pipes Philippines in order to perpetuate
their control over the property through the corporation and to avoid taxes;
that in order to accomplish this end, two pieces of real estate, including Lot
No. 1095 which had been leased to Hydro Pipes Philippines, were
transferred to the corporation; that the leased property was transferred to
the corporation by virtue of a deed of exchange of property; that in
exchange for these properties, Pelagia and Delfin acquired 2,500 unissued
no par value shares of stock which are equivalent to a 55% majority in the
corporation because the other owners only owned 2,000 shares; and that
at the time of incorporation, he knew all about the contract of lease of Lot.
116 | P a g e
No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for
reconsideration, they refer to this scheme as "estate planning." (p. 252,
Rollo)
Under this factual backdrop, the petitioners contend that there was actually
no transfer of ownership of the subject parcel of land since the Pachecos
remained in control of the property. Thus, the petitioners allege:
"Considering that the beneficial ownership and control of petitioner
corporation remained in the hands of the original co-owners, there was no
transfer of actual ownership interests over the land when the same was
transferred to petitioner corporation in exchange for the latter's shares of
stock. The transfer of ownership, if anything, was merely in form but not in
substance. In reality, petitioner corporation is a mere alter ego or conduit
of the Pacheco co-owners; hence the corporation and the co-owners
should be deemed to be the same, there being in substance and in effect
an Identity of interest." (p. 254, Rollo)
The petitioners maintain that the Pachecos did not sell the property. They
argue that there was no sale and that they exchanged the land for shares
of stocks in their own corporation. "Hence, such transfer is not within the
letter, or even spirit of the contract. There is a sale when ownership is
transferred for a price certain in money or its equivalent (Art. 1468, Civil
Code) while there is a barter or exchange when one thing is given in
consideration of another thing (Art. 1638, Civil Code)." (pp. 254-255, Rollo)
On the other hand, the private respondent argues that Delpher Trades
Corporation is a corporate entity separate and distinct from the Pachecos.
Thus, it contends that it cannot be said that Delpher Trades Corporation is
the Pacheco's same alter ego or conduit; that petitioner Delfin Pacheco,
having treated Delpher Trades Corporation as such a separate and distinct
corporate entity, is not a party who may allege that this separate corporate
existence should be disregarded. It maintains that there was actual
transfer of ownership interests over the leased property when the same
was transferred to Delpher Trades Corporation in exchange for the latter's
shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by
subscription or by purchasing stock directly from the corporation or from
individual owners thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649,
citing Bole v. Fulton [1912], 233 Pa., 609). In the case at bar, in exchange
for their properties, the Pachecos acquired 2,500 original unissued no par
value shares of stocks of the Delpher Trades Corporation. Consequently,
the Pachecos became stockholders of the corporation by subscription
"The essence of the stock subscription is an agreement to take and pay
for original unissued shares of a corporation, formed or to be formed."
(Rohrlich 243, cited in Agbayani, Commentaries and Jurisprudence on the
Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 430) It is
significant that the Pachecos took no par value shares in exchange for
their properties.
A no-par value share does not purport to represent any
stated proportionate interest in the capital stock measured
by value, but only an aliquot part of the whole number of
such shares of the issuing corporation. The holder of no-
par shares may see from the certificate itself that he is
only an aliquot sharer in the assets of the corporation. But
this character of proportionate interest is not hidden
beneath a false appearance of a given sum in money, as
in the case of par value shares. The capital stock of a
corporation issuing only no-par value shares is not set
forth by a stated amount of money, but instead is
expressed to be divided into a stated number of shares,
such as, 1,000 shares. This indicates that a shareholder
of 100 such shares is an aliquot sharer in the assets of the
corporation, no matter what value they may have, to the
extent of 100/1,000 or 1/10. Thus, by removing the par
value of shares, the attention of persons interested in the
financial condition of a corporation is focused upon the
value of assets and the amount of its debts. (Agbayani,
Commentaries and Jurisprudence on the Commercial
Laws of the Philippines, Vol. III, 1980 Edition, p. 107).
117 | P a g e
Moreover, there was no attempt to state the true or current market value of
the real estate. Land valued at P300.00 a square meter was turned over to
the family's corporation for only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no par shares of
stock, the Pachecos have control of the corporation. Their equity capital is
55% as against 45% of the other stockholders, who also belong to the
same family group.
In effect, the Delpher Trades Corporation is a business conduit of the
Pachecos. What they really did was to invest their properties and change
the nature of their ownership from unincorporated to incorporated form by
organizing Delpher Trades Corporation to take control of their properties
and at the same time save on inheritance taxes.
As explained by Eduardo Neria:
xxx xxx xxx
ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of taxation, is there any
benefit to the spouses Hernandez and Pacheco in connection
with their execution of a deed of exchange on the properties for
no par value shares of the defendant corporation?
A Yes, sir.
COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and corporation
in entering in the deed of exchange.
ATTY. LINSANGAN:
Q (What do you mean by "point of view"?) What are
these benefits to the spouses of this deed of exchange?
A Continuous control of the property, tax exemption
benefits, and other inherent benefits in a corporation.
Q What are these advantages to the said spouses from
the point of view of taxation in entering in the deed of
exchange?
A Having fulfilled the conditions in the income tax law,
providing for tax free exchange of property, they were
able to execute the deed of exchange free from income
tax and acquire a corporation.
Q What provision in the income tax law are you referring
to?
A I refer to Section 35 of the National Internal Revenue
Code under par. C-sub-par. (2) Exceptions regarding
the provision which I quote: "No gain or loss shall also
be recognized if a person exchanges his property for
stock in a corporation of which as a result of such
exchange said person alone or together with others not
exceeding four persons gains control of said
corporation."
Q Did you explain to the spouses this benefit at the time
you executed the deed of exchange?
A Yes, sir
Q You also, testified during the last hearing that the
decision to have no par value share in the defendant
corporation was for the purpose of flexibility. Can you
explain flexibility in connection with the ownership of the
property in question?
118 | P a g e
 A There is flexibility in using no par value
shares as the value is determined by the
board of directors in increasing
capitalization. The board can fix the value
of the shares equivalent to the capital
requirements of the corporation.
Q Now also from the point of taxation, is
there any flexibility in the holding by the
corporation of the property in question?
A Yes, since a corporation does not die it
can continue to hold on to the property
indefinitely for a period of at least 50
years. On the other hand, if the property
is held by the spouse the property will be
tied up in succession proceedings and the
consequential payments of estate and
inheritance taxes when an owner dies.
a taxpayer to decrease the amount of what otherwise could be his taxes or
altogether avoid them, by means which the law permits, cannot be
doubted." (Liddell & Co., Inc. v. The collector of Internal Revenue, 2 SCRA
632 citing Gregory v. Helvering, 293 U.S. 465, 7 L. ed. 596).
The "Deed of Exchange" of property between the Pachecos and Delpher
Trades Corporation cannot be considered a contract of sale. There was no
transfer of actual ownership interests by the Pachecos to a third party. The
Pacheco family merely changed their ownership from one form to another.
The ownership remained in the same hands. Hence, the private
respondent has no basis for its claim of a light of first refusal under the
lease contract.
WHEREFORE, the instant petition is hereby GRANTED, The questioned
decision and resolution of the then Intermediate Appellate Court are
REVERSED and SET ASIDE. The amended complaint in Civil Case No.
885-V-79 of the then Court of First Instance of Bulacan is DISMISSED. No
costs.

Q Now what advantage is this continuity

in relation to ownership by a particular
person of certain properties in respect to
taxation?

A The property is not subjected to taxes

on succession as the corporation does
not die.

Q So the benefit you are talking about are

inheritance taxes?

A Yes, sir. (pp. 3-5, tsn., December 15,

1981)

The records do not point to anything wrong or objectionable about this

"estate planning" scheme resorted to by the Pachecos. "The legal right of

119 | P a g e
C. TAX EVASION
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-23041 July 31, 1969
E. RODRIGUEZ, INC., petitioner,
vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
Tolentino and Garcia and D. R. Cruz for petitioner.
Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B.
Afurong and Special Attorney Salvador D. David for respondents.
BARREDO, J.:
This is a petition for review of the decision of the Court of Tax Appeals in
its CTA Case No. 849, affirming the decision of the respondent Collector
(now Commissioner) of Internal Revenue holding petitioner E. Rodriguez,
Inc. liable for deficiency income tax in the sum of P63,880.00 for the year
1950.
The records of the case show that on July 17, 1948, Congress enacted
Republic Act No. 333, 1 pursuant to which the Republic of the Philippines
sued the petitioner, among four other defendants, in Civil Case No. Q-54
of the Court of First Instance of Quezon City, for the expropriation of about
1,360,000 square meters of land owned by it and situated within the area
delimited for the new capital city site. After due trial, the said court
rendered a decision in the case, dated February 21, 1950, with the
following dispositive portion:
WHEREFORE, judgment is hereby rendered, declaring plaintiff
entitled to retain and appropriate the property involved in this
proceeding, as site for the development and establishment of the
new capital city of the Philippines in accordance with our
condemnation order dated September 19, 1949; and ordering
plaintiff to pay defendants, as just compensation for the lands to
be taken from them, the following amounts, to wit: to defendant
Eulogio Rodriguez, Sr., the sum of THIRTY-NINE THOUSAND
SEVEN HUNDRED SEVENTY-SIX PESOS (P39,776.00); to
defendant E. Rodriguez, Inc., the sum of ONE MILLION FOUR
HUNDRED EIGHTEEN THOUSAND SIX HUNDRED FOUR
(P1,418,604.00) PESOS; to defendant Luzon Investment &
Development Co., the sum of FIVE THOUSAND TWO HUNDRED
EIGHTY (P5,280.00) PESOS; and to defendants Enrique
Manaloto and Canuto G. Manuel, the sum of SIXTEEN
THOUSAND SEVEN HUNDRED TWENTY (P16,720.00) PESOS,
with interest at the rate of 6% per annum on the said amounts
from September 19, 1949, the date the plaintiff entered upon the
possession of the lands in question until payment, plus the costs.
Following the issuance of the above-mentioned decision, however, a
series of negotiations were had between petitioner and the Government,
represented by the Capital City Planning Commission, after which, the
said parties entered into a compromise agreement under date of May 11,
1950, providing, inter alia, as follows:
(1) That the parties will accept the decision laid down in said case
by the Court of First Instance of Rizal (Quezon City Branch) with
the following stipulations:
a. That the defendants mentioned above hereby waive all
interest due on the adjudged value of the expropriated
properties;
b. That the defendants above-named hereby donate
207,006 square meters out of Lots Nos. 41-C-3 and 39,
object of expropriation in Civil Case No. Q-54;
120 | P a g e
c. That defendant Eulogio Rodriguez, Inc. obligates itself
to donate as it hereby donates the land object of
expropriation in Civil Case No. Q-90, in favor of the
Republic of the Philippines, containing an area of 15,200
square meters, which is a portion of Lot No. 41-C-3 as
indicated in the plan attached to the complaint therein;
said defendant Eulogio Rodriguez, Inc. binding itself to
execute the necessary deed of donation thereof;
d. That defendants named above agree to the payment of
the price awarded by the Court subject to the foregoing
stipulations in the total sum of ONE MILLION TWO
HUNDRED FIFTY THOUSAND SIX HUNDRED THIRTY-
ONE PESOS and EIGHTY CENTAVOS (P1,250,631.80)
payable in the following manner:
1) SIX HUNDRED TWENTY-FIVE THOUSAND
THREE HUNDRED FIFTEEN PESOS AND
NINETY CENTAVOS (P625,315.90) in
government bonds in favor of Eulogio Rodriguez,
Sr. and E. Rodriguez, Inc., payable within five (5)
years at not less than three percent (3%) per
annum;
2) THREE HUNDRED THOUSAND PESOS
(P300,000.00) to be given to the Philippine
National Bank in payment of the mortgage
indebtedness of defendants E. Rodriguez, Sr. and
E. Rodriguez, Inc.; and
3) the balance of THREE HUNDRED TWENTY-
FIVE THOUSAND TWO HUNDRED FIFTEEN
PESOS AND NINETY CENTAVOS (P325,215.90)
in cash to be paid to all defendants abovenamed,
through Eulogio Rodriguez, Sr., within a
reasonable time.
(2) That after approval of this compromise by the Court, the
parties herein agree not to interpose an approval from the
judgment of the Court of First Instance of Rizal (Quezon City
Branch) which shall be considered final and executory under the
Rules of Court;
(3) And, finally, that the said parties will submit this compromise
agreement to the Court for its approval and/or its consideration in
the decision rendered in this case.
This compromise agreement was duly approved by the Court of First
Instance of Rizal (Quezon City Branch) on May 12, 1950, and pursuant to
the terms thereof, the Government paid to petitioner the sum of
P1,238,204.00, of which P625,315.90 were in Government Bonds.
On March 1, 1951, petitioner filed its income tax return for the year 1950,
showing on the face thereof a loss of P17,982.06. In said return, petitioner
did not include the sum of P625,315.90 received by it from the government
in the form of bonds in payment of its expropriated properties, in the belief
that the said amount was free or exempt from taxation. When this return
was later examined by an agent of the Bureau of Internal Revenue, the
Collector of said bureau assessed against petitioner a deficiency income
tax of P63,880.00, computed as follows:
Net income per return (loss)
P17,982.06
..................................
Amount received for
P1,238,204.00
property .....
Less: Cost of Land 827,279.82
...................
Gain
P410,924.18
..............................................
Undeclared gain
P410,924.18
..............................................
121 | P a g e
 Accounts receivable charged off as bad
debts but not forming part of gross income
..........................
Miscellaneous expenses not connected with
the business
..................................................................
Net Income
P399,252.12
..............................................................
Tax due on P399,262.12
P63,980.00
.........................................
==========
A series of communications between petitioner and respondent Collector
of Internal Revenue followed the foregoing assessment, with the former
protesting against and requesting the cancellation of the deficiency income
tax assessed against it, and the latter maintaining its accuracy and
demanding payment thereof. As petitioner, did not past, on July 6, 1959,
the Collector of Internal Revenue sought the collection of said deficiency
income tax of P63,880.00, plus 5% surcharge and 1% monthly interest
thereon from, March 11, 1956, by means of an action in the Court of First
Instance of Manila.
On June 8,k 1960, petitioner offered by way of compromise to pay the
amount of P30,676.25 in full settlement of its disputed deficiency income
tax liability for 1950. This offer was rejected by the Collector of Internal
Revenue; whereupon, under date of June 24, 1960, petitioner filed a
petition for review of the assessment in question before the respondent
Court of Tax Appeals which, after trial on the merits, rendered its decision
affirming the assessment in question. Hence, this appeal by petitioner thru
the instant petition for review of the said decision of respondent of Court of
Tax Appeals, with the following assigned errors:
I. THE RESPONDENT COURT ERRED IN HOLDING THAT THE
EXEMPTION CONTEMPLATED BY THE BONDS IN QUESTION
APPLIES ONLY TO DOCUMENTARY STAMP TAX AND TAX ON
INTEREST DERIVED FROM SUCH BONDS, AND THAT SUCH
EXEMPTION CONSTITUTES SUFFICIENT INDUCEMENT FOR
PETITIONER TO ACCEPT SAID BONDS.
1,860.00
II. THE RESPONDENT COURT ERRED IN AFFIRMING THE
4,450.00 ORDER OF THE RESPONDENT COLLECTOR HOLDING
PETITIONER LIABLE FOR INCOME TAX ON THE EXCHANGE
OF ITS PROPERTIES FOR GOVERNMENT TAX-EXEMPT
BONDS UNDER REPUBLIC ACT NO. 333.
As petitioner correctly puts it, the only question to decide here is whether
or not in determining the profit realized from the payment of the purchase
price of its (petitioner's) expropriated property, for income tax purposes
portion of the purchase price paid in the form of tax-exempt bonds issued
under Republic Act No. 333 should be included.
The pertinent provisions of law involved are found in Section 9 of the Act
abovementioned which reads as follows:1äwphï1.ñët
SEC. 9. The President of the Philippines is authorized to issue, in
the name and behalf of the Republic of the Philippines, bonds in
an amount of twenty million pesos, the proceeds of which shall be
used as a revolving fund for the acquisition of private estates, the
subdivision of the area, and the construction of streets, bridges,
waterworks, sewerage and other municipal improvements in the
Capital City of the Philippines.
The bonds so authorized to be issued shall bear such date and in
such form as the President of the Philippines may determine and
shall bear such rate of interest and run for such length of time as
may be determined by the President. Both principal and interest
shall be payable in Philippine currency or its equivalent in the
United States currency, in the discretion of the Secretary of
Finance, at the Treasury of the Philippines, and the interest shall
be payable at such periods as the President of the Philippines
may determine.
122 | P a g e
 Said bonds shall be exempt from taxation by the Government of
the Republic of the Philippines or by any political or municipal
subdivisions thereof, which fact shall be stated upon their face, in
accordance with this Act, under which the said bonds are issued.
[Emphasis supplied]
Petitioner maintains that the portion (paid in tax-exempt Government
Bonds) of the profit it derived from the expropriation of its property should
not be made subject to income tax, for the reasons that: (1) the Republic
of the Philippines gave no concession to petitioner in the compromise
agreement involved in this case except that, as testified to by the lawyer
who represented petitioner in the negotiations which led to the
compromise agreement in question, it was understood between the
parties, and it was precisely the only inducement, according to the witness,
that made petitioner accept payment of P625,315.90 in Government
Bonds instead of cash, that said bonds would be "tax-free"; now, it is
argued that by "tax-free" is meant that by acceptance of the bonds rather
than cash, petitioner would not also have to pay income tax on the
exchange gain from said bonds; 2 (2) that the third paragraph of Section 9
of the Act granting tax exemption on bonds issued thereunder was
inserted in the law as a further inducement to private land owners within
the new capital site to part away with their properties in favor of the
Government other than for cash, which legislative history of the law
allegedly sustains the position of petitioner; and (3) Congress must have
really intended such income tax exemption under Republic Act No. 333,
since, similar provisions in Republic Act No. 1400, 3 likewise involving the
expropriation of private estates, expressly declare that the price paid by
the Government for the lands acquired for resale to tenants under the
authority of said Act (Republic Act No. 1400) shall not be considered as
income of the landowner for purposes of the income tax. This reasoning
was brushed aside by the respondent Court of Tax Appeals in its decision
under review, on the following rationale:
Petitioner contends that since the Government bonds which it
received as part payment of the price of its lot were exempt from
taxation, the deficiency assessment made by respondent against it
is not in order. On the other hand, respondent claims that the
exemption of Government bonds refers only the documentary
stamps on the bonds and does not include income tax on the
income derived by petitioner which was paid to him in the form of
bonds.
The pertinent portion of Section 9 of Republic Act No. 333, which
is the sole basis of petitioner's claim for exemption,
provides:1äwphï1.ñët
Said bonds shall be exempt from taxation by the
Government of the Republic of the Philippines or by any
political or municipal subdivision thereof, which fact shall
be stated upon their face, in accordance with this Act,
under which the said bonds are issued.
There can be no question that petitioner is taxable on its income
derived from the sale of its property to the Government. The fact
that a portion of the purchase price of the property was paid by the
Government in the form of tax exempt bonds does not operate to
exempt said income from income tax. The income from the sale of
the land in question and the bond are two different and distinct
taxable items so that the exemption of one does not operate to
exempt the other, unless the law expressly so provides.
It is alleged that to deny exemption from income tax on the
amount represented by the said bonds would be to nullify the
purpose of the law in granting exemption. The question has been
asked: If income or gain derived from the acceptance of such
bonds in exchange for private estates would be taxed, what
inducement did such provision of Republic Act No. 333 give to
landowners to accept payment in bonds for their properties in the
proposed site of the Capital City? To our mind, there is sufficient
inducement, and that is, the exemption not only of the bonds from
documentary stamp tax but also of the interest derived from such
bonds. Section 29(b) (4) of the National Internal Revenue Code
exempts interest derived from such bonds from income tax to the
extent provided in the law authorizing the issue thereof.
123 | P a g e
Counsel for petitioner also alleged that the prevailing rule
obtaining in the United States before removal of exemptions of
government obligations was to exempt such bonds from income
tax both as to principal and interest. To quote from the
memorandum of counsel:
... Actually, most of the Federal Treasury Bonds issued by
the U.S. Government from 1921 to 1941, or before the
Public Debt Acts of 1941 and 1942, that removed tax
exemptions on obligations issued by the United States
and its agencies and its instrumentalities, were —
'exempt, both as to principal and interest, from all taxation
now or hereafter imposed by the United States, any
States, or any of the possessions of the United States, or
by any local taxing authority, except (a) estate or
inheritance taxes, and (b) graduated additional income
taxes, known as surtaxes and excess profits and war
profits taxes, now or hereafter imposed by the United
States, upon the income or profits of individuals,
partnerships, associations, or corporations. (I Mertens,
Law of Federal Income Taxation, pp. 297-313).' [See page
12, Memorandum of counsel for petitioner, March 20,
1963.]
Apparently the import of the ruling quoted above from the book of
Mertens has not been clearly understood. We think that the
exemption referred to therein of both principal and interest has
reference to the exemption from income tax of the income derived
from the sale or exchange of the bonds and the interest paid by
the U.S. Government on such bonds. The opinion quoted from
Mertens is inapplicable to the instant case because it does not
refer to any income derived by petitioner from the sale or
exchange of bonds received by petitioner from the Government
under Republic Act No. 333. The tax here involved is on the
income derived from the sale of petitioner's property to the
Government, not the income derived from the sale or exchange of
the bonds.
Mention has been made of Republic Act No. 1400, Section 22 of
which provides that 'the purchase price paid by the Government
for any agricultural land acquired for resale to tenants under the
authority of this Act, whether by negotiation or expropriation, shall
not be considered as income of the landowner concerned for
purposes of the income tax.' It is argued that since Republic Acts
Nos. 333 and 1400 are in pari materia both should be construed
together, and since Republic Act No. 1400 exempts income
derived from the sale of property to the Government under said
Act, the same exemption should also apply to income derived from
the sale of property to the Government under Republic Act No.
333. It is precisely because Republic Act No. 1400 contains an
express exemption from income tax of the income derived by
property owners from the sale of their lands under said Act and
the absence of a similarly provision in Republic Act No. 333 which
indicates plainly that Congress intended not to grant such
exemption to landowners under Republic Act No. 333. If Congress
had intended to grant exemption from income tax with respect to
income derived by a person from the sale of his property under
Republic Act No. 333, it should have expressly made an express
provision to that effect as it did in Republic Act No. 1400; that it did
not, is a clear indication that its purpose was to withhold such
exemption.
We find no cogent reasons to disturb the above holding of the Court of Tax
Appeals. It has been the constant and uniform holding of this Court that
exemption from taxation is not favored and is never presumed; in fact, if it
is granted, the grant must be strictly construed against the
taxpayer. 4 Affirmatively put, the law requires courts to frown on alleged
exemptions from taxation, hence, an exempting provision in a legislative
enactment should be construed in strictissimi juris 5 against the taxpayer
and liberally in favor of the taxing authority. 6 This Court has been most
consistent in this holding. In Asiatic Petroleum Co. vs. Llanes, 7 it was
explained beyond any possibility of miscomprehension that: .
... Exemptions from taxation are highly disfavored, so much so
that they may almost be said to be odious to the law. He who
claims an exemption must be able to point to some positive
124 | P a g e
 provision of law creating the right. It cannot be allowed to exist
upon a vague implication ... The books are full of very strong
expressions on this point. As was said by the Supreme Court of
Tennessee in Memphis vs. U & P. Bank (91 Tenn. 546, 550), 'The
right of taxation is inherent in the State. It is a prerogative
essential to the perpetuity of the government; and he who claims
an exemption from the common burden, must justify his claim by
the clearest grant of organic or statute law.' Other utterances
equally or more emphatic come readily to hand from the highest
authority. In Ohio Life Ins. and Trust Co. vs. Debolt (16 Howard
416), it was said by Chief Justice Taney, that the right of taxation
will not be held to have been surrendered, 'unless the intention to
surrender is manifested by words too plain to be mistaken.' In the
case of the Delaware Railroad Tax (18 Wallace 206, 226), the
Supreme Court of the United States said that the surrender, when
claimed, must be shown by clear, unambiguous language, which
will admit of no reasonable construction consistent with the
reservation of the power. If a doubt arises as to the intent of the
legislature, that doubt must be resolved in favor of the State.
In Erie Railway Company vs. Commonwealth of Pennsylvania (21
Wallace 492, 499), Mr. Justice Hunt, speaking of exemptions,
observed that the State cannot strip itself of the most essential
power of taxation by doubtful words. 'It cannot by ambiguous
language, be deprived of this highest attribute of sovereignty.'
In Tennessee vs. Whitworth (117 U.S. 129, 136), it was said: 'In all
cases of this kind the question is as to the intent of the legislature,
the presumption always being against any surrender of the taxing
power.' In Farrington vs. Tennessee and County of Shelby (95
U.S. 679, 686), Mr. Justice Swayne said: '... When exemption is
claimed it must be shown indubitably to exist. At the outset every
presumption is against it. A well-founded doubt is fatal to the
claim. It is only when the terms of the concession are too explicit
to admit fairly of any other construction that the proposition can be
supported.'
The above rules should be applied to the case at bar where the law
invoked (Section 9 of Republic Act No. 333) does not make any reference
whatsoever to exemption of income derived from sale of expropriated
property thereunder unlike under Republic Act No. 1400 where relative to
the price paid by the Government for any agricultural land acquired for
resale to tenants there is an express declaration that the same "shall not
be considered as income of the landowner concerned for purposes of the
income tax." Nor are We convinced by the argument that the particular
provision of Republic Act No. 333 relied upon which grants exemption on
bonds issued thereunder for purposes of inducement to private
landowners within the new capital site to part away with their properties in
favor of the Government other than for cash should be taken to mean that
said property owners need not pay income tax on their income derived
from the sale of such properties. The pertinent Congressional Record of
the proceedings held during the consideration of the bill which later
became Republic Act No. 333, 8 does not show that Congress had
intended to exempt said property owners from the payment of income tax
on the proceeds of the sale of their properties when the same is paid in
government bonds issued under the said law. Likewise even were We to
assume for the sake of argument, that the Capital City Planning
Commission and other officials of the government did make some
assurance or promise to herein petitioner that the portion of the price of its
expropriated property paid in tax-exempt government bonds would not be
made subject to income tax payment, such assurance or promise, made
without statutory sanction, cannot bind the Government. The same
amounts to a surrender of the State's power to require payment of income
tax, which in this case is not explicitly granted by Republic Act No. 333. It
is a well-known rule that erroneous application and enforcement of the law
by public officers do not block subsequent correct application of the
statute, 9 and that the Government is never estopped by mistake or error
on the part of its agents. 10 In the present circumstances, the Collector of
Internal Revenue is right in assessing against petitioner the deficiency
income tax in question, consonant with the proposition that income from
expropriation proceedings is income from sales or exchange and therefore
taxable. 11
FOR THE FOREGOING CONSIDERATIONS, the decision of the Court of
Tax Appeals under review is affirmed, with costs against herein
petitioner.1äwphï1.ñët
125 | P a g e
5. exemption from taxation
a. meaning of exemption from taxation
b. nature of tax exemption
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
Manila Electric Company, petitioner in these two cases, poses a
single before Us: is Manila Electric Company (MERALCO for short)
exempt from payment of a compensating tax on poles, wires,
transformers, and insulators imported by it for use in the operation of
its electric light, heat, and power system? MERALCO answers the
query in the affirmative while the Commissioner of Internal Revenue
asserts the contrary.
MERALCO is the holder of a franchise to construct, maintain, and
operate an electric light, heat, and power system in the City of Manila
and its suburbs.1

In 1962, MERALCO imported and received from abroad on various dates

G.R. No. L-29987 October 22, 1975
MANILA ELECTRIC COMPANY, petitioner,
vs.
MISAEL P. VERA, in his capacity as Commissioner of Internal
Revenue, respondent.
G.R. No. L-23847 October 22, 1975
MANILA ELECTRIC COMPANY, petitioner,
vs.
BENJAMIN. TABIOS, as Commissioner of Internal Revenue,
respondent.
Salcedo, Del Rosario, Bito, Misa and Lozada for petitioner.
Office of the Solicitor General for respondents.
copper wires, transformers, and insulators for use in the operation of its
business on which, the Collector of Customs, as Deputy of Commissioner
of Internal Revenue, levied and collected a compensating tax amounting to
a total of P62,335.00. A claim for refund of said amount was presented by
MERALCO and because no action was taken by the Commissioner of
Internal Revenue on its claim, it appealed to the Court of Tax Appeals by
filing a petition for review on February 25, 1964 (CTA Case No. 1495). On
November 28, 1968, the Court of Tax Appeals denied MERALCO claim,
forthwith, the case was elevated to the Court on appeal (L-29987).
Again in 1963, MERALCO imported certain quantities of copper wires,
transformers and insulators also to be used in its business and again a
compensating tax of P6,587.00 on said purchases was collected. Its claim
for refund of the amount having been denied by the Commissioner of
Internal Revenue on January 23, 1964, MERALCO riled with the Court of
Tax Appeals CTA Case No. 1493. On September 23, 1964 the Court of
Tax Appeals decided against petitioner, and the latter filed with this Court
the corresponding Petition for Review of said decision docketed herein as
G.R. No. L-23847.

Inasmuch as the two appeals raise the same issue, they are consolidated
in this Decision.
MUÑOZ PALMA, J.:
The law under which the Commissioner of Internal Revenue, respondent
in these two cases, assessed and collected the corresponding

126 | P a g e
compensating taxes in 1962 and 1963 was found in Section 190 of the
National Internal Revenue Code(Commonwealth Act No. 466, as
amended) the pertinent provision of which read at the time as follows:
Sec. 190. Compensating Tax. — All persons residing or
doing business in the Philippines, who purchase or
receive from without the Philippines any commodities,
goods, wares, or merchandise, excepting those subject to
specific taxes under Title IV of this Code, shall pay on the
total value thereof at the time they are received by such
persons, including freight, postage, insurance,
commission and all similar charges, a compensating tax
equivalent to the percentage taxes imposed under this
Title on original transactions effected by merchants,
importers, or manufacturers, such tax to be paid before
the withdrawal or removal of said commodities, goods,
wares, or merchandise from the customhouse or the post
office: ... 2
In deciding against petitioner, the Court of Tax Appeals held that following
the ruling of the Supreme Court in the case of Panay Electric Co. vs.
Collector of Internal Revenue, G.R. No. L-6753, July 30, 1955, Manila Gas
Corp. vs. Collector of Internal Revenue, G.R. No. L-11784, October 24,
1958, and Borja vs. Collector of Internal Revenue, G.R. No. L-12134,
November 30,1961, MERALCO is not exempt from paying the
compensating tax provided for in Section 190 of the National Internal
Revenue Code, the purpose of which is to "place casual importers, who
are not merchants on equal putting with established merchants who pay
sales tax on articles imported by them." The court further stated that
MERALCO's claim for exemption from the payment of the compensating
tax is not clear or expressed, contrary to the cardinal rule in taxation that
"exemptions from taxation are highly disfavored in law, and he who claims
exemption must be able to justify his claim by the clearest grant of organic
or statute law. (pp. 10-11, L-23847, rollo)
Petitioner, on the other hand, bases its claim for exemption from the
compensating tax on poles, wires, transformers and insulators purchased
by it from abroad on paragraph 9 of its franchise which We quote from its
brief:
PARAGRAPH 9. The grantee shall be liable to pay the
same taxes upon its real estate, buildings, plant (not
including poles, wires, transformers, and insulators),
machinery, and personal property as other persons are or
may be hereafter by law to pay. Inconsideration of Part
Two of the franchise herein granted, to wit, the right to
build and maintain in the City of Manila and its suburbs a
plant for the conveying and furnishing of electric current
for light, heat, and power, and to charge for the same, the
grantee shall pay to the City of Manila a five per centum of
the gross earnings received form its business under this
franchise in the City and its suburbs: PROVIDED, That
two and one-half per centum of the gross earnings
received from the business of the line to Malabon shall be
paid to the Province of Rizal. Said percentage shall be
due and payable at the times stated in paragraph nineteen
of Part One hereof, and after an audit, like that provided in
paragraph twenty of Part One hereof, and shall be in lieu
of all taxes and assessments of whatsoever nature, and
by whatsoever authority upon the privileges, earnings,
income, franchise, and poles, wires, transformers, and
insulators of the grantee, from which taxes and
assessments the grantee is hereby expressly exempted.
(Petitioner's brief, p. 4, G.R. No. L-29987; see also pp. 3-
4, petitioner's brief, L-23847)
Petitioner argues that the abovequoted provision in plain and
unambiguous terms makes two references to the exemption of the articles
in question from all taxes except the franchise tax. Thus, after prescribing
in the opening sentence that "the grantee shall be liable to pay the said
taxes upon its real estate buildings, plant (not including poles, wires,
transformers and insulators), machinery and personal property as other
persons are or may be hereinafter required by law to pay," par. 9,
specifically provides that the percentage tax payable by petitioner as fixed
therein "shall be in lieu of all taxes and assessments of whatsoever nature,
127 | P a g e
and by whatsoever authority upon the privileges, earnings, income,
franchise, and poles, wires, transformers and insulators of the
grantee from which taxes and assessments the grantee is hereby
expressly exempted." Petitioner further states that while par. 9 does not
specifically mention the compensating tax for the obvious reason that
petitioner's original franchise was an earlier enactment, the words "in lieu
of all taxes and assessments of whatsoever nature and by whatsoever
authority" are broad and sweeping enough to include the compensating
tax. (p. 5, petitioner's brief, L-29987; pp, 4-5, ibid, L-23847)
Petitioner also contends that the ruling of this Court in the cases of Panay
Electric Co., Manila Gas Corporation, and Borja (supra) are not applicable
to its situation.
We find no merit in petitioner's cause.
1. One who claims to be exempt from the payment of a particular tax must
do so under clear and unmistakable terms found in the statute. Tax
exemptions are strictly construed against the taxpayer, they being highly
disfavored and may almost be said "to be odious to the law." He who
claims an exemption must be able to print to some positive provision of
law creating the right; it cannot be allowed to exist upon a mere vague
implication or inference.3The right of taxation will not beheld to have been
surrendered unless the intention to surrender is manifested by words too
plain to be mistaken (Ohio Life Insurance & Trust Co. vs. Debolt, 60
Howard, 416), for the state cannot strip itself of the most essential power
of taxation by doubtful words; it cannot, by ambiguous language, be
deprived of this highest attribute of sovereignty (Erie Railway Co. vs.
Commonwealth of Pennsylvania, 21 Wallace 492, 499). So, when
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 vs. Tennessee & County of Shelby, 95 U.S. 679, 686). 4
2. Petitioner's submission that its right to exemption is supported by the
"plain and unambiguous" term of paragraph 9 of its franchise is positively
without basis.
First, the Court cannot overlook the tax court's finding that, and We quote:
At the outset it should be noted that the franchise by the
Municipal Board of the City of Manila to Mr. Charles M.
Swift and later assumed and taken over by petitioner (see
Rep. Act No. 150, CTA rec. p. 84), is a municipal
franchise and not a legal franchise. While it is true that
Section 1 of Act No. 484 of the Philippine Commission of
1902 authorizes the Municipal Board of the City of Manila
to grant a franchise to the person making the most
favorable bid for the construction and maintenance of an
electric street railway and the construction, maintenance,
and operation of an electric light, heat, and power system
in Manila and its suburbs, Section 2 of the same Act
authorize the said Municipal Board to make necessary
amendments to be fixed by the terms of the successful
bid; otherwise, the form of the franchise to be granted
shall be in the words and figures appearing in Act No. 484
of the Philippine Commission, which includes Par. 9. Part
Two, thereof, supra.
This Court is not aware whether or not the tax exemption
provisions contained in Par. 9, Part Two of Act No. 484 of
the Philippine Commission of 1902 was incorporated in
the municipal franchise granted to Mr. Charles M. Swift by
the Municipal Board of the City of Manila and later
assumed and taken over by petitioner because no
admissible copy of Ordinance No. 44 of the said Board
was ever presented in evidence by the herein petitioner.
Neither is this Court aware of any amendment to the
terms of this franchise granted by the aforesaid Municipal
Board to the successful bidder in the absence of
Ordinance No. 44 and the amendment thereto, if any. In
the circumstances, we are at a Las to interpret and apply
the tax exemption provisions relied upon by petitioner.
(pp. 11-13, rollo, L-29987)
Second, and this is the controlling reason for the denial of petitioner's
claim in these cases, We do not see in paragraph 9 of its petitioner's
franchise, on the assumption that it does exist as worded, what may be
128 | P a g e
considered as "plain and unambiguous terms" declaring petitioner
MERALCO exempt from paying a compensating tax on its imports of
poles, wires, transformers, and insulators. What MERALCO really wants
Us to do, but which We cannot under the principles enumerated earlier, is
to infer and imply that there is such an exemption from the following
phrase: "... the grantee shall pay to the City of Manila five per centum of
the gross earnings received from its business ... and shall be in lieu of all
taxes and assessments of whatsoever nature, and by whatsoever
authority upon the privileges, earnings, income, franchise, and poles,
wires, transformers, and insulators of the grantee, from which taxes and
assessments the grantee is hereby expressly exempted."
Note that what the above provision exempts petitioner from, is the
payment of property, tax on its poles, wires, transformers, and insulators; it
does not exempt it from payment of taxes like the one in question which,
by mere necessity or consequence alone, fall upon property. The first
sentence of paragraph 9 of petitioner's franchise expressly states that the
grantee like any other taxpayer shall pay taxes upon its real estate,
buildings, plant (not including poles, wires, transformers, and
insulators),machinery, and personal property. These are direct taxes
imposed upon the thing or property itself. Thus, while the grantee is to pay
tax on its plant, its poles, wires, transformers, and insulators as forming
part of the plant or installation(significantly the enumeration is in
parenthesis and follows the word "plant") are exempt and as such are not
to be included in the assessment of the property tax to be paid.
The ending clause of paragraph 9 providing in effect that the percentage
tax imposed upon petitioner shall be in lieu of "all taxes and assessments
of what and by whatsoever authority" cannot be said to have granted it
exemption from payment of compensating tax. The phrase "all taxes and
assessments of whatsoever nature and by whatsoever authority" is not so
broad and sweeping, as petitioner would have Us think, as to include the
tax in question because there is an immediately succeeding phrase which
limits the scope of exemption to taxes and assessments "upon the
privileges earnings, income, franchise, and poles, wires, transformers,
and insulators of the grantee." The last clause of paragraph 9 merely
reaffirms, with regards to poles, wires, transformers, and insulators, what
has been expressed in the that first sentence of the same paragraph
namely, exemption of petitioner from payment of property tax. It is a
principle of statutory construction that general terms may be restricted by
specific words, with the result that the general language will be limited by
the specific language which indicates the statute's object and purpose.
(Statutory Construction by Crawford, 1940 ed. p. 324-325)
3. It is a well-settled rule or principle in taxation that a compensating tax is
not a property tax but is an excise tax.5Generally stated, an excise tax is
one that is imposed on the performance of an act, the engaging in an
occupation, or the enjoyment of a privilege. 6 A tax upon property because
of its ownership its a direct tax, whereas one levied upon property because
of its use is an excise duty. (Manufacturer's Trust Co. vs. United States,
Ct. Cl., 32 F. Supp. 289, 296) Thus, where a tax which is not on the
property as such, is upon certain kinds of property, having reference to
their origin and their intended use, that is an excise tax. (State v. Wynne,
133 S.W. 2d 951, 956,957, 133 Tex. 622)
The compensating tax being imposed upon petitioner herein, MERALCO,
is an impost on its use of imported articles and is not in the nature of a
direct tax on the articles themselves, the latter tax falling within the
exemption. Thus, in International Business Machine Corp. vs. Collector of
Internal Revenue, 1956, 98 Phil. Reports 595, 593, which involved the
collection of a compensating tax from the plaintiff-petitioner on business
machines imported by it, this Court stated in unequivocal terms that "it is
not the act of importation that is taxed under section 190, but the use of
imported goods not subjected to sales tax" because "the compensating tax
was expressly designed as a substitute to make up or compensate for the
revenue lost to the government through the avoidance of sales taxes by
means of direct purchases abroad. ..."
It is true that upon the collection of a compensating tax on petitioner's
poles, wires, transformers, and insulators purchased from abroad, the tax
falls on the goods themselves; this fact leads petitioner to claim that what
is being imposed upon it is a property tax. But petitioner loses sight of the
principle that "every excise necessarily must finally fall upon and be paid
by property, and so may be indirectly a tax upon property; but if it is really
imposed upon theperformance of an act, the enjoyment of a privilege, or
the engaging in an occupation, it will be considered an excise." (51 Am.
129 | P a g e
Jur. 1d, Taxation, Sec. 34, emphasis supplied) And so, to reiterate, what is
being taxed here is the use of goods purchased from out of the country,
and the imposition is in the nature of an excise tax.
4. There is no valid reason for Us not to apply to petitioner the ruling of the
Court in Panay Electric Co. and Borja, supra, for MERALCO is similarly
situated.
Panay Electric Co. sought exemption from payment of a compensating tax
on equipments purchased abroad for use in its electric plant. A provision in
its franchise reads:
Sec 8. ... Said percentage shall be due and payable
quarterly and shall be lieu of all taxes of any kind levied,
established, or collected by any authority whatsoever, now
or in the future, on its poles, wires, insulators, switches,
transformers and other structures, installations,
conductors, and accessories, placed in and over the
public streets, avenues, roads, thoroughfares, squares,
bridges, and other places on its franchise, from which
taxes the grantee is hereby expressly exempted. (113
Phil. 570)
This Court rejected the exemption sought by Panay Electric and held that
the cited provision in its franchise exempts from taxation those rights and
privileges which are not enjoyed by the public in general but only by the
grantee of a franchise, but do not include the common right or privileges of
every citizen to make purchases anywhere; and that we must bear in mind
the purpose for the imposition of compensating tax which as explained in
the report of the Tax Commission is as follows:
The purpose of this proposal is to place persons
purchasing goods from dealers doing business in the
Philippines on an equal footing, for tax purposes, with
those who purchase goods directly from without the
Philippines. Under the present tax law, the former bear the
burden of the local sales tax because it is shifted to them
as part of the selling price demanded by the local
merchants, while the latter do not. The proposed tax will
do away with this inequality and render justice to
merchants and firms of all nationalities who are in
legitimate business here, paying taxes and giving
employment to a large number of people. (113 Phil. 571)
In Borja, petitioner Consuelo P. Borja, a grantee of a legislative franchise,
also claimed to be free from paying the compensating tax imposed on the
materials and equipment such as wires, insulators, transformers,
conductors, etc. imported from Japan, on the basis of Sec. 10 of Act No.
3636 (Model Electric Light and Power Franchise Act) which has been
incorporated by reference in franchise under Act No. 3810. Section 10
provides:
The grantee shall pay the same taxes as are now or may
"hereafter be required by law from other individuals, co-
partnerships, private, public or quasi-public associations,
corporations, or joint-stock companies, on his (its) real
estate, buildings, plants, machinery; and other personal
property, except property section. In consideration of the
franchise and rights hereby granted, the grantee shall pay
into the municipal treasury of the (of each) municipality in
which it is supplying electric current to the public under
this franchise, a tax equal to two per centum of the gross
earnings from electric current sold or supplied under this
franchise in said (each) municipality. Said tax shall be due
and payable quarterly and shall be in lieu of any and all
taxes of any kind, nature or description levied,
established, or collected by any authority whatsoever,
municipal, provincial or insular, now or in the future, on its
poles, wires, insulators, switches; transformers and
structures, installations, conductors, and accessories,
placed in and over and under all public property, including
public streets and highways, provincial roads, bridges and
public squares, and on its franchise, rights, privileges,
receipts, revenues and profits, from which taxes the
grantee is hereby expressly exempted. (113 Phil. 569-
570)
130 | P a g e
The Court applying the ruling in Panay Electric denied the exemption with
the added statement that
Considering, therefore, the fact that section 190 of the Tax
Code is a sort of an equalizer, to place casual importers,
who are not merchants on equal footing with established
merchants who pay sales tax on articles imported by them
... We may conclude that it was not the intention of the law
to exempt the payment of compensating tax on the
personal properties in question. The principle and legal
philosophy underlying the imposition of compensating tax,
as enunciated in the above case (referring to Borja), are
fundamentally correct, and no plausible reason is
advanced for their non-application to the case at bar. (p.
572, ibid.)
Petitioner claims that there exists a difference between paragraph 9 of its
franchise and the corresponding provisions of the franchise of Panay
Electric and Borja in that in the latter, unlike in the former, there is no
statement that the grantee is exempt from "all taxes of whatsoever nature
and whatsoever authority." In addition, petitioner points out, the franchise
of Panay Electric and Borja contains a qualifying phrase, to wit: "placed in
and over the public streets, avenues, roads, thoroughfares, etc."
A comparison of the pertinent provisions mentioned by petitioner and
which are quoted in the preceding pages reveals no substantial or
fundamental distinction as to remove petitioner MERALCO from the ambit
of the Panay Electric and Borja ruling. There may be differences in the
phraseology used, but the intent to exempt the grantee from the payment
only of property tax on its poles, wires, transformers, and insulators is
evidently common to the three; withal, in all the franchises in question
there is no specific mention of exemption of the grantee from the payment
of compensating tax.
Petitioner disputes, however, the applicability of the stare decisis principle
to its case claiming that this Court should not blindly follow the doctrine
of Panay Electric and Borja, and that in Philippine Trust Co. et al. vs.
Mitchell, 59 Phil. 30, 36, the Court had occasion to state: ,the rule of stare
decisis is entitled to respect. Stability in the law, particularly in the
business field, is desirable. But idolatrous reverence for precedent, simply
as precedent, no longer rules. More important than anything else is that
the court should be right." (pp. 18-19, petitioner's brief, L-29987)
But what possible ground can there be for deviating from the decisions of
this Court in these two cases? A doctrine buttressed by the law, reason,
and logic is not to be simply brushed aside to suit the convenience of a
particular party or interest or to avoid hardship to one. As We view this
legal problem, no justification can be found for giving petitioner herein
preferential treatment by reading into its franchise an exemption from a
particular kind of tax which is not there. If it had been the legislative intent
to exempt MERALCO from paying a tax on the use of imported
equipments, the legislative body could have easily done so by expanding
the provision of paragraph 9 and adding to the exemption such words as
"compensating tax" or "purchases from abroad for use in its business,"
and the like. We cannot ignore the principle that express mention in a
statute of one exemption precludes reading others into it. (Hoard vs.
Sears, Roebuck & Co., 122 Conn. 185, 193, 188 A. 269)
On this point, the Government correctly argues that the provision in
petitioner's franchise that the payment of the percentage tax on the gross
earnings shall be "in lieu of all taxes and assessments of whatsoever
nature, and whatsoever authority" is not to be given a literal meaning as to
preclude the imposition of the compensating tax in this particular case, and
cites for its authority the Opinion of the Supreme Court of Connecticut
rendered in Connecticut Light & Power Co., et al. vs. Walsh, 1948, which
involved the construction of a statute imposing a sales and use tax, and
which inter alia held:
The broad statement that the tax upon the gross earning
of telephone companies shall be "in lieu of all other
taxation" upon them is not necessarily to be given a literal
meaning. "In construing the act it is our duty to seek the
real intent of the legislature, even though by so doing we
may limit the literal meaning of the broad language
used." Greenwich Trust Co. v. Tyson, 129 Conn. 211,
222, 27 A. 2d 166, 172. It is not reasonable to assume
131 | P a g e
 that the General Assembly intended by the provisions we
have quoted that the tax on gross earnings should take
the place of taxes of a kind not then anywhere imposed
and entire outside its knowledge. ... ." (57 A.R., 2d S, pp.
129, 133-134, emphasis supplied)
IN VIEW OF THE FOREGOING, We find no merit in these Petitions for
Review and We hereby AFFIRM the decision of the Court of Tax Appeals
in these two cases, with costs against petitioner in both instances.

In 1902 when Act 484 of the Philippine Commission was enacted,

"compensating tax' was certainly not generally known or in use, hence, to
paraphrase the above-mentioned Connecticut decision, the Court cannot
assume that the Philippine Commission in providing that the gross
earnings taxes imposed on the grantee of the electric light franchise shall
be in lieu of all taxes and assessments, meant to include impositions in the
nature of a compensating tax which came into use in this country only
upon the enactment of Commonwealth Act 466 in 1939.

5. One last argument of petitioner to support its cause is that just as a new
and necessary industry was held to be exempt from paying a
compensating tax on its imports under the tax exemption provision of
Republic Act 901, so should MERALCO be exempt from such a tax under
the general clause in its franchise, to wit: "... in lieu of all taxes and
assessments of whatsoever nature and whatsoever authority upon poles,
wires, etc."

We agree with the court below that there can be no analogy between
MERALCO and what is considered as a new and necessary industry
under Republic Act 35 now superseded by Republic Act 901.

The rationale of Republic Act 901 is "to encourage the establishment or

exploitation of new and necessary industries to promote the economic
growth of the country," and because "an entrepreneur engaging in a new
and necessary industry faces uncertainty and assumes a risk bigger than
one engaging in a venture already known and developed ... the law grants
him tax exemption — to lighten onerous financial burdens and reduce
losses." (Marcelo Steel Corporation vs. Collector of Internal Revenue, 109
Phil. 921, 926) This intendment of the legislature in enacting Republic Act
901 is not the motivation behind the tax exemption clause found in
petitioner MERALCO's franchise; consequently, there can be no analogy
between the two.

132 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-23041 July 31, 1969
E. RODRIGUEZ, INC., petitioner,
vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
Tolentino and Garcia and D. R. Cruz for petitioner.
Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B.
Afurong and Special Attorney Salvador D. David for respondents.
BARREDO, J.:
This is a petition for review of the decision of the Court of Tax Appeals in
its CTA Case No. 849, affirming the decision of the respondent Collector
(now Commissioner) of Internal Revenue holding petitioner E. Rodriguez,
Inc. liable for deficiency income tax in the sum of P63,880.00 for the year
1950.
The records of the case show that on July 17, 1948, Congress enacted
Republic Act No. 333, 1 pursuant to which the Republic of the Philippines
sued the petitioner, among four other defendants, in Civil Case No. Q-54
of the Court of First Instance of Quezon City, for the expropriation of about
1,360,000 square meters of land owned by it and situated within the area
delimited for the new capital city site. After due trial, the said court
rendered a decision in the case, dated February 21, 1950, with the
following dispositive portion:
WHEREFORE, judgment is hereby rendered, declaring plaintiff
entitled to retain and appropriate the property involved in this
proceeding, as site for the development and establishment of the
new capital city of the Philippines in accordance with our
condemnation order dated September 19, 1949; and ordering
plaintiff to pay defendants, as just compensation for the lands to
be taken from them, the following amounts, to wit: to defendant
Eulogio Rodriguez, Sr., the sum of THIRTY-NINE THOUSAND
SEVEN HUNDRED SEVENTY-SIX PESOS (P39,776.00); to
defendant E. Rodriguez, Inc., the sum of ONE MILLION FOUR
HUNDRED EIGHTEEN THOUSAND SIX HUNDRED FOUR
(P1,418,604.00) PESOS; to defendant Luzon Investment &
Development Co., the sum of FIVE THOUSAND TWO HUNDRED
EIGHTY (P5,280.00) PESOS; and to defendants Enrique
Manaloto and Canuto G. Manuel, the sum of SIXTEEN
THOUSAND SEVEN HUNDRED TWENTY (P16,720.00) PESOS,
with interest at the rate of 6% per annum on the said amounts
from September 19, 1949, the date the plaintiff entered upon the
possession of the lands in question until payment, plus the costs.
Following the issuance of the above-mentioned decision, however, a
series of negotiations were had between petitioner and the Government,
represented by the Capital City Planning Commission, after which, the
said parties entered into a compromise agreement under date of May 11,
1950, providing, inter alia, as follows:
(1) That the parties will accept the decision laid down in said case
by the Court of First Instance of Rizal (Quezon City Branch) with
the following stipulations:
a. That the defendants mentioned above hereby waive all
interest due on the adjudged value of the expropriated
properties;
b. That the defendants above-named hereby donate
207,006 square meters out of Lots Nos. 41-C-3 and 39,
object of expropriation in Civil Case No. Q-54;
c. That defendant Eulogio Rodriguez, Inc. obligates itself
to donate as it hereby donates the land object of
expropriation in Civil Case No. Q-90, in favor of the
133 | P a g e
 Republic of the Philippines, containing an area of 15,200
square meters, which is a portion of Lot No. 41-C-3 as
indicated in the plan attached to the complaint therein;
said defendant Eulogio Rodriguez, Inc. binding itself to
execute the necessary deed of donation thereof;
d. That defendants named above agree to the payment of
the price awarded by the Court subject to the foregoing
stipulations in the total sum of ONE MILLION TWO
HUNDRED FIFTY THOUSAND SIX HUNDRED THIRTY-
ONE PESOS and EIGHTY CENTAVOS (P1,250,631.80)
payable in the following manner:
1) SIX HUNDRED TWENTY-FIVE THOUSAND
THREE HUNDRED FIFTEEN PESOS AND
NINETY CENTAVOS (P625,315.90) in
government bonds in favor of Eulogio Rodriguez,
Sr. and E. Rodriguez, Inc., payable within five (5)
years at not less than three percent (3%) per
annum;
2) THREE HUNDRED THOUSAND PESOS
(P300,000.00) to be given to the Philippine
National Bank in payment of the mortgage
indebtedness of defendants E. Rodriguez, Sr. and
E. Rodriguez, Inc.; and
3) the balance of THREE HUNDRED TWENTY-
FIVE THOUSAND TWO HUNDRED FIFTEEN
PESOS AND NINETY CENTAVOS (P325,215.90)
in cash to be paid to all defendants abovenamed,
through Eulogio Rodriguez, Sr., within a
reasonable time.
(2) That after approval of this compromise by the Court, the
parties herein agree not to interpose an approval from the
judgment of the Court of First Instance of Rizal (Quezon City
Branch) which shall be considered final and executory under the
Rules of Court;
(3) And, finally, that the said parties will submit this compromise
agreement to the Court for its approval and/or its consideration in
the decision rendered in this case.
This compromise agreement was duly approved by the Court of First
Instance of Rizal (Quezon City Branch) on May 12, 1950, and pursuant to
the terms thereof, the Government paid to petitioner the sum of
P1,238,204.00, of which P625,315.90 were in Government Bonds.
On March 1, 1951, petitioner filed its income tax return for the year 1950,
showing on the face thereof a loss of P17,982.06. In said return, petitioner
did not include the sum of P625,315.90 received by it from the government
in the form of bonds in payment of its expropriated properties, in the belief
that the said amount was free or exempt from taxation. When this return
was later examined by an agent of the Bureau of Internal Revenue, the
Collector of said bureau assessed against petitioner a deficiency income
tax of P63,880.00, computed as follows:
Net income per return (loss)
P17,982.06
..................................
Amount received for
P1,238,204.00
property .....
Less: Cost of Land 827,279.82
...................
Gain
P410,924.18
..............................................
Undeclared gain
P410,924.18
..............................................
Accounts receivable charged off as bad
debts but not forming part of gross income
.......................... 1,860.00
134 | P a g e
 Miscellaneous expenses not connected with
4,450.00
the business
..................................................................
Net Income
P399,252.12
..............................................................
Tax due on P399,262.12
P63,980.00
.........................................
==========
A series of communications between petitioner and respondent Collector
of Internal Revenue followed the foregoing assessment, with the former
protesting against and requesting the cancellation of the deficiency income
tax assessed against it, and the latter maintaining its accuracy and
demanding payment thereof. As petitioner, did not past, on July 6, 1959,
the Collector of Internal Revenue sought the collection of said deficiency
income tax of P63,880.00, plus 5% surcharge and 1% monthly interest
thereon from, March 11, 1956, by means of an action in the Court of First
Instance of Manila.
On June 8,k 1960, petitioner offered by way of compromise to pay the
amount of P30,676.25 in full settlement of its disputed deficiency income
tax liability for 1950. This offer was rejected by the Collector of Internal
Revenue; whereupon, under date of June 24, 1960, petitioner filed a
petition for review of the assessment in question before the respondent
Court of Tax Appeals which, after trial on the merits, rendered its decision
affirming the assessment in question. Hence, this appeal by petitioner thru
the instant petition for review of the said decision of respondent of Court of
Tax Appeals, with the following assigned errors:
I. THE RESPONDENT COURT ERRED IN HOLDING THAT THE
EXEMPTION CONTEMPLATED BY THE BONDS IN QUESTION
APPLIES ONLY TO DOCUMENTARY STAMP TAX AND TAX ON
INTEREST DERIVED FROM SUCH BONDS, AND THAT SUCH
EXEMPTION CONSTITUTES SUFFICIENT INDUCEMENT FOR
PETITIONER TO ACCEPT SAID BONDS.
II. THE RESPONDENT COURT ERRED IN AFFIRMING THE
ORDER OF THE RESPONDENT COLLECTOR HOLDING
PETITIONER LIABLE FOR INCOME TAX ON THE EXCHANGE
OF ITS PROPERTIES FOR GOVERNMENT TAX-EXEMPT
BONDS UNDER REPUBLIC ACT NO. 333.
As petitioner correctly puts it, the only question to decide here is whether
or not in determining the profit realized from the payment of the purchase
price of its (petitioner's) expropriated property, for income tax purposes
portion of the purchase price paid in the form of tax-exempt bonds issued
under Republic Act No. 333 should be included.
The pertinent provisions of law involved are found in Section 9 of the Act
abovementioned which reads as follows:1äwphï1.ñët
SEC. 9. The President of the Philippines is authorized to issue, in
the name and behalf of the Republic of the Philippines, bonds in
an amount of twenty million pesos, the proceeds of which shall be
used as a revolving fund for the acquisition of private estates, the
subdivision of the area, and the construction of streets, bridges,
waterworks, sewerage and other municipal improvements in the
Capital City of the Philippines.
The bonds so authorized to be issued shall bear such date and in
such form as the President of the Philippines may determine and
shall bear such rate of interest and run for such length of time as
may be determined by the President. Both principal and interest
shall be payable in Philippine currency or its equivalent in the
United States currency, in the discretion of the Secretary of
Finance, at the Treasury of the Philippines, and the interest shall
be payable at such periods as the President of the Philippines
may determine.
Said bonds shall be exempt from taxation by the Government of
the Republic of the Philippines or by any political or municipal
subdivisions thereof, which fact shall be stated upon their face, in
accordance with this Act, under which the said bonds are issued.
[Emphasis supplied]
135 | P a g e
Petitioner maintains that the portion (paid in tax-exempt Government
Bonds) of the profit it derived from the expropriation of its property should
not be made subject to income tax, for the reasons that: (1) the Republic
of the Philippines gave no concession to petitioner in the compromise
agreement involved in this case except that, as testified to by the lawyer
who represented petitioner in the negotiations which led to the
compromise agreement in question, it was understood between the
parties, and it was precisely the only inducement, according to the witness,
that made petitioner accept payment of P625,315.90 in Government
Bonds instead of cash, that said bonds would be "tax-free"; now, it is
argued that by "tax-free" is meant that by acceptance of the bonds rather
than cash, petitioner would not also have to pay income tax on the
exchange gain from said bonds; 2 (2) that the third paragraph of Section 9
of the Act granting tax exemption on bonds issued thereunder was
inserted in the law as a further inducement to private land owners within
the new capital site to part away with their properties in favor of the
Government other than for cash, which legislative history of the law
allegedly sustains the position of petitioner; and (3) Congress must have
really intended such income tax exemption under Republic Act No. 333,
since, similar provisions in Republic Act No. 1400, 3 likewise involving the
expropriation of private estates, expressly declare that the price paid by
the Government for the lands acquired for resale to tenants under the
authority of said Act (Republic Act No. 1400) shall not be considered as
income of the landowner for purposes of the income tax. This reasoning
was brushed aside by the respondent Court of Tax Appeals in its decision
under review, on the following rationale:
Petitioner contends that since the Government bonds which it
received as part payment of the price of its lot were exempt from
taxation, the deficiency assessment made by respondent against it
is not in order. On the other hand, respondent claims that the
exemption of Government bonds refers only the documentary
stamps on the bonds and does not include income tax on the
income derived by petitioner which was paid to him in the form of
bonds.
The pertinent portion of Section 9 of Republic Act No. 333, which
is the sole basis of petitioner's claim for exemption,
provides:1äwphï1.ñët
Said bonds shall be exempt from taxation by the
Government of the Republic of the Philippines or by any
political or municipal subdivision thereof, which fact shall
be stated upon their face, in accordance with this Act,
under which the said bonds are issued.
There can be no question that petitioner is taxable on its income
derived from the sale of its property to the Government. The fact
that a portion of the purchase price of the property was paid by the
Government in the form of tax exempt bonds does not operate to
exempt said income from income tax. The income from the sale of
the land in question and the bond are two different and distinct
taxable items so that the exemption of one does not operate to
exempt the other, unless the law expressly so provides.
It is alleged that to deny exemption from income tax on the
amount represented by the said bonds would be to nullify the
purpose of the law in granting exemption. The question has been
asked: If income or gain derived from the acceptance of such
bonds in exchange for private estates would be taxed, what
inducement did such provision of Republic Act No. 333 give to
landowners to accept payment in bonds for their properties in the
proposed site of the Capital City? To our mind, there is sufficient
inducement, and that is, the exemption not only of the bonds from
documentary stamp tax but also of the interest derived from such
bonds. Section 29(b) (4) of the National Internal Revenue Code
exempts interest derived from such bonds from income tax to the
extent provided in the law authorizing the issue thereof.
Counsel for petitioner also alleged that the prevailing rule
obtaining in the United States before removal of exemptions of
government obligations was to exempt such bonds from income
tax both as to principal and interest. To quote from the
memorandum of counsel:
136 | P a g e
 ... Actually, most of the Federal Treasury Bonds issued by
the U.S. Government from 1921 to 1941, or before the
Public Debt Acts of 1941 and 1942, that removed tax
exemptions on obligations issued by the United States
and its agencies and its instrumentalities, were —
'exempt, both as to principal and interest, from all taxation
now or hereafter imposed by the United States, any
States, or any of the possessions of the United States, or
by any local taxing authority, except (a) estate or
inheritance taxes, and (b) graduated additional income
taxes, known as surtaxes and excess profits and war
profits taxes, now or hereafter imposed by the United
States, upon the income or profits of individuals,
partnerships, associations, or corporations. (I Mertens,
Law of Federal Income Taxation, pp. 297-313).' [See page
12, Memorandum of counsel for petitioner, March 20,
1963.]
Apparently the import of the ruling quoted above from the book of
Mertens has not been clearly understood. We think that the
exemption referred to therein of both principal and interest has
reference to the exemption from income tax of the income derived
from the sale or exchange of the bonds and the interest paid by
the U.S. Government on such bonds. The opinion quoted from
Mertens is inapplicable to the instant case because it does not
refer to any income derived by petitioner from the sale or
exchange of bonds received by petitioner from the Government
under Republic Act No. 333. The tax here involved is on the
income derived from the sale of petitioner's property to the
Government, not the income derived from the sale or exchange of
the bonds.
Mention has been made of Republic Act No. 1400, Section 22 of
which provides that 'the purchase price paid by the Government
for any agricultural land acquired for resale to tenants under the
authority of this Act, whether by negotiation or expropriation, shall
not be considered as income of the landowner concerned for
purposes of the income tax.' It is argued that since Republic Acts
Nos. 333 and 1400 are in pari materia both should be construed
together, and since Republic Act No. 1400 exempts income
derived from the sale of property to the Government under said
Act, the same exemption should also apply to income derived from
the sale of property to the Government under Republic Act No.
333. It is precisely because Republic Act No. 1400 contains an
express exemption from income tax of the income derived by
property owners from the sale of their lands under said Act and
the absence of a similarly provision in Republic Act No. 333 which
indicates plainly that Congress intended not to grant such
exemption to landowners under Republic Act No. 333. If Congress
had intended to grant exemption from income tax with respect to
income derived by a person from the sale of his property under
Republic Act No. 333, it should have expressly made an express
provision to that effect as it did in Republic Act No. 1400; that it did
not, is a clear indication that its purpose was to withhold such
exemption.
We find no cogent reasons to disturb the above holding of the Court of Tax
Appeals. It has been the constant and uniform holding of this Court that
exemption from taxation is not favored and is never presumed; in fact, if it
is granted, the grant must be strictly construed against the
taxpayer. 4 Affirmatively put, the law requires courts to frown on alleged
exemptions from taxation, hence, an exempting provision in a legislative
enactment should be construed in strictissimi juris 5 against the taxpayer
and liberally in favor of the taxing authority. 6 This Court has been most
consistent in this holding. In Asiatic Petroleum Co. vs. Llanes, 7 it was
explained beyond any possibility of miscomprehension that: .
... Exemptions from taxation are highly disfavored, so much so
that they may almost be said to be odious to the law. He who
claims an exemption must be able to point to some positive
provision of law creating the right. It cannot be allowed to exist
upon a vague implication ... The books are full of very strong
expressions on this point. As was said by the Supreme Court of
Tennessee in Memphis vs. U & P. Bank (91 Tenn. 546, 550), 'The
right of taxation is inherent in the State. It is a prerogative
137 | P a g e
 essential to the perpetuity of the government; and he who claims
an exemption from the common burden, must justify his claim by
the clearest grant of organic or statute law.' Other utterances
equally or more emphatic come readily to hand from the highest
authority. In Ohio Life Ins. and Trust Co. vs. Debolt (16 Howard
416), it was said by Chief Justice Taney, that the right of taxation
will not be held to have been surrendered, 'unless the intention to
surrender is manifested by words too plain to be mistaken.' In the
case of the Delaware Railroad Tax (18 Wallace 206, 226), the
Supreme Court of the United States said that the surrender, when
claimed, must be shown by clear, unambiguous language, which
will admit of no reasonable construction consistent with the
reservation of the power. If a doubt arises as to the intent of the
legislature, that doubt must be resolved in favor of the State.
In Erie Railway Company vs. Commonwealth of Pennsylvania (21
Wallace 492, 499), Mr. Justice Hunt, speaking of exemptions,
observed that the State cannot strip itself of the most essential
power of taxation by doubtful words. 'It cannot by ambiguous
language, be deprived of this highest attribute of sovereignty.'
In Tennessee vs. Whitworth (117 U.S. 129, 136), it was said: 'In all
cases of this kind the question is as to the intent of the legislature,
the presumption always being against any surrender of the taxing
power.' In Farrington vs. Tennessee and County of Shelby (95
U.S. 679, 686), Mr. Justice Swayne said: '... When exemption is
claimed it must be shown indubitably to exist. At the outset every
presumption is against it. A well-founded doubt is fatal to the
claim. It is only when the terms of the concession are too explicit
to admit fairly of any other construction that the proposition can be
supported.'
The above rules should be applied to the case at bar where the law
invoked (Section 9 of Republic Act No. 333) does not make any reference
whatsoever to exemption of income derived from sale of expropriated
property thereunder unlike under Republic Act No. 1400 where relative to
the price paid by the Government for any agricultural land acquired for
resale to tenants there is an express declaration that the same "shall not
be considered as income of the landowner concerned for purposes of the
income tax." Nor are We convinced by the argument that the particular
provision of Republic Act No. 333 relied upon which grants exemption on
bonds issued thereunder for purposes of inducement to private
landowners within the new capital site to part away with their properties in
favor of the Government other than for cash should be taken to mean that
said property owners need not pay income tax on their income derived
from the sale of such properties. The pertinent Congressional Record of
the proceedings held during the consideration of the bill which later
became Republic Act No. 333, 8 does not show that Congress had
intended to exempt said property owners from the payment of income tax
on the proceeds of the sale of their properties when the same is paid in
government bonds issued under the said law. Likewise even were We to
assume for the sake of argument, that the Capital City Planning
Commission and other officials of the government did make some
assurance or promise to herein petitioner that the portion of the price of its
expropriated property paid in tax-exempt government bonds would not be
made subject to income tax payment, such assurance or promise, made
without statutory sanction, cannot bind the Government. The same
amounts to a surrender of the State's power to require payment of income
tax, which in this case is not explicitly granted by Republic Act No. 333. It
is a well-known rule that erroneous application and enforcement of the law
by public officers do not block subsequent correct application of the
statute, 9 and that the Government is never estopped by mistake or error
on the part of its agents. 10 In the present circumstances, the Collector of
Internal Revenue is right in assessing against petitioner the deficiency
income tax in question, consonant with the proposition that income from
expropriation proceedings is income from sales or exchange and therefore
taxable. 11
FOR THE FOREGOING CONSIDERATIONS, the decision of the Court of
Tax Appeals under review is affirmed, with costs against herein
petitioner.1äwphï1.ñët
138 | P a g e
1. express
2. implied
Republic of the Philippines
SUPREME COURT
THIRD DIVISION
G.R. No. 140230 December 15, 2005
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, Respondent.
DECISION
GARCIA, J.:
In this petition for review on certiorari, the Commissioner of Internal
Revenue (Commissioner) seeks the review and reversal of the September
17, 1999 Decision1 of the Court of Appeals (CA) in CA-G.R. No. SP 47895,
affirming, in effect, the February 18, 1998 decision2 of the Court of Tax
Appeals (CTA) in C.T.A. Case No. 5178, a claim for tax refund/credit
instituted by respondent Philippine Long Distance Company (PLDT)
against petitioner for taxes it paid to the Bureau of Internal Revenue (BIR)
in connection with its importation in 1992 to 1994 of equipment,
machineries and spare parts.
The facts:
PLDT is a grantee of a franchise under Republic Act (R.A.) No. 7082 to
install, operate and maintain a telecommunications system throughout the
Philippines.
For equipment, machineries and spare parts it imported for its business on
different dates from October 1, 1992 to May 31, 1994, PLDT paid the BIR
the amount of ₱164,510,953.00, broken down as follows: (a)
compensating tax of ₱126,713,037.00; advance sales tax of
₱12,460,219.00 and other internal revenue taxes of ₱25,337,697.00. For
similar importations made between March 1994 to May 31, 1994, PLDT
paid ₱116,041,333.00 value-added tax (VAT).
On March 15, 1994, PLDT addressed a letter to the BIR seeking a
confirmatory ruling on its tax exemption privilege under Section 12 of R.A.
7082, which reads:
Sec. 12. The grantee … shall be liable to pay the same taxes on their real
estate, buildings, and personal property, exclusive of this franchise, as
other persons or corporations are now or hereafter may be required by law
to pay. In addition thereto, the grantee, … shall pay a franchise tax
equivalent to three percent (3%) of all gross receipts of the telephone or
other telecommunications businesses transacted under this franchise by
the grantee, its successors or assigns, and the said percentage shall be
in lieu of all taxes on this franchise or earnings thereof: Provided, That
the grantee … shall continue to be liable for income taxes payable under
Title II of the National Internal Revenue Code pursuant to Sec. 2 of
Executive Order No. 72 unless the latter enactment is amended or
repealed, in which case the amendment or repeal shall be applicable
thereto. (Emphasis supplied).
Responding, the BIR issued on April 19, 1994 Ruling No. UN-140-
94,3 pertinently reading, as follows:
PLDT shall be subject only to the following taxes, to wit:
xxx xxx xxx
7. The 3% franchise tax on gross receipts which shall be in lieu of all taxes
on its franchise or earnings thereof.
xxx xxx xxx
139 | P a g e
The "in lieu of all taxes" provision under Section 12 of RA 7082 clearly COMPENSATING TAX
exempts PLDT from all taxes including the 10% value-added tax (VAT) Total amount claimed ₱126,713.037.00
prescribed by Section 101 (a) of the same Code on its importations of Less:
equipment, machineries and spare parts necessary in the conduct of its a) Amount already prescribed: xxx
business covered by the franchise, except the aforementioned Total P 38,015,132.00
enumerated taxes for which PLDT is expressly made liable. b) Waived by petitioner
(Exh. B-216) ₱ 1,440,874.00 ₱39,456,006.00
xxx xxx xxx Amount refundable ₱87,257,031.00
ADVANCE SALES TAX
Total amount claimed ₱12,460.219.00
In view thereof, this Office … hereby holds that PLDT, is exempt from VAT
Less amount already prescribed: ₱5,043,828.00
on its importation of equipment, machineries and spare parts … needed in
Amount refundable ₱7,416,391.00
its franchise operations.
OTHER BIR TAXES
Total amount claimed ₱25,337,697.00
Armed with the foregoing BIR ruling, PLDT filed on December 2, 1994 a Less amount already prescribed: 11,187,740.00
claim4 for tax credit/refund of the VAT, compensating taxes, advance sales Amount refundable ₱14,149,957.00
taxes and other taxes it had been paying "in connection with its VALUE ADDED TAX
importation of various equipment, machineries and spare parts needed for Total amount claimed ₱116.041,333.00
its operations". With its claim not having been acted upon by the BIR, and Less amount waived by petitioner
obviously to forestall the running of the prescriptive period therefor, PLDT (unaccounted receipts) 1,599,436.00
filed with the CTA a petition for review,5 therein seeking a refund of, or the Amount refundable ₱114,441,897.00
issuance of a tax credit certificate in, the amount of ₱280,552,286.00, TOTAL AMOUNT REFUNDABLE ₱223,265,276.00,
representing compensating taxes, advance sales taxes, VAT and other ============
internal revenue taxes alleged to have been erroneously paid on its (Breakdown omitted)
importations from October 1992 to May 1994. The petition was docketed in
said court as CTA Case No. 5178.
and accordingly disposed, as follows:
On February 18, 1998, the CTA rendered a decision6 granting PLDT’s
WHEREFORE, in view of all the foregoing, this Court finds the instant
petition, pertinently saying:
petition meritorious and in accordance with law. Accordingly, respondent is
hereby ordered to REFUND or to ISSUE in favor of petitioner a Tax Credit
This Court has noted that petitioner has included in its claim receipts Certificate in the reduced amount of ₱223,265,276.00 representing
covering the period prior to December 16, 1992, thus, prescribed and erroneously paid value-added taxes, compensating taxes, advance sales
barred from recovery. In conclusion, We find that the petitioner is entitled taxes and other BIR taxes on its importation of equipments (sic),
to the reduced amount of ₱223,265,276.00 after excluding from the final machineries and spare parts for the period covering the taxable years
computation those taxes that were paid prior to December 16, 1992 as 1992 to 1994.
they fall outside the two-year prescriptive period for claiming for a refund
as provided by law. The computation of the refundable amount is
Noticeably, the CTA decision, penned by then Associate Justice Ramon
summarized as follows:
O. de Veyra, with then CTA Presiding Judge Ernesto D. Acosta,

140 | P a g e
concurring, is punctuated by a dissenting opinion7 of Associate Judge
Amancio Q. Saga who maintained that the phrase "in lieu of all taxes"
found in Section 12 of R.A. No. 7082, supra, refers to exemption from
"direct taxes only" and does not cover "indirect taxes", such as VAT,
compensating tax and advance sales tax.
In time, the BIR Commissioner moved for a reconsideration but the CTA,
in its Resolution8 of May 7, 1998, denied the motion, with Judge Amancio
Q. Saga reiterating his dissent.9
Unable to accept the CTA decision, the BIR Commissioner elevated the
matter to the Court of Appeals (CA) by way of petition for review, thereat
docketed as CA-G.R. No. 47895.
As stated at the outset hereof, the appellate court, in the herein challenged
Decision10 dated September 17, 1999, dismissed the BIR’s petition,
thereby effectively affirming the CTA’s judgment.
Relying on its ruling in an earlier case between the same parties and
involving the same issue – CA-G.R. SP No. 40811, decided 16 February
1998 – the appellate court partly wrote in its assailed decision:
This Court has already spoken on the issue of what taxes are referred to in
the phrase "in lieu of all taxes" found in Section 12 of R.A. 7082. There are
no reasons to deviate from the ruling and the same must be followed
pursuant to the doctrine of stare decisis. xxx. "Stare decisis et non quieta
movere. Stand by the decision and disturb not what is settled."
Hence, this recourse by the BIR Commissioner on the lone assigned error
that:
THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT
IS EXEMPT FROM THE PAYMENT OF VALUE-ADDED TAXES,
COMPENSATING TAXES, ADVANCE SALES TAXES AND OTHER BIR
TAXES ON ITS IMPORTATIONS, BY VIRTUE OF THE PROVISION IN
ITS FRANCHISE THAT THE 3% FRANCHISE TAX ON ITS GROSS
RECEIPTS SHALL BE IN LIEU OF ALL TAXES ON ITS FRANCHISE OR
EARNINGS THEREOF.
There is no doubt that, insofar as the Court of Appeals is concerned, the
issue petitioner presently raises had been resolved by that court in CA-
G.R. SP No. 40811, entitled Commissioner of Internal Revenue vs.
Philippine Long Distance Company. There, the Sixteenth Division of the
appellate court declared that under the express provision of Section 12 of
R.A. 7082, supra, "the payment [by PLDT] of the 3% franchise tax of [its]
gross receipts shall be in lieu of all taxes" exempts PLDT from payment of
compensating tax, advance sales tax, VAT and other internal revenue
taxes on its importation of various equipment, machinery and spare parts
for the use of its telecommunications system.
Dissatisfied with the CA decision in that case, the BIR Commissioner
initially filed with this Court a motion for time to file a petition for review,
docketed in this Court as G.R. No. 134386. However, on the last day for
the filing of the intended petition, the then BIR Commissioner had a
change of heart and instead manifested11 that he will no longer pursue
G.R. No. 134386, there being no compelling grounds to disagree with the
Court of Appeals’ decision in CA-G.R. 40811. Consequently, on
September 28, 1998, the Court issued a Resolution12 in G.R. No. 134386
notifying the parties that "no petition" was filed in said case and that the
CA judgment sought to be reviewed therein "has now become final and
executory". Pursuant to said Resolution, an Entry of Judgment13 was
issued by the Court of Appeals in CA-G.R. SP No. 40811. Hence, the CA’s
dismissal of CA-G.R. No. 47895 on the additional ground of stare decisis.
Under the doctrine of stare decisis et non quieta movere, a point of law
already established will, generally, be followed by the same determining
court and by all courts of lower rank in subsequent cases where the same
legal issue is raised.14 For reasons needing no belaboring, however, the
Court is not at all concluded by the ruling of the Court of Appeals in its
earlier CA-G.R. SP No. 47895.
The Court has time and again stated that the rule on stare
decisis promotes stability in the law and should, therefore, be accorded
respect. However, blind adherence to precedents, simply as precedent, no
141 | P a g e
longer rules. More important than anything else is that the court is
right,15 thus its duty to abandon any doctrine found to be in violation of the
law in force.16
As it were, the former BIR Commissioner’s decision not to pursue his
petition in G.R. No. 134386 denied the BIR, at least as early as in that
case, the opportunity to obtain from the Court an authoritative
interpretation of Section 12 of R.A. 7082. All is, however, not lost. For, the
government is not estopped by acts or errors of its agents, particularly on
matters involving taxes. Corollarily, the erroneous application of tax laws
by public officers does not preclude the subsequent correct application
thereof.17 Withal, the errors of certain administrative officers, if that be the
case, should never be allowed to jeopardize the government’s financial
position.18
Hence, the need to address the main issue tendered herein.
According to the Court of Appeals, the "in lieu of all taxes" clause found in
Section 12 of PLDT’s franchise (R.A. 7082) covers all taxes, whether
direct or indirect; and that said section states, in no uncertain terms, that
PLDT’s payment of the 3% franchise tax on all its gross receipts from
businesses transacted by it under its franchise is in lieu of all taxes on the
franchise or earnings thereof. In fine, the appellate court, agreeing with
PLDT, posits the view that the word "all" encompasses any and all taxes
collectible under the National Internal Revenue Code (NIRC), save those
specifically mentioned in PLDT’s franchise, such as income and real
property taxes.
The BIR Commissioner excepts. He submits that the exempting "in lieu of
all taxes" clause covers direct taxes only, adding that for indirect taxes to
be included in the exemption, the intention to include must be specific and
unmistakable. He thus faults the Court of Appeals for erroneously
declaring PLDT exempt from payment of VAT and other indirect taxes on
its importations. To the Commissioner, PLDT’s claimed entitlement to tax
refund/credit is without basis inasmuch as the 3% franchise tax being
imposed on PLDT is not a substitute for or in lieu of indirect taxes.
The sole issue at hand is whether or not PLDT, given the tax component
of its franchise, is exempt from paying VAT, compensating taxes, advance
sales taxes and internal revenue taxes on its importations.
Based on the possibility of shifting the incidence of taxation, or as to who
shall bear the burden of taxation, taxes may be classified into either direct
tax or indirect tax.
In context, direct taxes are those that are exacted from the very person
who, it is intended or desired, should pay them;19 they are impositions for
which a taxpayer is directly liable on the transaction or business he is
engaged in.20
On the other hand, indirect taxes are those that are demanded, in the first
instance, from, or are paid by, one person in the expectation and intention
that he can shift the burden to someone else.21 Stated elsewise, indirect
taxes are taxes wherein the liability for the payment of the tax falls on one
person but the burden thereof can be shifted or passed on to another
person, such as when the tax is imposed upon goods before reaching the
consumer who ultimately pays for it. When the seller passes on the tax to
his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the
purchaser as part of the price of goods sold or services rendered.
To put the situation in graphic terms, by tacking the VAT due to the selling
price, the seller remains the person primarily and legally liable for the
payment of the tax. What is shifted only to the intermediate buyer and
ultimately to the final purchaser is the burden of the tax.22 Stated
differently, a seller who is directly and legally liable for payment of an
indirect tax, such as the VAT on goods or services, is not necessarily the
person who ultimately bears the burden of the same tax. It is the final
purchaser or end-user of such goods or services who, although not directly
and legally liable for the payment thereof, ultimately bears the burden of
the tax.23
There can be no serious argument that PLDT, vis-à-vis its payment of
internal revenue taxes on its importations in question, is effectively
claiming exemption from taxes not falling under the category of direct
taxes. The claim covers VAT, advance sales tax and compensating tax.
142 | P a g e
The NIRC classifies VAT as "an indirect tax … the amount of [which] may
be shifted or passed on to the buyer, transferee or lessee of the
goods".24 As aptly pointed out by Judge Amancio Q. Saga in his dissent in
C.T.A. Case No. 5178, the 10% VAT on importation of goods partakes of
an excise tax levied on the privilege of importing articles. It is not a tax on
the franchise of a business enterprise or on its earnings. It is imposed on
all taxpayers who import goods (unless such importation falls under the
category of an exempt transaction under Sec. 109 of the Revenue Code)
whether or not the goods will eventually be sold, bartered, exchanged or
utilized for personal consumption. The VAT on importation replaces the
advance sales tax payable by regular importers who import articles for
sale or as raw materials in the manufacture of finished articles for sale. 25
Advance sales tax has the attributes of an indirect tax because the tax-
paying importer of goods for sale or of raw materials to be processed into
merchandise can shift the tax or, to borrow from Philippine Acetylene Co,
Inc. vs. Commissioner of Internal Revenue,26 lay the "economic burden of
the tax", on the purchaser, by subsequently adding the tax to the selling
price of the imported article or finished product.
Compensating tax also partakes of the nature of an excise tax payable by
all persons who import articles, whether in the course of business or
not.27 The rationale for compensating tax is to place, for tax purposes,
persons purchasing from merchants in the Philippines on a more or less
equal basis with those who buy directly from foreign countries. 28
It bears to stress that the liability for the payment of the indirect taxes lies
only with the seller of the goods or services, not in the buyer thereof. Thus,
one cannot invoke one’s exemption privilege to avoid the passing on or the
shifting of the VAT to him by the manufacturers/suppliers of the goods he
purchased.29 Hence, it is important to determine if the tax exemption
granted to a taxpayer specifically includes the indirect tax which is shifted
to him as part of the purchase price, otherwise it is presumed that the tax
exemption embraces only those taxes for which the buyer is directly
liable.30
Time and again, the Court has stated that taxation is the rule, exemption is
the exception. Accordingly, statutes granting tax exemptions must be
construed in strictissimi juris against the taxpayer and liberally in favor of
the taxing authority.31 To him, therefore, who claims a refund or exemption
from tax payments rests the burden of justifying the exemption by words
too plain to be mistaken and too categorical to be misinterpreted.32
As may be noted, the clause "in lieu of all taxes" in Section 12 of RA 7082
is immediately followed by the limiting or qualifying clause "on this
franchise or earnings thereof", suggesting that the exemption is limited to
taxes imposed directly on PLDT since taxes pertaining to PLDT’s franchise
or earnings are its direct liability. Accordingly, indirect taxes, not being
taxes on PLDT’s franchise or earnings, are outside the purview of the "in
lieu" provision.
If we were to adhere to the appellate court’s interpretation of the law that
the "in lieu of all taxes" clauseencompasses the totality of all taxes
collectible under the Revenue Code, then, the immediately following
limiting clause "on this franchise and its earnings" would be nothing more
than a pure jargon bereft of effect and meaning whatsoever. Needless to
stress, this kind of interpretation cannot be accorded a governing sway
following the familiar legal maxim redendo singula singulis meaning, take
the words distributively and apply the reference. Under this principle, each
word or phrase must be given its proper connection in order to give it
proper force and effect, rendering none of them useless or superfluous. 33
Significantly, in Manila Electric Company [Meralco] vs. Vera,34 the Court
declared the relatively broader exempting clause "shall be in lieu of all
taxes and assessments of whatsoever nature … upon the privileges
earnings, income franchise ... of the grantee" written in par. # 9 of
Meralco’s franchise as not so all encompassing as to embrace indirect tax,
like compensating tax. There, the Court said:
It is a well-settled rule or principle in taxation that a compensating tax … is
an excise tax … one that is imposed on the performance of an act, the
engaging in an occupation, or the enjoyment of a privilege. A tax levied
upon property because of its ownership is a direct tax, whereas one levied
upon property because of its use is an excise duty. ….
143 | P a g e
The compensating tax being imposed upon … MERALCO, is an impost on
its use of imported articles and is not in the nature of a direct tax on the
articles themselves, the latter tax falling within the exemption. Thus,
in International Business Machine Corporation vs. Collector of Internal
Revenue, … which involved the collection of a compensating tax from the
plaintiff-petitioner on business machines imported by it, this Court stated in
unequivocal terms that "it is not the act of importation that is taxed under
section 190 but the uses of imported goods not subjected to a sales tax"
because the "compensating tax was expressly designated as a substitute
to make up or compensate for the revenue lost to the government through
the avoidance of sales taxes by means of direct purchases abroad.
xxx xxx xxx
xxx If it had been the legislative intent to exempt MERALCO from paying a
tax on the use of imported equipments, the legislative body could have
easily done so by expanding the provision of paragraph 9 and adding to
the exemption such words as "compensating tax" or "purchases from
abroad for use in its business," and the like.
It may be so that in Maceda vs. Macaraig, Jr.35 the Court held that an
exemption from "all taxes" granted to the National Power Corporation
(NPC) under its charter36 includes both direct and indirect taxes. But far
from providing PLDT comfort, Maceda in fact supports the case of herein
petitioner, the correct lesson of Maceda being that an exemption from "all
taxes" excludes indirect taxes, unless the exempting statute, like NPC’s
charter, is so couched as to include indirect tax from the exemption. Wrote
the Court:
xxx However, the amendment under Republic Act No. 6395 enumerated
the details covered by the exemption. Subsequently, P.D. 380, made even
more specific the details of the exemption of NPC to cover, among others,
both direct and indirect taxes on all petroleum products used in its
operation. Presidential Decree No. 938 [NPC’s amended charter)
amended the tax exemption by simplifying the same law in general terms.
It succinctly exempts NPC from "all forms of taxes, duties fees …."
The use of the phrase "all forms" of taxes demonstrate the intention of the
law to give NPC all the tax exemptions it has been enjoying before. ….
xxx xxx xxx
It is evident from the provisions of P.D. No. 938 that its purpose is to
maintain the tax exemption of NPC from all forms of taxes including
indirect taxes as provided under R.A. No. 6395 and P.D. 380 if it is to
attain its goals. (Italics in the original; words in bracket added)
Of similar import is what we said in Borja vs. Collector of Internal
Revenue.37 There, the Court upheld the decision of the CTA denying a
claim for refund of the compensating taxes paid on the importation of
materials and equipment by a grantee of a heat and power legislative
franchise containing an "in lieu" provision, rationalizing as follows:
xxx Moreover, the petitioner’s alleged exemption from the payment of
compensating tax in the present case is not clear or expressed; unlike the
exemption from the payment of income tax which was clear and expressed
in the Carcar case. Unless it appears clearly and manifestly that an
exemption is intended, the provision is to be construed strictly against the
party claiming exemption. xxx.
Jurisprudence thus teaches that imparting the "in lieu of all taxes" clause a
literal meaning, as did the Court of Appeals and the CTA before it, is
fallacious. It is basic that in construing a statute, it is the duty of courts to
seek the real intent of the legislature, even if, by so doing, they may limit
the literal meaning of the broad language.38
It cannot be over-emphasized that tax exemption represents a loss of
revenue to the government and must, therefore, not rest on vague
inference. When claimed, it must be strictly construed against the taxpayer
who must prove that he falls under the exception. And, if an exemption is
found to exist, it must not be enlarged by construction, since the
reasonable presumption is that the state has granted in express terms all it
intended to grant at all, and that, unless the privilege is limited to the very
144 | P a g e
terms of the statute the favor would be extended beyond dispute in
ordinary cases.39
All told, we fail to see how Section 12 of RA 7082 operates as granting
PLDT blanket exemption from payment of indirect taxes, which, in the
ultimate analysis, are not taxes on its franchise or earnings. PLDT has not
shown its eligibility for the desired exemption. None should be granted.
Factoring in the fact that a portion of the claim was barred by prescription,
the CTA had determined that PLDT is entitled to a total refundable amount
of ₱94,673,422.00 (₱87,257,031.00 of compensating tax + ₱7,416,391.00
= ₱94,673,422.00). Accordingly, it behooves the BIR to grant a refund of
the advance sales tax and compensating tax in the total amount of
₱94,673,422.00, subject to the condition that PLDT present proof of
payment of the corresponding VAT on said transactions.

As a final consideration, the Court takes particular stock, as the CTA WHEREFORE, the petition is partially GRANTED. The Decision of the
earlier did, of PLDT’s allegation that the Bureau of Customs assessed the Court of Appeals in CA-G.R. No. 47895 dated September 17, 1999
company for advance sales tax and compensating tax for importations is MODIFIED. The Commissioner of Internal Revenue is ORDERED to
entered between October 1, 1992 and May 31, 1994 when the value- issue a Tax Credit Certificate or to refund to PLDT only the of
added tax system already replaced, if not totally eliminated, advance sales ₱94,673,422.00 advance sales tax and compensating tax erroneously
and compensating taxes.40 Indeed, pursuant to Executive Order No. collected by the Bureau of Customs from October 1, 1992 to May 31,
27341 which took effect on January 1, 1988, a multi-stage value-added tax 1994, less the VAT which may have been due on the importations in
was put into place to replace the tax on original and subsequent sales question, but have otherwise remained uncollected.
tax.42 It stands to reason then, as urged by PLDT, that compensating tax
and advance sales tax were no longer collectible internal revenue taxes
under the NILRC when the Bureau of Customs made the assessments in
question and collected the corresponding tax. Stated a bit differently,
PLDT was no longer under legal obligation to pay compensating tax and
advance sales tax on its importation from 1992 to 1994.

Parenthetically, petitioner has not made an issue about PLDT’s allegations

concerning the abolition of the provisions of the Tax Code imposing the
payment of compensating and advance sales tax on importations and the
non-existence of these taxes during the period under review. On the
contrary, petitioner admits that the VAT on importation of goods has
"replace[d] the compensating tax and advance sales tax under the old Tax
Code".43

Given the above perspective, the amount PLDT paid in the concept of
advance sales tax and compensating tax on the 1992 to 1994 importations
were, in context, erroneous tax payments and would theoretically be
refundable. It should be emphasized, however, that, such importations
were, when made, already subject to VAT.

145 | P a g e

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-45355 January 12, 1990
THE PROVINCE OF MISAMIS ORIENTAL, represented by its
PROVINCIAL TREASURER, petitioner,
vs.
CAGAYAN ELECTRIC POWER AND LIGHT COMPANY, INC.
(CEPALCO), respondent.
Jaime A. Chaves for petitioner.
Quiason, Makalintal, Barot & Torres for respondent.
GRIÑO-AQUINO, J.:
The issue in this case is a legal one: whether or not a corporation whose
franchise expressly provides that the payment of the "franchise tax of
three per centum of the gross earnings shall be in lieu of all taxes and
assessments of whatever authority upon privileges, earnings, income,
franchise, and poles, wires, transformers, and insulators of the grantee."
(p. 20, Rollo), is exempt from paying a provincial franchise tax.
Cagayan Electric Power and Light Company, Inc. (CEPALCO for short)
was granted a franchise on June 17, 1961 under Republic Act No. 3247 to
install, operate and maintain an electric light, heat and power system in the
City of Cagayan de Oro and its suburbs. Said franchise was amended on
June 21, 1963 by R.A. No. 3570 which added the municipalities of
Tagoloan and Opol to CEPALCO's sphere of operation, and was further
amended on August 4, 1969 by R.A. No. 6020 which extended its field of
operation to the municipalities of Villanueva and Jasaan.
R.A. Nos. 3247, 3570 and 6020 uniformly provide that:
Sec. 3. In consideration of the franchise and rights hereby
granted, the grantee shall pay a franchise tax equal to three per
centum of the gross earnings for electric current sold under this
franchise, of which two per centum goes into the National
Treasury and one per centum goes into the treasury of the
Municipalities of Tagoloan, Opol, Villanueva and Jasaan and
Cagayan de Oro City, as the case may be: Provided, That the said
franchise tax of three per centum of the gross earnings shall be in
lieu of all taxes and assessments of whatever authority upon
privileges earnings, income, franchise, and
poles, wires, transformers, and insulators of the grantee from
which taxes and assessments the grantee is hereby expressly
exempted. (Emphasis supplied.)
On June 28, 1973, the Local Tax Code (P.D. No. 231) was promulgated,
Section 9 of which provides:
Sec. 9. Franchise Tax.—Any provision of special laws to the
contrary notwithstanding, the province may impose a tax on
businesses enjoying franchise, based on the gross receipts
realized within its territorial jurisdiction, at the rate of not exceeding
one-half of one per cent of the gross annual receipts for the
preceding calendar year.
In the case of newly started business, the rate shall not exceed
three thousand pesos per year. Sixty per cent of the proceeds of
the tax shall accrue to the general fund of the province and forty
per cent to the general fund of the municipalities serviced by the
business on the basis of the gross annual receipts derived
therefrom by the franchise holder. In the case of a newly started
business, forty per cent of the proceeds of the tax shall be divided
equally among the municipalities serviced by the business.
(Emphasis supplied.)
146 | P a g e
Pursuant thereto, the Province of Misamis Oriental (herein petitioner)
enacted Provincial Revenue Ordinance No. 19, whose Section 12 reads:
Sec. 12. Franchise Tax.—There shall be levied, collected and paid
on businesses enjoying franchise tax of one-half of one per cent of
their gross annual receipts for the preceding calendar year
realized within the territorial jurisdiction of the province of Misamis
Oriental. (p. 27, Rollo.)
The Provincial Treasurer of Misamis Oriental demanded payment of the
provincial franchise tax from CEPALCO. The company refused to pay,
alleging that it is exempt from all taxes except the franchise tax required by
R.A. No. 6020. Nevertheless, in view of the opinion rendered by the
Provincial Fiscal, upon CEPALCO's request, upholding the legality of the
Revenue Ordinance, CEPALCO paid under protest on May 27, 1974 the
sum of P 4,276.28 and appealed the fiscal's ruling to the Secretary of
Justice who reversed it and ruled in favor of CEPALCO.
On June 26, 1976, the Secretary of Finance issued Local Tax Regulation
No. 3-75 adopting entirely the opinion of the Secretary of Justice.
On February 16, 1976, the Province filed in the Court of First Instance of
Misamis Oriental a complaint for declaratory relief praying, among others,
that the Court exercise its power to construe P.D. No. 231 in relation to the
franchise of CEPALCO (R.A. No. 6020), and to declare the franchise as
having been amended by P.D. No. 231. The Court dismissed the
complaint and ordered the Province to return to CEPALCO the sum of
P4,276.28 paid under protest.
The Province has appealed to this Court, alleging that the lower court
erred in holding that:
1) CEPALCO's tax exemption under Section 3 of Republic Act No. 6020
was not amended or repealed by P.D. No. 231;
2) the imposition of the provincial franchise tax on CEPALCO would
subvert the purpose of P.D. No. 231;
3) CEPALCO is exempt from paying the provincial franchise tax; and
4) petitioner should refund CEPALCO's tax payment of P4,276.28.
We find no merit in the petition for review.
There is no provision in P.D. No. 231 expressly or impliedly amending or
repealing Section 3 of R.A. No. 6020. The perceived repugnancy between
the two statutes should be very clear before the Court may hold that the
prior one has been repealed by the later, since there is no express
provision to that effect (Manila Railroad Co. vs. Rafferty, 40 Phil. 224). The
rule is that a special and local statute applicable to a particular case is not
repealed by a later statute which is general in its terms, provisions and
application even if the terms of the general act are broad enough to
include the cases in the special law (id.) unless there is manifest intent to
repeal or alter the special law.
Republic Acts Nos. 3247, 3570 and 6020 are special laws applicable only
to CEPALCO, while P.D. No. 231 is a general tax law. The presumption is
that the special statutes are exceptions to the general law (P.D. No. 231)
because they pertain to a special charter granted to meet a particular set
of conditions and circumstances.
The franchise of respondent CEPALCO expressly exempts it from
payment of "all taxes of whatever authority" except the three per
centum (3%) tax on its gross earnings.
In an earlier case, the phrase "shall be in lieu of all taxes and at any time
levied, established by, or collected by any authority" found in the franchise
of the Visayan Electric Company was held to exempt the company from
payment of the 5% tax on corporate franchise provided in Section 259 of
the Internal Revenue Code (Visayan Electric Co. vs. David, 49 O.G. [No.
4] 1385).
Similarly, we ruled that the provision: "shall be in lieu of all taxes of every
name and nature" in the franchise of the Manila Railroad (Subsection 12,
Section 1, Act No. 1510) exempts the Manila Railroad from payment of
147 | P a g e
internal revenue tax for its importations of coal and oil under Act No. 2432
and the Amendatory Acts of the Philippine Legislature (Manila Railroad vs.
Rafferty, 40 Phil. 224).
The same phrase found in the franchise of the Philippine Railway Co.
(Sec. 13, Act No. 1497) justified the exemption of the Philippine Railway
Company from payment of the tax on its corporate franchise under Section
259 of the Internal Revenue Code, as amended by R.A. No. 39 (Philippine
Railway Co. vs. Collector of Internal Revenue, 91 Phil. 35).
Those magic words: "shall be in lieu of all taxes" also excused the
Cotabato Light and Ice Plant Company from the payment of the tax
imposed by Ordinance No. 7 of the City of Cotabato (Cotabato Light and
Power Co. vs. City of Cotabato, 32 SCRA 231).
So was the exemption upheld in favor of the Carcar Electric and Ice Plant
Company when it was required to pay the corporate franchise tax under
Section 259 of the Internal Revenue Code, as amended by R.A. No. 39
(Carcar Electric & Ice Plant vs. Collector of Internal Revenue, 53 O.G. [No.
4] 1068). This Court pointed out that such exemption is part of the
inducement for the acceptance of the franchise and the rendition of public
service by the grantee. As a charter is in the nature of a private contract,
the imposition of another franchise tax on the corporation by the local
authority would constitute an impairment of the contract between the
government and the corporation.
Recently, this Court ruled that the franchise (R.A. No. 3843) of the
Lingayen Gulf Electric Power Company which provided that the company
shall pay:
tax equal to 2% per annum of the gross receipts . . . and shall be
in lieu of any and all taxes . . . now or in the future . . . from which
taxes . . . the grantee is hereby expressly exempted and . . . no
other tax . . . other than the franchise tax of 2% on the gross
receipts as provided for in the original franchise shall be collected.
exempts the company from paying the franchise tax under Section 259 of
the National Internal Revenue Code (Commissioner of Internal Revenue
vs. Lingayen Gulf Electric Power Co., Inc., G.R. No. 23771, August 4,
1988).
On the other hand, the Balanga Power Plant Company, Imus Electric
Company, Inc., Guagua Electric Company, Inc. were subjected to the 5%
tax on corporate franchise under Section 259 of the Internal Revenue
Code, as amended, because Act No. 667 of the Philippine Commission
and the ordinance or resolutions granting their respective franchises did
not contain the "in-lieu-of-all-taxes" clause (Balanga Power Plant Co. vs.
Commissioner of Internal Revenue, G.R. No. L-20499, June 30, 1965;
Imus Electric Co. vs. Court of Tax Appeals, G.R. No. L-22421, March 18,
1967; Guagua Electric Light vs. Collector of Internal Revenue, G.R. No. L-
23611, April 24, 1967).
Local Tax Regulation No. 3-75 issued by the Secretary of Finance on June
26, 1976, has made it crystal clear that the franchise tax provided in the
Local Tax Code (P.D. No. 231, Sec. 9) may only be imposed on
companies with franchises that do not contain the exempting clause. Thus
it provides:
The franchise tax imposed under local tax ordinance pursuant to
Section 9 of the Local Tax Code, as amended, shall be collected
from businesses holding franchise but not from business
establishments whose franchise contain the "in-lieu-of-all-taxes-
proviso".
Manila Electric Company vs. Vera, 67 SCRA 351, cited by the petitioner, is
not applicable here because what the Government sought to impose on
Meralco in that case was not a franchise tax but a compensating tax on
the poles, wires, transformers and insulators which it imported for its use.
WHEREFORE, the petition for review is denied, and the decision of the
Court of First Instance is hereby affirmed in toto. No costs.
148 | P a g e

d. rationale/grounds for exemption
e. revocation of tax exemption
6. compensation anf set-off
7. compromise
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 167278 February 27, 2008
ATTY. GIL A. VALERA, CPA-LCB, Deputy Commissioner, Revenue
Collection Monitoring Group, Bureau of Customs, petitioner,
vs.
OFFICE OF THE OMBUDSMAN, rep. by Hon. ORLANDO C.
CASIMIRO, Deputy Ombudsman for the and Military Other Law
Enforcement Offices (MOLEO), in his capacity as Acting
Ombudsman; PNP-CIDG, rep. by Director General Eduardo S.
Matillano (public complainant); ATTY. ADOLFO CASARENO (private
complainant); Hon. CESAR V. PURISIMA, Secretary of Finance,
Department of Finance; Hon. ALBERTO D. LINA, Commissioner of
Customs, Bureau of Customs; Hon. ROBERTO D. GEOTINA, Deputy
Commissioner for Internal Administration Group, Bureau of
Customs; and HONORABLE COURT OF APPEALS(Fourth
Division), respondents.
DECISION
PUNO, C.J.:
Public office is a public trust.1 Public officers and employees must at all
times be accountable to the people, serve them with utmost responsibility,
integrity, loyalty and efficiency, and act with patriotism and justice, and
lead modest lives.2 With the numerous ills and negative perception
surrounding the revenue collection agencies of the government, this
mandate of our fundamental law becomes all the more relevant to the
present petition. Petitioner, a Deputy Commissioner of the Bureau of
Customs, seeks to reverse and set aside the Decision3 rendered by the
Court of Appeals which affirmed the Decision4 of the Office of the Deputy
Ombudsman for the Military and other Law Enforcement Offices (OMB-
MOLEO) finding him guilty of grave misconduct, and decreeing his
dismissal from the service with all the accessory penalties appertaining
thereto.
The records show that petitioner Gil A. Valera was appointed by President
Gloria Macapagal Arroyo as Deputy Commissioner of Customs in charge
of the Revenue Collection Monitoring Group on July 13, 2001. He took his
oath of office on August 3, 2001, and assumed his post on August 7 of the
same year.
On December 21, 2001, he filed in the Regional Trial Court (RTC) of
Manila, for and on behalf of the Bureau of Customs, a collection case with
prayer for the issuance of a writ of preliminary attachment for the collection
of P37,195,859.00 in unpaid duties and taxes against Steel Asia
Manufacturing Corporation (SAMC), which utilized fraudulent tax credit
certificates in the payment of its duties. The case, docketed as Civil Case
No. 01-102504, was raffled off to Branch 39 of the RTC of Manila.
On January 16, 2002, a writ of preliminary attachment was issued against
SAMC in the aforementioned case. The writ was duly implemented and
the raw materials, finished products and plant equipment of SAMC were
subsequently attached. Petitioner and SAMC entered into a compromise
agreement wherein the latter offered to pay on a staggered basis through
thirty (30) monthly equal installments the P37,195,859.00 duties and taxes
sought to be collected in the civil case.
149 | P a g e
On August 20, 2003, the Director of the Criminal Investigation and
Detention Group of the Philippine National Police, Eduardo Matillano, filed
a letter-complaint against petitioner with the Ombudsman, which reads:
Investigation conducted disclosed that Atty. Gil A. Valera was
appointed as Deputy Commissioner, Bureau of Customs by the
President on July 13, 2001, took his oath on August 03, 2001 and
assumed his post on August 07, 2001.
On January 30, 2002, while in the performance of his official
functions, Atty. Gil A. Valera had compromised the case against
the Steel Asia Manufacturing Corporation in Civil Case No. 01-
102504 before Branch 39, RTC Manila without proper authority
from the Commissioner of the Bureau of Customs in violation of
Section 2316 TCCP (Authority of the Commission to make
Compromise) and without the approval of the President, in
violation of Executive Order No. 156 and Executive Order No. 38.
Such illegal acts of Atty. Gil A. Valera indeed caused undue injury
to the government by having deprived the government of its right
to collect the legal interest, surcharges, litigation
expenses and damages and gave the Steel Asia unwarranted
benefits in the total uncollected amount of FOURTEEN MILLION
SEVEN HUNDRED SIXTY TWO THOUSAND FOUR HUNDRED
SIXTY SEVEN PESOS AND SEVENTY
CENTAVOS (P14,762,467.70),which is violative of Sections 3(e)
and (g) respectively of RA 3019.
Further investigation disclosed that Atty. Gil A. Valera while being
a Bureau of Customs official directly and indirectly had financial or
pecuniary interest in the CACTUS CARGOES SYSTEMS a
brokerage whose line of business or transaction, in connection
with which, he intervenes or takes part in his official capacity by
way of causing the employment of his brother-in-law, Ariel
Manongdo, thus, violating 3(h) of RA 3019 and RA 6713 and
Section 4, RA 3019 as against Ariel Manongdo.
Finally, investigation also disclosed that on April 21, 2002 Atty. Gil
A. Valera traveled to Hongkong with his family without proper
authority from the office of the President in violation of Executive
Order No. 298 (foreign travel of government personnel) dated May
19, 1995, thus, he committed an administrative offense of Grave
Misconduct.5
The administrative aspect of the complaint was docketed as OMB-C-A-03-
0379-J. On November 12, 2003, then Ombudsman Simeon V. Marcelo
issued a Memorandum6 to Special Prosecutor Dennis M. Villa-Ignacio,
inhibiting himself from the cases against the petitioner, and directing the
latter to act in his stead and place. Acting pursuant to this authority,
Special Prosecutor Villa-Ignacio made the finding that by entering into the
compromise agreement, petitioner may have made concessions that may
be deemed highly prejudicial to the government, i.e., waiver of the legal
interest and the penalty charges imposed by law, as well as the virtual
exoneration of SAMC of its fraudulent act of using spurious tax credit
certificates. He issued an Order7 placing petitioner on preventive
suspension for six (6) months without pay pending administrative
investigation on the matter.
On March 19, 2004, the petitioner filed his motion for reconsideration of
the preventive suspension order. Upon the lapse of the period8 within
which the Special Prosecutor, as acting Ombudsman, should have
resolved the motion for reconsideration, petitioner filed a Petition
for Certiorari and Prohibition before the Court of Appeals on March 29,
2004, docketed as CA-G.R. SP No. 83091 and raffled off to the Special
First Division.
On June 14, 2004, Special Prosecutor Villa-Ignacio inhibited himself from
the cases of herein petitioner in view of a complaint filed by the latter
against him. OMB-C-A-03-0379-J was next assigned to the OMB-MOLEO,
represented by respondent Orlando C. Casimiro.
On June 25, 2004, the Special First Division of the Court of Appeals
rendered a Decision9 setting aside the preventive suspension order of
Special Prosecutor Villa-Ignacio and directing him to desist from taking
any further action in OMB-C-A-03-0379-J. In so ruling, the appellate court
held mainly that Special Prosecutor Villa-Ignacio was not authorized by
law to sign and issue preventive suspension orders.
150 | P a g e
The OMB-MOLEO perfected an appeal from this decision on July 16,
2004. The appeal, docketed as G.R. No. 164250, was raffled off to the
Second Division of this Court, and was eventually elevated motu proprio to
the Court En Banc.
In the meantime, the adjudication of OMB-C-A-03-0379-J continued and
the respondent Deputy Ombudsman issued a Decision 10 finding the
petitioner administratively liable for grave misconduct and decreeing his
dismissal from the service, with all the accessory penalties appertaining
thereto. It was found that petitioner committed grave misconduct based on
the following charges:
(i) compromising the case against SAMC in Civil Case No. 01-
102504 before Branch 39, RTC Manila, without proper authority
from the Commissioner of the Bureau of Customs in violation of
Section 231611 of the Tariff and Customs Code, and without the
approval of the President in violation of Section 4(d) of Executive
Order (E.O.) No. 156 as amended by E.O. No. 38;12
(ii) causing the employment of his brother-in-law with the Cactus
Cargoes Systems, Inc. whose principal business involves
transactions with the Bureau of Customs in violation of Section
3(d) of Republic Act (R.A.) No. 3019;13 and
(iii) traveling to Hongkong without conforming with the guidelines
on the application to travel abroad for private purposes of public
officials.14
The petitioner questioned this decision before the Court of Appeals, via a
petition for review, and the case was raffled off to the 4 th Division and
docketed as CA G.R. SP. No. 86281.
The 4th Division of the Court of Appeals refrained from ruling on the first
charge against the petitioner in deference to this Court in G.R. No.
164250. It however found enough evidence to substantiate the second and
third charges and issued and promulgated its assailed decision affirming
the decision of respondent Deputy Ombudsman finding petitioner guilty of
grave misconduct. It held as follows:
After careful consideration of the matter, this Court finds it more
prudent to defer from deciding the matters raised in connection
with the first ground raised by petitioner in deference to the
Supreme Court which is now tackling the very same issues.
Respondents themselves argued that:
"Needless to state, the Office of the Ombudsman lost no
time in bringing the foregoing matters to the attention of
the Honorable Supreme Court in a petition for review
(G.R. No. 164250). Since then, the Supreme Court
has motu proprio elevated the case from the Second
Division to the Court En Banc,apparently because of the
serious nature of the issues raised against the honorable
Special First Division." (Rollo, p. 292)
It should also be considered that a ruling of the Supreme Court on
the applicability of Section 2316 of the TCC is determinative of the
existence of a basis to the charges made against petitioner.
Coming now to the second ground raised, petitioner asserted that
the respondents erred in finding him liable for the employment of
his brother-in-law Ariel N. Manongdo with CCSI, claiming that
there is no evidence that he had any participation in the
employment of said brother-in-law, to wit:
"But, nothing is contained in the decision under review,
particularly under the heading 'evidence for the
complainant', which shows that petitioner did anything or
performed any act or participated in any way, directly or
indirectly, in the employment of his brother-in-law, Ariel N.
Manongdo, with CCSI. Simply put, the finding of fact is
also a conclusion of law with no fact or iota of evidence to
support the discussion and conclusion in the decision
under review." (Rollo, p. 48)
151 | P a g e
Respondents countered that petitioner not only used his "official
ascendancy" (Rollo, p. 348) to cause the employment of his
brother-in-law with CCSI, but they further claimed that the joint-
affidavit (Rollo, pp. 88-93) of the elements of the Criminal
Investigation Detection Group (CIDG) showed that petitioner was
a co-owner of CCSI as shown by the fact that he invited his close
friends and relatives to the blessing of the brokerage firm. The
relevant portion of said joint-affidavit stated that:
"12. Further, during the conduct of our surveillance on the
lifestyle of Atty. Valera, we received information that he
has sent text messages to his close friends and relatives
for the blessing of his brokerage. The text of the message
is as follows" 'ON WED, INVITE KO KAYO SA BLESSING
NG BROKERAGE KO. ROOM 604, GLC Bldg., TM
KALAW cor MABINI 6 TO 8 PM.'
13. Atty. Gil A. Valera's visitors were mostly his
classmates from Ramon Magsaysay Cubao High School.
He gave our asset his professional card (Annex '35');
14. Our investigation disclosed that the GLC Bldg. is
owned by a certain Mr. GERARDO L. CONTRERAS.
According to Ms. JENNIE ESGUERRA, the building
administrator, party on the 6th Floor was the inauguration
of the CACTUS CARGOES SYSTEMS represented by its
Marketing Coordinator, Mr. ARIEL MONONGDO (sic). Our
information was that Monongdo is the brother-in-law of
Atty. Valera. Attached are the SEC Registration of Cactus
Cargo Inc., (Annex '36') and the Contract of Lease signed
by Mr. Ariel Monongdo the Marketing Manager of Cactus
with the building administrator (Annex '37')." (Rollo, pp.
91-92)
Respondents also asserted that CCSI is a customs brokerage firm
which necessarily deals on a regular basis with petitioner's office,
more particularly:
"The Code of Conduct and Ethical Standards (R.A. No.
6713), under Section 7, subpar. (b)(3) thereof, is very
specific in criminalizing the act of '(r)ecommend(ing) any
person to any position in a private enterprise which has a
regular or pending official transaction with their office.' On
the other hand, Section 3 (d) of the Anti Graft and Corrupt
Practices Act (sic) (R.A. No. 3019) punishes as criminal
offense a public officer's act of '(a)ccepting or having any
member of his family accept employment in a private
enterprise which has pending official business with him
during the pendency thereof or within one year after its
termination." (Rollo, pp. 349-350)
Parenthetically, petitioner also argued that this charge was also
held by the Special First Division to be "too trivial". However, the
Court considers that statement to have been made in relation to
the question of whether or not the deputy ombudsman had the
power to order petitioner's preventive suspension. That is, that
statement should not be read to be a disposition of the question
on the merits.
Now, to dispose of the matter, it should be noted that the findings
of the respondent Deputy Ombudsman regarding the second
charge was based on two (2) grounds: first, the alleged act of
using petitioner's influence to obtain employment for his brother-in-
law and, second, the mere fact of employment of his brother-in-
law in a company which has regular business with petitioner's
office.
While the evidence regarding the alleged use of influence by the
petitioner to cause the employment of his brother-in-law maybe a
little tenuous, the Court finds basis to the second ground. The
Court notes that petitioner did not deny that CCSI has regular
transactions with his office. Neither did he deny that Ariel
Monongdo is his brother-in-law. Under Section 3(d) of R.A. No.
3019, as amended, mere acceptance by a member of his family of
employment with a private enterprise which has pending official
business with the official involved is considered a corrupt practice.
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It is clear, therefore, that mere acceptance by Ariel Manongdo, a
family member, of the employment with CCSI rendered petitioner
liable under the law. The Court, therefore, agrees with respondent
Deputy Ombudsman when he held that:
"Moreover, the Anti-Graft and Corrupt Practices Act (R.A.
3019) prohibits the public officer's act of accepting or
having any member of his family accept employment in a
private enterprise which has pending official business with
him during the pendency thereof or within one year after
its termination. Ariel N. Manongdo, as brother-in-law of
respondent Valera falls squarely within the definition of
family under Section 4 of the same law." (Rollo, p. 70)
Coming now to the matter of his travel to Hongkong which is the
subject matter of the third objection raised by petitioner, he first
argued that his constitutional right to be informed of the charges
against him had been violated. He asserted that while the
Matillano Complaint charged him with violating E.O. No. 278, the
questioned Decision was based on E.O. No. 39.
The Court does not agree with this assertion. It should be
remembered that the present case is an administrative case while
Section 14 of Art. 3 of the 1987 Constitution refers strictly to
criminal prosecution. Said Constitutional provision reads:
"SECTION 14. (1) No person shall be held to answer for a
criminal offense without due process of law. (2) In all
criminal prosecutions, the accused shall be presumed
innocent until the contrary is proved, and shall enjoy the
right to be heard by himself and counsel, to be informed of
the nature and cause of the accusation against him, to
have a speedy, impartial, and public trial, to meet the
witnesses face to face, and to have compulsory process
to secure the attendance of witnesses and the production
of evidence in his behalf. However, after arraignment, trial
may proceed notwithstanding the absence of the accused
provided that he has been duly notified and his failure to
appear is unjustifiable."
It is well-settled that in an administrative case, due process is
served when the respondent was given an opportunity to be heard
(Utto v. Comelec, 375 SCRA 523 [2002]). In the instant case,
petitioner cannot deny that he was given all the opportunity to
present his side of the story. Thus, the Court agrees with
respondents when they argued:
"It is, thus, unfortunate that instead of demonstrating that
he either complied with the requirement of presidential
authority to travel that petitioner, as a lawyer, presumably
knows to have existed (sic), or that he was legitimately
exempted therefrom, petitioner instead resorted to the
unavailing technicality that the complaint did not properly
identify by the correct number [the] EO in point. Petitioner
invokes the right to be informed of charges against an
accused which, needless to state, has specific application
to criminal charges. Needlessly, however, even in criminal
cases, what matters is not the title of the law violated but
rather the allegations of acts constituting a crime. In his
case, the allegation in the complaint was simply that
petitioner did not comply with the requirement for
presidential authority to travel abroad. It certainly fully
informed him of his infraction. After the issue was joined
on such factual allegation, identifying and enforcing the
applicable law by the public respondent simply followed as
part and parcel of its quasi-judicial function." (Rollo, p. 35)
Turning now to his defense that his foreign travel should not be
taken against him because at the time he made the travel with his
family, he was a private citizen because he was prevented by a
temporary restraining order issued by this Court in CA-G.R. SP
No. 69855 (in the case entitled Rosqueta versus Hon. Judge Juan
Nabong) from assuming office and from dispossessing then
Deputy Commissioner Rosqueta of the position of Deputy
Commissioner.
153 | P a g e
 The Court cannot subscribe to this argument. Under the theory
proposed by petitioner, there was in effect an interegnum as to his
government service during the effectivity of the TRO. But it cannot
be denied that once CA-G.R. SP No. 69855 was decided and
petitioner was allowed to assume his position, the effectivity of his
appointment retroacted to the original date of appointment. While
the temporary restraining order was in effect, he nevertheless
continued to assert on his right to the office. The Court also notes
that petitioner did not even present any evidence to show that he
had dissociated himself from the office at the time in question. As
pointed out by the respondents' Comment:
"For that matter, petitioner cannot claim that he suffered a
gap in his public service during the period covered by the
so-called TRO. He certainly was not dissociated from
office during such period. He continued to be a public
officer, notwithstanding, such that the application on him
of the presidential authority to travel can not be deemed to
have been then suspended." (Rollo, p. 356)
xxx
In fine, while the Court refrained from tackling the first charge
against petitioner, the Court finds that as to the second and third
charges, respondent Deputy Ombudsman did not err in finding
petitioner guilty of grave misconduct.15
On September 30, 2005, without going into the issue of petitioner's guilt,
the Court En Banc rendered a decision in G.R. No. 164250 ruling that the
power to place a public officer or employee under preventive suspension
pending an investigation is lodged only with the Ombudsman or the
Deputy Ombudsmen and affirmed the nullification and setting aside by the
appellate court of the preventive suspension order of the Special
Prosecutor.
Petitioner now comes before us praying that he be absolved of the
charges against him and that the decision of the 4th Division of the Court of
Appeals which effectively affirmed the decision of the OMB-MOLEO be
annulled and set aside.
We shall now put a finis to this controversy that has raged bitterly for the
past several months and shun further delay so as to ensure that this case
would really attain finality and resolve whether petitioner is guilty of grave
misconduct in connection with administrative case OMB-C-A-03-0379-J.
First, we discuss the definition of grave misconduct as established by
jurisprudence:
Misconduct is a transgression of some established and definite rule of
action, more particularly, unlawful behavior or gross negligence by a public
officer.16 The misconduct is grave if it involves any of the additional
elements of corruption, willful intent to violate the law or disregard of
established rules, which must be proved by substantial evidence.17
At the onset, the Court would like to point out that in an administrative
proceeding, the quantum of proof required for a finding of guilt is only
substantial evidence, that amount of relevant evidence which a reasonable
mind might accept as adequate to justify a conclusion. 18 We reiterate the
well-settled rule that, when supported by substantial evidence and absent
any clear showing of abuse, arbitrariness or capriciousness, findings of
fact of administrative agencies, especially when affirmed by the Court of
Appeals, are binding and conclusive upon this Court.19 After a thorough
examination of the evidence on record, we find no reason to depart from
this rule.
With respect to the second and third charges against the petitioner, the
4th Division of the Court of Appeals agreed with the findings of the OMB-
MOLEO. The petitioner utterly failed to show that the factual findings of the
respondent, affirmed by the appellate court, were attended with
arbitrariness or abuse. The Matillano letter-complaint as well as its
supporting affidavits made clear allegations under oath that petitioner
recommended his brother-in-law, Ariel Manongdo, for employment with
Cactus Cargoes Systems, Inc. (CCSI), a customs brokerage firm which
necessarily deals on a regular basis with petitioner's office. Further, the
Matillano letter-complaint also categorically asserted that petitioner
154 | P a g e
traveled to Hongkong without obtaining the proper clearance. These
allegations under oath constitute substantial evidence required in
administrative proceedings.
On the other hand, petitioner did not deny that Ariel Manongdo is his
brother-in-law or that CCSI has regular transactions with his office. Neither
did he deny that he failed to comply with the requirement of presidential
authority to travel abroad. It is thus unfortunate that instead of
demonstrating that he is innocent of the charges, the petitioner instead
resorted to unavailing technicalities to disprove the allegations. The
Supreme Court cannot weigh once more the evidence submitted not only
before the Office of the Ombudsman but also before the Court of Appeals.
All told, we are convinced that there is substantial evidence to hold
petitioner liable for the second and third charges against him.
Be that as it may, petitioner raises some legal issues regarding these
charges which we shall settle.
Anent the second charge, petitioner contends that under Section 3(d) of
R.A. No. 3019,20 a brother-in-law is not included within the scope of the
word "family" and therefore, he cannot be found liable under the said law.
In arguing so, petitioner refers to the definition of the word "family" found
under Section 3(g) of R.A. No. 6713, which states:
SEC. 3. Definition of Terms. - As used in this Act, the term:
xxx
(g) "Family of public officials or employees" means their spouses
and unmarried children under eighteen (18) years of age.
This contention deserves scant consideration.
Section 3 of R.A. No. 6713 is unequivocal in that its definition of terms is
limited to as used in the Act. Under R.A. No. 6713, the term "family" was
used only once under Section 4, par. (h),21 which implores public officials
and employees and their families to observe "simple living." The restrictive
definition accorded to the word "family" under the law is logical since
children of public officials and employees who are above eighteen and
already emancipated by law and freed from parental authority should not
be bound by this standard where their emancipation may lead them to an
otherwise private lifestyle or one which is not beholden to the public trust.
This otherwise perfect logic would result in irrationality if we follow the
contention of petitioner that the definition of "family" under R.A. No. 6713
should also apply to R.A. No. 3019. It makes no rhyme nor reason to
suppose that public officials and employees are prohibited from having
their children under eighteen years accept employment in a private
enterprise having pending official business before their office, and yet are
allowed to have their children over eighteen years, which is the
employable age, to do so.
What petitioner fails to mention is that R.A. No. 6713 itself prohibits the act
of public officials and employees during their incumbency to
recommend any person to any position in a private enterprise which has a
regular or pending official transaction with their office.22 Certainly, the
definition of the word "family" under said law would unduly limit and render
meaningless Section 3(d) of R.A. No. 3019 if applied to the latter. In fact,
family relation is defined under Section 4 of R.A. No. 301923 which,
according to the said section, "shall include the spouse or relatives by
consanguinity or affinity in the third civil degree." Thus, we need not look
beyond the provisions of R.A. No. 3019 to hold that a brother-in-law falls
within the definition of family under Section 3(d) thereof.
Proceeding now to the legal issue with respect to the third charge, it is
advanced by petitioner that a public official reverts to his quo ante status
as a private citizen upon being subjected to a temporary restraining order
directing him to refrain from holding his office. Hence, he need not comply
with the requirements for traveling abroad during said period.
We are not persuaded.
We agree with the appellate court that petitioner suffered no gap in his
public service while the temporary restraining order was in effect. The
nature of a temporary restraining order which would have the effect of
155 | P a g e
preventing a public officer from discharging his office is provisional until a
preliminary injunction is issued by the court hearing the case. Because of
its temporary character, it would not have the effect of divesting such
officer of the public character of his office.
It cannot be denied that once CA-G.R. SP No. 69855 was decided and
petitioner was allowed to re-assume his office, the effectivity of his
appointment retroacted to the original date of his appointment. He certainly
remained as a public officer during such period and it was incumbent upon
him, especially since he was continuously asserting his right to the office,
to comply with the guidelines on the application to travel abroad for private
purposes24 of public officials.
We now come to the pivotal first charge facing petitioner that was left
unresolved by the Court of Appeals in deference to this Court - that of
compromising the case against SAMC without prior authorization from the
Commissioner of Customs in violation of Section 231625 of the Tariff and
Customs Code, and without prior approval of the President as required by
Section 4(d)26 of E.O. No. 156 as amended by E.O. No. 38.
Prefatorily, we emphasize that violations or disregard of regulations
governing the collection of government funds are administratively
sanctionable. Intended to raise revenue for government operations, these
regulations must be followed strictly.
On the first provision of the special law alleged to have been violated by
petitioner, Title VI Book II of the Tariff and Customs Code entitled
"ADMINISTRATIVE AND JUDICIAL PROCEEDINGS" is divided as
follows:
1. Part 1 - Search, Seizure and Arrest,
2. Part 2 - Administrative Proceedings,
3. Part 3 - Judicial Proceedings,
4. Part 4 - Surcharges, Fines and Forfeitures,
5. Part 5 - Disposition of Property in Customs Custody, and
6. Part 7 - Fees and Charges. (Note: No Part 6)
According to petitioner, Sections 2301 up to 2316 are provisions found
under Part 2 and pertain to administrative proceedings, while Sections
2401 and 2402 are provisions found under Part 3 and pertain to judicial
proceedings. Section 2316 provides:
Section 2316. Authority of Commissioner to make Compromise.-
Subject to the approval of the Secretary of Finance, the
Commissioner of Customs may compromise any case arising
under this Code or other laws or part of laws enforced by the
Bureau of Customs involving the imposition of fines, surcharges
and forfeitures unless otherwise specified by law.
While Section 2401 as amended, which was made by petitioner as basis
for his entering into the compromise agreement, provides:
Section 2401. Supervision and Control over Criminal and Civil
Proceedings.-Civil and criminal actions and proceedings instituted
in behalf of the government under the authority of this Code or
other law enforced by the Bureau shall be brought in the name of
the government of the Philippines and shall be conducted by
customs officers but no civil or criminal action for the recovery of
duties or the enforcement of any fine, penalty or forfeiture under
this Code shall be filed in court without the approval of the
Commissioner.
Thus, for petitioner, since the case wherein the compromise agreement
was entered into was already pending before a regular court, the
requirement of prior authority of the Commissioner of Customs to enter
into a compromise is not necessary.
This contention must fail.
156 | P a g e
Basic is the maxim in statutory construction that a statute must be read or
construed as a whole or in its entirety. All parts, provisions, or sections,
must be read, considered or construed together, and each must be
considered with respect to all others, and in harmony with the whole.27
A reading of the provisions cited by the petitioner will show that there is
really no conflict between them. Section 2401 covers the matter of the
institution and filing of civil and criminal actions by customs officers, which
is subject to the approval of the Commissioner if filed for the recovery of
duties or the enforcement of any fine, penalty or forfeiture under the Code.
It does not cover the compromise of such civil or criminal actions, while
Section 2316 is the provision that deals with such a situation. In fact, the
latter is categorical in providing an encompassing scope for the strict
conditions for any compromise. Its coverage includes "any case arising
under this code or other laws or part of laws enforced by the Bureau
of Customs involving the imposition of fines, surcharges and
forfeitures unless otherwise specified by law." Doubtless, civil cases
for collection of customs taxes and duties, including the one in the case at
bar, would fall under this coverage.
To be sure, the adoption of petitioner's interpretation of these provisions
would result in absurdity that could not have been intended by Congress.
Following his logic, the Commissioner of Customs has to actively
participate and seek the approval of the Secretary of Finance in
compromising administrative collection cases; whereas, customs officers
without even seeking authority from the Commissioner or approval from
the Secretary of Finance can proceed to bargain off much larger collection
cases in courts. Clearly, the Court cannot countenance the abuse and
corruption engendered by this misreading of the law.
Petitioner next claims that there was no violation of Section 4(d) 28 of E.O.
No. 156 as amended by E.O. No. 38, when he entered into the
compromise agreement without the express approval of the President.
E.O. No. 156, as amended by E.O. No. 38, created a Special Task Force
to investigate and prosecute the irregularities relative to the "tax credit
scam" committed at the center of the Department of Finance and to
recover and collect revenues lost by the government through the "scam."
Section 4(d) thereof provides:
Section 4. Powers, Duties and Functions. The Task Force shall
have the following powers, duties and functions:
xxx
d) To recommend the settlement of cases for approval of the
President, subject to appropriate rules on the settlement of claims
by the government;
In the case at bar, and during the time relevant to this case,29 specifically
on May 10, 2002, the then Chairman of the Task Force, Department of
Finance Undersecretary Cornelio Gison, reported to the then Department
of Finance Secretary Jose Isidro Camacho the successful collection by
petitioner of P37,195,859.00 in the SAMC case. On October 3, 2002, in his
Memorandum,30 Department of Finance Undersecretary Innocencio P.
Ferrer, Jr., who succeeded Undersecretary Gison, also congratulated
petitioner for his accomplishment in the said case.
Petitioner invokes the principle of qualified political agency wherein these
acts of the Special Task Force Chairmen - who both approved the
compromise agreement and lauded him for his accomplishment in the
recovery efforts against the original grantees and buyers of fraudulently
secured tax credit certificates - should be considered as approval by the
President herself, especially since she did not disapprove of nor reprobate
their acts.
This argument is likewise unavailing.
E.O. No. 156, as amended by E.O. No. 38, is clear in its requirement
that in cases involving tax credit scams the favorable
recommendation for approval by the Special Task Force and the
approval by the President of the Republic are both required. The
approval by the Chairmen of the Special Task Force is still subject to
approval of the President. Prior presidential approval is the highest form of
157 | P a g e
check and balance within the Executive branch of government and cannot
be satisfied by mere failure of the President to reverse or reprobate the
acts of subordinates. To sanction otherwise would be to ask the Court to
reward passivity and render nugatory the fundamental safeguard required
under the law.
The Court notes that in Civil Case No. 01-102504, SAMC defrauded the
government of the amount of P37,195,859.00 in unpaid duties and taxes
with the use of fraudulent tax credit certificates that were directly and
originally procured by its officials on the basis of inexistent supporting
documents. The legal interest, surcharges, litigation expenses and
damages of this principal amount totaled a staggering P14,762,467.70,
which petitioner effectively waived through his entering into a compromise
agreement with SAMC. We find lamentable the utter disregard of the legal
requirements for entering into a compromise displayed by petitioner which
is further aggravated by the fact that there were already sufficient
properties of SAMC that were attached in the said case to satisfy not only
the principal amount owed but also the penalties, surcharges and
interests.
No amount of reasoning can infuse an empty plea to justify this
bloodletting. Fundamental it is in law that taxes being the lifeblood of the
government,31 such must be continuously replenished and carefully
preserved-and no public official should maintain a standard lower than
utmost diligence in keeping our revenue system flowing. It is not for any
government official to deem it within his complete control to let precious
blood flow to the private sphere where it would have been rightfully and
lawfully collected by the public through the government.
Persons appointed to the revenue collection agencies of the government,
like petitioner, ought to live up to the strictest standards of honesty and
integrity in the public service and must at all times be above suspicion.
Because of the nature of their office, the officials and employees of the
Bureau of Customs should serve as the primary role models in the faithful
observance of the constitutional canon that public office is a public trust.
Petitioner, being a Deputy Commissioner of the Revenue Collection
Monitoring Group, should know that his actuations reflect adversely on the
integrity and efficiency of his office and erode the faith and confidence of
our people in its daily administration. We find that the totality of petitioner's
acts constitutes flagrant disregard of established rules constitutive of grave
misconduct.
One final note. It appears that petitioner is no longer a Deputy
Commissioner of Customs.32 This fact, however, does not render this
petition moot and academic. As held in Gallo v. Cordero:
. . . [T]he jurisdiction that was ours at the time of the filing of the
administrative complaint was not lost by the mere fact that the
respondent public official had ceased to be in office during the
pendency of his case. The Court retains its jurisdiction either to
pronounce the respondent official innocent of the charges or
declare him guilty thereof. A contrary rule would be fraught with
injustices and pregnant with dreadful and dangerous implications.
For what remedy would the people have against a judge or any
other public official who resorts to wrongful and illegal conduct
during his last days in office? xxx If innocent, respondent official
merits vindication of his name and integrity as he leaves the
government which he has served well and faithfully; if guilty, he
deserves to receive the corresponding censure and a penalty
proper and imposable under the situation. 33
WHEREFORE, premises considered, the petition is DENIED. The assailed
Decision dated February 28, 2005 of the Court of Appeals in CA G.R. SP.
No. 86281 is hereby AFFIRMED.
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