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Keywords: Free Port
HON. EXECUTIVE SECRETARY vs. SOUTHWING HEAVY INDUSTRIES, INC.
Ynares-Santiago, J.:
The Consolidated Cases of:
G.R. No. 164171 February 20, 2006
HON. EXECUTIVE SECRETARY, HON. SECRETARY OF THE DEPARTMENT OF
TRANSPORTATION AND COMMUNICATIONS (DOTC), COMMISSIONER OF
CUSTOMS, ASSISTANT SECRETARY, LAND TRANSPORTATION OFFICE (LTO),
COLLECTOR OF CUSTOMS, SUBIC BAY FREE PORT ZONE, AND CHIEF OF LTO, SUBIC
BAY FREE PORT ZONE, Petitioners,
vs.
SOUTHWING HEAVY INDUSTRIES, INC., represented by its President JOSE T.
DIZON, UNITED AUCTIONEERS, INC., represented by its President DOMINIC SYTIN,
and MICROVAN, INC., represented by its President MARIANO C.
SONON, Respondents.
G.R. No. 164172 February 20, 2006
HON. EXECUTIVE SECRETARY, SECRETARY OF THE DEPARTMENT OF
TRANSPORTATION AND COMMUNICATION (DOTC), COMMISSIONER OF CUSTOMS,
ASSISTANT SECRETARY, LAND TRANSPORTATION OFFICE (LTO), COLLECTOR OF
CUSTOMS, SUBIC BAY FREE PORT ZONE AND CHIEF OF LTO, SUBIC BAY FREE PORT
ZONE, Petitioners,
vs.
SUBIC INTEGRATED MACRO VENTURES CORP., represented by its President
YOLANDA AMBAR,Respondent.
G.R. No. 168741 February 20, 2006
HON. EXECUTIVE SECRETARY, HON. SECRETARY OF FINANCE, THE CHIEF OF THE
LAND TRANSPORTATION OFFICE, THE COMMISSIONER OF CUSTOMS, and THE
COLLECTOR OF CUSTOMS, SUBIC SPECIAL ECONOMIC ZONE, Petitioners,
vs.
MOTOR VEHICLE IMPORTERS ASSOCIATION OF SUBIC BAY FREEPORT, INC.,
represented by its President ALFREDO S. GALANG, Respondent.
FACTS: This instant consolidated petitions seek to annul the decisions of the Regional
Trial Court which declared Article 2, Section 3.1 of Executive Order 156
unconstitutional. Said EO 156 prohibits the importation of used vehicles in the country
inclusive of the Subic Bay Freeport Zone.
On December 12, 2002, President Gloria Macapagal Arroyo issued Executive Order 156
entitled "Providing for a comprehensive industrial policy and directions for the motor
vehicle development program and its implementing guidelines." The said provision
prohibits the importation of all types of used motor vehicles in the country including the
Subic Bay Freeport, or the Freeport Zone, subject to a few exceptions.
Consequently, three separate actions for declaratory relief were filed by Southwing
Heavy Industries Inc, Subic Integrated Macro Ventures Corp, and Motor Vehicle Importers
Association of Subic Bay Freeport Inc. praying that judgment be rendered declaring
Article 2, Section3.1 of the EO 156 unconstitutional and illegal.
The RTC rendered a summary judgment declaring that Article 2, Section 3.1 of EO 156
constitutes an unlawful usurpation of legislative power vested by the Constitution with
Congress and that the proviso is contrary to the mandate of Republic Act 7227(RA
7227) or the Bases Conversion and Development Act of 1992 which allows the free flow
of goods and capital within the Freeport.
The petitioner appealed in the CA but was denied on the ground of lack of any statutory
basis for the President to issue the same. It held that the prohibition on the importation
of use motor vehicles is an exercise of police power vested on the legislature and absent
any enabling law, the exercise thereof by the President through an executive issuance is
void.
ISSUES:
1. Whether or not the Private Respondents have the legal standing in
questionaing the said law?
2. Whether or not Article2, Section 3.1 of EO 156 is a valid exercise of the
President’s quasi-legislative power.
HELD:
1. YES. Petitioners argue that respondents will not be affected by the importation
ban considering that their certificate of registration and tax exemption do not
authorize them to engage in the importation and/or trading of used cars.
The established rule that the constitutionality of a law or administrative issuance can be
challenged by one who will sustain a direct injury as a result of its enforcementhas been
satisfied in the instant case. The broad subject of the prohibited importation is “all
types of used motor vehicles.” Respondents would definitely suffer a direct injury from
the implementation of EO 156 because their certificate of registration and tax
exemption authorize them to trade and/or import new and used motor vehicles and
spare parts, except “used cars.” Other types of motor vehicles imported and/or traded
by respondents and not falling within the category of used cars would thus be subjected
to the ban to the prejudice of their business. Undoubtedly, respondents have the legal
standing to assail the validity of EO 156.
2. YES BUT
Police power is inherent in a government to enact laws, within constitutional limits, to
promote the order, safety, health, morals, and general welfare of society. It is lodged
primarily with the legislature. By virtue of a valid delegation of legislative power, it may
also be exercised by the President and administrative boards, as well as the lawmaking
bodies on all municipal levels, including the barangay. Such delegation confers upon the
President quasi-legislative power which may be defined as the authority delegated by the
law-making body to the administrative body to adopt rules and regulations intended to
carry out the provisions of the law and implement legislative policy provided that it must
comply with the following requisites:
(1) Its promulgation must be authorized by the legislature;

(2) It must be promulgated in accordance with the prescribed procedure;
(3) It must be within the scope of the authority given by the legislature; and
(4) It must be reasonable.
The first requisite was actually satisfied since EO 156 has both constitutional and
statutory bases.
Anent the second requisite, that the order must be issued or promulgated in accordance
with the prescribed procedure, the presumption is that the said executive issuance duly
complied with the procedures and limitations imposed by law since the respondents
never questioned the procedure that paved way for the issuance of EO 156 but instead,
what they challenged was the absence of substantive due process in the issuance of the
EO.
In the third requisite, the Court held that the importation ban runs afoul with the third
requisite as administrative issuances must not be ultra vires or beyond the limits of the
authority conferred. In the instant case, the subject matter of the laws authorizing the
President to regulate or forbid importation of used motor vehicles, is the domestic
industry. EO 156, however, exceeded the scope of its application by extending the
prohibition on the importation of used cars to the Freeport, which RA 7227, considers to
some extent, a foreign territory. The domestic industry which the EO seeks to protect is
actually the "customs territory" which is defined under the Rules and Regulations
Implementing RA 7227 which states: "the portion of the Philippines outside the Subic Bay
Freeport where the Tariff and Customs Code of the Philippines and other national tariff
and customs laws are in force and effect."
Regarding the fourth requisite, the Court finds that the issuance of EO is unreasonable.
Since the nature of EO 156 is to protect the domestic industry from the deterioration of
the local motor manufacturing firms, the Court however, finds no logic in all the
encompassing application of the assailed provision to the Freeport Zone which is
outside the customs territory of the Philippines. As long as the used motor vehicles do
not enter the customs territory, the injury or harm sought to be prevented or remedied
will not arise.
The Court finds that Article 2, Section 3.1 of EO 156 is VOID insofar as it is made
applicable within the secured fenced-in former Subic Naval Base area but is declared
VALID insofar as it applies to the customs territory or the Philippine territory outside
the presently secured fenced-in former Subic Naval Base area as stated in Section 1.1 of
EO 97-A (an EO executed by Pres. Fidel V. Ramos in 1993 providing the Tax and Duty
Free Privilege within the Subic Freeport Zone). Hence, used motor vehicles that come
into the Philippine territory via the secured fenced-in former Subic Naval Base area may
be stored, used or traded therein, or exported out of the Philippine territory, but they
cannot be imported into the Philippine territory outside of the secured fenced-in former
Subic Naval Base area.
Petitions are PARTIALLY GRANTED provided that said provision is declared VALID
insofar as it applies to the Philippine territory outside the presently fenced-in former
Subic Naval Base area and VOID with respect to its application to the secured fenced-in
former Subic Naval Base area.
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John Hay Peoples Alternative Coalition, et al. vs. Victor Lim, President, Bases
Conversion Development Authority (BCDA); John Hay Poro Point Development
Corp, City of Baguio, Tuntex Co., Ltd., Asiaworld Internationale Group, Inc., DENR
G.R. No. 119775, October 24, 2003
Carpio-Morales, J.:
FACTS: Herein petitioners assail the validity of Presidential Decree No. 420, Series of
1994, “CREATING AND DESIGNATING A PORTION OF THE AREA COVERED BY THE
FORMER CAMP JOHN [HAY] AS THE JOHN HAY SPECIAL ECONOMIC ZONE PURSUANT
TO REPUBLIC ACT NO. 7227.” R.A. 7227 is AN ACT ACCELERATING THE CONVERSION
OF MILITARY RESERVATIONS INTO OTHER PRODUCTIVE USES, CREATING THE BASES
CONVERSION AND DEVELOPMENT AUTHORITY FOR THIS PURPOSE, PROVIDING
FUNDS THEREFOR AND FOR OTHER PURPOSES.
R.A. 7227 provides for the conversion into alternative productive uses of former
military bases in the Philippines, such as Clark and Subic military reservations and their
extensions including John Hay Station (Camp John Hay). RA 7227 created BCDA to carry
out the objectives of the law, and the Subic Special Economic (and Free Port) Zone
(Subic SEZ), the metes and bounds of which were to be delineated in a Presidential
Proclamation.
Subic SEZ was granted by R.A. 7227 incentives ranging from tax and duty-free
importations, exemption of businesses therein from local and national taxes, to other
hallmarks of a liberalized financial and business climate. R.A. No. 7227 expressly gave
authority to the President to create, through executive proclamation, subject to the
concurrence of the local government units directly affected, other SEZs in areas such as
Camp John Hay.
BCDA entered into a Joint Venture Agreement with private respondents Tuntex and
Asiaworld for the development of Poro Poin in La Union and Camp John Hay as premier
tourist destinations and recreation centers. The Baguio City government passed several
resolutions regarding the actions taken by BCDA. Among these involve the exclusion of
barangays located within the camp from BCDA’s development programs, a development
program that affords protection to the environment, family-oriented tourist
destinations, priority for Baguio residents in employment opportunities, and liability for
local taxes of businesses to be established within the camp. The Sangguniang
Panlungsod of Baguio finally passed a resolution supporting P.D. 420 issued by
President Ramos, declaring a portion of the camp as a SEZ.
P.D. 420 also declared among others that Camp John Hay SEZ is likewise entitled to all
applicable incentives of SEZ under Section 12 of RA 7227 such as the tax exemptions
aforementioned. Herein petitioners challenged among others this provision of PD 420
on tax exemption for being invalid as it is an unconstitutional exercise by the president
of a power granted only to the legislature, and that it violates the rule that taxes should
be uniform and equitable. Hence, this application to the Supreme Court for temporary
restraining order and/or writ of preliminary injunction against respondents for
implementation of PD 420.
ISSUES: Whether or not PD 420 is constitutional by providing for national and local tax
exemption within and granting other economic incentives to John Hay SEZ.

RULING: NO. The Court observed that nowhere in RA 7227 is there a grant of tax
exemption to SEZs yet to be established in base areas. The tax exemption provision of
Section 12 of RA 7227 only applies exclusively to Subic SEZ, as confirmed by the
deliberations of the Senate during the reading of the bill of RA 7227 with respect to
investment policies that would govern Subic SEZ.
It is clear that under said Section 12, it is only the Subic SEZ which was granted
by Congress with tax exemption, investment incentives and the like. There is no express
extension of the aforesaid benefits to other SEZs still to be created at the time via
presidential proclamation.
While the grant of economic incentives may be essential to the creation and success of
SEZs, free trade zones and the like, the grant thereof to John Hay SEZ cannot be
sustained. The incentives under R.A. 7227 are exclusive only to the Subic SEZ, hence,
the extension of the same to the John Hay SEZ finds no support therein. Neither does the
same grant of privileges to the John Hay SEZ find support in the other laws specified
under Section 3 of Proclamation No. 420.
Petitioners are correct in concluding that the grant of tax exemption to John Hay SEZ
contravenes Article VI, Section 28 (4) of the Constitution which provides that “No law
granting any tax exemption shall be passed without the concurrence of a majority of all
the members of Congress.” It is the legislature, unless limited by a provision of the state
constitution, that has full power to exempt any person or corporation or class of
property from taxation, its power to exempt being as broad as its power to tax. Other
than Congress, the Constitution may itself provide for specific tax exemptions, or local
governments may pass ordinances on exemption only from local taxes. The challenged
grant of tax exemption would circumvent the Constitution’s imposition that a law
granting any tax exemption must have the concurrence of a majority of all the members
of Congress.
The claimed statutory exemption of the John Hay SEZ from taxation should be manifest
and unmistakable from the language of the law on which it is based; it must be expressly
granted in a statute stated in a language too clear to be mistaken. Tax exemption cannot
be implied as it must be categorically and unmistakably expressed. If it were the intent
of the legislature to grant to the John Hay SEZ the same tax exemption and incentives
given to the Subic SEZ, it would have so expressly provided in the R.A. No. 7227.
In view of the foregoing, the second sentence of Section 3 of PD 420 is declared NULL
AND VOID and of no legal force and effect. The remaining provisions thereof remains
valid and effective.
OTHER THINGS to note in the case (baka maitanong ni sir):
1. When questions of constitutional significance are raised, the court can exercise its
power of judicial review only if the following requisites are present: (1) the existence of
an actual and appropriate case; (2) a personal and substantial interest of the party
raising the constitutional question; (3) the exercise of judicial review is pleaded at the
earliest opportunity; and (4) the constitutional question is the lis mota of the case.
These are present in the case, thus, SC has jurisdiction to try and decide the case, despite
the fact that that RA 7227 actually gives it the jurisdiction to enjoin or restrain
implementation of projects for conversion of the base areas. Petitioners also have locus
standi to institute this action as they have real interest over the subject matter.
2. The SC can void an act or policy of the political departments of the government on
either of two grounds–infringement of the Constitution or grave abuse of discretion.
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3. Where part of a statute is void as contrary to the Constitution, while another part is
valid, the valid portion, if separable from the invalid, may stand and be enforced.
G.R. No. L-69259 January 26, 1988
DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,

vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC.,
respondents.
GUTIERREZ, JR., J.:
Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters
of real estate Identified as Lot. No. 1095, Malinta Estate, in the Municipality of Polo (now
Valenzuela), Province of Bulacan (now Metro Manila) which is covered by Transfer
Certificate of Title No. T-4240 of the Bulacan land registry.
The said co-owners leased to Construction Components International Inc. the same
property and providing that during the existence or after the term of this lease the
lessor should he decide to sell the property leased shall first offer the same to the lessee
and the letter has the priority to buy under similar conditions.
The lessee Construction Components International, Inc. assigned its rights and
obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the
signed conformity and consent of lessors.
In January, 1976, a deed of exchange was executed between lessors Delfin and Pelagia
Pacheco and defendant Delpher Trades Corporation whereby the former conveyed to
the latter the leased property together with another parcel of land also located in
Malinta Estate, Valenzuela, Metro Manila for 2,500 shares of stock of defendant
corporation with a total value of P1,500,000.
On the ground that it was not given the first option to buy the leased property pursuant
to the proviso in the lease agreement, respondent Hydro Pipes filed an amended
complaint for reconveyance of Lot. No. 1095 in its favor under conditions similar to
those whereby Delpher Trades Corporation acquired the property from Pelagia Pacheco
and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff.
The judgment is hereby rendered declaring the valid existence of the plaintiffs
preferential right to acquire the subject property. The lower court's decision was
affirmed on appeal by the Intermediate Appellate Court.
The defendants-appellants, now the petitioners, filed a petition for certiorari to review
the appellate court's decision.
The court initially denied the petition but upon motion for reconsideration, the court set
aside the resolution denying the petition and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the petitioners, in that:
1. Respondent Hydro Pipes Philippines, Inc, will acquire from petitioners a parcel of
industrial land consisting of 27,169 square meters or 2.7 hectares for only P14/sq.
meter, or a total of P380,366, although the prevailing value thereof is approximately
P300/sq. meter or P8.1 Million;
2. Private respondent is allowed to exercise its right of first refusal even if there is no
"sale" or transfer of actual ownership interests by petitioners to third parties; and

3. Assuming arguendo that there has been a transfer of actual ownership interests,
private respondent will acquire the land not under "similar conditions" by which it was
transferred to petitioner Delpher Trades Corporation.
ISSUE: Whether or not the "Deed of Exchange" of the properties executed by the
Pachecos on the one hand and the Delpher Trades Corporation on the other was meant
to be a contract of sale which, in effect, prejudiced the private respondent's right of first
refusal over the leased property included in the "deed of exchange."
HELD: NO. Eduardo Neria, a certified public accountant and son-in-law of the late
Pelagia Pacheco testified that Delpher Trades Corporation is a family corporation; that
the corporation was organized by the children of the two spouses (spouses Pelagia
Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles) who
owned in common the parcel of land leased to Hydro Pipes Philippines in order to
perpetuate their control over the property through the corporation and to avoid taxes;
that in order to accomplish this end, two pieces of real estate, which had been leased to
Hydro Pipes Philippines, were transferred to the corporation; that the leased property
was transferred to the corporation by virtue of a deed of exchange of property; that in
exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value
shares of stock which are equivalent to a 55% majority in the corporation because the
other owners only owned 2,000 shares; and that at the time of incorporation, he knew
all about the contract of lease of Lot. No. 1095 to Hydro Pipes Philippines. In the
petitioners' motion for reconsideration, they refer to this scheme as "estate planning."
Under this factual backdrop, the petitioners contend that there was actually no transfer
of ownership of the subject parcel of land since the Pachecos remained in control of the
property. The transfer of ownership, if anything, was merely in form but not in
substance. In reality, petitioner corporation is a mere alter ego or conduit of the Pacheco
co-owners; hence the corporation and the co-owners should be deemed to be the same,
there being in substance and in effect an Identity of interest."
The petitioners maintain that the Pachecos did not sell the property. They argue that
there was no sale and that they exchanged the land for shares of stocks in their own
corporation.
On the other hand, the private respondent argues that Delpher Trades Corporation is a
corporate entity separate and distinct from the Pachecos. Thus, it contends that it
cannot be said that Delpher Trades Corporation is the Pacheco's same alter ego or
conduit; that petitioner Delfin Pacheco, having treated Delpher Trades Corporation as
such a separate and distinct corporate entity, is not a party who may allege that this
separate corporate existence should be disregarded. It maintains that there was actual
transfer of ownership interests over the leased property when the same was transferred
to Delpher Trades Corporation in exchange for the latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by subscription or by
purchasing stock directly from the corporation or from individual owners thereof. In the
case at bar, in exchange for their properties, the Pachecos acquired 2,500 original
unissued no par value shares of stocks of the Delpher Trades Corporation.
Consequently, the Pachecos became stockholders of the corporation by subscription
"The essence of the stock subscription is an agreement to take and pay for original
unissued shares of a corporation, formed or to be formed." It is significant that the
Pachecos took no par value shares in exchange for their properties.
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A no-par value share does not purport to represent any stated proportionate interest
in the capital stock measured by value, but only an aliquot part of the whole number of
such shares of the issuing corporation. The holder of no-par shares may see from the
certificate itself that he is only an aliquot sharer in the assets of the corporation. But this
character of proportionate interest is not hidden beneath a false appearance of a given
sum in money, as in the case of par value shares. The capital stock of a corporation
issuing only no-par value shares is not set forth by a stated amount of money, but
instead is expressed to be divided into a stated number of shares, such as, 1,000 shares.
This indicates that a shareholder of 100 such shares is an aliquot sharer in the assets of
the corporation, no matter what value they may have, to the extent of 100/1,000 or
1/10. Thus, by removing the par value of shares, the attention of persons interested in
the financial condition of a corporation is focused upon the value of assets and the
amount of its debts.
Moreover, there was no attempt to state the true or current market value of the real
estate. Land valued at P300.00 a square meter was turned over to the family's
corporation for only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the
Pachecos have control of the corporation. Their equity capital is 55% as against 45% of
the other stockholders, who also belong to the same family group.
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What
they really did was to invest their properties and change the nature of their ownership
from unincorporated to incorporated form by organizing Delpher Trades Corporation to
take control of their properties and at the same time save on inheritance taxes.
As explained by Eduardo Neria:
xxx xxx xxx
ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses
Hernandez and Pacheco in connection with their execution of a deed of exchange on the
properties for no par value shares of the defendant corporation?
A Yes, sir.
COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and corporation in entering in the deed of
exchange.
ATTY. LINSANGAN:
Q (What do you mean by "point of view"?) What are these benefits to the spouses of this
deed of exchange?
A Continuous control of the property, tax exemption benefits, and other inherent
benefits in a corporation.
Q What are these advantages to the said spouses from the point of view of taxation in
entering in the deed of exchange?
A Having fulfilled the conditions in the income tax law, providing for tax free exchange
of property, they were able to execute the deed of exchange free from income tax and
acquire a corporation.
Q What provision in the income tax law are you referring to?
A I refer to Section 35 of the National Internal Revenue Code under par. C-sub-par. (2)
Exceptions regarding the provision which I quote: "No gain or loss shall also be
recognized if a person exchanges his property for stock in a corporation of which as a

result of such exchange said person alone or together with others not exceeding four
persons gains control of said corporation."
Q Did you explain to the spouses this benefit at the time you executed the deed of
exchange?
A Yes, sir
Q You also, testified during the last hearing that the decision to have no par value share
in the defendant corporation was for the purpose of flexibility. Can you explain
flexibility in connection with the ownership of the property in question?
A There is flexibility in using no par value shares as the value is determined by the
board of directors in increasing capitalization. The board can fix the value of the shares
equivalent to the capital requirements of the corporation.
Q Now also from the point of taxation, is there any flexibility in the holding by the
corporation of the property in question?
A Yes, since a corporation does not die it can continue to hold on to the property
indefinitely for a period of at least 50 years. On the other hand, if the property is held by
the spouse the property will be tied up in succession proceedings and the consequential
payments of estate and inheritance taxes when an owner dies.
Q Now what advantage is this continuity in relation to ownership by a particular person
of certain properties in respect to taxation?
A The property is not subjected to taxes on succession as the corporation does not die.
Q So the benefit you are talking about are inheritance taxes?
A Yes, sir.
The records do not point to anything wrong or objectionable about this "estate
planning" scheme resorted to by the Pachecos. "The legal right of a taxpayer to decrease
the amount of what otherwise could be his taxes or altogether avoid them, by means
which the law permits, cannot be doubted."
The "Deed of Exchange" of property between the Pachecos and Delpher Trades
Corporation cannot be considered a contract of sale. There was no transfer of actual
ownership interests by the Pachecos to a third party. The Pacheco family merely
changed their ownership from one form to another. The ownership remained in the
same hands. Hence, the private respondent has no basis for its claim of a light of first
refusal under the lease contract.
WHEREFORE, the instant petition is hereby GRANTED.
G.R. No. 119176 March 19, 2002
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LINCOLN PHILIPPINE LIFE
INSURANCE COMPANY, INC. (now JARDINE-CMA LIFE INSURANCE COMPANY, INC.)
and THE COURT OF APPEALS, respondents.
Facts: In the years prior to 1984, private respondent issued a special kind of life
insurance policy known as the "Junior Estate Builder Policy," the distinguishing feature
of which is a clause providing for an automatic increase in the amount of life insurance
coverage upon attainment of a certain age by the insured without the need of issuing a
new policy. Documentary stamp taxes due on the policy were paid by petitioner only on
the initial sum assured. In 1984, private respondent also issued 50,000 shares of stock
dividends with a par value of P100 per share or a total par value of P5,000,000. The
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actual value of said shares, represented by its book value, was P19,307,500.
Documentary stamp taxes were paid based only on the par value of P5,000,000 and not
on the book value. Subsequently, petitioner issued deficiency documentary stamps tax
assessment for the year 1984 in the amounts of (a) P464,898.75, corresponding to the
amount of automatic increase of the sum assured on the policy issued by respondent,
and (b) P78,991.25 corresponding to the book value in excess of the par value of the
stock dividends. Private respondent questioned the deficiency assessments and sought
their cancellation in a petition filed in the Court of Tax Appeals which found no valid
basis for the deficiency tax assessment on the stock dividends, as well as on the
insurance policy. Petitioner appealed the CTA’s decision to the Court of Appeals which
affirmed the CTA’s decision insofar as it nullified the deficiency assessment on the
insurance policy, but reversed the same with regard to the deficiency assessment on the
stock dividends. A motion for reconsideration of the decision having been denied, both
the Commissioner of Internal Revenue and private respondent appealed to this Court.
Issue: WON the "automatic increase clause" is separate and distinct from the main
agreement and involves another transaction, hence, a deficiency assessment based on
the additional insurance not covered in the main policy is in order.
Held: Yes. It is clear from Section 173 that the payment of documentary stamp taxes is
done at the time the act is done or transaction had and the tax base for the computation
of documentary stamp taxes on life insurance policies under Section 183 is the amount
fixed in policy, unless the interest of a person insured is susceptible of exact pecuniary
measurement. Logically, we believe that the amount fixed in the policy is the figure
written on its face and whatever increases will take effect in the future by reason of the
"automatic increase clause" embodied in the policy without the need of another
contract. In the instant case, the additional insurance that took effect in 1984 was an
obligation subject to a suspensive obligation, but still a part of the insurance sold to
which private respondent was liable for the payment of the documentary stamp tax.
Finally, it should be emphasized that while tax avoidance schemes and arrangements
are not prohibited, tax laws cannot be circumvented in order to evade the payment of
just taxes. In the case at bar, to claim that the increase in the amount insured (by virtue
of the automatic increase clause incorporated into the policy at the time of issuance)
should not be included in the computation of the documentary stamp taxes due on the
policy would be a clear evasion of the law requiring that the tax be computed on the
basis of the amount insured by the policy.
G.R. No. 147188 September 14, 2004
COMMISSIONER OF INTERNAL REVENUE vs.THE ESTATE OF BENIGNO P. TODA, JR.,
Represented by Special Co-administrators Lorna Kapunan and Mario Luza
Bautista
FACTS: CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its
issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of

land on which the building stands for an amount of not less than P90 million. Toda
purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold
the same property on the same day to Royal Match Inc. (RMI) for P200 million. These
two transactions were evidenced by Deeds of Absolute Sale notarized on the same day
by the same notary public. For the sale of the property to RMI, Altonaga paid capital
gains tax in the amount of P10 million.
CIC filed its corporate annual income tax return for the year 1989, declaring, among
other things, its gain from the sale of real property in the amount of P75,728.021. After
crediting withholding taxes ofP254,497.00, it paid P26,341,207 for its net taxable
income of P75,987,725. Toda sold his entire shares of stocks in CIC to Le Hun T. Choa
for P12.5 million, as evidenced by a Deed of Sale of Shares of Stocks. Three and a half
years later, Toda died. Subsequently, Bureau of Internal Revenue (BIR) sent an
assessment notice and demand letter to the CIC for deficiency income tax for the year
1989. The new CIC asked for a reconsideration, asserting that the assessment should be
directed against the old CIC, and not against the new CIC, which is owned by an entirely
different set of stockholders; moreover, Toda had undertaken to hold the buyer of his
stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989. The
estate of Toda then received a Notice of Assessment for the deficiency of income tax in
the amount of P79,099,999.22. The Estate thereafter filed a letter of protest.
The Commissioner dismissed the protest. The Estate filed a petition for review with the
CTA. CTA held that the Commissioner failed to prove that CIC committed fraud to
deprive the government of the taxes due it. The CTA also denied the motion for
reconsideration. The Court of Appeals affirmed the decision of the CTA.
ISSUES:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the year 1989
prescribed? and
3. Can respondent Estate be held liable for the deficiency income tax of CIC for
the year 1989, if any?
HELD: 1. Tax evasion. Tax avoidance and tax evasion are the two most common ways
used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device
within the means sanctioned by law. This method should be used by the taxpayer in
good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside
of those lawful means and when availed of, it usually subjects the taxpayer to further or
additional civil or criminal liabilities.
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the
payment of less than that known by the taxpayer to be legally due, or the non-payment
of tax when it is shown that a tax is due; (2) an accompanying state of mind which is
6
described as being "evil," in "bad faith," "willfull," or "deliberate and not accidental";
and (3) a course of action or failure of action which is unlawful.24
All these factors are present in the instant case. It is significant to note that as early as 4
May 1989, prior to the purported sale of the Cibeles property by CIC to Altonaga on 30
August 1989, CIC received P40 million from RMI, and not from Altonaga. That P40
million was debited by RMI and reflected in its trial balance as "other inv. – Cibeles
Bldg." Also, as of 31 July 1989, another P40 million was debited and reflected in RMI’s
trial balance as "other inv. – Cibeles Bldg." This would show that the real buyer of the
properties was RMI, and not the intermediary Altonaga.
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely
petitioner cannot be faulted for wanting to reduce the tax from 35% to 5%. The
scheme resorted to by CIC in making it appear that there were two sales of the subject
properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be
considered a legitimate tax planning. Such scheme is tainted with fraud. Fraud in its
general sense, "is deemed to comprise anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or equitable duty, trust or
confidence justly reposed, resulting in the damage to another, or by which an undue and
unconscionable advantage is taken of another."
Hence, the sale to Altonaga should be disregarded for income tax purposes. The two sale
transactions should be treated as a single direct sale by CIC to RMI. Accordingly, the tax
liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27
(A) of the Tax Reform Act of 1997). CIC is therefore liable to pay a 35% corporate tax for
its taxable net income in 1989. The 5% individual capital gains tax provided for in
Section 34 (h) of the NIRC of 198635 (now 6% under Section 24 (D) (1) of the Tax
Reform Act of 1997) is inapplicable. Hence, the assessment for the deficiency income tax
issued by the BIR must be upheld.
2. No. (Legal basis: Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform
Act of 1997).
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade
tax; and (3) failure to file a return, the period within which to assess tax is ten years
from discovery of the fraud, falsification or omission, as the case may be. The
prescriptive period to assess the correct taxes in case of false returns is ten years from
the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity
thereof was claimed to have been discovered only on 8 March 1991.The assessment for
the 1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly, the
issuance of the correct assessment for deficiency income tax was well within the
prescriptive period.
3. Yes. A corporation has a juridical personality distinct and separate from the persons
owning or composing it. Thus, the owners or stockholders of a corporation may not
generally be made to answer for the liabilities of a corporation and vice versa. There are,
however, certain instances in which personal liability may arise. It has been held in a

number of cases that personal liability of a corporate director, trustee, or officer along,
albeit not necessarily, with the corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith
or gross negligence in directing its affairs, or (c) conflict of interest, resulting in
damages to the corporation, its stockholders, or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge
thereof, does not forthwith file with the corporate secretary his written
objection thereto;
3. He agrees to hold himself personally and solidarily liable with the
corporation; or
4. He is made, by specific provision of law, to personally answer for his
corporate action.38
When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any
all income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989," he thereby
voluntarily held himself personally liable therefor. Respondent estate cannot, therefore,
deny liability for CIC’s deficiency income tax for the year 1989 by invoking the separate
corporate personality of CIC, since its obligation arose from Toda’s contractual
undertaking, as contained in the Deed of Sale of Shares of Stock.
CITY OF ILOILO, Mr. Romeo V. Manikan (Treasurer of Iloilo City) vs. SMART
COMMUNICATIONS, INC.
G.R. No. 167260. February 27, 2009
Brion, J.
Doctrine: A tax exemption cannot arise from vague inference – tax exemptions must be
clear an unequivocal; A taxpayer claiming a tax exemption must point to a specific
provision of law conferring on the taxpayer, in clear and plain terms, exemption from a
common burden.
Facts: SMART received a letter of assessment dated February 2, 2002 from petitioner
requiring it to pay deficiency local franchise and business taxes in the amount of
P764,545.29, plus interests and surcharges, which it incurred for the years 1997 to
2001. SMART protested the assessment claiming exemption from local franchise and
business taxes based on Section 9 of its legislative franchise under Republic Act No.
7294. Under SMART’s franchise, it was required to pay a franchise tax equivalent to 3%
of all gross receipts, which amount shall be in lieu of all taxes. SMART contends that the
“in lieu of all taxes” clause covers local franchise and business taxes.
SMART similarly invoked R.A. 7295 or the Public Telecommunications Policy
Act (Public Telecoms Act) whose Section 23 declares that any existing privilege,
7
incentive, advantage or exemption granted under existing franchises shall ipso facto
become part of previously granted-telecommunications franchise. SMART contends that
by virtue of Section 23, tax exemptions granted by the legislature to other holders of
telecommunications franchise may be extended to and availed of by SMART.
Petitioner denied SMART’s protest citing the failure of SMART to comply with
Section 252 or R.A. 7160 or the Local Government Code (LGC) before filing the protest
against the assessment. Section 252 of the LGC requires payment of the tax before any
protest against the tax assessment can be made.
SMART instituted a case against petitioner before the RTC of Iloilo City. The
trial court ruled in favor of SMART and declared the telecommunications firm exempt
from the payment of local franchise and business taxes; it agreed with SMART’s claim of
exemption under Section 9 of its franchise and Section 23 of the Public Telecoms Act.
Petitioner files this petition for review on certiorari.
Issue: Whether or not SMART is exempt from the payment of local franchise and
business taxes.
Ruling: NO.
SMART relies on two provisions of law to support its claim for tax exemption:
Section 9 of SMART’s franchise and Section 23 of the Public Telecoms Act.
“Section 9. Tax provisions. – The grantee, its successors or assigns 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 which are now or hereafter may be required
by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a
franchise tax equivalent to three percent (3%) of all gross receipts of the
business transacted under the said percentage shall be in lieu of all taxes on this
franchise or earnings thereof; xxxxxxxxxxx”
“Section 193. Withdrawal of Tax Exemption Privileges. – Unless otherwise provided in
this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, xxxxxxx, are hereby withdrawn upon the
effectivity of this Code.”
By virtue of Section 193 of the LGC, all tax exemption privileges then enjoyed
by all persons, save those expressly mentioned, have been withdrawn effective January
1, 1992 – the date of effectivity of the LGC. However, the withdrawal of exemptions
pertains only to those already existing when the LGC was enacted. The intention of the
legislature was to remove all tax exemptions or incentives granted prior to the LGC. As
SMART’s franchise was made effective on March 27, 1992 – after the effectivity of the
LGC – Section 193 will therefore not apply in this case
SMART additionally invokes the “equality clause” under Section 23 of the Public
Telecoms Act:
“Section 23. Equality of Treatment in the Telecommunications Industry. – Any
advantage, favor, privilege, exemption, or immunity granted under existing
franchises, or may hereafter be granted, shall ipso facto become part of previously
granted telecommunications franchise and shall be accorded immediately and
unconditionally to the grantees of such franchises: XXXX”

The term “exemption” in Section 23 of the Public Telecoms Act does not mean tax
exemption; rather, it refers to exemption from certain regulatory or reporting
requirements imposed by government agencies such as the National
Telecommunications Commission. The thrust of the Public Telecoms Act is to promote
the gradual deregulation of entry, pricing and operations of all public
telecommunications entities, and thus to level the playing field in the
telecommunications industry.
The Court finds SMART’s claim for exemption to be unfounded. He who claims an
exemption from his share of the common burden of taxation must justify his claim by
showing that the Legislature intended to exempt him by words too plain to be beyond
doubt or mistake. The burden therefore is on SMART to prove that, based on its
franchise and the Public Telecoms Act, it is entitled to exemption from the local
franchise and business taxes being collected by the petitioner.
Petition is granted.
NATIONAL POWER CORPORATION vs. CENTRAL BOARD OF ASSESSMENT APPEALS
(CBAA), LOCAL BOARD OF ASSESSMENT APPEALS (LBAA) OF LA UNION,
PROVINCIAL TREASURER, LA UNION and MUNICIPAL ASSESSOR OF BAUANG, LA
UNION
G.R. No. 171470
January 30, 2009
BRION, J.:
FACTS: The National Power Corporation (NAPOCOR) claims in this case that the
machineries and equipment used in a project covered by a BOT agreement, to which it is
a party, should be accorded the tax-exempt status it enjoys. The Local Board of
Assessment Appeals of the Province of La Union (LBAA), the Central Board of
Assessment Appeals (CBAA) and the Court of Tax Appeals (CTA) were one in rejecting
NAPOCOR’s claim.
Hence, the present petition for review on certiorari filed under Rule 45 of the Rules of
Court by NAPOCOR challenges this uniform ruling and seeks the reversal of the CTA’s
Decision.
In 1993, First Private Power Corporation (FPPC) entered into a BOT agreement with
NAPOCOR for the construction of the 215 Megawatt Bauang Diesel Power Plant in
Payocpoc, Bauang, La Union. The BOT Agreement provided, via an Accession
Undertaking, for the creation of the Bauang Private Power Corporation (BPPC) that will
own, manage and operate the power plant/station, and assume and perform FPPC’s
obligations under the BOT agreement. For a fee, BPPC will convert NAPOCOR’s supplied
diesel fuel into electricity and deliver the product to NAPOCOR.
The pertinent provisions of the BOT agreement, as they relate to the submitted issues in
the present case, read:
8
2.08 From the date hereof until the Transfer Date,
CONTRACTOR shall, directly or indirectly, own the
Power Station and all the fixtures, fittings, machinery,
and equipment on the Site or used in connection with
the Power Station which have been supplied by it or at
its cost and it shall operate and manage the Power
Station for the purpose of converting fuel of NAPOCOR
into electricity.
2.09 Until the Transfer Date, NAPOCOR shall, at its own
cost, supply and deliver all Fuel for the Power Station
and shall take all electricity generated by the Power
Station at the request of NAPOCOR which shall pay to
CONTRACTOR fees as provided in Clause 11.
The OIC of the Municipal Assessor’s Office of Bauang, La Union initially issued
Declaration of Real Property Nos. 25016 and 25022 to 25029 declaring BPPC’s
machineries and equipment as tax-exempt. On the initiative of the Bauang Vice Mayor,
the municipality questioned before the Regional Director of the Bureau of Local
Government Finance (BLGF) the declared tax exemption; later, the issue was elevated to
the Deputy Executive Director and Officer-in-Charge of the BLGF, Department of
Finance, who ruled that BPPC’s machineries and equipments are subject to real
property tax and directed the Assessors’ Office to take appropriate action.
The Provincial/Municipal Assessors thereupon issued Revised Tax Declaration Nos.
30026 to 30033 and 30337, and cancelled the earlier issued Declarations of Real
Property. The Municipal Assessor of Bauang then issued a Notice of Assessment and
Tax Bill to BPPC assessing/taxing the machineries and equipments in the total sum of
P288,582,848.00 for the 1995-1998 period, sans interest of two percent (2%) on the
unpaid amounts. BPPC’s Vice-President and Plant Manager received the Notice of
Assessment and Tax Bill on August 1998.
In October 1998, NAPOCOR filed a petition (styled In Re Petition to Declare Exempt the
Revised and Retroactive to 1995 Tax Declaration Nos. 30026 to 30033 and 30037) with
the LBAA. The petition asked that, retroactive to 1995, the machineries covered by the
tax declarations be exempt from real property tax under Section 234(c) of Republic Act
No. 7160 (the Local Government Code or LGC); and, that these properties be dropped
from the assessment roll pursuant to Section 206 of the LGC. Section 234(c) of the LGC
provides:
Section 234. Exemptions from Real Property Tax. – The
following are exempted from the payment of real property
tax:
xxxx
(c) All machineries and equipment that are actually, directly
and exclusively used by local water districts and
government-owned or –controlled corporations engaged in

the supply and distribution of water and/or generation and
transmission of electric power.
The LBAA denied NAPOCOR’s petition for exemption. NAPOCOR appealed the LBAA
ruling to the CBAA. BPPC moved to intervene on the ground that it has a direct interest
in the outcome of the litigation. CBAA subsequently dismissed the appeal based on its
finding that the BPPC, and not NAPOCOR, is the actual, direct and exclusive user of the
equipment and machineries; thus, the exemption under Section 234(c) does not apply.
NAPOCOR then filed with the CTA a petition for review. BPPC filed its own petition for
review of the CBAA decision with the CTA. The two petitions were subsequently
consolidated. The CTA rendered on February 2006 a decision dismissing the
consolidated petitions. Hence, this petition for reviews by BPPC and NAPOCOR before
the SC.
ISSUE:
Under the terms of the BOT Agreement, can the GOCC be deemed the actual, direct, and
exclusive user of machineries and equipment for tax exemption purposes? If not, can it
pass on its tax-exempt status to its BOT partner, a private corporation, through the BOT
agreement?
Otherwise put, whether NAPOCOR was able to convincingly show the factual basis for
its claimed tax exemption?
HELD:
NO, it failed to convincingly show the factual basis for its claimed tax exemption. The
Court found the petition devoid of merit. NAPOCOR failed to sufficiently show that the
CTA committed any reversible error in its ruling. NAPOCOR’s basis for its claimed
exemption – Section 234(c) of the LGC – is clear and not at all ambiguous in its
terms. Exempt from real property taxation are: (a) all machineries and equipment; (b)
[that are] actually, directly, and exclusively used by; (c) [local water districts and]
government-owned or –controlled corporations engaged in the [supply and distribution
of water and/or] generation and transmission of electric power.
The Court notes, in the first place, that the present case is not the first occasion where
NAPOCOR claimed real property tax exemption for a contract partner under Sec. 234 (c)
of the LGC. In FELS Energy, Inc. v. The Province of Batangas, the Province of Batangas
assessed real property taxes against FELS Energy, Inc. – the owner of a barge used in
generating electricity under an agreement with NAPOCOR. Their agreement provided
that NAPOCOR shall pay all of FELS’ real estate taxes and assessments. We concluded in
that case that we could not recognize the tax exemption claimed, since NAPOCOR was
not the actual, direct and exclusive user of the barge as required by Sec. 234 (c).
The Court also recognized this strictissimi juris standard in NAPOCOR v. City of
Cabanatuan. Under this standard, the claimant must show beyond doubt, with clear
and convincing evidence, the factual basis for the claim. Thus, the real issue in a tax
exemption case such as the present case is whether NAPOCOR was able to convincingly
show the factual basis for its claimed exception.
9
The records show that NAPOCOR, no less, admits BPPC’s ownership of the machineries
and equipment in the power plant. Likewise, the provisions of the BOT agreement cited
above clearly show BPPC’s ownership. Thus, ownership is not a disputed issue.
Rather than ownership, NAPOCOR’s use of the machineries and equipment is the critical
issue, since its claim under Sec. 234(c) of the LGC is premised on actual, direct and
exclusive use. To support this claim, NAPOCOR characterizes the BOT Agreement as a
mere financing agreement where BPPC is the financier, while it (NAPOCOR) is the actual
user of the properties.
In a BOT agreement, it is the project proponent who constructs the project at its own
cost and subsequently operates and manages it. The proponent secures the return on
its investments from those using the project’s facilities through appropriate tolls, fees,
rentals, and charges not exceeding those proposed in its bid or as negotiated. At the end
of the fixed term agreed upon, the project proponent transfers the ownership of the
facility to the government agency.
BPPC has complete ownership – both legal and beneficial – of the project, including the
machineries and equipment used, subject only to the transfer of these properties
without cost to NAPOCOR after the lapse of the period agreed upon. Notably, BPPC – as
owner-user – is responsible for any defect in the machineries and equipment.
The arrangement, however, goes beyond the simple provision of funds, since the private
sector proponent not only constructs and buys the necessary assets to put up the
project, but operates and manages it as well during an agreed period that would allow it
to recover its basic costs and earn profits. In other words, the private sector proponent
goes into business for itself, assuming risks and incurring costs for its account. If it
receives support from the government at all during the agreed period, these are pre-
agreed items of assistance geared to ensure that the BOT agreement’s objectives – both
for the project proponent and for the government – are achieved. In this sense, a BOT
arrangement is sui generis and is different from the usual financing arrangements where
funds are advanced to a borrower who uses the funds to establish a project that it owns,
subject only to a collateral security arrangement to guard against the nonpayment of the
loan. It is different, too, from an arrangement where a government agency borrows
funds to put a project from a private sector-lender who is thereafter commissioned to
run the project for the government agency. In the latter case, the government agency is
the owner of the project from the beginning, and the lender-operator is merely its agent
in running the project.
BPPC’s ownership and use of the machineries and equipment are actual, direct, and
immediate, while NAPOCOR’s is contingent and, at this stage of the BOT Agreement, not
sufficient to support its claim for tax exemption. Thus, the CTA committed no
reversible error in denying NAPOCOR’s claim for tax exemption.