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[G.R. No. L-10114. November 26, 1957.

BISAYA LAND TRANSPORTATION CO., INC., Petitioner, v. COURT OF INDUSTRIAL RELATIONS and
PHILIPPINE MARINE RADIO OFFICERS ASSOCIATION, Respondents.

Nicolas Belmonte & Silverio B. Rey for Petitioner.

Mariano B. Tuason for respondent CIR.

Villaluz, Viola & Associates for respondent Philippine Marine Radio Officers’ Association.

SYLLABUS

1. EMPLOYER AND EMPLOYEE; STRIKE AND LOCKOUTS; RETURN OF STRIKERS TO WORK NOT WAIVER OF
DEMANDS. — The PHILMAROA presented its demands for the standardization and increase of salaries, sick
and vacation leaves, hospitalization, and closed shop agreement. Thereafter notice of intention to strike was
filed in the Conciliation Service Division of the Department of Labor against the employer. Pending the
resolution of the dispute by the CIR of the Presidential Certification to it, of the said dispute, two radio
operators abandoned their ships by some weeks thereafter, they returned to work and readmitted by the
employer. The question is whether the return of the radio officers was a waiver of the demands of the labor
Union, Held: that the strike in the case at bar was adopted by the union to compel the employer to accede
to its demands. The strike was but one of the means employed to achieve its ends. When the radio officers
returned to work after the strike, such return did not imply the waiver of the original demands. The fact that
the radio operators returned to work and ended their strike only meant that they desisted from the strike;
such desistance is a personal act of the strikers and cannot be used against the union and interpreted as a
waiver by it of its regional demands for which the strike was adopted as a weapon.

2. ID.; UNION CRAFT HAS POWER TO BARGAIN COLLECTIVELY. — A Union craft, such as the one to which
the radio operators belonged, is expressly recognized in the Industrial Peace (section 9 (f), paragraphs 1
and 2, Republic Act No. 875) and its right and power to bargain collectively is recognized.

3. ID.; EMPLOYEE’S AFFILIATION WITH ANOTHER LABOR UNION; RIGHT TO BARGAIN COLLECTIVELY. —
The contention that the PHILMAROA has no right to bargain collectively for radio operators employed by the
employer in the case at bar, because these radio operators are affiliated with another local labor union to
which the union most of the employees of said employer are affiliated is without merit. The PHILMAROA
acted as representative of the radio operators N and O as radio operators not as mere employees of the
employer. There is no prohibition in the law against employees affiliating with a craft union as well as with
an ordinary labor union. . As PHILMAROA represented the interest of N and O as radio operators said union
was fully competent to represent them in the proceedings in said capacity.

4. ID.; PRESIDENTIAL CERTIFICATION OF LABOR DISPUTE; NOT LIMITED TO PREVENT STRIKES AND
LOCKOUTS. — There is no reason or ground for the contention that Presidential certification of labor dispute
to the CIR is limited to the prevention of strikes and lockouts. Even after a strike has been declared where
the President believes that public interest demands arbitration and conciliation, the President may certify the
case for that purpose. The practice has been for the Court of Industrial Relations to order the strikers to
return to work , pending final determination of the union demands that impelled the strike. There is nothing
in the law to indicate that this practice is abolished.

DECISION

LABRADOR, J.:

Appeal by certiorari instituted by petitioner against the decision of the Court of Industrial Relations in its
case No. 4 L-IPA entitled the Philippine Marine Radio Officers’ Association v. Compañia Maritima, Et. Al.

This case is intimately related to G. R. No. L-10095 and G. R No. L-10115, already resolved by Us in a
decision promulgated last October 31, 1957. Insofar as this appeal is concerned, it appears that the
PHILMAROA presented its demands for standardization and increase of salaries, sick and vacation leaves,
hospitalization, and closed shop agreement on September 26, 1953. On October 24, 1953, notice of
intention to strike was filed in the Conciliation Service Division of the Department of Labor against the
petitioners herein. Pending the resolution of the dispute by the Court of Industrial Relations, by reason of
the presidential certification to it of the said dispute, Benjamin Nadanza and Arcadio Ouano abandoned their
ships, which belong to the petitioner, on November 30 and December 7, 1953, respectively. But some weeks
thereafter said radio operators came back and, upon their request, were readmitted by the company. In the
court below the petitioner herein alleged that the strike was unlawful because no notice of the strike was
served directly to it. It was also contended that with the reinstatement of the radio operators there was no
longer any cause of action against the Bisaya Land Transportation Co., petitioner herein. The court a quo
held that the illegality of the strike was waived by the Bisaya Land Transportation Company when it
accepted the striking radio operators. As to the Absence of the cause of action against the petitioner herein,
the court a quo held that this defense is good as against the reinstatement and backpay of the striking radio
operators, but not as to the prosecution of the demands contained in the original petition of the union.

On this appeal the petitioner assigns the following errors: jgc:chan roble s.com.p h

"I. THE PETITIONER-UNION, NOW RESPONDENT, HAS NO CAUSE OF ACTION AGAINST THE BISAYA LAND
TRANSPORTATION CO., INC.

"II. THE PETITIONER-UNION BEING ONLY A CRAFT UNION HAS NO RIGHT OR POWER TO BARGAIN
COLLECTIVELY.

"III. THE PETITIONER-UNION HAS NO RIGHT OR POWER TO BARGAIN COLLECTIVELY FOR RADIO
OPERATORS NADANZA AND OUANO AS BOTH OF THEM ARE AFFILIATED WITH ANOTHER LOCAL LABOR
UNION IN CEBU, THE PHILIPPINE MARINE & SHIPPING EMPLOYEES ASSOCIATION (PHILMASEA), WITH
WHICH THE GREAT MAJORITY OF THE EMPLOYEES OF THE BISAYA LAND TRANSPORTATION CO., INC. ARE
AFFILIATED.

"IV. THE STRIKE OR ABANDONING OF THEIR POSTS BY THE RADIO OPERATORS WAS NOT LEGAL.

"V. THE CERTIFICATION OF THE CASE TO THE C.I.R. BY THE PRESIDENT OF THE PHILIPPINES WAS NULL
AND VOID. "VI. THE COURT OF INDUSTRIAL RELATIONS HAD NO JURISDICTION OVER THE CASE." cralaw virtua 1aw lib rary

In support of the first assignment of error, it is claimed that when the radio operators employed by the
petitioner went back to work and the latter reinstated them, the parties thereby waived any of the grounds
that they may have had for striking. There is absolutely no merit in this contention. The strike in this case
was adopted by the union to compel the respondent shipping company to accede to its demands. The strike
was but one of the means employed to achieve its ends. When the radio officers returned back to work after
the strike, such return did not imply the waiver of the original demands. The fact that the radio operators
returned back to work and ended their strike only meant that they desisted from the strike; such desistance
is a personal act of the strikers, and cannot be used against the union and interpreted as a waiver by it of its
original demands for which the strike was adopted as weapon.

The second assignment of error is also without merit as held by the court below. A union craft, such as the
one to which the radio operators belonged, is expressly recognized in the Industrial Peace Act (Sec. 9 [f],
pars. 1 & 2 Rep. Act No. 875) and its right and power to bargain collectively is recognized.

In third assignment of error it is claimed that the PHILMAROA has no right to bargain collectively for the
radio operators employed by the petitioner Bisaya Land Transportation Company, because these radio
operators are affiliated with another local union to which union most of employees of the petitioner union
are affiliated. This contention is also without merit. The PHILMAROA acted as representatives of the radio
operators Nadanza and Ouano, as radio operators, not as mere employees of the Bisaya Land Transportation
Company. There is no prohibition in the law against employees affiliating with a craft union as well as with
an ordinary labor union. As the PHILMAROA represented the interest of Nadan and Ouano as radio
operators, said union was fully competent to represent them in the proceedings in said capacity.

In the fourth assignment of error it is claimed that the strike was illegal. Admitting for the sake of argument
that the strike was illegal for being premature, this defense was waived by the Bisaya Land Transportation
Company when it voluntarily agreed to reinstate the radio operators.
The fifth assignment of error refers to the supposed invalidity of the presidential certification of the case to
the Court of Industrial Relations. It is argued that the real purpose of certification is to avoid or prevent
strikes and lockouts, but that since the strike in this case occurred before the certification, the latter was
null and void. There is no reason or ground for the contention that presidential certification is limited to the
prevention of strikes and lockouts. Even after a strike has been declared, where the President believes that
public interest demands arbitration and conciliation, the President may certify the case for that purpose. The
practice has been for the Court of Industrial Relations to order the strikers to return to work, pending final
determination of the union demands that impelled the strike. There is nothing in the law to indicate that the
practice is abolished.

The last assignment of error is so clearly unfounded as to deserve no consideration on Our part other than a
statement that it is without merit.

The petition is hereby denied and the resolution appealed from, affirmed. With costs against petitioner.
G.R. Nos. L-31776-78 October 21, 1993

THE COMMISSIONER OF CUSTOMS, petitioner,


vs.
MANILA STAR FERRY, INC., UNITED NAVIGATION & TRANSPORT CORPORATION, CEABA
SHIPPING AGENCY, INC., and THE COURT' OF TAX APPEALS, respondents.

The Solicitor General for petitioner.

Tañada, Vivo & Tan for private respondents.

Valentino G. Castro & Associates for CEABA.

QUIASON, J.:

This is a petition for review under Rule 44 of the Revised Rules of Court filed by the Commissioner
of Customs to set aside the consolidated Decision dated September 30, 1969 of the Court of Tax
Appeals in C.T.A. Cases Nos. 1836, 1837 and 1839, modifying his decision by ordering only the
payment of a fine, in lieu of the forfeiture of private respondents vessels used in the smuggling of
foreign-made cigarettes and other goods.

Private respondents Manila Star Ferry, Inc. and the United Navigation & Transport Corporation are
domestic corporations engaged in the lighterage business and are the owners and operators,
respectively, of the tugboat Orestes and the barge-lighter UN-L-106. Private respondent Ceaba
Shipping Agency, Inc. (Ceaba) is the local shipping agent of the Chiat Lee Navigation Trading Co. of
Hongkong, the registered owner and operator of the S/S Argo, an ocean-going vessel.

On June 12, 1966, the S/S Argo, the Orestes and the UN-L-106, as well as two wooden bancas of
unknown ownership, were apprehended for smuggling by a patrol boat of the Philippine Navy along
the Explosives Anchorage Area of Manila Bay. the patrol boat caught the crew of the S/S Argo in the
act of unloading foreign-made goods onto the UN-L-106, which was towed by the Orestes and
escorted by the two wooden bancas. The goods of 330 cases of foreign-made cigarettes, assorted
ladies' wear, clothing material and plastic bags, all of which were not manifested and declared by the
vessel for discharge in Manila. No proper notice of arrival of the S/S Argo was given to the local
customs authorities.

Thereafter, seizure and forfeiture proceedings were separately instituted before the Collector of
Customs for the Port of Manila against the S/S Argo (Seizure Identification Case No. 10009, Manila)
and its cargo (S.I. No. 10009-C, Manila), the Orestes (S.I. No. 10009-A, Manila), the UN-L-106 (S.I.
No. 1009-B, Manila) and the two bancas (S.I. No. 10009-D, Manila), charging them with violations of
Section 2530 (a), (b) and (c) of the Tariff and Customs Code. Criminal charges were likewise filed
against the officers and crew of said vessels and watercraft.

In the seizure and forfeiture proceedings, the Collector of Customs rendered a consolidated decision
dated December 27, 1966, declaring the forfeiture of said vessels and watercraft in favor of the
Philippine government by virtue of Section 2530 (a) and (b) of the Tariff and Customs Code.

All respondents therein, except the owner of the two wooden bancas, separately appealed the
consolidated decision of the Collector of Customs for the Port of Manila to the Commissioner of
Customs. In his Decision dated February 1, 1967, the Acting Commissioner of Customs found the
Collector's decision to be in order and affirmed the same accordingly.

The same respondents separately elevated the matter to the Court of Tax Appeals (C.T.A. Cases
Nos. 1836, 1837 and 1839), which in a consolidated decision dated September 30, 1989,
substantially modified the decision of the Commissioner of Customs, stating thus:

IN VIEW OF THE FOREGOING, the Manila Star Ferry, Inc., petitioner in C.T.A. Case
No. 1836, and the United Navigation & Transport Corporation, petitioner in C.T.A.
Case No. 1837, are each hereby ordered to pay a fine of five thousand pesos
(P5,000.00) and Ceaba Shipping Agency, Inc., petitioner in C.T.A. Case No. 1839, a
fine of ten thousand pesos (P10,000.00), within thirty days from the date this decision
becomes final (Rollo, p., 100).

It is this decision of the Court of Tax Appeals that is being questioned by the Commissioner of
Customs before this Court.

On February 7, 1978, petitioner filed a Motion to Allow Sale of the Vessel (S/S Argo), informing this
Court that the said vessel was deteriorating and depreciating in value, and was congesting the
Cavite Naval Base where it was berthed. Petitioner prayed that it be allowed to sell the S/S Argo at
the best possible price. The Court granted petitioner's motion.

An Urgent Motion for Modification was filed by respondent Ceaba, praying that it, instead of
petitioner, be allowed to sell the S/S Argo through a negotiated sale and not a public sale. In a
resolution dated May 12, 1978, this Court granted respondent Ceaba's motion, ordering it, however,
to first pay the fine of P10,000.00 stated in the decision of the Commissioner of Customs and then
"deposit the proceeds of the sale with a reputable commercial bank in an interest bearing account in
trust for whosoever will prevail in the cases at bar" (Rollo, p. 317). A manager's check in the amount
of P10,000.00 was made payable to the Commissioner of Customs and was delivered y the
respondent Ceaba to the Cashier of the Supreme Court. In the Resolution of July 9, 1978, this
payment was accepted, subject to the Court's decision in the case (Rollo, p. 327). The S/S Argo was
sold, with this Court's approval, for P125,000.00 to one Severino Caperlac. The proceeds were
subjected to the charging lien of respondent Ceaba's attorneys in the amount of P315,000.00 (Rollo,
p. 402).

The petition for review posits the theory that the subject vessels and watercraft were engaged in
smuggling, and that the S/S Argo should be forfeited under Section 2530 (a), while the barge UN-L-
106 and tugboat Orestes should be forfeited under Section 2530 (c) of the Tariff and Customs Code.

Section 2530 (a) and (c) of said law reads as follows:

Sec. 2530. Property Subject to Forfeiture under Tariff and Customs Laws. — Any
vessel or aircraft, cargo, articles and other objects shall, under the following
conditions, be subject to forfeiture:

(a) Any vessel or aircraft, including cargo, which shall, be used unlawfully in the
importation or exportation of articles into or from any Philippine port or place except a
port of entry; and any vessel which, being of less than thirty tons capacity shall be
used in the importation of articles into any Philippine port or place except into a port
of the Sulu sea where importation in such vessel may be authorized by the
Commissioner, with the approval of the department head.
xxx xxx xxx

(c) Any vessel or aircraft into which shall be transferred cargo unladen contrary to
law prior to the arrival of the importing vessel or aircraft at her port of destination.

The penalty of forfeiture is imposed on any vessel, engaged in smuggling if the conditions
enumerated in Section 2530 (a) are compresent.

These conditions are:

(1) The vessel is "used unlawfully in the importation or exportation of articles into or from" the
Philippines;

(2) The articles are imported or exported into or from "any Philippine port or place, except a port of
entry;" or

(3) If the vessel has a capacity of less than 30 tons and is "used in the importation of articles into any
Philippine Port or place other than a port of the Sulu Sea, where importation in such vessel may be
authorized by the Commissioner, with the approval of the department head."

There is no question that the vessel S/S Argo was apprehended while unloading goods of foreign
origin onto the barge UN-L-106 and the tugboat Orestes, without the necessary papers showing that
the goods were entered lawfully though a port of entry and that taxes and duties on said goods had
been paid. The claim that the S/S Argo made an emergency call at the Port of Manila for
replacement of crew members and had to stop at the Explosives Anchorage Area because it was
carrying nitric acid, a dangerous cargo, cannot be upheld, much less given credence by this Court.
The facts found by the Court of Tax Appeals are in consonance with the findings of the Collector of
Customs, and the Commissioner of Customs. Absent a showing of any irregularity, or arbitrariness,
the findings of fact of quasi-judicial and administrative bodies are entitled to great weight:, and are
conclusive and binding on this Court. (Feeder International Line, Pte., Ltd. v. Court of Appeals, 197
SCRA 842 [1991]; Jaculina v. National Police Commission, 200 SCRA 489 [1991]). Moreover, the
Collector of Customs in S.I. No. 10009-C, Manila, ordered on July 28, 1966 the forfeiture of the
subject cargo after finding that they were, in truth and in fact, smuggled articles (Rollo, p. 7).
Respondent Ceaba did not appeal from said order and the same has become final.

In its decision, the Court of Tax Appeals held that while the S/S Argo was caught unloading
smuggled goods in Manila Bay, the said vessel and the goods cannot be forfeited in favor of the
government because the Port of Manila is a port of entry (R.A. 1937, Sec. 701).

The Commissioner of Customs argues that the phrase "except a port of entry" should mean "except
a port of destination," and inasmuch as there is no showing that the Port of Manila was the port of
destination of the S/S Argo, its forfeiture was in order.

We disagree.

Section 2530(a) in unmistakable terms provides that a vessel engaged in smuggling "in a port of
entry" cannot be forfeited. This is the clear and plain meaning of the law. It is not within the province
of the Court to inquire into the wisdom of the law, for indeed, we are bound by the words of the
statute. Neither can we put words in the mouths of the lawmaker. A verba legis non est recedendum.
It must be noted that the Revised Administrative Code of 1917 from which the Tariff and Customs
Code is based, contained in Section 1363(a) thereof almost exactly the same provision in Section
2530(a) of the Tariff and Customs Code, including the phrase "except a port of entry." If the
lawmakers intended the term "port of entry" to mean "port of destination," they could have expressed
facilely such intention when they adopted the Tariff and Customs Code in 1957. Instead on
amending the law, Congress reenacted verbatim the provision of Section 1363(a) of the Revised
Administrative Code of 1917. Congress, in the very same Article 2530 of the Tariff and Customs
Code, used the term "port of destination" in subsections (c) and (d) thereof. This is a clear indication
that Congress is aware of the distinction between the two wordings.

It was only in 1972, after this case was instituted, when the questioned exception ("except a port of
entry") in Section 2530(a) of the Tariff and Customs Code was deleted by P.D. No. 74.

Nevertheless, although the vessel cannot be forfeited, it is subject to a fine of not more than
P10,000.00 for failure to supply the requisite manifest for the unloaded cargo under Section 2521 of
Code, which reads as follows:

Sec. 2521. Failure to Supply Requisite Manifests. — If any vessel or aircraft enters or
departs from a port of entry without submitting the proper manifest to the customs
authorities, or shall enter or depart conveying unmanifested cargo other than as
stated in the next preceding section hereof, such vessel or aircraft shall be fined in a
sum not exceeding ten thousand pesos.

xxx xxx xxx

The barge-lighter UN-L-106 and the tugboat Orestes, on the other hand, are subject to forfeiture
under paragraph (c) of Section 2530 of the Tariff and Customs Code. The barge-lighter and tugboat
fall under the term "vessel" which includes every sort of boat, craft or other artificial contrivance
used, or capable of being used, as a means of transportation on water (R.A. No. 1937, Section
3514). Said section 2530 (c) prescribes the forfeiture of' any vessel or aircraft into which shall be
transferred cargo unladen contrary to law before the arrival of the vessel or aircraft at her port of
destination Manila was not the port of destination, much less a port of call of the S/S Argo, the
importing vessel. The S/S Argo left Hongkong and was bound for Jesselton, North Borneo, Djakarta
and Surabaja, Indonesia; and yet it stopped at the Port of Manila to unload the smuggled goods onto
the UN-L-106 and the Orestes.

Forfeiture proceedings are proceedings in rem (Commissioner of Customs v. Court of Tax Appeals,
138 SCRA 581 [1985] citing Vierneza v. Commissioner of Customs, 24 SCRA 394 [1968]) and are
directed against the res. It is no defense that the owner of the vessel sought to be forfeited had no
actual knowledge that his property was used illegally. The absence or lack of actual knowledge of
such use is a defense personal to the owner himself which cannot in any way absolve the vessel
from the liability of forfeiture Commissioner of Customs v. Court of Appeals, supra; U.S. v.
Steamship "Rubi.", 32 Phil. 228, 239 [1915]).

WHEREFORE, the consolidated Decision dated September 30, 1969 of respondent Court of Tax
Appeals in C.T.A. Cases Nos. 1836, I837 and 1839 is MODIFIED as follows: (1) that the S/S Argo
through respondent Ceaba Shipping Agency, Inc. is ordered to pay a fine of P10,000.00, to be
satisfied from the deposit of the same amount by respondent Ceaba to the Cashier of this Court per
Resolution of July 9, 1978; (2) that the Cashier of this Court is ordered to release the said amount for
payment to the Commissioner of Customs, within thirty (30) days from the date this decision
becomes final; and 3) the tugboat Orestes and the barge-lighter UN-L-106 of respondents Manila
Star Ferry, Inc. and the United Navigation & Transport. Corporation respectively, are ordered
forfeited in favor of the Philippine Government.

SO ORDERED.
G.R. No. 108524 November 10, 1994

MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS, INC., petitioner,


vs.
DEPARTMENT OF FINANCE SECRETARY, COMMISSIONER OF THE BUREAU OF INTERNAL
REVENUE (BIR), AND REVENUE DISTRICT OFFICER, BIR MISAMIS ORIENTAL, respondents.

Damasing Law Office for petitioner.

MENDOZA, J.:

This is a petition for prohibition and injunction seeking to nullify Revenue Memorandum Circular No.
47-91 and enjoin the collection by respondent revenue officials of the Value Added Tax (VAT) on the
sale of copra by members of petitioner organization. 1

Petitioner Misamis Oriental Association of Coco Traders, Inc. is a domestic corporation whose
members, individually or collectively, are engaged in the buying and selling of copra in Misamis
Oriental. The petitioner alleges that prior to the issuance of Revenue Memorandum Circular 47-91
on June 11, 1991, which implemented VAT Ruling 190-90, copra was classified as agricultural food
product under $ 103(b) of the National Internal Revenue Code and, therefore, exempt from VAT at
all stages of production or distribution.

Respondents represent departments of the executive branch of government charged with the
generation of funds and the assessment, levy and collection of taxes and other imposts.

The pertinent provision of the NIRC states:

Sec. 103. Exempt Transactions. — The following shall be exempt from the value-
added tax:

(a) Sale of nonfood agricultural, marine and forest products in their original state by
the primary producer or the owner of the land where the same are produced;

(b) Sale or importation in their original state of agricultural and marine food products,
livestock and poultry of a kind generally used as, or yielding or producing foods for
human consumption, and breeding stock and genetic material therefor;

Under §103(a), as above quoted, the sale of agricultural non-food products in their original state is
exempt from VAT only if the sale is made by the primary producer or owner of the land from which
the same are produced. The sale made by any other person or entity, like a trader or dealer, is not
exempt from the tax. On the other hand, under §103(b) the sale of agricultural food products in their
original state is exempt from VAT at all stages of production or distribution regardless of who the
seller is.

The question is whether copra is an agricultural food or non-food product for purposes of this
provision of the NIRC. On June 11, 1991, respondent Commissioner of Internal Revenue issued the
circular in question, classifying copra as an agricultural non-food product and declaring it "exempt
from VAT only if the sale is made by the primary producer pursuant to Section 103(a) of the Tax
Code, as amended." 2
The reclassification had the effect of denying to the petitioner the exemption it previously enjoyed
when copra was classified as an agricultural food product under §103(b) of the NIRC. Petitioner
challenges RMC No. 47-91 on various grounds, which will be presently discussed although not in the
order raised in the petition for prohibition.

First. Petitioner contends that the Bureau of Food and Drug of the Department of Health and not the
BIR is the competent government agency to determine the proper classification of food products.
Petitioner cites the opinion of Dr. Quintin Kintanar of the Bureau of Food and Drug to the effect that
copra should be considered "food" because it is produced from coconut which is food and 80% of
coconut products are edible.

On the other hand, the respondents argue that the opinion of the BIR, as the government agency
charged with the implementation and interpretation of the tax laws, is entitled to great respect.

We agree with respondents. In interpreting §103(a) and (b) of the NIRC, the Commissioner of
Internal Revenue gave it a strict construction consistent with the rule that tax exemptions must be
strictly construed against the taxpayer and liberally in favor of the state. Indeed, even Dr. Kintanar
said that his classification of copra as food was based on "the broader definition of food which
includes agricultural commodities and other components used in the manufacture/processing of
food." The full text of his letter reads:

10 April 1991

Mr. VICTOR A. DEOFERIO, JR.


Chairman VAT Review Committee
Bureau of Internal Revenue
Diliman, Quezon City

Dear Mr. Deoferio:

This is to clarify a previous communication made by this Office about copra in a letter
dated 05 December 1990 stating that copra is not classified as food. The statement
was made in the context of BFAD's regulatory responsibilities which focus mainly on
foods that are processed and packaged, and thereby copra is not covered.

However, in the broader definition of food which include agricultural commodities and
other components used in the manufacture/ processing of food, it is our opinion that
copra should be classified as an agricultural food product since copra is produced
from coconut meat which is food and based on available information, more than 80%
of products derived from copra are edible products.

Very
truly
yours,

QUINTI
N L.
KINTA
NAR,
M.D.,
Ph.D.
Directo
r
Assista
nt
Secret
ary of
Health
for
Standa
rds and
Regula
tions

Moreover, as the government agency charged with the enforcement of the law, the opinion of the
Commissioner of Internal Revenue, in the absence of any showing that it is plainly wrong, is entitled
to great weight. Indeed, the ruling was made by the Commissioner of Internal Revenue in the
exercise of his power under § 245 of the NIRC to "make rulings or opinions in connection with the
implementation of the provisions of internal revenue laws, including rulings on the classification of
articles for sales tax and similar purposes."

Second. Petitioner complains that it was denied due process because it was not heard before the
ruling was made. There is a distinction in administrative law between legislative rules and
interpretative rules. 3 There would be force in petitioner's argument if the circular in question were in
the nature of a legislative rule. But it is not. It is a mere interpretative rule.

The reason for this distinction is that a legislative rule is in the nature of subordinate legislation,
designed to implement a primary legislation by providing the details thereof. In the same way that
laws must have the benefit of public hearing, it is generally required that before a legislative rule is
adopted there must be hearing. In this connection, the Administrative Code of 1987 provides:

Public Participation. — If not otherwise required by law, an agency shall, as far as


practicable, publish or circulate notices of proposed rules and afford interested
parties the opportunity to submit their views prior to the adoption of any rule.

(2) In the fixing of rates, no rule or final order shall be valid unless the proposed rates
shall have been published in a newspaper of general circulation at least two (2)
weeks before the first hearing thereon.

(3) In case of opposition, the rules on contested cases shall be observed. 4

In addition such rule must be published.5 On the other hand, interpretative rules are designed to
provide guidelines to the law which the administrative agency is in charge of enforcing.

Accordingly, in considering a legislative rule a court is free to make three inquiries: (i) whether the
rule is within the delegated authority of the administrative agency; (ii) whether it is reasonable; and
(iii) whether it was issued pursuant to proper procedure. But the court is not free to substitute its
judgment as to the desirability or wisdom of the rule for the legislative body, by its delegation of
administrative judgment, has committed those questions to administrative judgments and not to
judicial judgments. In the case of an interpretative rule, the inquiry is not into the validity but into the
correctness or propriety of the rule. As a matter of power a court, when confronted with an
interpretative rule, is free to (i) give the force of law to the rule; (ii) go to the opposite extreme and
substitute its judgment; or (iii) give some intermediate degree of authoritative weight to the
interpretative rule. 6
In the case at bar, we find no reason for holding that respondent Commissioner erred in not
considering copra as an "agricultural food product" within the meaning of § 103(b) of the NIRC. As
the Solicitor General contends, "copra per se is not food, that is, it is not intended for human
consumption. Simply stated, nobody eats copra for food." That previous Commissioners considered
it so, is not reason for holding that the present interpretation is wrong. The Commissioner of Internal
Revenue is not bound by the ruling of his predecessors. 7 To the contrary, the overruling of decisions
is inherent in the interpretation of laws.

Third. Petitioner likewise claims that RMC No. 47-91 is discriminatory and violative of the equal
protection clause of the Constitution because while coconut farmers and copra producers are
exempt, traders and dealers are not, although both sell copra in its original state. Petitioners add that
oil millers do not enjoy tax credit out of the VAT payment of traders and dealers.

The argument has no merit. There is a material or substantial difference between coconut farmers
and copra producers, on the one hand, and copra traders and dealers, on the other. The
former produce and sell copra, the latter merely sell copra. The Constitution does not forbid the
differential treatment of persons so long as there is a reasonable basis for classifying them
differently. 8

It is not true that oil millers are exempt from VAT. Pursuant to § 102 of the NIRC, they are subject to
10% VAT on the sale of services. Under § 104 of the Tax Code, they are allowed to credit the input
tax on the sale of copra by traders and dealers, but there is no tax credit if the sale is made directly
by the copra producer as the sale is VAT exempt. In the same manner, copra traders and dealers
are allowed to credit the input tax on the sale of copra by other traders and dealers, but there is no
tax credit if the sale is made by the producer.

Fourth. It is finally argued that RMC No. 47-91 is counterproductive because traders and dealers
would be forced to buy copra from coconut farmers who are exempt from the VAT and that to the
extent that prices are reduced the government would lose revenues as the 10% tax base is
correspondingly diminished.

This is not so. The sale of agricultural non-food products is exempt from VAT only when made by the
primary producer or owner of the land from which the same is produced, but in the case of
agricultural food products their sale in their original state is exempt at all stages of production or
distribution. At any rate, the argument that the classification of copra as agricultural non-food product
is counterproductive is a question of wisdom or policy which should be addressed to respondent
officials and to Congress.

WHEREFORE, the petition is DISMISSED.

SO ORDERED.
COMMISSIONER OF INTERNAL G.R. No. 140230
REVENUE,
Petitioner, Present :
PANGANIBAN, J., Chairman,
- versus - SANDOVAL-GUTIERREZ,
CORONA,
CARPIO MORALES and
GARCIA, JJ.
PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY,
Respondent. Promulgated:

December 15, 2005


x-----------------------------------------x

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 Decision[1]of the Court of Appeals (CA) in CA-G.R. No. SP 47895,
affirming, in effect, the February 18, 1998 decision[2] of the Court of Tax
Appeals (CTA) in C.T.A. Case No. 5178, a claim for tax refund/credit
instituted by respondent Philippine Long Distance Company (PLDT) against
petitioner for taxes it paid to the Bureau of Internal Revenue (BIR) in
connection with its importation in 1992 to 1994 of equipment, machineries
and spare parts.

The facts:

PLDT is a grantee of a franchise under Republic Act (R.A.) No. 7082 to


install, operate and maintain a telecommunications system throughout the
Philippines.
For equipment, machineries and spare parts it imported for its business
on different dates from October 1, 1992 to May 31, 1994, PLDT paid the BIR
the amount of P164,510,953.00, broken down as follows: (a) compensating
tax of P126,713,037.00; advance sales tax of P12,460,219.00 and other
internal revenue taxes of P25,337,697.00. For similar importations made
between March 1994 to May 31, 1994, PLDT paid P116,041,333.00 value-
added tax (VAT).

On March 15, 1994, PLDT addressed a letter to the BIR seeking a


confirmatory ruling on its tax exemption privilege under Section 12 of R.A.
7082, which reads:

Sec. 12. The grantee shall be liable to pay the same taxes on their
real estate, buildings, and personal property, exclusive of this franchise,
as other persons or corporations are now or hereafter may be required by
law to pay. In addition thereto, the grantee, shall pay a franchise tax
equivalent to three percent (3%) of all gross receipts of the telephone or
other telecommunications businesses transacted under this franchise by
the grantee, its successors or assigns, and the said percentage shall be
in lieu of all taxes on this franchise or earnings thereof: Provided, That
the grantee shall continue to be liable for income taxes payable under Title
II of the National Internal Revenue Code pursuant to Sec. 2 of Executive
Order No. 72 unless the latter enactment is amended or repealed, in which
case the amendment or repeal shall be applicable thereto. (Emphasis
supplied).

Responding, the BIR issued on April 19, 1994 Ruling No. 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
The in lieu of all taxes provision under Section 12 of RA 7082
clearly exempts PLDT from all taxes including the 10% value-added tax
(VAT) prescribed by Section 101 (a) of the same Code on its importations
of equipment, machineries and spare parts necessary in the conduct of its
business covered by the franchise, except the aforementioned enumerated
taxes for which PLDT is expressly made liable.
xxx xxx xxx
In view thereof, this Office hereby holds that PLDT, is exempt from VAT
on its importation of equipment, machineries and spare parts needed in its
franchise operations.

Armed with the foregoing BIR ruling, PLDT filed on December 2, 1994 a
claim[4] for tax credit/refund of the VAT, compensating taxes, advance sales
taxes and other taxes it had been paying in connection with its importation
of various equipment, machineries and spare parts needed for its operations.
With its claim not having been acted upon by the BIR, and obviously to
forestall the running of the prescriptive period therefor, PLDT filed with the
CTA a petition for review,[5] therein seeking a refund of, or the issuance of a
tax credit certificate in, the amount of P280,552,286.00, representing
compensating taxes, advance sales taxes, VAT and other internal revenue
taxes alleged to have been erroneously paid on its importations from October
1992 to May 1994. The petition was docketed in said court as CTA Case No.
5178.
On February 18, 1998, the CTA rendered a decision[6] granting PLDTs
petition, pertinently saying:

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

COMPENSATING TAX
Total amount claimed P126,713.037.00

Less:

a) Amount already prescribed: xxx

Total P 38,015,132.00

b) Waived by petitioner
(Exh. B-216) P 1,440,874.00 P39,456,006.00

Amount refundable P87,257,031.00

ADVANCE SALES TAX

Total amount claimed P12,460.219.00


Less amount already prescribed: P5,043,828.00

Amount refundable P7,416,391.00

OTHER BIR TAXES

Total amount claimed P25,337,697.00

Less amount already prescribed: 11,187,740.00

Amount refundable P14,149,957.00

VALUE ADDED TAX

Total amount claimed P116.041,333.00


Less amount waived by petitioner
(unaccounted receipts) 1,599,436.00

Amount refundable P114,441,897.00

TOTAL AMOUNT REFUNDABLE P223,265,276.00,


============
(Breakdown omitted)
and accordingly disposed, as follows:

WHEREFORE, in view of all the foregoing, this Court finds the


instant petition meritorious and in accordance with law. Accordingly,
respondent is hereby ordered to REFUND or to ISSUE in favor of
petitioner a Tax Credit Certificate in the reduced amount
of P223,265,276.00 representing erroneously paid value-added taxes,
compensating taxes, advance sales taxes and other BIR taxes on its
importation of equipments (sic), machineries and spare parts for the period
covering the taxable years 1992 to 1994.

Noticeably, the CTA decision, penned by then Associate Justice Ramon O. de


Veyra, with then CTA Presiding Judge Ernesto D. Acosta, concurring, is
punctuated by a dissenting opinion[7] of Associate Judge Amancio Q. Saga
who maintained that the phrase in lieu of all taxes found in Section 12 of
R.A. No. 7082, supra, refers to exemption from direct taxes only and does
not cover indirect taxes, such as VAT, compensating tax and advance sales
tax.

In time, the BIR Commissioner moved for a reconsideration but the CTA, in
its Resolution[8] of May 7, 1998, denied the motion, with Judge Amancio Q.
Saga reiterating his dissent.[9]
Unable to accept the CTA decision, the BIR Commissioner elevated the
matter to the Court of Appeals (CA) by way of petition for review, thereat
docketed as CA-G.R. No. 47895.
As stated at the outset hereof, the appellate court, in the herein
challenged Decision[10] dated September 17, 1999, dismissed the BIRs
petition, thereby effectively affirming the CTAs judgment.

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 manifested[11] that he will no longer pursue G.R. No.
134386, there being no compelling grounds to disagree with the Court of
Appeals decision in CA-G.R. 40811. Consequently, on September 28, 1998,
the Court issued a Resolution[12] in G.R. No. 134386 notifying the parties
that no petition was filed in said case and that the CA judgment sought to
be reviewed therein has now become final and executory. Pursuant to said
Resolution, an Entry of Judgment[13] was issued by the Court of Appeals in
CA-G.R. SP No. 40811. Hence, the CAs dismissal of CA-G.R. No. 47895 on
the additional ground of stare decisis.
Under the doctrine of stare 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
longer rules. More important than anything else is that the court is
right,[15] thus its duty to abandon any doctrine found to be in violation of the
law in force.[16]

As it were, the former BIR Commissioners decision not to pursue his


petition in G.R. No. 134386 denied the BIR, at least as early as in that case,
the opportunity to obtain from the Court an authoritative interpretation of
Section 12 of R.A. 7082. All is, however, not lost. For, the government is not
estopped by acts or errors of its agents, particularly on matters involving
taxes. Corollarily, the erroneous application of tax laws by public officers
does not preclude the subsequent correct application thereof.[17] Withal, the
errors of certain administrative officers, if that be the case, should never be
allowed to jeopardize the governments financial position.[18]

Hence, the need to address the main issue tendered herein.

According to the Court of Appeals, the in lieu of all taxes clause found
in Section 12 of PLDTs franchise (R.A. 7082) covers all taxes, whether direct
or indirect; and that said section states, in no uncertain terms, that PLDTs
payment of the 3% franchise tax on all its gross receipts from businesses
transacted by it under its franchise is in lieu of all taxes on the franchise or
earnings thereof. In fine, the appellate court, agreeing with PLDT, posits the
view that the word all encompasses any and all taxes collectible under the
National Internal Revenue Code (NIRC), save those specifically mentioned in
PLDTs franchise, such as income and real property taxes.
The BIR Commissioner excepts. He submits that the exempting in lieu
of all taxes clause covers direct taxes only, adding that for indirect taxes to
be included in the exemption, the intention to include must be specific and
unmistakable. He thus faults the Court of Appeals for erroneously declaring
PLDT exempt from payment of VAT and other indirect taxes on its
importations. To the Commissioner, PLDTs claimed entitlement to tax
refund/credit is without basis inasmuch as the 3% franchise tax being
imposed on PLDT is not a substitute for or in lieu of indirect taxes.

The sole issue at hand is whether or not PLDT, given the tax
component of its franchise, is exempt from paying VAT, compensating taxes,
advance sales taxes and internal revenue taxes on its importations.

Based on the possibility of shifting the incidence of taxation, or as to who


shall bear the burden of taxation, taxes may be classified into either direct
tax or indirect tax.

In context, direct taxes are those that are exacted from the very person
who, it is intended or desired, should pay them;[19] they are impositions for
which a taxpayer is directly liable on the transaction or business he is
engaged in.[20]

On the other hand, indirect taxes are those that are demanded, in the
first instance, from, or are paid by, one person in the expectation and
intention that he can shift the burden to someone else.[21] Stated elsewise,
indirect taxes are taxes wherein the liability for the payment of the tax falls
on one person but the burden thereof can be shifted or passed on to another
person, such as when the tax is imposed upon goods before reaching the
consumer who ultimately pays for it. When the seller passes on the tax to
his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the
purchaser as part of the price of goods sold or services rendered.

To put the situation in graphic terms, by tacking the VAT due to the
selling price, the seller remains the person primarily and legally liable for the
payment of the tax. What is shifted only to the intermediate buyer and
ultimately to the final purchaser is the burden of the tax.[22] Stated
differently, a seller who is directly and legally liable for payment of an indirect
tax, such as the VAT on goods or services, is not necessarily the person who
ultimately bears the burden of the same tax. It is the final purchaser or end-
user of such goods or services who, although not directly and legally liable
for the payment thereof, ultimately bears the burden of the tax.[23]

There can be no serious argument that PLDT, vis--vis its payment of internal
revenue taxes on its importations in question, is effectively claiming
exemption from taxes not falling under the category of direct taxes. The
claim covers VAT, advance sales tax and compensating tax.

The NIRC classifies VAT as an indirect tax the amount of [which] may
be shifted or passed on to the buyer, transferee or lessee of the goods.[24] As
aptly pointed out by Judge Amancio Q. Saga in his dissent in C.T.A. Case No.
5178, the 10% VAT on importation of goods partakes of an excise tax levied
on the privilege of importing articles. It is not a tax on the franchise of a
business enterprise or on its earnings. It is imposed on all taxpayers who
import goods (unless such importation falls under the category of an exempt
transaction under Sec. 109 of the Revenue Code) whether or not the goods
will eventually be sold, bartered, exchanged or utilized for personal
consumption. The VAT on importation replaces the advance sales tax
payable by regular importers who import articles for sale or as raw materials
in the manufacture of finished articles for sale.[25]

Advance sales tax has the attributes of an indirect tax because the tax-
paying importer of goods for sale or of raw materials to be processed into
merchandise can shift the tax or, to borrow from Philippine Acetylene Co,
Inc. vs. Commissioner of Internal Revenue,[26] lay the economic burden of
the tax, on the purchaser, by subsequently adding the tax to the selling price
of the imported article or finished product.

Compensating tax also partakes of the nature of an excise tax payable


by all persons who import articles, whether in the course of business or
not.[27] The rationale for compensating tax is to place, for tax purposes,
persons purchasing from merchants in the Philippines on a more or less equal
basis with those who buy directly from foreign countries.[28]
It bears to stress that the liability for the payment of the indirect taxes
lies only with the seller of the goods or services, not in the buyer thereof.
Thus, one cannot invoke ones exemption privilege to avoid the passing on
or the shifting of the VAT to him by the manufacturers/suppliers of the goods
he purchased.[29] Hence, it is important to determine if the tax exemption
granted to a taxpayer specifically includes the indirect tax which is shifted to
him as part of the purchase price, otherwise it is presumed that the tax
exemption embraces only those taxes for which the buyer is directly liable.[30]

Time and again, the Court has stated that taxation is the rule,
exemption is the exception. Accordingly, statutes granting tax exemptions
must be construed in 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 PLDTs franchise or
earnings are its direct liability. Accordingly, indirect taxes, not being taxes
on PLDTs franchise or earnings, are outside the purview of the in
lieu provision.

If we were to adhere to the appellate courts interpretation of the law


that the in lieu of all taxes clause encompasses the totality of all taxes
collectible under the Revenue Code, then, the immediately following limiting
clause on this franchise and its earnings would be nothing more than a pure
jargon bereft of effect and meaning whatsoever. Needless to stress, this kind
of interpretation cannot be accorded a governing sway following the familiar
legal maxim 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 granteewritten in par. # 9 of Meralcos franchise as not
so all encompassing as to embrace indirect tax, like compensating tax.
There, the Court said:
It is a well-settled rule or principle in taxation that a compensating
tax is an excise tax one that is imposed on the performance of an act, the
engaging in an occupation, or the enjoyment of a privilege. A tax levied
upon property because of its ownership is a direct tax, whereas one levied
upon property because of its use is an excise duty. .

The compensating tax being imposed upon MERALCO, is an impost on


its use of imported articles and is not in the nature of 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 charter[36]includes both direct and indirect taxes. But far from
providing PLDT comfort, Macedain fact supports the case of herein
petitioner, the correct lesson of Maceda being that an exemption from all
taxes excludes indirect taxes, unless the exempting statute, like NPCs
charter, is so couched as to include indirect tax from the exemption. Wrote
the Court:
xxx However, the amendment under Republic Act No. 6395 enumerated
the details covered by the exemption. Subsequently, P.D. 380, made even
more specific the details of the exemption of NPC to cover, among others,
both direct and indirect taxes on all petroleum products used in its
operation. Presidential Decree No. 938 [NPCs amended charter) amended
the tax exemption by simplifying the same law in general terms. It
succinctly exempts NPC from all forms of taxes, duties fees .

The use of the phrase all forms of taxes demonstrate the intention of the
law to give NPC all the tax exemptions it has been enjoying before. .

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 petitioners alleged exemption from the payment of


compensating tax in the present case is not clear or expressed; unlike the
exemption from the payment of income tax which was clear and expressed
in the Carcar case. Unless it appears clearly and manifestly that an
exemption is intended, the provision is to be construed strictly against the
party claiming exemption. xxx.

Jurisprudence thus teaches that imparting the in lieu of all taxes clause a
literal meaning, as did the Court of Appeals and the CTA before it, is
fallacious. It is basic that in construing a statute, it is the duty of courts to
seek the real intent of the legislature, even if, by so doing, they may limit
the literal meaning of the broad language.[38]
It cannot be over-emphasized that tax exemption represents a loss of
revenue to the government and must, therefore, not rest on vague inference.
When claimed, it must be strictly construed against the taxpayer who must
prove that he falls under the exception. And, if an exemption is found to
exist, it must not be enlarged by construction, since the reasonable
presumption is that the state has granted in express terms all it intended to
grant at all, and that, unless the privilege is limited to the very terms of the
statute the favor would be extended beyond dispute in ordinary cases.[39]

All told, we fail to see how Section 12 of RA 7082 operates as granting PLDT
blanket exemption from payment of indirect taxes, which, in the ultimate
analysis, are not taxes on its franchise or earnings. PLDT has not shown its
eligibility for the desired exemption. None should be granted.

As a final consideration, the Court takes particular stock, as the CTA earlier
did, of PLDTs allegation that the Bureau of Customs assessed the company
for advance sales tax and compensating tax for importations entered
between October 1, 1992 and May 31, 1994 when the value-added tax
system already replaced, if not totally eliminated, advance sales and
compensating taxes.[40] Indeed, pursuant to Executive Order No.
273[41] which took effect on January 1, 1988, a multi-stage value-added tax
was put into place to replace the tax on original and subsequent sales
tax.[42] It stands to reason then, as urged by PLDT, that compensating tax
and advance sales tax were no longer collectible internal revenue taxes
under the NILRC when the Bureau of Customs made the assessments in
question and collected the corresponding tax. Stated a bit differently, PLDT
was no longer under legal obligation to pay compensating tax and advance
sales tax on its importation from 1992 to 1994.

Parenthetically, petitioner has not made an issue about PLDTs allegations


concerning the abolition of the provisions of the Tax Code imposing the
payment of compensating and advance sales tax on importations and the
non-existence of these taxes during the period under review. On the
contrary, petitioner admits that the VAT on importation of goods
has replace[d] the compensating tax and advance sales tax under the old
Tax Code.[43]
Given the above perspective, the amount PLDT paid in the concept of
advance sales tax and compensating tax on the 1992 to 1994 importations
were, in context, erroneous tax payments and would theoretically be
refundable. It should be emphasized, however, that, such importations were,
when made, already subject to VAT.
Factoring in the fact that a portion of the claim was barred by prescription,
the CTA had determined that PLDT is entitled to a total refundable amount
of P94,673,422.00 (P87,257,031.00 of compensating tax + P7,416,391.00
= P94,673,422.00). Accordingly, it behooves the BIR to grant a refund of
the advance sales tax and compensating tax in the total amount
of P94,673,422.00, subject to the condition that PLDT present proof of
payment of the corresponding VAT on said transactions.

WHEREFORE, the petition is partially GRANTED. The Decision of the


Court of Appeals in CA-G.R. No. 47895 dated September 17, 1999
is MODIFIED. The Commissioner of Internal Revenue is ORDERED to
issue a Tax Credit Certificate or to refund to PLDT only the of P94,673,422.00
advance sales tax and compensating tax erroneously collected by the Bureau
of Customs from October 1, 1992 to May 31, 1994, less the VAT which may
have been due on the importations in question, but have otherwise remained
uncollected.

SO ORDERED.
[G.R. No. 153866. February 11, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE TECHNOLOGY


(PHILIPPINES), respondent.
DECISION
PANGANIBAN, J.:

Business companies registered in and operating from the Special Economic Zone in Naga, Cebu
-- like herein respondent -- are entities exempt from all internal revenue taxes and the
implementing rules relevant thereto, including the value-added taxes or VAT. Although export
sales are not deemed exempt transactions, they are nonetheless zero-rated. Hence, in the present
case, the distinction between exempt entities and exempt transactions has little significance,
because the net result is that the taxpayer is not liable for the VAT. Respondent, a VAT-
registered enterprise, has complied with all requisites for claiming a tax refund of or credit for
the input VAT it paid on capital goods it purchased. Thus, the Court of Tax Appeals and the
Court of Appeals did not err in ruling that it is entitled to such refund or credit.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set aside
the May 27, 2002 Decision[2] of the Court of Appeals (CA) in CA-GR SP No. 66093. The
decretal portion of the Decision reads as follows:

WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of
merit.[3]

The Facts

The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:

As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows:

1. [Respondent] is a resident foreign corporation duly registered with the Securities and
Exchange Commission to do business in the Philippines, with principal office address at the new
Cebu Township One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu;

2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to
perform the duties of his office, including, among others, the duty to act and approve claims for
refund or tax credit;

3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been
issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to
engage in the manufacture of recording components primarily used in computers for export.
Such registration was made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT
Registration Certification No. 97-083-000600-V issued on 2 April 1997;

5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];

6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with
supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition
for Review), was filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu;

7. No final action has been received by [respondent] from [petitioner] on [respondents] claim for
VAT refund.

The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon
by the [petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000
by way of Petition for Review in order to toll the running of the two-year prescriptive period.

For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:

1. [Respondents] alleged claim for tax refund/credit is subject to administrative routinary


investigation/examination by [petitioners] Bureau;

2. Since taxes are presumed to have been collected in accordance with laws and regulations, the
[respondent] has the burden of proof that the taxes sought to be refunded were erroneously or
illegally collected x x x;

3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that:

A claimant has the burden of proof to establish the factual basis of his or her claim for tax
credit/refund.

4. Claims for tax refund/tax credit are construed in strictissimi juris against the taxpayer. This is
due to the fact that claims for refund/credit [partake of] the nature of an exemption from tax.
Thus, it is incumbent upon the [respondent] to prove that it is indeed entitled to the refund/credit
sought. Failure on the part of the [respondent] to prove the same is fatal to its claim for tax
credit. He who claims exemption must be able to justify his claim by the clearest grant of organic
or statutory law. An exemption from the common burden cannot be permitted to exist upon
vague implications;

5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority


(PEZA) registered Ecozone Enterprise, then its business is not subject to VAT pursuant to
Section 24 of Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax Code, as
amended. As [respondents] business is not subject to VAT, the capital goods and services it
alleged to have purchased are considered not used in VAT taxable business. As such,
[respondent] is not entitled to refund of input taxes on such capital goods pursuant to Section
4.106.1 of Revenue Regulations No. ([RR])7-95, and of input taxes on services pursuant to
Section 4.103 of said regulations.
6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of the
1997 Tax Code on filing of a written claim for refund within two (2) years from the date of
payment of tax.

On July 19, 2001, the Tax Court rendered a decision granting the claim for refund.[4]

Ruling of the Court of Appeals

The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax
credit certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This
sum represented the unutilized but substantiated input VAT paid on capital goods purchased for
the period covering April 1, 1998 to June 30, 1999.

The appellate court reasoned that respondent had availed itself only of the fiscal incentives under
Executive Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987), not
of those under both Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916.
Respondent was, therefore, considered exempt only from the payment of income tax when it
opted for the income tax holiday in lieu of the 5 percent preferential tax on gross income earned.
As a VAT-registered entity, though, it was still subject to the payment of other national internal
revenue taxes, like the VAT.

Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and 4.103-
1 of RR 7-95 were applicable. Having paid the input VAT on the capital goods it purchased,
respondent correctly filed the administrative and judicial claims for its refund within the two-
year prescriptive period. Such payments were -- to the extent of the refundable value -- duly
supported by VAT invoices or official receipts, and were not yet offset against any output VAT
liability.

Hence this Petition.[5]

Sole Issue

Petitioner submits this sole issue for our consideration:

Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the
amount of P12,122,922.66 representing alleged unutilized input VAT paid on capital goods
purchased for the period April 1, 1998 to June 30, 1999.[6]

The Courts Ruling

The Petition is unmeritorious.

Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to
a Refund of or Credit for Input VAT
No doubt, as a PEZA-registered enterprise within a special economic zone,[7] respondent is
entitled to the fiscal incentives and benefits[8] provided for in either PD 66[9] or EO 226.[10] It
shall, moreover, enjoy all privileges, benefits, advantages or exemptions under both Republic
Act Nos. (RA) 7227[11] and 7844.[12]

Preferential Tax Treatment


Under Special Laws

If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary,
respondent shall not be subject to internal revenue laws and regulations for raw materials,
supplies, articles, equipment, machineries, spare parts and wares, except those prohibited by law,
brought into the zone to be stored, broken up, repacked, assembled, installed, sorted, cleaned,
graded or otherwise processed, manipulated, manufactured, mixed or used directly or indirectly
in such activities.[13] Even so, respondent would enjoy a net-operating loss carry over;
accelerated depreciation; foreign exchange and financial assistance; and exemption from export
taxes, local taxes and licenses.[14]

Comparatively, the same exemption from internal revenue laws and regulations applies if EO
226[15] is chosen. Under this law, respondent shall further be entitled to an income tax holiday;
additional deduction for labor expense; simplification of customs procedure; unrestricted use of
consigned equipment; access to a bonded manufacturing warehouse system; privileges for
foreign nationals employed; tax credits on domestic capital equipment, as well as for taxes and
duties on raw materials; and exemption from contractors taxes, wharfage dues, taxes and duties
on imported capital equipment and spare parts, export taxes, duties, imposts and fees,[16] local
taxes and licenses, and real property taxes.[17]

A privilege available to respondent under the provision in RA 7227 on tax and duty-free
importation of raw materials, capital and equipment[18] -- is, ipso facto, also accorded to the
zone[19] under RA 7916. Furthermore, the latter law -- notwithstanding other existing laws,
rules and regulations to the contrary -- extends[20] to that zone the provision stating that no local
or national taxes shall be imposed therein.[21] No exchange control policy shall be applied; and
free markets for foreign exchange, gold, securities and future shall be allowed and
maintained.[22] Banking and finance shall also be liberalized under minimum Bangko Sentral
regulation with the establishment of foreign currency depository units of local commercial banks
and offshore banking units of foreign banks.[23]

In the same vein, respondent benefits under RA 7844 from negotiable tax credits[24] for locally-
produced materials used as inputs. Aside from the other incentives possibly already granted to it
by the Board of Investments, it also enjoys preferential credit facilities[25] and exemption from
PD 1853.[26]

From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax
treatment.[27] It is not subject to internal revenue laws and regulations and is even entitled to tax
credits. The VAT on capital goods is an internal revenue tax from which petitioner as an entity is
exempt. Although the transactions involving such tax are not exempt, petitioner as a VAT-
registered person,[28] however, is entitled to their credits.

Nature of the VAT and


the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent
levied on every importation of goods, whether or not in the course of trade or business, or
imposed on each sale, barter, exchange or lease of goods or properties or on each rendition of
services in the course of trade or business[29] as they pass along the production and distribution
chain, the tax being limited only to the value added[30] to such goods, properties or services by
the seller, transferor or lessor.[31] It is an indirect tax that may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services.[32] As such, it should be
understood not in the context of the person or entity that is primarily, directly and legally liable
for its payment, but in terms of its nature as a tax on consumption.[33] In either case, though, the
same conclusion is arrived at.

The law[34] that originally imposed the VAT in the country, as well as the subsequent
amendments of that law, has been drawn from the tax credit method.[35] Such method adopted
the mechanics and self-enforcement features of the VAT as first implemented and practiced in
Europe and subsequently adopted in New Zealand and Canada.[36] Under the present method
that relies on invoices, an entity can credit against or subtract from the VAT charged on its sales
or outputs the VAT paid on its purchases, inputs and imports.[37]

If at the end of a taxable quarter the output taxes[38] charged by a seller[39] are equal to the
input taxes[40] passed on by the suppliers, no payment is required. It is when the output taxes
exceed the input taxes that the excess has to be paid.[41] If, however, the input taxes exceed the
output taxes, the excess shall be carried over to the succeeding quarter or quarters.[42] Should
the input taxes result from zero-rated or effectively zero-rated transactions or from the
acquisition of capital goods,[43] any excess over the output taxes shall instead be refunded[44]
to the taxpayer or credited[45] against other internal revenue taxes.[46]

Zero-Rated and Effectively


Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ from effectively
zero-rated transactions as to their source.

Zero-rated transactions generally refer to the export sale of goods and supply of services.[47]
The tax rate is set at zero.[48] When applied to the tax base, such rate obviously results in no tax
chargeable against the purchaser. The seller of such transactions charges no output tax,[49] but
can claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.

Effectively zero-rated transactions, however, refer to the sale of goods[50] or supply of


services[51] to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects such transactions to a zero
rate.[52] Again, as applied to the tax base, such rate does not yield any tax chargeable against the
purchaser. The seller who charges zero output tax on such transactions can also claim a refund of
or a tax credit certificate for the VAT previously charged by suppliers.

Zero Rating and


Exemption

In terms of the VAT computation, zero rating and exemption are the same, but the extent of
relief that results from either one of them is not.

Applying the destination principle[53] to the exportation of goods, automatic zero rating[54] is
primarily intended to be enjoyed by the seller who is directly and legally liable for the VAT,
making such seller internationally competitive by allowing the refund or credit of input taxes that
are attributable to export sales.[55] Effective zero rating, on the contrary, is intended to benefit
the purchaser who, not being directly and legally liable for the payment of the VAT, will
ultimately bear the burden of the tax shifted by the suppliers.

In both instances of zero rating, there is total relief for the purchaser from the burden of the
tax.[56] But in an exemption there is only partial relief,[57] because the purchaser is not allowed
any tax refund of or credit for input taxes paid.[58]

Exempt Transaction
and Exempt Party

The object of exemption from the VAT may either be the transaction itself or any of the parties
to the transaction.[59]

An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard
to the tax status -- VAT-exempt or not -- of the party to the transaction.[60] Indeed, such
transaction is not subject to the VAT, but the seller is not allowed any tax refund of or credit for
any input taxes paid.

An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax
Code, a special law or an international agreement to which the Philippines is a signatory, and by
virtue of which its taxable transactions become exempt from the VAT.[61] Such party is also not
subject to the VAT, but may be allowed a tax refund of or credit for input taxes paid, depending
on its registration as a VAT or non-VAT taxpayer.

As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or
passed on by the seller to the purchaser of the goods, properties or services.[62] While the
liability is imposed on one person, the burden may be passed on to another. Therefore, if a
special law merely exempts a party as a seller from its direct liability for payment of the VAT,
but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted to
it by its VAT-registered suppliers, the purchase transaction is not exempt. Applying this
principle to the case at bar, the purchase transactions entered into by respondent are not VAT-
exempt.

Special laws may certainly exempt transactions from the VAT.[63] However, the Tax Code
provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special
law under which respondent was registered. The purchase transactions it entered into are,
therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register.

Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10
percent,[64] depending again on the application of the destination principle.[65]

If respondent enters into such sales transactions with a purchaser -- usually in a foreign country -
- for use or consumption outside the Philippines, these shall be subject to 0 percent.[66] If
entered into with a purchaser for use or consumption in the Philippines, then these shall be
subject to 10 percent,[67] unless the purchaser is exempt from the indirect burden of the VAT, in
which case it shall also be zero-rated.

Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero.
Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero
rate,[68] because the ecozone within which it is registered is managed and operated by the PEZA
as a separate customs territory.[69] This means that in such zone is created the legal fiction of
foreign territory.[70] Under the cross-border principle[71] of the VAT system being enforced by
the Bureau of Internal Revenue (BIR),[72] no VAT shall be imposed to form part of the cost of
goods destined for consumption outside of the territorial border of the taxing authority. If exports
of goods and services from the Philippines to a foreign country are free of the VAT,[73] then the
same rule holds for such exports from the national territory -- except specifically declared areas -
- to an ecozone.

Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are
considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-
registered person in the customs territory are deemed imports from a foreign country.[74] An
ecozone -- indubitably a geographical territory of the Philippines -- is, however, regarded in law
as foreign soil.[75] This legal fiction is necessary to give meaningful effect to the policies of the
special law creating the zone.[76] If respondent is located in an export processing zone[77]
within that ecozone, sales to the export processing zone, even without being actually exported,
shall in fact be viewed as constructively exported under EO 226.[78] Considered as export
sales,[79] such purchase transactions by respondent would indeed be subject to a zero rate.[80]

Tax Exemptions
Broad and Express

Applying the special laws we have earlier discussed, respondent as an entity is exempt from
internal revenue laws and regulations.

This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT
as a tax on consumption, for which the direct liability is imposed on one person but the indirect
burden is passed on to another. Respondent, as an exempt entity, can neither be directly charged
for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent
VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does
not distinguish, we ought not to distinguish.

Moreover, the exemption is both express and pervasive for the following reasons:

First, RA 7916 states that no taxes, local and national, shall be imposed on business
establishments operating within the ecozone.[81] Since this law does not exclude the VAT from
the prohibition, it is deemed included. Exceptio firmat regulam in casibus non exceptis. An
exception confirms the rule in cases not excepted; that is, a thing not being excepted must be
regarded as coming within the purview of the general rule.

Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still
be passed on and, therefore, indirectly imposed on the same entity -- a patent circumvention of
the law. That no VAT shall be imposed directly upon business establishments operating within
the ecozone under RA 7916 also means that no VAT may be passed on and imposed indirectly.
Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited
directly, it is also prohibited indirectly.

Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except for
real property taxes that presently are imposed on land owned by developers.[82] This similar and
repeated prohibition is an unambiguous ratification of the laws intent in not imposing local or
national taxes on business enterprises within the ecozone.

Third, foreign and domestic merchandise, raw materials, equipment and the like shall not be
subject to x x x internal revenue laws and regulations under PD 66[83] -- the original charter of
PEZA (then EPZA) that was later amended by RA 7916.[84] No provisions in the latter law
modify such exemption.

Although this exemption puts the government at an initial disadvantage, the reduced tax
collection ultimately redounds to the benefit of the national economy by enticing more business
investments and creating more employment opportunities.[85]

Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except
those prohibited by law -- shall not be subject to x x x internal revenue laws and regulations x x
x[86] if brought to the ecozones restricted area[87] for manufacturing by registered export
enterprises,[88] of which respondent is one. These rules also apply to all enterprises registered
with the EPZA prior to the effectivity of such rules.[89]

Fifth, export processing zone enterprises registered[90] with the Board of Investments (BOI)
under EO 226 patently enjoy exemption from national internal revenue taxes on imported capital
equipment reasonably needed and exclusively used for the manufacture of their products;[91] on
required supplies and spare part for consigned equipment;[92] and on foreign and domestic
merchandise, raw materials, equipment and the like -- except those prohibited by law -- brought
into the zone for manufacturing.[93] In addition, they are given credits for the value of the
national internal revenue taxes imposed on domestic capital equipment also reasonably needed
and exclusively used for the manufacture of their products,[94] as well as for the value of such
taxes imposed on domestic raw materials and supplies that are used in the manufacture of their
export products and that form part thereof.[95]

Sixth, the exemption from local and national taxes granted under RA 7227[96] are ipso facto
accorded to ecozones.[97] In case of doubt, conflicts with respect to such tax exemption
privilege shall be resolved in favor of the ecozone.[98]

And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used in
the production of export goods,[99] and for locally produced raw materials, capital equipment
and spare parts used by exporters of non-traditional products[100] -- shall also be continuously
enjoyed by similar exporters within the ecozone.[101] Indeed, the latter exporters are likewise
entitled to such tax exemptions and credits.

Tax Refund as
Tax Exemption

To be sure, statutes that grant tax exemptions are construed strictissimi juris[102] against the
taxpayer[103] and liberally in favor of the taxing authority.[104]

Tax refunds are in the nature of such exemptions.[105] Accordingly, the claimants of those
refunds bear the burden of proving the factual basis of their claims;[106] and of showing, by
words too plain to be mistaken, that the legislature intended to exempt them.[107] In the present
case, all the cited legal provisions are teeming with life with respect to the grant of tax
exemptions too vivid to pass unnoticed. In addition, respondent easily meets the challenge.

Respondent, which as an entity is exempt, is different from its transactions which are not exempt.
The end result, however, is that it is not subject to the VAT. The non-taxability of transactions
that are otherwise taxable is merely a necessary incident to the tax exemption conferred by law
upon it as an entity, not upon the transactions themselves.[108] Nonetheless, its exemption as an
entity and the non-exemption of its transactions lead to the same result for the following
considerations:

First, the contemporaneous construction of our tax laws by BIR authorities who are called upon
to execute or administer such laws[109] will have to be adopted. Their prior tax issuances have
held inconsistent positions brought about by their probable failure to comprehend and fully
appreciate the nature of the VAT as a tax on consumption and the application of the destination
principle.[110] Revenue Memorandum Circular No. (RMC) 74-99, however, now clearly and
correctly provides that any VAT-registered suppliers sale of goods, property or services from the
customs territory to any registered enterprise operating in the ecozone -- regardless of the class
or type of the latters PEZA registration -- is legally entitled to a zero rate.[111]

Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is its
very soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the
establishment of export processing zones, seeks to encourage and promote foreign commerce as
a means of x x x strengthening our export trade and foreign exchange position, of hastening
industrialization, of reducing domestic unemployment, and of accelerating the development of
the country.[112]

RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the
special economic zones, the government shall actively encourage, promote, induce and
accelerate a sound and balanced industrial, economic and social development of the country x x
x through the establishment, among others, of special economic zones x x x that shall effectively
attract legitimate and productive foreign investments.[113]

Under EO 226, the State shall encourage x x x foreign investments in industry x x x which shall
x x x meet the tests of international competitiveness[,] accelerate development of less developed
regions of the country[,] and result in increased volume and value of exports for the
economy.[114] Fiscal incentives that are cost-efficient and simple to administer shall be devised
and extended to significant projects to compensate for market imperfections, to reward
performance contributing to economic development,[115] and to stimulate the establishment and
assist initial operations of the enterprise.[116]

Wisely accorded to ecozones created under RA 7916[117] was the governments policy -- spelled
out earlier in RA 7227 -- of converting into alternative productive uses[118] the former military
reservations and their extensions,[119] as well as of providing them incentives[120] to enhance
the benefits that would be derived from them[121] in promoting economic and social
development.[122]

Finally, under RA 7844, the State declares the need to evolve export development into a national
effort[123] in order to win international markets. By providing many export and tax
incentives,[124] the State is able to drive home the point that exporting is indeed the key to
national survival and the means through which the economic goals of increased employment and
enhanced incomes can most expeditiously be achieved.[125]

The Tax Code itself seeks to promote sustainable economic growth x x x; x x x increase
economic activity; and x x x create a robust environment for business to enable firms to compete
better in the regional as well as the global market.[126] After all, international competitiveness
requires economic and tax incentives to lower the cost of goods produced for export. State
actions that affect global competition need to be specific and selective in the pricing of particular
goods or services.[127]

All these statutory policies are congruent to the constitutional mandates of providing incentives
to needed investments,[128] as well as of promoting the preferential use of domestic materials
and locally produced goods and adopting measures to help make these competitive.[129] Tax
credits for domestic inputs strengthen backward linkages. Rightly so, the rule of law and the
existence of credible and efficient public institutions are essential prerequisites for sustainable
economic development.[130]
VAT Registration, Not Application
for Effective Zero Rating,
Indispensable to VAT Refund

Registration is an indispensable requirement under our VAT law.[131] Petitioner alleges that
respondent did register for VAT purposes with the appropriate Revenue District Office.
However, it is now too late in the day for petitioner to challenge the VAT-registered status of
respondent, given the latters prior representation before the lower courts and the mode of appeal
taken by petitioner before this Court.

The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from
internal revenue laws and regulations the equipment -- including capital goods -- that registered
enterprises will use, directly or indirectly, in manufacturing.[132] EO 226 even reiterates this
privilege among the incentives it gives to such enterprises.[133] Petitioner merely asserts that by
virtue of the PEZA registration alone of respondent, the latter is not subject to the VAT.
Consequently, the capital goods and services respondent has purchased are not considered used
in the VAT business, and no VAT refund or credit is due.[134] This is a non sequitur. By the
VATs very nature as a tax on consumption, the capital goods and services respondent has
purchased are subject to the VAT, although at zero rate. Registration does not determine
taxability under the VAT law.

Moreover, the facts have already been determined by the lower courts. Having failed to present
evidence to support its contentions against the income tax holiday privilege of respondent,[135]
petitioner is deemed to have conceded. It is a cardinal rule that issues and arguments not
adequately and seriously brought below cannot be raised for the first time on appeal.[136] This is
a matter of procedure[137] and a question of fairness.[138] Failure to assert within a reasonable
time warrants a presumption that the party entitled to assert it either has abandoned or declined to
assert it.[139]

The BIR regulations additionally requiring an approved prior application for effective zero
rating[140] cannot prevail over the clear VAT nature of respondents transactions. The scope of
such regulations is not within the statutory authority x x x granted by the legislature.[141]

First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former
cannot purport to do any more than interpret the latter.[142] The courts will not countenance one
that overrides the statute it seeks to apply and implement.[143]

Other than the general registration of a taxpayer the VAT status of which is aptly determined, no
provision under our VAT law requires an additional application to be made for such taxpayers
transactions to be considered effectively zero-rated. An effectively zero-rated transaction does
not and cannot become exempt simply because an application therefor was not made or, if made,
was denied. To allow the additional requirement is to give unfettered discretion to those officials
or agents who, without fluid consideration, are bent on denying a valid application. Moreover,
the State can never be estopped by the omissions, mistakes or errors of its officials or
agents.[144]
Second, grantia argumenti that such an application is required by law, there is still the
presumption of regularity in the performance of official duty.[145] Respondents registration
carries with it the presumption that, in the absence of contradictory evidence, an application for
effective zero rating was also filed and approval thereof given. Besides, it is also presumed that
the law has been obeyed[146] by both the administrative officials and the applicant.

Third, even though such an application was not made, all the special laws we have tackled
exempt respondent not only from internal revenue laws but also from the regulations issued
pursuant thereto. Leniency in the implementation of the VAT in ecozones is an imperative,
precisely to spur economic growth in the country and attain global competitiveness as envisioned
in those laws.

A VAT-registered status, as well as compliance with the invoicing requirements,[147] is


sufficient for the effective zero rating of the transactions of a taxpayer. The nature of its business
and transactions can easily be perused from, as already clearly indicated in, its VAT registration
papers and photocopied documents attached thereto. Hence, its transactions cannot be exempted
by its mere failure to apply for their effective zero rating. Otherwise, their VAT exemption
would be determined, not by their nature, but by the taxpayers negligence -- a result not at all
contemplated. Administrative convenience cannot thwart legislative mandate.

Tax Refund or
Credit in Order

Having determined that respondents purchase transactions are subject to a zero VAT rate, the tax
refund or credit is in order.

As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives
in EO 226 over those in RA 7916 and PD 66. It opted for the income tax holiday regime instead
of the 5 percent preferential tax regime.

The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA
law,[148] for EO 226[149] also has provisions to contend with. These two regimes are in fact
incompatible and cannot be availed of simultaneously by the same entity. While EO 226 merely
exempts it from income taxes, the PEZA law exempts it from all taxes.

Therefore, respondent can be considered exempt, not from the VAT, but only from the payment
of income tax for a certain number of years, depending on its registration as a pioneer or a non-
pioneer enterprise. Besides, the remittance of the aforesaid 5 percent of gross income earned in
lieu of local and national taxes imposable upon business establishments within the ecozone
cannot outrightly determine a VAT exemption. Being subject to VAT, payments erroneously
collected thereon may then be refunded or credited.

Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916,
Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that such
provision merely exempts respondent from taxes imposed on business. To repeat, the VAT is a
tax imposed on consumption, not on business. Although respondent as an entity is exempt, the
transactions it enters into are not necessarily so. The VAT payments made in excess of the zero
rate that is imposable may certainly be refunded or credited.

Compliance with All Requisites


for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the requisites for claiming
a VAT refund or credit.[150]

First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from
Contex, in which this Court held that the petitioner therein was registered as a non-VAT
taxpayer.[151] Hence, for being merely VAT-exempt, the petitioner in that case cannot claim
any VAT refund or credit.

Second, the input taxes paid on the capital goods of respondent are duly supported by VAT
invoices and have not been offset against any output taxes. Although enterprises registered with
the BOI after December 31, 1994 would no longer enjoy the tax credit incentives on domestic
capital equipment -- as provided for under Article 39(d), Title III, Book I of EO 226[152] --
starting January 1, 1996, respondent would still have the same benefit under a general and
express exemption contained in both Article 77(1), Book VI of EO 226; and Section 12,
paragraph 2 (c) of RA 7227, extended to the ecozones by RA 7916.

There was a very clear intent on the part of our legislators, not only to exempt investors in
ecozones from national and local taxes, but also to grant them tax credits. This fact was revealed
by the sponsorship speeches in Congress during the second reading of House Bill No. 14295,
which later became RA 7916, as shown below:

MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national
and local taxes; x x x tax credit for locally-sourced inputs x x x.

xxxxxxxxx

MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an
environment conducive for investors, the bill offers incentives such as the exemption from local
and national taxes, x x x tax credits for locally sourced inputs x x x.[153]

And third, no question as to either the filing of such claims within the prescriptive period or the
validity of the VAT returns has been raised. Even if such a question were raised, the tax
exemption under all the special laws cited above is broad enough to cover even the enforcement
of internal revenue laws, including prescription.[154]

Summary

To summarize, special laws expressly grant preferential tax treatment to business establishments
registered and operating within an ecozone, which by law is considered as a separate customs
territory. As such, respondent is exempt from all internal revenue taxes, including the VAT, and
regulations pertaining thereto. It has opted for the income tax holiday regime, instead of the 5
percent preferential tax regime. As a matter of law and procedure, its registration status entitling
it to such tax holiday can no longer be questioned. Its sales transactions intended for export may
not be exempt, but like its purchase transactions, they are zero-rated. No prior application for the
effective zero rating of its transactions is necessary. Being VAT-registered and having
satisfactorily complied with all the requisites for claiming a tax refund of or credit for the input
VAT paid on capital goods purchased, respondent is entitled to such VAT refund or credit.

WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to


costs.

SO ORDERED.
THE COMMISIONER OF G.R. No. 147295
INTERNAL REVENUE,
Petitioner, Present:

QUISUMBING, J., Chairperson,


- versus - CARPIO,
CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.
ACESITE (PHILIPPINES)
HOTEL CORPORATION, Promulgated:
Respondent.
February 16, 2007
x-----------------------------------------------------------------------------------------x

DECISION

VELASCO, JR., J.:

The Case

Before us is a Petition for Review on Certiorari[1] under Rule 45 of the Rules


of Court, assailing the November 17, 2000 Decision[2] of the Court of Appeals (CA)
in CA-G.R. SP No. 56816, which affirmed the January 3, 2000 Decision[3] of
the Court of Tax Appeals (CTA) in CTA Case No. 5645 entitled Acesite
(Philippines) Hotel Corporation v. The Commissioner of Internal
Revenue for Refund of VAT Payments.

The Facts

The facts as found by the appellate court are undisputed, thus:

Acesite is the owner and operator of the Holiday Inn Manila Pavilion
Hotel along United Nations Avenue in Manila. It leases 6,768.53
square meters of the hotels premises to the Philippine Amusement
and Gaming Corporation [hereafter, PAGCOR] for casino
operations.It also caters food and beverages to PAGCORs casino
patrons through the hotels restaurant outlets. For the period January
(sic) 96 to April 1997, Acesite incurred VAT amounting to
P30,152,892.02 from its rental income and sale of food and
beverages to PAGCOR during said period. Acesite tried to shift the
said taxes to PAGCOR by incorporating it in the amount assessed to
PAGCOR but the latter refused to pay the taxes on account of its tax
exempt status.

Thus, PAGCOR paid the amount due to Acesite minus the


P30,152,892.02 VAT while the latter paid the VAT to the
Commissioner of Internal Revenue [hereafter, CIR] as it feared the
legal consequences of non-payment of the tax. However, Acesite
belatedly arrived at the conclusion that its transaction with PAGCOR
was subject to zero rate as it was rendered to a tax-exempt
entity. On 21 May 1998, Acesite filed an administrative claim for
refund with the CIR but the latter failed to resolve the same. Thus
on 29 May 1998, Acesite filed a petition with the Court of Tax
Appeals [hereafter, CTA] which was decided in this wise:

As earlier stated, Petitioner is subject to zero percent tax


pursuant to Section 102 (b)(3) [now 106(A)(C)] insofar as
its gross income from rentals and sales to PAGCOR, a tax
exempt entity by virtue of a special law. Accordingly, the
amounts of P21,413,026.78 and P8,739,865.24, representing
the 10% EVAT on its sales of food and services and gross
rentals, respectively from PAGCOR shall, as a matter of
course, be refunded to the petitioner for having been
inadvertently remitted to the respondent.

Thus, taking into consideration the prescribed portion of


Petitioners claim for refund of P98,743.40, and considering
further the principle of solutio indebiti which requires the
return of what has been delivered through mistake,
Respondent must refund to the Petitioner the amount of
P30,054,148.64 computed as follows:

Total amount per claim 30,152,892.02


Less Prescribed amount (Exhs A, X, & X-20)
January 1996 P 2,199.94
February 1996 26,205.04
March 1996 70,338.42 98,743.40
P30,054,148.64
vvvvvvvvvvvvv
WHEREFORE, in view of all the foregoing, the instant
Petition for Review is partially GRANTED. The
Respondent is hereby ORDERED to REFUND to the
petitioner the amount of THIRTY MILLION FIFTY FOUR
THOUSAND ONE HUNDRED FORTY EIGHT PESOS
AND SIXTY FOUR CENTAVOS (P30,054,148.64)
immediately.

SO ORDERED.[4]

The Ruling of the Court of Appeals

Upon appeal by petitioner, the CA affirmed in toto the decision of the CTA
holding that PAGCOR was not only exempt from direct taxes but was also exempt
from indirect taxes like the VAT and consequently, the transactions between
respondent Acesite and PAGCOR were effectively zero-rated because they involved
the rendition of services to an entity exempt from indirect taxes. Thus, the CA
affirmed the CTAs determination by ruling that respondent Acesite was entitled to a
refund of PhP 30,054,148.64 from petitioner.

The Issues

Hence, we have the instant petition with the following issues: (1) whether
PAGCORs tax exemption privilege includes the indirect tax of VAT to entitle
Acesite to zero percent (0%) VAT rate; and (2) whether the zero percent (0%) VAT
rate under then Section 102 (b)(3) of the Tax Code (now Section 108 (B)(3) of the
Tax Code of 1997) legally applies to Acesite.

The petition is devoid of merit.


In resolving the first issue on whether PAGCORs tax exemption privilege
includes the indirect tax of VAT to entitle Acesite to zero percent (0%) VAT rate,
we answer in the affirmative. We will however discuss both issues together.

PAGCOR is exempt from payment of indirect taxes

It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter
an exemption from the payment of taxes. Section 13 of P.D. 1869 pertinently
provides:

Sec. 13. Exemptions.

xxxx

(2) Income and other taxes. (a) Franchise Holder: No tax of any
kind or form, income or otherwise, as well as fees, charges or
levies of whatever nature, whether National or Local, shall be
assessed and collected under this Franchise from the
Corporation; nor shall any form of tax or charge attach in any
way to the earnings of the Corporation, except a Franchise Tax of
five (5%) percent of the gross revenue or earnings derived by the
Corporation from its operation under this Franchise. Such tax shall
be due and payable quarterly to the National Government and shall
be in lieu of all kinds of taxes, levies, fees or assessments of any
kind, nature or description, levied, established or collected by any
municipal, provincial, or national government authority.

xxxx

(b) Others: The exemptions herein granted for earnings


derived from the operations conducted under the franchise
specifically from the payment of any tax, income or otherwise, as
well as any form of charges, fees or levies, shall inure to the
benefit of and extend to corporation(s), association(s),
agency(ies), or individual(s) with whom the Corporation or
operator has any contractual relationship in connection with the
operations of the casino(s) authorized to be conducted under this
Franchise and to those receiving compensation or other
remuneration from the Corporation or operator as a result of essential
facilities furnished and/or technical services rendered to the
Corporation or operator. (Emphasis supplied.)

Petitioner contends that the above tax exemption refers only to PAGCORs
direct tax liability and not to indirect taxes, like the VAT.

We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket


exemption to taxes with no distinction on whether the taxes are direct or indirect. We
are one with the CA ruling that PAGCOR is also exempt from indirect taxes, like
VAT, as follows:

Under the above provision [Section 13 (2) (b) of P.D. 1869], the term
Corporation or operator refers to PAGCOR. Although the law does
not specifically mention PAGCORs exemption from indirect
taxes, PAGCOR is undoubtedly exempt from such taxes because
the law exempts from taxes persons or entities contracting with
PAGCOR in casino operations. Although, differently worded, the
provision clearly exempts PAGCOR from indirect taxes. In fact, it
goes one step further by granting tax exempt status to persons
dealing with PAGCOR in casino operations. The unmistakable
conclusion is that PAGCOR is not liable for the P30,152,892.02
VAT and neither is Acesite as the latter is effectively subject to zero
percent rate under Sec. 108 B (3). R.A. 8424. (Emphasis supplied.)

Indeed, by extending the exemption to entities or individuals dealing with


PAGCOR, the legislature clearly granted exemption also from indirect taxes. It must
be noted that the indirect tax of VAT, as in the instant case, can be shifted or passed
to the buyer, transferee, or lessee of the goods, properties, or services subject to
VAT. Thus, by extending the tax exemption to entities or individuals dealing with
PAGCOR in casino operations, it is exempting PAGCOR from being liable to
indirect taxes.

The manner of charging VAT does not make PAGCOR liable to said tax
It is true that VAT can either be incorporated in the value of the goods,
properties, or services sold or leased, in which case it is computed as 1/11 of such
value, or charged as an additional 10% to the value. Verily, the seller or lessor has
the option to follow either way in charging its clients and customer. In the instant
case, Acesite followed the latter method, that is, charging an additional 10% of the
gross sales and rentals. Be that as it may, the use of either method, and in particular,
the first method, does not denigrate the fact that PAGCOR is exempt from an indirect
tax, like VAT.

VAT exemption extends to Acesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by
Acesite, the latter is not liable for the payment of it as it is exempt in this particular
transaction by operation of law to pay the indirect tax. Such exemption falls within
the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b]
[3] of R.A. 8424), which provides:

Section 102. Value-added tax on sale of services (a) Rate and base
of tax There shall be levied, assessed and collected, a value-added
tax equivalent to 10% of gross receipts derived by any person
engaged in the sale of services x x x; Provided, that the following
services performed in the Philippines by VAT-registered persons
shall be subject to 0%.

xxxx

(b) Transactions subject to zero percent (0%) rated.

xxxx

(3) Services rendered to persons or entities whose exemption


under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of such
services to zero (0%) rate (emphasis supplied).

The rationale for the exemption from indirect taxes provided for in P.D. 1869
and the extension of such exemption to entities or individuals dealing with PAGCOR
in casino operations are best elucidated from the 1987 case of Commissioner of
Internal Revenue v. John Gotamco & Sons, Inc.,[5] where the absolute tax exemption
of the World Health Organization (WHO) upon an international agreement was
upheld. We held in said case that the exemption of contractee WHO should be
implemented to mean that the entity or person exempt is the contractor itself who
constructed the building owned by contractee WHO, and such does not violate the
rule that tax exemptions are personal because the manifest intention of the
agreement is to exempt the contractor so that no contractors tax may be shifted
to the contractee WHO. Thus, the proviso in P.D. 1869, extending the exemption
to entities or individuals dealing with PAGCOR in casino operations, is clearly to
proscribe any indirect tax, like VAT, that may be shifted to PAGCOR.

Acesite paid VAT by mistake

Considering the foregoing discussion, there are undoubtedly erroneous


payments of the VAT pertaining to the effectively zero-rate transactions between
Acesite and PAGCOR. Verily, Acesite has clearly shown that it paid the subject
taxes under a mistake of fact, that is, when it was not aware that the transactions it
had with PAGCOR were zero-rated at the time it made the payments. In UST
Cooperative Store v. City of Manila,[6] we explained that there is erroneous payment
of taxes when a taxpayer pays under a mistake of fact, as for the instance in a case
where he is not aware of an existing exemption in his favor at the time the payment
was made.[7] Such payment is held to be not voluntary and, therefore, can be
recovered or refunded.[8]

Moreover, it must be noted that aside from not raising the issue of Acesites
compliance with pertinent Revenue Regulations on exemptions during the
proceedings in the CTA, it cannot be gainsaid that Acesite should have done so as it
paid the VAT under a mistake of fact.Hence, petitioners argument on this point is
utterly tenuous.

Solutio indebiti applies to the Government

Tax refunds are based on the principle of quasi-contract or solutio indebiti and
the pertinent laws governing this principle are found in Arts. 2142 and 2154 of the
Civil Code, which provide, thus:
Art. 2142. Certain lawful, voluntary, and unilateral acts give rise to
the juridical relation of quasi-contract to the end that no one shall be
unjustly enriched or benefited at the expense of another.

Art. 2154. If something is received when there is no right to demand


it, and it was unduly delivered through mistake, the obligation to
return it arises.

When money is paid to another under the influence of a mistake of fact, that
is to say, on the mistaken supposition of the existence of a specific fact, where it
would not have been known that the fact was otherwise, it may be recovered. The
ground upon which the right of recovery rests is that money paid through
misapprehension of facts belongs in equity and in good conscience to the person
who paid it.[9]

The Government comes within the scope of solutio indebiti principle as elucidated
in Commissioner of Internal Revenue v. Firemans Fund Insurance Company, where
we held that: Enshrined in the basic legal principles is the time-honored doctrine that
no person shall unjustly enrich himself at the expense of another. It goes without
saying that the Government is not exempted from the application of this doctrine.[10]

Action for refund strictly construed; Acesite discharged the


burden of proof

Since an action for a tax refund partakes of the nature of an exemption, which
cannot be allowed unless granted in the most explicit and categorical language, it is
strictly construed against the claimant who must discharge such burden
convincingly.[11] In the instant case, respondent Acesite had discharged this burden
as found by the CTA and the CA. Indeed, the records show that Acesite proved its
actual VAT payments subject to refund, as attested to by an independent Certified
Public Accountant who was duly commissioned by the CTA. On the other hand,
petitioner never disputed nor contested respondents testimonial and documentary
evidence. In fact, petitioner never presented any evidence on its behalf.

One final word. The BIR must release the refund to respondent without any
unreasonable delay. Indeed, fair dealing is expected by our taxpayers from the BIR
and this duty demands that the BIR should refund without any unreasonable delay
what it has erroneously collected.[12]

WHEREFORE, the petition is DENIED for lack of merit and the November
17, 2000Decision of the CA is hereby AFFIRMED. No costs.

SO ORDERED.
G.R. No. 173594, February 6, 2008
SILKAIR (SINGAPORE) PTE, LTD., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

CARPIO MORALES, J.:

Petitioner, Silkair (Singapore) Pte. Ltd. (Silkair), a corporation organized under the laws of
Singapore which has a Philippine representative office, is an online international air carrier
operating the Singapore-Cebu-Davao-Singapore, Singapore-Davao-Cebu-Singapore, and
Singapore-Cebu-Singapore routes.

On December 19, 2001, Silkair filed with the Bureau of Internal Revenue (BIR) a written
application for the refund of P4,567,450.79 excise taxes it claimed to have paid on its purchases
of jet fuel from Petron Corporation from January to June 2000.1

As the BIR had not yet acted on the application as of December 26, 2001, Silkair filed a Petition
for Review2 before the CTA following Commissioner of Internal Revenue v. Victorias Milling
Co., Inc., et al.3

Opposing the petition, respondent Commissioner on Internal Revenue (CIR) alleged in his
Answer that, among other things,

Petitioner failed to prove that the sale of the petroleum products was directly made from a
domestic oil company to the international carrier. The excise tax on petroleum products is the
direct liability of the manufacturer/producer, and when added to the cost of the goods sold to the
buyer, it is no longer a tax but part of the price which the buyer has to pay to obtain the article.4
(Emphasis and underscoring supplied)

By Decision of May 27, 2005, the Second Division of the CTA denied Silkair’s petition on the
ground that as the excise tax was imposed on Petron Corporation as the manufacturer of
petroleum products, any claim for refund should be filed by the latter; and where the burden of
tax is shifted to the purchaser, the amount passed on to it is no longer a tax but becomes an added
cost of the goods purchased. Thus the CTA discoursed:

The liability for excise tax on petroleum products that are being removed from its refinery is
imposed on the manufacturer/producer (Section 130 of the NIRC of 1997). x x x

xxxx

While it is true that in the case of excise tax imposed on petroleum products, the seller thereof
may shift the tax burden to the buyer, the latter is the proper party to claim for the refund in the
case of exemption from excise tax. Since the excise tax was imposed upon Petron Corporation as
the manufacturer of petroleum products, pursuant to Section 130(A)(2), and that the
corresponding excise taxes were indeed, paid by it, . . . any claim for refund of the subject excise
taxes should be filed by Petron Corporation as the taxpayer contemplated under the law.
Petitioner cannot be considered as the taxpayer because it merely shouldered the burden of the
excise tax and not the excise tax itself.

Therefore, the right to claim for the refund of excise taxes paid on petroleum products lies with
Petron Corporation who paid and remitted the excise tax to the BIR. Respondent, on the other
hand, may only claim from Petron Corporation the reimbursement of the tax burden shifted to
the former by the latter. The excise tax partaking the nature of an indirect tax, is clearly the
liability of the manufacturer or seller who has the option whether or not to shift the burden of the
tax to the purchaser. Where the burden of the tax is shifted to the [purchaser], the amount passed
on to it is no longer a tax but becomes an added cost on the goods purchased which constitutes a
part of the purchase price. The incidence of taxation or the person statutorily liable to pay the tax
falls on Petron Corporation though the impact of taxation or the burden of taxation falls on
another person, which in this case is petitioner Silkair.5 (Italics in the original; emphasis and
underscoring supplied)

Silkair filed a Motion for Reconsideration6 during the pendency of which or on September 12,
2005 the Bengzon Law Firm entered its appearance as counsel,7 without Silkair’s then-counsel
of record (Jimenez Gonzales Liwanag Bello Valdez Caluya & Fernandez or "JGLaw") having
withdrawn as such.

By Resolution8 of September 22, 2005, the CTA Second Division denied Silkair’s motion for
reconsideration. A copy of the Resolution was furnished Silkair’s counsel JGLaw which received
it on October 3, 2005.9

On October 13, 2005, JGLaw, with the conformity of Silkair, filed its Notice of Withdrawal of
Appearance.10 On even date, Silkair, through the Bengzon Law Firm, filed a
Manifestation/Motion11 stating:

Petitioner was formerly represented xxx by JIMENEZ GONZALES LIWANAG BELLO


VALDEZ CALUYA & FERNANDEZ (JGLaw).

1. On 24 August 2005, petitioner served notice to JGLaw of its decision to cease all legal
representation handled by the latter on behalf of the petitioner. Petitioner also requested JGLaw
to make arrangements for the transfer of all files relating to its legal representation on behalf of
petitioner to the undersigned counsel. x x x

2. The undersigned counsel was engaged to act as counsel for the petitioner in the above-entitled
case; and thus, filed its entry of appearance on 12 September 2005. x x x

3. The undersigned counsel, through petitioner, has received information that the Honorable
Court promulgated a Resolution on petitioner’s Motion for Reconsideration. To date, the
undersigned counsel has yet to receive an official copy of the above-mentioned Resolution. In
light of the foregoing, undersigned counsel hereby respectfully requests for an official copy of
the Honorable Court’s Resolution on petitioner’s Motion for Reconsideration x x x.12
(Underscoring supplied)
On October 14, 2005, the Bengzon Law Firm received its requested copy of the September 22,
200513 CTA Second Division Resolution. Thirty-seven days later or on October 28, 2005,
Silkair, through said counsel, filed a Motion for Extension of Time to File Petition for Review14
before the CTA En Banc which gave it until November 14, 2005 to file a petition for review.

On November 11, 2005, Silkair filed another Motion for Extension of Time.15 On even date, the
Bengzon Law Firm informed the CTA of its withdrawal of appearance as counsel for Silkair
with the information, that Silkair would continue to be represented by Atty. Teodoro A. Pastrana,
who used to be with the firm but who had become a partner of the Pastrana and Fallar Law
Offices.16

The CTA En Banc granted Silkair’s second Motion for Extension of Time, giving Silkair until
November 24, 2005 to file its petition for review. On November 17, 2005, Silkair filed its
Petition for Review17 before the CTA En Banc.

By Resolution of May 19,2006, the CTA En Banc dismissed18 Silkair’s petition for review for
having been filed out of time in this wise:

A petitioner is given a period of fifteen (15) days from notice of award, judgment, final order or
resolution, or denial of motion for new trial or reconsideration to appeal to the proper forum, in
this case, the CTA En Banc. This is clear from both Section 11 and Section 9 of Republic Act
No. 9282 x x x.

xxxx

The petitioner, through its counsel of record Jimenez, Gonzalez, L[iwanag], Bello, Valdez,
Caluya & Fernandez Law Offices, received the Resolution dated September 22, 2005 on October
3, 2005. At that time, the petitioner had two counsels of record, namely, Jimenez, Gonzales,
L[iwanag], Bello, Valdez, Caluya & Fernandez Law Offices and The Bengzon Law Firm which
filed its Entry of Appearance on September 12, 2005. However, as of said date, Atty. Mary Jane
B. Austria-Delgado of Jimenez, Gonzales, L[iwanag], Bello, Valdez, Caluya & Fernandez Law
Offices was still the counsel of record considering that the Notice of Withdrawal of Appearance
signed by Atty. Mary Jane B. Austria-Delgado was filed only on October 13, 2005 or ten (10)
days after receipt of the September 22, 2005 Resolution of the Court’s Second Division. This
notwithstanding, Section 2 of Rule 13 of the Rules of Court provides that if any party has
appeared by counsel, service upon him shall be made upon his counsel or one of them, unless
service upon the party himself is ordered by the Court. Where a party is represented by more
than one counsel of record, "notice to any one of the several counsel on record is equivalent to
notice to all the counsel (Damasco vs. Arrieta, et. al., 7 SCRA 224)." Considering that petitioner,
through its counsel of record, had received the September 22, 2005 Resolution as early as
October 3, 2005, it had only until October 18, 2005 within which to file its Petition for Review.
Petitioner only managed to file the Petition for Review with the Court En Banc on November 17,
2005 or [after] thirty (30) days had lapsed from the final date of October 18, 2005 to appeal.
The argument that it requested Motions for Extension of Time on October 28, 2005 or ten (10)
days from the appeal period and the second Motion for Extension of Time to file its Petition for
Review on November 11, 2005 and its allowance by the CTA En Banc notwithstanding, the
questioned Decision is no longer appealable for failure to timely file the necessary Petition for
Review.19 (Emphasis in the original)

In a Separate Concurring Opinion,20 CTA Associate Justice Juanito C. Castañeda, Jr. posited
that Silkair is not the proper party to claim the tax refund.

Silkair filed a Motion for Reconsideration21 which the CTA En Banc denied.22 Hence, the
present Petition for Review23 which raises the following issues:

I. WHETHER OR NOT THE PETITION FOR REVIEW FILED WITH THE HONORABLE
COURT OF TAX APPEALS EN BANC WAS TIMELY FILED.

II. APPEAL BEING AN ESSENTIAL PART OF OUR JUDICIAL SYSTEM, WHETHER OR


NOT PETITIONER SHOULD BE DEPRIVED OF ITS RIGHT TO APPEAL ON THE BASIS
OF TECHNICALITY.

III. ASSUMING THE HONORABLE SUPREME COURT WOULD HOLD THAT THE
FILING OF THE PETITITON FOR REVIEW WITH THE HONORABLE COURT OF TAX
APPEALS EN BANC WAS TIMELY, WHETHER OR NOT THE PETITIONER IS THE
PROPER PARTY TO CLAIM FOR REFUND OR TAX CREDIT.24 (Underscoring supplied)

Silkair posits that "the instant case does not involve a situation where the petitioner was
represented by two (2) counsels on record, such that notice to the former counsel would be held
binding on the petitioner, as in the case of Damasco v. Arrieta, etc., et al.25 x x x heavily relied
upon by the respondent";26 and that "the case of Dolores De Mesa Abad v. Court of Appeals27
has more appropriate application to the present case."28

In Dolores De Mesa Abad, the trial court issued an order of November 19, 1974 granting the
therein private respondents’ Motion for Annulment of documents and titles. The order was
received by the therein petitioner’s counsel of record, Atty. Escolastico R. Viola, on November
22, 1974 prior to which or on July 17, 1974, Atty. Vicente Millora of the Millora, Tobias and
Calimlim Law Office had filed an "Appearance and Manifestation." Atty. Millora received a
copy of the trial court’s order on December 9, 1974. On January 4, 1975, the therein petitioners,
through Atty. Ernesto D. Tobias also of the Millora, Tobias and Calimlim Law Office, filed their
Notice of Appeal and Cash Appeal Bond as well as a Motion for Extension of the period to file a
Record on Appeal. They filed the Record on Appeal on January 24, 1975. The trial court
dismissed the appeal for having been filed out of time, which was upheld by the Court of
Appeals on the ground that the period within which to appeal should be counted from November
22, 1974, the date Atty. Viola received a copy of the November 19, 1974 order. The appellate
court held that Atty. Viola was still the counsel of record, he not having yet withdrawn his
appearance as counsel for the therein petitioners. On petition for certiorari,29 this Court held
x x x [R]espondent Court reckoned the period of appeal from the time petitioners’ original
counsel, Atty. Escolastico R. Viola, received the Order granting the Motion for Annulment of
documents and titles on November 22, 1974. But as petitioners stress, Atty. Vicente Millora of
the Millora, Tobias and Calimlim Law Office had filed an "Appearance and Manifestation" on
July 16, 1974. Where there may have been no specific withdrawal by Atty. Escolastico R. Viola,
for which he should be admonished, by the appearance of a new counsel, it can be said that Atty.
Viola had ceased as counsel for petitioners. In fact, Orders subsequent to the aforesaid date were
already sent by the trial Court to the Millora, Tobias and Calimlim Law Office and not to Atty.
Viola.

Under the circumstances, December 9, 1974 is the controlling date of receipt by petitioners’
counsel and from which the period of appeal from the Order of November 19, 1974 should be
reckoned. That being the case, petitioner’s x x x appeal filed on January 4, 1975 was timely
filed.30 (Underscoring supplied)

The facts of Dolores De Mesa Abad are not on all fours with those of the present case. In any
event, more recent jurisprudence holds that in case of failure to comply with the procedure
established by Section 26, Rule 13831 of the Rules of Court re the withdrawal of a lawyer as a
counsel in a case, the attorney of record is regarded as the counsel who should be served with
copies of the judgments, orders and pleadings.32 Thus, where no notice of withdrawal or
substitution of counsel has been shown, notice to counsel of record is, for all purposes, notice to
the client.33 The court cannot be expected to itself ascertain whether the counsel of record has
been changed.34

In the case at bar, JGLaw filed its Notice of Withdrawal of Appearance on October 13, 200535
after the Bengzon Law Firm had entered its appearance. While Silkair claims it dismissed
JGLaw as its counsel as early as August 24, 2005, the same was communicated to the CTA only
on October 13, 2005.36 Thus, JGLaw was still Silkair’s counsel of record as of October 3, 2005
when a copy of the September 22, 2005 resolution of the CTA Second Division was served on it.
The service upon JGLaw on October 3, 2005 of the September 22, 2005 resolution of CTA
Second Division was, therefore, for all legal intents and purposes, service to Silkair, and the
CTA correctly reckoned the period of appeal from such date.

TECHNICALITY ASIDE, on the merits, the petition just the same fails.

Silkair bases its claim for refund or tax credit on Section 135 (b) of the NIRC of 1997 which
reads

Sec. 135. Petroleum Products sold to International Carriers and Exempt Entities of Agencies. –
Petroleum products sold to the following are exempt from excise tax:

xxxx

(b) Exempt entities or agencies covered by tax treaties, conventions, and other international
agreements for their use and consumption: Provided, however, That the country of said foreign
international carrier or exempt entities or agencies exempts from similar taxes petroleum
products sold to Philippine carriers, entities or agencies; x x x

x x x x,

and Article 4(2) of the Air Transport Agreement between the Government of the Republic of the
Philippines and the Government of the Republic of Singapore (Air Transport Agreement
between RP and Singapore) which reads

Fuel, lubricants, spare parts, regular equipment and aircraft stores introduced into, or taken on
board aircraft in the territory of one Contracting party by, or on behalf of, a designated airline of
the other Contracting Party and intended solely for use in the operation of the agreed services
shall, with the exception of charges corresponding to the service performed, be exempt from the
same customs duties, inspection fees and other duties or taxes imposed in the territories of the
first Contracting Party , even when these supplies are to be used on the parts of the journey
performed over the territory of the Contracting Party in which they are introduced into or taken
on board. The materials referred to above may be required to be kept under customs supervision
and control.

The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the
person on whom the tax is imposed by law and who paid the same even if he shifts the burden
thereof to another.37 Section 130 (A) (2) of the NIRC provides that "[u]nless otherwise
specifically allowed, the return shall be filed and the excise tax paid by the manufacturer or
producer before removal of domestic products from place of production." Thus, Petron
Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund based on
Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP
and Singapore.

Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount
billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a
purchaser.38

Silkair nevertheless argues that it is exempt from indirect taxes because the Air Transport
Agreement between RP and Singapore grants exemption "from the same customs duties,
inspection fees and other duties or taxes imposed in the territory of the first Contracting
Party."39 It invokes Maceda v. Macaraig, Jr.40 which upheld the claim for tax credit or refund
by the National Power Corporation (NPC) on the ground that the NPC is exempt even from the
payment of indirect taxes.

Silkairs’s argument does not persuade. In Commissioner of Internal Revenue v. Philippine Long
Distance Telephone Company,41 this Court clarified the ruling in Maceda v. Macaraig, Jr., viz:

It may be so that in Maceda vs. Macaraig, Jr., the Court held that an exemption from "all taxes"
granted to the National Power Corporation (NPC) under its charter 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:

x x x 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 demonstrates the intention of the law to give NPC all
the tax exemptions it has been enjoying before…

xxxx

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; emphasis supplied)42

The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air
Transport Agreement between RP and Singapore cannot, without a clear showing of legislative
intent, be construed as including indirect taxes. Statutes granting tax exemptions must be
construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority,
43 and if an exemption is found to exist, it must not be enlarged by construction.44

WHEREFORE, the petition is DENIED.

Costs against petitioner.

SO ORDERED.
G.R. No. L-19707, August 17, 1967

PHILIPPINE ACETYLENE CO., INC., petitioner,


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

Ponce Enrile, Siguion Reyna, Montecillo and Belo, for petitioner.


Office of the Solicitor General for respondents.

CASTRO, J.:

The petitioner is a corporation engaged in the manufacture and sale of oxygen and acetylene gases.
During the period from June 2, 1953 to June 30, 1958, it made various sales of its products to the
National Power Corporation, an agency of the Philippine Government, and to the Voice of America
an agency of the United States Government. The sales to the NPC amounted to P145,866.70, while
those to the VOA amounted to P1,683, on account of which the respondent Commission of Internal
Revenue assessed against, and demanded from, the petitioner the payment of P12,910.60 as
deficiency sales tax and surcharge, pursuant to the following-provisions of the National Internal
Revenue Code:

Sec. 186. Percentage tax on sales of other articles.—There shall be levied, assessed and
collected once only on every original sale, barter, exchange, and similar transaction either for
nominal or valuable considerations, intended to transfer ownership of, or title to, the articles
not enumerated in sections one hundred and eighty-four and one hundred and eighty-five a
tax equivalent to seven per centum of the gross selling price or gross value in money of the
articles so sold, bartered exchanged, or transferred, such tax to be paid by the manufacturer
or producer: . . . .

Sec. 183. Payment of percentage taxes.—(a) In general.—It shall be the duty of every
person conducting business on which a percentage tax is imposed under this Title, to make
a true and complete return of the amount of his, her, or its gross monthly sales, receipts or
earnings, or gross value of output actually removed from the factory or mill warehouse and
within twenty days after the end of each month, pay the tax due thereon: Provided, That any
person retiring from a business subject to the percentage tax shall notify the nearest internal
revenue officer thereof, file his return or declaration and pay the tax due thereon within
twenty days after closing his business.

If the percentage tax on any business is not paid within the time specified above, the amount
of the tax shall be increased by twenty-five per centum, the increment to be a part of the tax.

The petitioner denied liability for the payment of the tax on the ground that both the NPC and the
VOA are exempt from taxation. It asked for a reconsideration of the assessment and, failing to
secure one, appealed to the Court of Tax Appeals.

The court ruled that the tax on the sale of articles or goods in section 186 of the Code is a tax on the
manufacturer and not on the buyer with the result that the "petitioner Philippine Acetylene Company,
the manufacturer or producer of oxygen and acetylene gases sold to the National Power
Corporation, cannot claim exemption from the payment of sales tax simply because its buyer — the
National Power Corporation — is exempt from the payment of all taxes." With respect to the sales
made to the VOA, the court held that goods purchased by the American Government or its agencies
from manufacturers or producers are exempt from the payment of the sales tax under the agreement
between the Government of the Philippines and that of the United States, provided the purchases
are supported by certificates of exemption, and since purchases amounting to only P558, out of a
total of P1,683, were not covered by certificates of exemption, only the sales in the sum of P558
were subject to the payment of tax. Accordingly, the assessment was revised and the petitioner's
liability was reduced from P12,910.60, as assessed by the respondent commission, to P12,812.16.1

The petitioner appealed to this Court. Its position is that it is not liable for the payment of tax on the
sales it made to the NPC and the VOA because both entities are exempt from taxation.

The NPC enjoys tax exemption by virtue of an act2 of Congress which provides as follows:

Sec. 2. To facilitate the payment of its indebtedness, the National Power Corporation shall be
exempt from all taxes, except real property tax, and from all duties, fees, imposts, charges,
and restrictions of the Republic of the Philippines, its provinces, cities and municipalities.

It is contended that the immunity thus given to the NPC would be impaired by the imposition of a tax
on sales made to it because while the tax is paid by the manufacturer or producer, the tax is
ultimately shifted by the latter to the former. The petitioner invokes in support of its position a 1954
opinion of the Secretary of Justice which ruled that the NPC is exempt from the payment of all taxes
"whether direct or indirect."

We begin with an analysis of the nature of the percentage (sales) tax imposed by section 186 of the
Code. Is it a tax on the producer or on the purchaser? Statutes of the type under consideration,
which impose a tax on sales, have been described as "act[s] with schizophrenic symptoms,"3 as they
apparently have two faces — one that of a vendor tax, the other, a vendee tax. Fortunately for us the
provisions of the Code throw some light on the problem. The Code states that the sales tax "shall be
paid by the manufacturer or producer,"4 who must "make a true and complete return of the amount of
his, her or its gross monthly sales, receipts or earnings or gross value of output actually removed
from the factory or mill warehouse and within twenty days after the end of each month, pay the tax
due thereon."5

But it is argued that a sales tax is ultimately passed on to the purchaser, and that, so far as the
purchaser is an entity like the NPC which is exempt from the payment of "all taxes, except real
property tax," the tax cannot be collected from sales.

Many years ago, Mr. Justice Oliver Wendell Holmes expressed dissatisfaction with the use of the
phrase "pass the tax on." Writing the opinion of the U.S. Supreme Court in Lash's Products v. United
States,6 he said: "The phrase 'passed the tax on' is inaccurate, as obviously the tax is laid and
remains on the manufacturer and on him alone. The purchaser does not really pay the tax. He pays
or may pay the seller more for the goods because of the seller's obligation, but that is all. . . . The
price is the sum total paid for the goods. The amount added because of the tax is paid to get the
goods and for nothing else. Therefore it is part of the price . . .".

It may indeed be that the incidence of the tax ultimately settles on the purchaser, but it is not for that
reason alone that one may validly argue that it is a tax on the purchaser. The exemption granted to
the NPC may be likened to the immunity of the Federal Government from state taxation and vice
versa in the federal system of government of the United States. In the early case of Panhandle Oil
Co. v. Mississippi7 the doctrine of intergovernment mental tax immunity was held as prohibiting the
imposition of a tax on sales of gasoline made to the Federal Government. Said the Supreme court of
the United States:
A charge at the prescribed. rate is made on account of every gallon acquired by the United
States. It is immaterial that the seller and not the purchaser is required to report and make
payment to the state. Sale and purchase constitute a transaction by which the tax is
measured and on which the burden rests. . . . The necessary operation of these enactments
when so construed is directly to retard, impede and burden the exertion by the United States,
of its constitutional powers to operate the fleet and hospital. . . . To use the number of
gallons sold the United States as a measure of the privilege tax is in substance and legal
effect to tax the sale. . . . And that is to tax the United States — to exact tribute on its
transactions and apply the same to the support of the state. 1äw phï1.ñët

Justice Holmes did not agree. In a powerful dissent joined by Justices Brandeis and Stone, he said:

If the plaintiff in error had paid the tax and added it to the price the government would have
nothing to say. It could take the gasoline or leave it but it could not require the seller to abate
his charge even if it had been arbitrarily increased in the hope of getting more from the
government than could be got from the public at large. . . . It does not appear that the
government would have refused to pay a price that included the tax if demanded, but if the
government had refused it would not have exonerated the seller. . . .

. . . I am not aware that the President, the Members of the Congress, the Judiciary or to
come nearer to the case at hand, the Coast Guard or the officials of the Veterans' Hospital
[to which the sales were made], because they are instrumentalities of government and
cannot function naked and unfed, hitherto have been held entitled to have their bills for food
and clothing cut down so far as their butchers and tailors have been taxed on their sales; and
I had not supposed that the butchers and tailors could omit from their tax returns all receipts
from the large class of customers to which I have referred. The question of interference with
Government, I repeat, is one of reasonableness and degree and it seems to me that the
interference in this case is too remote.

But time was not long in coming to confirm the soundness of Holmes' position. Soon it became
obvious that to test the constitutionality of a statute by determining the party on which the legal
incidence of the tax fell was an unsatisfactory way of doing things. The fall of the bastion was
signalled by Chief Justice Hughes' statement in James v. Dravo Constructing Co.8 that "These cases
[referring to Panhandle and Indian Motorcycle Co. v. United States, 283 U.S. 570 (1931)] have been
distinguished and must be deemed to be limited to their particular facts."

In 1941, Alabama v. King & Boozer9 held that the constitutional immunity of the United States from
state taxation was not infringed by the imposition of a state sales tax with which the seller was
chargeable but which he was required to collect from the buyer, in respect of materials purchased by
a contractor with the United States on a cost-plus basis for use in carrying out its contract, despite
the fact that the economic burden of the tax was borne by the United States.

The asserted right of the one to be free of taxation by the other does not spell immunity from
paying the added costs, attributable to the taxation of those who furnish supplies to the
Government and who have been granted no tax immunity. So far as a different view has
prevailed, see Panhandle Oil Co. v. Mississippi and Graves v. Texas Co., supra, we think it
no longer tenable.

Further inroads into the doctrine of Panhandle were made in 1943 when the U.S. Supreme Court
held that immunity from state regulation in the performance of governmental functions by Federal
officers and agencies did not extend to those who merely contracted to furnish supplies or render
services to the government even though as a result of an increase in the price of such supplies or
services attributable to the state regulation, its ultimate effect may be to impose an additional
economic burden on the Government.10

But if a complete turnabout from the rule announced in Panhandle was yet to be made, it was so
made in 1952 in Esso Standard Oil v. Evans11 which held that a contractor is not exempt from the
payment of a state privilege tax on the business of storing gasoline simply because the Federal
Government with which it has a contract for the storage of gasoline is immune from state taxation.

This tax was imposed because Esso stored gasoline. It is not . . . based on the worth of the
government property. Instead, the amount collected is graduated in accordance with the
exercise of Esso's privilege to engage in such operations; so it is not "on" the federal
property. . . . Federal ownership of the fuel will not immunize such a private contractor from
the tax on storage. It may generally, as it did here, burden the United States financially. But
since James vs. Dravo Contracting Co., 302 U.S. 134, 151, 82 L. ed. 155, 167, 58 S. Ct.
208, 114 ALR 318, this has been no fatal flaw. . . . 12

We have determined the current status of the doctrine of intergovernmental tax immunity in the
United States, by showing the drift of the decisions following announcement of the original rule, to
point up the that fact that even in those cases where exemption from tax was sought on the ground
of state immunity, the attempt has not met with success.

As Thomas Reed Powell noted in 1945 in reviewing the development of the doctrine:

Since the Dravo case settled that it does not matter that the economic burden of the gross
receipts tax may be shifted to the Government, it could hardly matter that the shift comes
about by explicit agreement covering taxes rather than by being absorbed in a higher
contract price by bidders for a contract. The situation differed from that in the Panhandle and
similar cases in that they involved but two parties whereas here the transaction was tripartite.
These cases are condemned in so far as they rested on the economic ground of the ultimate
incidence of the burden being on the Government, but this condemnation still leaves open
the question whether either the state or the United States when acting in governmental
matters may be made legally liable to the other for a tax imposed on it as vendee.

The carefully chosen language of the Chief Justice keeps these cases from foreclosing the
issue. . . . Yet at the time it would have been a rash man who would find in this a dictum that
a sales tax clearly on the Government as purchaser is invalid or a dictum that Congress may
immunize its contractors.13

If a claim of exemption from sales tax based on state immunity cannot command assent, much less
can a claim resting on statutory grant.

It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does the
tax becomes a part of the price which the purchaser must pay. It does not matter that an additional
amount is billed as tax to the purchaser. The method of listing the price and the tax separately and
defining taxable gross receipts as the amount received less the amount of the tax added, merely
avoids payment by the seller of a tax on the amount of the tax. The effect is still the same, namely,
that the purchaser does not pay the tax. He pays or may pay the seller more for the goods because
of the seller's obligation, but that is all and the amount added because of the tax is paid to get the
goods and for nothing else.14
But the tax burden may not even be shifted to the purchaser at all. A decision to absorb the burden
of the tax is largely a matter of economics.15 Then it can no longer be contended that a sales tax is a
tax on the purchaser.

We therefore hold that the tax imposed by section 186 of the National Internal Revenue Code is a
tax on the manufacturer or producer and not a tax on the purchaser except probably in a very
remote and inconsequential sense. Accordingly its levy on the sales made to tax-exempt entities like
the NPC is permissible.

II

This conclusion should dispose of the same issue with respect to sales made to the VOA, except
that a claim is here made that the exemption of such sales from taxation rests on stronger grounds.
Even the Court of Tax Appeals appears to share this view as is evident from the following portion of
its decision:

With regard to petitioner's sales to the Voice of America, it appears that the petitioner and
the respondent are in agreement that the Voice of America is an agency of the United States
Government and as such, all goods purchased locally by it directly from manufacturers or
producers are exempt from the payment of the sales tax under the provisions of the
agreement between the Government of the Philippines and the Government of the United
States, (See Commonwealth Act No. 733) provided such purchases are supported by serially
numbered Certificates of Tax Exemption issued by the vendee-agency, as required by
General Circular No. V-41, dated October 16, 1947. . . .

The circular referred to reads:

Goods purchased locally by U.S. civilian agencies directly from manufacturers, producers or
importers shall be exempt from the sales tax.

It was issued purportedly to implement the Agreement between the Republic of the Philippines and
the United States of America Concerning Military Bases,16 but we find nothing in the language of the
Agreement to warrant the general exemption granted by that circular.

The pertinent provisions of the Agreement read:

ARTICLE V. — Exemption from Customs and Other Duties

No import, excise, consumption or other tax, duty or impost shall be charged on material,
equipment, supplies or goods, including food stores and clothing, for exclusive use in the
construction, maintenance, operation or defense of the bases, consigned to, or destined for,
the United States authorities and certified by them to be for such purposes.

ARTICLE XVIII.—Sales and Services Within the Bases

1. It is mutually agreed that the United States Shall have the right to establish on bases, free
of all licenses; fees; sales, excise or other taxes, or imposts; Government agencies, including
concessions, such as sales commissaries and post exchanges, messes and social clubs, for
the exclusive use of the United States military forces and authorized civilian personnel and
their families. The merchandise or services sold or dispensed by such agencies shall be free
of all taxes, duties and inspection by the Philippine authorities. . . .
Thus only sales made "for exclusive use in the construction, maintenance, operation or defense of
the bases," in a word, only sales to the quartermaster, are exempt under article V from taxation.
Sales of goods to any other party even if it be an agency of the United States, such as the VOA, or
even to the quartermaster but for a different purpose, are not free from the payment of the tax.

On the other hand, article XVIII exempts from the payment of the tax sales made within the
base by (not sales to) commissaries and the like in recognition of the principle that a sales tax is a
tax on the seller and not on the purchaser.

It is a familiar learning in the American law of taxation that tax exemption must be strictly construed
and that the exemption will not be held to be conferred unless the terms under which it is granted
clearly and distinctly show that such was the intention of the parties.17 Hence, in so far as the circular
of the Bureau of Internal Revenue would give the tax exemptions in the Agreement an expansive
construction it is void.

We hold, therefore, that sales to the VOA are subject to the payment of percentage taxes under
section 186 of the Code. The petitioner is thus liable for P12,910.60, computed as follows:

Sales to NPC P145,866.70

Sales to VOA P 1,683.00

Total sales subject to tax P147,549.70

7% sales tax due thereon P 10,328.48

Add: 25% surcharge P 2,582.12

Total amount due and collectible P 12,910.60

Accordingly, the decision a quo is modified by ordering the petitioner to pay to the respondent
Commission the amount of P12,910.60 as sales tax and surcharge, with costs against the petitioner.
G.R. No. L-16254, February 21, 1922

G.A. CUUNJIENG, plaintiff-appellee,


vs.
FRED L. PATSTONE, engineer of the city of Manila, defendant-appellant.

City Fiscal Diaz for appellant.


Gabriel La O for appellee.

OSTRAND, J.:

This is a for a writ of mandamus to compel the city engineer of Manila to issue a building permit.
There is no dispute as to the facts. The plaintiff desires a erect a warehouse on Azcarraga Street but
is denied a building permit until be shall have made provision fopr the construction of an arcade over
the side walk in front of the building and until he shall have further complied with section 1 of
Ordinance No.301 of the city of Manila, with reads as follow:

Whenever the owner,, preson in charge, or any other person or entering having a right in any
property located of the principal streets and avenues of the city of Manila, such as
Legarda,R. Hidalgo, Carriedo, Echague, Moriones, Azcarraga, Rizal, Taft, San Miguel, and
others which may, by ordinance, hereafter be desiganted by the Municipal Board, desires to
erect to reconstruct a building or any other construction of said property, the same shall pay,
once the plan of the work has been approved by the city engineer, one-half of the assessed
value of the city land as a licence fee for the use and occupation of said land: Provided, That
the construction of arcades on streets having a width of twenty or more meters, not
hereinbefore mentioned in this section, shall be not be carriedout, until after the plan of the
work has been approved by the city of engineer, said aracadeshas been paid for by owner,
person in charge or any other person or entity having a right in the building which is to be
erected or constructed, as a licence fee for the use and occupation of said land.

The plaintiff refuses to construct the arcade and to comply with the ordinance in question on the
grounds that the arcade is unnecessary aand unsuitable for his warehouse and that the city has no
power to require its constructin; and that the ordinance in exacting the payment of a fee of one-half
of the assessed value of the city of land covered by the arcade is in eexcess of the legislative
powers of the Municipal Board and, therefore, unconstitutional. It sems, however, to be conceded
that under the climatic constditions here existing , arcades are both useful and desirable from the
standpoint of public convenience and that the Municipal Board, under the general welfare of the city
charter, has power to provide for the construction of arcades on certain by assignment of error and
the discussion may, therefore, properly be limited to two points: First, whether the question of the
constitutionality of statutes or city ordinance may be raised in mandamus proceedings and second,
whether under the charter, the city of Manila may, under the guise of a licence fee and as a
prerequisite for the issuance for a building permit, exact the payment of one-half of the assessed
value of the portion of the sidewalk covered by the arcade.

Upon the first point th authorities are not entirely in harmony, but in modern practice it has been
generally held by the writ will lie where, as in the present generally the question of constitutionally is
raised by the petitioner. (SeeState ex rel., Fooshe vs. Burley, 16 L. A. [N.S.], 266, with its case note.)
The rule is different where the respondent relies on the unconstitutionality of a statute as a defense
in mandamus proceedings. In such cases the courts have generally declined to consider questions
of costitutionality. (See State ex rel., New Orleans Canal & Banking Co. vs.Heaard, 47 L.R.A., 512,
and the case note thereto.) The reason fir this is obvious: It might seriously hinder the transanction
of public business if ministerial constitutionality of statutes and ordinances imposing duties upon
them and which have not judicially beem declared uncostitutional. The same reasons do not exist
where the validity of the statutes is attacked by the petitioner.

There being no other adequate remedy and there appearing to be no reason in principlee why we
should not in mandamus proceedings, we are of the opinion, and so hold, that the present action has
been properly brought.

The second point above-mentioned merits a more extended consideration. In discussing it we must
bear in mind that legislative powers in regard to taxes and licences are not inherent in municipal
corporations but must be granted by statute either expressly or by necessary implication. Like other
delegated powers, theyare subject to scrict construction.

That the city does not possses such an extraordinary power as that of compelling property holders to
lease the portions of the public sidewalks which adkoin their lands requires no argument. The charge
of one-half of the assessed value imposed on applicants for building permits can therefore, not
beconsidered as rent, and to be valid must either be a tax or a licence fe.. The legislative powers of
the city in regard to taxes and licence fee are enumerated in the following subsections of section
2444 of the Administrative Code, as amended ny section 8 of Act No. 2774, and in section 2507 of
the Administrative Code:

SEC. 2444. General powers and duties of the Baord. — Except as otherwise provided by
law, and subject to the shall have the following legislative powers:

(a) To provide for the levy and collection of taxes for general and special purposes in
accordance with law.

(b) To fix the tartiff of fees and charges for all services rendered by the city or any of its
departments, branches, or officials.

xxx xxx xxx

(h) To established fire limits, determine the kinds of buildings or structures that may be
eracted within siad limits, regulate the manner of constructing and repairing the same, and fix
fees for permits for the construction, repair, or demolition of building and structures.

xxx xxx xxx

( j ) To regulate the use of lights in stavbles, shops, and other buildings and places, to
regulate and restrict the issuance of permits for the building of bonfires and the use of
fircrackers, fireworks torpedoes, candles, skyrockets, and other pyrotechnic displays, and to
fix the fees for such permits.

xxx xxx xxx

(l) To regulate and fix the amount of the licence fees for the following: Hawkers, peddlers,
hucksters, not including huckster or peddlers who sell only native vegetables, fruit, of foods,
personally by the huckstersor peddlers; auctioneers, plumbers, barbers, embamers,
collecting agencies, mercantile agencies, shipping and intelligence offices, private detective
agencies, advertising agencies, massagist, tatooers, judglers, acroboats, hotels, clubs,
restaurants, cafe, lodging houses, boarding houses, livery garages, livery stables, boarding
stables, dealers in large cattle, public billiard tables, laundries, cleaning and dyeing
establishements, public warehouse, dance halls, cabarets, circus and othe similar parades,
public vehicles, race tracks, house races, bowling alleys, shooting galleries, slot machines,
merry-go-arounds, pawshops, dealers in second-hand merchandise, junk dealers,
brewers,distillers rectifyers, money changers and brokers, public ferries, theatrs, theatrical
performances, cimnematographs, public exhibitions, circuses and all othe perfermances, and
place of amusement, and the keeping, preparation, and sale of meat, poultry, fish, game,
butter, cheese, lard, vegetables, bread, and other provisions.

(m) To tax, fix the licence fee for, regulate the business, and fix the location of match
factories, blacksmith shops, foundaries, steam biolers, lumber yards, ship tards, the storage
and sale of gunpowder, tar, pitch, resin, coal, oil, gasoline, benzine, turpentine, hemp, cotton,
nitroglycerin, petroleum, or any products thereof, and of all other highly combustible or
explosive materials, and other tablishment likelyto endanger the public safety or give rise to
conflagrations, or explosions, and, subject to the provisions of ordinance with alw, tenneries,
renderies, tallow chandleries, bone factories, and soap factories, and soap factories.

(n) To tax motor and other vehicles and draft animals not paying the public vehicles licence
fee or any other Isular tax.

(o) To regulate the method of using steam engines and boilers, other than marine or
belonging to the Federal or Insular Governments; to provide for th inspection thereof, and for
a reasonable fee for such inspection, and to regulate, and to fix the fees for the licence of the
engineers engaged in operaating the same.

xxx xxx xxx

(q) To probit, or regulate and fix the licence fees for, the keeping of dogs, and authorized
their impounding and destruction when running at large contrary to ordinanaces, and to tax
and reguate the keeping or training of fighting cocks.

xxx xxx xxx

(u) Subject to the provisions of sections nineteen hundred and for nineteen hundred and five
of this Code, to provide for laying out, construction, and improvement, and to regulate the
use, of streets avenues, alleys, sidewalks, wharves, piers, parks, cemeteries, and othe public
places; to provide for lighting, cleaning and sprinkling of streets and public places; to
reegulate, fix licence fees for and prohibit the use of the same for processions, signs,
signspost, awnings, awning post, the carrying or displaying of banners, placards,
advertisements, or hand bills, or the flying of signs, flags, or banners, whether along, across
ovr, or from buildings along the same; to prohibit the placing, throwing, depositing, or leaving
of obstacles of any kind, offal, garbage, refuse, or other offensive matter or matter liable to
cause damage, in the streets and other public places, and to provide for the collection and
disposition thereof; to provide for the inspection of, fix the license fees for, and regulate the
openings in the same for the laying of gas, water, sewer, and other pipes, the building and
repair of tunnels, sewers, and drains, and all structures in an under the same, and the
erecting of poles and the strining of wires therein; to provides for and regulate crosswalks,
curbs, and gutters therein; to name streets without a name and provide for a regulate the
numbering of houses and lots fronting thereon or in the interior of the blocks; to regulate
traffic and sales upon the streets and other public places; to provide for the abatement of
nuisances in the same and punish the authors or owners thereof; to provide for the
construction and maintenance, and regulate the use, of bridges, viaducts, and culverts; to
prohibit and regulate ball playing, kite flying, hoop rolling, and other amusements which may
annoy persons using the street and public places, or frighten horses or other animals; to
regulate the speed of horses and other animals, motor and other vehicles, cars, and
locomotives with the limits of the city; to regulate the lights use on all such vehicles, cars,
and locomotives; to regulate the locating, constructing and laying of the track of horse,
electric, and other forms of railroad in the streets or othre public places of the city authorized
by law; to provide for and change the location, grade, and crossings of railroads, and to
compel any such railroad to rais or lower its tracks to conform to such provisions or changes;
and to require railroad to raise or lower its tracks to conform to such provisions or changes;
and to require railroad companies to fence their property, or any part thereof, to provide
suitable protection against injury to persons or property, and to construct and repair ditches,
drains, sewer, and culvertes along and under their tracts, so that the natural drainage of the
streets and adjacent property shall not be obstructed.

xxx xxx xxx

(w) To fix the charges to be paid by all water craft landing at or using public wharves, docks,
levees, or landing places: Provided, That the provisions of this subsection shall not apply to
the public wharves, docks, levees, or landing places constructed with the breakwater, on the
bndks of the canal connecting the Pasig River with the inner basin, and on both sides of said
river below the Jones Bridge.

xxx xxx xxx

(z) Subject to the provisions of ordinances issued by the Philippine Health Service in
accordance with law, to provide for the establishement and maintenance and fix the fees for
the use of , and regulate public stables, laundries, and baths, and public markets and
slautherhouses, and prohibit the establishmet or operation within the city limits of public
markets and slaughterhouses by any person, entity, association, or corporation other than
the city.

(aa) To regulate, inspect, and provide measures preventing any discrimination the exclusion
of any race or races in or from any institution, establishment, or service open to the public
within the city limits, or in the sale and supply of gas or electricity, or in the telephone and
street-railway service; to fix and regulate charges therefor where the same have not been
fixed by Act of Congress or of the Philippine Legislature; to regulate and provide for the
inspection of all gas, electric, telephone, and street-railway conduits, mains, meters, and
other apparatus, and provide for the condemnation, substitution or removal of the same
when defective or dangerous.

xxx xxx xxx

(ee) To enact all ordinances it may deem necessary and proper for the sanitation and safey ,
the furtherance of the prosperity, and the promotion of the morality, peace, good order,
comfort, convenience, and general welfare of the city and its inhabitants, and such others as
may be necessary to carry into effect and discharge the powers and duties conferred by the
chapter; and to fix penalities for the violation of ordinances which shall not exceed a two
hundred peso fine or sx month's imprisonment, or both such fine and imprisonment, for a
single offense.

SEC. 2507. Power to levy special assessments for certain purposes. — The Municipal Board
may, by ordinance duly approved, provide for the levying and collection, by special
assessment of the real estate comprised within the district or section of the city especially
benefited, of a part not to exceed sixty per centum of the cost of laying out, not to exceed
sixty per centrum of the cost of laying out, opening, cconstructing, straightening, widening,
extending, grading, paving, curbing, walling, deepening, or otherwise establishing, repairin,
enlarging, or improving public avenues, roads, streets, alleys, sidewalks, prks, plazas,
bridges, landing places, wharves, piers, docks, levees, reservoirs, waterworks, water mains,
water courses, esteros, canals, drains, and swers, including the cost of acquiring the
necessary land. Within the meaning of this article, all real estate comprised withn the district
benefited, except lands or buildings owned by the United States of America, the Govenment
of the Philippine Islands, or the city of Manila, shall be subject to the payment of the special
assessment, based upon the valuation of such real estate as shown by the books of the city
assessor and collector, or its present value as fixed by said officer in the first instance if the
property does not appear of record in his books according to the valuation whereof the
special tax has to be made, computed, and assessed.

Conceivably, there may be other instances where the police power to regulate carries with it
impliedly the power to prescribe fees, but they have no relation to the issues here involved.

Examining the provisions quoted, it is clear that the only one which can possibly by applied to the
present case is subsection (h) of section 2444 authorizing the fixing of fees for building permits and
that if the charge in question possesses any validity whatever it must be as a license fee under that
subsection.

The allowable amount of a license fee or tax depends so much on the special circumstances of each
particular case that it is difficult to harmonize the numerous decisions on the subject and to formulate
definite rules; but, generally speaking, the adjudications appear to recognize three classes been
taken into consideration in determining the reasonableness of the license fee: First, license for the
regulation of useful occupation or enterprises; secondly, license for the regulation or restriction of
non-useful occupation or enterprises, and thirdly, license for revenue only.

(1) The first two of these classes is based on the exercise of the police power and, though there is
some conflict of authority on this point, the better rule seems to be that the conferred power to
regulate and to issue such liscenses carries with it the right to fix a lcense fee. It is well settled that in
the absence of special authority to impose a tax for revenue the fee for this class of licenses may be
only be of a sufficient amount to include the expense of issuing the license and the cost of the
necessary inspection or police surveillance, taking into account not only the expense of direct
regulation but also incidetnal consequences.

Cooley on Constitutional Limitations, 6th ed., at page 242, says:

A right to license an employment does not imply a right to charge a license fee therefore with
a view to revenue, unless such seems to be the manifest purpose of the power; but the
authority of the corporation will be limited to such a charge for the license as will cover the
necessary expenses of issuing it, and the additional labor of officers and other expenses
thereby imposed. (Davis vs. Petrinovich, 112 Al., 654; 21 So., 344; 36 L.R.A., 615; Ft.
Smith vs. Hunt, 72 Ark., 556; 82 S.W., 163; 105 A.S.R., 51; 66 L.R.A., 238; Waters-Pierce
Oil Co. vs. Hot Springs, 85 Arl, 509; 109 S.W., 293 16 L.R.A [N.S.], 1035; Ex parte Dickey,
144 Cal., 234; 77 Pac., 924; 103 A.S.R., 82; 1 Ann. Cas., 428 and note; 66 L.R.A., 928;
Morton vs. Macon, 111 Ga., 162; 36 S.E., 627; 50 L.R.A., 485; State vs. Ashbrook, 154 Mo.,
375; 55 S.W., 627; 77 A.S.R., 765; 48 LR.A., 265; St. Louis vs. Grafeman Dairy Co., 190
Mo., 492; 89 S.W., 617; 1 L.R.A. [N.S.], 936; Johnson vs. Great Falls, 38 Mont., 369; 99
Pac., 1059; 16 Ann. Cas., 974; Rosenbloom vs. State, 64 Neb., 342; ;89 N.W., 1053; 57
L.R.A., 922; State vs. Boyd, 63 Neb., 829; 89 N.W., 417; 58 L.R.A., 108; Hughes vs. Snell,
28 Okla., 828; 115 Pac., 1105, Ann. Cas. [1912D] 374; 34 L.R.A. [N.S.], 1133;
Ellis vs. Frazier, 38 Ore., 462; 63 Pac., 642; 53 L.R.A. 454; lAURENS VS. aNDERSON, 75
S.C., 62; 55 S.E., 136; 117 A.S.R., 885; 9 Ann. Cas., 1003; Seattle vs. Dencker, 58 Wash.,
501; 108 Pac., 1086; 137 A.S.R., 1076; 28 L.R.A. [N.S.], 446.)

(2) Licenses for non-useful occupations are also incidental to the police power and the right to exact
a fee may be implied from the power to license regulate, but in fixing the amount of the license fees
the municipal corporations are allowed a much wider discretion in this class of cases than in the
former, and aside from applying the well-known legal principle that muncipal ordinances must not be
unreasonable, oppressive, or tyrannical, courts have, as a general rule, declined to interfere with
such discretion. The desirability of imposing restraint upon the number of persons who might
otherwise engage in non-useful enterprises is, of course, generally an important factor in the
determination of the amount of this kind of license fee. Hence license fees clearly in the nature of
privilege taxes for revenue have frequently been upheld, especially in cases of licenses for the sale
of liquors. In fact, in the latter cases the fees have rarely been declared unreasonable.
(Swarth vs. Peoplle, 109 Ill.., 621; Dennehy vs. City of Chicago, 120 Ill., 6278 N.E., 227; United
States Distilling Co. vs. City of Chicago, 112 Ill., 19; Drew Country vs.Bennett, 43 Ark., 364; Merced
County vs. Fleming, 111 Cal., 46; 43 Pac., 392; Williams vs. City Council of West Point, 68 Ga., 816;
Cheny vs. Shellbyvile, 19 Ind., 84; Wiley vs.Owens, 39 Ind., 429; Sweet vs. City of Wabash, 41 Ind.,
7; Jones vs. Grady, 25 La. Ann., 646; People ex rel., Cramer vs. Medberry, 39 N.Y.S., 207; 17 Misc.
Rep.., 8; McGuigan vs. Town of Belmont, 89 Wis., 637; 62 N.W., 421; Ex parte Burnett, 30 Ala,, 461;
Craig vs. Burnett, 32 Ala., 728, and Muhlenbrinck vs. Long Branch Commissioners, 42 N.J.L., 364;
36 Am. Rep., 518.)

(3) The fee in the third class of cases, those for revenue purposes, is, perhaps, not a license fee
properly speaking but is generally so termed. It rests upon the taxing power as distinguished from
the police power, and the power of the municipality to exact such fees must be expressly granted by
character or statute and is not to be implied from the conferred power to license and regulate merely.
Judge Cooley, citing numerous authorities, says:

A license is issued under the police power; but the exaction of a license fee with a view to
revenue would be an exercise of the power of taxation; and the character must plainly show
an intent to confer that power, or the municipal corporation cannot assume it. (Cooley,
Constitutional Limitations, 6th ed., pp. 242-243. See also Mayor vs. Beasly, 34 Am. Dec.,
646, and Ki vs. City of Paterson, 26 N.J.L., 298.)

License taxes for revenue on useful occupations fall within this class.

When the power to license for revenue has been clearly granted, the rule as to the amount of the tax
or fee laid down in Fire Department vs. Stanton (159 N.Y., 225), is applicable to the municipality as
much as to the state:

The legislature of the state is not without power to impose a tax on a business in the form of
a license fee, when it deems such to be warranted by considerations of public interest and
for the general welfare, and the only limitation upon its exercise of power, in tha respect, is
that there shall be no discrimination or oppression, and that the burden shall be equally
charged upon all person in similar circumstanes.

Applying the legal principles above stated to the case at bar, we are constrained to hold that in
imposing a fee equal to one-half of the assessed value of the portion of the sidwalk covered by the
arcade in question, the Municipal Board of the city of Manila exceeded its powers. The construction
of buildings is a useful enterprises and the amount of the license fee should therefore be limited to
the cost of licensing, regulating, and suverveillance. It appears that without the arcade the normal
fee for the building permit would have been about P31, with the arcade the fee exacted is P525.60. It
does not appear tha the cost of licensing, regulaitng, and surveillance would be materially increased
through the construction of the arcade, and it is therefore clear that the excess fee is imposed for the
purpose of revenue

Theree is nothing in the character of the city of Manila indicating an intention on the part of the
Legislature to confer power on the Municipal Board to impose a license tax for revenue on the
construction of buildings. The power conferred in relation to such construction is considered merely
as police power from which, as we have seen, taxing power is not inferred. Under the
circumstances, to hold the fee in this case valid would amount to judicial legislation, particularly
undesirable in the present instance where the Legislature, upon its attention being called to the
matter, would no doubt willingly grant as much power as could wisely be placed in the hands of the
municipality.

The judgment of the Court of First Instance holding that the city of Manila has the power to require
the construction of arcades in certain circumstances but that the license fee prescribed by city
Ordinance No. 301 is ilegal, is therefore hereby affirmed. No costs will be allowed. So ordered.
G.R. No. L-12695, March 23, 1959

CITY OF ILOILO, plaintiff-appellee,


vs.
REMEDIOS SIAN VILLANUEVA and EUSEBIO VILLANUEVA, defendants-appellants.

City Fiscal Filemon R. Consolacion and Assistant City Fiscal Enrique I. Soriano, Jr. for appellee.
Rodegilio M. Jalandomi, for appellant.

BAUTISTA ANGELO, J.:

Remedios Sian Villanueva and Eusebio Villanueva, spouses, are the owners of four apartment
houses for rent situated in Iloilo City, to wit: the first house consists of 11 apartments situated at the
corner of Iznart and Aldeguer Sts.; the second consists of 14 apartments situated at Aldeguer St.;
the third consists of 7 apartments situated at the corner of Aldeguer and J.M. Basa Sts.; and the
fourth consists of 2 apartments situated at the same place. Each apartment is occupied by one
family and the food for each is cooked therein.

On September 30, 1946, the Municipal Board of Iloilo City enacted Ordinance No. 86, amending
Ordinance No. 33, wherein the following was provide: (1) tenement house (casa de vecindad), P25
annually; (2) tenement house partly or wholly engaged in or dedicated to business in the streets of
J.M. Basa, Iznart and Aldeguer, P24 per apartment; (3) tenement house partly or wholly engaged in
business in any other streets, P12.00 per apartment.

Pursuant to Ordinance No. 86, the city sought to collect from the spouses an annual license tax fee
of P24 for each of their 34 apartments, or the total sum of P1,610 allegedly due during the period
from the fourth quarter of 1946 to the third quarter of 1948, plus the sum of P332 representing 20%
penalty. The spouses having refused to pay the same, the City of Iloilo filed in the municipal court
action to recover the tax and penalty above-mentioned.

Defendant spouses answered the complaint contending that the ordinance under which the tax is
sought to be collected infringes the powers granted to the city by its Charter and that said ordinance
is violative of the constitutional provisions requiring uniformity of taxation upon the theory that it is
oppressive, unreasonable and discriminatory. Because of the issue of constitutionality raised, the
case was elevated to the Court of First Instance of Iloilo.

Counsel for both parties submitted a stipulation of facts, which was supplemented by an oral
admission of other facts in open court. Thereafter, the court rendered judgment upholding the
legality of the ordinance and ordering defendants to pay the taxes claimed, with interest and costs.
Defendants appealed from this decision to the Court of Appeals, but this case was elevated to this
Court because it involves only questions of law.

It is clear from the Charter of Iloilo City that its municipal board is given the power to impose a
license fee upon the owner of any business or occupation established in the city in the exercise of its
police power. This is clearly inferred from paragraph (cc), section 21, of the Charter (C.A. No. 158),
which provides that the municipal board has the express power (a) to regulate any business or
occupation, and (b) to require licenses from persons engaged in such business or occupation in the
city. But in fixing the fee that may be exacted, it becomes important to determine its nature and
purpose to ascertain whether the power thus conferred has been properly exercised. To this effect, it
becomes equally important to bear in mind if the fee is imposed either as a police regulation or
purely as a revenue measure, for the rules that govern its validity are different. Thus, it has been
held that "License fees for revenue rest upon the taxing power as distinguished from the police
power and the power of the municipality to exact such fees must be expressly granted by charter or
statute and is not to be implied from the conferred power to license and regulate merely" (Cu Unjieng
vs. Patstone, 42 Phil., 818).

It is therefore imperative to determine when a license fee is charged merely for purposes of
regulation and when for purposes of revenue in order to see if the power has been exercised within
the scope of the express powers granted by the law of statute. One test formulated by the authorities
to attain this objectives is the following: "If the fee is designed to raise substantially more than the
cost of the regulation to which it purports to be an incident, its purpose is to raise revenue. If it is a
fee attached to a particular provision for regulation, and appears to be imposed to cover the cost of
that regulation, and does substantially only that, then it is merely for the cost-paying part of a
regulatory measure" (Carter vs. State Tax Commission, 1256 A.L.R., 1402).

This Court has also had occasion to lay down certain rules for determining the nature of the license
fees that may be imposed on the business or occupation that may be established in a given place,
and so that the same may guide us in drawing the demarcation line in the exercise of the power one
way or the other, we will quote hereunder the portions we consider pertinent:

(1) The first two of these classes is based on the exercise of the police power and, though
there is some conflict of authority on this point, the better rule seems to be that the conferred
power to regulate and to issue such license carries with it the right to fix a license fee. It is
well settled that in the absence of special authority to impose a tax for revenue the fee for
this class of licenses may only be of a sufficient amount to include the expense of issuing the
license and the cost of the necessary expense of direct regulation but also incidental
consequences.

xxx xxx xxx

(3) The fee in the third class of cases, those for revenue purposes, is, perhaps, not a license
fee properly speaking but is generally so termed. It rest upon the taxing power as
distinguished from the police power, and the power of the municipality to exact such fees
must be expressly granted by charter or statute and is not to be implied from the conferred
power to license and regulate merely. (Cu Unjieng vs. Patstone, supra.)

It can therefore be said that in order that a license fee may be considered merely as a regulatory
measure, it must be only "of a sufficient amount to include the expenses of issuing the license and
the cost of the necessary inspection or police surveillance, taking into account not only the expense
of direct regulation but also incidental consequences.?' On the other hand, if the fee charged is a
revenue measure, the power to exact such fee "must be expressly granted by charter or statute and
is not to be implied from the conferred power to license and regulate merely."

A cursory reading of the ordinance in question would at once reveal that the license fees charged
therein are not merely for regulation but for revenue, because the fee of P24 per annum charged
therein for every apartment far exceeds "the expense of issuing the license", plus "the cost of
inspection or police surveillance", and other incidental expenses. Thus, for the first house which
consists of 11 apartments, the defendants would have to pay a license fee of P264 annually; for the
second house which consists of 14 apartments, the fee would be P308 annually; for the third house
which consists of 14 apartments, the fee would be P308 annually; for the third house which consists
of 7 apartments, and the fourth which consists of 2 apartments, the fee would be P2156 annually. All
in all, defendants would have to pay a license tax fee amounting to P888 per annum. This, in
addition to the fees that may be exacted from many other residents similarly situated, would
constitute a sizeable sum of revenue which would engross the coffers of the City. These fees cannot
therefore be considered as merely for regulation purposes as contended.

It is however claimed that even if the fees exacted in the ordinance be considered as taxes for
purposes of revenue still their exaction may be justified because the same comes within the power
granted to the city by its Charter. And in that advocacy the city invokes section 21, paragraph j, of
the Charter, which gives the city the power "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." The city claims that a tenement house can be
considered as one belonging to the group of hotels, lodging houses, or boarding houses therein
enumerated.

We disagree. As may be seen from the definition of each establishment hereunder quoted, a
tenement house is different from a hotel, lodging house, or boarding house. These are different
purposes. And it is preposterous to contend that a tenement house may be considered as included
in the clause "other establishments likely to endanger public safety or give rise to conflagration or
explosions" mentioned in the Charter, for as to them the power given to the city is merely to fix their
location to protect the safety of the public, and not to impose a license fee or tax.

A hotel is a place for the accommodation of travelers with food and lodging. (Judell vs.
Goldfield Realty Co., 108 P. 455, 457)

"Lodging houses" is the term applied to houses containing furnished apartments which are
let out by the week or by the month, without meals, or with breakfast simply. (Cromwell vs.
Stephens, N.Y., 2 Daly, 15, 25, 3 Abb. Prac. 26, 35, Cited in Vol. 25, Words and Phrases, p.
583)

A boarding house is not in common parlance or in legal meaning, every private house where
one or more boarders are kept occasionally only and upon special considerations. But it is a
quasi-public house, where boarders are generally and habitually kept, and which is held out
and known as a place of entertainment of that kind. (Cady vs. Mcdowell, 1 Lans. N.Y. 486,
State vs. MacRae 170 N.C. 712, 86 S.E., 1039; Friedrich Music House vs. Harris, 200 Mich.
421, 166 N.W. 869 L.R.A. 1918D, 400.)

A tenement house is any house or building, or portion thereof, which is rented, leased, let, 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 provides, or some of them. (Webster's New International
Dictionary, 2nd Ed., p. 2601.)

It is well-settled that a municipal corporation, unlike a sovereign state, is clothed with no inherent
power of taxation. "The charter or statute must plainly show an intent to confer that power or the
municipality cannot assume it. And the power when granted is to be construed strictissimi juris. Any
doubt or ambiguity arising out of the term used in granting that power must be resolved against the
municipality. Inferences, implications, deductions — all these — have no place in the interpretation
of the taxing power of a municipal corporation." (Icard vs. City of Baguio, 83 Phil., 870; 46 Off. Gaz.
11 Sup., 320; Medina vs. City of Baguio, 91 Phil., 854; 48 Off. Gaz., [11] 4769; Yu vs. City of Lipa,
99 Phil., 975; 54 Off . Gaz., [13] 4055. 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 its taxes a tenement house such as those belonging to defendants.
Wherefore, the decision appealed from is reversed. The complaint is dismissed, without costs.
June 18, 1987

G.R. No. L-75697

VALENTIN TIO doing business under the name and style of OMI ENTERPRISES, petitioner,
vs.
VIDEOGRAM REGULATORY BOARD, MINISTER OF FINANCE, METRO MANILA COMMISSION,
CITY MAYOR and CITY TREASURER OF MANILA, respondents.

Nelson Y. Ng for petitioner.


The City Legal Officer for respondents City Mayor and City Treasurer.

MELENCIO-HERRERA, J.:

This petition was filed on September 1, 1986 by petitioner on his own behalf and purportedly on
behalf of other videogram operators adversely affected. It assails the constitutionality of Presidential
Decree No. 1987 entitled "An Act Creating the Videogram Regulatory Board" with broad powers to
regulate and supervise the videogram industry (hereinafter briefly referred to as the BOARD). The
Decree was promulgated on October 5, 1985 and took effect on April 10, 1986, fifteen (15) days
after completion of its publication in the Official Gazette.

On November 5, 1985, a month after the promulgation of the abovementioned decree, Presidential
Decree No. 1994 amended the National Internal Revenue Code providing, inter alia:

SEC. 134. Video Tapes. — There shall be collected on each processed video-tape cassette,
ready for playback, regardless of length, an annual tax of five pesos; Provided, That locally
manufactured or imported blank video tapes shall be subject to sales tax.

On October 23, 1986, the Greater Manila Theaters Association, Integrated Movie Producers,
Importers and Distributors Association of the Philippines, and Philippine Motion Pictures Producers
Association, hereinafter collectively referred to as the Intervenors, were permitted by the Court to
intervene in the case, over petitioner's opposition, upon the allegations that intervention was
necessary for the complete protection of their rights and that their "survival and very existence is
threatened by the unregulated proliferation of film piracy." The Intervenors were thereafter allowed to
file their Comment in Intervention.

The rationale behind the enactment of the DECREE, is set out in its preambular clauses as follows:

1. WHEREAS, the proliferation and unregulated circulation of videograms including, among


others, videotapes, discs, cassettes or any technical improvement or variation thereof, have
greatly prejudiced the operations of moviehouses and theaters, and have caused a sharp
decline in theatrical attendance by at least forty percent (40%) and a tremendous drop in the
collection of sales, contractor's specific, amusement and other taxes, thereby resulting in
substantial losses estimated at P450 Million annually in government revenues;

2. WHEREAS, videogram(s) establishments collectively earn around P600 Million per annum
from rentals, sales and disposition of videograms, and such earnings have not been
subjected to tax, thereby depriving the Government of approximately P180 Million in taxes
each year;

3. WHEREAS, the unregulated activities of videogram establishments have also affected the
viability of the movie industry, particularly the more than 1,200 movie houses and theaters
throughout the country, and occasioned industry-wide displacement and unemployment due
to the shutdown of numerous moviehouses and theaters;

4. "WHEREAS, in order to ensure national economic recovery, it is imperative for the


Government to create an environment conducive to growth and development of all business
industries, including the movie industry which has an accumulated investment of about P3
Billion;

5. WHEREAS, proper taxation of the activities of videogram establishments will not only
alleviate the dire financial condition of the movie industry upon which more than 75,000
families and 500,000 workers depend for their livelihood, but also provide an additional
source of revenue for the Government, and at the same time rationalize the heretofore
uncontrolled distribution of videograms;

6. WHEREAS, the rampant and unregulated showing of obscene videogram features


constitutes a clear and present danger to the moral and spiritual well-being of the youth, and
impairs the mandate of the Constitution for the State to support the rearing of the youth for
civic efficiency and the development of moral character and promote their physical,
intellectual, and social well-being;

7. WHEREAS, civic-minded citizens and groups have called for remedial measures to curb
these blatant malpractices which have flaunted our censorship and copyright laws;

8. WHEREAS, in the face of these grave emergencies corroding the moral values of the
people and betraying the national economic recovery program, bold emergency measures
must be adopted with dispatch; ... (Numbering of paragraphs supplied).

Petitioner's attack on the constitutionality of the DECREE rests on the following grounds:

1. Section 10 thereof, which imposes a tax of 30% on the gross receipts payable to the local
government is a RIDER and the same is not germane to the subject matter thereof;

2. The tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint of trade in
violation of the due process clause of the Constitution;

3. There is no factual nor legal basis for the exercise by the President of the vast powers
conferred upon him by Amendment No. 6;

4. There is undue delegation of power and authority;

5. The Decree is an ex-post facto law; and

6. There is over regulation of the video industry as if it were a nuisance, which it is not.

We shall consider the foregoing objections in seriatim.


1. The Constitutional requirement that "every bill shall embrace only one subject which shall be
expressed in the title thereof" 1 is sufficiently complied with if the title be comprehensive enough to
include the general purpose which a statute seeks to achieve. It is not necessary that the title
express each and every end that the statute wishes to accomplish. The requirement is satisfied if all
the parts of the statute are related, and are germane to the subject matter expressed in the title, or
as long as they are not inconsistent with or foreign to the general subject and title. 2An act having a
single general subject, indicated in the title, may contain any number of provisions, no matter how
diverse they may be, so long as they are not inconsistent with or foreign to the general subject, and
may be considered in furtherance of such subject by providing for the method and means of carrying
out the general object." 3 The rule also is that the constitutional requirement as to the title of a bill
should not be so narrowly construed as to cripple or impede the power of legislation. 4 It should be
given practical rather than technical construction. 5

Tested by the foregoing criteria, petitioner's contention that the tax provision of the DECREE is a
rider is without merit. That section reads, inter alia:

Section 10. Tax on Sale, Lease or Disposition of Videograms. — Notwithstanding any


provision of law to the contrary, the province shall collect a tax of thirty percent (30%) of the
purchase price or rental rate, as the case may be, for every sale, lease or disposition of a
videogram containing a reproduction of any motion picture or audiovisual program. Fifty
percent (50%) of the proceeds of the tax collected shall accrue to the province, and the other
fifty percent (50%) shall acrrue to the municipality where the tax is collected; PROVIDED,
That in Metropolitan Manila, the tax shall be shared equally by the City/Municipality and the
Metropolitan Manila Commission.

xxx xxx xxx

The foregoing provision is allied and germane to, and is reasonably necessary for the
accomplishment of, the general object of the DECREE, which is the regulation of the video industry
through the Videogram Regulatory Board as expressed in its title. The tax provision is not
inconsistent with, nor foreign to that general subject and title. As a tool for regulation 6 it is simply one
of the regulatory and control mechanisms scattered throughout the DECREE. The express purpose
of the DECREE to include taxation of the video industry in order to regulate and rationalize the
heretofore uncontrolled distribution of videograms is evident from Preambles 2 and 5, supra. Those
preambles explain the motives of the lawmaker in presenting the measure. The title of the DECREE,
which is the creation of the Videogram Regulatory Board, is comprehensive enough to include the
purposes expressed in its Preamble and reasonably covers all its provisions. It is unnecessary to
express all those objectives in the title or that the latter be an index to the body of the DECREE. 7

2. Petitioner also submits that the thirty percent (30%) tax imposed is harsh and oppressive,
confiscatory, and in restraint of trade. However, it is beyond serious question that a tax does not
cease to be valid merely because it regulates, discourages, or even definitely deters the activities
taxed. 8 The power to impose taxes is one so unlimited in force and so searching in extent, that the
courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest
in the discretion of the authority which exercises it. 9 In imposing a tax, the legislature acts upon its
constituents. This is, in general, a sufficient security against erroneous and oppressive taxation. 10

The tax imposed by the DECREE is not only a regulatory but also a revenue measure prompted by
the realization that earnings of videogram establishments of around P600 million per annum have
not been subjected to tax, thereby depriving the Government of an additional source of revenue. It is
an end-user tax, imposed on retailers for every videogram they make available for public viewing. It
is similar to the 30% amusement tax imposed or borne by the movie industry which the theater-
owners pay to the government, but which is passed on to the entire cost of the admission ticket, thus
shifting the tax burden on the buying or the viewing public. It is a tax that is imposed uniformly on all
videogram operators.

The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for
regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of
intellectual property rights, and the proliferation of pornographic video tapes. And while it was also
an objective of the DECREE to protect the movie industry, the tax remains a valid imposition.

The public purpose of a tax may legally exist even if the motive which impelled the legislature
to impose the tax was to favor one industry over another. 11

It is inherent in the power to tax that a state be free to select the subjects of taxation, and it
has been repeatedly held that "inequities which result from a singling out of one particular
class for taxation or exemption infringe no constitutional limitation". 12 Taxation has been
made the implement of the state's police power.13

At bottom, the rate of tax is a matter better addressed to the taxing legislature.

3. Petitioner argues that there was no legal nor factual basis for the promulgation of the DECREE by
the former President under Amendment No. 6 of the 1973 Constitution providing that "whenever in
the judgment of the President ... , there exists a grave emergency or a threat or imminence thereof,
or whenever the interim Batasang Pambansa or the regular National Assembly fails or is unable to
act adequately on any matter for any reason that in his judgment requires immediate action, he may,
in order to meet the exigency, issue the necessary decrees, orders, or letters of instructions, which
shall form part of the law of the land."

In refutation, the Intervenors and the Solicitor General's Office aver that the 8th "whereas" clause
sufficiently summarizes the justification in that grave emergencies corroding the moral values of the
people and betraying the national economic recovery program necessitated bold emergency
measures to be adopted with dispatch. Whatever the reasons "in the judgment" of the then
President, considering that the issue of the validity of the exercise of legislative power under the said
Amendment still pends resolution in several other cases, we reserve resolution of the question
raised at the proper time.

4. Neither can it be successfully argued that the DECREE contains an undue delegation of
legislative power. The grant in Section 11 of the DECREE of authority to the BOARD to "solicit the
direct assistance of other agencies and units of the government and deputize, for a fixed and limited
period, the heads or personnel of such agencies and units to perform enforcement functions for the
Board" is not a delegation of the power to legislate but merely a conferment of authority or discretion
as to its execution, enforcement, and implementation. "The true distinction is between the delegation
of power to make the law, which necessarily involves a discretion as to what it shall be, and
conferring authority or discretion as to its execution to be exercised under and in pursuance of the
law. The first cannot be done; to the latter, no valid objection can be made." 14 Besides, in the very
language of the decree, the authority of the BOARD to solicit such assistance is for a "fixed and
limited period" with the deputized agencies concerned being "subject to the direction and control of
the BOARD." That the grant of such authority might be the source of graft and corruption would not
stigmatize the DECREE as unconstitutional. Should the eventuality occur, the aggrieved parties will
not be without adequate remedy in law.

5. The DECREE is not violative of the ex post facto principle. An ex post facto law is, among other
categories, one which "alters the legal rules of evidence, and authorizes conviction upon less or
different testimony than the law required at the time of the commission of the offense." It is
petitioner's position that Section 15 of the DECREE in providing that:

All videogram establishments in the Philippines are hereby given a period of forty-five (45)
days after the effectivity of this Decree within which to register with and secure a permit from
the BOARD to engage in the videogram business and to register with the BOARD all their
inventories of videograms, including videotapes, discs, cassettes or other technical
improvements or variations thereof, before they could be sold, leased, or otherwise disposed
of. Thereafter any videogram found in the possession of any person engaged in the
videogram business without the required proof of registration by the BOARD, shall be prima
facie evidence of violation of the Decree, whether the possession of such videogram be for
private showing and/or public exhibition.

raises immediately a prima facie evidence of violation of the DECREE when the required proof of
registration of any videogram cannot be presented and thus partakes of the nature of an ex post
facto law.

The argument is untenable. As this Court held in the recent case of Vallarta vs. Court of Appeals, et
al. 15

... it is now well settled that "there is no constitutional objection to the passage of a law
providing that the presumption of innocence may be overcome by a contrary presumption
founded upon the experience of human conduct, and enacting what evidence shall be
sufficient to overcome such presumption of innocence" (People vs. Mingoa 92 Phil. 856
[1953] at 858-59, citing 1 COOLEY, A TREATISE ON THE CONSTITUTIONAL
LIMITATIONS, 639-641). And the "legislature may enact that when certain facts have been
proved that they shall be prima facie evidence of the existence of the guilt of the accused
and shift the burden of proof provided there be a rational connection between the facts
proved and the ultimate facts presumed so that the inference of the one from proof of the
others is not unreasonable and arbitrary because of lack of connection between the two in
common experience". 16

Applied to the challenged provision, there is no question that there is a rational connection between
the fact proved, which is non-registration, and the ultimate fact presumed which is violation of the
DECREE, besides the fact that the prima facie presumption of violation of the DECREE attaches
only after a forty-five-day period counted from its effectivity and is, therefore, neither retrospective in
character.

6. We do not share petitioner's fears that the video industry is being over-regulated and being eased
out of existence as if it were a nuisance. Being a relatively new industry, the need for its regulation
was apparent. While the underlying objective of the DECREE is to protect the moribund movie
industry, there is no question that public welfare is at bottom of its enactment, considering "the unfair
competition posed by rampant film piracy; the erosion of the moral fiber of the viewing public brought
about by the availability of unclassified and unreviewed video tapes containing pornographic films
and films with brutally violent sequences; and losses in government revenues due to the drop in
theatrical attendance, not to mention the fact that the activities of video establishments are virtually
untaxed since mere payment of Mayor's permit and municipal license fees are required to engage in
business. 17

The enactment of the Decree since April 10, 1986 has not brought about the "demise" of the video
industry. On the contrary, video establishments are seen to have proliferated in many places
notwithstanding the 30% tax imposed.
In the last analysis, what petitioner basically questions is the necessity, wisdom and expediency of
the DECREE. These considerations, however, are primarily and exclusively a matter of legislative
concern.

Only congressional power or competence, not the wisdom of the action taken, may be the
basis for declaring a statute invalid. This is as it ought to be. The principle of separation of
powers has in the main wisely allocated the respective authority of each department and
confined its jurisdiction to such a sphere. There would then be intrusion not allowable under
the Constitution if on a matter left to the discretion of a coordinate branch, the judiciary would
substitute its own. If there be adherence to the rule of law, as there ought to be, the last
offender should be courts of justice, to which rightly litigants submit their controversy
precisely to maintain unimpaired the supremacy of legal norms and prescriptions. The attack
on the validity of the challenged provision likewise insofar as there may be objections, even if
valid and cogent on its wisdom cannot be sustained. 18

In fine, petitioner has not overcome the presumption of validity which attaches to a challenged
statute. We find no clear violation of the Constitution which would justify us in pronouncing
Presidential Decree No. 1987 as unconstitutional and void.

WHEREFORE, the instant Petition is hereby dismissed.

No costs.

SO ORDERED.
G.R. No. 75713 October 2, 1989

PHILIPPINE COCONUT PRODUCERS FEDERATION, INC., (COCOFED), MARIA CLARA L.


LOBREGAT, BIENVENIDO A. MARQUEZ, SR., MANUEL J. LASERNA, JR., DOMINGO P.
ESPINA, CELESTINO B. SABATE, JOSE A. GOMEZ, EDUARDO U. ESCUETA, MANUEL V. DEL
ROSARIO, SULPICIO G. GRANADA, INAKI R. MENDEZONA, JOSE R. ELEAZER, JR., JOSE
REYNALDO V. MORENTE, ELADIO I. CHATTO, COCONUT INVESTMENT COMPANY, INC.,
SERGIO R. RIGODON, SPOUSES MANUEL AND CONCEPCION UTZURRUM, represented by
MANUEL M. UTZURRUM, JR., MAXIMO M. PEREZ, RAUL ANTONIO Z. UNSON, JUSTO C.
RUBI, RODOLFO Z. SALVACION, PAZ F. ABILA, JESUS 0. SALVAN, TEODORICO R. RANERA,
CRISPULO M. PIONILLA, ROSARIO P. MERTO, ISABEL R. ALVAREZ, GREGORIO L.
ANTENOR, EDILBERTO CONTRERAS, REYNALDO R. LADLAD, VENANCIO R. PINON, LUIS A.
NEGRE, ANASTACIO S. NIERE, FRANCISCO R. BINABAY, JAMITO A. DAPULA, ROSENDO M.
ABARRENTOS, RAUL M. ALEGRE, AGUSTIN C. IBAL, ROGELIO A. DELA CRUZ, GREGORIO
V. MERCADO, and All other coconut farmers similarly situated, petitioners,
vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, HON. JOVITO R. SALONGA, HON.
RAMON DIAZ, HON. RAUL DAZA, HON. MARY CONCEPCION BAUTISTA and HON. QUINTIN
DOROMAL, respondents, THE PHILIPPINE COCONUT AUTHORITY, intervenor.

Jose D. Valmores, Reynaldo A. Ruiz, Manuel J. Laserna, Jr. and Ramon C. Malinao for petitioners.

Agcaoili and Associates for movant.

NARVASA, J.:

The petition for certiorari and prohibition with preliminary injunction at bar seeks the annulment of the
sequestration and other orders issued by the Presidential Commission on Good Government
PCGG)1 against petitioner Philippine Coconut Producers Federation, Inc. (COCOFED) and various
other industrial and commercial enterprises set up ostensibly for purposes concerned with the
development of the coconut industry and the welfare of those involved in or served by it. These
agencies or enterprises were organized and financed with revenues derived from coconut levies
imposed under a succession of laws of the late dictatorship and are alleged to have been thereafter
used as conduits to perpetrate "the most stupendous malversation of public funds in the annals of
our history," as the PCGG puts it, 2 with deposed President Ferdinand Marcos and his cronies as the
suspected authors and chief beneficiaries of the resulting "coconut industry monopoly.

The action is denominated a class suit of the COCOFED, a private national association of coconut
producers which by legal mandate receives allocations from the coconut levy funds to finance its
operating expenses and projects; the Coconut Investment Company (CIC), the first government
corporation created to administer the coconut levy funds (as will later be explained in some detail);
and individual petitioners Maria Clara Lobregat and some 37 other persons, all claiming to be either
coconut farmers, coconut workers or stockholders of the sequestered companies, bringing suit for
themselves and in representation of "the more than one million coconut farmers who are similarly
situated" upon a claim of private interest in the sequestered assets and properties.

The COCONUT LEVY FUNDS:

The sequestration of the corporations and the other acts complained of were undertaken by the
PCGG preparatory to the filing of suit in the Sandiganbayan against Marcos and his associates for
the illicit conversion of the coconut levy funds, purportedly channeled through the COCOFED and
the other sequestered businesses, into private pelf. These funds fall into four general classes, viz.:
(a) the Coconut Investment Fund created under R.A. 6260 (effective June 19, 1971); (b) the Coconut
Consumers Stabilization Fund created under PD 276 (effective August 20, 1973); (c) the Coconut
Industry Development Fund created under PD 582 (effective November 14,1974); and (d) the
Coconut Industry Stabilization Fund created under P.D. 1841 (effective October 2, 1981).

The Coconut Investment Fund (CIF):

The Coconut Investment Fund, or CIF, was put up in 1971 by R.A. 6260 which declared it to be the
national policy to accelerate the development of the coconut industry through the provision of
adequate medium and long term financing for capital investment in the industry.3 A levy of P 0.55
was imposed on the first domestic sale of every 100 kilograms of copra or equivalent coconut
product,4 fifty centavos (P 0. 50) of which accrued to the CIF. The Philippine Coconut Administration
(or PHILCOA), 5 received three centavos (P 0.03)6 of the five remaining, and the balance was placed
"at the disposition of the recognized national association of coconut producers with the largest x x
membership"7- which association was declared by PHILCOA 8 to be petitioner COCOFED.

The CIF was to be used exclusively to pay for the Philippine Government's subscription to the capital
stock 9 of the Coconut Investment Company (CIC), a corporation with a capitalization of P
100,000,000.00 created by the statute to administer the Fund, as has already been stated, and to
invest its capital in financing "agricultural, industrial or other productive (coconut) enterprises"
qualified under the terms of the statute to apply for loans with the CIC.10 The State was to initially
subscribe to CIC's capital stock "for and on behalf of the coconut farmers," to whom such shares
were supposed to be transferred "upon full payment (with the collections on the levy) of the
authorized capital stock x x or upon termination of a ten-year period from the start of the collection of
the levy x x, whichever comes first."11 The scheme, in short, called for the use of the CIF-funds
collected mainly from coconut farmers-to pay for the CIC shares of stock to be subscribed by the
Government and held by it until the levy was lifted, whereupon the Government was to "convert" the
receipts issued to the farmers (as evidence of payment of the levy) "into shares of stock"-this time in
the farmers' names in the new, private corporation to be formed by them at such time, conformably
with the provisions of the law. 12

The levy imposed by R.A. 6260 was collected from 1972 to 1982.

The Coconut Consumers Stabilization Fund (CCSF)

P.D. 276 established a second fund on August 20,1973, barely a year after the creation of the CIF.
The decree imposed a "Stabilization Fund Levy" of fifteen pesos (P 15.00) on the first sale of every
100 kilograms of copra resecada or equivalent product.13 The revenues were to be credited to the
Coconut Stabilization Fund (CCSF)14Which was to be used to subsidize the sale of coconut-based
products at prices set by the Price Control Council, in order to stabilize the price of edible oil and
other coconut oil-based products for the benefit of consumers 15 The levy was to be collected for only
one year.16 The CCSF however became a permanent fund under PD 414.17

The Coconut Industry Development Fund (CIDF):

On November 14, 1974, PD 582 was promulgated setting up yet another "permanent fund ... (this
time to) finance the establishment, operation and maintenance of a hybrid coconut seednut farm ...
(and the implementation of) a nationwide coconut replanting program" "using precocious high-
yielding hybrid seednuts x x to (be) distribute(d), ... free, to coconut farmers." 18 The fund was
denominated the Coconut Industry Development Fund, or the CIDF. Its initial capital of P100 million
was to be paid from the CCSF, and in addition to this, the PCA was directed to thereafter remit to the
fund "an amount equal to at least twenty centavos (PO.20) per kilogram of copra resecada or its
equivalent out of its current collections of the coconut consumers stabilization levy." 19 The CIDF was
assured of continued contribution from the permanent levy in the same amount deemed to be
"automatically imposed" in the event of the lifting of the Stabilization Fund Levy.20

The Coconut Industry Investment Fund (CIIF)

The various laws relating to the coconut industry were codified in 1976; promulgated on October 21
of that year was PD 961 or the "Coconut Industry Code," which later came to be known as the
"Revised Coconut Industry Code" upon its amendment by PD 1468, effective June 11, 1978. The
Code provided for the continued enforcement of the Stabilization Fund Levy imposed by PD 276 and
for the use of the CCSF and the CIDF for substantially the same purposes specified by the
enactments ordaining their creation.

A new provision was however inserted in the Code, authorizing the use of the balance of the CIDF
not needed to finance the replanting program and other authorized projects, for the acquisition of
"shares of stock in corporations organized for the purpose of engaging in the establishment and
operation of industries, .. commercial activities and other allied business undertakings relating to
coconut and other palm oil indust(ries)."21 From this fund thus created, the Coconut Industry
Investment Fund or the CIIF, were purchased the shares of stock in what have come to be known as
the "CIIF companies the sequestered corporations into which said CIIF (Coconut Industry
Investment Fund) was heavily invested after its creation.

The Coconut Industry Stabilization Fund (CISF): (Formerly CCSF)

The collection of the CCSF and the CIDF was suspended for a time in virtue of PD 1699.22 However,
on October 2, 1981, PD 1841 was issued reviving the levies and renaming the CCSF the Coconut
Industry Stabilization Fund, or the CISF, to which accrued the new collections. The impost was in the
amount of P50.00 for every 100 kilos of copra resecada or equivalent product delivered to exporters
and other copra users. The funds collected were to be apportioned among the CIDF,23 the
COCOFED,24 the PCA,25 and the "bank acquired for the benefit of the coconut farmers under PD 755"
referring to the United Coconut Planters Bank or the UCPB.26

The AGENCIES INVOLVED:

As may be observed, three agencies played key roles in the collection, management, investment
and use of the coconut levy funds: (a) the Philippine Coconut Authority (PCA), formerly the
Philippine Coconut Administration or the PHILCOA; (b) the COCOFED; and (c) the UCPB. Charged
with the duty to "receive and administer the funds provided by law,"27 the Philippine Coconut
Authority or the PCA was created on June 30, 1973 by P.D. 232 to replace and assume the
functions of (1) the Philippine Coconut Administration or PHILCOA (which had been established in
1954), (2) the Coconut Coordinating Council (CCC), and (3) the Philippine Coconut Research
Institute(PHILCORIN). By virtue of the Decree, the PCA took over the collection of the CIF Levy
under RA 6260 in 1973, while subsequent statutes, to wit, PD 276 (in relation to PD 414), PD 582,
and PD 1841, empowered it specifically to manage the CCSF, the CIDF, and the CISF, from the
time of their creation. Under the laws just mentioned, the PCA, as the government arm that
"formulate(s) x x (the) general program of development for the coconut x x and palm oil
indust(ries)" 28 is allotted a share in the funds kept in its trust. Its governing board is composed of
members coming from the public and private sectors, among them representatives of COCOFED.29
The Philippine Coconut Producers Federation, Inc. or the COCOFED, as the private national
association of coconut producers certified in 1971 by the PHILCOA as having the largest
membership among such producers,30 receives substantial portions of the coconut funds to finance
its operating expenses and socio-economic projects. R.A. 6260 entrusted it with the task of
maintaining "continuing liaison with the different sectors of the industry, the government and its own
mass base." 31 Its president sits on the governing board of the PCA and on the Philippine Coconut
Consumers Stabilization Committee, the agency assisting the PCA in the administration of the
CCSF. It is also represented in the Board of Directors of the CIC and of two (2) CIIF companies
COCOMARK (the COCOFED Marketing Corporation) and COCOLIFE (the United Coconut Planters'
Life Insurance Co.).

The United Coconut Planters Bank (or the UCPB) is a commercial bank acquired "for the benefit of
the coconut farmers" 32 with the use of the Coconut Consumers Stabilization Fund (CCSF) in virtue of
P.D. 755, promulgated on July 29,1975. The Decree authorized the Bank to provide the intended
beneficiaries with "readily available credit facilities at preferential rates." 33 It also authorized the
distribution of the Bank's shares of stock, free, to the coconut farmers; and some 1,405,366
purported recipients have been listed as UCPB stockholders as of April 10, 1986.34

The UCPB was thereafter empowered by PD 1468 to "(make) investments for the benefit of the
coconut farmers"35using that part of the CIDF referred to as the CIIF. Thus were organized the "CIIF
companies" subject of the sequestration orders herein assailed.36 As in the case of the shares of
stock in the UCPB, the law provided for the "equitable distribution" to the coconut farmers, free, of
the investments made in the CIIF companies.37 Among the corporations in which the UCPB has
come to have substantial shareholdings are the COCOFED Marketing Corporation (COCOMARK),
United Coconut Planters' Life Insurance (COCOLIFE) GRANEX, ILICOCO, Southern Island Oil Mill,
Legaspi Oil of Davao City and of Cagayan de Oro City, Anchor Insurance Brokerage, Inc., Southern
Luzon Coconut Oil Mills, and San Pablo Oil Manufacturing Co., Inc. Some of these corporations in
turn acquired UCPB shares of stock as well as shareholdings in the San Miguel Corporation.

The SEQUESTRATION PROCEEDINGS:

On March 19, 1986, the Presidential Commission on Good Government (PCGG) sequestered CIIF
companies GRANEX, ILICOCO, Southern Island Oil Mill, Legaspi Oil of Davao City, and Legaspi Oil
of Cagayan de Oro City. Also sequestered shortly thereafter, on April 21, 1986, were Anchor
Insurance Brokerage, Inc., Southern Luzon Coconut Oil Mills and the San Pablo Oil Manufacturing
Co., Inc. Shares of stock in the UCPB registered in the names of these and other CIIF companies,
and later those issued to 1,405,366 purported coconut farmers-stockholders were likewise
sequestered, as were the 33.1 million shares of stock held by fourteen (14) CIIF companies in the
San Miguel Corporation.

Next placed under sequestration on July 8,1986 was the COCOFED. Its bank accounts as well as
those of CIIF companies COCOLIFE and COCOMARK, of COCOFED president Maria Clara
Lobregat, and of COCOFED directors Inaki Mendezona and Eladio Chatto, were frozen. On May 30,
1988, PCGG appointed a 15-man Board of Directors for COCOFED, replacing the incumbents.
Management teams for the CIC and COCOMARK were deputized the day after, relieving Maria
Clara Lobregat and Manuel Agcaoili as president and vice-president, respectively, of both
corporations, and Vicente Valmores as corporate secretary of the CIC. Various other orders
pertaining to the CIC, the CIIF companies, COCOFED, and the UCPB were also afterwards issued
and implemented, with a view to conserving their assets pending the government's investigation into
the suspected plunder of the coconut levy funds by former President Ferdinand Marcos and his
associates and cronies.
PETITIONERS' SUBMITTALS

The instant petition was filed on September 3, 1986 to assail the foregoing directives and acts. The
petitioners posit that:

1) the PCGG has no jurisdiction over the sequestered properties as the


powersconferred upon it by Executive Orders Numbered 1, 2 and 14 extend only to
ill-gotten wealth of "former President Ferdinand E. Marcos and/or his wife, Imelda
Romualdez Marcos" or "their close relatives, subordinates, business associates,
dummies, agents, or nominees," 38 and not to the private properties of the coconut
farmers and the petitioners, who do not fall under any of the classes of persons
specified under the Orders;

2) the sequestered properties are not ill-gotten wealth of the petitioners whose
ownership of the shares of stock in the COCOFED, the CIIF companies, and the
UCPB resulted from lawful disbursements of the coconut levy fund; and

3) the sequestration of the petitioners' private properties is a gross abuse of


prosecutorial discretion on the part of PCGG and, corollarily, rendered enforcement
of E.O.'s 1, 2 and 14 as against them unconstitutional and violative of the Bill of
Rights.

PCA INTERVENTION

A petition-in-intervention presented by the PCA was admitted by the Court by Resolution dated May
24, 1988.

THE PCGG POSITION

The Solicitor General, for the PCGG, submits that the funds collected from the coconut levy are
public funds which no amount of pronouncements to the contrary-by decree or any other presidential
issuance can convert into private money; that in the light of the report of the Commission on Audit of
its examination of the funds made after the unceremonious deposal of President Marcos, to the
effect that the funds were misappropriated and squandered by the latter, his cronies and the leaders
of the coconut industry, it is the duty of PCGG to recover the same and, pending recovery
proceedings, to make use of its power of sequestration and other remedies conferred by Executive
Orders 1, 2 and 14. In his view, the so-called "more than one million coconut farmers" do not own
the coconut levy funds or the assets acquired therewith.

1. The question of the validity of PCGG sequestration and freeze orders as


provisional measures to collect and conserve the assets believed to be ill-gotten
wealth has been laid to rest in BASECO vs. PCGG (150 SCRA 181) where this Court
held that such orders are not confiscatory but only preservative in character, not
designed to effect a confiscation of, but only to conserve properties believed to be ill-
gotten wealth of the ex-president, his family and associates, and to prevent their
concealment, dissipation, or transfer, pending the determination of their true
ownership.

Nor may it be gainsaid that pending the institution of the suits for the recovery of
such ill-gotten wealth as the evidence at hand may reveal, there is an obvious and
imperative need for preliminary provisional measures to prevent the concealment,
disappearance, destruction, dissipation, or loss of the assets and properties subject
of the suits, or to restrain or foil acts that may render moot and academic, or
effectively hamper, delay, or negate efforts to recover the same.

xxx

To answer this need, the law has prescribed three (3) provisional remedies. These
are: (1) sequestration; (2) freeze orders; and (3) provisional takeover. (at p. 208)

The PCGG exercised the powers conferred upon it by Executive Orders Numbered 1, 2 and 14 on
the basis of evidence in its possession which it deemed sufficient to show, prima facie, that former
President Marcos, Mr. Eduardo Cojuangco, Jr., the COCOFED and its national leaders, collaborated
with each other to perpetrate the "systematic plunder" of the funds generated by the coconut levy.
That preliminary determination finds support in the documents and evidence relative thereto.
Reports, for example, from the Commission on Audit (COA) which audited the funds after the
February 1986 Revolution tend to show that:

(1) of the funds allocated to COCOFED, some P20 million were delivered to Mrs.
Imelda R. Marcos for the Imelda Romualdez Marcos Scholarship Program of which
no accounting has been made;

(2) COCOFED purchased an aircraft at a total cost of P 11,849,071.29;

(3) a COCOFED disbursement of P 23 million for the account of the Census


Committee which undertook the survey of coconut farmers to determine other
farmers entitled to the unissued shares of UCPB, was under-reimbursed by P
3,584,826.36;

(4) cash advances in hundreds of thousands of pesos granted by COCOMARK to


COCOFED officials Jose Reynaldo Morente, Inaki Mendezona, Bienvenido Marquez
and Maria Clara Lobregat were unliquidated;

(5) COCOMARK made disbursements for cash advances for travel and
transportation expenses to its directors who are also directors of COCOFED without
supporting documents.

The investigation by the PCGG of the funds supposed to havebeen invested in the UCPB on behalf
of the coconut farmers, also reveal that UCPB shares appearing in the UCPB books as issued to
1,405,366 coconut farmers are not in fact owned by the said persons because a large number of
them sold their stock to national and local officials of COCOFED at the latter's initiative; and
documents found in Malacanang in the wake of the February 1986 people's revolution tend to show
that Eduardo Cojuangco, Jr., apart from owning his own shares in UCPB, also "fronted" for the
shares of Mr. Marcos in that bank.

As to the coconut levy funds invested in the CIIF companies for the benefit of coconut farmers, COA
findings adverted to by the PCGG disclose that said funds were invested in companies most of
which were or became vehicles to effectuate their misuse. The United Coconut Oil Mills, Inc.
(UNICOM), a CIIF funded company, for example, appears to have spent millions of pesos to acquire
non-operating and unprofitable coconut oil mills owned by persons close to the Marcoses that P840
million of the CIDF were siphoned off to Agricultural Investors, Inc., a corporation owned and
controlled by Eduardo Cojuangco, Jr., which has a paid-up capital of only P100,000; and that P41.9
million worth of seednuts equivalent to 24.48% of the total purchases of UCPB using CIDF from
1979 to 1982 had not been accounted for. Reports were also cited showing that only 75.52% of the
total seednuts purchased had been distributed to the participants of the replanting program. The
PCGG also claims to have in its possession evidence of other instances of misuse or
misappropriation of the coconut levy funds attributable to the petitioners.

The petitioners deny the PCGG's postulations and assertions.

It is of course not for this Court to pass upon the factual issues thus raised. That function pertains to
the Sandiganbayan in the first instance. For purposes of this proceeding, all that the Court needs to
determine is whether or not there is prima facie justification for the sequestration ordered by the
PCGG. The Court is satisfied that there is. The cited incidents, given the public character of the
coconut levy funds, place petitioners COCOFED and its leaders and officials, at least prima facie,
squarely within the purview of Executive Orders Nos. 1, 2 and 14, as construed and applied
in BASECO, to wit:

1. that ill-gotten properties (were) amassed by the leaders and supporters of the
previous regime;

a. more particularly, that (i)ll-gotten wealth was accumulated by former President


Ferdinand E. Marcos, his immediate family, relatives, subordinates and close
associates, x x located in the Philippines or abroad, x x (and) business enterprises
and entities (came to be) owned or controlled by them, during x x (the Marcos)
administration, directly or through nominees, by taking undue advantage of their
public office and using their powers, authority, influence, connections or
relationships

b. otherwise stated, that 'there are assets and properties purportedly pertaining to
former President Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez
Marcos, their close relatives, subordinates, business associates, dummies, agents or
nominees which had been or were acquired by them directly or indirectly, through or
as a result of the improper or illegal use of funds or properties owned by the
Government of the Philippines or any of its branches, instrumentalities, enterprises,
banks or financial institutions, or by taking undue advantage of their office, authority,
influence, connections or relationship, resulting in their unjust enrichment and
causing grave damage and prejudice to the Filipino people and the Republic of the
Philippines';

c. that 'said assets and properties are in the form of bank accounts, deposits, trust
accounts, shares of stocks, buildings, shopping centers, condominiums, mansions,
residences, estates, and other kinds of real and personal properties in the Philippines
and in various countries of the world' ...39

2. The petitioners' claim that the assets acquired with the coconut levy funds are
privately owned by the coconut farmers is founded on certain provisions of law, to
wit:

Sec. 7. Incorporation as a private entity under Act Numbered One Thousand Four
Hundred Fifty-Nine, as amended. -Upon full payment of the authorized capital stock,
as evidenced by receipts issued for levies paid, or upon termination of a ten-year
period from the start of the collection of the levy as provided in Section eight hereof,
whichever comes first, the shares of stock held by the Philippine Government for and
in behalf of the coconut farmers shall be transferred, in accordance with such rules,
regulations and procedures as the Company shall prescribe and promulgate, to and
in the name of the coconut farmers who shall then incorporate as a private entity
under Act Numbered One Thousand Four Hundred Fifty-Nine, as amended.... (Sec.
7, Republic Act 6260)

and

The Coconut Consumers Stabilization Fund and the Coconut Industry Development
Fund as well as all disbursements of said Funds for the benefit of the coconut
farmers x x shall not be construed or interpreted .. as special and/or fiduciary funds,
or as part of the general funds of the national government within the contemplation of
P.D. 711; nor as subsidy, donation, levy government funded investment, or
government share within the contemplation of PD 898, the intention being that said
fund and the disbursements thereof as herein authorized for the benefit of the
coconut farmers shall be owned by them in their private capacities .... (Section 5,
Article III, P.D. 1468)

The proposition is open to question, to say the least. Indeed, the Solicitor General suggests quite
strongly that the laws operating or purporting to convert the coconut levy funds into private funds,
are a transgression of the basic limitations for the licit exercise of the state's taxing and police
powers, and that certain provisions of said laws are merely clever strategems to keep away
government audit in order to facilitate misappropriation of the funds in question.

The utilization and proper management of the coconut levy funds, raised as they were by the State's
police and taxing powers, are certainly the concern of the Government. It cannot be denied that it
was the welfare of the entire nation that provided the prime moving factor for the imposition of the
levy. It cannot be denied that the coconut industry is one of the major industries supporting the
national economy. It is, therefore, the State's concern to make it a strong and secure source not only
of the livelihood of a significant segment of the population but also of export earnings the sustained
growth of which is one of the imperatives of economic stability. The coconut levy funds are clearly
affected with public interest. Until it is demonstrated satisfactorily that they have legitimately become
private funds, they must prima facie and by reason of the circumstances in which they were raised
and accumulated be accounted subject to the measures prescribed in E.O. Nos. 1, 2, and 14 to
prevent their concealment, dissipation, etc., which measures include the sequestration and other
orders of the PCGG complained of.

3. The incidents concerning the voting of the sequestered shares, the COCOFED
elections, and the replacement of directors, being matters incidental to the
sequestration, should be addressed to the Sandiganbayan in accordance with the
doctrine laid down in PCGG vs. Pena, 159 SCRA 556, reiterated in G.R. No. 74910,
Andres Soriano III vs. Hon. Manuel Yuzon; G.R. No. 75075, Eduardo Cojuangco, Jr.
vs. Securities and Exchange Commission; G.R. No. 75094, Clifton Ganay vs.
Presidential Commission on Good Government; G.R. No. 76397, Board of Directors
of San Miguel Corporation vs. Securities and Exchange Commission; G.R. No.
79459, Eduardo Cojuangco, Jr. vs. Hon. Pedro N. Laggui; G.R. No. 79520, Neptunia
Corporation, Ltd. vs. Presidential Commission on Good Government, August 10,
1988.

In view of the foregoing, the petition and the petition-in-intervention are hereby DISMISSED. Costs
against petitioners.

SO ORDERED.
[G.R. No. 125704. August 28, 1998]

PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF


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

DECISION
ROMERO, J.:

Petitioner Philex Mining Corp. assails the decision of the Court of Appeals
promulgated on April 8, 1996 in CA-G.R. SP No. 36975[1] affirming the Court of Tax
Appeals decision in CTA Case No. 4872 dated March 16, 1995 [2] ordering it to pay the
amount of P110,677,668.52 as excise tax liability for the period from the 2 nd quarter of
1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully
paid pursuant to Sections 248 and 249 of the Tax Code of 1977.
The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to
settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd
quarter of 1992 in the total amount of P123,821,982.52 computed as follows:

PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE

TAX DUE

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

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

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

------------------- ----------------- ----------------- ---------------------

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

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

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

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

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

========== ========== =========== ===========[3]


In a letter dated August 20, 1992,[4] Philex protested the demand for payment of the
tax liabilities stating that it has pending claims for VAT input credit/refund for the taxes it
paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus
interest. Therefore, these claims for tax credit/refund should be applied against the tax
liabilities, citing our ruling in Commissioner of Internal Revenue v. Itogon-Suyoc Mines,
Inc.[5]
In reply, the BIR, in a letter dated September 7, 1992,[6] found no merit in Philexs
position. Since these pending claims have not yet been established or determined with
certainty, it follows that no legal compensation can take place. Hence, he BIR reiterated
its demand that Philex settle the amount plus interest within 30 days from the receipt of
the letter.
In view of the BIRs denial of the offsetting of Philexs claim for VAT input credit/refund
against its exercise tax obligation, Philex raised the issue to the Court of Tax Appeals on
November 6, 1992.[7] In the course of the proceedings, the BIR issued a Tax Credit
Certificate SN 001795 in the amount of P13,144,313.88 which, applied to the total tax
liabilities of Philex of P123,821,982.52; effectively lowered the latters tax obligation
of P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the
remaining balance of P110,677,688.52 plus interest, elucidating its reason, to wit:

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

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

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

Aggrieved with the decision, Philex appealed the case before the Court of Appeals
docketed as CA-G.R. CV No. 36975.[11] Nonetheless, on April 8, 1996, the Court of
Appeals affirmed the Court of Tax Appeals observation. The pertinent portion of which
reads:[12]
WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the
decision dated March 16, 1995 is AFFIRMED.

Philex filed a motion for reconsideration which was, nevertheless, denied in a


Resolution dated July 11, 1996.[13]
However, a few days after the denial of its motion for reconsideration, Philex was able
to obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but also
for 1992 and 1994, computed as follows:[14]
Period Covered By Tax Credit Certificate Date Of Issue Amount
Claims For Vat Number
refund/credit

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

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

1989 007732 11 July 1996 P37,322,799.19

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

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

In view of the grant of its VAT input credit/refund, Philex now contends that the same
should, ipso jure, off-set its excise tax liabilities[15] since both had already become due and
demandable, as well as fully liquidated;[16] hence, legal compensation can properly take
place.
We see no merit in this contention.
In several instances prior to the instant case, we have already made the
pronouncement that taxes cannot be subject to compensation for the simple reason that
the government and the taxpayer are not creditors and debtors of each other. [17] There is
a material distinction between a tax and debt. Debts are due to the Government in its
corporate capacity, while taxes are due to the Government in its sovereign capacity. [18] We
find no cogent reason to deviate from the aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court,[19] we
categorically held that taxes cannot be subject to set-off or compensation, thus:

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

The ruling in Francia has been applied to the subsequent case of Caltex Philippines,
Inc. v. Commission on Audit,[20] which reiterated that:
x x x a taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government
and taxpayer are not mutually creditors and debtors of each other and a claim for taxes
is not such a debt, demand, contract or judgment as is allowed to be set-off.

Further, Philexs reliance on our holding in Commissioner of Internal Revenue v.


Itogon-Suyoc Mines, Inc., wherein we ruled that a pending refund may be set off against
an existing tax liability even though the refund has not yet been approved by the
Commissioner,[21] is no longer without any support in statutory law.
It is important to note that the premise of our ruling in the aforementioned case was
anchored on Section 51(d) of the National Revenue Code of 1939. However, when the
National Internal Revenue Code of 1977 was enacted, the same provision upon which
the Itogon-Suyoc pronouncement was based was omitted.[22] Accordingly, the doctrine
enunciated in Itogon-Suyoc cannot be invoked by Philex.
Despite the foregoing rulings clearly adverse to Philexs position, it asserts that the
imposition of surcharge and interest for the non-payment of the excise taxes within the
time prescribed was unjustified.Philex posits the theory that it had no obligation to pay the
excise liabilities within the prescribed period since, after all, it still has pending claims for
VAT input credit/refund with BIR.[23]
We fail to see the logic of Philexs claim for this is an outright disregard of the basic
principle in tax law that taxes are the lifeblood of the government and so should be
collected without unnecessary hindrance.[24] Evidently, to countenance Philexs whimsical
reason would render ineffective our tax collection system.Too simplistic, it finds no
support in law or in jurisprudence.
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the
ground that it has a pending tax claim for refund or credit against the government which
has not yet been granted. It must be noted that a distinguishing feature of a tax is that it
is compulsory rather than a matter of bargain.[25]Hence, a tax does not depend upon the
consent of the taxpayer.[26] If any payer can defer the payment of taxes by raising the
defense that it still has a pending claim for refund or credit, this would adversely affect the
government revenue system. A taxpayer cannot refuse to pay his taxes when they fall
due simply because he has a claim against the government or that the collection of the
tax is contingent on the result of the lawsuit it filed against the government. [27] Moreover,
Philex's theory that would automatically apply its VAT input credit/refund against its tax
liabilities can easily give rise to confusion and abuse, depriving the government of
authority over the manner by which taxpayers credit and offset their tax liabilities.
Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the
government is immaterial for the imposition of charges and penalties prescribed under
Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory
and the BIR is not vested with any authority to waive the collection thereof. [28] The same
cannot be condoned for flimsy reasons,[29] similar to the one advanced by Philex in
justifying its non-payment of its tax liabilities.
Finally, Philex asserts that the BIR violated Section 106(e)[30] of the National Internal
Revenue Code of 1977, which requires the refund of input taxes within 60 days, [31] when it
took five years for the latter to grant its tax claim for VAT input credit/refund. [32]
In this regard, we agree with Philex. While there is no dispute that a claimant has the
burden of proof to establish the factual basis of his or her claim for tax credit or
refund,[33] however, once the claimant has submitted all the required documents, it is the
function of the BIR to assess these documents with purposeful dispatch. After all, since
taxpayers owe honesty to government it is but just that government render fair service to
the taxpayers.[34]
In the instant case, the VAT input taxes were paid between 1989 to 1991 but the
refund of these erroneously paid taxes was only granted in 1996. Obviously, had the BIR
been more diligent and judicious with their duty, it could have granted the refund earlier.
We need not remind the BIR that simple justice requires the speedy refund of wrongly-
held taxes.[35] Fair dealing and nothing less, is expected by the taxpayer from the BIR in
the latter's discharge of its function. As aptly held in Roxas v. Court of Tax Appeals:[36]

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

Despite our concern with the lethargic manner by which the BIR handled Philex's tax
claim, it is a settled rule that in the performance of governmental function, the State is not
bound by the neglect of its agents and officers. Nowhere is this more true than in the field
of taxation.[37] Again, while we understand Philex's predicament, it must be stressed that
the same is not valid reason for the non- payment of its tax liabilities.
To be sure, this is not state that the taxpayer is devoid of remedy against public
servants or employees especially BIR examiners who, in investigating tax claims are seen
to drag their feet needlessly. First, if the BIR takes time in acting upon the taxpayer's
claims for refund, the latter can seek judicial remedy before the Court of Tax Appeals in
the manner prescribed by law.[38] Second, if the inaction can be characterized as willful
neglect of duty, then recourse under the Civil Code and the Tax Code can also be availed
of.
Article 27 of the Civil Code provides:

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

More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states:
"xxx xxx xxx
(c) wilfully neglecting to give receipts, as by law required for any sum collected in the
performance of duty or wilfully neglecting to perform, any other duties enjoined by law."

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

In sum, while we can never condone the BIR's apparent callousness in performing its
duties, still, the same cannot justify Philex's non-payment of its tax liabilities. The adage
"no one should take the law into his own hands" should have guided Philex's action.
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED.
The assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED.
SO ORDERED.
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)
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.


G.R. Nos. L-28502-03 April 18, 1989

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
ESSO STANDARD EASTERN, INC. and THE COURT OF TAX APPEALS, respondents.

NARVASA, J.:

In two (2) cases appealed to it 1 by the private respondent, hereafter simply referred to as ESSO, the Court of Tax Appeals
rendered judgment 2sustaining the decisions of the Commissioner of Internal Revenue excepted to, save "the refund-claim .. in the amount
of P39,787.94 as overpaid interest which it ordered refunded to ESSO

Reversal of this decision is sought by the Commissioner by a petition for review on certiorari filed
with this Court. He ascribes to the Tax Court one sole error: "of applying the tax credit for
overpayment of the 1959 income tax of .. ESSO, granted by the petitioner (Commissioner), to ..
(ESSO's) basic 1960 deficiency income tax liability x x and imposing the 1-1/2% monthly
interests 3 only on the remaining balance thereof in the sum of P146,961.00" 4 (instead of the full amount of the 1960 deficiency liability
in the amount of P367,994.00). Reversal of the same judgment of the Court of Tax Appeals is also sought by ESSO in its own appeal
(docketed as G.R. Nos. L28508-09); but in the brief filed by it in this case, it indicates that it will not press its appeal in the event that "the
instant petition for review be denied and that judgment be rendered affirming the decision of the Court of Tax Appeals."

The facts are simple enough and are quite quickly recounted. ESSO overpaid its 1959 income tax by
P221,033.00. It was accordingly granted a tax credit in this amount by the Comissioner on August
5,1964. However, ESSOs payment of its income tax for 1960 was found to be short by P367,994.00.
So, on July 10, 1964, the Commissioner wrote to ESSO demanding payment of the deficiency tax,
together with interest thereon for the period from April 18,1961 to April 18,1964. On August 10,
1964, ESSO paid under protest the amount alleged to be due, including the interest as reckoned by
the Commissioner. It protested the computation of interest, contending it was more than that
properly due. It claimed that it should not have been required to pay interest on the total amount of
the deficiency tax, P367,994.00, but only on the amount of P146,961.00—representing the
difference between said deficiency, P367,994.00, and ESSOs earlier overpayment of P221,033.00
(for which it had been granted a tax credit). ESSO thus asked for a refund.

The Internal Revenue Commissioner denied the claim for refund. ESSO appealed to the Court of
Tax Appeals. As aforestated. that Court ordered payment to ESSO of its "refund-claim x x in the
amount of P39,787.94 as overpaid interest. Hence, this appeal by the Commissioner. The CTA
justified its award of the refund as follows:

... In the letter of August 5, 1964, .. (the Commissioner) admitted that .. ESSO had
overpaid its 1959 income tax by P221,033.00. Accordingly .. (the Commissioner)
granted to .. ESSO a tax credit of P221,033.00. In short, the said sum of
P221,033.00 of ESSO's money was in the Government's hands at the latest on July
15, 1960 when it ESSO paid in full its second installment of income tax for 1959. On
July 10, 1964 .. (the Commissioner) claimed that for 1960, .. ESSO underpaid its
income tax by P367,994.00. However, instead of deducting from P367,994.00 the tax
credit of P221,033.00 which .. (the Commissioner) had already admitted was due ..
ESSO .. (the Commissioner) still insists in collecting the interest on the full amount of
P367,994.00 for the period April 18, 1961 to April 18,1964 when the Government had
already in its hands the sum of P221,033.00 of .. ESSOs money even before the
latter's income tax for 1960 was due and payable. If the imposition of interest does
not amount to a penalty but merely a just compensation to the State for the delay in
paying the tax, and for the concomitant use by the taxpayer of funds that rightfully
should be in the Government's hand (Castro v. Collector, G.R. No. L-1274, Dec. 28,
1962), the collection of the interest on the full amount of P367,994.00 without
deducting first the tax credit of P221,033.00, which has long been in the hands of the
Government, becomes erroneous, illegal and arbitrary.

.. (ESSO) could hardly be charged of delinquency in paying P221,033.00 out of the


deficiency income tax of P367,994.00, for which the State should be compensated by
the payment of interest, because the said amount of P221,033.00 was already in the
coffers of the Government. Neither could .. ESSO be charged for the concomitant
use of funds that rightfully belong to the Government because as early as July 15,
1960, it was the Government that was using .. ESSOs funds of P221,033.00. In the
circumstances, we find it unfair and unjust for .. (the Commissioner) to exact the
interest on the said sum of P221,033.00 which, after all, was paid to and received by
the Government even before the incidence of the deficiency income tax of
P367,994.00. (Itogon-Suyoc Mines, Inc. v. Commissioner, C.T.A. Case No. 1327,
Sept. 30,1965). On the contrary, the Government should be the first to blaze the trail
and set the example of fairness and honest dealing in the administration of tax laws.

Accordingly, we hold that the tax credit of P221,033.00 for 1959 should first be
deducted from the basic deficiency tax of P367,994.00 for 1960 and the resulting
difference of P146,961.00 would be subject to the 18% interest prescribed by Section
51 (d) of the Revenue Code. According to the prayer of ..(ESSO) .. (the
Commissioner) is hereby ordered to refund to .. (ESSO) the amount of P39,787.94
as overpaid interest in the settlement of its 1960 income tax liability. However, as the
collection of the tax was not attended with arbitrariness because .. (ESSO) itself
followed x x (the Commissioner's) manner of computing the tax in paying the sum of
P213,189.93 on August 10, 1964, the prayer of .. (ESSO) that it be granted the legal
rate of interest on its overpayment of P39,787.94 from August 10, 1964 to the time it
is actually refunded is denied. (See Collector of Internal Revenue v. Binalbagan
Estate, Inc., G.R. No. 1,12752, Jan. 30, 1965).

The Commissioner's position is that income taxes are determined and paid on an annual basis, and
that such determination and payment of annual taxes are separate and independent transactions;
and that a tax credit could not be so considered until it has been finally approved and the taxpayer
duly notified thereof. Since in this case, he argues, the tax credit of P221,033.00 was approved only
on August 5, 1964, it could not be availed of in reduction of ESSOs earlier tax deficiency for the year
1960; as of that year, 1960, there was as yet no tax credit to speak of, which would reduce the
deficiency tax liability for 1960. In support of his position, the Commissioner invokes the provisions of
Section 51 of the Tax Code pertinently reading as follows:

(c) Definition of deficiency. As used in this Chapter in respect of tax imposed by this
Title, the term 'deficiency' means:

(1) The amount by which the tax imposed by this Title exceeds the amount shown as
the tax by the taxpayer upon his return; but the amount so shown on the return shall
first be increased by the amounts previously assessed (or collected without
assessment) as a deficiency, and decreased by the amount previously abated
credited, returned, or otherwise in respect of such tax; ..

xxx xxx xxx


(d) Interest on deficiency. — Interest upon the amount determined as deficiency shall
be assessed at the same time as the deficiency and shall be paid upon notice and
demand from the Commissioner of Internal Revenue; and shall be collected as a part
of the tax, at the rate of six per centum per annum from the date prescribed for the
payment of the tax (or, if the tax is paid in installments, from the date prescribed for
the payment of the first installment) to the date the deficiency is assessed; Provided,
That the amount that may be collected as interest on deficiency shall in no case
exceed the amount corresponding to a period of three years, the present provision
regarding prescription to the contrary notwithstanding.

The fact is that, as respondent Court of Tax Appeals has stressed, as early as July 15, 1960, the
Government already had in its hands the sum of P221,033.00 representing excess payment. Having
been paid and received by mistake, as petitioner Commissioner subsequently acknowledged, that
sum unquestionably belonged to ESSO, and the Government had the obligation to return it to ESSO
That acknowledgment of the erroneous payment came some four (4) years afterwards in nowise
negates or detracts from its actuality. The obligation to return money mistakenly paid arises from the
moment that payment is made, and not from the time that the payee admits the obligation to
reimburse. The obligation of the payee to reimburse an amount paid to him results from the mistake,
not from the payee's confession of the mistake or recognition of the obligation to reimburse. In other
words, since the amount of P221,033.00 belonging to ESSO was already in the hands of the
Government as of July, 1960, although the latter had no right whatever to the amount and indeed
was bound to return it to ESSO, it was neither legally nor logically possible for ESSO thereafter to be
considered a debtor of the Government in that amount of P221,033.00; and whatever other
obligation ESSO might subsequently incur in favor of the Government would have to be reduced by
that sum, in respect of which no interest could be charged. To interpret the words of the statute in
such a manner as to subvert these truisms simply can not and should not be countenanced.
"Nothing is better settled than that courts are not to give words a meaning which would lead to
absurd or unreasonable consequences. That is a principle that goes back to In re Allen (2 Phil. 630)
decided on October 29, 1903, where it was held that a literal interpretation is to be rejected if it would
be unjust or lead to absurd results." 6 "Statutes should receive a sensible construction, such as will give effect to the legislative
intention and so as to avoid an unjust or absurd conclusion." 7

WHEREFORE, the petition for review is DENIED, and the Decision of the Court of Tax Appeals dated October 28, 1967 subject of the
petition is AFFIRMED, without pronouncement as to costs.
G.R. No. L-67649 June 28, 1988

ENGRACIO FRANCIA, petitioner,


vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

GUTIERREZ, JR., J.:

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

The antecedent facts are as follows:

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

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

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

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

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

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

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

WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the


amended complaint and ordering:

(a) The Register of Deeds of Pasay City to issue a new Transfer


Certificate of Title in favor of the defendant Ho Fernandez over the
parcel of land including the improvements thereon, subject to
whatever encumbrances appearing at the back of TCT No. 4739
(37795) and ordering the same TCT No. 4739 (37795) cancelled.

(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00


as attorney's fees. (p. 30, Record on Appeal)

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

Hence, this petition for review.

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

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW


IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX
DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS
INDEBTED TO THE FORMER.

II

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS


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

III

RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS


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

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

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

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

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

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

xxx xxx xxx

(3) that the two debts be due.

xxx xxx xxx

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

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

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

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

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

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

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

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

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

xxx xxx xxx

... [D]ue process of law to be followed in tax proceedings must be established by


proof and the general rule is that the purchaser of a tax title is bound to take upon
himself the burden of showing the regularity of all proceedings leading up to the
sale. (emphasis supplied)

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

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

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

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

Q. My question to you is this letter marked as Exhibit I for Ho


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

A. I just signed it because I was not able to read the same. It was just
sent by mail carrier.
Q. So you admit that you received the original of Exhibit I and you
signed upon receipt thereof but you did not read the contents of it?

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

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

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

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

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

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

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

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

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

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

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

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

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

SO ORDERED.
TO PIC: DOCTRINE OF EQUITABLE RECOUPMENT
Collector v. UST (1958)
MONTEMAYOR, J.
THE COURT HELD THAT THE CTA ERRED IN APPLYING THE DOCTRINE OF EQUITABLE
RECOUPMENT IN ITS DECISION. Such doctrine is not binding in this country, and the Court refused
to introduce the same in this jurisdiction by virtue of this decision. Its acceptance and adoption
should be left to the sound discretion of the Legislature. Thus, the CIR may still collect the amount
of P2,451.04 as percentage tax and surcharge against UST.
The doctrine of equitable recoupment means that when a refund of a tax illegally or
erroneously collected or overpaid by a taxpayer is barred by the statute of limitations and a tax is
being presently assessed against said taxpayer, SAID PRESENT TAX MAY BE RECOUPED OR SET-OFF
AGAINST THE TAX, the refund of which has been barred. The same thing would have been true
where the Government has failed to collect a tax within the period of limitation and said collection
is already barred, and the taxpayer has to its credit a tax illegally or erroneously collected or
overpaid, whose refund is not yet barred, the Government need not make refund of all the tax
illegally or erroneously collected, BUT IT MAY SET OFF AGAINST ITTHE TAX WHOSE COLLECTION IS
BARRED BY THE STATURE OF LIMITATIONS.
EFFECT: mitigates the effect of prescription and the statute of limitations
Notes from reviewer: Common law doctrine to the effect that a claim for refund barred
by prescription may be allowed to offset unsettled tax liabilities should be pertinent only to taxes
arising from the same transaction on which an overpayment is made and underpayment is due.
It finds no application where the taxes involved are totally unrelated. (Invocation of equity rather
than law)

FACTS
1. During the period from January 1, 1948-June 30, 1950, UST paid on its gross receipts derived
from its printing and binding jobs for the public and the different departments of the University,
the aggregate amount of Php13,590.03, representing the 2% tax on its gross receipts during the
period in question
2. On October 17,1950, UST requested in writing from the respondent the refund of the sum of Php
8,293.31, on account of the following:
a. The amount of Php 359,972.45 paid by the other departments to the UST Press was for
the purposes of accounting onlyand does not legally constitute gross receipts subject to
the percentage tax
b. The printing and binding of the annuals THOMASIAN and VERITAS fall under the
exception provided for in Section 191 in relation to Section 183(a) of the Tax Code
3. COLLECTOR OF INTERNAL REVENUE: UST’s claim for refund in the sum of Php 8,293.31
(representing business printer’s percentage tax pursuant to Section 191 of the Tax Code, in
relation to Section 183(a)) is denied; also, the amount of Php 2,452.04, representing deficiency
percentage tax and surcharge on the undeclared receipts derived from the printing and binding
of the subject annuals, is hereby assessed and demanded from UST; also, petitioner is ordered to
pay Php 100 as compromise penalty
4. Court of tax appeals: Modified the decision of the CIR
a. UST’s claim for refund to the extent of Php 5, 842.27 is DENIED, the same being BARRED
BY PRESCRIPTION
b. The deficiency tax assessment of Php 2, 451.04 for percentage taxes and surcharges is
RECOGNIZED, but the amount is DEEMED PAID, BY WAY OF RECOUPMENT, to the extent
of the amount of Php 2, 451.04 which UST erroneously paid for the period from January
1948 to Jun 1950
i. Respondent is thus ordered to desist from further collecting said deficiency
assessment

SUPREME COURT
1. W/N THE CTA ERRED IN APPLYING THE DOCTRINE OF EQUITABLE RECOUPMENT IN THE CASE?
a. YES.
b. With this doctrine available and enforceable to both parties,
i. The tax collector would be tempted to delay and neglect the collection of taxes
within the period set by the law confident that when it finally wakes up from its
lethargy, it could still recover the tax it failed to collect by having it set off or
recouped from any tax which it may have illegally collected from the same
taxpayer
1. And this is not without its resulting danger, because a collector, to play
safe and have a fund available for said set-off and recoupment of a tax
which he had failed and neglected to collect, may be tempted to make
illegal assessments and collections, and the taxpayer would be helpless
because however illegal and unauthorized the assessment may be, the
Collector can always enforce the same by levy and distraint, and the only
remedy of the taxpayer would be to file a formal demand for refund,
followed by a court suit to enforce the demand.
ii. As regards the taxpayer, he may also be tempted to delay and neglect the filing of
the corresponding suit for refund of a tax illegally or erroneously collected,
trusting that he can always recover or be credited with the same or part thereof by
refusing to pay a valid tax assessed against him and compelling the Government to
set-off the same against a tax payment he could no longer recover.
c. Contrary to the CTA’s contention that the application of the doctrine in this jurisdiction is
sanctioned by Sections 306 and 309 of the Internal Revenue Code, the Court found that:
i. The aforementioned sections do not contain any right of a taxpayer to a set off
or credit, where because of the expiration of the period of prescription, his right
to a refund is already barred
ii. It is true that under Section 309, the Collector “may credit or refund taxes
erroneously or illegally received,” but the word may clearly implies discretion.
1. He may or he may not exercise the authority granted him by the law to
make the refund or credit
2. Under the circumstances, he may not be compelled or ordered by the
courts, as the Tax Court is compelling him and ordering him to do so,
especially when the Collector himself not only refuses to make the
refund or set off, but also denies the authority of the Tax Court to order
it.
d. The Tax Court, in applying such doctrine, reasoned that the same serves as a cushion to
the harsh and iniquitous effects of the statute of limitations, because it would be
oppressive to leave the taxpayer without any remedy to set off taxes erroneously
collected, which are barred by prescription.
i. SUPREME COURT:
1. Prescription may be rigorous and at times may be a little harsh, but
certainly there could be no oppression, much less iniquity WHERE THE
SAME LAW IS APPLIED EQUALLY TO THE GOVERNMENT AND THE
TAXPAYER
a. On the contrary, that statute of limitations has a salutary and
wholesome effect because under the same, the tax collecting
agency of the Government, and the taxpayer would be alert and
vigilant, and would be constrained to make assessment and
collection, and demand the refund of taxes illegally or
erroneously collected, respectively, ON TIME.
2. Also, when a tax is illegally or erroneously collected, or an overpayment
is made by a taxpayer, and the latter fails to ask for the refund thereof
within the time prescribed by law, which under the tax law is also two
years, then the Government would feel free to appropriate the same for
its purposes…
a. And when the taxpayer years afterward remembers and decides
to ask for the refund, by way of equitable recoupment, the
Government may find itself financially embarrassed, because it
had already spent the money
3. The same thing would be true for a taxpayer, when the Government fails
to collect the tax within the statute of limitations, the taxpayer would
feel free, and in all probability would dispose of the amount...
a. And when the Government finally wakes up and demands the
tax by way of recoupment, the taxpayer might be unable to meet
the demand without detriment to its business
ii. HALL V. US (1942):
1. We are not unmindful of the merits of the principle of recoupment nor
of the measure of justice which it permits…but there is also a reason
behind limitation statutes. Frequently, records are lost and memories
fade as to the transactions long past… Limitation statutes…operate to
terminate what otherwise be almost endless litigation and consequent
confusion.
OTHER ISSUES DISCUSSED
1. USTS’S CLAIM FOR REFUND IS BARRED BY PRESCRIPTION
a. The amount of PHP 8,293.31, which the university seeks to be refunded was paid during
the period from January 1, 1948 to June 30, 1950, the last payment having been made on
July 15, 1950
b. On the other hand, the appeal or petition for review of the CIR’s decision was filed with
the CTA on September 8, 1954
c. Thus, the action for refund was filed more than four years from last payment, and is
therefore already barred by the statute of limitations
i. Section 306 provides that no suit or proceeding for the recovery of any internal
revenue tax alleged to have been erroneously or illegally assessed or collected,
shall be begun after the expiration of TWO YEARS from the date of payment of
tax
d. UST contends that its claim has not yet prescribed because in the course of its
negotiations with the CIR, the latter allegedly stated in a letter that a refund will be
granted
i. WRONG
ii. The mere mention of a possible grant is not a grant in itself, and thus, does not
bind the government
iii. In the letter, the CIR, spoke of arrangements being made, hence, there was as
yet no favourable action taken on the petitioner’s claim for refund
2. THE TAX OF PHP7,199.45, CORRESPONDING TO THE GROSS RECEIPTS AMOUNTING TO
PHP359,572.45 HAD BEEN ERRONEOUSLY COLLECTED BY THE CIR
a. Although the UST Press is a distinct department, separate and independent from the
other departments of the university, IT IS NEVERTHELESSAN INTEGRAL PART THEREOF
i. And thus, for purposes of taxation, IT IS THE UNIVERSITYAS A LEGAL ENTITY
WHICH SHOULDER TAXES THAT MAY BE DUE FROM ANY OF ITS DEPARTMENTS
1. Because the individual existence or personality of the various
departments are merged into one taxable being UST
3. THE CIR’S ASSESSMENT IN THE AMOUNT OF PHP 2,451.04 AS DEFICIENCY IN TAX PERCENTAGE
AND SURCHARGES WAS VALID
a. The university was liable under this tax because it did not come under the exemption
provided for under Section 191 of the Internal Revenue Code, because:
i. The subject annuals do not have fixed prices
ii. It was not shown that the UST Press is the publisher of these annuals
iii. It is also unclear whether such annuals fall within the purview of the term
newspaper, magazine, review, or bulletin
4. THE COMPROMISE PENALTY WORTH PHP 100 WAS IMPROPER
a. Compromise implies mutual agreement between the parties, thus, one party cannot
exact from or impose upon another a compromise
i. In this case, THE COMPROMISE SOUGHT BY CIR WAS REJECTED BY UST (so
walang mutual agreement)
EN BANC

G.R. No. L-16626 October 29, 1966

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
CARLOS PALANCA, JR., respondent.

Office of the Solicitor General for petitioner.


Manuel B. San Jose for respondent.

REGALA, J.:

This is an appeal by the Government from the decision of the Court of Tax Appeals in CTA Case No.
571 ordering the petitioner to refund to the respondent the amount of P20,624.01 representing
alleged over-payment of income taxes for the calendar year 1955. The facts are:

Sometime in July, 1950, the late Don Carlos Palanca, Sr. donated in favor of his son, the
petitioner, herein shares of stock in La Tondeña, Inc. amounting to 12,500 shares. For failure
to file a return on the donation within the statutory period, the petitioner was assessed the
sums of P97,691.23, P24,442.81 and P47,868.70 as gift tax, 25% surcharge and interest,
respectively, which he paid on June 22, 1955.

On March 1, 1956, the petitioner filed with the Bureau of Internal Revenue his income tax
return for the calendar year 1955, claiming, among others, a deduction for interest amounting
to P9,706.45 and reporting a taxable income of P65,982.12. On the basis of this return, he
was assessed the sum of P21,052.91, as income tax, which he paid, as follows:

Taxes withheld by La Tondeña Inc. from Mr.


Palanca's wages P13,172.41

Payment under Income Tax Receipt No. 677395


dated May 11, 1956 3,939.80

Payment under Income Tax Receipt dated August 14,


1956 3,939.80

P21,052.01

Subsequently, on November 10, 1956, the petitioner filed an amended return for the
calendar year 1955, claiming therein an additional deduction in the amount of P47,868.70
representing interest paid on the donee's gift tax, thereby reporting a taxable net income of
P18,113.42 and a tax due thereon in the sum of P3,167.00. The claim for deduction was
based on the provisions of Section 30(b) (1) of the Tax Code, which authorizes the deduction
from gross income of interest paid within the taxable year on indebtedness. A claim for the
refund of alleged overpaid income taxes for the year 1955 amounting to P17,885.01, which is
the difference between the amount of P21,052.01 he paid as income taxes under his original
return and of P3,167.00, was filed together with this amended return. In a communication
dated June 20, 1957, the respondent (BIR) denied the claim for refund.
On August 27, 1957, the petitioner reiterated his claim for refund, and at the same time
requested that the case be elevated to the Appellate Division of the Bureau of Internal
Revenue for decision. The reiterated claim was denied on October 14, 1957.

On November 2, 1957, the petitioner requested that the case be referred to the Conference
Staff of the Bureau of Internal Revenue for review. Later, on November 6, 1957, he
requested the respondent to hold his action on the case in abeyance until after the Court of
Tax Appeals renders its division on a similar case. And on November 7, 1957, the
respondent denied the claim for the refund of the sum of P17,885.01.

Meanwhile, the Bureau of Internal Revenue considered the transfer of 12,500 shares of
stock of La Tondeña Inc. to be a transfer in contemplation of death pursuant to Section 88(b)
of the National Internal Revenue Code. Consequently, the respondent assessed against the
petitioner the sum of P191,591.62 as estate and inheritance taxes on the transfer of said
12,500 shares of stock. The amount of P17,002.74 paid on June 22, 1955 by the petitioner
as gift tax, including interest and surcharge, under Official Receipt No. 2855 was applied to
his estate and inheritance tax liability. On the tax liability of P191,591.62, the petitioner paid
the amount of P60,581.80 as interest for delinquency as follows:

1% monthly interest on P76,724.38 P22,633.69


September 2, 1952 to February 16, 1955

1% monthly interest on P71,264.77 1,068.97


February 16, 1955 to March 31, 1955

1% monthly interest on P114,867.24 4,287.99


September 2, 1952 to April 16, 1953

1% monthly interest on P50,832.77 1,372.48


March 31, 1955 to June 22, 1955

1% monthly interest on P119,155.23 31,218.67


April 16, 1953 to June 22, 1955

Total P60,581.80

On August 12, 1958, the petitioner once more filed an amended income tax return for the
calendar year 1955, claiming, in addition to the interest deduction of P9,076.45 appearing in
his original return, a deduction in the amount of P60,581.80, representing interest on the
estate and inheritance taxes on the 12,500 shares of stock, thereby reporting a net taxable
income for 1955 in the amount of P5,400.32 and an income tax due thereon in the sum of
P428.00. Attached to this amended return was a letter of the petitioner, dated August 11,
1958, wherein he requested the refund of P20,624.01 which is the difference between the
amounts of P21,052.01 he paid as income tax under his original return and of P428.00.

Without waiting for the respondent's decision on this claim for refund, the petitioner filed his
petition for review before this Court on August 13, 1958. On July 24, 1959, the respondent
denied the petitioner's request for the refund of the sum of P20,624.01.
The Commissioner of Internal Revenue now seeks the reversal of the Court of Tax Appeal's ruling
on the aforementioned petition for review. Specifically, he takes issue with the said court's
determination that the amount paid by respondent Palanca for interest on his delinquent estate and
inheritance tax is deductible from the gross income for that year under Section 30 (b) (1) of the
Revenue Code, and, that said respondent's claim for refund therefor has not prescribed.

On the first point, the Commissioner urges that a tax is not an indebtedness. Citing American cases,
he argues that there is a material and fundamental distinction between a "tax" and a "debt."
(Meriwether v. Garrett, 102 U.S. 427; Liberty Mutual Ins. Co. v. Johnson Shipyards Corporation, 5
AFTR pp. 5504, 5507; City of Camden v. Allen, 26 N.J. Law, p. 398). He adopts the view that "debts
are due to the government in its corporate capacity, while taxes are due to the government in its
sovereign capacity. A debt is a sum of money due upon contract express or implied or one which is
evidenced by a judgment. Taxes are imposts levied by government for its support or some special
purpose which the government has recognized." In view of the distinction, then, the Commissioner
submits that the deductibility of "interest on indebtedness" from a person's income tax under Section
30(b) (1) cannot extend to "interest on taxes."

We find for the respondent. While "taxes" and "debts" are distinguishable legal concepts, in certain
cases as in the suit at bar, on account of their nature, the distinction becomes inconsequential. This
qualification is recognized even in the United States. Thus,

The term "debt" is properly used in a comprehensive sense as embracing not merely money
due by contract, but whatever one is bound to render to another, either for contract or the
requirements of the law. (Camden vs. Fink Coule and Coke Co., 61 ALR 584).

Where statutes impose a personal liability for a tax, the tax becomes at least in a broad
sense, a debt. (Idem.)

Some American authorities hold that, especially for remedial purposes, Federal taxes are
debts. (Tax Commission vs. National Malleable Castings Co., 35 ALR 1448)

In our jurisdiction, the rule is settled that although taxes already due have not, strictly speaking, the
same concept as debts, they are, however obligations that may be considered as such. (Sambrano
vs. Court of Tax Appeals, G.R. no. L-8652, March 30, 1957). In a more recent case Commissioner of
Internal Revenue vs. Prieto, G.R. No. L-13912, September 30, 1960, we explicitly announced that
while the distinction between "taxes" and "debts" was recognized in this jurisdiction, the variance in
their legal conception does not extend to the interests paid on them, at least insofar as Section 30
(b) (1) of the National Internal Revenue Code is concerned. Thus,

Under the law, for interest to be deductible, it must be shown that there be an indebtedness,
that there should be interest upon it, and that what is claimed as an interest deduction should
have been paid or accrued within the year. It is here conceded that the interest paid by
respondent was in consequence of the late payment of her donor's tax, and the same was
paid within the year it is sought to be deducted. The only question to be determined, as
stated by the parties, is whether or not such interest was paid upon an indebtedness within
the contemplation of Section 30(b) (1) of the Tax Code, the pertinent part of which reads:

Sec. 30. Deductions from gross income — In computing net income there shall be
allowed as deductions —

xxx xxx xxx


"Interest:

(1) In general. — The amount of interest paid within the taxable year on
indebtedness, except on indebtedness incurred or continued to purchase or carry
obligations the interest upon which is exempt from taxation as income under this
Title.

The term "indebtedness" as used in the Tax Code of the United States containing
similar provisions as in the above-quoted section has been defined as the
unconditional and legally enforceable obligation for the payment of money. (Federal
Taxes Vol. 2, p. 13, 019, Prentice Hall, Inc.; Mertens' Law of Federal Income
Taxation, Vol. 4, p. 542.) Within the meaning of that definition, it is apparent that a
tax may be considered an indebtedness. . . . (Emphasis supplied)

"It follows that the interest paid by herein respondent for the late payment of her
donor's tax is deductible from her gross income under section 30 (b) of the Tax Code
above-quoted."

We do not see any element in this case which can justify a departure from or abandonment of the
doctrine in the Prieto case above. In both this and the said case, the taxpayer sought the allowance
as deductible items from the gross income of the amounts paid by them as interests on delinquent
tax liabilities. Of course, what was involved in the cited case was the donor's tax while the present
suit pertains to interest paid on the estate and inheritance tax. This difference, however, submits no
appreciable consequence to the rationale of this Court's previous determination that interests on
taxes should be considered as interests on indebtedness within the meaning of Section 30(b) (1) of
the Tax Code. The interpretation we have placed upon the said section was predicated on the
congressional intent, not on the nature of the tax for which the interest was paid.

On the issue of prescription: There were actually two claims for refund filed by the herein
respondent, Carlos Palanca, Jr., anent the case at bar. The first one was on November 10, 1956,
when he filed a claim for refund on the interest paid by him on the donee's gift tax of P17,885.10, as
originally demanded by the Bureau of Internal Revenue. The second one was the one filed by him
on August 12, 1958, which was a claim for refund on the interest paid by him on the estate and
inheritance tax assessed by the same Bureau in the amount of P20,624.01. Actually, this second
assessment by the Bureau was for the same transaction as that for which they assessed respondent
Palanca the above donee's gift tax. The Bureau, however, on further consideration, decided that the
donation of the stocks in question was made in contemplation of death, and hence, should be
assessed as an inheritance. Thus the second assessment. The first claim was denied by the
petitioner for the first time on June 20, 1957. Thereafter, the said denial was twice reiterated, on
October 14, 1957 and November 7, 1957, upon respondent Palanca's plea for the reconsideration of
the ruling of June 20, 1957. The second claim was filed with the Court of Tax Appeals on August 13,
1958, or even before the same had been denied by the petitioner. Respondent Palanca's second
claim was denied by the latter on July 24, 1959.

The petitioner contends that under Section 11 of Republic Act 1124,1 the herein claimant's claim for
refund has prescribed since the same was filed outside the thirty-day period provided for therein.
According to the petitioner, the said prescriptive period commenced to run on October 14, 1947
when the denial by the Bureau of Internal Revenue of the respondent Palanca's claim for refund,
under his letter of November 10, 1956, became final. Considering that the case was filed with the
Court of Tax Appeals only on August 13, 1958, then it is urged that the same had prescribed.
The petitioner also invokes prescription, at least with respect to the sum of P17,112.21, under
Section 306 of the Tax Code.2 He claims that for the calendar year 1955, respondent Palanca paid
his income tax as follows:

Taxes withheld by La Tondeña Inc. from Mr.


Palanca's wages P13,172.41

Payment under Income Tax Receipt No. 677395


dated May 11, 1956 3,939.89

Payment under Income Tax Receipt No. 742334


dated August 14, 1956 3,939.89

P21,952.01

Therefore, the petitioner contends, the amounts paid by claimant Palanca under his withheld tax and
under Receipt No. 677395 dated May 11, 1956 may no longer be refunded since the claim therefor
was filed in court only on August 13, 1958, or beyond two years of their payment.

We find the petitioner's contention on prescription untenable.

In the first place, the 30-day period under Section 11 of Republic Act 1125 did not even commence
to run in this incident. It should be recalled that while the herein petitioner originally assessed the
respondent-claimant for alleged gift tax liabilities, the said assessment was subsequently abandoned
and in its lieu, a new one was prepared and served on the respondent-taxpayer. In this new
assessment, the petitioner charged the said respondent with an entirely new liability and for a
substantially different amount from the first. While initially the petitioner assessed the respondent for
donee's gift tax in the amount of P170,002.74, in the subsequent assessment the latter was asked to
pay P191,591.62 for delinquent estate and inheritance tax. Considering that it is the interest paid on
this latter-assessed estate and inheritance tax that respondent Palanca is claiming refund for, then
the thirty-day period under the abovementioned section of Republic Act 1125 should be computed
from the receipt of the final denial by the Bureau of Internal Revenue of the said claim. As has earlier
been recited, respondent Palanca's claim in this incident was filed with the Court of Tax Appeals
even before it had been denied by the herein petitioner or the Bureau of Internal Revenue. The case
was filed with the said court on August 13, 1958 while the petitioner denied the claim subject of the
said case only on July 24, 1959.

In the second place, the claim at bar refers to the alleged overpayment by respondent Palanca of his
1955 income tax. Inasmuch as the said account was paid by him by installment, then the
computation of the two-year prescriptive period, under Section 306 of the National Internal Revenue
Code, should be from the date of the last installment. (Antonio Prieto, et al. vs. Collector of Internal
Revenue, G.R. No. L-11976, August 29, 1961) Respondent Palanca paid the last installment on his
1955 income tax account on August 14, 1956. His claim for refund of the alleged overpayment on it
was filed with the court on August 13, 1958. It was, therefore, still timely instituted.

WHEREFORE, the decision appealed from is affirmed in full, without pronouncement on costs.