Republic of the Philippines international agreements (the Republic of the Philippines’ air transport agreements with the
SUPREME COURT United States of America, Netherlands, Belgium and Japan).
Manila
FIRST DIVISION
G.R. No. 188497 February 19, 2014
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
PILIPINAS SHELL PETROLEUM CORPORATION, Respondent.
RESOLUTION
VILLARAMA, JR., J.:
For resolution are the Motion for Reconsideration dated May 22, 2012 and Supplemental
Motion for Reconsideration dated December 12, 2012 filed by Pilipinas Shell Petroleum
Corporation (respondent). As directed, the Solicitor General on behalf of petitioner
Commissioner of Internal Revenue filed their Comment, to which respondent filed its Reply.
In our Decision promulgated on April 25, 2012, we ruled that the Court of Tax Appeals (CTA)
erred in granting respondent's claim for tax refund because the latter failed to establish a tax
exemption in its favor under Section 135(a) of the National Internal Revenue Code of 1997
(NIRC).
WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated March
25, 2009 and Resolution dated June 24, 2009 of the Court of Tax Appeals En Banc in CTA EB
No. 415 are hereby REVERSED and SET ASIDE. The claims for tax refund or credit filed by
respondent Pilipinas Shell Petroleum Corporation are DENIED for lack of basis.
No pronouncement as to costs.
SO ORDERED.1
Respondent argues that a plain reading of Section 135 of the NIRC reveals that it is the
petroleum products sold to international carriers which are exempt from excise tax for which
reason no excise taxes are deemed to have been due in the first place. It points out that excise
tax being an indirect tax, Section 135 in relation to Section 148 should be interpreted as
referring to a tax exemption from the point of production and removal from the place of
production considering that it is only at that point that an excise tax is imposed. The situation
is unlike the value-added tax (VAT) which is imposed at every point of turnover – from
production to wholesale, to retail and to end-consumer. Respondent thus concludes that
exemption could only refer to the imposition of the tax on the statutory seller, in this case the
respondent. This is because when a tax paid by the statutory seller is passed on to the buyer it
is no longer in the nature of a tax but an added cost to the purchase price of the product sold.
Respondent also contends that our ruling that Section 135 only prohibits local petroleum
manufacturers like respondent from shifting the burden of excise tax to international carriers
has adverse economic impact as it severely curtails the domestic oil industry. Requiring local
petroleum manufacturers to absorb the tax burden in the sale of its products to international
carriers is contrary to the State’s policy of "protecting gasoline dealers and distributors from
unfair and onerous trade conditions," and places them at a competitive disadvantage since
foreign oil producers, particularly those whose governments with which we have entered into
bilateral service agreements, are not subject to excise tax for the same transaction. Respondent
fears this could lead to cessation of supply of petroleum products to international carriers,
retrenchment of employees of domestic manufacturers/producers to prevent further losses, or
worse, shutting down of their production of jet A-1 fuel and aviation gas due to unprofitability
of sustaining operations. Under this scenario, participation of Filipino capital, management
and labor in the domestic oil industry is effectively diminished.
Lastly, respondent asserts that the imposition by the Philippine Government of excise tax on
petroleum products sold to international carriers is in violation of the Chicago Convention on
International Aviation ("Chicago Convention") to which it is a signatory, as well as other
1
In his Comment, the Solicitor General underscores the statutory basis of this Court’s ruling
that the exemption under Section 135 does not attach to the products. Citing Exxonmobil
Petroleum & Chemical Holdings, Inc.-Philippine Branch v. Commissioner of Internal
Revenue,2 which held that the excise tax, when passed on to the purchaser, becomes part of
the purchase price, the Solicitor General claims this refutes respondent’s theory that the
exemption attaches to the petroleum product itself and not to the purchaser for it would have
been erroneous for the seller to pay the excise tax and inequitable to pass it on to the purchaser
if the excise tax exemption attaches to the product.
As to respondent’s reliance in the cases of Silkair (Singapore) Pte. Ltd. v. Commissioner of
Internal Revenue3 and Exxonmobil Petroleum & Chemical Holdings, Inc.-Philippine Branch
v. Commissioner of Internal Revenue,4 the Solicitor General points out that there was no
pronouncement in these cases that petroleum manufacturers selling petroleum products to
international carriers are exempt from paying excise taxes. In fact, Exxonmobil even cited the
case of Philippine Acetylene Co, Inc. v. Commissioner of Internal Revenue. 5 Further, the
ruling in Maceda v. Macaraig, Jr.6 which confirms that Section 135 does not intend to exempt
manufacturers or producers of petroleum products from the payment of excise tax.
The Court will now address the principal arguments proffered by respondent: (1) Section 135
intended the tax exemption to apply to petroleum products at the point of production; (2)
Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue and Maceda v. Macaraig,
Jr. are inapplicable in the light of previous rulings of the Bureau of Internal Revenue (BIR)
and the CTA that the excise tax on petroleum products sold to international carriers for use or
consumption outside the Philippines attaches to the article when sold to said international
carriers, as it is the article which is exempt from the tax, not the international carrier; and (3)
the Decision of this Court will not only have adverse impact on the domestic oil industry but is
also in violation of international agreements on aviation.
Under Section 129 of the NIRC, excise taxes are those applied to goods manufactured or
produced in the Philippines for domestic sale or consumption or for any other disposition and
to things imported. Excise taxes as used in our Tax Code fall under two types – (1) specific tax
which is based on weight or volume capacity and other physical unit of measurement, and (2)
ad valorem tax which is based on selling price or other specified value of the goods. Aviation
fuel is subject to specific tax under Section 148 (g) which attaches to said product "as soon as
they are in existence as such."
On this point, the clarification made by our esteemed colleague, Associate Justice Lucas P.
Bersamin regarding the traditional meaning of excise tax adopted in our Decision, is well-
taken.
The transformation undergone by the term "excise tax" from its traditional concept up to its
current definition in our Tax Code was explained in the case of Petron Corporation v.
Tiangco,7 as follows:
Admittedly, the proffered definition of an excise tax as "a tax upon the performance, carrying
on, or exercise of some right, privilege, activity, calling or occupation" derives from the
compendium American Jurisprudence, popularly referred to as Am Jur and has been cited in
previous decisions of this Court, including those cited by Petron itself. Such a definition would
not have been inconsistent with previous incarnations of our Tax Code, such as the NIRC of
1939, as amended, or the NIRC of 1977 because in those laws the term "excise tax" was not
used at all. In contrast, the nomenclature used in those prior laws in referring to taxes imposed
on specific articles was "specific tax." Yet beginning with the National Internal Revenue Code
of 1986, as amended, the term "excise taxes" was used and defined as applicable "to goods
manufactured or produced in the Philippines… and to things imported." This definition was
carried over into the present NIRC of 1997. Further, these two latest codes categorize two
different kinds of excise taxes: "specific tax" which is imposed and based on weight or volume
capacity or any other physical unit of measurement; and "ad valorem tax" which is imposed
and based on the selling price or other specified value of the goods. In other words, the
meaning of "excise tax" has undergone a transformation, morphing from the Am Jur definition
to its current signification which is a tax on certain specified goods or articles.
The change in perspective brought forth by the use of the term "excise tax" in a different
connotation was not lost on the departed author Jose Nolledo as he accorded divergent
treatments in his 1973 and 1994 commentaries on our tax laws. Writing in 1973, and
essentially alluding to the Am Jur definition of "excise tax," Nolledo observed:
Are specific taxes, taxes on property or excise taxes –
In the case of Meralco v. Trinidad ([G.R.] 16738, 1925) it was held that specific taxes are
property taxes, a ruling which seems to be erroneous. Specific taxes are truly excise taxes for
the fact that the value of the property taxed is taken into account will not change the nature of
the tax. It is correct to say that specific taxes are taxes on the privilege to import, manufacture
and remove from storage certain articles specified by law.
In contrast, after the tax code was amended to classify specific taxes as a subset of excise
taxes, Nolledo, in his 1994 commentaries, wrote:
1. Excise taxes, as used in the Tax Code, refers to taxes applicable to certain
specified goods or articles manufactured or produced in the Philippines for domestic
sale or consumption or for any other disposition and to things imported into the
Philippines. They are either specific or ad valorem.
2. Nature of excise taxes. – They are imposed directly on certain specified goods.
(infra) They are, therefore, taxes on property. (see Medina vs. City of Baguio, 91
Phil. 854.)
A tax is not excise where it does not subject directly the produce or goods to tax but indirectly
as an incident to, or in connection with, the business to be taxed.
In their 2004 commentaries, De Leon and De Leon restate the Am Jur definition of excise tax,
and observe that the term is "synonymous with ‘privilege tax’ and [both terms] are often used
interchangeably." At the same time, they offer a caveat that "[e]xcise tax, as [defined by Am
Jur], is not to be confused with excise tax imposed [by the NIRC] on certain specified articles
manufactured or produced in, or imported into, the Philippines, ‘for domestic sale or
consumption or for any other disposition.’"
It is evident that Am Jur aside, the current definition of an excise tax is that of a tax levied on a
specific article, rather than one "upon the performance, carrying on, or the exercise of an
activity."
This current definition was already in place when the Code was enacted in 1991, and we can
only presume that it was what the Congress had intended as it specified that local government
units could not impose "excise taxes on articles enumerated under the [NIRC]." This
prohibition must pertain to the same kind of excise taxes as imposed by the NIRC, and not
those previously defined "excise taxes" which were not integrated or denominated as such in
our present tax law.8 (Emphasis supplied.)
That excise tax as presently understood is a tax on property has no bearing at all on the issue
of respondent’s entitlement to refund. Nor does the nature of excise tax as an indirect tax
supports respondent’s postulation that the tax exemption provided in Sec. 135 attaches to the
petroleum products themselves and consequently the domestic petroleum manufacturer is not
liable for the payment of excise tax at the point of production. As already discussed in our
Decision, to which Justice Bersamin concurs, "the accrual and payment of the excise tax on
the goods enumerated under Title VI of the NIRC prior to their removal at the place of
production are absolute and admit of no exception." This also underscores the fact that the
exemption from payment of excise tax is conferred on international carriers who purchased the
petroleum products of respondent.
On the basis of Philippine Acetylene, we held that a tax exemption being enjoyed by the buyer
cannot be the basis of a claim for tax exemption by the manufacturer or seller of the goods for
2
any tax due to it as the manufacturer or seller. The excise tax imposed on petroleum products
under Section 148 is the direct liability of the manufacturer who cannot thus invoke the excise
tax exemption granted to its buyers who are international carriers. And following our
pronouncement in Maceda v. Macarig, Jr. we further ruled that Section 135(a) should be
construed as prohibiting the shifting of the burden of the excise tax to the international carriers
who buy petroleum products from the local manufacturers. Said international carriers are thus
allowed to purchase the petroleum products without the excise tax component which otherwise
would have been added to the cost or price fixed by the local manufacturers or
distributors/sellers.
Excise tax on aviation fuel used for international flights is practically nil as most countries are
signatories to the 1944 Chicago Convention on International Aviation (Chicago Convention).
Article 249 of the Convention has been interpreted to prohibit taxation of aircraft fuel
consumed for international transport. Taxation of international air travel is presently at such
low level that there has been an intensified debate on whether these should be increased to
"finance development rather than simply to augment national tax revenue" considering the
"cross-border environmental damage" caused by aircraft emissions that contribute to global
warming, not to mention noise pollution and congestion at airports).10 Mutual exemptions
given under bilateral air service agreements are seen as main legal obstacles to the imposition
of indirect taxes on aviation fuel. In response to present realities, the International Civil
Aviation Organization (ICAO) has adopted policies on charges and emission-related taxes and
charges.11
Section 135(a) of the NIRC and earlier amendments to the Tax Code represent our
Governments’ compliance with the Chicago Convention, its subsequent resolutions/annexes,
and the air transport agreements entered into by the Philippine Government with various
countries. The rationale for exemption of fuel from national and local taxes was expressed by
ICAO as follows:
...The Council in 1951 adopted a Resolution and Recommendation on the taxation of fuel, a
Resolution on the taxation of income and of aircraft, and a Resolution on taxes related to the
sale or use of international air transport (cf. Doc 7145) which were further amended and
amplified by the policy statements in Doc 8632 published in 1966. The Resolutions and
Recommendation concerned were designed to recognize the uniqueness of civil aviation and
the need to accord tax exempt status to certain aspects of the operations of international air
transport and were adopted because multiple taxation on the aircraft, fuel, technical supplies
and the income of international air transport, as well as taxes on its sale and use, were
considered as major obstacles to the further development of international air transport. Non-
observance of the principle of reciprocal exemption envisaged in these policies was also seen
as risking retaliatory action with adverse repercussions on international air transport which
plays a major role in the development and expansion of international trade and travel. 12
In the 6th Meeting of the Worldwide Air Transport Conference (ATCONF) held on March 18-
22, 2013 at Montreal, among matters agreed upon was that "the proliferation of various taxes
and duties on air transport could have negative impact on the sustainable development of air
transport and on consumers." Confirming that ICAO’s policies on taxation remain valid, the
Conference recommended that "ICAO promote more vigorously its policies and with industry
stakeholders to develop analysis and guidance to States on the impact of taxes and other levies
on air transport."13 Even as said conference was being held, on March 7, 2013, President
Benigno Aquino III has signed into law Republic Act (R.A.) No. 10378 14 granting tax
incentives to foreign carriers which include exemption from the 12% value-added tax (VAT)
and 2.5% gross Philippine billings tax (GPBT). GPBT is a form of income tax applied to
international airlines or shipping companies. The law, based on reciprocal grant of similar tax
exemptions to Philippine carriers, is expected to increase foreign tourist arrivals in the
country.
Indeed, the avowed purpose of a tax exemption is always "some public benefit or interest, would be travelling further than necessary to fill up in low-tax jurisdictions; in addition they
which the law-making body considers sufficient to offset the monetary loss entailed in the would be burning up more fuel when carrying the extra weight of a full fuel tank.
grant of the exemption."15 The exemption from excise tax of aviation fuel purchased by With the prospect of declining sales of aviation jet fuel sales to international carriers on
international carriers for consumption outside the Philippines fulfills a treaty obligation account of major domestic oil companies' unwillingness to shoulder the burden of excise tax,
pursuant to which our Government supports the promotion and expansion of international or of petroleum products being sold to said carriers by local manufacturers or sellers at still
travel through avoidance of multiple taxation and ensuring the viability and safety of high prices , the practice of "tankering" would not be discouraged. This scenario does not
international air travel. In recent years, developing economies such as ours focused more augur well for the Philippines' growing economy and the booming tourism industry. Worse,
serious attention to significant gains for business and tourism sectors as well. Even without our Government would be risking retaliatory action under several bilateral agreements with
such recent incidental benefit, States had long accepted the need for international cooperation various countries. Evidently, construction of the tax exemption provision in question should
in maintaining a capital intensive, labor intensive and fuel intensive airline industry, and give primary consideration to its broad implications on our commitment under international
recognized the major role of international air transport in the development of international agreements.
trade and travel. In view of the foregoing reasons, we find merit in respondent's motion for reconsideration. We
Under the basic international law principle of pacta sunt servanda, we have the duty to fulfill therefore hold that respondent, as the statutory taxpayer who is directly liable to pay the excise
our treaty obligations in good faith. This entails harmonization of national legislation with tax on its petroleum products, is entitled to a refund or credit of the excise taxes it paid for
treaty provisions. In this case, Sec. 135(a) of the NIRC embodies our compliance with our petroleum products sold to international carriers, the latter having been granted exemption
undertakings under the Chicago Convention and various bilateral air service agreements not to from the payment of said excise tax under Sec. 135 (a) of the NIRC.
impose excise tax on aviation fuel purchased by international carriers from domestic WHEREFORE, the Court hereby resolves to:
manufacturers or suppliers. In our Decision in this case, we interpreted Section 135 (a) as (1) GRANT the original and supplemental motions for reconsideration filed by
prohibiting domestic manufacturer or producer to pass on to international carriers the excise respondent Pilipinas Shell Petroleum Corporation; and
tax it had paid on petroleum products upon their removal from the place of production, (2) AFFIRM the Decision dated March 25, 2009 and Resolution dated June 24, 2009
pursuant to Article 148 and pertinent BIR regulations. Ruling on respondent’s claim for tax of the Court of Tax Appeals En Banc in CT A EB No. 415; and DIRECT petitioner
refund of such paid excise taxes on petroleum products sold to tax-exempt international Commissioner of Internal Revenue to refund or to issue a tax credit certificate to
carriers, we found no basis in the Tax Code and jurisprudence to grant the refund of an Pilipinas Shell Petroleum Corporation in the amount of J195,014,283.00
"erroneously or illegally paid" tax. representing the excise taxes it paid on petroleum products sold to international
Justice Bersamin argues that "(T)he shifting of the tax burden by manufacturers-sellers is a carriers from October 2001 to June 2002.
business prerogative resulting from the collective impact of market forces," and that it is SO ORDERED.
"erroneous to construe Section 135(a) only as a prohibition against the shifting by the MARTIN S. VILLARAMA, JR.
manufacturers-sellers of petroleum products of the tax burden to international carriers, for Associate Justice
such construction will deprive the manufacturers-sellers of their business prerogative to
determine the prices at which they can sell their products."
We maintain that Section 135 (a), in fulfillment of international agreement and practice to
exempt aviation fuel from excise tax and other impositions, prohibits the passing of the excise
tax to international carriers who buys petroleum products from local manufacturers/sellers
such as respondent. However, we agree that there is a need to reexamine the effect of denying
the domestic manufacturers/sellers’ claim for refund of the excise taxes they already paid on
petroleum products sold to international carriers, and its serious implications on our
Government’s commitment to the goals and objectives of the Chicago Convention.
The Chicago Convention, which established the legal framework for international civil
aviation, did not deal comprehensively with tax matters. Article 24 (a) of the Convention
simply provides that fuel and lubricating oils on board an aircraft of a Contracting State, on
arrival in the territory of another Contracting State and retained on board on leaving the
territory of that State, shall be exempt from customs duty, inspection fees or similar national
or local duties and charges. Subsequently, the exemption of airlines from national taxes and
customs duties on spare parts and fuel has become a standard element of bilateral air service
agreements (ASAs) between individual countries.
The importance of exemption from aviation fuel tax was underscored in the following
observation made by a British author16 in a paper assessing the debate on using tax to control
aviation emissions and the obstacles to introducing excise duty on aviation fuel, thus:
Without any international agreement on taxing fuel, it is highly likely that moves to impose
duty on international flights, either at a domestic or European level, would encourage
'tankering': carriers filling their aircraft as full as possible whenever they landed outside the
EU to avoid paying tax.1âwphi1 Clearly this would be entirely counterproductive. Aircraft
3
 FIRST DIVISION
G.R. No. 188497 February 19, 2014
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
PILIPINAS SHELL PETROLEUM CORPORATION, Respondent.
SEPARATE OPINION
BERSAMIN, J.:
In essence, the Resolution written for the Court by my esteemed colleague, Justice Martin S.
Villarama, Jr., maintains that the exemption from payment of the excise tax under Section
135(a) of the National Internal Revenue Code (NIRC) is conferred on the international
carriers; and that, accordingly, and in fulfillment of international agreement and practice to
exempt aviation fuel from the excise tax and other impositions, Section 135(a) of the NIRC
prohibits the passing of the excise tax to international carriers purchasing petroleum products
from local manufacturers/sellers. Hence, he finds merit in the Motion for Reconsideration filed
by Pilipinas Shell Petroleum Corporation (Pilipinas Shell), and rules that Pilipinas Shell, as the
statutory taxpayer directly liable to pay the excise tax on its petroleum products, is entitled to
the refund or credit of the excise taxes it paid on the petroleum products sold to international
carriers, the latter having been granted exemption from the payment of such taxes under
Section 135(a) of the NIRC.
I CONCUR in the result.
I write this separate opinion only to explain that I hold a different view on the proper
interpretation of the excise tax exemption under Section 135(a) of the NIRC. I hold that the
excise tax exemption under Section 135(a) of the NIRC is conferred on the petroleum products
on which the excise tax is levied in the first place in view of its nature as a tax on property, the
liability for the payment of which is statutorily imposed on the domestic petroleum
manufacturer.
I submit the following disquisition in support of this separate opinion.
The issue raised here was whether the manufacturer was entitled to claim the refund of the
excise taxes paid on the petroleum products sold to international carriers exempt under Section
135(a) of the NIRC.
We ruled in the negative, and held that the exemption from the excise tax under Section 135(a)
of the NIRC was conferred on the international carriers to whom the petroleum products were
sold. In the decision promulgated onn April 25, 2012, 1 the Court granted the petition for
review on certiorari filed by the Commissioner of Internal Revenue (CIR), and disposed
thusly:
WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated March
25, 2009 and Resolution dated June 24, 2009 of the Court of Tax Appeals En Banc in CTA EB
No. 415 are hereby REVERSED and SET ASIDE. The claims for tax refund or credit filed by
respondent Pilipinas Shell Petroleum Corporation are DENIED for lack of basis.
No pronouncement as to costs.
SO ORDERED.2
We thereby agreed with the position of the Solicitor General that Section 135(a) of the NIRC
must be construed only as a prohibition for the manufacturer-seller of the petroleum products
from shifting the tax burden to the international carriers by incorporating the previously-paid
excise tax in the selling price. As a consequence, the manufacturer-seller could not invoke the
exemption from the excise tax granted to international carriers. Concluding, we said: –
Respondent’s locally manufactured petroleum products are clearly subject to excise tax under
Sec. 148. Hence, its claim for tax refund may not be predicated on Sec. 229 of the NIRC
allowing a refund of erroneous or excess payment of tax. Respondent’s claim is premised on
what it determined as a tax exemption "attaching to the goods themselves," which must be
based on a statute granting tax exemption, or "the result of legislative grace." Such a claim is
to be construed strictissimi juris against the taxpayer, meaning that the claim cannot be made
4
to rest on vague inference. Where the rule of strict interpretation against the taxpayer is
applicable as the claim for refund partakes of the nature of an exemption, the claimant must
show that he clearly falls under the exempting statute.
The exemption from excise tax payment on petroleum products under Sec. 135 (a) is conferred
on international carriers who purchased the same for their use or consumption outside the
Philippines. The only condition set by law is for these petroleum products to be stored in a
bonded storage tank and may be disposed of only in accordance with the rules and regulations
to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner.3
xxxx
Because an excise tax is a tax on the manufacturer and not on the purchaser, and there being
no express grant under the NIRC of exemption from payment of excise tax to local
manufacturers of petroleum products sold to international carriers, and absent any provision in
the Code authorizing the refund or crediting of such excise taxes paid, the Court holds that
Sec. 135 (a) should be construed as prohibiting the shifting of the burden of the excise tax to
the international carriers who buys petroleum products from the local manufacturers. Said
provision thus merely allows the international carriers to purchase petroleum products without
the excise tax component as an added cost in the price fixed by the manufacturers or
distributors/sellers. Consequently, the oil companies which sold such petroleum products to
international carriers are not entitled to a refund of excise taxes previously paid on the goods.4
In its Motion for Reconsideration filed on May 23, 2012, Pilipinas Shell principally contends
that the Court has erred in its interpretation of Section 135(a) of the 1997 NIRC; that Section
135(a) of the NIRC categorically exempts from the excise tax the petroleum products sold to
international carriers of Philippine or foreign registry for their use or consumption outside the
Philippines;5 that no excise tax should be imposed on the petroleum products, whether in the
hands of the qualified international carriers or in the hands of the manufacturer-seller;6 that
although it is the manufacturer, producer or importer who is generally liable for the excise tax
when the goods or articles are subject to the excise tax, no tax should accordingly be collected
from the manufacturer, producer or importer in instances when the goods or articles
themselves are not subject to the excise tax;7 and that as a consequence any excise tax paid in
advance on products that are exempt under the law should be considered erroneously paid and
subject of refund.8
Pilipinas Shell further contends that the Court’s decision, which effectively prohibits
petroleum manufacturers from passing on the burden of the excise tax, defeats the rationale
behind the grant of the exemption;9 and that without the benefit of a refund or the ability to
pass on the burden of the excise tax to the international carriers, the excise tax will constitute
an additional production cost that ultimately increases the selling price of the petroleum
products.10
The CIR counters that the decision has clearly set forth that the excise tax exemption under
Section 135(a) of the NIRC does not attach to the products; that Pilipinas Shell’s reliance on
the Silkair rulings is misplaced considering that the Court made no pronouncement therein that
the manufacturers selling petroleum products to international carriers were exempt from
paying the taxes; that the rulings that are more appropriate are those in Philippine Acetylene
Co., Inc. v. Commissioner of Internal Revenue11 and Maceda v. Macaraig, Jr.,12 whereby the
Court confirmed the obvious intent of Section 135 of the NIRC to grant the excise tax
exemption to the international carriers or agencies as the buyers of petroleum products; and
that this intention is further supported by the requirement that the petroleum manufacturer
must pay the excise tax in advance without regard to whether or not the petroleum purchaser is
qualified for exemption under Section 135 of the NIRC.
In its Supplemental Motion for Reconsideration, Pilipinas Shell reiterates that what is being
exempted under Section 135 of the NIRC is the petroleum product that is sold to international
carriers; that the exemption is not given to the producer or the buyer but to the product itself
considering that the excise taxes, according to the NIRC, are taxes applicable to certain
specific goods or articles for domestic sale or consumption or for any other disposition,
whether manufactured in or imported into the Philippines; that the excise tax that is passed on
to the buyer is no longer in the nature of a tax but of an added cost to the purchase price of the
product sold; that what is contemplated under Section 135 of the NIRC is an exemption from
the excise tax, not an exemption from the burden to shoulder the tax; and that inasmuch as the
exemption can refer only to the imposition of the tax on the statutory seller, like Pilipinas
Shell, a contrary interpretation renders Section 135 of the NIRC nugatory because the NIRC
does not impose the excise tax on subsequent holders of the product like the international
carriers.
As I earlier said, I agree to GRANT Pilipinas Shell’s motions for reconsideration.
Excise tax is essentially a tax
on goods, products or articles
Taxes are classified, according to subject matter or object, into three groups, to wit: (1)
personal, capitation or poll taxes; (2) property taxes; and (3) excise or license taxes. Personal,
capitation or poll taxes are fixed amounts imposed upon residents or persons of a certain class
without regard to their property or business, an example of which is the basic community
tax.13 Property taxes are assessed on property or things of a certain class, whether real or
personal, in proportion to their value or other reasonable method of apportionment, such as the
real estate tax.14 Excise or license taxes are imposed upon the performance of an act, the
enjoyment of a privilege, or the engaging in an occupation, profession or business.15 Income
tax, value-added tax, estate and donor’s tax fall under the third group.
Excise tax, as a classification of tax according to object, must not be confused with the excise
tax under Title VI of the NIRC. The term "excise tax" under Title VI of the 1997 NIRC
derives its definition from the 1986 NIRC,16 and relates to taxes applied to goods
manufactured or produced in the Philippines for domestic sale or consumption or for any other
disposition and to things imported.17 In contrast, an excise tax that is imposed directly on
certain specified goods – goods manufactured or produced in the Philippines, or things
imported – is undoubtedly a tax on property.18
The payment of excise taxes is the direct
liability of the manufacturer or producer
The production, manufacture or importation of the goods belonging to any of the categories
enumerated in Title VI of the NIRC (i.e., alcohol products, tobacco products, petroleum
products, automobiles and non-essential goods, mineral products) are not the sole
determinants for the proper levy of the excise tax. It is further required that the goods be
manufactured, produced or imported for domestic sale, consumption or any other
disposition.19 The accrual of the tax liability is, therefore, contingent on the production,
manufacture or importation of the taxable goods and the intention of the manufacturer,
producer or importer to have the goods locally sold or consumed or disposed in any other
manner. This is the reason why the accrual and liability for the payment of the excise tax are
imposed directly on the manufacturer or producer of the taxable goods, 20 and arise before the
removal of the goods from the place of their production.21
The manufacturer’s or producer’s direct liability to pay the excise taxes similarly operates
although the goods produced or manufactured within the country are intended for export and
are "actually exported without returning to the Philippines, whether so exported in their
original state or as ingredients or parts of any manufactured goods or products." This is
implied from the grant of a tax credit or refund to the manufacturer or producer by Section
130(4)(D) of the NIRC, thereby presupposing that the excise tax corresponding to the goods
exported were previously paid. Section 130(4)(D) reads:
xxxx
(D) Credit for Excise Tax on Goods Actually Exported. - When goods locally produced or
manufactured are removed and actually exported without returning to the Philippines, whether
so exported in their original state or as ingredients or parts of any manufactured goods or
5
products, any excise tax paid thereon shall be credited or refunded upon submission of the
proof of actual exportation and upon receipt of the corresponding foreign exchange payment:
Provided, That the excise tax on mineral products, except coal and coke, imposed under
Section 151 shall not be creditable or refundable even if the mineral products are actually
exported. (Emphasis supplied.)
Simply stated, the accrual and payment of the excise tax under Title VI of the NIRC materially
rest on the fact of actual production, manufacture or importation of the taxable goods in the
Philippines and on their presumed or intended domestic sale, consumption or disposition.
Considering that the excise tax attaches to the goods upon the accrual of the manufacturer’s
direct liability for its payment, the subsequent sale, consumption or other disposition of the
goods becomes relevant only to determine whether any exemption or tax relief may be granted
thereafter.
The actual sale, consumption or disposition
of the taxable goods confirms the proper tax
treatment of goods previously subjected
to the excise tax
Conformably with the foregoing discussion, the accrual and payment of the excise tax on the
goods enumerated under Title VI of the NIRC prior to their removal from the place of
production are absolute and admit of no exception. As earlier mentioned, even locally
manufactured goods intended for export cannot escape the imposition and payment of the
excise tax, subject to a future claim for tax credit or refund once proof of actual exportation
has been submitted to the Commissioner of Internal Revenue (CIR). 22 Verily, it is the actual
sale, consumption or disposition of the taxable goods that confirms the proper tax treatment of
goods previously subjected to the excise tax. If any of the goods enumerated under Title VI of
the NIRC are manufactured or produced in the Philippines and eventually sold, consumed, or
disposed of in any other manner domestically, therefore, there can be no claim for any tax
relief inasmuch as the excise tax was properly levied and collected from the manufacturer-
seller.
Here, the point of interest is the proper tax treatment of the petroleum products sold by
Pilipinas Shell to various international carriers. An international carrier is engaged in
international transportation or contract of carriage between places in different territorial
jurisdictions.23
Pertinent is Section 135(a) of the NIRC, which provides:
SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies.
- Petroleum products sold to the following are exempt from excise tax:
(a) International carriers of Philippine or foreign registry on their use or consumption outside
the Philippines: Provided, That the petroleum products sold to these international carriers shall
be stored in a bonded storage tank and may be disposed of only in accordance with the rules
and regulations to be prescribed by the Secretary of Finance, upon recommendation of the
Commissioner; x x x
xxxx
As the taxpayer statutorily and directly liable for the accrual and payment of the excise tax on
the petroleum products it manufactured and it intended for future domestic sale or
consumption, Pilipinas Shell paid the corresponding excise taxes prior to the removal of the
goods from the place of production. However, upon the sale of the petroleum products to the
international carriers, the goods became exempt from the excise tax by the express provision
of Section 135(a) of the NIRC. In the latter instance, the fact of sale to the international
carriers of the petroleum products previously subjected to the excise tax confirms the proper
tax treatment of the goods as exempt from the excise tax.
It is worthy to note that Section 135(a) of the NIRC is a product of the 1944 Convention of
International Civil Aviation, otherwise known as the Chicago Convention, of which the
Philippines is a Member State. Article 24(a) of the Chicago Convention provides –
 Article 24
Customs duty
(a) Aircraft on a flight to, from, or across the territory of another contracting State shall be
admitted temporarily free of duty, subject to the customs regulations of the State. Fuel,
lubricating oils, spare parts, regular equipment and aircraft stores on board an aircraft of a
contracting State, on arrival in the territory of another contracting State and retained on board
on leaving the territory of that State shall be exempt from customs duty, inspection fees or
similar national or local duties and charges. This exemption shall not apply to any quantities or
articles unloaded, except in accordance with the customs regulations of the State, which may
require that they shall be kept under customs supervision. x x x (Bold emphasis supplied.)
This provision was extended by the ICAO Council in its 1999 Resolution, which stated that
"fuel … taken on board for consumption" by an aircraft from a contracting state in the territory
of another contracting State departing for the territory of any other State must be exempt from
all customs or other duties. The Resolution broadly interpreted the scope of the Article 24
prohibition to include "import, export, excise, sales, consumption and internal duties and taxes
of all kinds levied upon . . . fuel."24
Given the nature of the excise tax on petroleum products as a tax on property, the tax
exemption espoused by Article 24(a) of the Chicago Convention, as now embodied in Section
135(a) of the NIRC, is clearly conferred on the aviation fuel or petroleum product on-board
international carriers. Consequently, the manufacturer’s or producer’s sale of the petroleum
products to international carriers for their use or consumption outside the Philippines operates
to bring the tax exemption of the petroleum products into full force and effect.
Pilipinas Shell, the statutory taxpayer, is
the proper party to claim the refund of
the excise taxes paid on petroleum
products sold to international carriers
The excise taxes are of the nature of indirect taxes, the liability for the payment of which may
fall on a person other than whoever actually bears the burden of the tax. 25
In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, 26 the
Court has discussed the nature of indirect taxes in the following manner:
[I]ndirect 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. 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.27
In another ruling, the Court has observed:
Accordingly, the party liable for the tax can shift the burden to another, as part of the purchase
price of the goods or services. Although the manufacturer/seller is the one who is statutorily
liable for the tax, it is the buyer who actually shoulders or bears the burden of the tax, albeit
not in the nature of a tax, but part of the purchase price or the cost of the goods or services
sold.28
Accordingly, the option of shifting the burden to pay the excise tax rests on the statutory
taxpayer, which is the manufacturer or producer in the case of the excise taxes imposed on the
petroleum products. Regardless of who shoulders the burden of tax payment, however, the
Court has ruled as early as in the 1960s that the proper party to question or to 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. 29 The Court has explained:
In Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue, the Court held that the
sales tax is imposed on the manufacturer or producer and not on the purchaser, "except
probably in a very remote and inconsequential sense." Discussing the "passing on" of the sales
6
tax to the purchaser, the Court therein cited Justice Oliver Wendell Holmes’ opinion in Lash’s
Products v. United States wherein 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. x x x 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 x x x."
Proceeding from this discussion, the Court went on to state:
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. x x x 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.
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. Then it can no longer be contended that a
sales tax is a tax on the purchaser.30
The Silkair rulings involving the excise taxes on the petroleum products sold to international
carriers firmly hold that the proper party to claim the refund of excise taxes paid is the
manufacturer-seller.
In the February 2008 Silkair ruling,31 the Court declared:
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. 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
In the November 2008 Silkair ruling,32 the Court reiterated:
Section 129 of the NIRC provides that excise taxes refer to taxes imposed on specified goods
manufactured or produced in the Philippines for domestic sale or consumption or for any other
disposition and to things imported. The excise taxes are collected from manufacturers or
producers before removal of the domestic products from the place of production. Although
excise taxes can be considered as taxes on production, they are really taxes on property as they
are imposed on certain specified goods.
Section 148(g) of the NIRC provides that there shall be collected on aviation jet fuel an excise
tax of ₱3.67 per liter of volume capacity. Since the tax imposed is based on volume capacity,
the tax is referred to as "specific tax." However, excise tax, whether classified as specific or ad
valorem tax, is basically an indirect tax imposed on the consumption of a specified list of
goods or products. The tax is directly levied on the manufacturer upon removal of the taxable
goods from the place of production but in reality, the tax is passed on to the end consumer as
part of the selling price of the goods sold
xxxx
When Petron removes its petroleum products from its refinery in Limay, Bataan, it pays the
excise tax due on the petroleum products thus removed. Petron, as manufacturer or producer,
is the person liable for the payment of the excise tax as shown in the Excise Tax Returns filed
with the BIR. Stated otherwise, Petron is the taxpayer that is primarily, directly and legally
liable for the payment of the excise taxes. However, since an excise tax is an indirect tax,
Petron can transfer to its customers the amount of the excise tax paid by treating it as part of
the cost of the goods and tacking it on to the selling price.
As correctly observed by the CTA, this Court held in Philippine Acetylene Co., Inc. v.
Commissioner of Internal Revenue:
It may indeed be that the economic burden of the tax finally falls on the purchaser; when it
does the tax becomes part of the price which the purchaser must pay.
Even if the consumers or purchasers ultimately pay for the tax, they are not considered the
taxpayers. The fact that Petron, on whom the excise tax is imposed, can shift the tax burden to
its purchasers does not make the latter the taxpayers and the former the withholding agent.
Petitioner, as the purchaser and end-consumer, ultimately bears the tax burden, but this does
not transform petitioner's status into a statutory taxpayer.
In the refund of indirect taxes, the statutory taxpayer is the proper party who can claim the
refund.
Section 204(c) of the NIRC provides:
Sec. 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit Taxes.
The Commissioner may –
xxxx
(b) Credit or refund taxes erroneously or illegally received or penalties imposed without
authority, refund the value of internal revenue stamps when they are returned in good
condition by the purchaser, and, in his discretion, redeem or change unused stamps that have
been rendered unfit for use and refund their value upon proof of destruction. No credit or
refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the
Commissioner a claim for credit or refund within two (2) years after the payment of the tax or
penalty: Provided, however, That a return filed showing an overpayment shall be considered
as a written claim for credit or refund. (Emphasis and underscoring supplied)
The person entitled to claim a tax refund is the statutory taxpayer. Section 22(N) of the NIRC
defines a taxpayer as "any person subject to tax." In Commissioner of Internal Revenue v.
Procter and Gamble Phil. Mfg. Corp., the Court ruled that:
A "person liable for tax" has been held to be a "person subject to tax" and properly considered
a "taxpayer." The terms "liable for tax" and "subject to tax" both connote a legal obligation or
duty to pay a tax.
The excise tax is due from the manufacturers of the petroleum products and is paid upon
removal of the products from their refineries. Even before the aviation jet fuel is purchased
from Petron, the excise tax is already paid by Petron. Petron, being the manufacturer, is the
"person subject to tax." In this case, Petron, which paid the excise tax upon removal of the
products from its Bataan refinery, is the "person liable for tax." Petitioner is neither a "person
liable for tax" nor "a person subject to tax." There is also no legal duty on the part of petitioner
to pay the excise tax; hence, petitioner cannot be considered the taxpayer.
Even if the tax is shifted by Petron to its customers and even if the tax is billed as a separate
item in the aviation delivery receipts and invoices issued to its customers, Petron remains the
taxpayer because the excise tax is imposed directly on Petron as the manufacturer. Hence,
Petron, as the statutory taxpayer, is the proper party that can claim the refund of the excise
taxes paid to the BIR.33
It is noteworthy that the foregoing pronouncements were applied in two more Silkair
cases34 involving the same parties and the same cause of action but pertaining to different
periods of taxation.
The shifting of the tax burden by manufacturers-sellers is a business prerogative resulting
from the collective impact of market forces. Such forces include government impositions like
the excise tax. Hence, the additional amount billed to the purchaser as part of the price the
purchaser pays for the goods acquired cannot be solely attributed to the effect of the tax
liability imposed on the manufacture-seller. It is erroneous to construe Section 135(a) only as
a prohibition against the shifting by the manufacturers-sellers of petroleum products of the tax
7
burden to international carriers, for such construction will deprive the manufacturers-sellers of
their business prerogative to determine the prices at which they can sell their products.
Section 135(a) of the NIRC cannot be further construed as granting the excise tax exemption
to the international carrier to whom the petroleum products are sold considering that the
international carrier has not been subjected to excise tax at the outset. To reiterate, the excise
tax is levied on the petroleum products because it is a tax on property. Levy is the act of
imposition by the Legislature such as by its enactment of a law. 35 The law enacted here is the
NIRC whereby the excise tax is imposed on the petroleum products, the liability for the
payment of which is further statutorily imposed on the domestic petroleum manufacturer.
Accordingly, the exemption must be allowed to the petroleum products because it is on them
that the tax is imposed. The tax status of an international carrier to whom the petroleum
products are sold is not based on exemption; rather, it is based on the absence of a law
imposing the excise tax on it. This further supports the position that the burden passed on by
the domestic petroleum manufacturer is not anymore in the nature of a tax – although resulting
from the previously-paid excise tax – but as an additional cost component in the selling price.
Consequently, the purchaser of the petroleum products to whom the burden of the excise tax
has been shifted, not being the statutory taxpayer, cannot claim a refund of the excise tax paid
by the manufacturer or producer.
Applying the foregoing, the Court concludes that: (1) the exemption under Section 135(a) of
the NIRC is conferred on the petroleum products on which the excise tax was levied in the
first place; (2) Pilipinas Shell, being the manufacturer or producer of petroleum products, was
the statutory taxpayer of the excise tax imposed on the petroleum products; (3) as the statutory
taxpayer, Pilipinas Shell’s liability to pay the excise tax accrued as soon as the petroleum
products came into existence, and Pilipinas Shell accordingly paid its excise tax liability prior
to its sale or disposition of the taxable goods to third parties, a fact not disputed by the CIR;
and (3) Pilipinas Shell’s sale of the petroleum products to international carriers for their use or
consumption outside the Philippines confirmed the proper tax treatment of the subject goods
as exempt from the excise tax.1âwphi1
Under the circumstances, therefore, Pilipinas Shell erroneously paid the excise taxes on its
petroleum products sold to international carriers, and was entitled to claim the refund of the
excise taxes paid in accordance with prevailing jurisprudence and Section 204(C) of the
NIRC, viz:
Section 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit
Taxes. – The Commissioner may – x x x
xxxx
(C) Credit or refund taxes erroneously or illegally received or penalties imposed without
authority, refund the value of internal revenue stamps when they are returned in good
condition by the purchaser, and, in his discretion, redeem or change unused stamps that have
been rendered unfit for use and refund their value upon proof of destruction. No credit or
refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the
Commissioner a claim for credit or refund within two (2) years after payment of the tax or
penalty: Provided, however, That a return filed showing an overpayment shall be considered
as a written claim for credit or refund.
IN VIEW OF THE FOREGOING, I VOTE TO GRANT the Motion for Reconsideration and
Supplemental Motion for Reconsideration of Pilipinas Shell Petroleum Corporation and,
accordingly:
(a) TO AFFIRM the decision dated March 25, 2009 and resolution dated June 24,
2009 of the Court of Tax Appeals En Banc in CTA EB No. 415; and
(b) TO DIRECT petitioner Commissioner of Internal Revenue to refund or to issue a
tax credit certificate to Pilipinas Shell Petroleum Corporation in the amount of
₱95,014,283.00 representing the excise taxes it paid on the petroleum products sold
to international carriers in the period from October 2001 to June 2002.
 FIRST DIVISION
ANGELES UNIVERSITY FOUNDATION, G.R. No. 189999
Petitioner,
Present:
- versus - LEONARDO-DE CASTRO,J.,*
Acting Chairperson,
BERSAMIN,
CITY OF ANGELES, JULIET G. VILLARAMA, JR.,
QUINSAAT, in her capacity as PEREZ,* and
PERLAS-BERNABE,* JJ.
Treasurer of Angeles City and ENGR.
DONATO N. DIZON, in his capacity as Promulgated:
Acting Angeles City Building Official,
Respondents. June 27, 2012
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
VILLARAMA, JR., J.:
Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of
Civil Procedure, as amended, which seeks to reverse and set aside the Decision [1] dated July
28, 2009 and Resolution[2] dated October 12, 2009 of the Court of Appeals (CA) in CA-G.R.
CV No. 90591. The CA reversed the Decision[3] dated September 21, 2007 of the Regional
Trial Court of Angeles City, Branch 57 in Civil Case No. 12995 declaring petitioner exempt
from the payment of building permit and other fees and ordering respondents to refund the
same with interest at the legal rate.
The factual antecedents:
Petitioner Angeles University Foundation (AUF) is an educational institution
established on May 25, 1962 and was converted into a non-stock, non-profit education
foundation under the provisions of Republic Act (R.A.) No. 6055 [4] on December 4, 1975.
Sometime in August 2005, petitioner filed with the Office of the City Building
Official an application for a building permit for the construction of an 11-storey building of
the Angeles University Foundation Medical Center in its main campus located at MacArthur
Highway, Angeles City, Pampanga. Said office issued a Building Permit Fee Assessment in
the amount of P126,839.20. An Order of Payment was also issued by the City Planning and
Development Office, Zoning Administration Unit requiring petitioner to pay the sum
of P238,741.64 as Locational Clearance Fee.[5]
In separate letters dated November 15, 2005 addressed to respondents City Treasurer
Juliet G. Quinsaat and Acting City Building Official Donato N. Dizon, petitioner claimed that
it is exempt from the payment of the building permit and locational clearance fees, citing legal
opinions rendered by the Department of Justice (DOJ). Petitioner also reminded the
respondents that they have previously issued building permits acknowledging such exemption
from payment of building permit fees on the construction of petitioners 4-storey AUF
Information Technology Center building and the AUF Professional Schools building on July
27, 2000 and March 15, 2004, respectively.[6]
Respondent City Treasurer referred the matter to the Bureau of Local Government
Finance (BLGF) of the Department of Finance, which in turn endorsed the query to the
DOJ. Then Justice Secretary Raul M. Gonzalez, in his letter-reply dated December 6, 2005, cited
previous issuances of his office (Opinion No. 157, s. 1981 and Opinion No. 147, s. 1982)
declaring petitioner to be exempt from the payment of building permit fees. Under the
1st Indorsement dated January 6, 2006, BLGF reiterated the aforesaid opinion of the DOJ stating
8
further that xxx the Department of Finance, thru this Bureau, has no authority to review the
resolution or the decision of the DOJ.[7]
Petitioner wrote the respondents reiterating its request to reverse the disputed
assessments and invoking the DOJ legal opinions which have been affirmed by Secretary
Gonzalez. Despite petitioners plea, however, respondents refused to issue the building permits
for the construction of the AUF Medical Center in the main campus and renovation of a school
building located at Marisol Village. Petitioner then appealed the matter to City Mayor Carmelo
F. Lazatin but no written response was received by petitioner.[8]
Consequently, petitioner paid under protest[9] the following:
Medical Center (new construction)
Building Permit and Electrical Fee P 217,475.20
Locational Clearance Fee 283,741.64
Fire Code Fee 144,690.00
Total - P 645,906.84
School Building (renovation)
Building Permit and Electrical Fee P 37,857.20
Locational Clearance Fee 6,000.57
Fire Code Fee 5,967.74
Total - P 49,825.51
Petitioner likewise paid the following sums as required by the City Assessors Office:
Real Property Tax Basic Fee P 86,531.10
SEF 43,274.54
Locational Clearance Fee 1,125.00
Total P130,930.64[10]
[GRAND TOTAL - P 826,662.99]
By reason of the above payments, petitioner was issued the corresponding Building Permit,
Wiring Permit, Electrical Permit and Sanitary Building Permit. On June 9, 2006, petitioner
formally requested the respondents to refund the fees it paid under protest. Under letters dated
June 15, 2006 and August 7, 2006, respondent City Treasurer denied the claim for refund.[11]
On August 31, 2006, petitioner filed a Complaint[12] before the trial court seeking the refund
of P826,662.99 plus interest at the rate of 12% per annum, and also praying for the award of
attorneys fees in the amount of P300,000.00 and litigation expenses.
In its Answer,[13] respondents asserted that the claim of petitioner cannot be granted because
its structures are not among those mentioned in Sec. 209 of the National Building Code as
exempted from the building permit fee. Respondents argued that R.A. No. 6055 should be
considered repealed on the basis of Sec. 2104 of the National Building Code.Since the
disputed assessments are regulatory in nature, they are not taxes from which petitioner is
exempt. As to the real property taxes imposed on petitioners property located in Marisol
Village, respondents pointed out that said premises will be used as a school dormitory which
cannot be considered as a use exclusively for educational activities.
Petitioner countered that the subject building permit are being collected on the basis of Art.
244 of the Implementing Rules and Regulations of the Local Government Code, which
impositions are really taxes considering that they are provided under the chapter on Local
Government Taxation in reference to the revenue raising power of local government units
(LGUs). Moreover, petitioner contended that, as held in Philippine Airlines, Inc. v.
Edu,[14] fees may be regarded as taxes depending on the purpose of its exaction. In any case,
petitioner pointed out that the Local Government Code of 1991 provides in Sec. 193 that non-
stock and non-profit educational institutions like petitioner retained the tax exemptions or
incentives which have been granted to them. Under Sec. 8 of R.A. No. 6055 and applicable
jurisprudence and DOJ rulings, petitioner is clearly exempt from the payment of building APPEALS ERRED WHEN IT RULED IN THE
permit fees.[15] QUESTIONED DECISION THAT NON-STOCK, NON-
On September 21, 2007, the trial court rendered judgment in favor of the petitioner and against PROFIT EDUCATIONAL FOUNDATIONS ARE NOT
the respondents. The dispositive portion of the trial courts decision[16] reads: EXEMPT.
WHEREFORE, premises considered, judgment is rendered as B. THE COURT OF APPEALS APPLICATION OF THE
follows: PRINCIPLE OF EJUSDEM GENERIS IN RULING IN
a. Plaintiff is exempt from the payment of building THE QUESTIONED DECISION THAT THE TERM
permit and other fees Ordering the Defendants to refund the total OTHER CHARGES IMPOSED BY THE
amount of Eight Hundred Twenty Six Thousand Six Hundred GOVERNMENT UNDER SECTION 8 OF RA 6055
Sixty Two Pesos and 99/100 Centavos (P826,662.99) plus legal DOES NOT INCLUDE BUILDING PERMIT AND
interest thereon at the rate of twelve percent (12%) per annum OTHER RELATED FEES AND/OR CHARGES IS
commencing on the date of extra-judicial demand or June 14, BASED ON ITS ERRONEOUS AND UNWARRANTED
2006, until the aforesaid amount is fully paid. ASSUMPTION THAT THE TAXES, IMPORT DUTIES
b. Finding the Defendants liable for attorneys fees in AND ASSESSMENTS AS PART OF THE PRIVILEGE
the amount of Seventy Thousand Pesos (Php70,000.00), plus OF EXEMPTION GRANTED TO NON-STOCK, NON-
litigation expenses. PROFIT EDUCATIONAL FOUNDATIONS ARE
c. Ordering the Defendants to pay the costs of the suit. LIMITED TO COLLECTIONS FOR REVENUE
SO ORDERED.[17] PURPOSES.
Respondents appealed to the CA which reversed the trial court, holding that while petitioner is a C. EVEN ASSUMING THAT THE BUILDING PERMIT AND
tax-free entity, it is not exempt from the payment of regulatory fees. The CA noted that under OTHER RELATED FEES AND/OR CHARGES ARE
R.A. No. 6055, petitioner was granted exemption only from income tax derived from its NOT INCLUDED IN THE TERM OTHER CHARGES
educational activities and real property used exclusively for educational purposes.Regardless of IMPOSED BY THE GOVERNMENT UNDER SECTION
the repealing clause in the National Building Code, the CA held that petitioner is still not exempt 8 OF RA 6055, ITS IMPOSITION IS GENERALLY A
because a building permit cannot be considered as the other charges mentioned in Sec. 8 of R.A. TAX MEASURE AND THEREFORE, STILL COVERED
No. 6055 which refers to impositions in the nature of tax, import duties, assessments and other UNDER THE PRIVILEGE OF EXEMPTION.
collections for revenue purposes, following the ejusdem generisrule. The CA further stated that II. THE COURT OF APPEALS DENIAL OF PETITIONER AUFS
petitioner has not shown that the fees collected were excessive and more than the cost of EXEMPTION FROM REAL PROPERTY TAXES CONTAINED
surveillance, inspection and regulation. And while petitioner may be exempt from the payment of IN ITS QUESTIONED DECISION AND QUESTIONED
real property tax, petitioner in this case merely alleged that the subject property is to be used RESOLUTION IS CONTRARY TO APPLICABLE LAW AND
actually, directly and exclusively for educational purposes, declaring merely that such premises is JURISPRUDENCE.[18]
intended to house the sports and other facilities of the university but by reason of the occupancy Petitioner stresses that the tax exemption granted to educational stock corporations which have
of informal settlers on the area, it cannot yet utilize the same for its intended use. Thus, the CA converted into non-profit foundations was broadened to include any other charges imposed by
concluded that petitioner is not entitled to the refund of building permit and related fees, as well the Government as one of the incentives for such conversion. These incentives necessarily
as real property tax it paid under protest. included exemption from payment of building permit and related fees as otherwise there
Petitioner filed a motion for reconsideration which was denied by the CA. would have been no incentives for educational foundations if the privilege were only limited
Hence, this petition raising the following grounds: to exemption from taxation, which is already provided under the Constitution.
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR Petitioner further contends that this Court has consistently held in several cases that
AND DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN the primary purpose of the exaction determines its nature. Thus, a charge of a fixed sum which
ACCORDANCE WITH LAW AND THE APPLICABLE DECISIONS bears no relation to the cost of inspection and which is payable into the general revenue of the
OF THE HONORABLE COURT AND HAS DEPARTED FROM THE state is a tax rather than an exercise of the police power. The standard set by law in the
ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS determination of the amount that may be imposed as license fees is such that is commensurate
NECESSITATING THE HONORABLE COURTS EXERCISE OF ITS with the cost of regulation, inspection and licensing. But in this case, the amount representing
POWER OF SUPERVISION CONSIDERING THAT: the building permit and related fees and/or charges is such an exorbitant amount as to warrant
I. IN REVERSING THE TRIAL COURTS DECISION DATED 21 a valid imposition; such amount exceeds the probable cost of regulation. Even with the alleged
SEPTEMBER 2007, THE COURT OF APPEALS criteria submitted by the respondents (e.g., character of occupancy or use of building/structure,
EFFECTIVELY WITHDREW THE PRIVILEGE OF cost of construction, floor area and height), and the construction by petitioner of an 11-storey
EXEMPTION GRANTED TO NON-STOCK, NON-PROFIT building, the costs of inspection will not amount to P645,906.84, presumably for the salary of
EDUCATIONAL FOUNDATIONS BY VIRTUE OF RA 6055 inspectors or employees, the expenses of transportation for inspection and the preparation and
WHICH WITHDRAWAL IS BEYOND THE AUTHORITY OF reproduction of documents. Petitioner thus concludes that the disputed fees are substantially
THE COURT OF APPEALS TO DO. and mainly for purposes of revenue rather than regulation, so that even these fees cannot be
A. INDEED, RA 6055 REMAINS VALID AND IS IN FULL deemed charges mentioned in Sec. 8 of R.A. No. 6055, they should properly be treated as tax
FORCE AND EFFECT. HENCE, THE COURT OF from which petitioner is exempt.
9
In their Comment, respondents maintain that petitioner is not exempt from the payment of
building permit and related fees since the only exemptions provided in the National Building
Code are public buildings and traditional indigenous family dwellings. Inclusio unius est
exclusio alterius. Because the law did not include petitioners buildings from those structures
exempt from the payment of building permit fee, it is therefore subject to the regulatory fees
imposed under the National Building Code.
Respondents assert that the CA correctly distinguished a building permit fee from those other
charges mentioned in Sec. 8 of R.A. No. 6055. As stated by petitioner itself, charges refer to
pecuniary liability, as rents, and fees against persons or property. Respondents point out that a
building permit is classified under the term fee. A fee is generally imposed to cover the cost of
regulation as activity or privilege and is essentially derived from the exercise of police power;
on the other hand, impositions for services rendered by the local government units or for
conveniences furnished, are referred to as service charges.
Respondents also disagreed with petitioners contention that the fees imposed and collected are
exorbitant and exceeded the probable expenses of regulation. These fees are based on
computations and assessments made by the responsible officials of the City Engineers Office
in accordance with the Schedule of Fees and criteria provided in the National Building
Code. The bases of assessment cited by petitioner (e.g. salary of employees, expenses of
transportation and preparation and reproduction of documents) refer to charges and fees on
business and occupation under Sec. 147 of the Local Government Code, which do not apply to
building permit fees. The parameters set by the National Building Code can be considered as
complying with the reasonable cost of regulation in the assessment and collection of building
permit fees. Respondents likewise contend that the presumption of regularity in the
performance of official duty applies in this case. Petitioner should have presented evidence to
prove its allegations that the amounts collected are exorbitant or unreasonable.
For resolution are the following issues: (1) whether petitioner is exempt from the payment of
building permit and related fees imposed under the National Building Code; and (2) whether
the parcel of land owned by petitioner which has been assessed for real property tax is
likewise exempt.
R.A. No. 6055 granted tax exemptions to educational institutions like petitioner which
converted to non-stock, non-profit educational foundations. Section 8 of said law provides:
SECTION 8. The Foundation shall be exempt from the payment
of all taxes, import duties, assessments, and other charges imposed by
the Government onall income derived from or property, real or
personal, used exclusively for the educational activities of the
Foundation.(Emphasis supplied.)
On February 19, 1977, Presidential Decree (P.D.) No. 1096 was issued adopting the National
Building Code of the Philippines. The said Code requires every person, firm or corporation,
including any agency or instrumentality of the government to obtain a building permit for any
construction, alteration or repair of any building or structure.[19]Building permit refers to a document
issued by the Building Official x x x to an owner/applicant to proceed with the construction,
installation, addition, alteration, renovation, conversion, repair, moving, demolition or other work
activity of a specific project/building/structure or portions thereof after the accompanying
principal plans, specifications and other pertinent documents with the duly notarized
application are found satisfactory and substantially conforming with the National Building
Code of the Philippines x x x and its Implementing Rules and Regulations (IRR). [20] Building
permit fees refers to the basic permit fee and other charges imposed under the National
Building Code.
Exempted from the payment of building permit fees are: (1) public buildings and (2)
traditional indigenous family dwellings.[21] Not being expressly included in the enumeration of
structures to which the building permit fees do not apply, petitioners claim for exemption rests
10
solely on its interpretation of the term other charges imposed by the National Government in
the tax exemption clause of R.A. No. 6055.
A charge is broadly defined as the price of, or rate for, something, while the word
fee pertains to a charge fixed by law for services of public officers or for use of a privilege
under control of government.[22] As used in the Local Government Code of 1991 (R.A. No.
7160), charges refers to pecuniary liability, as rents or fees against persons or property,
while fee means a charge fixed by law or ordinance for the regulation or inspection of a
business or activity.[23]
That charges in its ordinary meaning appears to be a general term which could cover
a specific fee does not support petitioners position that building permit fees are among those
other charges from which it was expressly exempted. Note that the other charges mentioned in
Sec. 8 of R.A. No. 6055 is qualified by the words imposed by the Government on all x x x
property used exclusively for the educational activities of the foundation. Building permit fees
are not impositions on property but on the activity subject of government regulation. While it
may be argued that the fees relate to particular properties, i.e., buildings and structures, they are
actually imposed on certain activities the owner may conduct either to build such structures or
to repair, alter, renovate or demolish the same. This is evident from the following provisions
of the National Building Code:
Section 102. Declaration of Policy
It is hereby declared to be the policy of the State to safeguard life, health,
property, and public welfare, consistent with theprinciples of sound
environmental management and control; and tothis end, make it the
purpose of this Code to provide for allbuildings and structures, a
framework of minimum standards and requirements to regulate and
control their location, site, design quality of materials, construction, use,
occupancy, and maintenance.
Section 103. Scope and Application
(a) The provisions of this Code shall apply to the design,location,
sitting, construction, alteration, repair,conversion, use, occupancy,
maintenance, moving, demolitionof, and addition to public and private
buildings andstructures, except traditional indigenous family dwellingsas
defined herein.
xxxx
Section 301. Building Permits
No person, firm or corporation, including any agency
orinstrumentality of the government shall erect, construct, alter, repair,
move, convert or demolish any building or structure or causethe same to
be done without first obtaining a building permittherefor from the
Building Official assigned in the place where thesubject building is
located or the building work is to be done. (Italics supplied.)
That a building permit fee is a regulatory imposition is highlighted by the fact that in
processing an application for a building permit, the Building Official shall see to it that the applicant
satisfies and conforms with approved standard requirements on zoning and land use, lines and
grades, structural design, sanitary and sewerage, environmental health, electrical and mechanical
safety as well as with other rules and regulations implementing the National Building
Code.[24] Thus, ancillary permits such as electrical permit, sanitary permit and zoning clearance
must also be secured and the corresponding fees paid before a building permit may be issued. And
as can be gleaned from the implementing rules and regulations of the National Building
Code, clearances from various government authorities exercising and enforcing regulatory functions
affecting buildings/structures, like local government units, may be further required before a building
permit may be issued.[25]
 Since building permit fees are not charges on property, they are not impositions
from which petitioner is exempt.
As to petitioners argument that the building permit fees collected by respondents are
in reality taxes because the primary purpose is to raise revenues for the local government unit,
the same does not hold water.
A charge of a fixed sum which bears no relation at all to the cost of inspection and
regulation may be held to be a tax rather than an exercise of the police power.[26] In this case,
the Secretary of Public Works and Highways who is mandated to prescribe and fix the amount
of fees and other charges that the Building Official shall collect in connection with the
performance of regulatory functions,[27] has promulgated and issued the Implementing Rules
and Regulations[28] which provide for the bases of assessment of such fees, as follows:
1. Character of occupancy or use of building
2. Cost of construction 10,000/sq.m (A,B,C,D,E,G,H,I), 8,000 (F),
6,000 (J)
3. Floor area
4. Height
Petitioner failed to demonstrate that the above bases of assessment were arbitrarily
determined or unrelated to the activity being regulated. Neither has petitioner adduced
evidence to show that the rates of building permit fees imposed and collected by the
respondents were unreasonable or in excess of the cost of regulation and inspection.
In Chevron Philippines, Inc. v. Bases Conversion Development Authority,[29] this
Court explained:
In distinguishing tax and regulation as a form of police power,
the determining factor is the purpose of the implemented measure. If the
purpose is primarily to raise revenue, then it will be deemed a tax even
though the measure results in some form of regulation. On the other
hand, if the purpose is primarily to regulate, then it is deemed a
regulation and an exercise of the police power of the state, even
though incidentally, revenue is generated. Thus, in Gerochi v.
Department of Energy, the Court stated:
The conservative and pivotal distinction
between these two (2) powers rests in the purpose for
which the charge is made. If generation of revenue is
the primary purpose and regulation is merely
incidental, the imposition is a tax; but if regulation is
the primary purpose, the fact that revenue is
incidentally raised does not make the imposition a
tax.[30] (Emphasis supplied.)
Concededly, in the case of building permit fees imposed by the National
Government under the National Building Code, revenue is incidentally generated for the
benefit of local government units. Thus:
Section 208. Fees
Every Building Official shall keep a permanent record and
accurate account of all fees and other charges fixed and authorized by the
Secretary to be collected and received under this Code.
Subject to existing budgetary, accounting and auditing rules and
regulations, the Building Official is hereby authorized to retain not more
than twenty percent of his collection for the operating expenses of his
office.
The remaining eighty percent shall be deposited with the
provincial, city or municipal treasurer and shall accrue to the General
Fund of the province, city or municipality concerned.
11
Petitioners reliance on Sec. 193 of the Local Government Code of 1991 is likewise
misplaced. Said provision states:
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, including government-owned or controlled corporations, except
local water districts, cooperatives duly registered under R.A. No.
6938, non-stock and non-profit hospitals and educational institutions,
are hereby withdrawn upon the effectivity of this Code. (Emphasis
supplied.)
Considering that exemption from payment of regulatory fees was not among those incentives
granted to petitioner under R.A. No. 6055, there is no such incentive that is retained under
the Local Government Code of 1991. Consequently, no reversible error was committed by the
CA in ruling that petitioner is liable to pay the subject building permit and related fees.
Now, on petitioners claim that it is exempted from the payment of real property tax assessed
against its real property presently occupied by informal settlers.
Section 28(3), Article VI of the 1987 Constitution provides:
xxxx
(3) Charitable institutions, churches and parsonages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly and exclusively used for
religious, charitable or educational purposes shall be exempt from
taxation.
x x x x (Emphasis supplied.)
Section 234(b) of the Local Government Code of 1991 implements the foregoing
constitutional provision by declaring that --
SECTION 234. Exemptions from Real Property Tax. The
following are exempted from payment of the real property tax:
xxxx
(b) Charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques, non-profit or religious cemeteries and all
lands, buildings, and improvements actually, directly, and exclusively
used for religious, charitable or educational purposes;
x x x x (Emphasis supplied.)
In Lung Center of the Philippines v. Quezon City,[31] this Court held that only portions of the
hospital actually, directly and exclusively used for charitable purposes are exempt from real
property taxes, while those portions leased to private entities and individuals are not exempt
from such taxes. We explained the condition for the tax exemption privilege of charitable and
educational institutions, as follows:
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160
in order to be entitled to the exemption, the petitioner is burdened to
prove, by clear and unequivocal proof, that (a) it is a charitable institution;
and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable
purposes. Exclusive is defined as possessed and enjoyed to the exclusion
of others; debarred from participation or enjoyment; and exclusively is
defined, in a manner to exclude; as enjoying a privilege exclusively. If real
property is used for one or more commercial purposes, it is not exclusively
used for the exempted purposes but is subject to taxation. The words
dominant use or principal use cannot be substituted for the words used
exclusively without doing violence to the Constitutions and the law.
Solely is synonymous with exclusively.
 What is meant by actual, direct and exclusive use of the
property for charitable purposes is the direct and immediate and actual
application of the property itself to the purposes for which the charitable
institution is organized. It is not the use of the income from the real
property that is determinative of whether the property is used for tax-
exempt purposes.[32] (Emphasis and underscoring supplied.)
Petitioner failed to discharge its burden to prove that its real property is actually, directly and
exclusively used for educational purposes. While there is no allegation or proof that petitioner
leases the land to its present occupants, still there is no compliance with the constitutional and
statutory requirement that said real property is actually, directly and exclusively used for
educational purposes. The respondents correctly assessed the land for real property taxes for
the taxable period during which the land is not being devoted solely to petitioners educational
activities. Accordingly, the CA did not err in ruling that petitioner is likewise not entitled to a
refund of the real property tax it paid under protest.
WHEREFORE, the petition is DENIED. The Decision dated July 28, 2009 and Resolution
dated October 12, 2009 of the Court of Appeals in CA-G.R. CV No. 90591 are AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

12
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-67649 June 28, 1988
ENGRACIO FRANCIA, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.
GUTIERREZ, JR., J.:
The petitioner invokes legal and equitable grounds to reverse the questioned decision of the
Intermediate Appellate Court, to set aside the auction sale of his property which took place on
December 5, 1977, and to allow him to recover a 203 square meter lot which was, sold at
public auction to Ho Fernandez and ordered titled in the latter's name.
The antecedent facts are as follows:
Engracio Francia is the registered owner of a residential lot and a two-story house built upon it
situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot,
with an area of about 328 square meters, is described and covered by Transfer Certificate of
Title No. 4739 (37795) of the Registry of Deeds of Pasay City.
On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by
the Republic of the Philippines for the sum of P4,116.00 representing the estimated amount
equivalent to the assessed value of the aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December
5, 1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant
to Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to
satisfy a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property.
Francia was not present during the auction sale since he was in Iligan City at that time helping
his uncle ship bananas.
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re:
Petition for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation
of TCT No. 4739 (37795) and the issuance in his name of a new certificate of title. Upon
verification through his lawyer, Francia discovered that a Final Bill of Sale had been issued in
favor of Ho Fernandez by the City Treasurer on December 11, 1978. The auction sale and the
final bill of sale were both annotated at the back of TCT No. 4739 (37795) by the Register of
Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his
complaint on January 24, 1980.
On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered
dismissing the amended complaint and ordering:
(a) The Register of Deeds of Pasay City to issue a new
Transfer Certificate of Title in favor of the defendant
Ho Fernandez over the parcel of land including the
improvements thereon, subject to whatever
encumbrances appearing at the back of TCT No. 4739
(37795) and ordering the same TCT No. 4739 (37795)
cancelled.
(b) The plaintiff to pay defendant Ho Fernandez the
sum of P1,000.00 as attorney's fees. (p. 30, Record on
Appeal)
The Intermediate Appellate Court affirmed the decision of the lower court in toto.
Hence, this petition for review.
13
Francia prefaced his arguments with the following assignments of grave errors of law:
I
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE
ERROR OF LAW IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00
FOR SUPPOSED TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00
WHICH THE GOVERNMENT IS INDEBTED TO THE FORMER.
II
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND
SERIOUS ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND
DULY NOTIFIED THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE
PLACE ON DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF
P2,400.00.
III
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A
SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT
THE PRICE OF P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY
INADEQUATE AS TO SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A
DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW, AND
CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21,
Rollo)
We gave due course to the petition for a more thorough inquiry into the petitioner's allegations
that his property was sold at public auction without notice to him and that the price paid for
the property was shockingly inadequate, amounting to fraud and deprivation without due
process of law.
A careful review of the case, however, discloses that Mr. Francia brought the problems raised
in his petition upon himself. While we commiserate with him at the loss of his property, the
law and the facts militate against the grant of his petition. We are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his land
was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation
of law as of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of persons, who
in their own right are reciprocally debtors and creditors of each other, are extinguished (Art.
1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by
Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the
same time a principal creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
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
14
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.

15
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 125704 August 28, 1998
PHILEX MINING CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE
COURT OF TAX APPEALS, respondents.
ROMERO, J.:
Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on
April 8, 1996 in CA-G.R. SP No. 36975 1 affirming the Court of Tax Appeals decision in CTA
Case No. 4872 dated March 16, 1995 2 ordering it to pay the amount of P110,677,668.52 as
excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus
20% annual interest from August 6, 1994 until fully paid pursuant to Sections 248 and 249 of
the Tax Code of 1977.
The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax
liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in
the total amount of P123,821.982.52 computed as follows:
PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE
TAX DUE
2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91
3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60
4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88
————— ————— —————— ——————
47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39
————— ————— —————— ——————
1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25
2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88
————— ————— —————— ——————
43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13
————— ————— —————— ——————
90,325,895.64 22,581,473.91 10,914,612.97
123,821,982.52 3
========= ========= ========= =========
In a letter dated August 20, 1992, 4 Philex protested the demand for payment of the tax
liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid for
the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore these claims
for tax credit/refund should be applied against the tax liabilities, citing our ruling
in Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc. 5
In reply, the BIR, in a letter dated September 7, 1992, 6 found no merit in Philex's position.
Since these pending claims have not yet been established or determined with certainty, it
follows that no legal compensation can take place. Hence, the BIR reiterated its demand that
Philex settle the amount plus interest within 30 days from the receipt of the letter.
In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund
against its excise tax obligation, Philex raised the issue to the Court of Tax Appeals on
November 6, 1992. 7 In the course of the proceedings, the BIR issued Tax Credit Certificate
SN 001795 in the amount of P13,144,313.88 which, applied to the total tax liabilities of Philex
of P123,821,982.52; effectively lowered the latter's tax obligation to P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining
balance of P110,677,688.52 plus interest, elucidating its reason, to wit:
16
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 Compañia General de Tabacos vs. French and
Unson, No. 14027, November 8, 1918, 39 Phil. 34). 8
Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to set-off on
compensation since claim for taxes is not a debt or contract." 9 The dispositive portion of the
CTA decision 10 provides:
In all the foregoing, this Petition for Review is hereby DENIED for lack of
merit and Petitioner is hereby ORDERED to PAY the Respondent the
amount of P110,677,668.52 representing excise tax liability for the period
from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual
interest from August 6, 1994 until fully paid pursuant to Section 248 and
249 of the Tax Code, as amended.
Aggrieved with the decision, Philex appealed the case before the Court of Appeals docketed as
CA-GR. CV No. 36975. 11 Nonetheless, on April 8, 1996, the Court of Appeals a Affirmed the
Court of Tax Appeals observation. The pertinent portion of which reads: 12
WHEREFORE, the appeal by way of petition for review is hereby
DISMISSED and the decision dated March 16, 1995 is AFFIRMED.
Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution
dated July 11, 1996. 13
However, a few days after the denial of its motion for reconsideration, Philex was able to
obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but also for 1992
and 1994, computed as follows: 14
Period Covered Tax Credit Date
By Claims For Certificate of
VAT refund/credit Number Issue Amount
1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01
1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61
1989 007732 11 July 1996 P37,322,799.19
1990-1991 007751 16 July 1996 P84,662,787.46
1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95
In view of the grant of its VAT input credit/refund, Philex now contends that the same
should, ipso jure, off-set its excise tax liabilities 15 since both had already become "due and
demandable, as well as fully liquidated;" 16 hence, legal compensation can properly take place.
We see no merit in this contention.
In several instances prior to the instant case, we have already made the pronouncement that
taxes cannot be subject to compensation for the simple reason that the government and the
taxpayer are not creditors and debtors of each other. 17 There is a material distinction between
a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due
to the Government in its sovereign capacity. 18 We find no cogent reason to deviate from the
aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, 19 we categorically
held that taxes cannot be subject to set-off or compensation, thus:
We have consistently ruled that there can be no off-setting of taxes against the
claims that the taxpayer may have against the government. A person cannot refuse to
pay a tax on the ground that the government owes him an amount equal to or greater
 than the tax being collected. The collection of a tax cannot await the results of a
lawsuit against the government.
The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v.
Commission on Audit, 20which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government
and taxpayer are not mutually creditors and debtors of each other and a claim for
taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.
Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc
Mines Inc., wherein we ruled that a pending refund may be set off against an existing tax
liability even though the refund has not yet been approved by the Commissioner, 21 is no
longer without any support in statutory law.
It is important to note, that the premise of our ruling in the aforementioned case was anchored
on Section 51 (d) of the National Revenue Code of 1939. However, when the National Internal
Revenue Code of 1977 was enacted, the same provision upon which the Itogon-
Suyoc pronouncement was based was omitted. 22 Accordingly, the doctrine enunciated
in Itogon-Suyoc cannot be invoked by Philex.
Despite the foregoing rulings clearly adverse to Philex's position, it asserts that the imposition
of surcharge and interest for the non-payment of the excise taxes within the time prescribed
was unjustified. Philex posits the theory that it had no obligation to pay the excise tax
liabilities within the prescribed period since, after all, it still has pending claims for VAT input
credit/refund with BIR. 23
We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle
in tax law that taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. 24 Evidently, to countenance Philex's whimsical reason would render
ineffective our tax collection system. Too simplistic, it finds no support in law or in
jurisprudence.
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground
that it has a pending tax claim for refund or credit against the government which has not yet
been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory
rather than a matter of bargain. 25 Hence, a tax does not depend upon the consent of the
taxpayer. 26 If any taxpayer can defer the payment of taxes by raising the defense that it still
has a pending claim for refund or credit, this would adversely affect the government revenue
system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a
claim against the government or that the collection of the tax is contingent on the result of the
lawsuit it filed against the government. 27 Moreover, Philex's theory that would automatically
apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion and
abuse, depriving the government of authority over the manner by which taxpayers credit and
offset their tax liabilities.
Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the
government is immaterial for the imposition of charges and penalties prescribed under Section
248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory and the BIR
is not vested with any authority to waive the collection thereof. 28 The same cannot be
condoned for flimsy reasons, 29 similar to the one advanced by Philex in justifying its non-
payment of its tax liabilities.
Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the National Internal
Revenue Code of 1977, which requires the refund of input taxes within 60 days, 31 when it
took five years for the latter to grant its tax claim for VAT input credit/refund. 32
In this regard, we agree with Philex. While there is no dispute that a claimant has the burden
of proof to establish the factual basis of his or her claim for tax credit or refund, 33 however,
once the claimant has submitted all the required documents it is the function of the BIR to
17
assess these documents with purposeful dispatch. After all, since taxpayers owe honestly to
government it is but just that government render fair service to the taxpayers. 34
In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of
these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more
diligent and judicious with their duty, it could have granted the refund earlier. We need not
remind the BIR that simple justice requires the speedy refund of wrongly-held taxes. 35 Fair
dealing and nothing less, is expected by the taxpayer from the BIR in the latter's discharge of
its function. As aptly held in Roxas v. Court of Tax Appeals: 36
The power of taxation is sometimes called also the power to destroy.
Therefore it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen that lays the golden egg"
And, in order to maintain the general public's trust and confidence in the
Government this power must be used justly and not treacherously.
Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it
is a settled rule that in the performance of governmental function, the State is not bound by the
neglect of its agents and officers. Nowhere is this more true than in the field of
taxation. 37 Again, while we understand Philex's predicament, it must be stressed that the same
is not a valid reason for the non-payment of its tax liabilities.
To be sure, this is not to state that the taxpayer is devoid of remedy against public servants or
employees, especially BIR examiners who, in investigating tax claims are seen to drag their
feet needlessly. First, if the BIR takes time in acting upon the taxpayer's claim for refund, the
latter can seek judicial remedy before the Court of Tax Appeals in the manner prescribed by
law. 38 Second, if the inaction can be characterized as willful neglect of duty, then recourse
under the Civil Code and the Tax Code can also be availed of.
Art. 27 of the Civil Code provides:
Art. 27. Any person suffering material or moral loss because a public servant or
employee refuses or neglects, without just cause, to perform his official duty may file an
action for damages and other relief against the latter, without prejudice to any
disciplinary action that may be taken.
More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states:
xxx xxx xxx
(c) Wilfully neglecting to give receipts, as by law required for any sum collected in the
performance of duty or wilfully neglecting to perform, any other duties enjoyed by law.
Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay in
the performance of official duties. 39 In no uncertain terms must we stress that every public
employee or servant must strive to render service to the people with utmost diligence and
efficiency. Insolence and delay have no place in government service. The BIR, being the
government collecting arm, must and should do no less. It simply cannot be apathetic and
laggard in rendering service to the taxpayer if it wishes to remain true to its mission of
hastening the country's development. We take judicial notice of the taxpayer's generally
negative perception towards the BIR; hence, it is up to the latter to prove its detractors wrong.
In sum, while we can never condone the BIR's apparent callousness in performing its duties,
still, the same cannot justify Philex's non-payment of its tax liabilities. The adage "no one
should take the law into his own hands" should have guided Philex's action.
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The
assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED.
SO ORDERED.
 SECOND DIVISION definition14 of Gross Philippine Billings under Section 28(A)(3)(a) of the 1997 National
January 11, 2016 Internal Revenue Code:
G.R. No. 169507 SEC. 28. Rates of Income Tax on Foreign Corporations. -
AIR CANADA, Petitioner, (A) Tax on Resident Foreign Corporations. -
vs. ....
COMMISSIONER OF INTERNAL REVENUE, Respondent. (3) International Carrier. - An international carrier doing business in the
DECISION Philippines shall pay a tax of two and onehalf percent (2 1/2%) on its
LEONEN, J.: ‘Gross Philippine Billings’ as defined hereunder:
An offline international air carrier selling passage tickets in the Philippines, through a general (a) International Air Carrier. - ‘Gross Philippine Billings’ refers to the
sales agent, is a resident foreign corporation doing business in the Philippines. As such, it is amount of gross revenue derived from carriage of persons, excess
taxable under Section 28(A)(l), and not Section 28(A)(3) of the 1997 National Internal baggage, cargo and mail originating from the Philippines in a
Revenue Code, subject to any applicable tax treaty to which the Philippines is a signatory. continuous and uninterrupted flight, irrespective of the place of sale or
Pursuant to Article 8 of the Republic of the Philippines-Canada Tax Treaty, Air Canada may issue and the place of payment of the ticket or passage document:
only be imposed a maximum tax of 1 ½% of its gross revenues earned from the sale of its Provided, That tickets revalidated, exchanged and/or indorsed to another
tickets in the Philippines. international airline form part of the Gross Philippine Billings if the
This is a Petition for Review1 appealing the August 26, 2005 Decision2 of the Court of Tax passenger boards a plane in a port or point in the Philippines: Provided,
Appeals En Banc, which in turn affirmed the December 22, 2004 Decision 3 and April 8, 2005 further, That for a flight which originates from the Philippines, but
Resolution4 of the Court of Tax Appeals First Division denying Air Canada’s claim for refund. transshipment of passenger takes place at any port outside the Philippines
Air Canada is a "foreign corporation organized and existing under the laws of Canada[.]"5 On on another airline, only the aliquot portion of the cost of the ticket
April 24, 2000, it was granted an authority to operate as an offline carrier by the Civil corresponding to the leg flown from the Philippines to the point of
Aeronautics Board, subject to certain conditions, which authority would expire on April 24, transshipment shall form part of Gross Philippine Billings. (Emphasis
2005.6 "As an off-line carrier, [Air Canada] does not have flights originating from or coming supplied)
to the Philippines [and does not] operate any airplane [in] the Philippines[.]"7 To prevent the running of the prescriptive period, Air Canada filed a Petition for Review
On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its before the Court of Tax Appeals on November 29, 2002.15 The case was docketed as C.T.A.
general sales agent in the Philippines.8 Aerotel "sells [Air Canada’s] passage documents in the Case No. 6572.16
Philippines."9 On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision denying
For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air the Petition for Review and, hence, the claim for refund.17 It found that Air Canada was
Canada, through Aerotel, filed quarterly and annual income tax returns and paid the income engaged in business in the Philippines through a local agent that sells airline tickets on its
tax on Gross Philippine Billings in the total amount of ₱5,185,676.77,10 detailed as follows: behalf. As such, it should be taxed as a resident foreign corporation at the regular rate of
1âwphi1 32%.18 Further, according to the Court of Tax Appeals First Division, Air Canada was deemed
Applicable Date Filed/Paid Amount of Tax to have established a "permanent establishment"19 in the Philippines under Article V(2)(i) of
Quarter[/]Year the Republic of the Philippines-Canada Tax Treaty20 by the appointment of the local sales
agent, "in which [the] petitioner uses its premises as an outlet where sales of [airline] tickets
3rd Qtr 2000 November 29, 2000 P 395,165.00 are made[.]"21
Air Canada seasonably filed a Motion for Reconsideration, but the Motion was denied in the
Annual ITR 2000 April 16, 2001 381,893.59 Court of Tax Appeals First Division’s Resolution dated April 8, 2005 for lack of merit.22 The
First Division held that while Air Canada was not liable for tax on its Gross Philippine
1st Qtr 2001 May 30, 2001 522,465.39
Billings under Section 28(A)(3), it was nevertheless liable to pay the 32% corporate income
2nd Qtr 2001 August 29, 2001 1,033,423.34 tax on income derived from the sale of airline tickets within the Philippines pursuant to
Section 28(A)(1).23
3rd Qtr 2001 November 29, 2001 765,021.28 On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Banc. 24 The appeal was
docketed as CTA EB No. 86.25
Annual ITR 2001 April 15, 2002 328,193.93 In the Decision dated August 26, 2005, the Court of Tax Appeals En Banc affirmed the
findings of the First Division.26 The En Banc ruled that Air Canada is subject to tax as a
1st Qtr 2002 May 30, 2002 594,850.13
resident foreign corporation doing business in the Philippines since it sold airline tickets in the
2nd Qtr 2002 August 29, 2002 1,164,664.11 Philippines.27 The Court of Tax Appeals En Banc disposed thus:
WHEREFORE, premises considered, the instant petition is hereby DENIED DUE
11
TOTAL P 5,185,676.77 COURSE, and accordingly, DISMISSED for lack of merit.28
On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously Hence, this Petition for Review29 was filed.
paid income taxes amounting to ₱5,185,676.77 before the Bureau of Internal The issues for our consideration are:
Revenue,12 Revenue District Office No. 47-East Makati.13It found basis from the revised

18
First, whether petitioner Air Canada, as an offline international carrier selling passage
documents through a general sales agent in the Philippines, is a resident foreign corporation
within the meaning of Section 28(A)(1) of the 1997 National Internal Revenue Code;
Second, whether petitioner Air Canada is subject to the 2½% tax on Gross Philippine Billings
pursuant to Section 28(A)(3). If not, whether an offline international carrier selling passage
documents through a general sales agent can be subject to the regular corporate income tax of
32%30 on taxable income pursuant to Section 28(A)(1);
Third, whether the Republic of the Philippines-Canada Tax Treaty applies, specifically:
a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;
b. Whether the appointment of a local general sales agent in the Philippines falls
under the definition of "permanent establishment" under Article V(2)(i) of the
Republic of the Philippines-Canada Tax Treaty; and
Lastly, whether petitioner Air Canada is entitled to the refund of ₱5,185,676.77 pertaining
allegedly to erroneously paid tax on Gross Philippine Billings from the third quarter of 2000 to
the second quarter of 2002.
Petitioner claims that the general provision imposing the regular corporate income tax on
resident foreign corporations provided under Section 28(A)(1) of the 1997 National Internal
Revenue Code does not apply to "international carriers,"31 which are especially classified and
taxed under Section 28(A)(3).32 It adds that the fact that it is no longer subject to Gross
Philippine Billings tax as ruled in the assailed Court of Tax Appeals Decision "does not render
it ipso facto subject to 32% income tax on taxable income as a resident foreign
corporation."33 Petitioner argues that to impose the 32% regular corporate income tax on its
income would violate the Philippine government’s covenant under Article VIII of the
Republic of the Philippines-Canada Tax Treaty not to impose a tax higher than 1½% of the
carrier’s gross revenue derived from sources within the Philippines.34 It would also allegedly
result in "inequitable tax treatment of on-line and off-line international air carriers[.]"35
Also, petitioner states that the income it derived from the sale of airline tickets in the
Philippines was income from services and not income from sales of personal
property.36 Petitioner cites the deliberations of the Bicameral Conference Committee on House
Bill No. 9077 (which eventually became the 1997 National Internal Revenue Code),
particularly Senator Juan Ponce Enrile’s statement,37 to reveal the "legislative intent to treat
the revenue derived from air carriage as income from services, and that the carriage of
passenger or cargo as the activity that generates the income."38 Accordingly, applying the
principle on the situs of taxation in taxation of services, petitioner claims that its income
derived "from services rendered outside the Philippines [was] not subject to Philippine income
taxation."39
Petitioner further contends that by the appointment of Aerotel as its general sales agent,
petitioner cannot be considered to have a "permanent establishment"40 in the Philippines
pursuant to Article V(6) of the Republic of the Philippines-Canada Tax Treaty.41 It points out
that Aerotel is an "independent general sales agent that acts as such for . . . other international
airline companies in the ordinary course of its business."42 Aerotel sells passage tickets on
behalf of petitioner and receives a commission for its services.43 Petitioner states that even the
Bureau of Internal Revenue—through VAT Ruling No. 003-04 dated February 14, 2004—has
conceded that an offline international air carrier, having no flight operations to and from the
Philippines, is not deemed engaged in business in the Philippines by merely appointing a
general sales agent.44 Finally, petitioner maintains that its "claim for refund of erroneously
paid Gross Philippine Billings cannot be denied on the ground that [it] is subject to income tax
under Section 28 (A) (1)"45 since it has not been assessed at all by the Bureau of Internal
Revenue for any income tax liability.46
On the other hand, respondent maintains that petitioner is subject to the 32% corporate income
tax as a resident foreign corporation doing business in the Philippines. Petitioner’s total
payment of ₱5,185,676.77 allegedly shows that petitioner was earning a sizable income from
19
the sale of its plane tickets within the Philippines during the relevant period.47 Respondent
further points out that this court in Commissioner of Internal Revenue v. American Airlines,
Inc.,48 which in turn cited the cases involving the British Overseas Airways Corporation and
Air India, had already settled that "foreign airline companies which sold tickets in the
Philippines through their local agents . . . [are] considered resident foreign corporations
engaged in trade or business in the country."49 It also cites Revenue Regulations No. 6-78
dated April 25, 1978, which defined the phrase "doing business in the Philippines" as
including "regular sale of tickets in the Philippines by offline international airlines either by
themselves or through their agents."50
Respondent further contends that petitioner is not entitled to its claim for refund because the
amount of ₱5,185,676.77 it paid as tax from the third quarter of 2000 to the second quarter of
2001 was still short of the 32% income tax due for the period. 51 Petitioner cannot allegedly
claim good faith in its failure to pay the right amount of tax since the National Internal
Revenue Code became operative on January 1, 1998 and by 2000, petitioner should have
already been aware of the implications of Section 28(A)(3) and the decided cases of this
court’s ruling on the taxability of offline international carriers selling passage tickets in the
Philippines.52
I
At the outset, we affirm the Court of Tax Appeals’ ruling that petitioner, as an offline
international carrier with no landing rights in the Philippines, is not liable to tax on Gross
Philippine Billings under Section 28(A)(3) of the 1997 National Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. -
....
(3) International Carrier. - An international carrier doing business in the Philippines shall pay
a tax of two and one-half percent (2 1/2%) on its ‘Gross Philippine Billings’ as defined
hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the
amount of gross revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the Philippines in a continuous
and uninterrupted flight, irrespective of the place of sale or issue and the
place of payment of the ticket or passage document: Provided, That tickets
revalidated, exchanged and/or indorsed to another international airline
form part of the Gross Philippine Billings if the passenger boards a plane
in a port or point in the Philippines: Provided, further, That for a flight
which originates from the Philippines, but transshipment of passenger
takes place at any port outside the Philippines on another airline, only the
aliquot portion of the cost of the ticket corresponding to the leg flown
from the Philippines to the point of transshipment shall form part of Gross
Philippine Billings. (Emphasis supplied)
Under the foregoing provision, the tax attaches only when the carriage of persons, excess
baggage, cargo, and mail originated from the Philippines in a continuous and uninterrupted
flight, regardless of where the passage documents were sold.
Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross
Philippine Billings tax.
II
Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes.
Petitioner falls within the definition of resident foreign corporation under Section 28(A)(1) of
the 1997 National Internal Revenue Code, thus, it may be subject to 32%53 tax on its taxable
income:
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation organized,
authorized, or existing under the laws of any foreign country, engaged in trade or business
within the Philippines, shall be subject to an income tax equivalent to thirty-five percent
(35%) of the taxable income derived in the preceding taxable year from all sources within
the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be
thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent
(33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent
(32%54). (Emphasis supplied)
The definition of "resident foreign corporation" has not substantially changed throughout the
amendments of the National Internal Revenue Code. All versions refer to "a foreign
corporation engaged in trade or business within the Philippines."
Commonwealth Act No. 466, known as the National Internal Revenue Code and approved on
June 15, 1939, defined "resident foreign corporation" as applying to "a foreign corporation
engaged in trade or business within the Philippines or having an office or place of business
therein."55
Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic Act No.
6110, approved on August 4, 1969, reads:
Sec. 24. Rates of tax on corporations. — . . .
(b) Tax on foreign corporations. — . . .
(2) Resident corporations. — A corporation organized, authorized, or existing under the laws
of any foreign country, except a foreign life insurance company, engaged in trade or business
within the Philippines, shall be taxable as provided in subsection (a) of this section upon the
total net income received in the preceding taxable year from all sources within the
Philippines.56 (Emphasis supplied)
Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain sections of the
1939 National Internal Revenue Code. Section 24(b)(2) on foreign resident corporations was
amended, but it still provides that "[a] corporation organized, authorized, or existing under the
laws of any foreign country, engaged in trade or business within the Philippines, shall be
taxable as provided in subsection (a) of this section upon the total net income received in the
preceding taxable year from all sources within the Philippines[.]"57
As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas Airways
Corporation58declared British Overseas Airways Corporation, an international air carrier with
no landing rights in the Philippines, as a resident foreign corporation engaged in business in
the Philippines through its local sales agent that sold and issued tickets for the airline
company.59 This court discussed that:
There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting"
business. Each case must be judged in the light of its peculiar environmental circumstances.
The term implies a continuity of commercial dealings and arrangements, and contemplates,
to that extent, the performance of acts or works or the exercise of some of the functions
normally incident to, and in progressive prosecution of commercial gain or for the purpose
and object of the business organization. "In order that a foreign corporation may be regarded
as doing business within a State, there must be continuity of conduct and intention to establish
a continuous business, such as the appointment of a local agent, and not one of a temporary
character.["]
BOAC, during the periods covered by the subject-assessments, maintained a general sales
agent in the Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1)
selling and issuing tickets; (2) breaking down the whole trip into series of trips — each trip in
the series corresponding to a different airline company; (3) receiving the fare from the whole
trip; and (4) consequently allocating to the various airline companies on the basis of their
participation in the services rendered through the mode of interline settlement as prescribed by
Article VI of the Resolution No. 850 of the IATA Agreement." Those activities were in
exercise of the functions which are normally incident to, and are in progressive pursuit of, the
20
purpose and object of its organization as an international air carrier. In fact, the regular sale of
tickets, its main activity, is the very lifeblood of the airline business, the generation of sales
being the paramount objective. There should be no doubt then that BOAC was "engaged in"
business in the Philippines through a local agent during the period covered by the assessments.
Accordingly, it is a resident foreign corporation subject to tax upon its total net income
received in the preceding taxable year from all sources within the Philippines.60 (Emphasis
supplied, citations omitted)
Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides guidance with its
definition of "doing business" with regard to foreign corporations. Section 3(d) of the law
enumerates the activities that constitute doing business:
d. the phrase "doing business" shall include soliciting orders, service contracts, opening
offices, whether called "liaison" offices or branches; appointing representatives or distributors
domiciled in the Philippines or who in any calendar year stay in the country for a period or
periods totalling one hundred eighty (180) days or more; participating in the management,
supervision or control of any domestic business, firm, entity or corporation in the Philippines;
and any other act or acts that imply a continuity of commercial dealings or arrangements,
and contemplate to that extent the performance of acts or works, or the exercise of some of
the functions normally incident to, and in progressive prosecution of, commercial gain or of
the purpose and object of the business organization: Provided, however, That the phrase
"doing business" shall not be deemed to include mere investment as a shareholder by a foreign
entity in domestic corporations duly registered to do business, and/or the exercise of rights as
such investor; nor having a nominee director or officer to represent its interests in such
corporation; nor appointing a representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account[.] 61 (Emphasis supplied)
While Section 3(d) above states that "appointing a representative or distributor domiciled in
the Philippines which transacts business in its own name and for its own account" is not
considered as "doing business," the Implementing Rules and Regulations of Republic Act No.
7042 clarifies that "doing business" includes "appointing representatives or
distributors, operating under full control of the foreign corporation, domiciled in the
Philippines or who in any calendar year stay in the country for a period or periods totaling one
hundred eighty (180) days or more[.]"62
An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics] Board,
but who maintains office or who has designated or appointed agents or employees in the
Philippines, who sells or offers for sale any air transportation in behalf of said foreign air
carrier and/or others, or negotiate for, or holds itself out by solicitation, advertisement, or
otherwise sells, provides, furnishes, contracts, or arranges for such transportation."63
"Anyone desiring to engage in the activities of an off-line carrier [must] apply to the [Civil
Aeronautics] Board for such authority."64 Each offline carrier must file with the Civil
Aeronautics Board a monthly report containing information on the tickets sold, such as the
origin and destination of the passengers, carriers involved, and commissions received. 65
Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the
Philippines.
Aerotel performs acts or works or exercises functions that are incidental and beneficial to the
purpose of petitioner’s business. The activities of Aerotel bring direct receipts or profits to
petitioner.66 There is nothing on record to show that Aerotel solicited orders alone and for its
own account and without interference from, let alone direction of, petitioner. On the contrary,
Aerotel cannot "enter into any contract on behalf of [petitioner Air Canada] without the
express written consent of [the latter,]"67 and it must perform its functions according to the
standards required by petitioner.68 Through Aerotel, petitioner is able to engage in an
economic activity in the Philippines.
Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an
offline carrier in the Philippines for a period of five years, or from April 24, 2000 until April
24, 2005.69
Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived
from sources within the Philippines. Petitioner’s income from sale of airline tickets, through
Aerotel, is income realized from the pursuit of its business activities in the Philippines.
III
However, the application of the regular 32% tax rate under Section 28(A)(1) of the 1997
National Internal Revenue Code must consider the existence of an effective tax treaty between
the Philippines and the home country of the foreign air carrier.
In the earlier case of South African Airways v. Commissioner of Internal Revenue,70 this court
held that Section 28(A)(3)(a) does not categorically exempt all international air carriers from
the coverage of Section 28(A)(1). Thus, if Section 28(A)(3)(a) is applicable to a taxpayer, then
the general rule under Section 28(A)(1) does not apply. If, however, Section 28(A)(3)(a) does
not apply, an international air carrier would be liable for the tax under Section 28(A)(1). 71
This court in South African Airways declared that the correct interpretation of these provisions
is that: "international air carrier[s] maintain[ing] flights to and from the Philippines . . . shall
be taxed at the rate of 2½% of its Gross Philippine Billings[;] while international air carriers
that do not have flights to and from the Philippines but nonetheless earn income from other
activities in the country [like sale of airline tickets] will be taxed at the rate of 32% of such
[taxable] income."72
In this case, there is a tax treaty that must be taken into consideration to determine the proper
tax rate.
A tax treaty is an agreement entered into between sovereign states "for purposes of eliminating
double taxation on income and capital, preventing fiscal evasion, promoting mutual trade and
investment, and according fair and equitable tax treatment to foreign residents or
nationals."73 Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc.74 explained the
purpose of a tax treaty:
The purpose of these international agreements is to reconcile the national fiscal legislations of
the contracting parties in order to help the taxpayer avoid simultaneous taxation in two
different jurisdictions. More precisely, the tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is defined as the imposition of
comparable taxes in two or more states on the same taxpayer in respect of the same subject
matter and for identical periods.
The apparent rationale for doing away with double taxation is to encourage the free flow of
goods and services and the movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies. Foreign investments will
only thrive in a fairly predictable and reasonable international investment climate and the
protection against double taxation is crucial in creating such a climate. 75 (Emphasis in the
original, citations omitted)
Observance of any treaty obligation binding upon the government of the Philippines is
anchored on the constitutional provision that the Philippines "adopts the generally accepted
principles of international law as part of the law of the land[.]"76 Pacta sunt servanda is a
fundamental international law principle that requires agreeing parties to comply with their
treaty obligations in good faith.77
Hence, the application of the provisions of the National Internal Revenue Code must be
subject to the provisions of tax treaties entered into by the Philippines with foreign countries.
In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue,78 this court
stressed the binding effects of tax treaties. It dealt with the issue of "whether the failure to
strictly comply with [Revenue Memorandum Order] RMO No. 1-200079 will deprive persons
or corporations of the benefit of a tax treaty."80 Upholding the tax treaty over the
administrative issuance, this court reasoned thus:
21
Our Constitution provides for adherence to the general principles of international law as part
of the law of the land. The time-honored international principle of pacta sunt servanda
demands the performance in good faith of treaty obligations on the part of the states that enter
into the agreement. Every treaty in force is binding upon the parties, and obligations under
the treaty must be performed by them in good faith. More importantly, treaties have the force
and effect of law in this jurisdiction.
Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting
parties and, in turn, help the taxpayer avoid simultaneous taxations in two different
jurisdictions." CIR v. S.C. Johnson and Son, Inc. further clarifies that "tax conventions are
drafted with a view towards the elimination of international juridical double taxation, which is
defined as the imposition of comparable taxes in two or more states on the same taxpayer in
respect of the same subject matter and for identical periods. The apparent rationale for doing
away with double taxation is to encourage the free flow of goods and services and the
movement of capital, technology and persons between countries, conditions deemed vital in
creating robust and dynamic economies. Foreign investments will only thrive in a fairly
predictable and reasonable international investment climate and the protection against double
taxation is crucial in creating such a climate." Simply put, tax treaties are entered into to
minimize, if not eliminate the harshness of international juridical double taxation, which is
why they are also known as double tax treaty or double tax agreements.
"A state that has contracted valid international obligations is bound to make in its legislations
those modifications that may be necessary to ensure the fulfillment of the obligations
undertaken." Thus, laws and issuances must ensure that the reliefs granted under tax treaties
are accorded to the parties entitled thereto. The BIR must not impose additional requirements
that would negate the availment of the reliefs provided for under international agreements.
More so, when the RPGermany Tax Treaty does not provide for any pre-requisite for the
availment of the benefits under said agreement.
....
Bearing in mind the rationale of tax treaties, the period of application for the availment of tax
treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the
relief as it would constitute a violation of the duty required by good faith in complying with a
tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within
the prescribed period under the administrative issuance would impair the value of the tax
treaty. At most, the application for a tax treaty relief from the BIR should merely operate to
confirm the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of RMO
No. 1-2000. Logically, noncompliance with tax treaties has negative implications on
international relations, and unduly discourages foreign investors. While the consequences
sought to be prevented by RMO No. 1-2000 involve an administrative procedure, these may
be remedied through other system management processes, e.g., the imposition of a fine or
penalty. But we cannot totally deprive those who are entitled to the benefit of a treaty for
failure to strictly comply with an administrative issuance requiring prior application for tax
treaty relief.81 (Emphasis supplied, citations omitted)
On March 11, 1976, the representatives82 for the government of the Republic of the
Philippines and for the government of Canada signed the Convention between the Philippines
and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income (Republic of the Philippines-Canada Tax Treaty). This treaty
entered into force on December 21, 1977.
Article V83 of the Republic of the Philippines-Canada Tax Treaty defines "permanent
establishment" as a "fixed place of business in which the business of the enterprise is wholly
or partly carried on."84
Even though there is no fixed place of business, an enterprise of a Contracting State is deemed
to have a permanent establishment in the other Contracting State if under certain conditions
there is a person acting for it.
Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states that "[a]
person acting in a Contracting State on behalf of an enterprise of the other Contracting State
(other than an agent of independent status to whom paragraph 6 applies) shall be deemed to be
a permanent establishment in the first-mentioned State if . . . he has and habitually exercises in
that State an authority to conclude contracts on behalf of the enterprise, unless his activities
are limited to the purchase of goods or merchandise for that enterprise[.]" The provision seems
to refer to one who would be considered an agent under Article 1868 85 of the Civil Code of the
Philippines.
On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting State shall not
be deemed to have a permanent establishment in the other Contracting State merely because it
carries on business in that other State through a broker, general commission agent or any other
agent of an independent status, where such persons are acting in the ordinary course of their
business."
Considering Article XV86 of the same Treaty, which covers dependent personal services, the
term "dependent" would imply a relationship between the principal and the agent that is akin
to an employer-employee relationship.
Thus, an agent may be considered to be dependent on the principal where the latter exercises
comprehensive control and detailed instructions over the means and results of the activities of
the agent.87
Section 3 of Republic Act No. 776, as amended, also known as The Civil Aeronautics Act of
the Philippines, defines a general sales agent as "a person, not a bonafide employee of an air
carrier, who pursuant to an authority from an airline, by itself or through an agent, sells or
offers for sale any air transportation, or negotiates for, or holds himself out by solicitation,
advertisement or otherwise as one who sells, provides, furnishes, contracts or arranges for,
such air transportation."88 General sales agents and their property, property rights, equipment,
facilities, and franchise are subject to the regulation and control of the Civil Aeronautics
Board.89 A permit or authorization issued by the Civil Aeronautics Board is required before a
general sales agent may engage in such an activity.90
Through the appointment of Aerotel as its local sales agent, petitioner is deemed to have
created a "permanent establishment" in the Philippines as defined under the Republic of the
Philippines-Canada Tax Treaty.
Petitioner appointed Aerotel as its passenger general sales agent to perform the sale of
transportation on petitioner and handle reservations, appointment, and supervision of
International Air Transport Associationapproved and petitioner-approved sales agents,
including the following services:
ARTICLE 7
GSA SERVICES
The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the following
services:
a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit of AC in
every matter relating to this Agreement;
....
c) Promotion of passenger transportation on AC;
....
e) Without the need for endorsement by AC, arrange for the reissuance, in the Territory of the
GSA [Philippines], of traffic documents issued by AC outside the said territory of the GSA
[Philippines], as required by the passenger(s);
....
22
h) Distribution among passenger sales agents and display of timetables, fare sheets, tariffs and
publicity material provided by AC in accordance with the reasonable requirements of AC;
....
j) Distribution of official press releases provided by AC to media and reference of any press or
public relations inquiries to AC;
....
o) Submission for AC’s approval, of an annual written sales plan on or before a date to be
determined by AC and in a form acceptable to AC;
....
q) Submission of proposals for AC’s approval of passenger sales agent incentive plans at a
reasonable time in advance of proposed implementation.
r) Provision of assistance on request, in its relations with Governmental and other authorities,
offices and agencies in the Territory [Philippines].
....
u) Follow AC guidelines for the handling of baggage claims and customer complaints and,
unless otherwise stated in the guidelines, refer all such claims and complaints to AC. 91
Under the terms of the Passenger General Sales Agency Agreement, Aerotel will "provide at
its own expense and acceptable to [petitioner Air Canada], adequate and suitable premises,
qualified staff, equipment, documentation, facilities and supervision and in consideration of
the remuneration and expenses payable[,] [will] defray all costs and expenses of and incidental
to the Agency."92 "[I]t is the sole employer of its employees and . . . is responsible for [their]
actions . . . or those of any subcontractor."93 In remuneration for its services, Aerotel would be
paid by petitioner a commission on sales of transportation plus override commission on flown
revenues.94 Aerotel would also be reimbursed "for all authorized expenses supported by
original supplier invoices."95
Aerotel is required to keep "separate books and records of account, including supporting
documents, regarding all transactions at, through or in any way connected with [petitioner Air
Canada] business."96
"If representing more than one carrier, [Aerotel must] represent all carriers in an unbiased
way."97 Aerotel cannot "accept additional appointments as General Sales Agent of any other
carrier without the prior written consent of [petitioner Air Canada]."98
The Passenger General Sales Agency Agreement "may be terminated by either party without
cause upon [no] less than 60 days’ prior notice in writing[.]"99 In case of breach of any
provisions of the Agreement, petitioner may require Aerotel "to cure the breach in 30 days
failing which [petitioner Air Canada] may terminate [the] Agreement[.]"100
The following terms are indicative of Aerotel’s dependent status:
First, Aerotel must give petitioner written notice "within 7 days of the date [it] acquires or
takes control of another entity or merges with or is acquired or controlled by another person or
entity[.]"101 Except with the written consent of petitioner, Aerotel must not acquire a
substantial interest in the ownership, management, or profits of a passenger sales agent
affiliated with the International Air Transport Association or a non-affiliated passenger sales
agent nor shall an affiliated passenger sales agent acquire a substantial interest in Aerotel as to
influence its commercial policy and/or management decisions.102 Aerotel must also provide
petitioner "with a report on any interests held by [it], its owners, directors, officers, employees
and their immediate families in companies and other entities in the aviation industry or . . .
industries related to it[.]"103 Petitioner may require that any interest be divested within a set
period of time.104
Second, in carrying out the services, Aerotel cannot enter into any contract on behalf of
petitioner without the express written consent of the latter;105 it must act according to the
standards required by petitioner;106 "follow the terms and provisions of the [petitioner Air
Canada] GSA Manual [and all] written instructions of [petitioner Air Canada;]"107 and "[i]n
the absence of an applicable provision in the Manual or instructions, [Aerotel must] carry out
its functions in accordance with [its own] standard practices and procedures[.]"108
Third, Aerotel must only "issue traffic documents approved by [petitioner Air Canada] for all
transportation over [its] services[.]"109 All use of petitioner’s name, logo, and marks must be
with the written consent of petitioner and according to petitioner’s corporate standards and
guidelines set out in the Manual.110
Fourth, all claims, liabilities, fines, and expenses arising from or in connection with the
transportation sold by Aerotel are for the account of petitioner, except in the case of
negligence of Aerotel.111
Aerotel is a dependent agent of petitioner pursuant to the terms of the Passenger General Sales
Agency Agreement executed between the parties. It has the authority or power to conclude
contracts or bind petitioner to contracts entered into in the Philippines. A third-party liability
on contracts of Aerotel is to petitioner as the principal, and not to Aerotel, and liability to such
third party is enforceable against petitioner. While Aerotel maintains a certain independence
and its activities may not be devoted wholly to petitioner, nonetheless, when representing
petitioner pursuant to the Agreement, it must carry out its functions solely for the benefit of
petitioner and according to the latter’s Manual and written instructions. Aerotel is required to
submit its annual sales plan for petitioner’s approval.
In essence, Aerotel extends to the Philippines the transportation business of petitioner. It is a
conduit or outlet through which petitioner’s airline tickets are sold.112
Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax Treaty, the
"business profits" of an enterprise of a Contracting State is "taxable only in that State[,] unless
the enterprise carries on business in the other Contracting State through a permanent
establishment[.]"113 Thus, income attributable to Aerotel or from business activities effected
by petitioner through Aerotel may be taxed in the Philippines. However, pursuant to the last
paragraph114 of Article VII in relation to Article VIII115 (Shipping and Air Transport) of the
same Treaty, the tax imposed on income derived from the operation of ships or aircraft in
international traffic should not exceed 1½% of gross revenues derived from Philippine
sources.
IV
While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of the
1997 National Internal Revenue Code on its taxable income116 from sale of airline tickets in
the Philippines, it could only be taxed at a maximum of 1½% of gross revenues, pursuant to
Article VIII of the Republic of the Philippines-Canada Tax Treaty that applies to petitioner as
a "foreign corporation organized and existing under the laws of Canada[.]"117
Tax treaties form part of the law of the land,118 and jurisprudence has applied the statutory
construction principle that specific laws prevail over general ones.119
The Republic of the Philippines-Canada Tax Treaty was ratified on December 21, 1977 and
became valid and effective on that date. On the other hand, the applicable
provisions120 relating to the taxability of resident foreign corporations and the rate of such tax
found in the National Internal Revenue Code became effective on January 1,
1998.121 Ordinarily, the later provision governs over the earlier one.122 In this case, however,
the provisions of the Republic of the Philippines-Canada Tax Treaty are more specific than the
provisions found in the National Internal Revenue Code.
These rules of interpretation apply even though one of the sources is a treaty and not simply a
statute.
Article VII, Section 21 of the Constitution provides:
SECTION 21. No treaty or international agreement shall be valid and effective unless
concurred in by at least two-thirds of all the Members of the Senate.
This provision states the second of two ways through which international obligations become
binding. Article II, Section 2 of the Constitution deals with international obligations that are
23
incorporated, while Article VII, Section 21 deals with international obligations that become
binding through ratification.
"Valid and effective" means that treaty provisions that define rights and duties as well as
definite prestations have effects equivalent to a statute. Thus, these specific treaty provisions
may amend statutory provisions. Statutory provisions may also amend these types of treaty
obligations.
We only deal here with bilateral treaty state obligations that are not international
obligations erga omnes. We are also not required to rule in this case on the effect of
international customary norms especially those with jus cogens character.
The second paragraph of Article VIII states that "profits from sources within a Contracting
State derived by an enterprise of the other Contracting State from the operation of ships or
aircraft in international traffic may be taxed in the first-mentioned State but the tax so
charged shall not exceed the lesser of a) one and one-half per cent of the gross revenues
derived from sources in that State; and b) the lowest rate of Philippine tax imposed on such
profits derived by an enterprise of a third State."
The Agreement between the government of the Republic of the Philippines and the
government of Canada on Air Transport, entered into on January 14, 1997, reiterates the
effectivity of Article VIII of the Republic of the Philippines-Canada Tax Treaty:
ARTICLE XVI
(Taxation)
The Contracting Parties shall act in accordance with the provisions of Article VIII of the
Convention between the Philippines and Canada for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed at Manila on March
31, 1976 and entered into force on December 21, 1977, and any amendments thereto, in
respect of the operation of aircraft in international traffic.123
Petitioner’s income from sale of ticket for international carriage of passenger is income
derived from international operation of aircraft. The sale of tickets is closely related to the
international operation of aircraft that it is considered incidental thereto.
"[B]y reason of our bilateral negotiations with [Canada], we have agreed to have our right to
tax limited to a certain extent[.]"124 Thus, we are bound to extend to a Canadian air carrier
doing business in the Philippines through a local sales agent the benefit of a lower tax
equivalent to 1½% on business profits derived from sale of international air transportation.
V
Finally, we reject petitioner’s contention that the Court of Tax Appeals erred in denying its
claim for refund of erroneously paid Gross Philippine Billings tax on the ground that it is
subject to income tax under Section 28(A)(1) of the National Internal Revenue Code because
(a) it has not been assessed at all by the Bureau of Internal Revenue for any income tax
liability;125 and (b) internal revenue taxes cannot be the subject of set-off or
compensation,126citing Republic v. Mambulao Lumber Co., et al.127 and Francia v.
Intermediate Appellate Court.128
In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue,129 we have
ruled that "[i]n an action for the refund of taxes allegedly erroneously paid, the Court of Tax
Appeals may determine whether there are taxes that should have been paid in lieu of the taxes
paid."130 The determination of the proper category of tax that should have been paid is
incidental and necessary to resolve the issue of whether a refund should be granted. 131 Thus:
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6% capital
gains tax or other taxes at the first instance. The Court of Tax Appeals has no power to make
an assessment.
As earlier established, the Court of Tax Appeals has no assessment powers. In stating that
petitioner’s transactions are subject to capital gains tax, however, the Court of Tax Appeals
was not making an assessment. It was merely determining the proper category of tax that
petitioner should have paid, in view of its claim that it erroneously imposed upon itself and
paid the 5% final tax imposed upon PEZA-registered enterprises.
The determination of the proper category of tax that petitioner should have paid is an
incidental matter necessary for the resolution of the principal issue, which is whether
petitioner was entitled to a refund.
The issue of petitioner’s claim for tax refund is intertwined with the issue of the proper taxes
that are due from petitioner. A claim for tax refund carries the assumption that the tax returns
filed were correct. If the tax return filed was not proper, the correctness of the amount paid
and, therefore, the claim for refund become questionable. In that case, the court must
determine if a taxpayer claiming refund of erroneously paid taxes is more properly liable for
taxes other than that paid.
In South African Airways v. Commissioner of Internal Revenue, South African Airways
claimed for refund of its erroneously paid 2½% taxes on its gross Philippine billings. This
court did not immediately grant South African’s claim for refund. This is because although
this court found that South African Airways was not subject to the 2½% tax on its gross
Philippine billings, this court also found that it was subject to 32% tax on its taxable income.
In this case, petitioner’s claim that it erroneously paid the 5% final tax is an admission that the
quarterly tax return it filed in 2000 was improper. Hence, to determine if petitioner was
entitled to the refund being claimed, the Court of Tax Appeals has the duty to determine if
petitioner was indeed not liable for the 5% final tax and, instead, liable for taxes other than the
5% final tax. As in South African Airways, petitioner’s request for refund can neither be
granted nor denied outright without such determination.
If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the
amount of the taxpayer’s liability should be computed and deducted from the refundable
amount.
Any liability in excess of the refundable amount, however, may not be collected in a case
involving solely the issue of the taxpayer’s entitlement to refund. The question of tax
deficiency is distinct and unrelated to the question of petitioner’s entitlement to refund. Tax
deficiencies should be subject to assessment procedures and the rules of prescription. The
court cannot be expected to perform the BIR’s duties whenever it fails to do so either through
neglect or oversight. Neither can court processes be used as a tool to circumvent laws
protecting the rights of taxpayers.132
Hence, the Court of Tax Appeals properly denied petitioner’s claim for refund of allegedly
erroneously paid tax on its Gross Philippine Billings, on the ground that it was liable instead
for the regular 32% tax on its taxable income received from sources within the Philippines. Its
determination of petitioner’s liability for the 32% regular income tax was made merely for the
purpose of ascertaining petitioner’s entitlement to a tax refund and not for imposing any
deficiency tax.
In this regard, the matter of set-off raised by petitioner is not an issue. Besides, the cases cited
are based on different circumstances. In both cited cases,133 the taxpayer claimed that his (its)
tax liability was off-set by his (its) claim against the government.
Specifically, in Republic v. Mambulao Lumber Co., et al., Mambulao Lumber contended that
the amounts it paid to the government as reforestation charges from 1947 to 1956, not having
been used in the reforestation of the area covered by its license, may be set off or applied to
the payment of forest charges still due and owing from it.134Rejecting Mambulao’s claim of
legal compensation, this court ruled:
[A]ppellant and appellee are not mutually creditors and debtors of each other. Consequently,
the law on compensation is inapplicable. On this point, the trial court correctly observed:
Under Article 1278, NCC, compensation should take place when two persons in their own
right are creditors and debtors of each other. With respect to the forest charges which the
defendant Mambulao Lumber Company has paid to the government, they are in the coffers of
the government as taxes collected, and the government does not owe anything to defendant
24
Mambulao Lumber Company. So, it is crystal clear that the Republic of the Philippines and
the Mambulao Lumber Company are not creditors and debtors of each other, because
compensation refers to mutual debts. * * *.
And the weight of authority is to the effect that internal revenue taxes, such as the forest
charges in question, can not be the subject of set-off or compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off
under the statutes of set-off, which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the state or municipality to one who is
liable to the state or municipality for taxes. Neither are they a proper subject of recoupment
since they do not arise out of the contract or transaction sued on. * * *. (80 C.J.S. 73–74.)
The general rule, based on grounds of public policy is well-settled that no set-off is admissible
against demands for taxes levied for general or local governmental purposes. The reason on
which the general rule is based, is that taxes are not in the nature of contracts between the
party and party but grow out of a duty to, and are the positive acts of the government, to the
making and enforcing of which, the personal consent of individual taxpayers is not required. *
* * If the taxpayer can properly refuse to pay his tax when called upon by the Collector,
because he has a claim against the governmental body which is not included in the tax levy, it
is plain that some legitimate and necessary expenditure must be curtailed. If the taxpayer’s
claim is disputed, the collection of the tax must await and abide the result of a lawsuit, and
meanwhile the financial affairs of the government will be thrown into great confusion. (47
Am. Jur. 766–767.)135 (Emphasis supplied)
In Francia, this court did not allow legal compensation since not all requisites of legal
compensation provided under Article 1279 were present.136 In that case, a portion of Francia’s
property in Pasay was expropriated by the national government, 137 which did not immediately
pay Francia. In the meantime, he failed to pay the real property tax due on his remaining
property to the local government of Pasay, which later on would auction the property on
account of such delinquency.138 He then moved to set aside the auction sale and argued,
among others, that his real property tax delinquency was extinguished by legal compensation
on account of his unpaid claim against the national government. 139 This court ruled against
Francia:
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.
....
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 ₱4,116.00 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 ₱4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy
matter to withdraw ₱2,400.00 from the deposit so that he could pay the tax obligation thus
aborting the sale at public auction.140
The ruling in Francia was applied to the subsequent cases of Caltex Philippines, Inc. v.
Commission on Audit141 and Philex Mining Corporation v. Commissioner of Internal
Revenue.142 In Caltex, this court reiterated:
[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.143 (Citations omitted)
Philex Mining ruled that "[t]here 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."144 Rejecting Philex Mining’s assertion that the imposition of surcharge
and interest was unjustified because it had no obligation to pay the excise tax liabilities within
the prescribed period since, after all, it still had pending claims for VAT input credit/refund
with the Bureau of Internal Revenue, this court explained:
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. Hence, a tax does not depend upon the consent of the taxpayer.
If any tax 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. 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.145 (Citations omitted)
In sum, the rulings in those cases were to the effect that the taxpayer cannot simply refuse to
pay tax on the ground that the tax liabilities were off-set against any alleged claim the taxpayer
may have against the government. Such would merely be in keeping with the basic policy on
prompt collection of taxes as the lifeblood of the government.1âwphi1
Here, what is involved is a denial of a taxpayer’s refund claim on account of the Court of Tax
Appeals’ finding of its liability for another tax in lieu of the Gross Philippine Billings tax that
was allegedly erroneously paid.
Squarely applicable is South African Airways where this court rejected similar arguments on
the denial of claim for tax refund:
Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of
a tax refund with a tax deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioner’s
supplemental motion for reconsideration alleging bringing to said court’s attention the
existence of the deficiency income and business tax assessment against Citytrust. The fact of
such deficiency assessment is intimately related to and inextricably intertwined with the right
of respondent bank to claim for a tax refund for the same year. To award such refund despite
the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects.
Herein private respondent cannot be entitled to refund and at the same time be liable for a tax
deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts
stated therein are true and correct. The deficiency assessment, although not yet final, created
a doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in
said return which, by itself and without unquestionable evidence, cannot be the basis for the
grant of the refund.
25
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the
applicable law when the claim of Citytrust was filed, provides that "(w)hen an assessment is
made in case of any list, statement, or return, which in the opinion of the Commissioner of
Internal Revenue was false or fraudulent or contained any understatement or undervaluation,
no tax collected under such assessment shall be recovered by any suits unless it is proved that
the said list, statement, or return was not false nor fraudulent and did not contain any
understatement or undervaluation; but this provision shall not apply to statements or returns
made or to be made in good faith regarding annual depreciation of oil or gas wells and mines."
Moreover, to grant the refund without determination of the proper assessment and the tax due
would inevitably result in multiplicity of proceedings or suits. If the deficiency assessment
should subsequently be upheld, the Government will be forced to institute anew a proceeding
for the recovery of erroneously refunded taxes which recourse must be filed within the
prescriptive period of ten years after discovery of the falsity, fraud or omission in the false or
fraudulent return involved. This would necessarily require and entail additional efforts and
expenses on the part of the Government, impose a burden on and a drain of government funds,
and impede or delay the collection of much-needed revenue for governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically
necessary and legally appropriate that the issue of the deficiency tax assessment against
Citytrust be resolved jointly with its claim for tax refund, to determine once and for all in a
single proceeding the true and correct amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just and
fair that the taxpayer and the Government alike be given equal opportunities to avail of
remedies under the law to defeat each other’s claim and to determine all matters of dispute
between them in one single case. It is important to note that in determining whether or not
petitioner is entitled to the refund of the amount paid, it would [be] necessary to determine
how much the Government is entitled to collect as taxes. This would necessarily include the
determination of the correct liability of the taxpayer and, certainly, a determination of this case
would constitute res judicata on both parties as to all the matters subject thereof or necessarily
involved therein.
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The
above pronouncements are, therefore, still applicable today.
Here, petitioner's similar tax refund claim assumes that the tax return that it filed was correct.
Given, however, the finding of the CTA that petitioner, although not liable under Sec.
28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(l), the correctness of the return filed
by petitioner is now put in doubt. As such, we cannot grant the prayer for a
refund.146 (Emphasis supplied, citation omitted)
In the subsequent case of United Airlines, Inc. v. Commissioner of Internal Revenue, 147 this
court upheld the denial of the claim for refund based on the Court of Tax Appeals' finding that
the taxpayer had, through erroneous deductions on its gross income, underpaid its Gross
Philippine Billing tax on cargo revenues for 1999, and the amount of underpayment was even
greater than the refund sought for erroneously paid Gross Philippine Billings tax on passenger
revenues for the same taxable period.148
In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was computed
at the rate of 1 ½% of its gross revenues amounting to P345,711,806.08 149 from the third
quarter of 2000 to the second quarter of 2002. It is quite apparent that the tax imposable under
Section 28(A)(l) of the 1997 National Internal Revenue Code [32% of t.axable income, that is,
gross income less deductions] will exceed the maximum ceiling of 1 ½% of gross revenues as
decreed in Article VIII of the Republic of the Philippines-Canada Tax Treaty. Hence, no
refund is forthcoming.
WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005 and
Resolution dated April 8, 2005 of the Court of Tax Appeals En Banc are AFFIRMED.
SO ORDERED.

FIRST DIVISION
[G.R. No. 148191. November 25, 2003]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SOLIDBANK
CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
Under the Tax Code, the earnings of banks from passive income are subject to a twenty
percent final withholding tax (20% FWT). This tax is withheld at source and is thus
not actuallyand physically received by the banks, because it is paid directly to the government
by the entities from which the banks derived the income. Apart from the 20% FWT, banks are
also subject to a five percent gross receipts tax (5% GRT) which is imposed by the Tax Code
on their gross receipts, including the passive income.
Since the 20% FWT is constructively received by the banks and forms part of their gross
receipts or earnings, it follows that it is subject to the 5% GRT. After all, the amount withheld
is paid to the government on their behalf, in satisfaction of their withholding taxes. That they
do not actually receive the amount does not alter the fact that it is remitted for their benefit in
satisfaction of their tax obligations.
Stated otherwise, the fact is that if there were no withholding tax system in place in this
country, this 20 percent portion of the passive income of banks would actually be paid to the
banks and then remitted by them to the government in payment of their income tax. The
institution of the withholding tax system does not alter the fact that the 20 percent portion of
their passive income constitutes part of their actual earnings, except that it is paid directly to
the government on their behalf in satisfaction of the 20 percent final income tax due on their
passive incomes.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to
annul the July 18, 2000 Decision[2] and the May 8, 2001 Resolution[3] of the Court of
Appeals[4] (CA) in CA-GR SP No. 54599. The decretal portion of the assailed Decision reads
as follows:
WHEREFORE, we AFFIRM in toto the assailed decision and resolution of the Court of Tax
Appeals.[5]
The challenged Resolution denied petitioners Motion for Reconsideration.
The Facts
Quoting petitioner, the CA[6] summarized the facts of this case as follows:
For the calendar year 1995, [respondent] seasonably filed its Quarterly Percentage Tax
Returns reflecting gross receipts (pertaining to 5% [Gross Receipts Tax] rate) in the total
amount of P1,474,691,693.44 with corresponding gross receipts tax payments in the sum
of P73,734,584.60, broken down as follows:
Period Covered Gross Receipts Gross Receipts Tax
January to March 1994 P 188,406,061.95 P 9,420,303.10
April to June 1994 370,913,832.70 18,545,691.63
July to September 1994 481,501,838.98 24,075,091.95
October to December 1994 433,869,959.81 21,693,497.98
Total P 1,474,691,693.44 P 73,734,584.60
[Respondent] alleges that the total gross receipts in the amount of P1,474,691,693.44 included
the sum of P350,807,875.15 representing gross receipts from passive income which was
already subjected to 20% final withholding tax.
On January 30, 1996, [the Court of Tax Appeals] rendered a decision in CTA Case No. 4720
entitled Asian Bank Corporation vs. Commissioner of Internal Revenue[,] wherein it was held
that the 20% final withholding tax on [a] banks interest income should not form part of its
taxable gross receipts for purposes of computing the gross receipts tax.
26
On June 19, 1997, on the strength of the aforementioned decision, [respondent] filed with the
Bureau of Internal Revenue [BIR] a letter-request for the refund or issuance of [a] tax credit
certificate in the aggregate amount of P3,508,078.75, representing allegedly overpaid gross
receipts tax for the year 1995, computed as follows:
Gross Receipts Subjected to the Final Tax
Derived from Passive [Income] P 350,807,875.15
Multiply by Final Tax rate 20%
20% Final Tax Withheld at Source P 70,161,575.03
Multiply by [Gross Receipts Tax] rate 5%
Overpaid [Gross Receipts Tax] P 3,508,078.75
Without waiting for an action from the [petitioner], [respondent] on the same day filed [a]
petition for review [with the Court of Tax Appeals] in order to toll the running of the two-year
prescriptive period to judicially claim for the refund of [any] overpaid internal revenue tax[,]
pursuant to Section 230 [now 229] of the Tax Code [also National Internal Revenue Code] x x
x.
xxxxxxxxx
After trial on the merits, the [Court of Tax Appeals], on August 6, 1999, rendered its decision
ordering x x x petitioner to refund in favor of x x x respondent the reduced amount
of P1,555,749.65 as overpaid [gross receipts tax] for the year 1995. The legal issue x x x was
resolved by the [Court of Tax Appeals], with Hon. Amancio Q. Saga dissenting, on the
strength of its earlier pronouncement in x x x Asian Bank Corporation vs. Commissioner of
Internal Revenue x x x, wherein it was held that the 20% [final withholding tax] on [a] banks
interest income should not form part of its taxable gross receipts for purposes of computing
the [gross receipts tax].[7]
Ruling of the CA
The CA held that the 20% FWT on a banks interest income did not form part of the
taxable gross receipts in computing the 5% GRT, because the FWT was not actually received
by the bank but was directly remitted to the government. The appellate court curtly said that
while the Tax Code does not specifically state any exemption, x x x the statute must receive a
sensible construction such as will give effect to the legislative intention, and so as to avoid an
unjust or absurd conclusion.[8]
Hence, this appeal.[9]
Issue
Petitioner raises this lone issue for our consideration:
Whether or not the 20% final withholding tax on [a] banks interest income forms part of the
taxable gross receipts in computing the 5% gross receipts tax.[10]
The Courts Ruling
The Petition is meritorious.
Sole Issue:
Whether the 20% FWT Forms Part
of the Taxable Gross Receipts
Petitioner claims that although the 20% FWT on respondents interest income was not
actually received by respondent because it was remitted directly to the government, the fact
that the amount redounded to the banks benefit makes it part of the taxable gross receipts in
computing the 5% GRT. Respondent, on the other hand, maintains that the CA correctly ruled
otherwise.
We agree with petitioner. In fact, the same issue has been raised recently in China
Banking Corporation v. CA,[11] where this Court held that the amount of interest income
withheld in payment of the 20% FWT forms part of gross receipts in computing for the GRT
on banks.
The FWT and the GRT:
Two Different Taxes
 The 5% GRT is imposed by Section 119[12] of the Tax Code,[13] which provides:
SEC. 119. Tax on banks and non-bank financial intermediaries. There shall be collected a tax
on gross receipts derived from sources within the Philippines by all banks and non-bank
financial intermediaries in accordance with the following schedule:
(a) On interest, commissions and discounts from lending activities as well as income from
financial leasing, on the basis of remaining maturities of instruments from which such receipts
are derived.
Short-term maturity not in excess of two (2) years5%
Medium-term maturity over two (2) years
but not exceeding four (4) years....3%
Long-term maturity:
(i) Over four (4) years but not exceeding
seven (7) years1%
(ii) Over seven (7) years..0%
(b) On dividends...0%
(c) On royalties, rentals of property, real or personal, profits from exchange
and all other items treated as gross income under Section
28[14] of this
Code....................................................................5%
Provided, however, That in case the maturity period referred to in paragraph (a) is shortened
thru pretermination, then the maturity period shall be reckoned to end as of the date of
pretermination for purposes of classifying the transaction as short, medium or long term and
the correct rate of tax shall be applied accordingly.
Nothing in this Code shall preclude the Commissioner from imposing the same tax herein
provided on persons performing similar banking activities.
The 5% GRT[15] is included under Title V. Other Percentage Taxes of the Tax Code and
is not subject to withholding. The banks and non-bank financial intermediaries liable therefor
shall, under Section 125(a)(1),[16] file quarterly returns on the amount of gross receipts and pay
the taxes due thereon within twenty (20)[17] days after the end of each taxable quarter.
The 20% FWT,[18] on the other hand, falls under Section 24(e)(1)[19] of Title II. Tax on
Income. It is a tax on passive income, deducted and withheld at source by the payor-
corporation and/or person as withholding agent pursuant to Section 50,[20] and paid in the same
manner and subject to the same conditions as provided for in Section 51.[21]
A perusal of these provisions clearly shows that two types of taxes are involved in the
present controversy: (1) the GRT, which is a percentage tax; and (2) the FWT, which is an
income tax. As a bank, petitioner is covered by both taxes.
A percentage tax is a national tax measured by a certain percentage of the gross selling
price or gross value in money of goods sold, bartered or imported; or of the gross receipts or
earnings derived by any person engaged in the sale of services.[22] It is not subject to
withholding.
An income tax, on the other hand, is a national tax imposed on the net or the gross
income realized in a taxable year. [23] It is subject to withholding.
In a withholding tax system, the payee is the taxpayer, the person on whom the tax is
imposed; the payor, a separate entity, acts as no more than an agent of the government for the
collection of the tax in order to ensure its payment. Obviously, this amount that is used to
settle the tax liability is deemed sourced from the proceeds constitutive of the tax
base.[24] These proceeds are either actual or constructive. Both parties herein agree that there is
no actual receipt by the bank of the amount withheld. What needs to be determined is if there
is constructive receipt thereof. Since the payee -- not the payor -- is the real taxpayer, the rule
on constructive receipt can be easily rationalized, if not made clearly manifest. [25]
Constructive Receipt
Versus Actual Receipt
27
Applying Section 7 of Revenue Regulations (RR) No. 17-84,[26] petitioner contends that
there is constructive receipt of the interest on deposits and yield on deposit
substitutes.[27]Respondent, however, claims that even if there is, it is Section 4(e) of RR 12-
80[28] that nevertheless governs the situation.
Section 7 of RR 17-84 states:
SEC. 7. Nature and Treatment of Interest on Deposits and Yield on Deposit Substitutes.
(a) The interest earned on Philippine Currency bank deposits and yield from deposit
substitutes subjected to the withholding taxes in accordance with these regulations need not be
included in the gross income in computing the depositors/investors income tax liability in
accordance with the provision of Section 29(b),[29] (c)[30] and (d) of the National Internal
Revenue Code, as amended.
(b) Only interest paid or accrued on bank deposits, or yield from deposit substitutes declared
for purposes of imposing the withholding taxes in accordance with these regulations shall be
allowed as interest expense deductible for purposes of computing taxable net income of the
payor.
(c) If the recipient of the above-mentioned items of income are financial institutions, the same
shall be included as part of the tax base upon which the gross receipt[s] tax is imposed.
Section 4(e) of RR 12-80, on the other hand, states that the tax rates to be imposed on
the gross receipts of banks, non-bank financial intermediaries, financing companies, and other
non-bank financial intermediaries not performing quasi-banking activities shall be based on all
items of income actually received. This provision reads:
SEC. 4. x x x x x x x x x
(e) Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and
other non-bank financial intermediaries not performing quasi-banking activities. The rates of
tax to be imposed on the gross receipts of such financial institutions shall be based on all items
of income actually received. Mere accrual shall not be considered, but once payment is
received on such accrual or in cases of prepayment, then the amount actually received shall be
included in the tax base of such financial institutions, as provided hereunder x x x.
Respondent argues that the above-quoted provision is plain and clear: since there is
no actual receipt, the FWT is not to be included in the tax base for computing the GRT. There
is supposedly no pecuniary benefit or advantage accruing to the bank from the FWT, because
the income is subjected to a tax burden immediately upon receipt through the withholding
process. Moreover, the earlier RR 12-80 covered matters not falling under the later RR 17-
84.[31]
We are not persuaded.
By analogy, we apply to the receipt of income the rules
on actual and constructive possession provided in Articles 531 and 532 of our Civil Code.
Under Article 531:[32]
Possession is acquired by the material occupation of a thing or the exercise of a right, or by the
fact that it is subject to the action of our will, or by the proper acts and legal formalities
established for acquiring such right.
Article 532 states:
Possession may be acquired by the same person who is to enjoy it, by his legal representative,
by his agent, or by any person without any power whatever; but in the last case, the possession
shall not be considered as acquired until the person in whose name the act of possession was
executed has ratified the same, without prejudice to the juridical consequences of negotiorum
gestio in a proper case.[33]
The last means of acquiring possession under Article 531 refers to juridical acts -- the
acquisition of possession by sufficient title to which the law gives the force of acts of
possession.[34] Respondent argues that only items of income actually received should be
included in its gross receipts. It claims that since the amount had already been withheld at
source, it did not have actual receipt thereof.
 We clarify. Article 531 of the Civil Code clearly provides that the acquisition of the
right of possession is through the proper acts and legal formalities established therefor. The
withholding process is one such act. There may not be actual receipt of the income withheld;
however, as provided for in Article 532, possession by any person without any power
whatsoever shall be considered as acquired when ratified by the person in whose name the act
of possession is executed.
In our withholding tax system, possession is acquired by the payor as the withholding
agent of the government, because the taxpayer ratifies the very act of possession for the
government. There is thus constructive receipt. The processes of bookkeeping and accounting
for interest on deposits and yield on deposit substitutes that are subjected to FWT are indeed --
for legal purposes -- tantamount to delivery, receipt or remittance.[35] Besides, respondent
itself admits that its income is subjected to a tax burden immediately upon receipt, although it
claims that it derives no pecuniary benefit or advantage through the withholding
process. There being constructive receipt of such income -- part of which is withheld -- RR
17-84 applies, and that income is included as part of the tax base upon which the GRT is
imposed.
RR 12-80 Superseded by RR 17-84
We now come to the effect of the revenue regulations on interest
income constructively received.
In general, rules and regulations issued by administrative or executive officers pursuant
to the procedure or authority conferred by law upon the administrative agency have the force
and effect, or partake of the nature, of a statute.[36] The reason is that statutes express the
policies, purposes, objectives, remedies and sanctions intended by the legislature in general
terms. The details and manner of carrying them out are oftentimes left to the administrative
agency entrusted with their enforcement.
In the present case, it is the finance secretary who promulgates the revenue regulations,
upon recommendation of the BIR commissioner. These regulations are the consequences of a
delegated power to issue legal provisions that have the effect of law. [37]
A revenue regulation is binding on the courts as long as the procedure fixed for its
promulgation is followed. Even if the courts may not be in agreement with its stated policy or
innate wisdom, it is nonetheless valid, provided that its scope is within the statutory authority
or standard granted by the legislature.[38] Specifically, the regulation must (1) be germane to
the object and purpose of the law;[39] (2) not contradict, but conform to, the standards the law
prescribes;[40] and (3) be issued for the sole purpose of carrying into effect the general
provisions of our tax laws.[41]
In the present case, there is no question about the regularity in the performance of
official duty. What needs to be determined is whether RR 12-80 has been repealed by RR 17-
84.
A repeal may be express or implied. It is express when there is a declaration in a
regulation -- usually in its repealing clause -- that another regulation, identified by its number
or title, is repealed. All others are implied repeals.[42] An example of the latter is a general
provision that predicates the intended repeal on a substantial conflict between the existing and
the prior regulations.[43]
As stated in Section 11 of RR 17-84, all regulations, rules, orders or portions thereof that
are inconsistent with the provisions of the said RR are thereby repealed. This declaration
proceeds on the premise that RR 17-84 clearly reveals such an intention on the part of the
Department of Finance. Otherwise, later RRs are to be construed as a continuation of, and not
a substitute for, earlier RRs; and will continue to speak, so far as the subject matter is the
same, from the time of the first promulgation.[44]
There are two well-settled categories of implied repeals: (1) in case the provisions are in
irreconcilable conflict, the later regulation, to the extent of the conflict, constitutes an implied
repeal of an earlier one; and (2) if the later regulation covers the whole subject of an earlier one and is
28
clearly intended as a substitute, it will similarly operate as a repeal of the earlier one.[45] There is no
implied repeal of an earlier RR by the mere fact that its subject matter is related to a later RR, which
may simply be a cumulation or continuation of the earlier one.[46]
Where a part of an earlier regulation embracing the same subject as a later one may not
be enforced without nullifying the pertinent provision of the latter, the earlier regulation is
deemed impliedly amended or modified to the extent of the repugnancy. [47] The unaffected
provisions or portions of the earlier regulation remain in force, while its omitted portions are
deemed repealed.[48] An exception therein that is amended by its subsequent elimination shall
now cease to be so and instead be included within the scope of the general rule. [49]
Section 4(e) of the earlier RR 12-80 provides that only items of
income actually received shall be included in the tax base for computing the GRT, but Section
7(c) of the later RR 17-84 makes no such distinction and provides that all interests earned
shall be included. The exception having been eliminated, the clear intent is that the later RR
17-84 includes the exception within the scope of the general rule.
Repeals by implication are not favored and will not be indulged, unless it is manifest
that the administrative agency intended them. As a regulation is presumed to have been made
with deliberation and full knowledge of all existing rules on the subject, it may reasonably be
concluded that its promulgation was not intended to interfere with or abrogate any earlier rule
relating to the same subject, unless it is either repugnant to or fully inclusive of the subject
matter of an earlier one, or unless the reason for the earlier one is beyond peradventure
removed.[50] Every effort must be exerted to make all regulations stand -- and a later rule will
not operate as a repeal of an earlier one, if by any reasonable construction, the two can be
reconciled.[51]
RR 12-80 imposes the GRT only on all items of income actually received, as opposed to
their mere accrual, while RR 17-84 includes all interest income in computing the GRT. RR
12-80 is superseded by the later rule, because Section 4(e) thereof is not restated in RR 17-
84. Clearly therefore, as petitioner correctly states, this particular provision was impliedly
repealed when the later regulations took effect.[52]
Reconciling the Two Regulations
Granting that the two regulations can be reconciled, respondents reliance on Section 4(e)
of RR 12-80 is misplaced and deceptive. The accrual referred to therein should not be equated
with the determination of the amount to be used as tax base in computing the GRT. Such
accrual merely refers to an accounting method that recognizes income as earned although not
received, and expenses as incurred although not yet paid.
Accrual should not be confused with the concept of constructive possession or receipt as
earlier discussed. Petitioner correctly points out that income that is merely accrued -- earned,
but not yet received -- does not form part of the taxable gross receipts; income that has been
received, albeit constructively, does.[53]
The word actually, used confusingly in Section 4(e), will be clearer if removed
entirely. Besides, if actually is that important, accrual should have been eliminated for being a
mere surplusage. The inclusion of accrual stresses the fact that Section 4(e) does not
distinguish between actual and constructive receipt. It merely focuses on the method of
accounting known as the accrual system.
Under this system, income is accrued or earned in the year in which the taxpayers right
thereto becomes fixed and definite, even though it may not be actually received until a later
year; while a deduction for a liability is to be accrued or incurred and taken when the liability
becomes fixed and certain, even though it may not be actually paid until later.[54]
Under any system of accounting, no duty or liability to pay an income tax upon a
transaction arises until the taxable year in which the event constituting the condition precedent
occurs.[55] The liability to pay a tax may thus arise at a certain time and the tax paid within
another given time.[56]
 In reconciling these two regulations, the earlier one includes in the tax base for
GRT all income, whether actually or constructively received, while the later one includes
specifically interest income. In computing the income tax liability, the only exception cited in
the later regulations is the exclusion from gross income of interest income, which is already
subjected to withholding. This exception, however, refers to a different tax altogether. To
extend mischievously such exception to the GRT will certainly lead to results not
contemplated by the legislators and the administrative body promulgating the regulations.
Manila Jockey Club
Inapplicable
In Commissioner of Internal Revenue v. Manila Jockey Club,[57] we held that the term
gross receipts shall not include money which, although delivered, has been especially
earmarked by law or regulation for some person other than the taxpayer.[58]
To begin, we have to nuance the definition of gross receipts[59] to determine what it is
exactly. In this regard, we note that US cases have persuasive effect in our jurisdiction,
because Philippine income tax law is patterned after its US counterpart.[60]
[G]ross receipts with respect to any period means the sum of: (a) The total amount received or
accrued during such period from the sale, exchange, or other disposition of x x x other
property of a kind which would properly be included in the inventory of the taxpayer if on
hand at the close of the taxable year, or property held by the taxpayer primarily for sale to
customers in the ordinary course of its trade or business, and (b) The gross income,
attributable to a trade or business, regularly carried on by the taxpayer, received or accrued
during such period x x x.[61]
x x x [B]y gross earnings from operations x x x was intended all operations xxx including
incidental, subordinate, and subsidiary operations, as well as principal operations.[62]
When we speak of the gross earnings of a person or corporation, we mean the entire earnings
or receipts of such person or corporation from the business or operations to which we refer. [63]
From these cases, gross receipts[64] refer to the total, as opposed to the net,
income.[65] These are therefore the total receipts before any deduction[66] for the expenses of
management.[67] Websters New International Dictionary, in fact, defines gross as whole or
entire.
Statutes taxing the gross receipts, earnings, or income of particular corporations are
found in many jurisdictions.[68] Tax thereon is generally held to be within the power of a state
to impose; or constitutional, unless it interferes with interstate commerce or violates the
requirement as to uniformity of taxation.[69]
Moreover, we have emphasized that the BIR has consistently ruled that gross receipts
does not admit of any deduction.[70] Following the principle of legislative approval by
reenactment,[71] this interpretation has been adopted by the legislature throughout the various
reenactments of then Section 119 of the Tax Code.[72]
Given that a tax is imposed upon total receipts and not upon net earnings, [73] shall the
income withheld be included in the tax base upon which such tax is imposed? In other words,
shall interest income constructively received still be included in the tax base for computing the
GRT?
We rule in the affirmative.
Manila Jockey Club does not apply to this case. Earmarking is not the same
as withholding. Amounts earmarked do not form part of gross receipts, because, although
delivered or received, these are by law or regulation reserved for some person other than the
taxpayer. On the contrary, amounts withheld form part of gross receipts, because these are
in constructivepossession and not subject to any reservation, the withholding agent being
merely a conduit in the collection process.
The Manila Jockey Club had to deliver to the Board on Races, horse owners and jockeys
amounts that never became the property of the race track.[74] Unlike these amounts, the interest
income that had been withheld for the government became property of the financial
29
institutions upon constructive possession thereof. Possession was indeed acquired, since it was
ratified by the financial institutions in whose name the act of possession had been
executed. The money indeed belonged to the taxpayers; merely holding it in trust was not
enough.[75]
The government subsequently becomes the owner of the money when the financial
institutions pay the FWT to extinguish their obligation to the government. As this Court has
held before, this is the consideration for the transfer of ownership of the FWT from these
institutions to the government.[76] It is ownership that determines whether interest income
forms part of taxable gross receipts.[77] Being originally owned by these financial institutions
as part of their interest income, the FWT should form part of their taxable gross receipts.
Besides, these amounts withheld are in payment of an income tax liability, which is
different from a percentage tax liability. Commissioner of Internal Revenue v. Tours
Specialists, Inc. aptly held thus:[78]
x x x [G]ross receipts subject to tax under the Tax Code do not include monies or receipts
entrusted to the taxpayer which do not belong to them and do not redound to the taxpayers
benefit; and it is not necessary that there must be a law or regulation which would exempt
such monies and receipts within the meaning of gross receipts under the Tax Code.[79]
In the construction and interpretation of tax statutes and of statutes in general, the
primary consideration is to ascertain and give effect to the intention of the legislature.[80] We
ought to impute to the lawmaking body the intent to obey the constitutional mandate, as long
as its enactments fairly admit of such construction.[81] In fact, x x x no tax can be levied
without express authority of law, but the statutes are to receive a reasonable construction with
a view to carrying out their purpose and intent.[82]
Looking again into Sections 24(e)(1) and 119 of the Tax Code, we find that the first
imposes an income tax; the second, a percentage tax. The legislature clearly intended two
different taxes. The FWT is a tax on passive income, while the GRT is on business. [83] The
withholding of one is not equivalent to the payment of the other.
Non-Exemption of FWT from GRT:
Neither Unjust nor Absurd
Taxing the people and their property is essential to the very existence of
government. Certainly, one of the highest attributes of sovereignty is the power of
taxation,[84] which may legitimately be exercised on the objects to which it is applicable to the
utmost extent as the government may choose.[85] Being an incident of sovereignty, such power
is coextensive with that to which it is an incident.[86] The interest on deposits and yield on
deposit substitutes of financial institutions, on the one hand, and their business as such, on the
other, are the two objects over which the State has chosen to extend its sovereign
power. Those not so chosen are, upon the soundest principles, exempt from taxation. [87]
While courts will not enlarge by construction the governments power of
taxation,[88] neither will they place upon tax laws so loose a construction as to permit evasions,
merely on the basis of fanciful and insubstantial distinctions.[89] When the legislature imposes
a tax on income and another on business, the imposition must be respected. The Tax Code
should be so construed, if need be, as to avoid empty declarations or possibilities of crafty tax
evasion schemes. We have consistently ruled thus:
x x x [I]t is upon taxation that the [g]overnment chiefly relies to obtain the means to carry on
its operations, and it is of the utmost importance that the modes adopted to enforce the
collection of the taxes levied should be summary and interfered with as little as possible. x x
x.[90]
Any delay in the proceedings of the officers, upon whom the duty is devolved of collecting the
taxes, may derange the operations of government, and thereby cause serious detriment to the
public.[91]
No government could exist if all litigants were permitted to delay the collection of its taxes. [92]
 A taxing act will be construed, and the intent and meaning of the legislature ascertained,
from its language.[93] Its clarity and implied intent must exist to uphold the taxes as against a
taxpayer in whose favor doubts will be resolved.[94] No such doubts exist with respect to the
Tax Code, because the income and percentage taxes we have cited earlier have been imposed
in clear and express language for that purpose.[95]
This Court has steadfastly adhered to the doctrine that its first and fundamental duty is
the application of the law according to its express terms -- construction and interpretation
being called for only when such literal application is impossible or inadequate without
them.[96] In Quijano v. Development Bank of the Philippines,[97] we stressed as follows:
No process of interpretation or construction need be resorted to where a provision of law
peremptorily calls for application. [98]
A literal application of any part of a statute is to be rejected if it will operate unjustly,
lead to absurd results, or contradict the evident meaning of the statute taken as a
whole.[99] Unlike the CA, we find that the literal application of the aforesaid sections of the
Tax Code and its implementing regulations does not operate unjustly or contradict the evident
meaning of the statute taken as a whole. Neither does it lead to absurd results. Indeed, our
courts are not to give words meanings that would lead to absurd or unreasonable
consequences.[100] We have repeatedly held thus:
x x x [S]tatutes should receive a sensible construction, such as will give effect to the
legislative intention and so as to avoid an unjust or an absurd conclusion.[101]
While it is true that the contemporaneous construction placed upon a statute by executive
officers whose duty is to enforce it should be given great weight by the courts, still if such
construction is so erroneous, x x x the same must be declared as null and void.[102]
It does not even matter that the CTA, like in China Banking Corporation,[103] relied
erroneously on Manila Jockey Club. Under our tax system, the CTA acts as a highly
specialized body specifically created for the purpose of reviewing tax cases. [104] Because of its
recognized expertise, its findings of fact will ordinarily not be reviewed, absent any showing
of gross error or abuse on its part.[105] Such findings are binding on the Court and, absent
strong reasons for us to delve into facts, only questions of law are open for determination.[106]
Respondent claims that it is entitled to a refund on the basis of excess GRT
payments. We disagree.
Tax refunds are in the nature of tax exemptions.[107] Such exemptions are strictly
construed against the taxpayer, being highly disfavored[108] and almost said to be odious to the
law.Hence, those who claim to be exempt from the payment of a particular tax must do so
under clear and unmistakable terms found in the statute. They must be able to point to some
positive provision, not merely a vague implication,[109] of the law creating that right.[110]
The right of taxation will not be surrendered, except in words too plain to be
mistaken. The reason is that the State cannot strip itself of this highest attribute of sovereignty
-- its most essential power of taxation -- by vague or ambiguous language. Since tax refunds
are in the nature of tax exemptions, these are deemed to be in derogation of sovereign
authority and to be construed strictissimi juris against the person or entity claiming the
exemption.[111]
No less than our 1987 Constitution provides for the mechanism for granting tax
exemptions.[112] They certainly cannot be granted by implication or mere administrative
regulation. Thus, when an exemption is claimed, it must indubitably be shown to exist, for
every presumption is against it,[113] and a well-founded doubt is fatal to the claim.[114] In the
instant case, respondent has not been able to satisfactorily show that its FWT on interest
income is exempt from the GRT. Like China Banking Corporation, its argument creates a tax
exemption where none exists.[115]
No exemptions are normally allowed when a GRT is imposed. It is precisely designed to
maintain simplicity in the tax collection effort of the government and to assure its steady
source of revenue even during an economic slump.[116]
30
No Double Taxation
We have repeatedly said that the two taxes, subject of this litigation, are different from
each other. The basis of their imposition may be the same, but their natures are different, thus
leading us to a final point. Is there double taxation?
The Court finds none.
Double taxation means taxing the same property twice when it should be taxed only
once; that is, x x x taxing the same person twice by the same jurisdiction for the same
thing.[117] It is obnoxious when the taxpayer is taxed twice, when it should be but
once.[118] Otherwise described as direct duplicate taxation,[119] the two taxes must be imposed on the
same subject matter, for the same purpose, by the same taxing authority, within the same
jurisdiction, during the same taxing period; and they must be of the same kind or character.[120]
First, the taxes herein are imposed on two different subject matters. The subject matter
of the FWT is the passive income generated in the form of interest on deposits and yield on
deposit substitutes, while the subject matter of the GRT is the privilege of engaging in the
business of banking.
A tax based on receipts is a tax on business rather than on the property; hence, it is an
excise[121] rather than a property tax.[122] It is not an income tax, unlike the FWT. In fact, we
have already held that one can be taxed for engaging in business and further taxed differently
for the income derived therefrom.[123] Akin to our ruling in Velilla v. Posadas,[124] these two
taxes are entirely distinct and are assessed under different provisions.
Second, although both taxes are national in scope because they are imposed by the same
taxing authority -- the national government under the Tax Code -- and operate within the same
Philippine jurisdiction for the same purpose of raising revenues, the taxing periods they affect
are different. The FWT is deducted and withheld as soon as the income is earned, and is paid
after every calendar quarter in which it is earned. On the other hand, the GRT is neither
deducted nor withheld, but is paid only after every taxable quarter in which it is earned.
Third, these two taxes are of different kinds or characters. The FWT is an income tax
subject to withholding, while the GRT is a percentage tax not subject to withholding.
In short, there is no double taxation, because there is no taxing twice, by the same taxing
authority, within the same jurisdiction, for the same purpose, in different taxing periods, some
of the property in the territory.[125] Subjecting interest income to a 20% FWT and including it
in the computation of the 5% GRT is clearly not double taxation.
WHEREFORE, the Petition is GRANTED. The assailed Decision and Resolution of the
Court of Appeals are hereby REVERSED and SET ASIDE. No costs.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 180651 July 30, 2014
NURSERY CARE CORPORATION; SHOEMART, INC.; STAR APPLIANCE
CENTER, INC.; H&B, INC.; SUPPLIES STATION, INC.; and HARDWARE
WORKSHOP, INC., Petitioners,
vs.
ANTHONY ACEVEDO, in his capacity as THE TREASURER OF MANILA; and THE
CITY OF MANILA,Respondents.
DECISION
BERSAMIN, J.:
The issue here concerns double taxation. There is double taxation when the same taxpayer is
taxed twice when he should be taxed only once for the same purpose by the same taxing
authority within the same jurisdiction during the same taxing period, and the taxes are of the
same kind or character. Double taxation is obnoxious.
The Case
Under review are the resolution promulgated in CA-G.R. SP No. 72191 on June 18,
2007,1 whereby the Court of Appeals (CA) denied petitioners' appeal for lack of jurisdiction;
and the resolution promulgated on November 14, 2007,2 whereby the CA denied their motion
for reconsideration for its lack of merit.
Antecedents
The City of Manila assessed and collected taxes from the individual petitioners pursuant to
Section 15 (Tax on Wholesalers, Distributors, or Dealers) and Section 17 (Tax on Retailers) of
the Revenue Code of Manila.3 At the same time, the City of Manila imposed additional taxes
upon the petitioners pursuant to Section 21 ofthe Revenue Code of Manila,4 as amended, as a
condition for the renewal of their respective business licenses for the year 1999. Section 21 of
the Revenue Code of Manila stated:
Section 21. Tax on Business Subject to the Excise, Value-Added or Percentage Taxes under
the NIRC - On any of the following businesses and articles of commerce subject to the excise,
value-added or percentage taxes under the National Internal Revenue Code, hereinafter
referred to as NIRC, as amended, a tax of FIFTY PERCENT (50%) OF ONE PERCENT (1%)
per annum on the gross sales or receipts of the preceding calendar year is hereby imposed:
A) On person who sells goods and services in the course of trade or businesses; x x x
PROVIDED, that all registered businesses in the City of Manila already paying the
aforementioned tax shall be exempted from payment thereof.
To comply with the City of Manila’s assessmentof taxes under Section 21, supra, the
petitioners paid under protest the following amounts corresponding to the first quarter of
1999,5 to wit:
(a) Nursery Care Corporation ₱595,190.25
(b) Shoemart Incorporated ₱3,283,520.14
(c) Star Appliance Center ₱236,084.03
(d) H & B, Inc. ₱1,271,118.74
(e) Supplies Station, Inc. ₱239,501.25
(f) Hardware Work Shop, Inc. ₱609,953.24
By letter dated March 1, 1999, the petitioners formally requested the Office of the City
Treasurer for the tax credit or refund of the local business taxes paid under protest. 6 However,
then City Treasurer Anthony Acevedo (Acevedo) denied the request through his letter of
March 10, 1999.7
31
On April 8, 1999, the petitioners, through their representative, Cecilia R. Patricio, sought the
reconsideration of the denial of their request.8 Still, the City Treasurer did not reconsider.9 In
the meanwhile, Liberty Toledo succeeded Acevedo as the City Treasurer of Manila. 10
On April 29, 1999, the petitioners filed their respective petitions for certiorariin the Regional
Trial Court (RTC) in Manila. The petitions, docketed as Civil Cases Nos. 99-93668 to 99-
93673,11 were initially raffled to different branches, but were soon consolidated in Branch
34.12 After the presiding judge of Branch 34 voluntarily inhibited himself, the consolidated
cases were transferred to Branch 23,13 but were again re-raffled to Branch 19 upon the
designation of Branch 23 as a special drugs court.14
The parties agreed on and jointly submitted the following issues for the consideration and
resolution of the RTC, namely:
(a) Whether or not the collection of taxes under Section 21 of Ordinance No. 7794,
as amended, constitutes double taxation.
(b) Whether or not the failure of the petitioners to avail of the statutorily provided
remedy for their tax protest on the ground of unconstitutionality, illegality and
oppressiveness under Section 187 of the Local Government Code renders the
present action dismissible for non-exhaustion of administrative remedy.15
Decision of the RTC
On April 26, 2002, the RTC rendered its decision, holding thusly:
The Court perceives of no instance of the constitutionally proscribed double taxation, in the
strict, narrow or obnoxious sense, imposed upon the petitioners under Section 15 and 17, on
the one hand, and under Section 21, on the other, of the questioned Ordinance. The tax
imposed under Section 15 and 17, as against that imposed under Section 21, are levied against
different tax objects or subject matter. The tax under Section 15 is imposed upon wholesalers,
distributors or dealers, while that under Section 17 is imposedupon retailers. In short, taxes
imposed under Section 15 and 17 is a tax on the business of wholesalers, distributors, dealers
and retailers. On the other hand, the tax imposed upon herein petitioners under Section 21 is
not a tax against the business of the petitioners (as wholesalers, distributors, dealers or
retailers)but is rather a tax against consumers or end-users of the articles sold by petitioners.
This is plain from a reading of the modifying paragraph of Section 21 which says:
"The tax shall be payable by the person paying for the services rendered and shall be paid to
the person rendering the services who is required to collect and pay the tax within twenty (20)
days after the end of each quarter." (Underscoring supplied)
In effect, the petitioners only act as the collection or withholding agent of the City while the
ones actually paying the tax are the consumers or end-users of the articles being sold by
petitioners. The taxes imposed under Sec. 21 represent additional amounts added by the
business establishment to the basic prices of its goods and services which are paid by the end-
users to the businesses. It is actually not taxes on the business of petitioners but on the
consumers. Hence, there is no double taxation in the narrow, strict or obnoxious
sense,involved in the imposition of taxes by the City of Manila under Sections 15, 17 and 21
of the questioned Ordinance. This in effect resolves infavor of the constitutionality of the
assailed sections of Ordinance No. 7807 of the City of Manila.
Petitioners, likewise, pray the Court to direct respondents to cease and desist from
implementing Section 21 of the questioned Ordinance. That the Court cannot do, without
doing away with the mandatory provisions of Section 187 of the Local Government Code
which distinctly commands that an appeal questioning the constitutionality or legality of a tax
ordinance shall not have the effectof suspending the effectivity of the ordinance and the
accrual and payment of the tax, fee or charge levied therein. This is so because an ordinance
carries with it the presumption of validity.
xxx
With the foregoing findings, petitioners’ prayer for the refund of the amounts paid by them
under protest must, likewise, fail.
Wherefore, the petitions are dismissed. Without pronouncement as to costs.
SO ORDERED.16
The petitioners appealed to the CA.17
Ruling of the CA
On June 18, 2007, the CA deniedthe petitioners’ appeal, ruling as follows:
The six (6) cases were consolidated on a common question of fact and law, that is, whether the
act ofthe City Treasurer of Manila of assessing and collecting business taxes under Section
21of Ordinance 7807, on top of other business taxes alsoassessed and collected under the
previous sections of the same ordinance is a violation of the provisions of Section 143 of the
Local Government Code.
Clearly, the disposition of the present appeal in these consolidated cases does not necessitate
the calibration of the whole evidence as there is no question or doubt as to the truth or the
falsehood of the facts obtaining herein, as both parties agree thereon. The present case
involves a question of law that would not lend itself to an examination or evaluation by this
Court of the probative value of the evidence presented.
Thus the Court is constrained todismiss the instant petition for lack of jurisdiction under
Section 2,Rule 50 of the 1997 Rules on Civil Procedure which states:
"Sec. 2. Dismissal of improper appeal to the Court of Appeals. – An appeal under Rule 41
taken from the Regional Trial Court to the Court of Appeals raising only questions of law shall
be dismissed, issues purely of law not being reviewable by said court. similarly, an appeal by
notice of appeal instead of by petition for review from the appellate judgment of a Regional
Trial Court shall be dismissed.
An appeal erroneously taken tothe Court of Appeals shall not be transferred to the appropriate
court but shall be dismissed outright.
WHEREFORE, the foregoing considered, the appeal is DISMISSED.
SO ORDERED.18
The petitioners moved for reconsideration, but the CA denied their motion through the
resolution promulgated on November 14, 2007.19
Issues
The petitioners now appeal, raising the following grounds, to wit:
A.
THE COURT OF APPEALS, IN DISMISSING THE APPEAL OF THE PETITIONERS
AND DENYING THEIR MOTION FOR RECONSIDERATION, ERRED INRULING
THAT THE ISSUE INVOLVED IS A PURELY LEGAL QUESTION.
B.
THE COURT OF APPEALS ERRED IN NOT REVERSING THE DECISION OF BRANCH
19 OF THE REGIONAL TRIAL COURT OF MANILA DATED 26 APRIL 2002 DENYING
PETITIONERS’ PRAYER FOR REFUND OF THE AMOUNTS PAID BY THEM UNDER
PROTEST AND DISMISSING THE PETITION FOR CERTIORARI FILED BY THE
PETITIONERS.
C.
THE COURT OF APPEALS ERRED IN NOT RULING THAT THE ACT OF THE CITY
TREASURER OF MANILA IN IMPOSING, ASSESSING AND COLLECTING THE
ADDITIONAL BUSINESS TAX UNDER SECTION 21 OFORDINANCE NO. 7794, AS
AMENDED BY ORDINANCE NO. 7807, ALSO KNOWN AS THE REVENUE CODE OF
THE CITY OFMANILA, IS CONSTITUTIVE OF DOUBLE TAXATION AND
VIOLATIVE OF THE LOCAL GOVERNMENT CODE OF 1991.20
The main issues for resolution are, therefore, (1) whether or not the CA properly denied due
course to the appeal for raising pure questions of law; and (2) whether or not the petitioners
were entitled to the tax credit or tax refund for the taxes paid under Section 21, supra.
Ruling
The appeal is meritorious.
32
1.
The CA did not err in dismissing the appeal;
but the rules should be liberally applied
for the sake of justice and equity
The Rules of Courtprovides three modes of appeal from the decisions and final orders of the
RTC, namely: (1) ordinary appeal or appeal by writ of error under Rule 41, where the
decisionsand final orders were rendered in civil or criminal actions by the RTC in the exercise
of original jurisdiction; (2) petition for review under Rule 42, where the decisions and final
orders were rendered by the RTC in the exerciseof appellate jurisdiction; and (3) petition for
review on certiorarito the Supreme Court under Rule 45.21 The first mode of appeal is taken to
the CA on questions of fact, or mixed questions of fact and law. The second mode of appeal is
brought to the CA on questions of fact, of law, or mixed questions of fact and law.22 The third
mode of appeal is elevated to the Supreme Court only on questions of law. 23
The distinction between a question oflaw and a question of fact is well established. On the one
hand, a question of law ariseswhen there is doubt as to what the law is on a certain state of
facts; on the other, there is a question of fact when the doubt arises asto the truth or falsity of
the alleged facts.24 According to Leoncio v. De Vera:25
x x x For a question to beone of law, the same must not involve an examination of the
probative value ofthe evidence presented by the litigants or any of them. The resolution of the
issue must restsolely on what the law provides on the given set of circumstances. Once it is
clear that the issue invites a review of the evidence presented, the question posed is one of
fact. Thus, the test of whether a question isone of law or offact is not the appellation given to
such question by the party raising the same; rather, it is whether the appellate court can
determine the issue raised without reviewing or evaluating the evidence, in which case, it is a
question oflaw; otherwise it is a question of fact.26
The nature of the issues to be raised on appeal can be gleaned from the appellant’s notice of
appeal filed in the trial court, and from the appellant’s brief submitted to the appellate
court.27 In this case, the petitioners filed a notice of appeal in which they contended that the
April 26, 2002 decision and the order of July 17, 2002 issued by the RTC denying their
consolidated motion for reconsideration were contrary to the facts and law obtaining in the
consolidated cases.28 In their consolidated memorandum filed in the CA, they essentially
assailed the RTC’s ruling that the taxes imposed on and collected from the petitioners under
Section 21 of the Revenue Code of Manila constituted double taxation in the strict, narrow or
obnoxious sense. Considered together, therefore, the notice of appeal and consolidated
memorandum evidently did notraise issues that required the reevaluation of evidence or the
relevance of surrounding circumstances.
The CA rightly concluded that the petitioners thereby raised only a question of law. The
dismissal of their appeal was proper, strictly speaking, because Section 2, Rule 50 of the Rules
of Court provides that an appeal from the RTC to the CA raising only questions of law shall be
dismissed;
and that an appeal erroneously taken to the CA shall be outrightly dismissed. 29
2.
Collection of taxes pursuant to Section 21 of the
Revenue Code of Manila constituted double taxation
The foregoing notwithstanding, the Court, given the circumstances obtaining herein and in
light of jurisprudence promulgated subsequent to the filing of the petition, deems it fitting and
proper to adopt a liberal approach in order to render a justand speedy disposition of the
substantive issue at hand. Hence, we resolve, bearing inmind the following pronouncement in
Go v. Chaves:30
Our rules of procedure are designed to facilitate the orderly disposition of cases and permit the
prompt disposition of unmeritorious cases which clog the court dockets and do little more than
waste the courts’ time. These technical and procedural rules, however, are intended to ensure,
rather than suppress, substantial justice. A deviation from their rigid enforcement may thus be
allowed, as petitioners should be given the fullest opportunity to establish the merits of their
case, rather than lose their property on mere technicalities. We held in Ong Lim Sing, Jr. v.
FEB Leasing and Finance Corporation that:
Courts have the prerogative to relax procedural rules of even the most mandatory character,
mindful of the duty to reconcile both the need to speedily put an end to litigation and the
parties' right to due process.In numerous cases, this Court has allowed liberal construction of
the rules when to do so would serve the demands of substantial justice and equity.
The petitioners point out that although Section 21 of the Revenue Code of Manila was not
itself unconstitutional or invalid, its enforcement against the petitioners constituted double
taxation because the local business taxes under Section 15 and Section 17 of the Revenue
Code of Manila were already being paid by them.31 They contend that the proviso in Section
21 exempted all registered businesses in the City of Manila from paying the tax imposed under
Section 21;32 and that the exemption was more in accord with Section 143 of the Local
Government Code,33 the law that vested in the municipal and city governments the power to
impose business taxes.
The respondents counter, however, that double taxation did not occur from the imposition and
collection of the tax pursuant to Section 21 of the Revenue Code of Manila;34 that the taxes
imposed pursuant to Section 21 were in the concept of indirect taxes upon the consumers of
the goods and services sold by a business establishment;35 and that the petitioners did not
exhaust their administrative remedies by first appealing to the Secretary of Justice to challenge
the constitutionalityor legality of the tax ordinance.36
In resolving the issue of double taxation involving Section 21 of the Revenue Code of Manila,
the Court is mindful of the ruling in City of Manila v. Coca-Cola Bottlers Philippines,
Inc.,37 which has been reiterated in Swedish Match Philippines, Inc. v. The Treasurer of the
City of Manila.38 In the latter, the Court has held:
x x x [T]he issue of double taxation is not novel, as it has already been settled by this Court in
The City of Manila v. Coca-Cola Bottlers Philippines, Inc.,in this wise:
Petitioners obstinately ignore the exempting proviso in Section 21 of Tax Ordinance No. 7794,
to their own detriment.1âwphi1 Said exempting proviso was precisely included in said section
so as to avoid double taxation.
Double taxation means taxingthe same property twice when it should be taxed only once; that
is, "taxing the same person twice by the same jurisdictionfor the same thing." It is obnoxious
when the taxpayer is taxed twice, when it should be but once. Otherwise described as "direct
duplicate taxation," the two taxes must be imposed on the same subject matter, for the same
purpose, by the same taxing authority, within the same jurisdiction, during the same taxing
period; and the taxes must be of the same kind or character.
Using the aforementioned test, the Court finds that there is indeed double taxation if
respondent is subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No.
7794, since these are being imposed: (1) on the same subject matter – the privilege of doing
business in the City of Manila; (2) for the same purpose – to make persons conducting
business within the City of Manila contribute tocity revenues; (3) by the same taxing authority
– petitioner Cityof Manila; (4) within the same taxing jurisdiction – within the territorial
jurisdiction of the City of Manila; (5) for the same taxing periods – per calendar year; and (6)
of the same kind or character – a local business tax imposed on gross sales or receipts of the
business.
The distinction petitioners attempt to make between the taxes under Sections 14 and 21 of Tax
Ordinance No. 7794 is specious. The Court revisits Section 143 of the LGC, the very source of
the power of municipalities and cities to impose a local business tax, and to which any local
business tax imposed by petitioner City of Manila must conform. It is apparent from a perusal
thereof that when a municipality or city has already imposed a business tax on manufacturers,
etc.of liquors, distilled spirits, wines, and any other article of commerce, pursuant to Section
33
143(a) of the LGC, said municipality or city may no longer subject the same manufacturers,
etc.to a business tax under Section 143(h) of the same Code. Section 143(h) may be imposed
only on businesses that are subject to excise tax, VAT, or percentagetax under the NIRC, and
that are "not otherwise specified in preceding paragraphs." In the same way, businesses such
as respondent’s, already subject to a local business tax under Section 14 of Tax Ordinance No.
7794 [which is based on Section 143(a) of the LGC], can no longer be made liable for local
business tax under Section 21 of the same Tax Ordinance [which is based on Section 143(h) of
the LGC].
Based on the foregoing reasons, petitioner should not have been subjected to taxes under
Section 21 of the ManilaRevenue Code for the fourth quarter of 2001, considering thatit had
already been paying local business tax under Section 14 of the same ordinance.
xxxx
Accordingly, respondent’s assessment under both Sections 14 and 21 had no basis. Petitioner
is indeed liable to pay business taxes to the City of Manila; nevertheless, considering that the
former has already paid these taxes under Section 14 of the Manila Revenue Code, it is
exempt from the same payments under Section 21 of the same code. Hence, payments made
under Section 21 must be refunded in favor of petitioner.
It is undisputed thatpetitioner paid business taxes based on Sections 14 and 21 for the fourth
quarter of 2001 in the total amount of ₱470,932.21. Therefore, it is entitled to a refund of
₱164,552.04 corresponding to the payment under Section 21 of the Manila Revenue Code.
On the basis of the rulings in Coca-Cola Bottlers Philippines, Inc. and Swedish Match
Philippines, Inc., the Court now holds that all the elements of double taxation concurred upon
the Cityof Manila’s assessment on and collection from the petitioners of taxes for the first
quarter of 1999 pursuant to Section 21 of the Revenue Code of Manila.
Firstly, because Section 21 of the Revenue Code of Manila imposed the tax on a person who
sold goods and services in the course of trade or business based on a certain percentage ofhis
gross sales or receipts in the preceding calendar year, while Section 15 and Section 17
likewise imposed the tax on a person who sold goods and services in the course of trade or
business but only identified such person with particularity, namely, the wholesaler, distributor
or dealer (Section 15), and the retailer (Section 17), all the taxes – being imposed on the
privilege of doing business in the City of Manila in order to make the taxpayers contributeto
the city’s revenues – were imposed on the same subject matter and for the same purpose.
Secondly, the taxes were imposed by the same taxing authority (the City of Manila) and within
the same jurisdiction in the same taxing period (i.e., per calendar year).
Thirdly, the taxes were all in the nature of local business taxes.
We note that although Coca-Cola Bottlers Philippines, Inc. and Swedish Match Philippines,
Inc. involved Section 21 vis-à-vis Section 14 (Tax on Manufacturers, Assemblers and Other
Processors)39 of the Revenue Code of Manila, the legal principlesenunciated therein should
similarly apply because Section 15 (Tax on Wholesalers, Distributors, or Dealers)and Section
17 (Tax on Retailers) of the Revenue Code of Manila imposed the same nature of tax as that
imposed under Section 14, i.e., local business tax, albeit on a different subject matter or group
of taxpayers.
In fine, the imposition of the tax under Section 21 of the Revenue Code of Manila constituted
double taxation, and the taxes collected pursuant thereto must be refunded.
WHEREFORE, the Court GRANTS the petition for review on certiorari; REVERSES and
SETS ASIDE the resolutions promulgated on June 18, 2007 and November 14, 2007 in CA-
G.R. SP No. 72191; and DIRECTS the City of Manila to refund the payments made by the
petitioners of the taxes assessed and collected for the first quarter of 1999 pursuant to Section
21 of the Revenue Code of Manila.
No pronouncement on costs of suit.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 127105 June 25, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.
GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set
aside the decision of the Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802
affirming the decision of the Court of Tax Appeals in CTA Case No. 5136.
The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:
[Respondent], a domestic corporation organized and operating under the
Philippine laws, entered into a license agreement with SC Johnson and
Son, United States of America (USA), a non-resident foreign corporation
based in the U.S.A. pursuant to which the [respondent] was granted the
right to use the trademark, patents and technology owned by the latter
including the right to manufacture, package and distribute the products
covered by the Agreement and secure assistance in management,
marketing and production from SC Johnson and Son, U. S. A.
The said License Agreement was duly registered with the Technology
Transfer Board of the Bureau of Patents, Trade Marks and Technology
Transfer under Certificate of Registration No. 8064 (Exh. "A").
For the use of the trademark or technology, [respondent] was obliged to
pay SC Johnson and Son, USA royalties based on a percentage of net sales
and subjected the same to 25% withholding tax on royalty payments
which [respondent] paid for the period covering July 1992 to May 1993 in
the total amount of P1,603,443.00 (Exhs. "B" to "L" and submarkings).
On October 29, 1993, [respondent] filed with the International Tax Affairs
Division (ITAD) of the BIR a claim for refund of overpaid withholding
tax on royalties arguing that, "the antecedent facts attending [respondent's]
case fall squarely within the same circumstances under which
said MacGeorge and Gillete rulings were issued. Since the agreement was
approved by the Technology Transfer Board, the preferential tax rate of
10% should apply to the [respondent]. We therefore submit that royalties
paid by the [respondent] to SC Johnson and Son, USA is only subject to
10% withholding tax pursuant to the most-favored nation clause of the
RP-US Tax Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the RP-
West Germany Tax Treaty [Article 12 (2) (b)]" (Petition for Review [filed
with the Court of Appeals], par. 12). [Respondent's] claim for there fund
of P963,266.00 was computed as follows:
Gross 25% 10%
Month/ Royalty Withholding Withholding
Year Fee Tax Paid Tax Balance
——— ——— ——— ——— ———
July 1992 559,878 139,970 55,988 83,982
August 567,935 141,984 56,794 85,190
September 595,956 148,989 59,596 89,393
October 634,405 158,601 63,441 95,161
34
November 620,885 155,221 62,089 93,133
December 383,276 95,819 36,328 57,491
Jan 1993 602,451 170,630 68,245 102,368
February 565,845 141,461 56,585 84,877
March 547,253 136,813 54,725 82,088
April 660,810 165,203 66,081 99,122
May 603,076 150,769 60,308 90,461
———— ———— ———— ———
P6,421,770 P1,605,443 P642,177 P963,266 1
======== ======== ======== ========
The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson &
Son, Inc. (S.C. Johnson) then filed a petition for review before the Court of Tax Appeals
(CTA) where the case was docketed as CTA Case No. 5136, to claim a refund of the overpaid
withholding tax on royalty payments from July 1992 to May 1993.
On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and
ordered the Commissioner of Internal Revenue to issue a tax credit certificate in the amount of
P963,266.00 representing overpaid withholding tax on royalty payments, beginning July, 1992
to May, 1993.2
The Commissioner of Internal Revenue thus filed a petition for review with the Court of
Appeals which rendered the decision subject of this appeal on November 7, 1996 finding no
merit in the petition and affirming in toto the CTA ruling.3
This petition for review was filed by the Commissioner of Internal Revenue raising the
following issue:
THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON
AND SON, USA IS ENTITLED TO THE "MOST FAVORED NATION"
TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US
TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX
TREATY.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known
as the "most favored nation" clause, the lowest rate of the Philippine tax at 10% may be
imposed on royalties derived by a resident of the United States from sources within the
Philippines only if the circumstances of the resident of the United States are similar to those of
the resident of West Germany. Since the RP-US Tax Treaty contains no "matching credit"
provision as that provided under Article 24 of the RP-West Germany Tax Treaty, the tax on
royalties under the RP-US Tax Treaty is not paid under similar circumstances as those
obtaining in the RP-West Germany Tax Treaty. Even assuming that the phrase "paid under
similar circumstances" refers to the payment of royalties, and not taxes, as held by the Court
of Appeals, still, the "most favored nation" clause cannot be invoked for the reason that when
a tax treaty contemplates circumstances attendant to the payment of a tax, or royalty
remittances for that matter, these must necessarily refer to circumstances that are tax-related.
Finally, petitioner argues that since S.C. Johnson's invocation of the "most favored nation"
clause is in the nature of a claim for exemption from the application of the regular tax rate of
25% for royalties, the provisions of the treaty must be construed strictly against it.
In its Comment, private respondent S.C. Johnson avers that the instant petition should be
denied (1) because it contains a defective certification against forum shopping as required
under SC Circular No. 28-91, that is, the certification was not executed by the petitioner
herself but by her counsel; and (2) that the "most favored nation" clause under the RP-US Tax
Treaty refers to royalties paid under similar circumstances as those royalties subject to tax in
other treaties; that the phrase "paid under similar circumstances" does not refer to payment of
the tax but to the subject matter of the tax, that is, royalties, because the "most favored nation"
clause is intended to allow the taxpayer in one state to avail of more liberal provisions
contained in another tax treaty wherein the country of residence of such taxpayer is also a
party thereto, subject to the basic condition that the subject matter of taxation in that other tax
treaty is the same as that in the original tax treaty under which the taxpayer is liable; thus, the
RP-US Tax Treaty speaks of "royalties of the same kind paid under similar circumstances".
S.C. Johnson also contends that the Commissioner is estopped from insisting on her
interpretation that the phrase "paid under similar circumstances" refers to the manner in which
the tax is paid, for the reason that said interpretation is embodied in Revenue Memorandum
Circular ("RMC") 39-92 which was already abandoned by the Commissioner's predecessor in
1993; and was expressly revoked in BIR Ruling No. 052-95 which stated that royalties paid to
an American licensor are subject only to 10% withholding tax pursuant to Art 13(2)(b)(iii) of
the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. Said ruling should be
given retroactive effect except if such is prejudicial to the taxpayer pursuant to Section 246 of
the National Internal Revenue Code.
Petitioner filed Reply alleging that the fact that the certification against forum shopping was
signed by petitioner's counsel is not a fatal defect as to warrant the dismissal of this petition
since Circular No. 28-91 applies only to original actions and not to appeals, as in the instant
case. Moreover, the requirement that the certification should be signed by petitioner and not
by counsel does not apply to petitioner who has only the Office of the Solicitor General as
statutory counsel. Petitioner reiterates that even if the phrase "paid under similar
circumstances" embodied in the most favored nation clause of the RP-US Tax Treaty refers to
the payment of royalties and not taxes, still the presence or absence of a "matching credit"
provision in the said RP-US Tax Treaty would constitute a material circumstance to such
payment and would be determinative of the said clause's application.1âwphi1.nêt
We address first the objection raised by private respondent that the certification against forum
shopping was not executed by the petitioner herself but by her counsel, the Office of the
Solicitor General (O.S.G.) through one of its Solicitors, Atty. Tomas M. Navarro.
SC Circular No. 28-91 provides:
SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS FILED WITH
THE SUPREME COURT AND THE COURT OF APPEALS TO
PREVENT FORUM SHOPPING OR MULTIPLE FILING OF PETITIONS
AND COMPLAINTS
TO: xxx xxx xxx
The attention of the Court has been called to the filing of multiple
petitions and complaints involving the same issues in the Supreme Court,
the Court of Appeals or other tribunals or agencies, with the result that
said courts, tribunals or agencies have to resolve the same issues.
(1) To avoid the foregoing, in every petition filed with the Supreme Court
or the Court of Appeals, the petitioner aside from complying with
pertinent provisions of the Rules of Court and existing circulars, must
certify under oath to all of the following facts or undertakings: (a) he has
not theretofore commenced any other action or proceeding involving the
same issues in the Supreme Court, the Court of Appeals, or any tribunal or
agency; . . .
(2) Any violation of this revised Circular will entail the following
sanctions: (a) it shall be a cause for the summary dismissal of the multiple
petitions or complaints; . . .
The circular expressly requires that a certificate of non-forum shopping should be attached to
petitions filed before this Court and the Court of Appeals. Petitioner's allegation that Circular
No. 28-91 applies only to original actions and not to appeals as in the instant case is not
supported by the text nor by the obvious intent of the Circular which is to prevent multiple
petitions that will result in the same issue being resolved by different courts.
Anent the requirement that the party, not counsel, must certify under oath that he has not
commenced any other action involving the same issues in this Court or the Court of Appeals
35
or any other tribunal or agency, we are inclined to accept petitioner's submission that since the
OSG is the only lawyer for the petitioner, which is a government agency mandated under
Section 35, Chapter 12, title III, Book IV of the 1987 Administrative Code 4 to be represented
only by the Solicitor General, the certification executed by the OSG in this case constitutes
substantial compliance with Circular No. 28-91.
With respect to the merits of this petition, the main point of contention in this appeal is the
interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be
imposed by the Philippines upon royalties received by a non-resident foreign corporation. The
provision states insofar as pertinent
that —
1) Royalties derived by a resident of one of the Contracting States from sources
within the other Contracting State may be taxed by both Contracting States.
2) However, the tax imposed by that Contracting State shall not exceed.
a) In the case of the United States, 15 percent of the gross amount of the
royalties, and
b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of the royalties;
(ii) 15 percent of the gross amount of the royalties, where the
royalties are paid by a corporation registered with the Philippine
Board of Investments and engaged in preferred areas of activities;
and
(iii) the lowest rate of Philippine tax that may be imposed on
royalties of the same kind paid under similar circumstances to a
resident of a third State.
xxx xxx xxx
(emphasis supplied)
Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is
entitled to the concessional tax rate of 10 percent on royalties based on Article 12 (2) (b) of the
RP-Germany Tax Treaty which provides:
(2) However, such royalties may also be taxed in the Contracting State in
which they arise, and according to the law of that State, but the tax so charged
shall not exceed:
xxx xxx xxx
b) 10 percent of the gross amount of royalties arising from the use
of, or the right to use, any patent, trademark, design or model, plan,
secret formula or process, or from the use of or the right to use,
industrial, commercial, or scientific equipment, or for information
concerning industrial, commercial or scientific experience.
For as long as the transfer of technology, under Philippine law, is subject
to approval, the limitation of the tax rate mentioned under b) shall, in the
case of royalties arising in the Republic of the Philippines, only apply if
the contract giving rise to such royalties has been approved by the
Philippine competent authorities.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent
of the gross amount of such royalties against German income and corporation tax for the taxes
payable in the Philippines on such royalties where the tax rate is reduced to 10 or 15 percent
under such treaty. Article 24 of the RP-Germany Tax Treaty states —
1) Tax shall be determined in the case of a resident of the Federal Republic of
Germany as follows:
xxx xxx xxx
b) Subject to the provisions of German tax law regarding credit for foreign tax, there
shall be allowed as a credit against German income and corporation tax payable in
 respect of the following items of income arising in the Republic of the Philippines,
the tax paid under the laws of the Philippines in accordance with this Agreement on:
xxx xxx xxx
dd) royalties, as defined in paragraph 3 of Article 12;
xxx xxx xxx
c) For the purpose of the credit referred in subparagraph; b) the Philippine tax shall
be deemed to be
xxx xxx xxx
cc) in the case of royalties for which the tax is reduced to 10 or 15 per cent
according to paragraph 2 of Article 12, 20 percent of the gross amount of such
royalties.
xxx xxx xxx
According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid
under circumstances similar to those in the RP-West Germany Tax Treaty since there is no
provision for a 20 percent matching credit in the former convention and private respondent
cannot invoke the concessional tax rate on the strength of the most favored nation clause in the
RP-US Tax Treaty. Petitioner's position is explained thus:
Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine
tax paid on income from sources within the Philippines is allowed as a credit
against German income and corporation tax on the same income. In the case of
royalties for which the tax is reduced to 10 or 15 percent according to paragraph 2
of Article 12 of the RP-West Germany Tax Treaty, the credit shall be 20% of the
gross amount of such royalty. To illustrate, the royalty income of a German
resident from sources within the Philippines arising from the use of, or the right to
use, any patent, trade mark, design or model, plan, secret formula or process, is
taxed at 10% of the gross amount of said royalty under certain conditions. The rate
of 10% is imposed if credit against the German income and corporation tax on said
royalty is allowed in favor of the German resident. That means the rate of 10% is
granted to the German taxpayer if he is similarly granted a credit against the
income and corporation tax of West Germany. The clear intent of the "matching
credit" is to soften the impact of double taxation by different jurisdictions.
The RP-US Tax Treaty contains no similar "matching credit" as that provided
under the RP-West Germany Tax Treaty. Hence, the tax on royalties under the RP-
US Tax Treaty is not paid under similar circumstances as those obtaining in the
RP-West Germany Tax Treaty. Therefore, the "most favored nation" clause in the
RP-West Germany Tax Treaty cannot be availed of in interpreting the provisions of
the RP-US Tax Treaty.5
The petition is meritorious.
We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the
Court of Appeals, that the phrase "paid under similar circumstances in Article 13 (2) (b), (iii)
of the RP-US Tax Treaty should be interpreted to refer to payment of royalty, and not to the
payment of the tax, for the reason that the phrase "paid under similar circumstances" is
followed by the phrase "to a resident of a third state". The respondent court held that "Words
are to be understood in the context in which they are used", and since what is paid to a resident
of a third state is not a tax but a royalty "logic instructs" that the treaty provision in question
should refer to royalties of the same kind paid under similar circumstances.
The above construction is based principally on syntax or sentence structure but fails to take
into account the purpose animating the treaty provisions in point. To begin with, we are not
aware of any law or rule pertinent to the payment of royalties, and none has been brought to
our attention, which provides for the payment of royalties under dissimilar circumstances. The
tax rates on royalties and the circumstances of payment thereof are the same for all the
recipients of such royalties and there is no disparity based on nationality in the circumstances
36
of such payment.6On the other hand, a cursory reading of the various tax treaties will show
that there is no similarity in the provisions on relief from or avoidance of double taxation 7 as
this is a matter of negotiation between the contracting parties.8 As will be shown later, this
dissimilarity is true particularly in the treaties between the Philippines and the United States
and between the Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has
entered into for the avoidance of double taxation.9 The purpose of these international
agreements is to reconcile the national fiscal legislations of the contracting parties in order to
help the taxpayer avoid simultaneous taxation in two different jurisdictions. 10 More precisely,
the tax conventions are drafted with a view towards the elimination of international juridical
double taxation, which is defined as the imposition of comparable taxes in two or more states
on the same taxpayer in respect of the same subject matter and for identical periods. 11 The
apparent rationale for doing away with double taxation is of encourage the free flow of goods
and services and the movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies. 12 Foreign investments
will only thrive in a fairly predictable and reasonable international investment climate and the
protection against double taxation is crucial in creating such a climate. 13
Double taxation usually takes place when a person is resident of a contracting state and
derives income from, or owns capital in, the other contracting state and both states impose tax
on that income or capital. In order to eliminate double taxation, a tax treaty resorts to several
methods. First, it sets out the respective rights to tax of the state of source or situs and of the
state of residence with regard to certain classes of income or capital. In some cases, an
exclusive right to tax is conferred on one of the contracting states; however, for other items of
income or capital, both states are given the right to tax, although the amount of tax that may be
imposed by the state of source is limited. 14
The second method for the elimination of double taxation applies whenever the state of source
is given a full or limited right to tax together with the state of residence. In this case, the
treaties make it incumbent upon the state of residence to allow relief in order to avoid double
taxation. There are two methods of relief — the exemption method and the credit method. In
the exemption method, the income or capital which is taxable in the state of source or situs is
exempted in the state of residence, although in some instances it may be taken into account in
determining the rate of tax applicable to the taxpayer's remaining income or capital. On the
other hand, in the credit method, although the income or capital which is taxed in the state of
source is still taxable in the state of residence, the tax paid in the former is credited against the
tax levied in the latter. The basic difference between the two methods is that in the exemption
method, the focus is on the income or capital itself, whereas the credit method focuses upon
the tax. 15
In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the
Philippines will give up a part of the tax in the expectation that the tax given up for this
particular investment is not taxed by the other
country. 16 Thus the petitioner correctly opined that the phrase "royalties paid under similar
circumstances" in the most favored nation clause of the US-RP Tax Treaty necessarily
contemplated "circumstances that are tax-related".
In the case at bar, the state of source is the Philippines because the royalties are paid for the
right to use property or rights, i.e. trademarks, patents and technology, located within the
Philippines. 17 The United States is the state of residence since the taxpayer, S. C. Johnson and
Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of residence and the state
of source are both permitted to tax the royalties, with a restraint on the tax that may be
collected by the state of source. 18 Furthermore, the method employed to give relief from
double taxation is the allowance of a tax credit to citizens or residents of the United States (in
an appropriate amount based upon the taxes paid or accrued to the Philippines) against the
United States tax, but such amount shall not exceed the limitations provided by United States
law for the taxable year. 19 Under Article 13 thereof, the Philippines may impose one of three
rates — 25 percent of the gross amount of the royalties; 15 percent when the royalties are paid
by a corporation registered with the Philippine Board of Investments and engaged in preferred
areas of activities; or the lowest rate of Philippine tax that may be imposed on royalties of the
same kind paid under similar circumstances to a resident of a third state.
Given the purpose underlying tax treaties and the rationale for the most favored nation clause,
the concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should
apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-
Germany Tax Treaty are paid under similar circumstances. This would mean that private
respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the
United States in respect of the taxes imposable upon royalties earned from sources within the
Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax
crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against
German income and corporation tax of 20% of the gross amount of royalties paid under the
law of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, which is the
counterpart provision with respect to relief for double taxation, does not provide for similar
crediting of 20% of the gross amount of royalties paid. Said Article 23 reads:
Article 23
Relief from double taxation
Double taxation of income shall be avoided in the following manner:
1) In accordance with the provisions and subject to the limitations of the law of the
United States (as it may be amended from time to time without changing the general
principle thereof), the United States shall allow to a citizen or resident of the United
States as a credit against the United States tax the appropriate amount of taxes paid or
accrued to the Philippines and, in the case of a United States corporation owning at least
10 percent of the voting stock of a Philippine corporation from which it receives
dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid
or accrued to the Philippines by the Philippine corporation paying such dividends with
respect to the profits out of which such dividends are paid. Such appropriate amount shall
be based upon the amount of tax paid or accrued to the Philippines, but the credit shall
not exceed the limitations (for the purpose of limiting the credit to the United States tax
on income from sources within the Philippines or on income from sources outside the
United States) provided by United States law for the taxable year. . . .
The reason for construing the phrase "paid under similar circumstances" as used in Article 13
(2) (b) (iii) of the RP-US Tax Treaty as referring to taxes is anchored upon a logical reading of
the text in the light of the fundamental purpose of such treaty which is to grant an incentive to
the foreign investor by lowering the tax and at the same time crediting against the domestic tax
abroad a figure higher than what was collected in the Philippines.
In one case, the Supreme Court pointed out that laws are not just mere compositions, but have
ends to be achieved and that the general purpose is a more important aid to the meaning of a
law than any rule which grammar may lay down. 20 It is the duty of the courts to look to the
object to be accomplished, the evils to be remedied, or the purpose to be subserved, and
should give the law a reasonable or liberal construction which will best effectuate its
purpose. 21 The Vienna Convention on the Law of Treaties states that a treaty shall be
interpreted in good faith in accordance with the ordinary meaning to be given to the terms of
the treaty in their context and in the light of its object and
purpose. 22
As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign
investors to invest in the Philippines — a crucial economic goal for developing
countries. 23 The goal of double taxation conventions would be thwarted if such treaties did
not provide for effective measures to minimize, if not completely eliminate, the tax burden
37
laid upon the income or capital of the investor. Thus, if the rates of tax are lowered by the state
of source, in this case, by the Philippines, there should be a concomitant commitment on the
part of the state of residence to grant some form of tax relief, whether this be in the form of a
tax credit or exemption. 24 Otherwise, the tax which could have been collected by the
Philippine government will simply be collected by another state, defeating the object of the tax
treaty since the tax burden imposed upon the investor would remain unrelieved. If the state of
residence does not grant some form of tax relief to the investor, no benefit would redound to
the Philippines, i.e., increased investment resulting from a favorable tax regime, should it
impose a lower tax rate on the royalty earnings of the investor, and it would be better to
impose the regular rate rather than lose much-needed revenues to another country.
At the same time, the intention behind the adoption of the provision on "relief from double
taxation" in the two tax treaties in question should be considered in light of the purpose behind
the most favored nation clause.
The purpose of a most favored nation clause is to grant to the contracting party treatment not
less favorable than that which has been or may be granted to the "most favored" among other
countries. 25 The most favored nation clause is intended to establish the principle of equality of
international treatment by providing that the citizens or subjects of the contracting nations may
enjoy the privileges accorded by either party to those of the most favored nation. 26 The
essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions
granted in another tax treaty to which the country of residence of such taxpayer is also a party
provided that the subject matter of taxation, in this case royalty income, is the same as that in
the tax treaty under which the taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and
Article 12 (2) (b) of the RP-West Germany Tax Treaty, above-quoted, speaks of tax on
royalties for the use of trademark, patent, and technology. The entitlement of the 10% rate by
U.S. firms despite the absence of a matching credit (20% for royalties) would derogate from
the design behind the most grant equality of international treatment since the tax burden laid
upon the income of the investor is not the same in the two countries. The similarity in the
circumstances of payment of taxes is a condition for the enjoyment of most favored nation
treatment precisely to underscore the need for equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a
matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed
under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the
10 percent rate granted under the latter treaty for the reason that there is no payment of taxes
on royalties under similar circumstances.
It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded
as in derogation of sovereign authority and to be construed strictissimi juris against the person
or entity claiming the exemption. 27 The burden of proof is upon him who claims the
exemption in his favor and he must be able to justify his claim by the clearest grant of organic
or statute law. 28 Private respondent is claiming for a refund of the alleged overpayment of tax
on royalties; however, there is nothing on record to support a claim that the tax on royalties
under the RP-US Tax Treaty is paid under similar circumstances as the tax on royalties under
the RP-West Germany Tax Treaty.
WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated
May 7, 1996 of the Court of Tax Appeals and the decision dated November 7, 1996 of the
Court of Appeals are hereby SET ASIDE.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 188550 August 19, 2013
DEUTSCHE BANK AG MANILA BRANCH, PETITIONER,
vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
SERENO, CJ.:
This is a Petition for Review1 filed by Deutsche Bank AG Manila Branch (petitioner) under
Rule 45 of the 1997 Rules of Civil Procedure assailing the Court of Tax Appeals En Banc
(CTA En Banc) Decision2 dated 29 May 2009 and Resolution3 dated 1 July 2009 in C.T.A. EB
No. 456.
THE FACTS
In accordance with Section 28(A)(5)4 of the National Internal Revenue Code (NIRC) of 1997,
petitioner withheld and remitted to respondent on 21 October 2003 the amount of PHP
67,688,553.51, which represented the fifteen percent (15%) branch profit remittance tax
(BPRT) on its regular banking unit (RBU) net income remitted to Deutsche Bank Germany
(DB Germany) for 2002 and prior taxable years.5
Believing that it made an overpayment of the BPRT, petitioner filed with the BIR Large
Taxpayers Assessment and Investigation Division on 4 October 2005 an administrative claim
for refund or issuance of its tax credit certificate in the total amount of PHP 22,562,851.17. On
the same date, petitioner requested from the International Tax Affairs Division (ITAD) a
confirmation of its entitlement to the preferential tax rate of 10% under the RP-Germany Tax
Treaty.6
Alleging the inaction of the BIR on its administrative claim, petitioner filed a Petition for
Review7 with the CTA on 18 October 2005. Petitioner reiterated its claim for the refund or
issuance of its tax credit certificate for the amount of PHP 22,562,851.17 representing the
alleged excess BPRT paid on branch profits remittance to DB Germany.
THE CTA SECOND DIVISION RULING8
After trial on the merits, the CTA Second Division found that petitioner indeed paid the total
amount of PHP 67,688,553.51 representing the 15% BPRT on its RBU profits amounting to
PHP 451,257,023.29 for 2002 and prior taxable years. Records also disclose that for the year
2003, petitioner remitted to DB Germany the amount of EURO 5,174,847.38 (or PHP
330,175,961.88 at the exchange rate of PHP 63.804:1 EURO), which is net of the 15% BPRT.
However, the claim of petitioner for a refund was denied on the ground that the application for
a tax treaty relief was not filed with ITAD prior to the payment by the former of its BPRT and
actual remittance of its branch profits to DB Germany, or prior to its availment of the
preferential rate of ten percent (10%) under the RP-Germany Tax Treaty provision. The court
a quo held that petitioner violated the fifteen (15) day period mandated under Section III
paragraph (2) of Revenue Memorandum Order (RMO) No. 1-2000.
Further, the CTA Second Division relied on Mirant (Philippines) Operations Corporation
(formerly Southern Energy Asia-Pacific Operations [Phils.], Inc.) v. Commissioner of Internal
Revenue9 (Mirant) where the CTA En Banc ruled that before the benefits of the tax treaty may
be extended to a foreign corporation wishing to avail itself thereof, the latter should first
invoke the provisions of the tax treaty and prove that they indeed apply to the corporation.
THE CTA EN BANC RULING10
The CTA En Banc affirmed the CTA Second Division’s Decision dated 29 August 2008 and
Resolution dated 14 January 2009. Citing Mirant, the CTA En Banc held that a ruling from the
ITAD of the BIR must be secured prior to the availment of a preferential tax rate under a tax
treaty. Applying the principle of stare decisis et non quieta movere, the CTA En Banc took
38
into consideration that this Court had denied the Petition in G.R. No. 168531 filed by Mirant
for failure to sufficiently show any reversible error in the assailed judgment. 11 The CTA En
Banc ruled that once a case has been decided in one way, any other case involving exactly the
same point at issue should be decided in the same manner.
The court likewise ruled that the 15-day rule for tax treaty relief application under RMO No.
1-2000 cannot be relaxed for petitioner, unlike in CBK Power Company Limited v.
Commissioner of Internal Revenue.12 In that case, the rule was relaxed and the claim for
refund of excess final withholding taxes was partially granted. While it issued a ruling to CBK
Power Company Limited after the payment of withholding taxes, the ITAD did not issue any
ruling to petitioner even if it filed a request for confirmation on 4 October 2005 that the
remittance of branch profits to DB Germany is subject to a preferential tax rate of 10%
pursuant to Article 10 of the RP-Germany Tax Treaty.
ISSUE
This Court is now confronted with the issue of whether the failure to strictly comply with
RMO No. 1-2000 will deprive persons or corporations of the benefit of a tax treaty.
THE COURT’S RULING
The Petition is meritorious.
Under Section 28(A)(5) of the NIRC, any profit remitted to its head office shall be subject to a
tax of 15% based on the total profits applied for or earmarked for remittance without any
deduction of the tax component. However, petitioner invokes paragraph 6, Article 10 of the
RP-Germany Tax Treaty, which provides that where a resident of the Federal Republic of
Germany has a branch in the Republic of the Philippines, this branch may be subjected to the
branch profits remittance tax withheld at source in accordance with Philippine law but shall
not exceed 10% of the gross amount of the profits remitted by that branch to the head office.
By virtue of the RP-Germany Tax Treaty, we are bound to extend to a branch in the
Philippines, remitting to its head office in Germany, the benefit of a preferential rate
equivalent to 10% BPRT.
On the other hand, the BIR issued RMO No. 1-2000, which requires that any availment of the
tax treaty relief must be preceded by an application with ITAD at least 15 days before the
transaction. The Order was issued to streamline the processing of the application of tax treaty
relief in order to improve efficiency and service to the taxpayers. Further, it also aims to
prevent the consequences of an erroneous interpretation and/or application of the treaty
provisions (i.e., filing a claim for a tax refund/credit for the overpayment of taxes or for
deficiency tax liabilities for underpayment).13
The crux of the controversy lies in the implementation of RMO No. 1-2000.
Petitioner argues that, considering that it has met all the conditions under Article 10 of the RP-
Germany Tax Treaty, the CTA erred in denying its claim solely on the basis of RMO No. 1-
2000. The filing of a tax treaty relief application is not a condition precedent to the availment
of a preferential tax rate. Further, petitioner posits that, contrary to the ruling of the CTA,
Mirant is not a binding judicial precedent to deny a claim for refund solely on the basis of
noncompliance with RMO No. 1-2000.
Respondent counters that the requirement of prior application under RMO No. 1-2000 is
mandatory in character. RMO No. 1-2000 was issued pursuant to the unquestioned authority
of the Secretary of Finance to promulgate rules and regulations for the effective
implementation of the NIRC. Thus, courts cannot ignore administrative issuances which
partakes the nature of a statute and have in their favor a presumption of legality.
The CTA ruled that prior application for a tax treaty relief is mandatory, and noncompliance
with this prerequisite is fatal to the taxpayer’s availment of the preferential tax rate.
We disagree.
A minute resolution is not a binding precedent
At the outset, this Court’s minute resolution on Mirant is not a binding precedent. The Court
has clarified this matter in Philippine Health Care Providers, Inc. v. Commissioner of Internal
Revenue14 as follows:
It is true that, although contained in a minute resolution, our dismissal of the petition was a
disposition of the merits of the case. When we dismissed the petition, we effectively affirmed
the CA ruling being questioned. As a result, our ruling in that case has already become final.
When a minute resolution denies or dismisses a petition for failure to comply with formal and
substantive requirements, the challenged decision, together with its findings of fact and legal
conclusions, are deemed sustained. But what is its effect on other cases?
With respect to the same subject matter and the same issues concerning the same parties, it
constitutes res judicata. However, if other parties or another subject matter (even with the
same parties and issues) is involved, the minute resolution is not binding precedent. Thus, in
CIR v. Baier-Nickel, the Court noted that a previous case, CIR v. Baier-Nickel involving the
same parties and the same issues, was previously disposed of by the Court thru a minute
resolution dated February 17, 2003 sustaining the ruling of the CA. Nonetheless, the Court
ruled that the previous case "ha(d) no bearing" on the latter case because the two cases
involved different subject matters as they were concerned with the taxable income of different
taxable years.
Besides, there are substantial, not simply formal, distinctions between a minute resolution and
a decision. The constitutional requirement under the first paragraph of Section 14, Article VIII
of the Constitution that the facts and the law on which the judgment is based must be
expressed clearly and distinctly applies only to decisions, not to minute resolutions. A minute
resolution is signed only by the clerk of court by authority of the justices, unlike a decision. It
does not require the certification of the Chief Justice. Moreover, unlike decisions, minute
resolutions are not published in the Philippine Reports. Finally, the proviso of Section 4(3) of
Article VIII speaks of a decision. Indeed, as a rule, this Court lays down doctrines or
principles of law which constitute binding precedent in a decision duly signed by the members
of the Court and certified by the Chief Justice. (Emphasis supplied)
Even if we had affirmed the CTA in Mirant, the doctrine laid down in that Decision cannot
bind this Court in cases of a similar nature. There are differences in parties, taxes, taxable
periods, and treaties involved; more importantly, the disposition of that case was made only
through a minute resolution.
Tax Treaty vs. RMO No. 1-2000
Our Constitution provides for adherence to the general principles of international law as part
of the law of the land.15The time-honored international principle of pacta sunt servanda
demands the performance in good faith of treaty obligations on the part of the states that enter
into the agreement. Every treaty in force is binding upon the parties, and obligations under the
treaty must be performed by them in good faith.16 More importantly, treaties have the force
and effect of law in this jurisdiction.17
Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting
parties and, in turn, help the taxpayer avoid simultaneous taxations in two different
jurisdictions."18 CIR v. S.C. Johnson and Son, Inc. further clarifies that "tax conventions are
drafted with a view towards the elimination of international juridical double taxation, which is
defined as the imposition of comparable taxes in two or more states on the same taxpayer in
respect of the same subject matter and for identical periods. The apparent rationale for doing
away with double taxation is to encourage the free flow of goods and services and the
movement of capital, technology and persons between countries, conditions deemed vital in
creating robust and dynamic economies. Foreign investments will only thrive in a fairly
predictable and reasonable international investment climate and the protection against double
taxation is crucial in creating such a climate."19
39
Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of
international juridical double taxation, which is why they are also known as double tax treaty
or double tax agreements.
"A state that has contracted valid international obligations is bound to make in its legislations
those modifications that may be necessary to ensure the fulfillment of the obligations
undertaken."20 Thus, laws and issuances must ensure that the reliefs granted under tax treaties
are accorded to the parties entitled thereto. The BIR must not impose additional requirements
that would negate the availment of the reliefs provided for under international agreements.
More so, when the RP-Germany Tax Treaty does not provide for any pre-requisite for the
availment of the benefits under said agreement.
Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which would indicate a
deprivation of entitlement to a tax treaty relief for failure to comply with the 15-day period.
We recognize the clear intention of the BIR in implementing RMO No. 1-2000, but the CTA’s
outright denial of a tax treaty relief for failure to strictly comply with the prescribed period is
not in harmony with the objectives of the contracting state to ensure that the benefits granted
under tax treaties are enjoyed by duly entitled persons or corporations.
Bearing in mind the rationale of tax treaties, the period of application for the availment of tax
treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the
relief as it would constitute a violation of the duty required by good faith in complying with a
tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within
the prescribed period under the administrative issuance would impair the value of the tax
treaty. At most, the application for a tax treaty relief from the BIR should merely operate to
confirm the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of RMO
No. 1-2000.1âwphi1 Logically, noncompliance with tax treaties has negative implications on
international relations, and unduly discourages foreign investors. While the consequences
sought to be prevented by RMO No. 1-2000 involve an administrative procedure, these may
be remedied through other system management processes, e.g., the imposition of a fine or
penalty. But we cannot totally deprive those who are entitled to the benefit of a treaty for
failure to strictly comply with an administrative issuance requiring prior application for tax
treaty relief.
Prior Application vs. Claim for Refund
Again, RMO No. 1-2000 was implemented to obviate any erroneous interpretation and/or
application of the treaty provisions. The objective of the BIR is to forestall assessments
against corporations who erroneously availed themselves of the benefits of the tax treaty but
are not legally entitled thereto, as well as to save such investors from the tedious process of
claims for a refund due to an inaccurate application of the tax treaty provisions. However, as
earlier discussed, noncompliance with the 15-day period for prior application should not
operate to automatically divest entitlement to the tax treaty relief especially in claims for
refund.
The underlying principle of prior application with the BIR becomes moot in refund cases, such
as the present case, where the very basis of the claim is erroneous or there is excessive
payment arising from non-availment of a tax treaty relief at the first instance. In this case,
petitioner should not be faulted for not complying with RMO No. 1-2000 prior to the
transaction. It could not have applied for a tax treaty relief within the period prescribed, or 15
days prior to the payment of its BPRT, precisely because it erroneously paid the BPRT not on
the basis of the preferential tax rate under
the RP-Germany Tax Treaty, but on the regular rate as prescribed by the NIRC. Hence, the
prior application requirement becomes illogical. Therefore, the fact that petitioner invoked the
provisions of the RP-Germany Tax Treaty when it requested for a confirmation from the
ITAD before filing an administrative claim for a refund should be deemed substantial
compliance with RMO No. 1-2000.
Corollary thereto, Section 22921 of the NIRC provides the taxpayer a remedy for tax recovery
when there has been an erroneous payment of tax.1âwphi1 The outright denial of petitioner’s
claim for a refund, on the sole ground of failure to apply for a tax treaty relief prior to the
payment of the BPRT, would defeat the purpose of Section 229.
Petitioner is entitled to a refund
It is significant to emphasize that petitioner applied – though belatedly – for a tax treaty relief,
in substantial compliance with RMO No. 1-2000. A ruling by the BIR would have confirmed
whether petitioner was entitled to the lower rate of 10% BPRT pursuant to the RP-Germany
Tax Treaty.
Nevertheless, even without the BIR ruling, the CTA Second Division found as follows:
Based on the evidence presented, both documentary and testimonial, petitioner was able to
establish the following facts:
a. That petitioner is a branch office in the Philippines of Deutsche Bank AG, a
corporation organized and existing under the laws of the Federal Republic of
Germany;
b. That on October 21, 2003, it filed its Monthly Remittance Return of Final Income
Taxes Withheld under BIR Form No. 1601-F and remitted the amount of
₱67,688,553.51 as branch profits remittance tax with the BIR; and
c. That on October 29, 2003, the Bangko Sentral ng Pilipinas having issued a
clearance, petitioner remitted to Frankfurt Head Office the amount of
EUR5,174,847.38 (or ₱330,175,961.88 at 63.804 Peso/Euro) representing its 2002
profits remittance.22
The amount of PHP 67,688,553.51 paid by petitioner represented the 15% BPRT on its RBU
net income, due for remittance to DB Germany amounting to PHP 451,257,023.29 for 2002
and prior taxable years.23
Likewise, both the administrative and the judicial actions were filed within the two-year
prescriptive period pursuant to Section 229 of the NIRC.24
Clearly, there is no reason to deprive petitioner of the benefit of a preferential tax rate of 10%
BPRT in accordance with the RP-Germany Tax Treaty.
Petitioner is liable to pay only the amount of PHP 45,125,702.34 on its RBU net income
amounting to PHP 451,257,023.29 for 2002 and prior taxable years, applying the 10% BPRT.
Thus, it is proper to grant petitioner a refund ofthe difference between the PHP 67,688,553.51
(15% BPRT) and PHP 45,125,702.34 (10% BPRT) or a total of PHP 22,562,851.17.
WHEREFORE, premises considered, the instant Petition is GRANTED. Accordingly, the
Court of Tax Appeals En Banc Decision dated 29 May 2009 and Resolution dated 1 July 2009
are REVERSED and SET ASIDE. A new one is hereby entered ordering respondent
Commissioner of Internal Revenue to refund or issue a tax credit certificate in favor of
petitioner Deutsche Bank AG Manila Branch the amount of TWENTY TWO MILLION FIVE
HUNDRED SIXTY TWO THOUSAND EIGHT HUNDRED FIFTY ONE PESOS AND
SEVENTEEN CENTAVOS (PHP 22,562,851.17), Philippine currency, representing the
erroneously paid BPRT for 2002 and prior taxable years.
SO ORDERED.

40
 Republic of the Philippines
Supreme Court On November 5, 2001, the Sangguniang Panlalawigan of Cagayan passed Resolution No.
Manila 2001-272[4] authorizing Governor Edgar R. Lara (Gov. Lara) to engage the services of and appoint
Preferred Ventures Corporation as financial advisor or consultant for the issuance and flotation of bonds to
SECOND DIVISION fund the priority projects of the governor without cost and commitment.

MANUEL N. MAMBA, G.R. No. 165109 On November 19, 2001, the Sangguniang Panlalawigan, through Resolution No. 290-
RAYMUND P. GUZMAN and 2001,[5] ratified the Memorandum of Agreement (MOA)[6] entered into by Gov. Lara and Preferred
LEONIDES N. FAUSTO, Ventures Corporation. The MOA provided that the provincial government of Cagayan shall pay Preferred
Petitioners, Ventures Corporation a one-time fee of 3% of the amount of bonds floated.
On February 15, 2002, the Sangguniang Panlalawigan approved Resolution No. 2002-061-
- versus - A[7] authorizing Gov. Lara to negotiate, sign and execute contracts or agreements pertinent to the flotation
of the bonds of the provincial government in an amount not to exceed P500 million for the construction
EDGAR R. LARA, Present: and improvement of priority projects to be approved by the Sangguniang Panlalawigan.
JENERWIN C. BACUYAG,
WILSON O. PUYAWAN, CARPIO,* J., Chairperson, On May 20, 2002, the majority of the members of the Sangguniang Panlalawigan of Cagayan
ALDEGUNDO Q. CAYOSA, JR., CARPIO-MORALES,* approved Ordinance No. 19-2002,[8] authorizing the bond flotation of the provincial government in an
NORMAN A. AGATEP, LEONARDO-DE CASTRO,* amount not to exceed P500 million to fund the construction and development of the new Cagayan Town
ESTRELLA P. FERNANDEZ, DEL CASTILLO, and Center. The Resolution likewise granted authority to Gov. Lara to negotiate, sign and execute contracts
VILMER V. VILORIA, ABAD, JJ. and agreements necessary and related to the bond flotation subject to the approval and ratification by
BAYLON A. CALAGUI, the Sangguniang Panlalawigan.
CECILIA MAEVE T. LAYOS,
PREFERRED VENTURES CORP., On October 20, 2003, the Sangguniang Panlalawigan approved Resolution No. 350-
ASSET BUILDERS CORP., 2003[9] ratifying the Cagayan Provincial Bond Agreements entered into by the provincial government,
RIZAL COMMERCIAL BANKING represented by Gov. Lara, to wit:
CORPORATION, MALAYAN
INSURANCE CO., and LAND BANK a. Trust Indenture with the Rizal Commercial Banking Corporation
OF THE PHILIPPINES, Promulgated: (RCBC) Trust and Investment Division and Malayan Insurance Company,
Respondents. December 14, 2009 Inc. (MICO).
x-------------------------------------------------------------------x
b. Deed of Assignment by way of security with the RCBC and the Land
Bank of the Philippines (LBP).
DECISION
c. Transfer and Paying Agency Agreement with the RCBC Trust and
Investment Division.
DEL CASTILLO, J.:
The decision to entertain a taxpayers suit is discretionary upon the Court. It can choose to strictly apply the d. Guarantee Agreement with the RCBC Trust and Investment Division and
rule or take a liberal stance depending on the controversy involved. Advocates for a strict application of MICO.
the rule believe that leniency would open floodgates to numerous suits, which could hamper the
government from performing its job. Such possibility, however, is not only remote but also negligible e. Underwriting Agreement with RCBC Capital Corporation.
compared to what is at stake - the lifeblood of the State. For this reason, when the issue hinges on the
illegal disbursement of public funds, a liberal approach should be preferred as it is more in keeping with On even date, the Sangguniang Panlalawigan also approved Resolution No. 351-
truth and justice. 2003,[10] ratifying the Agreement for the Planning, Design, Construction, and Site Development of the
This Petition for Review on Certiorari with prayer for a Temporary Restraining Order/Writ of New Cagayan Town Center[11] entered into by the provincial government, represented by Gov. Lara and
Preliminary Injunction, under Rule 45 of the Rules of Court, seeks to set aside the April 27, 2004 Asset Builders Corporation, represented by its President, Mr. Rogelio P. Centeno.
Order[1] of the Regional Trial Court (RTC), Branch 5, Tuguegarao City, dismissing the Petition for
Annulment of Contracts and Injunction with prayer for the issuance of a Temporary Restraining On May 20, 2003, Gov. Lara issued the Notice of Award to Asset Builders Corporation,
Order/Writ of Preliminary Injunction,[2] docketed as Civil Case No. 6283. Likewise assailed in this giving to the latter the planning, design, construction and site development of the town center project for a
Petition is the August 20, 2004 Resolution[3] of RTC, Branch 1, TuguegaraoCity denying the Motion for fee of P213,795,732.39.[12]
Reconsideration of the dismissal.
Proceedings before the Regional Trial Court
Factual Antecedents
41
 On December 12, 2003, petitioners Manuel N. Mamba, Raymund P. Guzman and Leonides
N. Fausto filed a Petition for Annulment of Contracts and Injunction with prayer for a Temporary
Restraining Order/Writ of Preliminary Injunction[13] against Edgar R. Lara, Jenerwin C. Bacuyag, Wilson
O. Puyawan, Aldegundo Q. Cayosa, Jr., Norman A. Agatep, Estrella P. Fernandez, Vilmer V. Viloria,
Baylon A. Calagui, Cecilia Maeve T. Layos, Preferred Ventures Corporation, Asset Builders Corporation,
RCBC, MICO and LBP.
At the time of the filing of the petition, Manuel N. Mamba was the Representative of the
3rd Congressional District of the province of Cagayan[14] while Raymund P. Guzman and Leonides N.
Fausto were members of the Sangguniang Panlalawigan of Cagayan.[15]
Edgar R. Lara was sued in his capacity as governor of Cagayan,[16] while Jenerwin C.
Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr., Norman A. Agatep, Estrella P. Fernandez,
Vilmer V. Viloria, Baylon A. Calagui and Cecilia Maeve T. Layos were sued as members of
the Sangguniang Panlalawigan of Cagayan.[17] Respondents Preferred Ventures Corporation, Asset
Builders Corporation, RCBC, MICO and LBP were all impleaded as indispensable or necessary parties.
Respondent Preferred Ventures Corporation is the financial advisor of
the province of Cagayan regarding the bond flotation undertaken by the province.[18] Respondent Asset
Builders Corporation was awarded the right to plan, design, construct and develop the proposed town
center.[19] Respondent RCBC, through its Trust and Investment Division, is the trustee of the seven-year
bond flotation undertaken by the province for the construction of the town center,[20] while respondent
MICO is the guarantor.[21] Lastly, respondent LBP is the official depositary bank of the province.[22]
In response to the petition, public respondents filed an Answer with Motion to
Dismiss,[23] raising the following defenses: a) petitioners are not the proper parties or they lack locus
standi in court; b) the action is barred by the rule on state immunity from suit and c) the issues raised are
not justiciable questions but purely political.
For its part, respondent Preferred Ventures Corporation filed a Motion to Dismiss[24] on the
following grounds: a) petitioners have no cause of action for injunction; b) failure to join an indispensable
party; c) lack of personality to sue and d) lack of locus standi. Respondent MICO likewise filed a Motion
to Dismiss[25] raising the grounds of lack of cause of action and legal standing. Respondent RCBC
similarly argued in its Motion to Dismiss[26] that: a) petitioners are not the real parties-in-interest or have
no legal standing to institute the petition; b) petitioners have no cause of action as the flotation of the bonds
are within the right and power of both respondent RCBC and the province of Cagayan and c) the viability
of the construction of a town center is not a justiciable question but a political question.
Respondent Asset Builders Corporation, on the other hand, filed an Answer[27] interposing
special and affirmative defenses of lack of legal standing and cause of action. Respondent LBP also filed
an Answer[28] alleging in the main that petitioners have no cause of action against it as it is not an
indispensable party or a necessary party to the case.
Two days after the filing of respondents respective memoranda on the issues raised during the
hearing of the special and/or affirmative defenses, petitioners filed a Motion to Admit Amended
Petition[29] attaching thereto the amended petition.[30] Public respondents opposed the motion for the
following reasons: 1) the motion was belatedly filed; 2) the Amended Petition is not sufficient in form and
in substance; 3) the motion is patently dilatory and 4) the Amended Petition was filed to cure the defect in
the original petition.[31]
Petitioners also filed a Consolidated Opposition to the Motion to Dismiss[32] followed by
supplemental pleadings[33] in support of their prayer for a writ of preliminary injunction.
42
On April 27, 2004, the RTC issued the assailed Order denying the Motion to Admit Amended
Petition and dismissing the petition for lack of cause of action. It ruled that:
The language of Secs. 2 & 3 of Rule 10 of the 1997 Rules of Civil
Procedure dealing on the filing of an amended pleading is quite clear. As such, the
Court rules that the motion was belatedly filed. The granting of leave to file
amended pleadings is a matter peculiarly within the sound discretion of the trial
court. But the rule allowing amendments to pleadings is subject to the general but
inflexible limitation that the cause of action or defense shall not be substantially
changed or the theory of the case altered to the prejudice of the other party (Avecilla
vs. Yatcvo, 103 Phil. 666).
On the assumption that the controversy presents justiciable issues which
this Court may take cognizance of, petitioners in the present case who presumably
presented legitimate interests in the controversy are not parties to the questioned
contract. Contracts produce effect as between the parties who execute them. Only a
party to the contract can maintain an action to enforce the obligations arising under
said contract (Young vs. CA, 169 SCRA 213). Since a contract is binding only
upon the parties thereto, a third person cannot ask for its rescission if it is in fraud of
his rights. One who is not a party to a contract has no rights under such contract and
even if the contrary may be voidable, its nullity can be asserted only by one who is
a party thereto; a third person would have absolutely no personality to ask for the
annulment (Wolfson vs. Estate of Martinez, 20 Phil. 340; Ibaez vs. Hongkong &
Shanghai Bank, 22 Phil. 572; Ayson vs. CA, G.R. Nos. L-6501 & 6599, May 21,
1955).
It was, however, held that a person who is not a party obliged principally
or subsidiarily in a contract may exercise an action for nullity of the contract if he is
prejudiced in his rights with respect to one of the contracting parties and can show
the detriment which would positively result to him from the contract in which he
had no intervention (Baez vs. CA, 59 SCRA 15; Anyong Hsan vs. CA, 59 SCRA
110, 112-113; Leodovica vs. CA, 65 SCRA 154-155). In the case at bar, petitioners
failed to show that they were prejudiced in their rights [or that a] detriment x x x
would positively result to them. Hence, they lack locus standi in court.
xxxx
To the mind of the Court, procedural matters in the present controversy
may be dispensed with, stressing that the instant case is a political question, a
question which the court cannot, in any manner, take judicial cognizance. Courts
will not interfere with purely political questions because of the principle of
separation of powers (Taada vs. Cuenco, 103 Phil. 1051). Political questions are
those questions which, under the Constitution, are to be decided by the people in
their sovereign capacity or in regard to which full discretionary authority has been
delegated to the legislative or [to the] executive branch of the government (Nuclear
Free Phils. Coalition vs. NPC, 141 SCRA 307 (1986); Torres vs. Gonzales, 152
SCRA 272; Citizens Alliance for Consumer Protection vs. Energy Regulatory
Board, G.R. No. 78888-90, June 23, 1988).
The citation made by the provincial government[, to] which this Court is
inclined to agree, is that the matter falls under the discretion of another department,
hence the decision reached is in the category of a political question and
consequently may not be the subject of judicial jurisdiction (Cruz in Political Law,
1998 Ed., page 81) is correct.
It is [a] well-recognized principle that purely administrative and
discretionary functions may not be interfered with by the courts (Adm. Law Test &
Cases, 2001 Ed., De Leon, De Leon, Jr.).
Andaya vs. Abadia, 46 SCAD 1036, G.R. No. 104033, Dec. 27, 1993 where the
court may dismiss a complaint even without a motion to dismiss or answer.
Upon the foregoing considerations, the case is hereby dismissed without
costs.
SO ORDERED.[34]

The case therefore calls for the doctrine of ripeness for judicial review.
This determines the point at which courts may review administrative action. The
basic principle of ripeness is that the judicial machinery should be conserved for
problems which are real and present or imminent and should not be squandered on
problems which are future, imaginary or remote. This case is not ripe for judicial
determination since there is no imminently x x x substantial injury to the petitioners.
In other words, the putting up of the New Cagayan Town Center by the
province over the land fully owned by it and the concomitant contracts entered into
by the same is within the bounds of its corporate power, an undertaking which falls
within the ambit of its discretion and therefore a purely political issue which is
beyond the province of the court x x x. [Consequently, the court cannot,] in any
manner, take judicial cognizance over it. The act of the provincial government was
in pursuance of the mandate of the Local Government Code of 1991.
Petitioners filed a Motion for Reconsideration[35] to which respondents filed their respective
Oppositions.[36] Petitioners then filed a Motion to Inhibit, which the court granted.Accordingly, the case
was re-raffled to Branch 1 of the RTC of Tuguegarao City.[37]
On August 20, 2004, Branch 1 of the RTC of Tuguegarao City issued a Resolution denying
petitioners plea for reconsideration. The court found the motion to be a mere scrap of paper as the notice
of hearing was addressed only to the Clerk of Court in violation of Section 5, Rule 15 of the Rules of
Court. As to the merits, the court sustained the findings of Branch 5 that petitioners lack legal standing to
sue and that the issue involved is political.
Issues
Hence, the present recourse where petitioners argue that:

xxxx A. The lower court decided a question of substance in a way not

in accord with law and with the applicable decision of the Supreme
Indeed, adjudication of the procedural issues presented for resolution by Court, and
the present action would be a futile exercise in exegesis.
B. The lower court has so far departed from the accepted and
What defeats the plea of the petitioners for the issuance of a writ of usual course of judicial proceedings as to call for an exercise of the
preliminary injunction is the fact that their averments are merely speculative and power of supervision in that:
founded on conjectures. An injunction is not intended to protect contingent or future
rights nor is it a remedy to enforce an abstract right (Cerebo vs. Dictado, 160 SCRA I. It denied locus standi to petitioners;
759; Ulang vs. CA, 225 SCRA 637). An injunction, whether preliminary or final,
will not issue to protect a right not in in esse and which may never arise, or to II. [It] determined that the matter of
restrain an act which does not give rise to a cause of action. The complainants right contract entered into by the provincial
on title, moreover, must be clear and unquestioned [since] equity, as a rule, will not government is in the nature of a political question;
take cognizance of suits to establish title and will not lend its preventive aid by
injunction where the complainants title or right is doubtful or disputed. The III. [It] denied the admission of Amended
possibility of irreparable damage, without proof of violation of an actual existing Petition; and
right, is no ground for injunction being a mere damnum, absque injuria (Talisay-
Silay Milling Company, Inc. vs. CFI of Negros Occidental, et. al. 42 SCRA 577, IV. [It] found a defect of substance in the
582). petitioners Motion for Reconsideration.[38]

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

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

The rule has to be so because it can motu propio dismiss it as its only
jurisdiction is to dismiss it if it has no jurisdiction. This is in line with the ruling in

43
Petitioners have legal
standing to sue as
taxpayers
A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or
that the public money is being deflected to any improper purpose, or that there is wastage of public funds
through the enforcement of an invalid or unconstitutional law.[39] A person suing as a taxpayer, however,
must show that the act complained of directly involves the illegal disbursement of public funds derived
from taxation.[40] He must also prove that he has sufficient interest in preventing the illegal expenditure of
money raised by taxation and that he will sustain a direct injury because of the enforcement of the
questioned statute or contract.[41] In other words, for a taxpayers suit to prosper, two requisites must be
met: (1) public funds derived from taxation are disbursed by a political subdivision or instrumentality and
in doing so, a law is violated or some irregularity is committed and (2) the petitioner is directly affected by
the alleged act.[42]
In light of the foregoing, it is apparent that contrary to the view of the RTC,
a taxpayer need not be a party to the contract to challenge its validity.[43] As long as taxes are involved,
people have a right to question contracts entered into by the government.
In this case, although the construction of the town center would be primarily sourced from the
proceeds of the bonds, which respondents insist are not taxpayers money, a government support in the
amount of P187 million would still be spent for paying the interest of the bonds.[44] In fact, a Deed of
Assignment[45] was executed by the governor in favor of respondent RCBC over the Internal Revenue
Allotment (IRA) and other revenues of the provincial government as payment and/or security for the
obligations of the provincial government under the Trust Indenture Agreement dated September 17,
2003. Records also show that on March 4, 2004, the governor requested the Sangguniang
Panlalawigan to appropriate an amount of P25 million for the interest of the bond.[46] Clearly, the first
requisite has been met.
As to the second requisite, the court, in recent cases, has relaxed the stringent direct injury test bearing in
mind that locus standi is a procedural technicality.[47] By invoking transcendental importance, paramount
public interest, or far-reaching implications, ordinary citizens and taxpayers were allowed to sue even if
they failed to show direct injury.[48] In cases where serious legal issues were raised or where public
expenditures of millions of pesos were involved, the court did not hesitate to give standing to taxpayers.[49]
We find no reason to deviate from the jurisprudential trend.
To begin with, the amount involved in this case is substantial. Under the various agreements entered into
by the governor, which were ratified by the Sangguniang Panlalawigan, the provincial government of
Cagayan would incur the following costs:[50]
Compensation to Preferred Ventures - P 6,150,000.00
(3% of P205M)[51] Resolution No. 290-2001
Management and Underwriting Fees - 3,075,000.00
(1.5% of P205M)[52]
Documentary Tax - 1,537,500.00
(0.75% of P205M)[53]
Guarantee Fee[54] - 7,350,000.00
Construction and Design of town center[55] - 213,795,732.39
Total Cost - P231,908,232.39
44
What is more, the provincial government would be shelling out a total amount of P187 million for the
period of seven years by way of subsidy for the interest of the bonds. Without a doubt,the resolution of the
present petition is of paramount importance to the people of Cagayan who at the end of the day would
bear the brunt of these agreements.
Another point to consider is that local government units now possess more powers, authority and
resources at their disposal,[56] which in the hands of unscrupulous officials may be abused and misused to
the detriment of the public. To protect the interest of the people and to prevent taxes from being
squandered or wasted under the guise of government projects, a liberal approach must therefore be
adopted in determining locus standi in public suits.
In view of the foregoing, we are convinced that petitioners have sufficient standing to file the present
suit. Accordingly, they should be given the opportunity to present their case before the RTC.
Having resolved the core issue, we shall now proceed to the remaining issues.
The controversy involved
is justiciable
A political question is a question of policy, which is to be decided by the people in their
sovereign capacity or by the legislative or the executive branch of the government to which full
discretionary authority has been delegated.[57]
In filing the instant case before the RTC, petitioners seek to restrain public respondents from
implementing the bond flotation and to declare null and void all contracts related to the bond flotation and
construction of the town center. In the petition before the RTC, they alleged grave abuse of discretion and
clear violations of law by public respondents. They put in issue the overpriced construction of the town
center; the grossly disadvantageous bond flotation; the irrevocable assignment of the provincial
governments annual regular income, including the IRA, to respondent RCBC to cover and secure the
payment of the bonds floated; and the lack of consultation and discussion with the community regarding
the proposed project, as well as a proper and legitimate bidding for the construction of the town center.
Obviously, the issues raised in the petition do not refer to the wisdom but to the legality of the
acts complained of. Thus, we find the instant controversy within the ambit of judicial review. Besides,
even if the issues were political in nature, it would still come within our powers of review under the
expanded jurisdiction conferred upon us by Section 1, Article VIII of the Constitution, which includes the
authority to determine whether grave abuse of discretion amounting to excess or lack of jurisdiction has
been committed by any branch or instrumentality of the government.[58]
The Motion to Admit
Amended Petition was
properly denied
However, as to the denial of petitioners Motion to Admit Amended Petition, we find no reason to reverse
the same. The inclusion of the province of Cagayan as a petitioner would not only change the theory of the
case but would also result in an absurd situation. The provincial government, if included as a petitioner,
would in effect be suing itself considering that public respondents are being sued in their official capacity.
In any case, there is no need to amend the petition because petitioners, as we have said, have
legal standing to sue as taxpayers.
Section 5, Rule 15 of the
Rules of Court was
substantially complied
with

This brings us to the fourth and final issue.

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

We cannot overemphasize that procedural rules are mere tools to aid the courts in the speedy,
just and inexpensive resolution of cases.[63] Procedural defects or lapses, if negligible, should be excused in
the higher interest of justice as technicalities should not override the merits of the case. Dismissal of cases
due to technicalities should also be avoided to afford the parties the opportunity to present their
case. Courts must be reminded that the swift unclogging of the dockets although a laudable objective must
not be done at the expense of substantial justice.[64]

WHEREFORE, the instant Petition is PARTIALLY GRANTED. The April 27, 2004
Order of Branch 5 and the August 20, 2004 Resolution of Branch 1 of the Regional Trial Court of
Tuguegarao City are hereby REVERSED and SET ASIDE insofar as the dismissal of the petition is
concerned. Accordingly, the case is hereby REMANDED to the court a quo for further proceedings.

SO ORDERED.

45
 Second DIVISION below per pack, the tax shall be Twenty-one pesos (₱2 l .00) per
April 17, 2017 pack; and
G.R. No. 210251 (2) If the net retail price (excluding the excise tax and the value-
SECRETARY OF FINANCE CESAR V. PURISIMA and COMMISSIONER OF added tax) is more than Eleven pesos and fifty centavos
INTERNAL REVENUE KIM S. JACINTO-HENARES, Petitioners (₱211.50) per pack, the tax shall be Twenty-eight pesos
vs. (₱228.00) per pack.
PHILIPPINE TOBACCO INSTITUTE, INC., Respondent Effective on January 1, 2016
DECISION (1) If the net retail price (excluding the excise tax and the value-
CARPIO,, J.: added tax) is Ele1·rn pesos and fifty centavos (₱211.50) and
This is a petition for review on certiorari 1 assailing the Decision2 dated 7 October 2013 of the below pet pack, the tax shall be Twenty-five pesos (₱225.00) per
Regional Trial Court (RTC) of Las Piñas City, Branch 253 in SCA Case No. 13-0003. The pack; and
RTC declared null and void certain portions of Revenue Regulations No. 17-20123 (RR 17- (2) If the net retail price (excluding the excise tax and the value-
2012) and Revenue Memorandum Circular No. 90-20124 (RMC 90-2012) and ordered added tax) is more than Eleven pesos and fifty centavos
petitioners to cease and desist from implementing Section 11 of RR 17-2012 and RMC 90- (₱211.50) per pack, the tax shall be Twenty-nine pesos
2012 which refer to cigarettes packed by-machine. (₱229.00) per pack.
The Facts Effective on January 1, 2017, the tax on all cigarettes packed by machine shall be Thirty pesos
On 20 December 2012, President Benigno S. Aquino III signed Republic Act No. 10351 5 (RA (₱230.00) per pack.
10351), otherwise known as the Sin Tax Reform Law. RA 10351 restructured the excise tax The rates of tax imposed under this subsection shall be increased by four percent (4%) every
on alcohol and tobacco products by amending pertinent provisions of Republic Act No. year thereafter effective on January 1, 2018, through revenue regulations issued by the
8424, 6 known as the Tax Reform Act of 1997 or the National Internal Revenue Code of 1997 Secretary of Finance.
(NIRC). Duly registered cigarettes packed by machine shall only be packed in twenties and other
Section 5 of RA 10351, which amended Section 145(C) of the NIRC, increased the excise tax packaging combinations of not more than twenty.
rate of cigars and cigarettes and allowed cigarettes packed by machine to be packed in other xxxx
packaging combinations of not more than 20. The relevant portions state: On 21 December 2012, the Secretary of Finance, upon the recommendation of the
SEC. 5. Section 145 of the National Internal Revenue Code of 1997, as amended by Republic Commissioner of Internal Revenue (CIR), issued RR 17-2012. Section 11 of RR 17-2012
Act No. 9334, is hereby further amended to read as follows: imposes an excise tax on individual cigarette pouches of 5's and l0's even if they are bundled
SEC. 145. Cigars and Cigarettes. – or packed in packaging combinations not exceeding 20 cigarettes. The provision states:
xxxx SEC. 11. Revised Provisions for the Manner of Packaging of Cigarettes. - All Cigarettes
(C) Cigarettes Packed by Machine.- There shall be levied, assessed and collected on cigarettes whether packed by hand or packed by machine shall only be packed in twenties (20s ), and
packed by machine a tax at the rates prescribed below: through other packaging combinations which shall result to not more than twenty sticks of
Effective on January 1, 2013 cigarettes: Provided, That, in case of cigarettes packed in not more than twenty sticks, whether
(1) If the net retail price (excluding the excise tax and the value- in S sticks, 10 sticks and other packaging combinations below 20 sticks, the net retail price of
added tax) is Eleven pesos and fifty centavos (₱11.50) and each individual package of 5s, 10s, etc. shall be the basis of imposing the tax rate prescribed
below per pack, the tax shall be Twelve pesos (₱12.00) per under the Act.
pack; and Pursuant to Section 11ofRR17-2012, the CIR issued RMC 90-2012 dated 27 December 2012.
(2) If the net retail price (excluding the excise tax and the value- Annex "D-1" of RMC 90-2012 provides for the initial classifications in tabular form, effective
added tax) is more than Eleven pesos and fifty centavos 1 January 2013, of locally manufactured cigarette brands packed by machine according to the
(₱11.50) per pack, the tax shall be Twenty-five pesos (₱25.00) tax rates prescribed under RA 10351 based on the (1) 2010 Bureau of Internal Revenue (BIR)
per pack. price survey of these products, and (2) suggested net retail price declared in the latest sworn
Effective on January l, 2014 statement filed by the local manufacturer or importer. Some relevant portions provide:
(1) If the net retail price (excluding the excise tax and the value- Annex "D-1"
added tax) is Eleven pesos and fifty centavos (₱11.50) and LIST OF LOCALLY MANUFACTURED CIGARETTE BRANDS
below per pack, the tax shall be Seventeen pesos (₱17.00) per AS OF DECEMBER 2012
pack; and 1. List of brands Based on 2010 BIR Price Survey
(2) If the net retail price (excluding the excise tax and the value-
BRAND NAMES Content/Unit Net Retail Applicable
added tax) is more than Eleven pesos and fifty centavos
(pack) Price Excise Tax
(₱11.50) per pack, the tax shall be Twenty-seven pesos (₱27.00)
(Based on Rates
per pack.
2010 BIR Effective
Effective on January 1, 2015
Price Jan 1,
(1) If the net retail price (excluding the excise tax and the value-
Survey) 2013
added tax) is Eleven pesos and fifty centavos (₱11.50) and
under R.A.

46
 In a Decision dated 7 October 2013, the RTC granted the petition for declaratory relief. The
No. 1035l
dispositive portion of the Decision states:
A. Cigarettes Packed by Machine WHEREFORE, premised on the foregoing, the Petition for Declaratory Relief is GRANTED.
The assailed portions of Revenue Regulation 17-2012 and Revenue Memorandum Circular
A. I. Net Retail Price (NRP) is Php 11.50 per Pack and below 90-2012 are declared NULL AND VOID and OF NO FORCE AND EFFECT. Respondents
are to immediately cease and desist from implementing Sec. 11 of Revenue Regulation 17-
1. Astro Filter King 20 sticks/pack 10.92 12.00 2012 and Revenue Memorandum Circular 90-2012 insofar as the cigarettes packed by
machine are concerned.
xxxx The tax rates imposed by RA No. 10351 should be imposed on the whole packaging
combination of 20's, regardless of whether they are packed by pouches of 2xl0's or 4x5's, etc.
22. Fortune Int'l Extra Filter King 20 sticks/pack 10.84 12.00 SO ORDERED.8
Hence, the instant petition filed by the Secretary of Finance and the CIR through the Office of
23. Fortune Int'l Extra Filter King the Solicitor General.
10 sticks/pack 6.58 12.00
(10*s) Meanwhile, in a Resolution dated 9 June 2014, this Court issued a temporary restraining order
against PTI and the RTC. The dispositive portion states:
xxxx NOW, THEREFORE, effective immediately and continuing until further orders from this
Court, You, the respondent, the RTC, Br. 253, Las Piñas City, their representatives, agents or
44. Marlboro Filter (2x10's) Flip Top* 10 sticks/pack 8.27 12.00
other persons acting on their behalf are hereby RESTRAINED from enforcing the assailed
45. Marlboro Filter KS (5's)* 5 sticks/pouch 4.11 12.00 Decision dated 7 October 2013 of the RTC, Br. 253, Las Piñas City in SCA Case No. 13-0003.
x x x x9
xxxx The Issue
Whether or not the RTC erred in nullifying Section 11of RR17-2012 andAnnex"D-1"of RMC
61. Miller Filter Silver KS SP 20 sticks/pack 10.27 12.00 90-2012 in imposing excise tax to packaging combinations of 5's, l0's, etc. not exceeding 20
cigarette sticks packed by machine.
xxxx The Court's Ruling
The petition lacks merit.
63. Miller Filter Silver –(5’s) KS Pouch* 5 sticks/pouch 2.88 12.00 Petitioners contend that RA10351 imposes the excise tax per pack," regardless of the content
or number of cigarette stick so each pack. Thus, the RTC erred in ruling that RR17-2012 and
xxxx RMC 90-2012 have gone beyond the plain meaning of RAl0351. Petitioners assert that the
two regulations merely clarify the tax rates set out in RA10351 but have neither amended nor
76. Philip Morris Menthol KS FTB-(10's)* 10 sticks/pack 6.25 12.00
added any new taxes. Petitioners maintain that the excise tax rates imposed by RA10351 on
77. Philip Morris Menthol-(5's) 100's 10's cigarettes packed by machine are based on the net retail price per pack. The pack, therefore, is
5 sticks/pouch 3.84 12.00 the unit on which the tax rates are imposed and is understood to be the packaging unit that
Pouch*
reaches the ultimate consumer. Each pack of 5, 10, or 20 cigarettes is meant to be sold at retail
xxxx individually. On the other bind, bundles of smaller packs resulting in 20 cigarettes are meant
to be sold whole sale. Thus, petitioners insist that the excise tax imposable on a bundle of 20 is
* NRP is converted into individual package of 5s or 1 Os pursuant to Section 11 of computed on the net retail price of each individual pack or pouch of the bundle and not on the
RR No. 17-2012 bundle as one unit.
PMFTC, Inc., a member of respondent Philippine Tobacco Institute, Inc. (PTI), paid the excise PTI, on the otherhand, contends that RA10351 allows a cigarette manufacturer to adopt
taxes required under RA 10351, RR 17-2012, and RMC 90-2012 in order to withdraw packaging combinations, such as the bundling of four pouches with five sticks per pack
cigarettes from its manufacturing facilities. However, on 16 January 2012, PMFTC wrote the (4x5's),or two pouches of ten sticks per pack (2x10’s),provided that such packaging
CIR prior to the payment of the excise taxes stating that payment was being made under combination does not exceed 20 sticks. Thus, individual cigarette pouches of 5's and 10's
protest and without prejudice to its right to question said issuances through remedies available bundled together in to a single packaging of not more than 20 sticks are considered as one
under the law. pack and should be subjected to excise tax only once. Otherwise, a cigarette pouch of 5's,for
As a consequence, on 26 February 2013, PTI filed a petition7 for declaratory relief with an example, will be subjected to an excise tax of ₱48.00 since the BIR Will Impose An Individual
application for writ of preliminary injunction with the RTC. PTI sought to have RR 17-2012 excise tax of ₱12.00 upon each and every pouch of 5's. While the same brand in a pack of 20's
and RMC 90-2012 declared null and void for allegedly violating the Constitution and will only be subjected to an excise tax rate of ₱12.00.Thus, PTI
imposing tax rates not authorized by RA 103 51. PTI stated that the excise tax rate of either maintainsthatSection11ofRR17-2012andAnnex"D-1"pertaining to Cigarettes Packed by
₱12 or ₱25 under RA 10351 should be imposed only on cigarettes packed by machine in packs Machine of RMC90-2012 disregarded the clear provision of RA10351 and imposed excise tax
of 20's or packaging combinations of 20's and should not be imposed on cigarette pouches of on each cigarette pouches of 5's and 10's regard less of whether they are packed together into
5's and 10's. 20 sticks per pack. As a result, the affected cigarette brands that

47
Should have been taxed only either ₱12.00 or ₱25.00 per pack are subjected to a different and
higher excise tax rate not provided in RA10351. Further, PTI asserts that petitioners did not
publish or circulate notices of the then proposed RR17 2012 or conduct a hearing to afford
interested parties the opportunity to submit their views prior to the issuance of RR17-2012
which deprived it of its due process rights.
The pertinent portions of Section145(C) of the NIRC, as amended by Section 5 of RA10351,
state:
SEC. 5 Section 145 of the National Internal Revenue Code of 1997,as amended by Republic
Act No.9334, is hereby further amended to read as follows:
SEC. 145. Cigars and Cigarettes.–
xxxx
(C)Cigarettes Packed by Machine.-There shall believed, assessed and collected on cigarettes
packed by machine a tax at the rates prescribed below:
Effective on January 1, 2013
(1)If the net retail price (excluding the excise tax and the value-
added tax) is Eleven pesos and fifty centavos (₱11.50) and
below per pack, the tax shall be Twelve pesos (₱112.00) per
pack; and
(2)If the net retail price (excluding the excise tax and the value-
added tax) is more than Eleven pesos and fifty centavos
(₱11.50) per pack, the tax shall be Twenty-five pesos (₱125.00)
per pack.
xxxx
Duly registered cigarettes packed by machine shall only be packed in twenties and other
packaging combinations of not more than twenty.
x x x x (Emphasis supplied)
Section 145(C) of the NIRC is clear that the excise tax on cigarettes packed by machine is
imposed per pack."Per pack"was not given a clear definition by the NIRC. However, a "pack"
would normally refer to a number of individual components packaged as a unit. 10 Under the
same provision, cigarette manufacturers are permitted to bundle cigarettes packed by machine
in the maximum number of 20 sticks and aside from 20's, the law also allows packaging
combinations of not more than 20's-it can be 4 pouches of 5cigarette sticks in a pack (4x5's), 2
pouches of 10 cigarette sticks in a pack (2x10's),etc.
Based on this maximum packaging and allowable combinations, the BIR, with RA10351 as
basis, issued RR17-2012. Section11of RR17-2012, which provides for the manner of
packaging cigarettes, states:
SEC. 11. Revised Provisions for the Manner of Packaging of Cigarettes.-All Cigarettes
whether packed by hand or packed by machine shall only be packed in twenties (20s), and
through other packaging combinations which shall result to not more than twenty sticks of
cigarettes: Provided, That, in case of cigarettes packed in not more than twenty sticks,whether
in 5 sticks, 10 sticks and other packaging combinations below 20 sticks, the net retail price of
each individual package of 5s,10s, etc. shall be the basis of imposing the tax rate prescribed
under the Act.(Emphasis supplied)
The BIR also released RMC90-2012, specifically Annex "D-1" on Cigarettes Packed by
Machine, in accordance with RA10351 and RR17-2012, showing in tabular form the different
brands of locally-manufactured cigarettes packed by machine with the brand names,
content/unit (pack), net retail price,and the applicable excise tax rates effective1January
2013.The net retail price of some brand names was converted in to individual packages of 5's
or10's pursuant to Section 11 of RR17-2012.
The RTC, in its Decision dated 7October 2013, ruled in favor of PTI and declared that
RA10351intends to tax the packs of 20's as awhole, regardless of
48
Whether They Are further repacked by10'sor5's, as long as they total 20sticks in all.Thus, the
tax rate tobe imposed shall only be either for a net retail price of(1)less than ₱11.50,or(2)
morethan P11.50,applying the two excise tax rates from 2013 until 2016 as mentioned under
RA10351.
The RTC added" that the fact the law allows' packaging combinations,' as long as they will not
exceed a total of 20 sticks, is indicative of the law makers' foresight that these combinations
shall be sold at retail individually.Yet,the law makers did not specify in the law that the tax
rate shall be imposed on each packaging combination."Thus, the RTC concluded that the
interpretation made by the Secretary of Finance and the CIR has no basis in the law.
We agree.
In the laws preceding RA10351-RA8240 11 and RA9334,12 both amendments to the excise tax
rates provisions of the NIRC dealing with cigarettes packed by machine, which took effect in
1997 and 2005, respectively, provided that all" duly registered or existing brands of cigarettes
or new brands there of packed by machine shall only be packed in twenties."
The confusion set in when RA 10351 amended the NIRC once again in 2012 and introduced
packaging combinations to cigarettes packed by machine, providing that" duly registered
cigarettes packed by machine shall only be packed in twenties and other packaging
combinations of not more than twenty."
Thereafter, RR17 2012 followed, where the BIR, in Section 11, reiterated the provision in the
NIRC that cigarettes shall only be packed in 20's and in other packaging combinations which
shall not exceed 20 sticks. However, the BIR added" xxx That, in case of cigarettes packed in
not more than twenty sticks, whether in 5 sticks, 10 sticks and other packaging combinations
below 20 sticks, the net retail price of each individual package of 5s,10s,etc. shall be the basis
of imposing the tax rate xxx."
The basis of RR17 2012 is RA 10351. RA 10351, in amending Section 145 (C) of the NIRC
provided that "duly registered cigarettes packed by machine shall only be packed in twenties
and other packaging combinations of not more than twenty.' However, now here is it
mentioned that the other packaging combinations of not more than 20 will be imposed
individual tax rates based on its different packages of 5's, 10's,etc. In such a case, a cigarette
pack of 20's will only be subjected to an excise tax rate of P 12.00 per pack as opposed to
packaging combinations of 5's or 10's which will be subjected to a higher excise tax rate of
₱24.00 for10's and ₱48.00 for 5's.
During the Bicameral Conference Committee on the Disagreeing Provisions of Senate Bill
No.3299 and House Bill No.5727 dealing with the Sin Tax bills of the l5th Congress, before
these bills were enacted into RA10351, our law makers and Kim S.Jacinto-Henares, the CIR at
the time, deliberated on the packaging of cigarettes. Therelevantexcerptsstate:
Rep. Villafuerte: Just appoint of clarification. The Senate says,' twenties.' Okay, that's very
reasonable. But can twopacks put together in tens, is that prohibited? Because in rural areas,
they don't necessarily have to sell.
The Chairman (Sen.Drilon): Can we ask our resource person, Congressman?
Ms. Jacinto-Henares: No, sir, as long as they take the two ten packs together or four, five
packs together, that is consideredtwenty.
Rep. Villafuerte: Okay. As long as the twenty packs is paid even if they are separable in
packaging for retail purposes, that's allowed. Because I got the impression from some people
that that is being prohibited that's why I sought to clarify.
The Chairman (Sen. Drilon): On record, yes.
xxxx
Sen. Recto: But you could have five, five, five, five and put a tape.
Ms. Jacinto-Henares: Yeah. But it should be taped together.
Sen. Recto: Okay.
Sen. P. Cayetano:Can I ask a question about that? When you say that you can have numbers
divisible, I guess, by five, so you have five, 10, 15, 20, right? So you can have two or four
packaged together for tax purposes.And then for retail purposes, you can divide that up. Is that
what we're saying?
xxxx
Ms.Jacinto-Henares:Yes.
xxxx
Sen.A. Cayetano: Mr. Chair. Mr. Chair. The point is, we're taxing by pack. If they sell less
than 20, that's advantageous to the government. So, if they want to pack it by 10 but not
combine it, we will tax them twice. So, it's good for the government. But if you allow
combinations without limiting it to20, they will pack three of 10’s together and you will be
taxing 30’s and the government will be getting less. So it's an irony that our problem now with
the sin tax is our sin tax.
So, can I propose this wording, In twenties and other packaging combinations not more
than20ornotmorethan20ornotmorethan20sticks.
Ms.Jacinto-Henares:Yes,Sir.13
From the above discussion, it can be gleaned that the lawmakers intended to impose the excise
tax on every pack of cigarettes that come in 20 sticks. Individual pouches or packaging
combinations of 5'sand l0's for retail purposes are allowed and will be subjected to the same
excise tax rate as long as they are bundled together by not more than 20 sticks. Thus, by
issuing Section11of RR17-2012 andAnnex"D-1"on Cigarettes Packed by Machine of RMC90-
2012, the BIR went beyond the express provisions of RA10351.
It is an elementary rule in administrative law that administrative rules and regulations enacted
by administrative bodies to implement the law which they are entrusted to enforce have the
force of law and are entitled to great weight and respect. However, these implementations of
the law must not override, supplant,or modify the law but must remain consistent with the law
they intend to implement. It is only Congress which has the power to repeal or amend the law.
In this case, Section 11 of RR17-2012 and Annex"D-1" on Cigarettes Packed by Machine of
RMC90-2012 clearly contravened the provisions of RA10351.1âwphi1 It is a well-settled
principle that are venue regulation cannot amend the law it seeks to implement. In
Commissioner of Internal Revenue v. Seagate Technology (Philippines), 14 we held that a
mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot
purport to do any more than implement the latter. The courts will not countenance an
administrative regulation that overrides the statute it seeks to implement.
In the present case, area ding of Section 11 of RR17-2012 and Annex"D-1" on Cigarettes
Packed by Machine of RMC 90-2012 reveals that they are not simply regulations to
implement RA10351. They are amendatory provisions which require cigarette manufacturers
to be liable to pay for more tax than the law, RA10351, allows. The BIR, in issuing these
revenue regulations, created an additional tax liability for packaging combinations smaller
than 20 cigarette sticks. In so doing, the BIR amended the law, an act beyond the power of the
BIR to do.
In sum, we agree with the ruling of the RTC that Section 11 of RR17-2012 and Annex"D-1"
on Cigarettes Packed by Machine of RMC 90-2012 are null and void. Excise tax on cigarettes
packed by machine shall be imposed on the packaging combination of 20 cigarette sticks as a
whole and not to individual packaging combinations or pouches of 5's, 10's,etc.
WHEREFORE, we DENY the petition. We AFFIRM the Decision dated 7 October 2013 of
the Regional Trial Court of Las Piñas City, Branch253 in SCA Case No.13-0003.
SO ORDERED.

49
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-31156 February 27, 1976
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-
appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET
AL., defendant appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and
Assistant Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes for appellees.
MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No.
3294, which was certified to Us by the Court of Appeals on October 6, 1969, as involving only
pure questions of law, challenging the power of taxation delegated to municipalities under the
Local Autonomy Act (Republic Act No. 2264, as amended, June 19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the
Philippines, Inc., commenced a complaint with preliminary injunction before the Court of
First Instance of Leyte for that court to declare Section 2 of Republic Act No. 2264. 1 otherwise
known as the Local Autonomy Act, unconstitutional as an undue delegation of taxing
authority as well as to declare Ordinances Nos. 23 and 27, series of 1962, of the municipality
of Tanauan, Leyte, null and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which
state that, first, both Ordinances Nos. 23 and 27 embrace or cover the same subject matter and
the production tax rates imposed therein are practically the same, and second, that on January
17, 1963, the acting Municipal Treasurer of Tanauan, Leyte, as per his letter addressed to the
Manager of the Pepsi-Cola Bottling Plant in said municipality, sought to enforce compliance
by the latter of the provisions of said Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962,
levies and collects "from soft drinks producers and manufacturers a tai of one-sixteenth (1/16)
of a centavo for every bottle of soft drink corked." 2 For the purpose of computing the taxes
due, the person, firm, company or corporation producing soft drinks shall submit to the
Municipal Treasurer a monthly report, of the total number of bottles produced and corked
during the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962,
levies and collects "on soft drinks produced or manufactured within the territorial jurisdiction
of this municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.)
of volume capacity." 4 For the purpose of computing the taxes due, the person, fun company,
partnership, corporation or plant producing soft drinks shall submit to the Municipal Treasurer
a monthly report of the total number of gallons produced or manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production
tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the
complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring
Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay the taxes due
under the oft the said Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of
Appeals, which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary Act of
1948, as amended.
50
There are three capital questions raised in this appeal:
1. — Is Section 2, Republic Act No. 2264 an undue delegation of power,
confiscatory and oppressive?
2. — Do Ordinances Nos. 23 and 27 constitute double taxation and impose
percentage or specific taxes?
3. — Are Ordinances Nos. 23 and 27 unjust and unfair?
1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a
matter of right to every independent government, without being expressly conferred by the
people. 6 It is a power that is purely legislative and which the central legislative body cannot
delegate either to the executive or judicial department of the government without infringing
upon the theory of separation of powers. The exception, however, lies in the case of municipal
corporations, to which, said theory does not apply. Legislative powers may be delegated to
local governments in respect of matters of local concern. 7 This is sanctioned by immemorial
practice. 8 By necessary implication, the legislative power to create political corporations for
purposes of local self-government carries with it the power to confer on such local
governmental agencies the power to tax. 9 Under the New Constitution, local governments are
granted the autonomous authority to create their own sources of revenue and to levy taxes.
Section 5, Article XI provides: "Each local government unit shall have the power to create its
sources of revenue and to levy taxes, subject to such limitations as may be provided by law."
Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the
sphere of the legislative power to enact and vest in local governments the power of local
taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's
pretense, would not suffice to invalidate the said law as confiscatory and oppressive. In
delegating the authority, the State is not limited 6 the exact measure of that which is exercised
by itself. When it is said that the taxing power may be delegated to municipalities and the like,
it is meant that there may be delegated such measure of power to impose and collect taxes as
the legislature may deem expedient. Thus, municipalities may be permitted to tax subjects
which for reasons of public policy the State has not deemed wise to tax for more general
purposes. 10 This is not to say though that the constitutional injunction against deprivation of
property without due process of law may be passed over under the guise of the taxing power,
except when the taking of the property is in the lawful exercise of the taxing power, as when
(1) the tax is for a public purpose; (2) the rule on uniformity of taxation is observed; (3) either
the person or property taxed is within the jurisdiction of the government levying the tax; and
(4) in the assessment and collection of certain kinds of taxes notice and opportunity for
hearing are provided. 11 Due process is usually violated where the tax imposed is for a private
as distinguished from a public purpose; a tax is imposed on property outside the State, i.e.,
extraterritorial taxation; and arbitrary or oppressive methods are used in assessing and
collecting taxes. But, a tax does not violate the due process clause, as applied to a particular
taxpayer, although the purpose of the tax will result in an injury rather than a benefit to such
taxpayer. Due process does not require that the property subject to the tax or the amount of tax
to be raised should be determined by judicial inquiry, and a notice and hearing as to the
amount of the tax and the manner in which it shall be apportioned are generally not necessary
to due process of law. 12
There is no validity to the assertion that the delegated authority can be declared
unconstitutional on the theory of double taxation. It must be observed that the delegating
authority specifies the limitations and enumerates the taxes over which local taxation may not
be exercised. 13 The reason is that the State has exclusively reserved the same for its own
prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental law,
since We have not adopted as part thereof the injunction against double taxation found in the
Constitution of the United States and some states of the Union.14 Double taxation becomes
obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental
entity 15 or by the same jurisdiction for the same purpose, 16 but not in a case where one tax is 3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all
imposed by the State and the other by the city or municipality. 17 softdrinks, produced or manufactured, or an equivalent of 1-½ centavos per case, 23 cannot be
2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation, considered unjust and unfair. 24 an increase in the tax alone would not support the claim that
because these two ordinances cover the same subject matter and impose practically the same the tax is oppressive, unjust and confiscatory. Municipal corporations are allowed much
tax rate. The thesis proceeds from its assumption that both ordinances are valid and legally discretion in determining the reates of imposable taxes. 25 This is in line with the constutional
enforceable. This is not so. As earlier quoted, Ordinance No. 23, which was approved on policy of according the widest possible autonomy to local governments in matters of local
September 25, 1962, levies or collects from soft drinks producers or manufacturers a tax of taxation, an aspect that is given expression in the Local Tax Code (PD No. 231, July 1, 1973).
one-sixteen (1/16) of a centavo for .every bottle corked, irrespective of the volume contents of 26 Unless the amount is so excessive as to be prohibitive, courts will go slow in writing off an
the bottle used. When it was discovered that the producer or manufacturer could increase the ordinance as unreasonable. 27 Reluctance should not deter compliance with an ordinance such
volume contents of the bottle and still pay the same tax rate, the Municipality of Tanauan as Ordinance No. 27 if the purpose of the law to further strengthen local autonomy were to be
enacted Ordinance No. 27, approved on October 28, 1962, imposing a tax of one centavo realized. 28
(P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The difference between Finally, the municipal license tax of P1,000.00 per corking machine with five but not more
the two ordinances clearly lies in the tax rate of the soft drinks produced: in Ordinance No. 23, than ten crowners or P2,000.00 with ten but not more than twenty crowners imposed on
it was 1/16 of a centavo for every bottle corked; in Ordinance No. 27, it is one centavo (P0.01) manufacturers, producers, importers and dealers of soft drinks and/or mineral waters under
on each gallon (128 fluid ounces, U.S.) of volume capacity. The intention of the Municipal Ordinance No. 54, series of 1964, as amended by Ordinance No. 41, series of 1968, of
Council of Tanauan in enacting Ordinance No. 27 is thus clear: it was intended as a plain defendant Municipality, 29 appears not to affect the resolution of the validity of Ordinance No.
substitute for the prior Ordinance No. 23, and operates as a repeal of the latter, even without 27. Municipalities are empowered to impose, not only municipal license taxes upon persons
words to that effect. 18 Plaintiff-appellant in its brief admitted that defendants-appellees are engaged in any business or occupation but also to levy for public purposes, just and uniform
only seeking to enforce Ordinance No. 27, series of 1962. Even the stipulation of facts taxes. The ordinance in question (Ordinance No. 27) comes within the second power of a
confirms the fact that the Acting Municipal Treasurer of Tanauan, Leyte sought t6 compel municipality.
compliance by the plaintiff-appellant of the provisions of said Ordinance No. 27, series of ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise
1962. The aforementioned admission shows that only Ordinance No. 27, series of 1962 is known as the Local Autonomy Act, as amended, is hereby upheld and Municipal Ordinance
being enforced by defendants-appellees. Even the Provincial Fiscal, counsel for defendants- No. 27 of the Municipality of Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance
appellees admits in his brief "that Section 7 of Ordinance No. 27, series of 1962 clearly No. 23, same series, is hereby declared of valid and legal effect. Costs against petitioner-
repeals Ordinance No. 23 as the provisions of the latter are inconsistent with the provisions of appellant.
the former." SO ORDERED.
That brings Us to the question of whether the remaining Ordinance No. 27 imposes a
percentage or a specific tax. Undoubtedly, the taxing authority conferred on local governments
under Section 2, Republic Act No. 2264, is broad enough as to extend to almost "everything,
accepting those which are mentioned therein." As long as the text levied under the authority of
a city or municipal ordinance is not within the exceptions and limitations in the law, the same
comes within the ambit of the general rule, pursuant to the rules of exclucion
attehus and exceptio firmat regulum in cabisus non excepti 19 The limitation applies,
particularly, to the prohibition against municipalities and municipal districts to impose "any
percentage tax or other taxes in any form based thereon nor impose taxes on articles subject
to specific tax except gasoline, under the provisions of the National Internal Revenue Code."
For purposes of this particular limitation, a municipal ordinance which prescribes a set ratio
between the amount of the tax and the volume of sale of the taxpayer imposes a sales tax and
is null and void for being outside the power of the municipality to enact. 20 But, the imposition
of "a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity"
on all soft drinks produced or manufactured under Ordinance No. 27 does not partake of the
nature of a percentage tax on sales, or other taxes in any form based thereon. The tax is levied
on the produce (whether sold or not) and not on the sales. The volume capacity of the
taxpayer's production of soft drinks is considered solely for purposes of determining the tax
rate on the products, but there is not set ratio between the volume of sales and the amount of
the tax.21
Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on
specified articles, such as distilled spirits, wines, fermented liquors, products of tobacco other
than cigars and cigarettes, matches firecrackers, manufactured oils and other fuels, coal,
bunker fuel oil, diesel fuel oil, cinematographic films, playing cards, saccharine, opium and
other habit-forming drugs. 22 Soft drink is not one of those specified.

51
 Republic of the Philippines
SUPREME COURT
EN BANC
G.R. No. 168056 September 1, 2005
ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S.
ALCANTARA and ED VINCENT S. ALBANO, Petitioners,
vs.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA;
HONORABLE SECRETARY OF THE DEPARTMENT OF FINANCE CESAR
PURISIMA; and HONORABLE COMMISSIONER OF INTERNAL REVENUE
GUILLERMO PARAYNO, JR., Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
The expenses of government, having for their object the interest of all, should be borne by
everyone, and the more man enjoys the advantages of society, the more he ought to hold
himself honored in contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation, inadequate fiscal allocation for education,
increased emoluments for health workers, and wider coverage for full value-added tax benefits
… these are the reasons why Republic Act No. 9337 (R.A. No. 9337) 1 was enacted. Reasons,
the wisdom of which, the Court even with its extensive constitutional power of review, cannot
probe. The petitioners in these cases, however, question not only the wisdom of the law, but
also perceived constitutional infirmities in its passage.
Every law enjoys in its favor the presumption of constitutionality. Their arguments
notwithstanding, petitioners failed to justify their call for the invalidity of the law. Hence, R.A.
No. 9337 is not unconstitutional.
LEGISLATIVE HISTORY
R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and
3705, and Senate Bill No. 1950.
House Bill No. 35552 was introduced on first reading on January 7, 2005. The House
Committee on Ways and Means approved the bill, in substitution of House Bill No. 1468,
which Representative (Rep.) Eric D. Singson introduced on August 8, 2004. The President
certified the bill on January 7, 2005 for immediate enactment. On January 27, 2005, the House
of Representatives approved the bill on second and third reading.
House Bill No. 37053 on the other hand, substituted House Bill No. 3105 introduced by Rep.
Salacnib F. Baterina, and House Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its
"mother bill" is House Bill No. 3555. The House Committee on Ways and Means approved
the bill on February 2, 2005. The President also certified it as urgent on February 8, 2005. The
House of Representatives approved the bill on second and third reading on February 28, 2005.
Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No. 19504 on
March 7, 2005, "in substitution of Senate Bill Nos. 1337, 1838 and 1873, taking into
consideration House Bill Nos. 3555 and 3705." Senator Ralph G. Recto sponsored Senate Bill
No. 1337, while Senate Bill Nos. 1838 and 1873 were both sponsored by Sens. Franklin M.
Drilon, Juan M. Flavier and Francis N. Pangilinan. The President certified the bill on March
11, 2005, and was approved by the Senate on second and third reading on April 13, 2005.
On the same date, April 13, 2005, the Senate agreed to the request of the House of
Representatives for a committee conference on the disagreeing provisions of the proposed
bills.
Before long, the Conference Committee on the Disagreeing Provisions of House Bill No.
3555, House Bill No. 3705, and Senate Bill No. 1950, "after having met and discussed in full
52
free and conference," recommended the approval of its report, which the Senate did on May
10, 2005, and with the House of Representatives agreeing thereto the next day, May 11, 2005.
On May 23, 2005, the enrolled copy of the consolidated House and Senate version was
transmitted to the President, who signed the same into law on May 24, 2005. Thus, came R.A.
No. 9337.
July 1, 2005 is the effectivity date of R.A. No. 9337. 5 When said date came, the Court issued a
temporary restraining order, effective immediately and continuing until further orders,
enjoining respondents from enforcing and implementing the law.
Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court
speaking through Mr. Justice Artemio V. Panganiban, voiced the rationale for its issuance of
the temporary restraining order on July 1, 2005, to wit:
J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell
you a little background. You know when the law took effect on July 1, 2005, the Court issued
a TRO at about 5 o’clock in the afternoon. But before that, there was a lot of complaints aired
on television and on radio. Some people in a gas station were complaining that the gas prices
went up by 10%. Some people were complaining that their electric bill will go up by 10%.
Other times people riding in domestic air carrier were complaining that the prices that they’ll
have to pay would have to go up by 10%. While all that was being aired, per your presentation
and per our own understanding of the law, that’s not true. It’s not true that the e-vat law
necessarily increased prices by 10% uniformly isn’t it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?
ATTY. BANIQUED : It’s not, because, Your Honor, there is an Executive Order that granted
the Petroleum companies some subsidy . . . interrupted
J. PANGANIBAN : That’s correct . . .
ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted
J. PANGANIBAN : . . . mitigating measures . . .
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the
elimination of the Excise Tax and the import duties. That is why, it is not correct to say that
the VAT as to petroleum dealers increased prices by 10%.
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by
10% to cover the E-Vat tax. If you consider the excise tax and the import duties, the Net Tax
would probably be in the neighborhood of 7%? We are not going into exact figures I am just
trying to deliver a point that different industries, different products, different services are hit
differently. So it’s not correct to say that all prices must go up by 10%.
ATTY. BANIQUED : You’re right, Your Honor.
J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at
present imposed a Sales Tax of 3%. When this E-Vat law took effect the Sales Tax was also
removed as a mitigating measure. So, therefore, there is no justification to increase the fares
by 10% at best 7%, correct?
ATTY. BANIQUED : I guess so, Your Honor, yes.
J. PANGANIBAN : There are other products that the people were complaining on that first
day, were being increased arbitrarily by 10%. And that’s one reason among many others this
Court had to issue TRO because of the confusion in the implementation. That’s why we added
as an issue in this case, even if it’s tangentially taken up by the pleadings of the parties, the
confusion in the implementation of the E-vat. Our people were subjected to the mercy of that
confusion of an across the board increase of 10%, which you yourself now admit and I think
even the Government will admit is incorrect. In some cases, it should be 3% only, in some
cases it should be 6% depending on these mitigating measures and the location and situation
of each product, of each service, of each company, isn’t it?
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : Alright. So that’s one reason why we had to issue a TRO pending the
clarification of all these and we wish the government will take time to clarify all these by
means of a more detailed implementing rules, in case the law is upheld by this Court. . . . 6
The Court also directed the parties to file their respective Memoranda.
G.R. No. 168056
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a
petition for prohibition on May 27, 2005. They question the constitutionality of Sections 4, 5
and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the National
Internal Revenue Code (NIRC). Section 4 imposes a 10% VAT on sale of goods and
properties, Section 5 imposes a 10% VAT on importation of goods, and Section 6 imposes a
10% VAT on sale of services and use or lease of properties. These questioned provisions
contain a uniform proviso authorizing the President, upon recommendation of the Secretary of
Finance, to raise the VAT rate to 12%, effective January 1, 2006, after any of the following
conditions have been satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 ½%).
Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of
its exclusive authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987
Philippine Constitution.
G.R. No. 168207
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise
assailing the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.
Aside from questioning the so-called stand-by authority of the President to increase the VAT
rate to 12%, on the ground that it amounts to an undue delegation of legislative power,
petitioners also contend that the increase in the VAT rate to 12% contingent on any of the two
conditions being satisfied violates the due process clause embodied in Article III, Section 1 of
the Constitution, as it imposes an unfair and additional tax burden on the people, in that: (1)
the 12% increase is ambiguous because it does not state if the rate would be returned to the
original 10% if the conditions are no longer satisfied; (2) the rate is unfair and unreasonable,
as the people are unsure of the applicable VAT rate from year to year; and (3) the increase in
the VAT rate, which is supposed to be an incentive to the President to raise the VAT
collection to at least 2 4/5 of the GDP of the previous year, should only be based on fiscal
adequacy.
Petitioners further claim that the inclusion of a stand-by authority granted to the President by
the Bicameral Conference Committee is a violation of the "no-amendment rule" upon last
reading of a bill laid down in Article VI, Section 26(2) of the Constitution.
G.R. No. 168461
Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association
of Pilipinas Shell Dealers, Inc., et al., assailing the following provisions of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on
depreciable goods shall be amortized over a 60-month period, if the acquisition, excluding the
VAT components, exceeds One Million Pesos (₱1, 000,000.00);
2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of
input tax to be credited against the output tax; and
3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of
its political subdivisions, instrumentalities or agencies, including GOCCs, to deduct a 5% final
53
withholding tax on gross payments of goods and services, which are subject to 10% VAT
under Sections 106 (sale of goods and properties) and 108 (sale of services and use or lease of
properties) of the NIRC.
Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive,
excessive, and confiscatory.
Petitioners’ argument is premised on the constitutional right of non-deprivation of life, liberty
or property without due process of law under Article III, Section 1 of the Constitution.
According to petitioners, the contested sections impose limitations on the amount of input tax
that may be claimed. Petitioners also argue that the input tax partakes the nature of a property
that may not be confiscated, appropriated, or limited without due process of law. Petitioners
further contend that like any other property or property right, the input tax credit may be
transferred or disposed of, and that by limiting the same, the government gets to tax a profit or
value-added even if there is no profit or value-added.
Petitioners also believe that these provisions violate the constitutional guarantee of equal
protection of the law under Article III, Section 1 of the Constitution, as the limitation on the
creditable input tax if: (1) the entity has a high ratio of input tax; or (2) invests in capital
equipment; or (3) has several transactions with the government, is not based on real and
substantial differences to meet a valid classification.
Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article
VI, Section 28(1) of the Constitution, and that it is the smaller businesses with higher input tax
to output tax ratio that will suffer the consequences thereof for it wipes out whatever meager
margins the petitioners make.
G.R. No. 168463
Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero
filed this petition for certiorari on June 30, 2005. They question the constitutionality of R.A.
No. 9337 on the following grounds:
1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power,
in violation of Article VI, Section 28(2) of the Constitution;
2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass
on provisions present in Senate Bill No. 1950 and House Bill No. 3705; and
3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119,
121, 125,7 148, 151, 236, 237 and 288, which were present in Senate Bill No. 1950, violates
Article VI, Section 24(1) of the Constitution, which provides that all appropriation, revenue or
tariff bills shall originate exclusively in the House of Representatives
G.R. No. 168730
On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and
prohibition on July 20, 2005, alleging unconstitutionality of the law on the ground that the
limitation on the creditable input tax in effect allows VAT-registered establishments to retain a
portion of the taxes they collect, thus violating the principle that tax collection and revenue
should be solely allocated for public purposes and expenditures. Petitioner Garcia further
claims that allowing these establishments to pass on the tax to the consumers is inequitable, in
violation of Article VI, Section 28(1) of the Constitution.
RESPONDENTS’ COMMENT
The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents.
Preliminarily, respondents contend that R.A. No. 9337 enjoys the presumption of
constitutionality and petitioners failed to cast doubt on its validity.
Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA
630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of
the bicameral proceedings, exclusive origination of revenue measures and the power of the
Senate concomitant thereto, have already been settled. With regard to the issue of undue
delegation of legislative power to the President, respondents contend that the law is complete
and leaves no discretion to the President but to increase the rate to 12% once any of the two
conditions provided therein arise.
Respondents also refute petitioners’ argument that the increase to 12%, as well as the 70%
limitation on the creditable input tax, the 60-month amortization on the purchase or
importation of capital goods exceeding ₱1,000,000.00, and the 5% final withholding tax by
government agencies, is arbitrary, oppressive, and confiscatory, and that it violates the
constitutional principle on progressive taxation, among others.
Finally, respondents manifest that R.A. No. 9337 is the anchor of the government’s fiscal
reform agenda. A reform in the value-added system of taxation is the core revenue measure
that will tilt the balance towards a sustainable macroeconomic environment necessary for
economic growth.
ISSUES
The Court defined the issues, as follows:
PROCEDURAL ISSUE
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the
NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the
NIRC; and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the
following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
RULING OF THE COURT
As a prelude, the Court deems it apt to restate the general principles and concepts of value-
added tax (VAT), as the confusion and inevitably, litigation, breeds from a fallacious notion of
its nature.
The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or
lease of goods or properties and services.8 Being an indirect tax on expenditure, the seller of
goods or services may pass on the amount of tax paid to the buyer, 9 with the seller acting
merely as a tax collector.10 The burden of VAT is intended to fall on the immediate buyers and
ultimately, the end-consumers.
In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or
business it engages in, without transferring the burden to someone else. 11 Examples are
individual and corporate income taxes, transfer taxes, and residence taxes. 12
In the Philippines, the value-added system of sales taxation has long been in existence, albeit
in a different mode. Prior to 1978, the system was a single-stage tax computed under the "cost
deduction method" and was payable only by the original sellers. The single-stage system was
subsequently modified, and a mixture of the "cost deduction method" and "tax credit method"
was used to determine the value-added tax payable.13 Under the "tax credit method," an entity
can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its
purchases, inputs and imports.14
It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that
the VAT system was rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales
using the "tax credit method."15
E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law, 16 R.A. No. 8241 or
the Improved VAT Law,17 R.A. No. 8424 or the Tax Reform Act of 1997,18 and finally, the
presently beleaguered R.A. No. 9337, also referred to by respondents as the VAT Reform Act.
54
The Court will now discuss the issues in logical sequence.
PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
A. The Bicameral Conference Committee
Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference
Committee exceeded its authority by:
1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No.
9337;
2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;
3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited
against the output tax; and
4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds
of taxes in addition to the value-added tax.
Petitioners now beseech the Court to define the powers of the Bicameral Conference
Committee.
It should be borne in mind that the power of internal regulation and discipline are intrinsic in
any legislative body for, as unerringly elucidated by Justice Story, "[i]f the power did not
exist, it would be utterly impracticable to transact the business of the nation, either at all,
or at least with decency, deliberation, and order."19 Thus, Article VI, Section 16 (3) of the
Constitution provides that "each House may determine the rules of its proceedings." Pursuant
to this inherent constitutional power to promulgate and implement its own rules of procedure,
the respective rules of each house of Congress provided for the creation of a Bicameral
Conference Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as
follows:
Sec. 88. Conference Committee. – In the event that the House does not agree with the Senate
on the amendment to any bill or joint resolution, the differences may be settled by the
conference committees of both chambers.
In resolving the differences with the Senate, the House panel shall, as much as possible,
adhere to and support the House Bill. If the differences with the Senate are so substantial that
they materially impair the House Bill, the panel shall report such fact to the House for the
latter’s appropriate action.
Sec. 89. Conference Committee Reports. – . . . Each report shall contain a detailed, sufficiently
explicit statement of the changes in or amendments to the subject measure.
...
The Chairman of the House panel may be interpellated on the Conference Committee Report
prior to the voting thereon. The House shall vote on the Conference Committee Report in the
same manner and procedure as it votes on a bill on third and final reading.
Rule XII, Section 35 of the Rules of the Senate states:
Sec. 35. In the event that the Senate does not agree with the House of Representatives on the
provision of any bill or joint resolution, the differences shall be settled by a conference
committee of both Houses which shall meet within ten (10) days after their composition. The
President shall designate the members of the Senate Panel in the conference committee with
the approval of the Senate.
Each Conference Committee Report shall contain a detailed and sufficiently explicit statement
of the changes in, or amendments to the subject measure, and shall be signed by a majority of
the members of each House panel, voting separately.
A comparative presentation of the conflicting House and Senate provisions and a reconciled discipline of its members. Congress is the best judge of how it should conduct its own
version thereof with the explanatory statement of the conference committee shall be attached business expeditiously and in the most orderly manner. It is also the sole
to the report. concern of Congress to instill discipline among the members of its conference committee if it
... believes that said members violated any of its rules of proceedings. Even the expanded
The creation of such conference committee was apparently in response to a problem, not jurisdiction of this Court cannot apply to questions regarding only the internal operation of
addressed by any constitutional provision, where the two houses of Congress find themselves Congress, thus, the Court is wont to deny a review of the internal proceedings of a co-equal
in disagreement over changes or amendments introduced by the other house in a legislative branch of government.
bill. Given that one of the most basic powers of the legislative branch is to formulate and Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs.
implement its own rules of proceedings and to discipline its members, may the Court then Secretary of Finance,23 the Court already made the pronouncement that "[i]f a change is
delve into the details of how Congress complies with its internal rules or how it conducts its desired in the practice [of the Bicameral Conference Committee] it must be sought in
business of passing legislation? Note that in the present petitions, the issue is not whether Congress since this question is not covered by any constitutional provision but is only an
provisions of the rules of both houses creating the bicameral conference committee are internal rule of each house." 24 To date, Congress has not seen it fit to make such changes
unconstitutional, but whether the bicameral conference committee has strictly complied adverted to by the Court. It seems, therefore, that Congress finds the practices of the bicameral
with the rules of both houses, thereby remaining within the jurisdiction conferred upon conference committee to be very useful for purposes of prompt and efficient legislative action.
it by Congress. Nevertheless, just to put minds at ease that no blatant irregularities tainted the proceedings of
In the recent case of Fariñas vs. The Executive Secretary,20 the Court En the bicameral conference committees, the Court deems it necessary to dwell on the issue. The
Banc, unanimously reiterated and emphasized its adherence to the "enrolled bill doctrine," Court observes that there was a necessity for a conference committee because a comparison of
thus, declining therein petitioners’ plea for the Court to go behind the enrolled copy of the bill. the provisions of House Bill Nos. 3555 and 3705 on one hand, and Senate Bill No. 1950 on
Assailed in said case was Congress’s creation of two sets of bicameral conference committees, the other, reveals that there were indeed disagreements. As pointed out in the petitions, said
the lack of records of said committees’ proceedings, the alleged violation of said committees disagreements were as follows:
of the rules of both houses, and the disappearance or deletion of one of the provisions in the House Bill No. 3555 House Bill No.3705 Senate Bill No. 1950
compromise bill submitted by the bicameral conference committee. It was argued that such With regard to "Stand-By Authority" in favor of President
irregularities in the passage of the law nullified R.A. No. 9006, or the Fair Election Act. Provides for 12% VAT on Provides for 12% VAT in Provides for a single rate of
Striking down such argument, the Court held thus: every sale of goods or general on sales of goods or 10% VAT on sale of goods
Under the "enrolled bill doctrine," the signing of a bill by the Speaker of the House and the properties (amending Sec. properties and reduced rates or properties (amending
Senate President and the certification of the Secretaries of both Houses of Congress that it was 106 of NIRC); 12% VAT for sale of certain locally Sec. 106 of NIRC), 10%
passed are conclusive of its due enactment. A review of cases reveals the Court’s consistent on importation of goods manufactured goods and VAT on sale of services
adherence to the rule. The Court finds no reason to deviate from the salutary rule in this (amending Sec. 107 of petroleum products and raw including sale of electricity
case where the irregularities alleged by the petitioners mostly involved the internal rules NIRC); and 12% VAT on materials to be used in the by generation companies,
of Congress, e.g., creation of the 2nd or 3 rd Bicameral Conference Committee by the sale of services and use or manufacture thereof transmission and
House. This Court is not the proper forum for the enforcement of these internal rules of lease of properties (amending Sec. 106 of NIRC); distribution companies, and
Congress, whether House or Senate. Parliamentary rules are merely procedural and (amending Sec. 108 of 12% VAT on importation of use or lease of properties
with their observance the courts have no concern. Whatever doubts there may be as to NIRC) goods and reduced rates for (amending Sec. 108 of
the formal validity of Rep. Act No. 9006 must be resolved in its favor.The Court reiterates certain imported products NIRC)
its ruling in Arroyo vs. De Venecia, viz.: including petroleum products
But the cases, both here and abroad, in varying forms of expression, all deny to the courts (amending Sec. 107 of NIRC);
the power to inquire into allegations that, in enacting a law, a House of Congress failed to and 12% VAT on sale of
comply with its own rules, in the absence of showing that there was a violation of a services and use or lease of
constitutional provision or the rights of private individuals. In Osmeña v. Pendatun, it was properties and a reduced rate
held: "At any rate, courts have declared that ‘the rules adopted by deliberative bodies are for certain services including
subject to revocation, modification or waiver at the pleasure of the body adopting them.’ And power generation (amending
it has been said that "Parliamentary rules are merely procedural, and with their Sec. 108 of NIRC)
observance, the courts have no concern. They may be waived or disregarded by the
With regard to the "no pass-on" provision
legislative body." Consequently, "mere failure to conform to parliamentary usage will
not invalidate the action (taken by a deliberative body) when the requisite number of No similar provision Provides that the VAT Provides that the VAT
members have agreed to a particular measure."21 (Emphasis supplied) imposed on power generation imposed on sales of
The foregoing declaration is exactly in point with the present cases, where petitioners allege and on the sale of petroleum electricity by generation
irregularities committed by the conference committee in introducing changes or deleting products shall be absorbed by companies and services of
provisions in the House and Senate bills. Akin to the Fariñas case,22 the present petitions also generation companies or transmission companies and
raise an issue regarding the actions taken by the conference committee on matters regarding sellers, respectively, and shall distribution companies, as
Congress’ compliance with its own internal rules. As stated earlier, one of the most basic and not be passed on to consumers well as those of franchise
inherent power of the legislature is the power to formulate rules for its proceedings and the grantees of electric utilities

55
 shall not apply to exceeds 2 4/5%, or National Government deficit as a percentage of GDP of the previous year
residential exceeds 1½%, when the President, upon recommendation of the Secretary of Finance shall
end-users. VAT shall be raise the rate of VAT to 12% effective January 1, 2006.
absorbed by generation, 2. With regard to the disagreement on whether only the VAT imposed on electricity
transmission, and generation, transmission and distribution companies should not be passed on to consumers or
distribution companies. whether both the VAT imposed on electricity generation, transmission and distribution
With regard to 70% limit on input tax credit companies and the VAT imposed on sale of petroleum products may be passed on to
Provides that the input tax No similar provision Provides that the input tax consumers, the Bicameral Conference Committee chose to settle such disagreement by
credit for capital goods on credit for capital goods on altogether deleting from its Report any no pass-on provision.
which a VAT has been which a VAT has been paid 3. With regard to the disagreement on whether input tax credits should be limited or not, the
paid shall be equally shall be equally distributed Bicameral Conference Committee decided to adopt the position of the House by putting a
distributed over 5 years or over 5 years or the limitation on the amount of input tax that may be credited against the output tax, although it
the depreciable life of such depreciable life of such crafted its own language as to the amount of the limitation on input tax credits and the manner
capital goods; the input tax capital goods; the input tax of computing the same by providing thus:
credit for goods and credit for goods and (A) Creditable Input Tax. – . . .
services other than capital services other than capital ...
goods shall not exceed 5% goods shall not exceed 90% Provided, The input tax on goods purchased or imported in a calendar month for use in trade
of the total amount of such of the output VAT. or business for which deduction for depreciation is allowed under this Code, shall be spread
goods and services; and evenly over the month of acquisition and the fifty-nine (59) succeeding months if the
for persons engaged in aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds one
retail trading of goods, the million Pesos (₱1,000,000.00): PROVIDED, however, that if the estimated useful life of the
allowable input tax credit capital good is less than five (5) years, as used for depreciation purposes, then the input VAT
shall not exceed 11% of shall be spread over such shorter period: . . .
the total amount of goods (B) Excess Output or Input Tax. – If at the end of any taxable quarter the output tax exceeds
purchased. the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds
the output tax, the excess shall be carried over to the succeeding quarter or quarters:
With regard to amendments to be made to NIRC provisions regarding income and excise
PROVIDED that the input tax inclusive of input VAT carried over from the previous quarter
taxes
that may be credited in every quarter shall not exceed seventy percent (70%) of the output
No similar No similar provision Provided for amendments to VAT: PROVIDED, HOWEVER, THAT any input tax attributable to zero-rated sales by a
provision several NIRC provisions VAT-registered person may at his option be refunded or credited against other internal
regarding corporate income, revenue taxes, . . .
percentage, franchise and 4. With regard to the amendments to other provisions of the NIRC on corporate income tax,
excise taxes franchise, percentage and excise taxes, the conference committee decided to include such
The disagreements between the provisions in the House bills and the Senate bill were with amendments and basically adopted the provisions found in Senate Bill No. 1950, with some
regard to (1) what rate of VAT is to be imposed; (2) whether only the VAT imposed on changes as to the rate of the tax to be imposed.
electricity generation, transmission and distribution companies should not be passed on to Under the provisions of both the Rules of the House of Representatives and Senate Rules, the
consumers, as proposed in the Senate bill, or both the VAT imposed on electricity generation, Bicameral Conference Committee is mandated to settle the differences between the
transmission and distribution companies and the VAT imposed on sale of petroleum products disagreeing provisions in the House bill and the Senate bill. The term "settle" is synonymous
should not be passed on to consumers, as proposed in the House bill; (3) in what manner input to "reconcile" and "harmonize."25 To reconcile or harmonize disagreeing provisions, the
tax credits should be limited; (4) and whether the NIRC provisions on corporate income taxes, Bicameral Conference Committee may then (a) adopt the specific provisions of either the
percentage, franchise and excise taxes should be amended. House bill or Senate bill, (b) decide that neither provisions in the House bill or the provisions
There being differences and/or disagreements on the foregoing provisions of the House and in the Senate bill would
Senate bills, the Bicameral Conference Committee was mandated by the rules of both houses be carried into the final form of the bill, and/or (c) try to arrive at a compromise between the
of Congress to act on the same by settling said differences and/or disagreements. The disagreeing provisions.
Bicameral Conference Committee acted on the disagreeing provisions by making the In the present case, the changes introduced by the Bicameral Conference Committee on
following changes: disagreeing provisions were meant only to reconcile and harmonize the disagreeing provisions
1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from the for it did not inject any idea or intent that is wholly foreign to the subject embraced by the
Conference Committee Report that the Bicameral Conference Committee tried to bridge the original provisions.
gap in the difference between the 10% VAT rate proposed by the Senate, and the various rates The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT
with 12% as the highest VAT rate proposed by the House, by striking a compromise whereby wanted by the Senate is retained until such time that certain conditions arise when the 12%
the present 10% VAT rate would be retained until certain conditions arise, i.e., the value- VAT wanted by the House shall be imposed, appears to be a compromise to try to bridge the
added tax collection as a percentage of gross domestic product (GDP) of the previous year difference in the rate of VAT proposed by the two houses of Congress. Nevertheless, such
56
compromise is still totally within the subject of what rate of VAT should be imposed on Petitioners’ argument that the practice where a bicameral conference committee is allowed to
taxpayers. add or delete provisions in the House bill and the Senate bill after these had passed three
The no pass-on provision was deleted altogether. In the transcripts of the proceedings of the readings is in effect a circumvention of the "no amendment rule" (Sec. 26 (2), Art. VI of the
Bicameral Conference Committee held on May 10, 2005, Sen. Ralph Recto, Chairman of the 1987 Constitution), fails to convince the Court to deviate from its ruling in the Tolentino case
Senate Panel, explained the reason for deleting the no pass-on provision in this wise: that:
. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking Nor is there any reason for requiring that the Committee’s Report in these cases must have
that no sector should be a beneficiary of legislative grace, neither should any sector be undergone three readings in each of the two houses. If that be the case, there would be no end
discriminated on. The VAT is an indirect tax. It is a pass on-tax. And let’s keep it plain and to negotiation since each house may seek modification of the compromise bill. . . .
simple. Let’s not confuse the bill and put a no pass-on provision. Two-thirds of the world have Art. VI. § 26 (2) must, therefore, be construed as referring only to bills introduced for
a VAT system and in this two-thirds of the globe, I have yet to see a VAT with a no pass- the first time in either house of Congress, not to the conference committee
though provision. So, the thinking of the Senate is basically simple, let’s keep the VAT report.32 (Emphasis supplied)
simple.26 (Emphasis supplied) The Court reiterates here that the "no-amendment rule" refers only to the procedure to be
Rep. Teodoro Locsin further made the manifestation that the no pass-on provision "never followed by each house of Congress with regard to bills initiated in each of said
really enjoyed the support of either House."27 respective houses, before said bill is transmitted to the other house for its concurrence or
With regard to the amount of input tax to be credited against output tax, the Bicameral amendment. Verily, to construe said provision in a way as to proscribe any further changes to
Conference Committee came to a compromise on the percentage rate of the limitation or cap a bill after one house has voted on it would lead to absurdity as this would mean that the other
on such input tax credit, but again, the change introduced by the Bicameral Conference house of Congress would be deprived of its constitutional power to amend or introduce
Committee was totally within the intent of both houses to put a cap on input tax that may be changes to said bill. Thus, Art. VI, Sec. 26 (2) of the Constitution cannot be taken to mean that
credited against the output tax. From the inception of the subject revenue bill in the House of the introduction by the Bicameral Conference Committee of amendments and modifications to
Representatives, one of the major objectives was to "plug a glaring loophole in the tax policy disagreeing provisions in bills that have been acted upon by both houses of Congress is
and administration by creating vital restrictions on the claiming of input VAT tax credits . . ." prohibited.
and "[b]y introducing limitations on the claiming of tax credit, we are capping a major leakage C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive
that has placed our collection efforts at an apparent disadvantage."28 Origination of Revenue Bills
As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in Coming to the issue of the validity of the amendments made regarding the NIRC provisions on
Senate Bill No. 1950, since said provisions were among those referred to it, the conference corporate income taxes and percentage, excise taxes. Petitioners refer to the following
committee had to act on the same and it basically adopted the version of the Senate. provisions, to wit:
Thus, all the changes or modifications made by the Bicameral Conference Committee were Section 27 Rates of Income Tax on Domestic Corporation
germane to subjects of the provisions referred 28(A)(1) Tax on Resident Foreign Corporation
to it for reconciliation. Such being the case, the Court does not see any grave abuse of 28(B)(1) Inter-corporate Dividends
discretion amounting to lack or excess of jurisdiction committed by the Bicameral Conference
34(B)(1) Inter-corporate Dividends
Committee. In the earlier cases of Philippine Judges Association vs. Prado29 and Tolentino vs.
Secretary of Finance,30 the Court recognized the long-standing legislative practice of giving 116 Tax on Persons Exempt from VAT
said conference committee ample latitude for compromising differences between the Senate 117 Percentage Tax on domestic carriers and keepers of Garage
and the House. Thus, in the Tolentino case, it was held that: 119 Tax on franchises
. . . it is within the power of a conference committee to include in its report an entirely new 121 Tax on banks and Non-Bank Financial Intermediaries
provision that is not found either in the House bill or in the Senate bill. If the committee can 148 Excise Tax on manufactured oils and other fuels
propose an amendment consisting of one or two provisions, there is no reason why it cannot 151 Excise Tax on mineral products
propose several provisions, collectively considered as an "amendment in the nature of a
236 Registration requirements
substitute," so long as such amendment is germane to the subject of the bills before the
committee. After all, its report was not final but needed the approval of both houses of 237 Issuance of receipts or sales or commercial invoices
Congress to become valid as an act of the legislative department. The charge that in this case 288 Disposition of Incremental Revenue
the Conference Committee acted as a third legislative chamber is thus without any Petitioners claim that the amendments to these provisions of the NIRC did not at all originate
basis.31 (Emphasis supplied) from the House. They aver that House Bill No. 3555 proposed amendments only regarding
B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the "No- Sections 106, 107, 108, 110 and 114 of the NIRC, while House Bill No. 3705 proposed
Amendment Rule" amendments only to Sections 106, 107,108, 109, 110 and 111 of the NIRC; thus, the other
Article VI, Sec. 26 (2) of the Constitution, states: sections of the NIRC which the Senate amended but which amendments were not found in the
No bill passed by either House shall become a law unless it has passed three readings on House bills are not intended to be amended by the House of Representatives. Hence, they
separate days, and printed copies thereof in its final form have been distributed to its Members argue that since the proposed amendments did not originate from the House, such amendments
three days before its passage, except when the President certifies to the necessity of its are a violation of Article VI, Section 24 of the Constitution.
immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill, The argument does not hold water.
no amendment thereto shall be allowed, and the vote thereon shall be taken immediately Article VI, Section 24 of the Constitution reads:
thereafter, and the yeas and nays entered in the Journal.
57
Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt,
bills of local application, and private bills shall originate exclusively in the House of
Representatives but the Senate may propose or concur with amendments.
In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705 that
initiated the move for amending provisions of the NIRC dealing mainly with the value-added
tax. Upon transmittal of said House bills to the Senate, the Senate came out with Senate Bill
No. 1950 proposing amendments not only to NIRC provisions on the value-added tax but also
amendments to NIRC provisions on other kinds of taxes. Is the introduction by the Senate of
provisions not dealing directly with the value- added tax, which is the only kind of tax being
amended in the House bills, still within the purview of the constitutional provision authorizing
the Senate to propose or concur with amendments to a revenue bill that originated from the
House?
The foregoing question had been squarely answered in the Tolentino case, wherein the Court
held, thus:
. . . To begin with, it is not the law – but the revenue bill – which is required by the
Constitution to "originate exclusively" in the House of Representatives. It is important to
emphasize this, because a bill originating in the House may undergo such extensive changes in
the Senate that the result may be a rewriting of the whole. . . . At this point, what is important
to note is that, as a result of the Senate action, a distinct bill may be produced. To insist that a
revenue statute – and not only the bill which initiated the legislative process culminating
in the enactment of the law – must substantially be the same as the House bill would be
to deny the Senate’s power not only to "concur with amendments" but also to "propose
amendments." It would be to violate the coequality of legislative power of the two houses of
Congress and in fact make the House superior to the Senate.
… additional revenues annually even while by mitigating prices of power, services and petroleum
…Given, then, the power of the Senate to propose amendments, the Senate can propose
its own version even with respect to bills which are required by the Constitution to
originate in the House.
...
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax
bills, bills authorizing an increase of the public debt, private bills and bills of local application
must come from the House of Representatives on the theory that, elected as they are from the
districts, the members of the House can be expected to be more sensitive to the local needs
and problems. On the other hand, the senators, who are elected at large, are expected to
approach the same problems from the national perspective. Both views are thereby made
to bear on the enactment of such laws.33 (Emphasis supplied)
Since there is no question that the revenue bill exclusively originated in the House of
Representatives, the Senate was acting within its
constitutional power to introduce amendments to the House bill when it included provisions in
Senate Bill No. 1950 amending corporate income taxes, percentage, excise and franchise
taxes. Verily, Article VI, Section 24 of the Constitution does not contain any prohibition or
limitation on the extent of the amendments that may be introduced by the Senate to the House
revenue bill.
Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not
been touched in the House bills are still in furtherance of the intent of the House in initiating
the subject revenue bills. The Explanatory Note of House Bill No. 1468, the very first House
bill introduced on the floor, which was later substituted by House Bill No. 3555, stated:
One of the challenges faced by the present administration is the urgent and daunting task of
solving the country’s serious financial problems. To do this, government expenditures must be
strictly monitored and controlled and revenues must be significantly increased. This may be
easier said than done, but our fiscal authorities are still optimistic the government will be
operating on a balanced budget by the year 2009. In fact, several measures that will result to
58
significant expenditure savings have been identified by the administration. It is supported
with a credible package of revenue measures that include measures to improve tax
administration and control the leakages in revenues from income taxes and the value-
added tax (VAT). (Emphasis supplied)
Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:
In the budget message of our President in the year 2005, she reiterated that we all
acknowledged that on top of our agenda must be the restoration of the health of our fiscal
system.
In order to considerably lower the consolidated public sector deficit and eventually achieve a
balanced budget by the year 2009, we need to seize windows of opportunities which might
seem poignant in the beginning, but in the long run prove effective and beneficial to the
overall status of our economy. One such opportunity is a review of existing tax rates,
evaluating the relevance given our present conditions.34 (Emphasis supplied)
Notably therefore, the main purpose of the bills emanating from the House of Representatives
is to bring in sizeable revenues for the government
to supplement our country’s serious financial problems, and improve tax administration and
control of the leakages in revenues from income taxes and value-added taxes. As these house
bills were transmitted to the Senate, the latter, approaching the measures from the point of
national perspective, can introduce amendments within the purposes of those bills. It can
provide for ways that would soften the impact of the VAT measure on the consumer, i.e., by
distributing the burden across all sectors instead of putting it entirely on the shoulders of the
consumers. The sponsorship speech of Sen. Ralph Recto on why the provisions on income tax
on corporation were included is worth quoting:
All in all, the proposal of the Senate Committee on Ways and Means will raise ₱64.3 billion in
products.
However, not all of this will be wrung out of VAT. In fact, only ₱48.7 billion amount is from
the VAT on twelve goods and services. The rest of the tab – ₱10.5 billion- will be picked by
corporations.
What we therefore prescribe is a burden sharing between corporate Philippines and the
consumer. Why should the latter bear all the pain? Why should the fiscal salvation be only on
the burden of the consumer?
The corporate world’s equity is in form of the increase in the corporate income tax from 32 to
35 percent, but up to 2008 only. This will raise ₱10.5 billion a year. After that, the rate will
slide back, not to its old rate of 32 percent, but two notches lower, to 30 percent.
Clearly, we are telling those with the capacity to pay, corporations, to bear with this
emergency provision that will be in effect for 1,200 days, while we put our fiscal house in
order. This fiscal medicine will have an expiry date.
For their assistance, a reward of tax reduction awaits them. We intend to keep the length of
their sacrifice brief. We would like to assure them that not because there is a light at the end of
the tunnel, this government will keep on making the tunnel long.
The responsibility will not rest solely on the weary shoulders of the small man. Big business
will be there to share the burden.35
As the Court has said, the Senate can propose amendments and in fact, the amendments made
on provisions in the tax on income of corporations are germane to the purpose of the house
bills which is to raise revenues for the government.
Likewise, the Court finds the sections referring to other percentage and excise taxes germane
to the reforms to the VAT system, as these sections would cushion the effects of VAT on
consumers. Considering that certain goods and services which were subject to percentage tax
and excise tax would no longer be VAT-exempt, the consumer would be burdened more as
they would be paying the VAT in addition to these taxes. Thus, there is a need to amend these
sections to soften the impact of VAT. Again, in his sponsorship speech, Sen. Recto said:
However, for power plants that run on oil, we will reduce to zero the present excise tax on
bunker fuel, to lessen the effect of a VAT on this product.
For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a VAT.
And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy
the VAT chain, we will however bring down the excise tax on socially sensitive products such
as diesel, bunker, fuel and kerosene.
...
What do all these exercises point to? These are not contortions of giving to the left hand what
was taken from the right. Rather, these sprang from our concern of softening the impact of
VAT, so that the people can cushion the blow of higher prices they will have to pay as a result
of VAT.36
The other sections amended by the Senate pertained to matters of tax administration which are
necessary for the implementation of the changes in the VAT system.
To reiterate, the sections introduced by the Senate are germane to the subject matter and
purposes of the house bills, which is to supplement our country’s fiscal deficit, among others.
Thus, the Senate acted within its power to propose those amendments.
SUBSTANTIVE ISSUES
I.
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the
NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et
al. contend in common that Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107
and 108, respectively, of the NIRC giving the President the stand-by authority to raise the
VAT rate from 10% to 12% when a certain condition is met, constitutes undue delegation of
the legislative power to tax.
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 106. Value-Added Tax on Sale of Goods or Properties. –
(A) Rate and Base of Tax. – There shall be levied, assessed and collected on every sale, barter
or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the
gross selling price or gross value in money of the goods or properties sold, bartered or
exchanged, such tax to be paid by the seller or transferor: provided, that the President, upon
the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise
the rate of value-added tax to twelve percent (12%), after any of the following conditions
has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one
and one-half percent (1 ½%).
SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as
follows:
SEC. 107. Value-Added Tax on Importation of Goods. –
(A) In General. – There shall be levied, assessed and collected on every importation of goods a
value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of
Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any,
and other charges, such tax to be paid by the importer prior to the release of such goods from
customs custody: Provided, That where the customs duties are determined on the basis of the
quantity or volume of the goods, the value-added tax shall be based on the landed cost plus
excise taxes, if any: provided, further, that the President, upon the recommendation of
59
the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added
tax to twelve percent (12%) after any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one
and one-half percent (1 ½%).
SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as
follows:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties –
(A) Rate and Base of Tax. – There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of
services: provided, that the President, upon the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve
percent (12%), after any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one
and one-half percent (1 ½%). (Emphasis supplied)
Petitioners allege that the grant of the stand-by authority to the President to increase the VAT
rate is a virtual abdication by Congress of its exclusive power to tax because such delegation is
not within the purview of Section 28 (2), Article VI of the Constitution, which provides:
The Congress may, by law, authorize the President to fix within specified limits, and may
impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or
imposts within the framework of the national development program of the government.
They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties
as well as on the sale or exchange of services, which cannot be included within the purview of
tariffs under the exempted delegation as the latter refers to customs duties, tolls or tribute
payable upon merchandise to the government and usually imposed on goods or merchandise
imported or exported.
Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President
the legislative power to tax is contrary to republicanism. They insist that accountability,
responsibility and transparency should dictate the actions of Congress and they should not
pass to the President the decision to impose taxes. They also argue that the law also effectively
nullified the President’s power of control, which includes the authority to set aside and nullify
the acts of her subordinates like the Secretary of Finance, by mandating the fixing of the tax
rate by the President upon the recommendation of the Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or
create the conditions provided by the law to bring about either or both the conditions
precedent.
On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the
imposition of the 12% rate would be subject to the whim of the Secretary of Finance, an
unelected bureaucrat, contrary to the principle of no taxation without representation. They
submit that the Secretary of Finance is not mandated to give a favorable recommendation and
he may not even give his recommendation. Moreover, they allege that no guiding standards
are provided in the law on what basis and as to how he will make his recommendation. They
claim, nonetheless, that any recommendation of the Secretary of Finance can easily be brushed
aside by the President since the former is a mere alter ego of the latter, such that, ultimately, it
is the President who decides whether to impose the increased tax rate or not.
A brief discourse on the principle of non-delegation of powers is instructive.
The principle of separation of powers ordains that each of the three great branches of
government has exclusive cognizance of and is supreme in matters falling within its own
constitutionally allocated sphere.37 A logical
corollary to the doctrine of separation of powers is the principle of non-delegation of powers,
as expressed in the Latin maxim: potestas delegata non delegari potest which means "what
has been delegated, cannot be delegated."38 This doctrine is based on the ethical principle that
such as delegated power constitutes not only a right but a duty to be performed by the delegate
through the instrumentality of his own judgment and not through the intervening mind of
another.39
With respect to the Legislature, Section 1 of Article VI of the Constitution provides that "the
Legislative power shall be vested in the Congress of the Philippines which shall consist of a
Senate and a House of Representatives." The powers which Congress is prohibited from
delegating are those which are strictly, or inherently and exclusively, legislative. Purely
legislative power, which can never be delegated, has been described as the authority to make
a complete law – complete as to the time when it shall take effect and as to whom it shall
be applicable – and to determine the expediency of its enactment.40 Thus, the rule is that in
order that a court may be justified in holding a statute unconstitutional as a delegation of
legislative power, it must appear that the power involved is purely legislative in nature – that
is, one appertaining exclusively to the legislative department. It is the nature of the power, and
not the liability of its use or the manner of its exercise, which determines the validity of its
delegation.
Nonetheless, the general rule barring delegation of legislative powers is subject to the
following recognized limitations or exceptions:
(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the
Constitution;
(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the
Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a showing that the delegation itself is
valid. It is valid only if the law (a) is complete in itself, setting forth therein the policy to be
executed, carried out, or implemented by the delegate;41 and (b) fixes a standard — the limits
of which are sufficiently determinate and determinable — to which the delegate must conform
in the performance of his functions.42 A sufficient standard is one which defines legislative
policy, marks its limits, maps out its boundaries and specifies the public agency to apply it. It
indicates the circumstances under which the legislative command is to be effected.43 Both tests
are intended to prevent a total transference of legislative authority to the delegate, who is not
allowed to step into the shoes of the legislature and exercise a power essentially legislative.44
In People vs. Vera,45 the Court, through eminent Justice Jose P. Laurel, expounded on the
concept and extent of delegation of power in this wise:
In testing whether a statute constitutes an undue delegation of legislative power or not, it is
usual to inquire whether the statute was complete in all its terms and provisions when it left
the hands of the legislature so that nothing was left to the judgment of any other appointee or
delegate of the legislature.
...
‘The true distinction’, says Judge Ranney, ‘is between the delegation of power to make
the law, which necessarily involves a discretion as to what it shall be, and conferring an
authority or discretion as to its execution, to be exercised under and in pursuance of the
law. The first cannot be done; to the latter no valid objection can be made.’
...
It is contended, however, that a legislative act may be made to the effect as law after it leaves
the hands of the legislature. It is true that laws may be made effective on certain contingencies,
as by proclamation of the executive or the adoption by the people of a particular community.
In Wayman vs. Southard, the Supreme Court of the United States ruled that the legislature
60
may delegate a power not legislative which it may itself rightfully exercise. The power to
ascertain facts is such a power which may be delegated. There is nothing essentially
legislative in ascertaining the existence of facts or conditions as the basis of the taking
into effect of a law. That is a mental process common to all branches of the
government. Notwithstanding the apparent tendency, however, to relax the rule prohibiting
delegation of legislative authority on account of the complexity arising from social and
economic forces at work in this modern industrial age, the orthodox pronouncement of Judge
Cooley in his work on Constitutional Limitations finds restatement in Prof. Willoughby's
treatise on the Constitution of the United States in the following language — speaking of
declaration of legislative power to administrative agencies: The principle which permits the
legislature to provide that the administrative agent may determine when the
circumstances are such as require the application of a law is defended upon the ground
that at the time this authority is granted, the rule of public policy, which is the essence of
the legislative act, is determined by the legislature. In other words, the legislature, as it is
its duty to do, determines that, under given circumstances, certain executive or
administrative action is to be taken, and that, under other circumstances, different or no
action at all is to be taken. What is thus left to the administrative official is not the
legislative determination of what public policy demands, but simply the ascertainment of
what the facts of the case require to be done according to the terms of the law by which
he is governed. The efficiency of an Act as a declaration of legislative will must, of
course, come from Congress, but the ascertainment of the contingency upon which the
Act shall take effect may be left to such agencies as it may designate. The legislature,
then, may provide that a law shall take effect upon the happening of future specified
contingencies leaving to some other person or body the power to determine when the
specified contingency has arisen. (Emphasis supplied).46
In Edu vs. Ericta,47 the Court reiterated:
What cannot be delegated is the authority under the Constitution to make laws and to alter and
repeal them; the test is the completeness of the statute in all its terms and provisions when it
leaves the hands of the legislature. To determine whether or not there is an undue delegation
of legislative power, the inquiry must be directed to the scope and definiteness of the measure
enacted. The legislative does not abdicate its functions when it describes what job must be
done, who is to do it, and what is the scope of his authority. For a complex economy, that
may be the only way in which the legislative process can go forward. A distinction has
rightfully been made between delegation of power to make the laws which necessarily
involves a discretion as to what it shall be, which constitutionally may not be done, and
delegation of authority or discretion as to its execution to be exercised under and in
pursuance of the law, to which no valid objection can be made. The Constitution is thus
not to be regarded as denying the legislature the necessary resources of flexibility and
practicability. (Emphasis supplied).48
Clearly, the legislature may delegate to executive officers or bodies the power to determine
certain facts or conditions, or the happening of contingencies, on which the operation of a
statute is, by its terms, made to depend, but the legislature must prescribe sufficient standards,
policies or limitations on their authority.49 While the power to tax cannot be delegated to
executive agencies, details as to the enforcement and administration of an exercise of such
power may be left to them, including the power to determine the existence of facts on which
its operation depends.50
The rationale for this is that the preliminary ascertainment of facts as basis for the enactment
of legislation is not of itself a legislative function, but is simply ancillary to legislation. Thus,
the duty of correlating information and making recommendations is the kind of subsidiary
activity which the legislature may perform through its members, or which it may delegate to
others to perform. Intelligent legislation on the complicated problems of modern society is
impossible in the absence of accurate information on the part of the legislators, and any
reasonable method of securing such information is proper. 51 The Constitution as a
continuously operative charter of government does not require that Congress find for itself
every fact upon which it desires to base legislative action or that it make for itself detailed
determinations which it has declared to be prerequisite to application of legislative policy to
particular facts and circumstances impossible for Congress itself properly to investigate.52
In the present case, the challenged section of R.A. No. 9337 is the common proviso in
Sections 4, 5 and 6 which reads as follows:
That the President, upon the recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 ½%).
The case before the Court is not a delegation of legislative power. It is simply a delegation of
ascertainment of facts upon which enforcement and administration of the increase rate under
the law is contingent. The legislature has made the operation of the 12% rate effective January
1, 2006, contingent upon a specified fact or condition. It leaves the entire operation or non-
operation of the 12% rate upon factual matters outside of the control of the executive.
No discretion would be exercised by the President. Highlighting the absence of discretion is
the fact that the word shall is used in the common proviso. The use of the word shall connotes
a mandatory order. Its use in a statute denotes an imperative obligation and is inconsistent with
the idea of discretion.53 Where the law is clear and unambiguous, it must be taken to mean
exactly what it says, and courts have no choice but to see to it that the mandate is obeyed.54
Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the
existence of any of the conditions specified by Congress. This is a duty which cannot be
evaded by the President. Inasmuch as the law specifically uses the word shall, the exercise of
discretion by the President does not come into play. It is a clear directive to impose the 12%
VAT rate when the specified conditions are present. The time of taking into effect of the 12%
VAT rate is based on the happening of a certain specified contingency, or upon the
ascertainment of certain facts or conditions by a person or body other than the legislature
itself.
The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al.
that the law effectively nullified the President’s power of control over the Secretary of Finance
by mandating the fixing of the tax rate by the President upon the recommendation of the
Secretary of Finance. The Court cannot also subscribe to the position of petitioners
Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase
"upon the recommendation of the Secretary of Finance." Neither does the Court find
persuasive the submission of petitioners Escudero, et al. that any recommendation by the
Secretary of Finance can easily be brushed aside by the President since the former is a mere
alter ego of the latter.
When one speaks of the Secretary of Finance as the alter ego of the President, it simply means
that as head of the Department of Finance he is the assistant and agent of the Chief Executive.
The multifarious executive and administrative functions of the Chief Executive are performed
by and through the executive departments, and the acts of the secretaries of such departments,
such as the Department of Finance, performed and promulgated in the regular course of
business, are, unless disapproved or reprobated by the Chief Executive, presumptively the acts
of the Chief Executive. The Secretary of Finance, as such, occupies a political position and
holds office in an advisory capacity, and, in the language of Thomas Jefferson, "should be of
the President's bosom confidence" and, in the language of Attorney-General Cushing, is
"subject to the direction of the President."55
61
In the present case, in making his recommendation to the President on the existence of either
of the two conditions, the Secretary of Finance is not acting as the alter ego of the President or
even her subordinate. In such instance, he is not subject to the power of control and direction
of the President. He is acting as the agent of the legislative department, to determine and
declare the event upon which its expressed will is to take effect. 56 The Secretary of Finance
becomes the means or tool by which legislative policy is determined and implemented,
considering that he possesses all the facilities to gather data and information and has a much
broader perspective to properly evaluate them. His function is to gather and collate statistical
data and other pertinent information and verify if any of the two conditions laid out by
Congress is present. His personality in such instance is in reality but a projection of that of
Congress. Thus, being the agent of Congress and not of the President, the President cannot
alter or modify or nullify, or set aside the findings of the Secretary of Finance and to substitute
the judgment of the former for that of the latter.
Congress simply granted the Secretary of Finance the authority to ascertain the existence of a
fact, namely, whether by December 31, 2005, the value-added tax collection as a percentage of
Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent
(24/5%) or the national government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1½%). If either of these two instances has occurred, the
Secretary of Finance, by legislative mandate, must submit such information to the President.
Then the 12% VAT rate must be imposed by the President effective January 1, 2006. There is
no undue delegation of legislative power but only of the discretion as to the execution of a
law. This is constitutionally permissible.57 Congress does not abdicate its functions or
unduly delegate power when it describes what job must be done, who must do it, and what is
the scope of his authority; in our complex economy that is frequently the only way in which
the legislative process can go forward.58
As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the
President the legislative power to tax is contrary to the principle of republicanism, the same
deserves scant consideration. Congress did not delegate the power to tax but the mere
implementation of the law. The intent and will to increase the VAT rate to 12% came from
Congress and the task of the President is to simply execute the legislative policy. That
Congress chose to do so in such a manner is not within the province of the Court to inquire
into, its task being to interpret the law.59
The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause,
influence or create the conditions to bring about either or both the conditions precedent does
not deserve any merit as this argument is highly speculative. The Court does not rule on
allegations which are manifestly conjectural, as these may not exist at all. The Court deals
with facts, not fancies; on realities, not appearances. When the Court acts on appearances
instead of realities, justice and law will be short-lived.
B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax
Burden
Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and
additional tax burden on the people. Petitioners also argue that the 12% increase, dependent on
any of the 2 conditions set forth in the contested provisions, is ambiguous because it does not
state if the VAT rate would be returned to the original 10% if the rates are no longer satisfied.
Petitioners also argue that such rate is unfair and unreasonable, as the people are unsure of the
applicable VAT rate from year to year.
Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two
conditions set forth therein are satisfied, the President shall increase the VAT rate to 12%. The
provisions of the law are clear. It does not provide for a return to the 10% rate nor does it
empower the President to so revert if, after the rate is increased to 12%, the VAT collection
goes below the 24/5 of the GDP of the previous year or that the national government deficit as
a percentage of GDP of the previous year does not exceed 1½%.
Therefore, no statutory construction or interpretation is needed. Neither can conditions or
limitations be introduced where none is provided for. Rewriting the law is a forbidden ground
that only Congress may tread upon.60
Thus, in the absence of any provision providing for a return to the 10% rate, which in this case
the Court finds none, petitioners’ argument is, at best, purely speculative. There is no basis for
petitioners’ fear of a fluctuating VAT rate because the law itself does not provide that the rate
should go back to 10% if the conditions provided in Sections 4, 5 and 6 are no longer present.
The rule is that where the provision of the law is clear and unambiguous, so that there is no
occasion for the court's seeking the legislative intent, the law must be taken as it is, devoid of
judicial addition or subtraction.61
Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to
the President to raise the VAT collection to at least 2 4/5 of the GDP of the previous year,
should be based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT collection is not the only condition.
There is another condition, i.e., the national government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 ½%).
Respondents explained the philosophy behind these alternative conditions:
1. VAT/GDP Ratio > 2.8%
The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If
VAT/GDP is less than 2.8%, it means that government has weak or no capability of
implementing the VAT or that VAT is not effective in the function of the tax collection.
Therefore, there is no value to increase it to 12% because such action will also be ineffectual.
2. Nat’l Gov’t Deficit/GDP >1.5%
The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal
condition of government has reached a relatively sound position or is towards the direction of
a balanced budget position. Therefore, there is no need to increase the VAT rate since the
fiscal house is in a relatively healthy position. Otherwise stated, if the ratio is more than 1.5%,
there is indeed a need to increase the VAT rate.62
That the first condition amounts to an incentive to the President to increase the VAT collection
does not render it unconstitutional so long as there is a public purpose for which the law was
passed, which in this case, is mainly to raise revenue. In fact, fiscal adequacy dictated the need
for a raise in revenue.
The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated
by Adam Smith in his Canons of Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the
people as little as possible over and above what it brings into the public treasury of the state.63
It simply means that sources of revenues must be adequate to meet government expenditures
and their variations.64
The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe.
During the Bicameral Conference Committee hearing, then Finance Secretary Purisima
bluntly depicted the country’s gloomy state of economic affairs, thus:
First, let me explain the position that the Philippines finds itself in right now. We are in a
position where 90 percent of our revenue is used for debt service. So, for every peso of
revenue that we currently raise, 90 goes to debt service. That’s interest plus amortization of
our debt. So clearly, this is not a sustainable situation. That’s the first fact.
The second fact is that our debt to GDP level is way out of line compared to other peer
countries that borrow money from that international financial markets. Our debt to GDP is
approximately equal to our GDP. Again, that shows you that this is not a sustainable situation.
The third thing that I’d like to point out is the environment that we are presently operating in is
not as benign as what it used to be the past five years.
What do I mean by that?
62
In the past five years, we’ve been lucky because we were operating in a period of basically
global growth and low interest rates. The past few months, we have seen an inching up, in
fact, a rapid increase in the interest rates in the leading economies of the world. And,
therefore, our ability to borrow at reasonable prices is going to be challenged. In fact,
ultimately, the question is our ability to access the financial markets.
When the President made her speech in July last year, the environment was not as bad as it is
now, at least based on the forecast of most financial institutions. So, we were assuming that
raising 80 billion would put us in a position where we can then convince them to improve our
ability to borrow at lower rates. But conditions have changed on us because the interest rates
have gone up. In fact, just within this room, we tried to access the market for a billion dollars
because for this year alone, the Philippines will have to borrow 4 billion dollars. Of that
amount, we have borrowed 1.5 billion. We issued last January a 25-year bond at 9.7 percent
cost. We were trying to access last week and the market was not as favorable and up to now
we have not accessed and we might pull back because the conditions are not very good.
So given this situation, we at the Department of Finance believe that we really need to front-
end our deficit reduction. Because it is deficit that is causing the increase of the debt and we
are in what we call a debt spiral. The more debt you have, the more deficit you have because
interest and debt service eats and eats more of your revenue. We need to get out of this debt
spiral. And the only way, I think, we can get out of this debt spiral is really have a front-end
adjustment in our revenue base.65
The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable
catastrophe. Whether the law is indeed sufficient to answer the state’s economic dilemma is
not for the Court to judge. In the Fariñas case, the Court refused to consider the various
arguments raised therein that dwelt on the wisdom of Section 14 of R.A. No. 9006 (The Fair
Election Act), pronouncing that:
. . . policy matters are not the concern of the Court. Government policy is within the exclusive
dominion of the political branches of the government. It is not for this Court to look into the
wisdom or propriety of legislative determination. Indeed, whether an enactment is wise or
unwise, whether it is based on sound economic theory, whether it is the best means to achieve
the desired results, whether, in short, the legislative discretion within its prescribed limits
should be exercised in a particular manner are matters for the judgment of the legislature, and
the serious conflict of opinions does not suffice to bring them within the range of judicial
cognizance.66
In the same vein, the Court in this case will not dawdle on the purpose of Congress or the
executive policy, given that it is not for the judiciary to "pass upon questions of wisdom,
justice or expediency of legislation."67
II.
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC;
and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following
provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
A. Due Process and Equal Protection Clauses
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A. No.
9337, amending Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337, amending
Section 114 (C) of the NIRC are arbitrary, oppressive, excessive and confiscatory. Their
argument is premised on the constitutional right against deprivation of life, liberty of property
without due process of law, as embodied in Article III, Section 1 of the Constitution.
Petitioners also contend that these provisions violate the constitutional guarantee of equal
protection of the law.
The doctrine is that where the due process and equal protection clauses are invoked,
considering that they are not fixed rules but rather broad standards, there is a need for proof of
such persuasive character as would lead to such a conclusion. Absent such a showing, the
presumption of validity must prevail.68
Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the
amount of input tax that may be credited against the output tax. It states, in part: "[P]rovided,
that the input tax inclusive of the input VAT carried over from the previous quarter that may
be credited in every quarter shall not exceed seventy percent (70%) of the output VAT: …"
Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax
due from or paid by a VAT-registered person on the importation of goods or local purchase of
good and services, including lease or use of property, in the course of trade or business, from a
VAT-registered person, and Output Tax is the value-added tax due on the sale or lease of
taxable goods or properties or services by any person registered or required to register under
the law.
Petitioners claim that the contested sections impose limitations on the amount of input tax that
may be claimed. In effect, a portion of the input tax that has already been paid cannot now be
credited against the output tax.
Petitioners’ argument is not absolute. It assumes that the input tax exceeds 70% of the output
tax, and therefore, the input tax in excess of 70% remains uncredited. However, to the extent
that the input tax is less than 70% of the output tax, then 100% of such input tax is still
creditable.
More importantly, the excess input tax, if any, is retained in a business’s books of accounts
and remains creditable in the succeeding quarter/s. This is explicitly allowed by Section
110(B), which provides that "if the input tax exceeds the output tax, the excess shall be carried
over to the succeeding quarter or quarters." In addition, Section 112(B) allows a VAT-
registered person to apply for the issuance of a tax credit certificate or refund for any unused
input taxes, to the extent that such input taxes have not been applied against the output taxes.
Such unused input tax may be used in payment of his other internal revenue taxes.
The non-application of the unutilized input tax in a given quarter is not ad infinitum, as
petitioners exaggeratedly contend. Their analysis of the effect of the 70% limitation is
incomplete and one-sided. It ends at the net effect that there will be unapplied/unutilized
inputs VAT for a given quarter. It does not proceed further to the fact that such
unapplied/unutilized input tax may be credited in the subsequent periods as allowed by the
carry-over provision of Section 110(B) or that it may later on be refunded through a tax credit
certificate under Section 112(B).
Therefore, petitioners’ argument must be rejected.
On the other hand, it appears that petitioner Garcia failed to comprehend the operation of the
70% limitation on the input tax. According to petitioner, the limitation on the creditable input
tax in effect allows VAT-registered establishments to retain a portion of the taxes they collect,
which violates the principle that tax collection and revenue should be for public purposes and
expenditures
As earlier stated, the input tax is the tax paid by a person, passed on to him by the seller, when
he buys goods. Output tax meanwhile is the tax due to the person when he sells goods. In
computing the VAT payable, three possible scenarios may arise:
First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the
input taxes that he paid and passed on by the suppliers, then no payment is required;
Second, when the output taxes exceed the input taxes, the person shall be liable for the excess,
which has to be paid to the Bureau of Internal Revenue (BIR); 69 and
Third, if the input taxes exceed the output taxes, the excess shall be carried over to the
succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively
zero-rated transactions, any excess over the output taxes shall instead be refunded to the
taxpayer or credited against other internal revenue taxes, at the taxpayer’s option. 70
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a
person can credit his input tax only up to the extent of 70% of the output tax. In layman’s
63
term, the value-added taxes that a person/taxpayer paid and passed on to him by a seller can
only be credited up to 70% of the value-added taxes that is due to him on a taxable transaction.
There is no retention of any tax collection because the person/taxpayer has already previously
paid the input tax to a seller, and the seller will subsequently remit such input tax to the BIR.
The party directly liable for the payment of the tax is the seller. 71 What only needs to be done
is for the person/taxpayer to apply or credit these input taxes, as evidenced by receipts, against
his output taxes.
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax
partakes the nature of a property that may not be confiscated, appropriated, or limited without
due process of law.
The input tax is not a property or a property right within the constitutional purview of the due
process clause. A VAT-registered person’s entitlement to the creditable input tax is a mere
statutory privilege.
The distinction between statutory privileges and vested rights must be borne in mind for
persons have no vested rights in statutory privileges. The state may change or take away
rights, which were created by the law of the state, although it may not take away property,
which was vested by virtue of such rights.72
Under the previous system of single-stage taxation, taxes paid at every level of distribution are
not recoverable from the taxes payable, although it becomes part of the cost, which is
deductible from the gross revenue. When Pres. Aquino issued E.O. No. 273 imposing a 10%
multi-stage tax on all sales, it was then that the crediting of the input tax paid on purchase or
importation of goods and services by VAT-registered persons against the output tax was
introduced.73 This was adopted by the Expanded VAT Law (R.A. No. 7716),74 and The Tax
Reform Act of 1997 (R.A. No. 8424).75 The right to credit input tax as against the output tax is
clearly a privilege created by law, a privilege that also the law can remove, or in this case,
limit.
Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A.
No. 9337, amending Section 110(A) of the NIRC, which provides:
SEC. 110. Tax Credits. –
(A) Creditable Input Tax. – …
Provided, That the input tax on goods purchased or imported in a calendar month for use in
trade or business for which deduction for depreciation is allowed under this Code, shall be
spread evenly over the month of acquisition and the fifty-nine (59) succeeding months if the
aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds
One million pesos (₱1,000,000.00): Provided, however, That if the estimated useful life of the
capital goods is less than five (5) years, as used for depreciation purposes, then the input VAT
shall be spread over such a shorter period: Provided, finally, That in the case of purchase of
services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or
license upon payment of the compensation, rental, royalty or fee.
The foregoing section imposes a 60-month period within which to amortize the creditable
input tax on purchase or importation of capital goods with acquisition cost of ₱1 Million
pesos, exclusive of the VAT component. Such spread out only poses a delay in the crediting of
the input tax. Petitioners’ argument is without basis because the taxpayer is not permanently
deprived of his privilege to credit the input tax.
It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in
this case amounts to a 4-year interest-free loan to the government.76 In the same breath,
Congress also justified its move by saying that the provision was designed to raise an annual
revenue of 22.6 billion.77 The legislature also dispelled the fear that the provision will fend off
foreign investments, saying that foreign investors have other tax incentives provided by law,
and citing the case of China, where despite a 17.5% non-creditable VAT, foreign investments
were not deterred.78 Again, for whatever is the purpose of the 60-month amortization, this
involves executive economic policy and legislative wisdom in which the Court cannot
intervene.
With regard to the 5% creditable withholding tax imposed on payments made by the
government for taxable transactions, Section 12 of R.A. No. 9337, which amended Section
114 of the NIRC, reads:
SEC. 114. Return and Payment of Value-added Tax. –
(C) Withholding of Value-added Tax. – The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or controlled corporations
(GOCCs) shall, before making payment on account of each purchase of goods and services
which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct
and withhold a final value-added tax at the rate of five percent (5%) of the gross payment
thereof: Provided, That the payment for lease or use of properties or property rights to
nonresident owners shall be subject to ten percent (10%) withholding tax at the time of
payment. For purposes of this Section, the payor or person in control of the payment shall be
considered as the withholding agent.
The value-added tax withheld under this Section shall be remitted within ten (10) days
following the end of the month the withholding was made.
Section 114(C) merely provides a method of collection, or as stated by respondents, a more
simplified VAT withholding system. The government in this case is constituted as a
withholding agent with respect to their payments for goods and services.
Prior to its amendment, Section 114(C) provided for different rates of value-added taxes to be
withheld -- 3% on gross payments for purchases of goods; 6% on gross payments for services
supplied by contractors other than by public works contractors; 8.5% on gross payments for
services supplied by public work contractors; or 10% on payment for the lease or use of
properties or property rights to nonresident owners. Under the present Section 114(C), these
different rates, except for the 10% on lease or property rights payment to nonresidents, were
deleted, and a uniform rate of 5% is applied.
The Court observes, however, that the law the used the word final. In tax usage, final, as
opposed to creditable, means full. Thus, it is provided in Section 114(C): "final value-added
tax at the rate of five percent (5%)."
In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax Reform Act of
1997), the concept of final withholding tax on income was explained, to wit:
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. – Under the final withholding tax system the amount of income
tax withheld by the withholding agent is constituted as full and final payment of the income
tax due from the payee on the said income. The liability for payment of the tax rests primarily
on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case
of underwithholding, the deficiency tax shall be collected from the payor/withholding agent.
… that a business is created precisely for profit.
(B) Creditable Withholding Tax. – Under the creditable withholding tax system, taxes
withheld on certain income payments are intended to equal or at least approximate the tax due
of the payee on said income. … Taxes withheld on income payments covered by the expanded
withholding tax (referred to in Sec. 2.57.2 of these regulations) and compensation income
(referred to in Sec. 2.78 also of these regulations) are creditable in nature.
As applied to value-added tax, this means that taxable transactions with the government are
subject to a 5% rate, which constitutes as full payment of the tax payable on the transaction.
This represents the net VAT payable of the seller. The other 5% effectively accounts for the
standard input VAT (deemed input VAT), in lieu of the actual input VAT directly or
attributable to the taxable transaction.79
The Court need not explore the rationale behind the provision. It is clear that Congress
intended to treat differently taxable transactions with the government.80 This is supported by
64
the fact that under the old provision, the 5% tax withheld by the government remains
creditable against the tax liability of the seller or contractor, to wit:
SEC. 114. Return and Payment of Value-added Tax. –
(C) Withholding of Creditable Value-added Tax. – The Government or any of its political
subdivisions, instrumentalities or agencies, including government-owned or controlled
corporations (GOCCs) shall, before making payment on account of each purchase of goods
from sellers and services rendered by contractors which are subject to the value-added tax
imposed in Sections 106 and 108 of this Code, deduct and withhold the value-added tax due at
the rate of three percent (3%) of the gross payment for the purchase of goods and six percent
(6%) on gross receipts for services rendered by contractors on every sale or installment
payment which shall be creditable against the value-added tax liability of the seller or
contractor: Provided, however, That in the case of government public works contractors, the
withholding rate shall be eight and one-half percent (8.5%): Provided, further, That the
payment for lease or use of properties or property rights to nonresident owners shall be subject
to ten percent (10%) withholding tax at the time of payment. For this purpose, the payor or
person in control of the payment shall be considered as the withholding agent.
The valued-added tax withheld under this Section shall be remitted within ten (10) days
following the end of the month the withholding was made. (Emphasis supplied)
As amended, the use of the word final and the deletion of the word creditable exhibits
Congress’s intention to treat transactions with the government differently. Since it has not
been shown that the class subject to the 5% final withholding tax has been unreasonably
narrowed, there is no reason to invalidate the provision. Petitioners, as petroleum dealers, are
not the only ones subjected to the 5% final withholding tax. It applies to all those who deal
with the government.
Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe.
Revenue Regulations No. 14-2005 or the Consolidated Value-Added Tax Regulations 2005
issued by the BIR, provides that should the actual input tax exceed 5% of gross payments, the
excess may form part of the cost. Equally, should the actual input tax be less than 5%, the
difference is treated as income.81
Petitioners also argue that by imposing a limitation on the creditable input tax, the government
gets to tax a profit or value-added even if there is no profit or value-added.
Petitioners’ stance is purely hypothetical, argumentative, and again, one-sided. The Court will
not engage in a legal joust where premises are what ifs, arguments, theoretical and facts,
uncertain. Any disquisition by the Court on this point will only be, as Shakespeare describes
life in Macbeth,82 "full of sound and fury, signifying nothing."
What’s more, petitioners’ contention assumes the proposition that there is no profit or value-
added. It need not take an astute businessman to know that it is a matter of exception that a
business will sell goods or services without profit or value-added. It cannot be overstressed
The equal protection clause under the Constitution means that "no person or class of persons
shall be deprived of the same protection of laws which is enjoyed by other persons or other
classes in the same place and in like circumstances."83
The power of the State to make reasonable and natural classifications for the purposes of
taxation has long been established. Whether it relates to the subject of taxation, the kind of
property, the rates to be levied, or the amounts to be raised, the methods of assessment,
valuation and collection, the State’s power is entitled to presumption of validity. As a rule, the
judiciary will not interfere with such power absent a clear showing of unreasonableness,
discrimination, or arbitrariness.84
Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio
of input tax, or invests in capital equipment, or has several transactions with the government,
is not based on real and substantial differences to meet a valid classification.
The argument is pedantic, if not outright baseless. The law does not make any classification in
the subject of taxation, the kind of property, the rates to be levied or the amounts to be raised,
the methods of assessment, valuation and collection. Petitioners’ alleged distinctions are based
on variables that bear different consequences. While the implementation of the law may yield
varying end results depending on one’s profit margin and value-added, the Court cannot go
beyond what the legislature has laid down and interfere with the affairs of business.
The equal protection clause does not require the universal application of the laws on all
persons or things without distinction. This might in fact sometimes result in unequal
protection. What the clause requires is equality among equals as determined according to a
valid classification. By classification is meant the grouping of persons or things similar to each
other in certain particulars and different from all others in these same particulars. 85
Petitioners brought to the Court’s attention the introduction of Senate Bill No. 2038 by Sens.
S.R. Osmeña III and Ma. Ana Consuelo A.S. – Madrigal on June 6, 2005, and House Bill No.
4493 by Rep. Eric D. Singson. The proposed legislation seeks to amend the 70% limitation by
increasing the same to 90%. This, according to petitioners, supports their stance that the 70%
limitation is arbitrary and confiscatory. On this score, suffice it to say that these are still
proposed legislations. Until Congress amends the law, and absent any unequivocal basis for its
unconstitutionality, the 70% limitation stays.
B. Uniformity and Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
system of taxation.
Uniformity in taxation means that all taxable articles or kinds of property of the same class
shall be taxed at the same rate. Different articles may be taxed at different amounts provided
that the rate is uniform on the same class everywhere with all people at all times. 86
In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all
goods and services. Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and
108, respectively, of the NIRC, provide for a rate of 10% (or 12%) on sale of goods and
properties, importation of goods, and sale of services and use or lease of properties. These
same sections also provide for a 0% rate on certain sales and transaction.
Neither does the law make any distinction as to the type of industry or trade that will bear the
70% limitation on the creditable input tax, 5-year amortization of input tax paid on purchase of
capital goods or the 5% final withholding tax by the government. It must be stressed that the
rule of uniform taxation does not deprive Congress of the power to classify subjects of
taxation, and only demands uniformity within the particular class. 87
R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate
of 0% or 10% (or 12%) does not apply to sales of goods or services with gross annual sales or
receipts not exceeding ₱1,500,000.00.88Also, basic marine and agricultural food products in
their original state are still not subject to the tax,89 thus ensuring that prices at the grassroots
level will remain accessible. As was stated in Kapatiran ng mga Naglilingkod sa Pamahalaan
ng Pilipinas, Inc. vs. Tan:90
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by
persons engaged in business with an aggregate gross annual sales exceeding ₱200,000.00.
Small corner sari-sari stores are consequently exempt from its application. Likewise exempt
from the tax are sales of farm and marine products, so that the costs of basic food and other
necessities, spared as they are from the incidence of the VAT, are expected to be relatively
lower and within the reach of the general public.
It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and
unduly favors those with high profit margins. Congress was not oblivious to this. Thus, to
equalize the weighty burden the law entails, the law, under Section 116, imposed a 3%
percentage tax on VAT-exempt persons under Section 109(v), i.e., transactions with gross
annual sales and/or receipts not exceeding ₱1.5 Million. This acts as a equalizer because in
65
effect, bigger businesses that qualify for VAT coverage and VAT-exempt taxpayers stand on
equal-footing.
Moreover, Congress provided mitigating measures to cushion the impact of the imposition of
the tax on those previously exempt. Excise taxes on petroleum products91 and natural
gas92 were reduced. Percentage tax on domestic carriers was removed.93 Power producers are
now exempt from paying franchise tax.94
Aside from these, Congress also increased the income tax rates of corporations, in order to
distribute the burden of taxation. Domestic, foreign, and non-resident corporations are now
subject to a 35% income tax rate, from a previous 32%.95 Intercorporate dividends of non-
resident foreign corporations are still subject to 15% final withholding tax but the tax credit
allowed on the corporation’s domicile was increased to 20%.96 The Philippine Amusement
and Gaming Corporation (PAGCOR) is not exempt from income taxes anymore. 97 Even the
sale by an artist of his works or services performed for the production of such works was not
spared.
All these were designed to ease, as well as spread out, the burden of taxation, which would
otherwise rest largely on the consumers. It cannot therefore be gainsaid that R.A. No. 9337 is
equitable.
C. Progressivity of Taxation
Lastly, petitioners contend that the limitation on the creditable input tax is anything but
regressive. It is the smaller business with higher input tax-output tax ratio that will suffer the
consequences.
Progressive taxation is built on the principle of the taxpayer’s ability to pay. This principle
was also lifted from Adam Smith’s Canons of Taxation, and it states:
I. The subjects of every state ought to contribute towards the support of the government, as
nearly as possible, in proportion to their respective abilities; that is, in proportion to the
revenue which they respectively enjoy under the protection of the state.
Taxation is progressive when its rate goes up depending on the resources of the person
affected.98
The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The
principle of progressive taxation has no relation with the VAT system inasmuch as the VAT
paid by the consumer or business for every goods bought or services enjoyed is the same
regardless of income. In
other words, the VAT paid eats the same portion of an income, whether big or small. The
disparity lies in the income earned by a person or profit margin marked by a business, such
that the higher the income or profit margin, the smaller the portion of the income or profit that
is eaten by VAT. A converso, the lower the income or profit margin, the bigger the part that
the VAT eats away. At the end of the day, it is really the lower income group or businesses
with low-profit margins that is always hardest hit.
Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the
VAT. What it simply provides is that Congress shall "evolve a progressive system of
taxation." The Court stated in the Tolentino case, thus:
The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT,
are regressive. What it simply provides is that Congress shall ‘evolve a progressive system of
taxation.’ The constitutional provision has been interpreted to mean simply that ‘direct taxes
are . . . to be preferred [and] as much as possible, indirect taxes should be minimized.’ (E.
FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977))
Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax system.
Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes, would have been
prohibited with the proclamation of Art. VIII, §17 (1) of the 1973 Constitution from which the
present Art. VI, §28 (1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if
not impossible, to avoid them by imposing such taxes according to the taxpayers' ability to
pay. In the case of the VAT, the law minimizes the regressive effects of this imposition by
providing for zero rating of certain transactions (R.A. No. 7716, §3, amending §102 (b) of the
NIRC), while granting exemptions to other transactions. (R.A. No. 7716, §4 amending §103 of
the NIRC)99
CONCLUSION
It has been said that taxes are the lifeblood of the government. In this case, it is just an enema,
a first-aid measure to resuscitate an economy in distress. The Court is neither blind nor is it
turning a deaf ear on the plight of the masses. But it does not have the panacea for the malady
that the law seeks to remedy. As in other cases, the Court cannot strike down a law as
unconstitutional simply because of its yokes.
Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the
judiciary should stand ready to afford relief. There are undoubtedly many wrongs the
judicature may not correct, for instance, those involving political questions. . . .
Let us likewise disabuse our minds from the notion that the judiciary is the repository of
remedies for all political or social ills; We should not forget that the Constitution has
judiciously allocated the powers of government to three distinct and separate compartments;
and that judicial interpretation has tended to the preservation of the independence of the three,
and a zealous regard of the prerogatives of each, knowing full well that one is not the guardian
of the others and that, for official wrong-doing, each may be brought to account, either by
impeachment, trial or by the ballot box.100
The words of the Court in Vera vs. Avelino101 holds true then, as it still holds true now. All
things considered, there is no raison d'être for the unconstitutionality of R.A. No. 9337.
WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos.
168056, 168207, 168461, 168463, and 168730, are hereby DISMISSED.
There being no constitutional impediment to the full enforcement and implementation of R.A.
No. 9337, the temporary restraining order issued by the Court on July 1, 2005
is LIFTED upon finality of herein decision.
SO ORDERED.

66
 Republic of the Philippines PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A[2] on
Supreme Court January 1, 1977. Simultaneous to its creation, P.D. No. 1067-B[3] (supplementing P.D. No.
Manila 1067-A) was issued exempting PAGCOR from the payment of any type of tax, except a
franchise tax of five percent (5%) of the gross revenue.[4] Thereafter, on June 2, 1978, P.D.
EN BANC No. 1399 was issued expanding the scope of PAGCOR's exemption. [5]
To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D.
PHILIPPINE AMUSEMENT AND GAMING G.R. No. 172087 No. 1869[6] was issued. Section 13 thereof reads as follows:
CORPORATION (PAGCOR),
Petitioner, Present: Sec. 13. Exemptions. x x x

CORONA, C.J., (1) Customs Duties, taxes and other imposts on importations. -
CARPIO, All importations of equipment, vehicles, automobiles, boats, ships, barges,
CARPIO MORALES, aircraft and such other gambling paraphernalia, including accessories or
- versus - VELASCO, JR., related facilities, for the sole and exclusive use of the casinos, the proper
NACHURA,* and efficient management and administration thereof and such other clubs,
LEONARDO-DE CASTRO, recreation or amusement places to be established under and by virtue of
BRION,* this Franchise shall be exempt from the payment of duties, taxes and other
THE BUREAU OF INTERNAL REVENUE PERALTA, imposts, including all kinds of fees, levies, or charges of any kind or
(BIR), represented herein by HON. JOSE MARIO BUAG, in BERSAMIN, nature.
his official capacity as COMMISSIONER OF INTERNAL DEL CASTILLO, Vessels and/or accessory ferry boats imported or to be imported
REVENUE, ABAD, by any corporation having existing contractual arrangements with the
Public Respondent, VILLARAMA, JR., Corporation, for the sole and exclusive use of the casino or to be used to
PEREZ, service the operations and requirements of the casino, shall likewise be
JOHN DOE and JANE DOE, who are persons acting for, in MENDOZA, and totally exempt from the payment of all customs duties, taxes and other
behalf, or under the authority of Respondent. SERENO, JJ. imposts, including all kinds of fees, levies, assessments or charges of any
Public and Private Respondents. kind or nature, whether National or Local.
Promulgated:
(2) Income and other taxes. - (a) Franchise Holder: No tax of
March 15, 2011 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
x-----------------------------------------------------------------------------------------x any form of tax or charge attach in any way to the earnings of the
Corporation, except a Franchise Tax of five percent (5%)of the gross
revenue or earnings derived by the Corporation from its operation
DECISION 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,
PERALTA, J.: established, or collected by any municipal, provincial or national
government authority.
For resolution of this Court is the Petition (b) Others: The exemption herein granted for earnings derived
for Certiorari and Prohibition[1] with prayer for the issuance of a Temporary Restraining from the operations conducted under the franchise, specifically from the
Order and/or Preliminary Injunction, dated April 17, 2006, of petitioner Philippine payment of any tax, income or otherwise, as well as any form of charges,
Amusement and Gaming Corporation (PAGCOR), seeking the declaration of nullity of fees or levies, shall inure to the benefit of and extend to corporation(s),
Section 1 of Republic Act (R.A.) No. 9337 insofar as it amends Section 27 (c) of the National association(s), agency(ies), or individual(s) with whom the Corporation or
Internal Revenue Code of 1997, by excluding petitioner from exemption from corporate operator has any contractual relationship in connection with the operations
income tax for being repugnant to Sections 1 and 10 of Article III of the of the casino(s) authorized to be conducted under this Franchise and to
Constitution. Petitioner further seeks to prohibit the implementation of Bureau of Internal those receiving compensation or other remuneration from the Corporation
Revenue (BIR) Revenue Regulations No. 16-2005 for being contrary to law. as a result of essential facilities furnished and/or technical services
rendered to the Corporation or operator.
The undisputed facts follow.

67
 The fee or remuneration of foreign entertainers contracted by the
Corporation or operator in pursuance of this provision shall be free of any
tax.
(3) Dividend Income. − Notwithstanding any provision of law to
the contrary, in the event the Corporation should declare a cash dividend
income corresponding to the participation of the private sector shall, as an
incentive to the beneficiaries, be subject only to a final flat income rate of
ten percent (10%) of the regular income tax rates. The dividend income
shall not in such case be considered as part of the beneficiaries' taxable
income; provided, however, that such dividend income shall be totally
exempted from income or other form of taxes if invested within six (6)
months from the date the dividend income is received in the following:
(a) operation of the casino(s) or investments in any
affiliate activity that will ultimately redound to the benefit of the
Corporation; or any other corporation with whom the
Corporation has any existing arrangements in connection with or
related to the operations of the casino(s);
(b) Government bonds, securities, treasury notes, or
government debentures; or
(c) BOI-registered or export-oriented corporation(s).[7]
PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it
was later restored by Letter of Instruction No. 1430, which was issued in September 1984.
On January 1, 1998, R.A. No. 8424,[8] otherwise known as the National Internal
Revenue Code of 1997, took effect. Section 27 (c) of R.A. No. 8424 provides that government-
owned and controlled corporations (GOCCs) shall pay corporate income tax, except petitioner
PAGCOR, the Government Service and Insurance Corporation, the Social Security System,
the Philippine Health Insurance Corporation, and the Philippine Charity Sweepstakes Office,
thus:
(c) Government-owned or Controlled Corporations, Agencies or
Instrumentalities. - The provisions of existing special general laws to the
contrary notwithstanding, all corporations, agencies or instrumentalities
owned and controlled by the Government, except the Government
Service and Insurance Corporation (GSIS), the Social Security
System (SSS), the Philippine Health Insurance Corporation (PHIC),
the Philippine Charity Sweepstakes Office (PCSO), and the Philippine
Amusement and Gaming Corporation (PAGCOR), shall pay such rate
of tax upon their taxable income as are imposed by this Section upon
corporations or associations engaged in similar business, industry, or
activity.[9]
With the enactment of R.A. No. 9337[10] on May 24, 2005, certain sections of the
National Internal Revenue Code of 1997 were amended. The particular amendment that is at
issue in this case is Section 1 of R.A. No. 9337, which amended Section 27 (c) of the National
Internal Revenue Code of 1997 by excluding PAGCOR from the enumeration of GOCCs that
are exempt from payment of corporate income tax, thus:
(c) Government-owned or Controlled Corporations, Agencies or
Instrumentalities. - The provisions of existing special general laws to the
contrary notwithstanding, all corporations, agencies, or instrumentalities
owned and controlled by the Government, except the Government
68
Service and Insurance Corporation (GSIS), the Social Security System
(SSS), the Philippine Health Insurance Corporation (PHIC), and the
Philippine Charity Sweepstakes Office (PCSO), shall pay such rate of
tax upon their taxable income as are imposed by this Section upon
corporations or associations engaged in similar business, industry, or
activity.
Different groups came to this Court via petitions for certiorari and
prohibition[11] assailing the validity and constitutionality of R.A. No. 9337, in particular:
1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of goods and
properties; Section 5, which imposes a 10% VAT on importation of goods; and Section 6,
which imposes a 10% VAT on sale of services and use or lease of properties, all contain a
uniform proviso authorizing the President, upon the recommendation of the Secretary of
Finance, to raise the VAT rate to 12%. The said provisions were alleged to be violative of
Section 28 (2), Article VI of the Constitution, which section vests in Congress the exclusive
authority to fix the rate of taxes, and of Section 1, Article III of the Constitution on due
process, as well as of Section 26 (2), Article VI of the Constitution, which section provides
for the "no amendment rule" upon the last reading of a bill;
2) Sections 8 and 12 were alleged to be violative of Section 1, Article III of the
Constitution, or the guarantee of equal protection of the laws, and Section 28 (1), Article VI
of the Constitution; and
3) other technical aspects of the passage of the law, questioning the manner it was
passed.
On September 1, 2005, the Court dismissed all the petitions and upheld the
constitutionality of R.A. No. 9337.[12]
On the same date, respondent BIR issued Revenue Regulations (RR) No. 16-
2005,[13] specifically identifying PAGCOR as one of the franchisees subject to 10% VAT
imposed under Section 108 of the National Internal Revenue Code of 1997, as amended by
R.A. No. 9337. The said revenue regulation, in part, reads:
Sec. 4. 108-3. Definitions and Specific Rules on Selected
Services.
xxxx
(h) x x x
Gross Receipts of all other franchisees, other than those covered
by Sec. 119 of the Tax Code, regardless of how their franchisees may have
been granted, shall be subject to the 10% VAT imposed under Sec.108 of
the Tax Code. This includes, among others, the Philippine Amusement
and Gaming Corporation (PAGCOR), and its licensees or franchisees.
Hence, the present petition for certiorari.
 PAGCOR raises the following issues:
I After a careful study of the positions presented by the parties, this Court finds the
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND
VOID AB INITIO FOR BEING REPUGNANT TO THE EQUAL
PROTECTION [CLAUSE] EMBODIED IN SECTION 1, ARTICLE III
OF THE 1987 CONSTITUTION.
II
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND
VOID AB INITIO FOR BEING REPUGNANT TO THE NON-
IMPAIRMENT [CLAUSE] EMBODIED IN SECTION 10, ARTICLE III
OF THE 1987 CONSTITUTION.
III
WHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH
(H) IS NULL AND VOID AB INITIO FOR BEING BEYOND THE
SCOPE OF THE BASIC LAW, RA 8424, SECTION 108, INSOFAR AS
THE SAID REGULATION IMPOSED VAT ON THE SERVICES OF
THE PETITIONER AS WELL AS PETITIONERS LICENSEES OR
FRANCHISEES WHEN THE BASIC LAW, AS INTERPRETED BY
APPLICABLE JURISPRUDENCE, DOES NOT IMPOSE VAT ON
PETITIONER OR ON PETITIONERS LICENSEES OR
FRANCHISEES.[14]
The BIR, in its Comment[15] dated December 29, 2006, counters:
I xxxx
SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D. 1869
ARE BOTH VALID AND CONSTITUTIONAL PROVISIONS OF
LAWS THAT SHOULD BE HARMONIOUSLY CONSTRUED
TOGETHER SO AS TO GIVE EFFECT TO ALL OF THEIR
PROVISIONS WHENEVER POSSIBLE.
II
SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF SECTION 1
AND SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.
III
BIR REVENUE REGULATIONS ARE PRESUMED VALID AND
CONSTITUTIONAL UNTIL STRICKEN DOWN BY LAWFUL
AUTHORITIES.
The Office of the Solicitor General (OSG), by way of Manifestation In Lieu of
Comment,[16] concurred with the arguments of the petitioner. It added that although the State
is free to select the subjects of taxation and that the inequity resulting from singling out a
particular class for taxation or exemption is not an infringement of the constitutional
limitation, a tax law must operate with the same force and effect to all persons, firms and
corporations placed in a similar situation. Furthermore, according to the OSG, public
respondent BIR exceeded its statutory authority when it enacted RR No. 16-2005, because the
latter's provisions are contrary to the mandates of P.D. No. 1869 in relation to R.A. No. 9337.
69
The main issue is whether or not PAGCOR is still exempt from corporate income
tax and VAT with the enactment of R.A. No. 9337.
petition partly meritorious.
Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal
Revenue Code of 1977, petitioner is no longer exempt from corporate income tax as it has
been effectively omitted from the list of GOCCs that are exempt from it. Petitioner argues that
such omission is unconstitutional, as it is violative of its right to equal protection of the laws
under Section 1, Article III of the Constitution:
Sec. 1. No person shall be deprived of life, liberty, or property
without due process of law, nor shall any person be denied the equal
protection of the laws.
.
In City of Manila v. Laguio, Jr.,[17] this Court expounded the meaning and scope of
equal protection, thus:
Equal protection requires that all persons or things similarly
situated should be treated alike, both as to rights conferred and
responsibilities imposed. Similar subjects, in other words, should not be
treated differently, so as to give undue favor to some and unjustly
discriminate against others. The guarantee means that no person or class of
persons shall be denied the same protection of laws which is enjoyed by
other persons or other classes in like circumstances. The "equal protection of
the laws is a pledge of the protection of equal laws." It limits governmental
discrimination. The equal protection clause extends to artificial persons but
only insofar as their property is concerned.
Legislative bodies are allowed to classify the subjects of
legislation. If the classification is reasonable, the law may operate only on
some and not all of the people without violating the equal protection clause.
The classification must, as an indispensable requisite, not be arbitrary. To be
valid, it must conform to the following requirements:
1) It must be based on substantial distinctions.
2) It must be germane to the purposes of the law.
3) It must not be limited to existing conditions only.
4) It must apply equally to all members of the class.[18]
It is not contested that before the enactment of R.A. No. 9337, petitioner was one of
the five GOCCs exempted from payment of corporate income tax as shown in R.A. No. 8424,
Section 27 (c) of which, reads:
(c) Government-owned or Controlled Corporations, Agencies or
Instrumentalities. - The provisions of existing special or general laws to
the contrary notwithstanding, all corporations, agencies or
instrumentalities owned and controlled by the Government, except the
Government Service and Insurance Corporation (GSIS), the Social
Security System (SSS), the Philippine Health Insurance Corporation
(PHIC), the Philippine Charity Sweepstakes Office (PCSO), and
the Philippine Amusement and Gaming Corporation (PAGCOR),
shall pay such rate of tax upon their taxable income as are imposed by this
 Section upon corporations or associations engaged in similar business,
industry, or activity.[19]
A perusal of the legislative records of the Bicameral Conference Meeting of the
Committee on Ways on Means dated October 27, 1997 would show that the exemption of
PAGCOR from the payment of corporate income tax was due to the acquiescence of the
Committee on Ways on Means to the request of PAGCOR that it be exempt from such
tax.[20] The records of the Bicameral Conference Meeting reveal:
HON. R. DIAZ. The other thing, sir, is we --- I noticed we
imposed a tax on lotto winnings.
CHAIRMAN ENRILE. Wala na, tinanggal na namin yon.
HON. R. DIAZ. Tinanggal na ba natin yon?
CHAIRMAN ENRILE. Oo.
HON. R. DIAZ. Because I was wondering whether we covered
the tax on --- Whether on a universal basis, we included a tax on
cockfighting winnings.
CHAIRMAN ENRILE. No, we removed the ---
HON. R. DIAZ. I . . . (inaudible) natin yong lotto?
CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon
request.
CHAIRMAN JAVIER. Yeah, Philippine Insurance
Commission.
CHAIRMAN ENRILE. Philippine Insurance --- Health, health
ba. Yon ang request ng Chairman, I will accept. (laughter) Pag-Pag-ibig
yon, maliliit na sa tao yon.
HON. ROXAS. Mr. Chairman, I wonder if in the revenue
gainers if we factored in an amount that would reflect the VAT and other
sales taxes---
CHAIRMAN ENRILE. No, were talking of this measure
only. We will not --- (discontinued)
HON. ROXAS. No, no, no, no, from the --- arising from the
exemption. Assuming that when we release the money into the hands of
the public, they will not use that to --- for wallpaper.They will spend that
eh, Mr. Chairman. So when they spend that---
CHAIRMAN ENRILE. Theres a VAT.
HON. ROXAS. There will be a VAT and there will be other
sales taxes no. Is there a quantification? Is there an approximation?
70
CHAIRMAN JAVIER. Not anything.
HON. ROXAS. So, in effect, we have sterilized that entire seven
billion. In effect, it is not circulating in the economy which is unrealistic.
CHAIRMAN ENRILE. It does, it does, because this is taken and
spent by government, somebody receives it in the form of wages and
supplies and other services and other goods. They are not being taken
from the public and stored in a vault.
CHAIRMAN JAVIER. That 7.7 loss because of tax
exemption. That will be extra income for the taxpayers.
HON. ROXAS. Precisely, so they will be spending it.[21]
The discussion above bears out that under R.A. No. 8424, the exemption of
PAGCOR from paying corporate income tax was not based on a classification showing
substantial distinctions which make for real differences, but to reiterate, the exemption was
granted upon the request of PAGCOR that it be exempt from the payment of corporate income
tax.
With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424,
PAGCOR has been excluded from the enumeration of GOCCs that are exempt from paying
corporate income tax. The records of the Bicameral Conference Meeting dated April 18, 2005,
of the Committee on the Disagreeing Provisions of Senate Bill No. 1950 and House Bill No.
3555, show that it is the legislative intent that PAGCOR be subject to the payment of
corporate income tax, thus:
THE CHAIRMAN (SEN. RECTO). Yes, Osmea, the proponent of the
amendment.
SEN. OSMEA. Yeah. Mr. Chairman, one of the reasons why we're even
considering this VAT bill is we want to show the world who our
creditors, that we are increasing official revenues that go to the national
budget. Unfortunately today, Pagcor is unofficial.
Now, in 2003, I took a quick look this morning, Pagcor had a net
income of 9.7 billion after paying some small taxes that they are
subjected to. Of the 9.7 billion, they claim they remitted to national
government seven billion. Pagkatapos, there are other specific
remittances like to the Philippine Sports Commission, etc., as mandated
by various laws, and then about 400 million to the President's Social
Fund. But all in all, their net profit today should be about 12
billion. That's why I am questioning this two billion. Because while
essentially they claim that the money goes to government, and I will
accept that just for the sake of argument. It does not pass through
the appropriation process. And I think that at least if we can
capture 35 percent or 32 percent through the budgetary process,
first, it is reflected in our official income of government which is
applied to the national budget, and secondly, it goes through what is
constitutionally mandated as Congress appropriating and defining
where the money is spent and not through a board of directors that
has absolutely no accountability.
REP. PUENTEBELLA. Well, with all due respect, Mr. Chairman,
follow up lang.
There is wisdom in the comments of my good friend from Cebu,
Senator Osmea.
SEN. OSMEA. And Negros.
REP. PUENTEBELLA. And Negros at the same time ay
Kasimanwa. But I would not want to put my friends from the
Department of Finance in a difficult position, but may we know your
comments on this knowing that as Senator Osmea just mentioned, he
said, I accept that that a lot of it is going to spending for basic
services, you know, going to most, I think, supposedly a lot or most of it
should go to government spending, social services and the like. What is
your comment on this? This is going to affect a lot of services on the
government side.
THE CHAIRMAN (REP. LAPUS). Mr. Chair, Mr. Chair.
SEN. OSMEA. It goes from pocket to the other, Monico.
REP. PUENTEBELLA. I know that. But I wanted to ask them, Mr.
Senator, because you may have your own pre-judgment on this and I
don't blame you. I don't blame you. And I know you have your own
research. But will this not affect a lot, the disbursements on social
services and other?
REP. LOCSIN. Mr. Chairman. Mr. Chairman, if I can add to that
question also. Wouldn't it be easier for you to explain to, say,
foreign creditors, how do you explain to them that if there is a fiscal gap
some of our richest corporations has [been] spared [from] taxation by
the government which is one rich source of revenues. Now, why do you
save, why do you spare certain government corporations on that, like
Pagcor? So, would it be easier for you to make an argument if
everything was exposed to taxation?
REP. TEVES. Mr. Chair, please.
THE CHAIRMAN (REP. LAPUS). Can we ask the DOF to respond to
those before we call Congressman Teves?
MR. PURISIMA. Thank you, Mr. Chair.
Yes, from definitely improving the collection, it will help us because
it will then enter as an official revenue although when dividends
declare it also goes in as other income. (sic)
xxxx
REP. TEVES. Mr. Chairman.
71
xxxx
THE CHAIRMAN (REP. LAPUS). Congressman Teves.
REP. TEVES. Yeah. Pagcor is controlled under Section 27, that is on
income tax. Now, we are talking here on value-added tax. Do you
mean to say we are going to amend it from income tax to value-
added tax, as far as Pagcor is concerned?
THE CHAIRMAN (SEN. RECTO). No. We are just amending that
section with regard to the exemption from income tax of Pagcor.
xxxx
REP. NOGRALES. Mr. Chairman, Mr. Chairman. Mr. Chairman.
THE CHAIRMAN (REP. LAPUS). Congressman Nograles.
REP. NOGRALES. Just a point of inquiry from the Chair. What exactly
are the functions of Pagcor that are VATable? What will we VAT in
Pagcor?
THE CHAIRMAN (REP. LAPUS). This is on own income tax. This is
Pagcor income tax.
REP. NOGRALES. No, that's why. Anong i-va-Vat natin sa kanya. Sale
of what?
xxxx
REP. VILLAFUERTE. Mr. Chairman, my question is, what are we
VATing Pagcor with, is it the . . .
REP. NOGRALES. Mr. Chairman, this is a secret agreement or the way
they craft their contract, which basis?
THE CHAIRMAN (SEN. RECTO). Congressman Nograles, the
Senate version does not discuss a VAT on Pagcor but it just takes
away their exemption from non-payment of income tax.[22]
Taxation is the rule and exemption is the exception.[23] The burden of proof rests
upon the party claiming exemption to prove that it is, in fact, covered by the exemption so
claimed.[24] As a rule, tax exemptions are construed strongly against the
claimant.[25] Exemptions must be shown to exist clearly and categorically, and supported by
clear legal provision.[26]
In this case, PAGCOR failed to prove that it is still exempt from the payment of
corporate income tax, considering that Section 1 of R.A. No. 9337 amended Section 27 (c) of
the National Internal Revenue Code of 1997 by omitting PAGCOR from the exemption. The
legislative intent, as shown by the discussions in the Bicameral Conference Meeting, is to
require PAGCOR to pay corporate income tax; hence, the omission or removal of PAGCOR
from exemption from the payment of corporate income tax. It is a basic precept of statutory
construction that the express mention of one person, thing, act, or consequence excludes all
others as expressed in the familiar maxim expressio unius est exclusio alterius.[27] Thus, the
express mention of the GOCCs exempted from payment of corporate income tax excludes all
others. Not being excepted, petitioner PAGCOR must be regarded as coming within the
purview of the general rule that GOCCs shall pay corporate income tax, expressed in the
maxim: exceptio firmat regulam in casibus non exceptis.[28]
PAGCOR cannot find support in the equal protection clause of the Constitution, as
the legislative records of the Bicameral Conference Meeting dated October 27, 1997, of the
Committee on Ways and Means, show that PAGCORs exemption from payment of corporate
income tax, as provided in Section 27 (c) of R.A. No. 8424, or the National Internal Revenue
Code of 1997, was not made pursuant to a valid classification based on substantial distinctions
and the other requirements of a reasonable classification bylegislative bodies, so that the law
may operate only on some, and not all, without violating the equal protection clause. The
legislative records show that the basis of the grant of exemption to PAGCOR from corporate
income tax was PAGCORs own request to be exempted.
Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab
initio for violating the non-impairment clause of the Constitution. Petitioner avers that laws
form part of, and is read into, the contract even without the parties expressly saying
so. Petitioner states that the private parties/investors transacting with it considered the tax
exemptions, which inure to their benefit, as the main consideration and inducement for their
decision to transact/invest with it. Petitioner argues that the withdrawal of its exemption from
corporate income tax by R.A. No. 9337 has the effect of changing the main consideration and
inducement for the transactions of private parties with it; thus, the amendatory provision is
violative of the non-impairment clause of the Constitution.
Petitioners contention lacks merit.
The non-impairment clause is contained in Section 10, Article III of the
Constitution, which provides that no law impairing the obligation of contracts shall be passed.
The non-impairment clause is limited in application to laws that derogate from prior acts
or contracts by enlarging, abridging or in any manner changing the intention of the
parties.[29] There is impairment if a subsequent law changes the terms of a contract between
the parties, imposes new conditions, dispenses with those agreed upon or withdraws remedies
for the enforcement of the rights of the parties.[30]
As regards franchises, Section 11, Article XII of the Constitution[31] provides that no
franchise or right shall be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when the common good so requires.[32]
In Manila Electric Company v. Province of Laguna,[33] the Court held that a
franchise partakes the nature of a grant, which is beyond the purview of the non-
impairment clause of the Constitution.[34] The pertinent portion of the case states:
While the Court has, not too infrequently, referred to tax
exemptions contained in special franchises as being in the nature of
contracts and a part of the inducement for carrying on the franchise, these
exemptions, nevertheless, are far from being strictly contractual in
nature. Contractual tax exemptions, in the real sense of the term and
72
where the non-impairment clause of the Constitution can rightly be
invoked, are those agreed to by the taxing authority in contracts, such as
those contained in government bonds or debentures, lawfully entered into
by them under enabling laws in which the government, acting in its private
capacity, sheds its cloak of authority and waives its governmental
immunity. Truly, tax exemptions of this kind may not be revoked without
impairing the obligations of contracts. These contractual tax exemptions,
however, are not to be confused with tax exemptions granted under
franchises. A franchise partakes the nature of a grant which is beyond
the purview of the non-impairment clause of the Constitution. Indeed,
Article XII, Section 11, of the 1987 Constitution, like its precursor
provisions in the 1935 and the 1973 Constitutions, is explicit that no
franchise for the operation of a public utility shall be granted except
under the condition that such privilege shall be subject to amendment,
alteration or repeal by Congress as and when the common good so
requires.[35]
In this case, PAGCOR was granted a franchise to operate and maintain gambling
casinos, clubs and other recreation or amusement places, sports, gaming pools, i.e., basketball,
football, lotteries, etc., whether on land or sea, within the territorial jurisdiction of the
Republic of the Philippines.[36] Under Section 11, Article XII of the Constitution, PAGCORs
franchise is subject to amendment, alteration or repeal by Congress such as the amendment
under Section 1 of R.A. No. 9377. Hence, the provision in Section 1 of R.A. No. 9337,
amending Section 27 (c) of R.A. No. 8424 by withdrawing the exemption of PAGCOR from
corporate income tax, which may affect any benefits to PAGCORs transactions with private
parties, is not violative of the non-impairment clause of the Constitution.
Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting
PAGCOR to 10% VAT is invalid for being contrary to R.A. No. 9337. Nowhere in R.A. No.
9337 is it provided that petitioner can be subjected to VAT. R.A. No. 9337 is clear only as to
the removal of petitioner's exemption from the payment of corporate income tax, which was
already addressed above by this Court.
As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT
pursuant to Section 7 (k) thereof, which reads:
Sec. 7. Section 109 of the same Code, as amended, is hereby
further amended to read as follows:
Section 109. Exempt Transactions. - (1)
Subject to the provisions of Subsection (2) hereof, the
following transactions shall be exempt from the value-
added tax:
xxxx
(k) Transactions which are exempt under
international agreements to which the Philippines is a
signatory or under special laws, except Presidential
Decree No. 529.[37]
Petitioner is exempt from the payment of VAT, because PAGCORs charter, P.D.
No. 1869, is a special law that grants petitioner exemption from taxes.

Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A.
No. 9337, which retained Section 108 (B) (3) of R.A. No. 8424, thus:
[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A.
No. 8424), as amended, is hereby further amended to read as follows:
SEC. 108. Value-Added Tax on Sale of
Services and Use or Lease of Properties.
(A) Rate and Base of Tax. There shall be
levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts
derived from the sale or exchange of services,
including the use or lease of properties: x x x
xxxx
(B) Transactions Subject to Zero Percent
(0%) Rate. The following services performed in the
Philippines by VAT-registered persons shall be
subject to zero percent (0%) rate;
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 percent (0%) rate;
x x x x[38]
As pointed out by petitioner, although R.A. No. 9337 introduced amendments to
Section 108 of R.A. No. 8424 by imposing VAT on other services not previously covered, it
did not amend the portion of Section 108 (B) (3) that subjects to zero percent rate services
performed by VAT-registered persons 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 0% rate.
Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has
been thoroughly and extensively discussed in Commissioner of Internal Revenue v.Acesite
(Philippines) Hotel Corporation.[39] Acesite was the owner and operator of the Holiday Inn
Manila Pavilion Hotel. It leased a portion of the hotels premises to PAGCOR. It incurred VAT
amounting to P30,152,892.02 from its rental income and sale of food and beverages to
PAGCOR from January 1996 to April 1997. Acesite tried to shift the said taxes to PAGCOR
by incorporating it in the amount assessed to PAGCOR. However, PAGCOR refused to pay
the taxes because of its tax-exempt status. PAGCOR paid only the amount due to Acesite
minus VAT in the sum of P30,152,892.02. Acesite paid VAT in the amount
of P30,152,892.02 to the Commissioner of Internal Revenue, fearing the legal consequences of
its non-payment. In May 1998, Acesite sought the refund of the amount it paid as VAT on the
ground that its transaction with PAGCOR was subject to zero rate as it was rendered to a tax-
73
exempt entity. The Court ruled that PAGCOR and Acesite were both exempt from paying
VAT, thus:
xxxx
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.
(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.
Petitioner contends that the above tax exemption refers only to
PAGCOR's 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 PAGCOR's 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
74
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
(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., 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 contractor's 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.[40]
Although the basis of the exemption of PAGCOR and Acesite from VAT in the case
of The Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporationwas
Section 102 (b) of the 1977 Tax Code, as amended, which section was retained as Section 108
(B) (3) in R.A. No. 8424,[41] it is still applicable to this case, since the provision relied upon
has been retained in R.A. No. 9337.[42]
It is settled rule that in case of discrepancy between the basic law and a rule or
regulation issued to implement said law, the basic law prevails, because the said rule or
regulation cannot go beyond the terms and provisions of the basic law. [43] RR No. 16-2005,
therefore, cannot go beyond the provisions of R.A. No. 9337. Since PAGCOR is exempt from
VAT under R.A. No. 9337, the BIR exceeded its authority in subjecting PAGCOR to 10%
VAT under RR No. 16-2005; hence, the said regulatory provision is hereby nullified.
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act
No. 9337, amending Section 27 (c) of the National Internal Revenue Code of 1997, by
excluding petitioner Philippine Amusement and Gaming Corporation from the enumeration of
government-owned and controlled corporations exempted from corporate income tax is valid
and constitutional, while BIR Revenue Regulations No. 16-2005 insofar as it subjects
PAGCOR to 10% VAT is null and void for being contrary to the National Internal Revenue
Code of 1997, as amended by Republic Act No. 9337.
No costs.
SO ORDERED.
 THIRD DIVISION
[G.R. No. 131359. May 5, 1999]
MANILA ELECTRIC COMPANY, petitioner vs. PROVINCE OF LAGUNA and
BENITO R. BALAZO, in his capacity as Provincial Treasurer of
Laguna, respondents.
DECISION
VITUG, J.:
On various dates, certain municipalities of the Province of Laguna including, Bian, Sta
Rosa, San Pedro, Luisiana, Calauan and Cabuyao, by virtue of existing laws then in effect,
issued resolutions through their respective municipal councils granting franchise in favor of
petitioner Manila Electric Company (MERALCO) for the supply of electric light, heat and
power within their concerned areas. On 19 January 1983, MERALCO was likewise granted a
franchise by the National Electrification Administration to operate an electric light and power
service in the Municipality of Calamba, Laguna.
On 12 September 1991, Republic Act No. 7160, otherwise known as the Local
Government Code of 1991, was enacted to take effect on 01 January 1992 enjoining local
government units to create their own sources of revenue and to levy taxes, fees and charges,
subject to the limitations expressed therein, consistent with the basic policy of local
autonomy. Pursuant to the provisions of the Code, respondent province enacted Laguna
Provincial Ordinance No. 01-92, effective 01 January 1993, providing, in part, as follows:
Sec. 2.09. Franchise Tax. There is hereby imposed a tax on businesses enjoying a franchise, at
a rate of fifty percent (50%) of one percent (1%) of the gross annual receipts, which shall
include both cash sales and sales on account realized during the preceding calendar year
within this province, including the territorial limits on any city located in the province [1]
On the basis of the above ordinance, respondent Provincial Treasurer sent a demand
letter to MERALCO for the corresponding tax payment. Petitioner MERALCO paid the tax,
which then amounted to P19,520,628.42, under protest. A formal claim for refund was
thereafter sent by MERALCO to the Provincial Treasurer of Laguna claiming that the
franchise tax it had paid and continued to pay to the National Government pursuant to P.D.
551 already included the franchise tax imposed by the Provincial Tax Ordinance. MERALCO
contended that the imposition of a franchise tax under Section 2.09 of Laguna Provincial
Ordinance No. 01-92, insofar as it concerned MERALCO, contravened the provisions of
Section 1 of P.D. 551 which read:
Any provision of law or local ordinance to the contrary notwithstanding, the franchise tax
payable by all grantees of franchises to generate, distribute and sell electric current for light,
heat and power shall be two per cent (2%) of their gross receipts received from the sale of
electric current and from transactions incident to the generation, distribution and sale of
electric current.
Such franchise tax shall be payable to the Commissioner of Internal Revenue or his duly
authorized representative on or before the twentieth day of the month following the end of
each calendar quarter or month, as may be provided in the respective franchise or pertinent
municipal regulation and shall, any provision of the Local Tax Code or any other law to the
contrary notwithstanding, be in lieu of all taxes and assessments of whatever nature imposed
by any national or local authority on earnings, receipts, income and privilege of generation,
distribution and sale of electric current.
On 28 August 1995, the claim for refund of petitioner was denied in a letter signed by
Governor Jose D. Lina. In denying the claim, respondents relied on a more recent
law, i.e., Republic Act No. 7160 or the Local Government Code of 1991, than the old decree
invoked by petitioner.
On 14 February 1996, petitioner MERALCO filed with the Regional Trial Court of Sta
Cruz, Laguna, a complaint for refund, with a prayer for the issuance of a writ of preliminary
injunction and/or temporary restraining order, against the Province of Laguna and also Benito
75
R. Balazo in his capacity as the Provincial Treasurer of Laguna. Aside from the amount of
P19,520,628.42 for which petitioner MERALCO had priority made a formal request for
refund, petitioner thereafter likewise made additional payments under protest on various dates
totaling P27,669,566.91.
The trial court, in its assailed decision of 30 September 1997, dismissed the complaint
and concluded:
WHEREFORE, IN THE LIGHT OF ALL THE FOREGOING CONSIDERATIONS,
JUDGMENT is hereby rendered in favor of the defendants and against the plaintiff, by:
1. Ordering the dismissal of the Complaint; and
2. Declaring Laguna Provincial Tax Ordinance No. 01-92 as valid, binding, reasonable and
enforceable.[2]
In the instant petition, MERALCO assails the above ruling and brings up the following
issues; viz:
1. Whether the imposition of a franchise tax under Section 2.09 of Laguna Provincial
Ordinance No. 01-92, insofar as petitioner is concerned, is violative of the non-impairment
clause of the Constitution and Section 1 of Presidential Decree No. 551.
2. Whether Republic Act. No. 7160, otherwise known as the Local Government Code of 1991,
has repealed, amended or modified Presidential Decree No. 551.
3. Whether the doctrine of exhaustion of administrative remedies is applicable in this case.[3]
The petition lacks merit.
Prefatorily, it might be well to recall that local governments do not have
the inherent power to tax[4] except to the extent that such power might be delegated to them
either by the basic law or by statute.Presently, under Article X of the 1987 Constitution, a
general delegation of that power has been given in favor of local government units. Thus:
Sec. 3. The Congress shall enact a local government code which shall provide for a more
responsive and accountable local government structure instituted through a system of
decentralization with effective mechanisms of recall, initiative, and referendum, allocate
among the different local government units their powers, responsibilities, and resources, and
provide for the qualifications, election, appointment and removal, term, salaries, powers and
functions, and duties of local officials, and all other matters relating to the organization and
operation of the local units.
xxxxxxxxx
Sec. 5. Each local government shall have the power to create its own sources of revenues and
to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall
accrue exclusively to the local governments.
The 1987 Constitution has a counterpart provision in the 1973 Constitution which did come
out with a similar delegation of revenue making powers to local governments. [5]
Under the regime of the 1935 Constitution no similar delegation of tax powers was
provided, and local government units instead derived their tax powers under a limited statutory
authority. Whereas, then, the delegation of tax powers granted at that time by statute to local
governments was confined and defined (outside of which the power was deemed withheld),
the present constitutional rule (starting with the 1973 Constitution), however, would broadly
confer such tax powers subject only to specific exceptions that the law might prescribe.
Under the now prevailing Constitution, where there is neither a grant nor a prohibition
by statute, the tax power must be deemed to exist although Congress may provide statutory
limitations and guidelines. The basic rationale for the current rule is to safeguard the viability
and self-sufficiency of local government units by directly granting them general and broad tax
powers. Nevertheless, the fundamental law did not intend the delegation to be absolute and
unconditional; the constitutional objective obviously is to ensure that, while the local
government units are being strengthened and made more autonomous,[6] the legislature must
still see to it that (a) the taxpayer will not be over-burdened or saddled with multiple and
unreasonable impositions; (b) each local government unit will have its fair share of available
resources; (c) the resources of the national government will not be unduly disturbed; and (d)
local taxation will be fair, uniform, and just.
The Local Government Code of 1991 has incorporated and adopted, by and large the
provisions of the now repealed Local Tax Code, which had been in effect since 01 July 1973,
promulgated into law by Presidential Decree No. 231[7] pursuant to the then provisions of
Section 2, Article XI, of the 1973 Constitution. The 1991 Code explicitly authorizes provincial
governments, notwithstanding any exemption granted by any law or other special law, x x x
(to) impose a tax on businesses enjoying a franchise. Section 137 thereof provides:
Sec. 137. Franchise Tax Notwithstanding any exemption granted by any law or other special
law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding
fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar
year based on the incoming receipt, or realized, within its territorial jurisdiction. In the case of
a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of
the capital investment. In the succeeding calendar year, regardless of when the business started
to operate, the tax shall be based on the gross receipts for the preceding calendar year, or any
fraction thereof, as provided herein. (Underscoring supplied for emphasis)
Indicative of the legislative intent to carry out the Constitutional mandate of vesting
broad tax powers to local government units, the Local Government Code has effectively
withdrawn under Section 193 thereof, tax exemptions or incentives theretofore enjoyed by
certain entities. This law states:
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, including government-owned or controlled corporations, except local water
districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals
and educational institutions, are hereby withdrawn upon the effectivity of this
Code. (Underscoring supplied for emphasis)
The Code, in addition, contains a general repealing clause in its Section 534; thus:
Section 534. Repealing Clause. x x x.
(f) All general and special laws, acts, city charters, decrees, executive orders, proclamations
and administrative regulations, or part or parts thereof which are inconsistent with any of the
provisions of this Code are hereby repealed or modified accordingly. (Underscoring supplied
for emphasis)[8]
To exemplify, in Mactan Cebu International Airport Authority vs. Marcos,[9] the Court
upheld the withdrawal of the real estate tax exemption previously enjoyed by Mactan Cebu
International Airport Authority. The Court ratiocinated:
x x x These policy considerations are consistent with the State policy to ensure autonomy to
local governments and the objective of the LGC that they enjoy genuine and meaningful local
autonomy to enable them to attain their fullest development as self-reliant communities and
make them effective partners in the attainment of national goals. The power to tax is the most
effective instrument to raise needed revenues to finance and support myriad activities of local
government units for the delivery of basic service essential to the promotion of the general
welfare and the enhancement of peace, progress, and prosperity of the people. It may also be
relevant to recall that the original reasons for the withdrawal of tax exemption privileges
granted to government-owned and controlled corporations and all other units of government
were that such privilege resulted in serious tax base erosion and distortions in the tax treatment
of similarly situated enterprises, and there was a need for these entities to share in the
requirements of development, fiscal or otherwise, by paying the taxes and other charges due
from them.[10]
Petitioner in its complaint before the Regional Trial Court cited the ruling of this Court
in Province of Misamis Oriental vs. Cagayan Electric Power and Light Company,
Inc.;[11] thus:
76
In an earlier case, the phrase shall be in lieu of all taxes and at any time levied, established by,
or collected by any authority found in the franchise of the Visayan Electric Company was held
to exempt the company from payment of the 5% tax on corporate franchise provided in
Section 259 of the Internal Revenue Code (Visayan Electric Co. vs. David, 49 O.G. [No. 4]
1385)
Similarly, we ruled that the provision: shall be in lieu of all taxes of every name and nature in
the franchise of the Manila Railroad (Subsection 12, Section 1, Act No. 1510) exempts the
Manila Railroad from payment of internal revenue tax for its importations of coal and oil
under Act No. 2432 and the Amendatory Acts of the Philippine Legislature (Manila Railroad
vs. Rafferty, 40 Phil. 224).
The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act No. 1497)
justified the exemption of the Philippine Railway Company from payment of the tax on its
corporate franchise under Section 259 of the Internal Revenue Code, as amended by R.A. No.
39 (Philippine Railway Co vs. Collector of Internal Revenue, 91 Phil. 35).
Those magic words, shall be in lieu of all taxes also excused the Cotabato Light and Ice Plant
Company from the payment of the tax imposed by Ordinance No. 7 of the City of Cotabato
(Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA 231).
So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company when it
was required to pay the corporate franchise tax under Section 259 of the Internal Revenue
Code as amended by R.A. No. 39 (Carcar Electric & Ice Plant vs. Collector of Internal
Revenue, 53 O.G. [No. 4] 1068). This Court pointed out that such exemption is part of the
inducement for the acceptance of the franchise and the rendition of public service by the
grantee.[12]
In the recent case of the City Government of San Pablo, etc., et al. vs. Hon. Bienvenido
V. Reyes, et al.,[13] the Court has held that the phrase in lieu of all taxes have to give way to
the peremptory language of the Local Government Code specifically providing for the
withdrawal of such exemptions, privileges, and that upon the effectivity of the Local
Government Code all exemptions except only as provided therein can no longer be invoked by
MERALCO to disclaim liability for the local tax. In fine, the Court has viewed its previous
rulings as laying stress more on the legislative intent of the amendatory law whether the
tax exemption privilege is to be withdrawn or not rather than on whether the law can
withdraw, without violating the Constitution, the tax exemption or not.
While the Court has, not too infrequently, referred to tax exemptions contained in
special franchises as being in the nature of contracts and a part of the inducement for carrying
on the franchise, these exemptions, nevertheless, are far from being strictly contractual in
nature. Contractual tax exemptions, in the real sense of the term and where the non-
impairment clause of the Constitution can rightly be invoked, are those agreed to by the
taxing authority in contracts, such as those contained in government bonds or
debentures, lawfully entered into by them under enabling laws in which the government,
acting in its private capacity, sheds its cloak of authority and waives its governmental
immunity. Truly, tax exemptions of this kind may not be revoked without impairing the
obligations of contracts.[14] These contractual tax exemptions, however, are not to be confused
with tax exemptions granted under franchises. A franchise partakes the nature of a grant which
is beyond the purview of the non-impairment clause of the Constitution.[15] Indeed, Article
XII, Section 11, of the 1987 Constitution, like its precursor provisions in the 1935 and the
1973 Constitutions, is explicit that no franchise for the operation of a public utility shall be
granted except under the condition that such privilege shall be subject to amendment,
alteration or repeal by Congress as and when the common good so requires.
WHEREFORE, the instant petition is hereby DISMISSED. No costs.
SO ORDERED.
 THIRD DIVISION by the City of Davao would amount to a violation of the constitutional provision against
impairment of contracts.[7]

SMART COMMUNICATIONS, INC., G.R. No. 155491 On March 2, 2002, respondents filed their Answer[8] in which they contested the tax
Petitioner, exemption claimed by Smart. They invoked the power granted by the Constitution to local
Present: government units to create their own sources of revenue.[9]

- versus - YNARES-SANTIAGO, J., On May 17, 2002, a pre-trial conference was held. Inasmuch as only legal issues were
Chairperson, involved in the case, the RTC issued an order requiring the parties to submit their respective
AUSTRIA-MARTINEZ, memoranda and, thereafter, the case would be deemed submitted for resolution. [10]
CHICO-NAZARIO,
THE CITY OF DAVAO, represented herein by its Mayor NACHURA, and On July 19, 2002, the RTC rendered its Decision [11] denying the petition. The trial court noted
HON. RODRIGO R. DUTERTE, and the SANGGUNIANG REYES, JJ. that the ambiguity of the in lieu of all taxes provision in R.A. No. 7294, on whether it covers
PANLUNGSOD OF DAVAO CITY, both national and local taxes, must be resolved against the taxpayer.[12] The RTC ratiocinated
Respondents. Promulgated: that tax exemptions are construed in strictissimi juris against the taxpayer and liberally in
favor of the taxing authority and, thus, those who assert a tax exemption must justify it with
September 16, 2008 words too plain to be mistaken and too categorical not to be misinterpreted. [13] On the issue of
x------------------------------------------------------------------------------------x violation of the non-impairment clause of the Constitution, the trial court cited Mactan Cebu
International Airport Authority v. Marcos,[14]and declared that the citys power to tax is based
not merely on a valid delegation of legislative power but on the direct authority granted to it
by the fundamental law. It added that while such power may be subject to restrictions or
DECISION conditions imposed by Congress, any such legislated limitation must be consistent with the
basic policy of local autonomy.[15]
NACHURA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court filed Smart filed a motion for reconsideration which was denied by the trial court in an
by Smart Communications, Inc. (Smart) against the City of Davao, represented by its Mayor, Order[16] dated September 26, 2002.
Hon. Rodrigo R. Duterte, and the Sangguniang Panlungsod of Davao City, to annul the
Decision[1] dated July 19, 2002 of the Regional Trial Court (RTC) and its Order [2] dated Thus, the instant case.
September 26, 2002 in Sp. Civil Case No. 28,976-2002.
Smart assigns the following errors:
The Facts
[a.] THE LOWER COURT ERRED IN NOT HOLDING THAT UNDER
On February 18, 2002, Smart filed a special civil action for declaratory relief [3] under Rule 63 PETITIONERS FRANCHISE (REPUBLIC ACT NO. 7294), WHICH CONTAINS
of the Rules of Court, for the ascertainment of its rights and obligations under the Tax Code of THE IN LIEU OF ALL TAXES CLAUSE, AND WHICH IS A SPECIAL LAW
the City of Davao,[4] particularly Section 1, Article 10 thereof, the pertinent portion of which ENACTED SUBSEQUENT TO THE LOCAL GOVERNMENT CODE, NO
reads: FRANCHISE TAX MAY BE IMPOSED ON PETITIONER BY RESPONDENT
CITY.
Notwithstanding any exemption granted by any law or other special law,
there is hereby imposed a tax on businesses enjoying a franchise, at a rate [b.] THE LOWER COURT ERRED IN HOLDING THAT PETITIONERS
of seventy-five percent (75%) of one percent (1%) of the gross annual FRANCHISE IS A GENERAL LAW AND DID NOT REPEAL RELEVANT
receipts for the preceding calendar year based on the income or receipts PROVISIONS REGARDING FRANCHISE TAX OF THE LOCAL GOVERNMENT
realized within the territorial jurisdiction of Davao City. CODE, WHICH ACCORDING TO THE COURT IS A SPECIAL LAW.

Smart contends that its telecenter in Davao City is exempt from payment of franchise tax to
the City, on the following grounds: (a) the issuance of its franchise under Republic Act (R.A.)
No. 7294[5] subsequent to R.A. No. 7160 shows the clear legislative intent to exempt it from
the provisions of R.A. 7160;[6] (b) Section 137 of R.A. No. 7160 can only apply to exemptions
already existing at the time of its effectivity and not to future exemptions; (c) the power of the
City of Davao to impose a franchise tax is subject to statutory limitations such as the in lieu of
all taxes clause found in Section 9 of R.A. No. 7294; and (d) the imposition of franchise tax
[c.] THE LOWER COURT ERRED IN NOT HOLDING THAT SECTION 137 OF
THE LOCAL GOVERNMENT CODE, WHICH, IN RELATION TO SECTION 151
THEREOF, ALLOWS RESPONDENT CITY TO IMPOSE THE FRANCHISE TAX,
AND SECTION 193 OF THE CODE, WHICH PROVIDES FOR WITHDRAWAL
OF TAX EXEMPTION PRIVILEGES, ARE NOT APPLICABLE TO THIS CASE.
[d.] THE LOWER COURT ERRED IN NOT HOLDING THAT SECTIONS 137
AND 193 OF THE LOCAL GOVERNMENT CODE REFER ONLY TO

77
 EXEMPTIONS ALREADY EXISTING AT THE TIME OF ITS ENACTMENT BUT
NOT TO FUTURE EXEMPTIONS.
[e.] THE LOWER COURT ERRED IN APPLYING THE RULE OF STATUTORY
CONSTRUCTION THAT TAX EXEMPTIONS ARE CONSTRUED STRICTLY
AGAINST THE TAXPAYER.
[f.] THE LOWER COURT ERRED IN NOT HOLDING THAT PETITIONERS
FRANCHISE (REPUBLIC ACT NO. 7294) HAS BEEN AMENDED AND
EXPANDED BY SECTION 23 OF REPUBLIC ACT NO. 7925, THE PUBLIC
TELECOMMUNICATIONS POLICY ACT, TAKING INTO ACCOUNT THE
FRANCHISE OF GLOBE TELECOM, INC. (GLOBE) (REPUBLIC ACT NO. 7229),
WHICH ARE SPECIAL PROVISIONS AND WERE ENACTED SUBSEQUENT TO
THE LOCAL GOVERNMENT CODE, THEREBY PROVIDING AN ADDITIONAL
GROUND WHY NO FRANCHISE TAX MAY BE IMPOSED ON PETITIONER BY
RESPONDENT CITY.
[g.] THE LOWER COURT ERRED IN DISREGARDING THE RULING OF THE
DEPARTMENT OF FINANCE, THROUGH ITS BUREAU OF LOCAL
GOVERNMENT FINANCE, THAT PETITIONER IS EXEMPT FROM THE
PAYMENT OF THE FRANCHISE TAX IMPOSABLE BY LOCAL
GOVERNMENT UNITS UNDER THE LOCAL GOVERNMENT CODE.
[h.] THE LOWER COURT ERRED IN NOT HOLDING THAT THE IMPOSITION
OF THE LOCAL FRANCHISE TAX ON PETITIONER WOULD VIOLATE THE
CONSTITUTIONAL PROHIBITION AGAINST IMPAIRMENT OF CONTRACTS.
[i.] THE LOWER COURT ERRED IN DENYING THE PETITION BELOW.[17]
The Issue
In sum, the pivotal issue in this case is whether Smart is liable to pay the franchise tax
imposed by the City of Davao.
The Ruling of the Court
We rule in the affirmative.
I. Prospective Effect of R.A. No. 7160
On March 27, 1992, Smarts legislative franchise (R.A. No. 7294) took effect. Section 9
thereof, quoted hereunder, is at the heart of the present controversy:
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 this franchise by the grantee, its successors or
assigns and the said percentage shall be in lieu of all taxes on this
78
franchise or earnings thereof: Provided, That the grantee, its successors
or assigns shall continue to be liable for income taxes payable under Title
II of the National Internal Revenue Code pursuant to Section 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.
The grantee shall file the return with and pay the tax due thereon to the
Commissioner of Internal Revenue or his duly authorized representative in
accordance with the National Internal Revenue Code and the return shall
be subject to audit by the Bureau of Internal Revenue. (Emphasis
supplied.)
Smart alleges that the in lieu of all taxes clause in Section 9 of its franchise exempts it from all
taxes, both local and national, except the national franchise tax (now VAT), income tax, and
real property tax.[18]
On January 1, 1992, two months ahead of Smarts franchise, the Local Government Code (R.A.
No. 7160) took effect. Section 137, in relation to Section 151 of R.A. No. 7160, allowed the
imposition of franchise tax by the local government units; while Section 193 thereof provided
for the withdrawal of tax exemption privileges granted prior to the issuance of R.A. No. 7160
except for those expressly mentioned therein, viz.:
Section 137. Franchise Tax. Notwithstanding any exemption granted
by any law or other special law, the province may impose a tax on
businesses enjoying a franchise, at the rate not exceeding fifty percent
(50%) of one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt, or realized,
within its territorial jurisdiction.
In the case of a newly started business, the tax shall not exceed
one-twentieth (1/20) of one percent (1%) of the capital investment. In the
succeeding calendar year, regardless of when the business started to
operate, the tax shall be based on the gross receipts for the preceding
calendar year, or any fraction thereon, as provided herein.
Section 151. Scope of Taxing Powers. Except as otherwise provided in this
Code, the city may levy the taxes, fees, and charges which the province or
municipality may impose: Provided, however, That the taxes, fees and
charges levied and collected by highly urbanized and independent
component cities shall accrue to them and distributed in accordance with
the provisions of this Code.
The rates of taxes that the city may levy may exceed the
maximum rates allowed for the province or municipality by not more
than fifty percent (50%) except the rates of professional and
amusement taxes.
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, including
 government-owned or controlled corporations, except local water districts,
cooperatives duly registered under RA No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon the
effectivity of this Code. (Emphasis supplied.)
Smart argues that it is not covered by Section 137, in relation to Section 151 of R.A. No. 7160,
because its franchise was granted after the effectivity of the said law. We agree with Smarts
contention on this matter. The withdrawal of tax exemptions or incentives provided in R.A.
No. 7160 can only affect those franchises granted prior to the effectivity of the law. The
intention of the legislature to remove all tax exemptions or incentives granted prior to the said
law is evident in the language of Section 193 of R.A. No. 7160. No interpretation is necessary.
II. The in lieu of all taxes Clause in R.A. No. 7294
The in lieu of all taxes clause in Smarts franchise is put in issue before the Court. In order to
ascertain its meaning, consistent with fundamentals of statutory construction, all the words in
the statute must be considered. The grant of tax exemption by R.A. No. 7294 is not to be
interpreted from a consideration of a single portion or of isolated words or clauses, but from a
general view of the act as a whole. Every part of the statute must be construed with reference
to the context.[19]
Smart is of the view that the only taxes it may be made to bear under its franchise are the
national franchise tax (now VAT), income tax, and real property tax.[20] It claims exemption
from the local franchise tax because the in lieu of taxes clause in its franchise does not
distinguish between national and local taxes.[21]
We pay heed that R.A. No. 7294 is not definite in granting exemption to Smart from local
taxation. Section 9 of R.A. No. 7294 imposes on Smart a franchise tax equivalent to three
percent (3%) of all gross receipts of the business transacted under the franchise and the said
percentage shall be in lieu of all taxes on the franchise or earnings thereof. R.A. No 7294 does
not expressly provide what kind of taxes Smart is exempted from. It is not clear whether the in
lieu of all taxes provision in the franchise of Smart would include exemption from local or
national taxation. What is clear is that Smart shall pay franchise tax equivalent to three percent
(3%) of all gross receipts of the business transacted under its franchise. But whether the
franchise tax exemption would include exemption from exactions by both the local and the
national government is not unequivocal.
The uncertainty in the in lieu of all taxes clause in R.A. No. 7294 on whether Smart is
exempted from both local and national franchise tax must be construed strictly against Smart
which claims the exemption. Smart has the burden of proving that, aside from the imposed 3%
franchise tax, Congress intended it to be exempt from all kinds of franchise taxes whether
local or national. However, Smart failed in this regard.
Tax exemptions are never presumed and are strictly construed against the taxpayer and
liberally in favor of the taxing authority.[22] They can only be given force when the grant is
clear and categorical.[23] The surrender of the power to tax, when claimed, must be clearly
shown by a language that will admit of no reasonable construction consistent with the
reservation of the power. If the intention of the legislature is open to doubt, then the intention
of the legislature must be resolved in favor of the State.[24]
79
In this case, the doubt must be resolved in favor of the City of Davao. The in lieu of all taxes
clause applies only to national internal revenue taxes and not to local taxes. As appropriately
pointed out in the separate opinion of Justice Antonio T. Carpio in a similar case [25] involving
a demand for exemption from local franchise taxes:
[T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes,
other than income tax, imposed under the National Internal Revenue Code.
The "in lieu of all taxes" clause does not apply to local taxes. The proviso
in the first paragraph of Section 9 of Smart's franchise states that the
grantee shall "continue to be liable for income taxes payable under Title II
of the National Internal Revenue Code." Also, the second paragraph of
Section 9 speaks of tax returns filed and taxes paid to the "Commissioner
of Internal Revenue or his duly authorized representative in accordance
with the National Internal Revenue Code." Moreover, the same paragraph
declares that the tax returns "shall be subject to audit by the Bureau of
Internal Revenue." Nothing is mentioned in Section 9 about local taxes.
The clear intent is for the "in lieu of all taxes" clause to apply only to taxes
under the National Internal Revenue Code and not to local taxes. Even
with respect to national internal revenue taxes, the "in lieu of all taxes"
clause does not apply to income tax.
If Congress intended the "in lieu of all taxes" clause in Smart's franchise to
also apply to local taxes, Congress would have expressly mentioned the
exemption from municipal and provincial taxes. Congress could have used
the language in Section 9(b) of Clavecilla's old franchise, as follows:
x x x in lieu of any and all taxes of any kind, nature or
description levied, established or collected by any
authority whatsoever, municipal, provincial or
national, from which the grantee is hereby expressly
exempted, x x x. (Emphasis supplied).
However, Congress did not expressly exempt Smart from local taxes.
Congress used the "in lieu of all taxes" clause only in reference to national
internal revenue taxes. The only interpretation, under the rule on strict
construction of tax exemptions, is that the "in lieu of all taxes" clause in
Smart's franchise refers only to national and not to local taxes.
It should be noted that the in lieu of all taxes clause in R.A. No. 7294 has become functus
officio with the abolition of the franchise tax on telecommunications companies.[26]As
admitted by Smart in its pleadings, it is no longer paying the 3% franchise tax mandated in
its franchise. Currently, Smart along with other telecommunications companies pays the
uniform 10% value-added tax.[27]
The VAT on sale of services of telephone franchise grantees is equivalent to 10% of gross
receipts derived from the sale or exchange of services.[28] R.A. No. 7716, as amended by
the Expanded Value Added Tax Law (R.A. No. 8241), the pertinent portion of which is
hereunder quoted, amended Section 9 of R.A. No. 7294:
SEC. 102. Value-added tax on sale of services and use or lease of
properties. (a) Rate and base of tax. There shall be levied assessed and
 collected, a value-added tax equivalent to ten percent (10%) of gross
receipts derived from the sale or exchange of services, including the
use or lease of properties.
The phrase sale or exchange of services means the performance of all
kinds of services in the Philippines for others for a fee, remuneration
or consideration, including those performed or rendered
by construction and service contractors; stock, real estate, commercial,
customs and immigration brokers; lessors of property, whether personal or
real; warehousing services; lessors or distributors of cinematographic
films; persons engaged in milling, processing, manufacturing or repacking
goods for others; proprietors, operators or keepers of hotels, motels, rest
houses, pension houses, inns, resorts; proprietors or operators of
restaurants, refreshment parlors, cafes and other eating places, including
clubs and caterers; dealers in securities; lending investors; transportation
contractors on their transport of goods or cargoes, including persons who
transport goods or cargoes for hire and other domestic common carriers by
land, air, and water relative to their transport of goods or cargoes; services
of franchise grantees of telephone and telegraph, radio and television
broadcasting and all other franchise grantees except those under
Section 117 of this Code; services of banks, non-bank financial
intermediaries and finance companies; and non-life insurance companies
(except their crop insurances) including surety, fidelity, indemnity and
bonding companies; and similar services regardless of whether or not the
performance thereof calls for the exercise or use of the physical or mental
faculties. x x x.[29]
R.A. No. 7716, specifically Section 20 thereof, expressly repealed the provisions of all special
laws relative to the rate of franchise taxes. It also repealed, amended, or modified all other
laws, orders, issuances, rules and regulations, or parts thereof which are inconsistent with
it.[30] In effect, the in lieu of all taxes clause in R.A. No. 7294 was rendered ineffective by the
advent of the VAT Law.[31]
However, the franchise tax that the City of Davao may impose must comply with Sections 137
and 151 of R.A. No. 7160. Thus, the local franchise tax that may be imposed by the City must
not exceed 50% of 1% of the gross annual receipts for the preceding calendar year based on
the income on receipts realized within the territorial jurisdiction of Davao.
III. Opinion of the Bureau of Local Government Finance (BLGF)
In support of its argument that the in lieu of all taxes clause is to be construed as an exemption
from local franchise taxes, Smart submits the opinion of the Department of Finance, through
the BLGF, dated August 13, 1998 and February 24, 1998, regarding the franchises of Smart
and Globe, respectively.[32] Smart presents the same arguments as the Philippine Long
Distance Telephone Company in the previous cases already decided by this Court.[33] As
previously held by the Court, the findings of the BLGF are not conclusive on the courts:
[T]he BLGF opined that 23 of R.A. No. 7925 amended the franchise of
petitioner and in effect restored its exemptions from local taxes. Petitioner
contends that courts should not set aside conclusions reached by the BLGF
80
because its function is precisely the study of local tax problems and it has
necessarily developed an expertise on the subject.
To be sure, the BLGF is not an administrative agency whose findings on
questions of fact are given weight and deference in the courts. The
authorities cited by petitioner pertain to the Court of Tax Appeals, a highly
specialized court which performs judicial functions as it was created for
the review of tax cases. In contrast, the BLGF was created merely to
provide consultative services and technical assistance to local
governments and the general public on local taxation, real property
assessment, and other related matters, among others. The question raised
by petitioner is a legal question, to wit, the interpretation of 23 of R.A. No.
7925. There is, therefore, no basis for claiming expertise for the BLGF
that administrative agencies are said to possess in their respective fields.
Petitioner likewise argues that the BLGF enjoys the presumption of
regularity in the performance of its duty. It does enjoy this presumption,
but this has nothing to do with the question in this case. This case does not
concern the regularity of performance of the BLGF in the exercise of its
duties, but the correctness of its interpretation of a provision of law. [34]
IV. Tax Exclusion/Tax Exemption
Smart gives another perspective of the in lieu of all taxes clause in Section 9 of R.A. No. 7294
in order to avoid the payment of local franchise tax. It says that, viewed from another angle,
the in lieu of all taxes clause partakes of the nature of a tax exclusion and not a tax exemption.
A tax exemption means that the taxpayer does not pay any tax at all. Smart pays VAT, income
tax, and real property tax. Thus, what it enjoys is more accurately a tax exclusion.[35]
However, as previously held by the Court, both in their nature and effect, there is no essential
difference between a tax exemption and a tax exclusion. An exemption is an immunity or a
privilege; it is the freedom from a charge or burden to which others are subjected. An
exclusion, on the other hand, is the removal of otherwise taxable items from the reach of
taxation, e.g., exclusions from gross income and allowable deductions. An exclusion is, thus,
also an immunity or privilege which frees a taxpayer from a charge to which others are
subjected. Consequently, the rule that a tax exemption should be applied in strictissimi
juris against the taxpayer and liberally in favor of the government applies equally to tax
exclusions.[36]
V. Section 23 of R.A. No. 7925
To further its claim, Smart invokes Section 23 of the Public Telecommunications Policy Act
(R.A. No. 7925):
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: Provided, however, That the foregoing
shall neither apply to nor affect provisions of telecommunications
franchises concerning territory covered by the franchise, the life span of
the franchise, or the type of service authorized by the franchise. (Emphasis
supplied.)
In sum, Smart wants us to interpret anew Section 23 of R.A. No. 7925, in connection with the
franchise of Globe (R.A. No. 7227),[37] which was enacted on March 19, 1992.
Allegedly, by virtue of Section 23 of R.A. No. 7925, otherwise known as the most favored
treatment clause or the equality clause, the provision in the franchise of Globe exempting it
from local taxes is automatically incorporated in the franchise of Smart. [38] Smart posits that,
since the franchise of Globe contains a provision exempting it from municipal or local
franchise tax, this provision should also benefit Smart by virtue of Section 23 of R.A. No.
7925. The provision in Globes franchise invoked by Smart reads:
(b) The grantee shall further pay to the Treasurer of the Philippines each
year after the audit and approval of the accounts as prescribed in this Act,
one and one-half per centum of all gross receipts from business transacted
under this franchise by the said grantee in the Philippines, in lieu of any
and all taxes of any kind, nature or description levied, established or
collected by any authority whatsoever, municipal, provincial or
national, from which the grantee is hereby expressly exempted,
effective from the date of the approval of Republic Act Numbered Sixteen
hundred eighteen.[39]
We find no reason to disturb the previous pronouncements of this Court regarding the
interpretation of Section 23 of R.A. No. 7925. As aptly explained in the en banc decision of
this Court in Philippine Long Distance Telephone Company, Inc. v. City of Davao, [40] and
recently in Digital Telecommunications Philippines, Inc. (Digitel)
v. Province of Pangasinan,[41] Congress, in approving Section 23 of R.A. No. 7925, did not
intend it to operate as a blanket tax exemption to all telecommunications entities. [42] The
language of Section 23 of R.A. No. 7925 and the proceedings of both Houses of Congress are
bereft of anything that would signify the grant of tax exemptions to all telecommunications
entities, including those whose exemptions had been withdrawn by R.A. No. 7160.[43] The
term exemption in Section 23 of R.A. No. 7925 does not mean tax exemption. The term refers
to exemption from certain regulations and requirements imposed by the National
Telecommunications Commission.[44]
Furthermore, in the franchise of Globe (R.A. No. 7229), the legislature incontrovertibly stated
that it will be liable for one and one-half per centum of all gross receipts from business
transacted under the franchise, in lieu of any and all taxes of any kind, nature, or description
levied, established, or collected by any authority whatsoever, municipal, provincial, or
national, from which the grantee is hereby expressly exempted. [45] The grant of exemption
from municipal, provincial, or national is clear and categorical that aside from the franchise
tax collected by virtue of R.A. No. 7229, no other franchise tax may be collected from Globe
regardless of who the taxing power is. No such provision is found in the franchise of Smart;
the kind of tax from which it is exempted is not clearly specified.
As previously explained by the Court, the stance of Smart would lead to absurd consequences.
81
The acceptance of petitioner's theory would result in absurd consequences.
To illustrate: In its franchise, Globe is required to pay a franchise tax of
only one and one-half percentum (1%) of all gross receipts from its
transactions while Smart is required to pay a tax of three percent (3%) on
all gross receipts from business transacted. Petitioner's theory would
require that, to level the playing field, any "advantage, favor, privilege,
exemption, or immunity" granted to Globe must be extended to all
telecommunications companies, including Smart. If, later, Congress again
grants a franchise to another telecommunications company imposing, say,
one percent (1%) franchise tax, then all other telecommunications
franchises will have to be adjusted to "level the playing field" so to speak.
This could not have been the intent of Congress in enacting 23 of Rep. Act
7925. Petitioner's theory will leave the Government with the burden of
having to keep track of all granted telecommunications franchises, lest
some companies be treated unequally. It is different if Congress enacts a
law specifically granting uniform advantages, favor, privilege, exemption,
or immunity to all telecommunications entities.[46]
VI. Non-impairment Clause of the Constitution
Another argument of Smart is that the imposition of the local franchise tax by the City
of Davao would violate the constitutional prohibition against impairment of contracts. The
franchise, according to petitioner, is in the nature of a contract between the government and
Smart.[47]
However, we find that there is no violation of Article III, Section 10 of the 1987 Philippine
Constitution. As previously discussed, the franchise of Smart does not expressly provide for
exemption from local taxes. Absent the express provision on such exemption under the
franchise, we are constrained to rule against it. The in lieu of all taxes clause in Section 9 of
R.A. No. 7294 leaves much room for interpretation. Due to this ambiguity in the law, the
doubt must be resolved against the grant of tax exemption.
Moreover, Smarts franchise was granted with the express condition that it is subject to
amendment, alteration, or repeal.[48] As held in Tolentino v. Secretary of Finance: [49]
It is enough to say that the parties to a contract cannot, through the
exercise of prophetic discernment, fetter the exercise of the taxing power
of the State. For not only are existing laws read into contracts in order to
fix obligations as between parties, but the reservation of essential
attributes of sovereign power is also read into contracts as a basic
postulate of the legal order. The policy of protecting contracts against
impairment presupposes the maintenance of a government which retains
adequate authority to secure the peace and good order of society.
In truth, the Contract Clause has never been thought as a limitation on the
exercise of the States power of taxation save only where a tax exemption
has been granted for a valid consideration. x x x.
WHEREFORE, the instant petition is DENIED for lack of merit. Costs against petitioner.
SO ORDERED.
 Republic of the Philippines in English and other foreign languages imported by it from the United States as well
SUPREME COURT as Bibles, New Testaments and bible portions in the local dialects imported and/or
Manila purchased locally; that from the fourth quarter of 1945 to the first quarter of 1953
EN BANC inclusive the sales made by the plaintiff were as follows:
G.R. No. L-9637 April 30, 1957
AMERICAN BIBLE SOCIETY, plaintiff-appellant, Quarter Amount of Sales
vs.
CITY OF MANILA, defendant-appellee. 4th quarter 1945 P1,244.21
City Fiscal Eugenio Angeles and Juan Nabong for appellant.
Assistant City Fiscal Arsenio Nañawa for appellee. 1st quarter 1946 2,206.85
FELIX, J.:
Plaintiff-appellant is a foreign, non-stock, non-profit, religious, missionary corporation duly 2nd quarter 1946 1,950.38
registered and doing business in the Philippines through its Philippine agency established in
Manila in November, 1898, with its principal office at 636 Isaac Peral in said City. The 3rd quarter 1946 2,235.99
defendant appellee is a municipal corporation with powers that are to be exercised in
conformity with the provisions of Republic Act No. 409, known as the Revised Charter of the 4th quarter 1946 3,256.04
City of Manila.
In the course of its ministry, plaintiff's Philippine agency has been distributing and selling 1st quarter 1947 13,241.07
bibles and/or gospel portions thereof (except during the Japanese occupation) throughout the
Philippines and translating the same into several Philippine dialects. On May 29 1953, the 2nd quarter 1947 15,774.55
acting City Treasurer of the City of Manila informed plaintiff that it was conducting the
business of general merchandise since November, 1945, without providing itself with the
3rd quarter 1947 14,654.13
necessary Mayor's permit and municipal license, in violation of Ordinance No. 3000, as
amended, and Ordinances Nos. 2529, 3028 and 3364, and required plaintiff to secure, within
three days, the corresponding permit and license fees, together with compromise covering the 4th quarter 1947 12,590.94
period from the 4th quarter of 1945 to the 2nd quarter of 1953, in the total sum of P5,821.45
(Annex A). 1st quarter 1948 11,143.90
Plaintiff protested against this requirement, but the City Treasurer demanded that plaintiff
deposit and pay under protest the sum of P5,891.45, if suit was to be taken in court regarding 2nd quarter 1948 14,715.26
the same (Annex B). To avoid the closing of its business as well as further fines and penalties
in the premises on October 24, 1953, plaintiff paid to the defendant under protest the said 3rd quarter 1948 38,333.83
permit and license fees in the aforementioned amount, giving at the same time notice to the
City Treasurer that suit would be taken in court to question the legality of the ordinances under 4th quarter 1948 16,179.90
which, the said fees were being collected (Annex C), which was done on the same date by
filing the complaint that gave rise to this action. In its complaint plaintiff prays that judgment 1st quarter 1949 23,975.10
be rendered declaring the said Municipal Ordinance No. 3000, as amended, and Ordinances
Nos. 2529, 3028 and 3364 illegal and unconstitutional, and that the defendant be ordered to 2nd quarter 1949 17,802.08
refund to the plaintiff the sum of P5,891.45 paid under protest, together with legal interest
thereon, and the costs, plaintiff further praying for such other relief and remedy as the court 3rd quarter 1949 16,640.79
may deem just equitable.
Defendant answered the complaint, maintaining in turn that said ordinances were enacted by
4th quarter 1949 15,961.38
the Municipal Board of the City of Manila by virtue of the power granted to it by section
2444, subsection (m-2) of the Revised Administrative Code, superseded on June 18, 1949, by
section 18, subsection (1) of Republic Act No. 409, known as the Revised Charter of the City 1st quarter 1950 18,562.46
of Manila, and praying that the complaint be dismissed, with costs against plaintiff. This
answer was replied by the plaintiff reiterating the unconstitutionality of the often-repeated 2nd quarter 1950 21,816.32
ordinances.
Before trial the parties submitted the following stipulation of facts: 3rd quarter 1950 25,004.55
COME NOW the parties in the above-entitled case, thru their undersigned attorneys
and respectfully submit the following stipulation of facts: 4th quarter 1950 45,287.92
1. That the plaintiff sold for the use of the purchasers at its principal office at 636
Isaac Peral, Manila, Bibles, New Testaments, bible portions and bible concordance
82

1st quarter 1951 37,841.21
2nd quarter 1951 29,103.98
3rd quarter 1951 20,181.10
4th quarter 1951 22,968.91
1st quarter 1952 23,002.65
2nd quarter 1952 17,626.96
3rd quarter 1952 17,921.01
4th quarter 1952 24,180.72
1st quarter 1953 29,516.21
2. That the parties hereby reserve the right to present evidence of other facts not
herein stipulated.
WHEREFORE, it is respectfully prayed that this case be set for hearing so that the
parties may present further evidence on their behalf. (Record on Appeal, pp. 15-16).
When the case was set for hearing, plaintiff proved, among other things, that it has been in
existence in the Philippines since 1899, and that its parent society is in New York, United
States of America; that its, contiguous real properties located at Isaac Peral are exempt from
real estate taxes; and that it was never required to pay any municipal license fee or tax before
the war, nor does the American Bible Society in the United States pay any license fee or sales
tax for the sale of bible therein. Plaintiff further tried to establish that it never made any profit
from the sale of its bibles, which are disposed of for as low as one third of the cost, and that in
order to maintain its operating cost it obtains substantial remittances from its New York office
and voluntary contributions and gifts from certain churches, both in the United States and in
the Philippines, which are interested in its missionary work. Regarding plaintiff's contention of
lack of profit in the sale of bibles, defendant retorts that the admissions of plaintiff-appellant's
lone witness who testified on cross-examination that bibles bearing the price of 70 cents each
from plaintiff-appellant's New York office are sold here by plaintiff-appellant at P1.30 each;
those bearing the price of $4.50 each are sold here at P10 each; those bearing the price of $7
each are sold here at P15 each; and those bearing the price of $11 each are sold here at P22
each, clearly show that plaintiff's contention that it never makes any profit from the sale of its
bible, is evidently untenable.
After hearing the Court rendered judgment, the last part of which is as follows:
As may be seen from the repealed section (m-2) of the Revised Administrative Code
and the repealing portions (o) of section 18 of Republic Act No. 409, although they
seemingly differ in the way the legislative intent is expressed, yet their meaning is
practically the same for the purpose of taxing the merchandise mentioned in said
legal provisions, and that the taxes to be levied by said ordinances is in the nature of
percentage graduated taxes (Sec. 3 of Ordinance No. 3000, as amended, and Sec. 1,
Group 2, of Ordinance No. 2529, as amended by Ordinance No. 3364).
IN VIEW OF THE FOREGOING CONSIDERATIONS, this Court is of the opinion
and so holds that this case should be dismissed, as it is hereby dismissed, for lack of
merits, with costs against the plaintiff.
83
Not satisfied with this verdict plaintiff took up the matter to the Court of Appeals which
certified the case to Us for the reason that the errors assigned to the lower Court involved only
questions of law.
Appellant contends that the lower Court erred:
1. In holding that Ordinances Nos. 2529 and 3000, as respectively amended, are not
unconstitutional;
2. In holding that subsection m-2 of Section 2444 of the Revised Administrative
Code under which Ordinances Nos. 2592 and 3000 were promulgated, was not
repealed by Section 18 of Republic Act No. 409;
3. In not holding that an ordinance providing for taxes based on gross sales or
receipts, in order to be valid under the new Charter of the City of Manila, must first
be approved by the President of the Philippines; and
4. In holding that, as the sales made by the plaintiff-appellant have assumed
commercial proportions, it cannot escape from the operation of said municipal
ordinances under the cloak of religious privilege.
The issues. — As may be seen from the proceeding statement of the case, the issues involved
in the present controversy may be reduced to the following: (1) whether or not the ordinances
of the City of Manila, Nos. 3000, as amended, and 2529, 3028 and 3364, are constitutional and
valid; and (2) whether the provisions of said ordinances are applicable or not to the case at bar.
Section 1, subsection (7) of Article III of the Constitution of the Republic of the Philippines,
provides that:
(7) No law shall be made respecting an establishment of religion, or prohibiting the
free exercise thereof, and the free exercise and enjoyment of religious profession
and worship, without discrimination or preference, shall forever be allowed. No
religion test shall be required for the exercise of civil or political rights.
Predicated on this constitutional mandate, plaintiff-appellant contends that Ordinances Nos.
2529 and 3000, as respectively amended, are unconstitutional and illegal in so far as its society
is concerned, because they provide for religious censorship and restrain the free exercise and
enjoyment of its religious profession, to wit: the distribution and sale of bibles and other
religious literature to the people of the Philippines.
Before entering into a discussion of the constitutional aspect of the case, We shall first
consider the provisions of the questioned ordinances in relation to their application to the sale
of bibles, etc. by appellant. The records, show that by letter of May 29, 1953 (Annex A), the
City Treasurer required plaintiff to secure a Mayor's permit in connection with the society's
alleged business of distributing and selling bibles, etc. and to pay permit dues in the sum of
P35 for the period covered in this litigation, plus the sum of P35 for compromise on account of
plaintiff's failure to secure the permit required by Ordinance No. 3000 of the City of Manila,
as amended. This Ordinance is of general application and not particularly directed against
institutions like the plaintiff, and it does not contain any provisions whatever prescribing
religious censorship nor restraining the free exercise and enjoyment of any religious
profession. Section 1 of Ordinance No. 3000 reads as follows:
SEC. 1. PERMITS NECESSARY. — It shall be unlawful for any person or entity to
conduct or engage in any of the businesses, trades, or occupations enumerated in
Section 3 of this Ordinance or other businesses, trades, or occupations for which a
permit is required for the proper supervision and enforcement of existing laws and
ordinances governing the sanitation, security, and welfare of the public and the
health of the employees engaged in the business specified in said section 3
hereof, WITHOUT FIRST HAVING OBTAINED A PERMIT THEREFOR FROM
THE MAYOR AND THE NECESSARY LICENSE FROM THE CITY
TREASURER.
The business, trade or occupation of the plaintiff involved in this case is not particularly
mentioned in Section 3 of the Ordinance, and the record does not show that a permit is
required therefor under existing laws and ordinances for the proper supervision and
enforcement of their provisions governing the sanitation, security and welfare of the public
and the health of the employees engaged in the business of the plaintiff. However, sections 3
of Ordinance 3000 contains item No. 79, which reads as follows:
79. All other businesses, trades or occupations not
mentioned in this Ordinance, except those upon which the
City is not empowered to license or to tax P5.00
Therefore, the necessity of the permit is made to depend upon the power of the City to license
or tax said business, trade or occupation.
As to the license fees that the Treasurer of the City of Manila required the society to pay from
the 4th quarter of 1945 to the 1st quarter of 1953 in the sum of P5,821.45, including the sum
of P50 as compromise, Ordinance No. 2529, as amended by Ordinances Nos. 2779, 2821 and
3028 prescribes the following:
SEC. 1. FEES. — Subject to the provisions of section 578 of the Revised
Ordinances of the City of Manila, as amended, there shall be paid to the City
Treasurer for engaging in any of the businesses or occupations below enumerated,
quarterly, license fees based on gross sales or receipts realized during the preceding
quarter in accordance with the rates herein prescribed: PROVIDED, HOWEVER,
That a person engaged in any businesses or occupation for the first time shall pay
the initial license fee based on the probable gross sales or receipts for the first
quarter beginning from the date of the opening of the business as indicated herein
for the corresponding business or occupation.
xxx xxx xxx
GROUP 2. — Retail dealers in new (not yet used) merchandise, which dealers are
not yet subject to the payment of any municipal tax, such as (1) retail dealers in
general merchandise; (2) retail dealers exclusively engaged in the sale of . . . books,
including stationery.
xxx xxx xxx
As may be seen, the license fees required to be paid quarterly in Section 1 of said Ordinance
No. 2529, as amended, are not imposed directly upon any religious institution but upon those
engaged in any of the business or occupations therein enumerated, such as retail "dealers in
general merchandise" which, it is alleged, cover the business or occupation of selling bibles,
books, etc.
Chapter 60 of the Revised Administrative Code which includes section 2444, subsection (m-2)
of said legal body, as amended by Act No. 3659, approved on December 8, 1929, empowers
the Municipal Board of the City of Manila:
(M-2) To tax and fix the license fee on (a) dealers in new automobiles or accessories
or both, and (b) retail dealers in new (not yet used) merchandise, which dealers are
not yet subject to the payment of any municipal tax.
For the purpose of taxation, these retail dealers shall be classified as (1) retail
dealers in general merchandise, and (2) retail dealers exclusively engaged in the sale
of (a) textiles . . . (e) books, including stationery, paper and office supplies, . . .:
PROVIDED, HOWEVER, That the combined total tax of any debtor or
manufacturer, or both, enumerated under these subsections (m-1) and (m-2),
whether dealing in one or all of the articles mentioned herein, SHALL NOT BE IN
EXCESS OF FIVE HUNDRED PESOS PER ANNUM.
and appellee's counsel maintains that City Ordinances Nos. 2529 and 3000, as amended, were
enacted in virtue of the power that said Act No. 3669 conferred upon the City of Manila.
Appellant, however, contends that said ordinances are longer in force and effect as the law
under which they were promulgated has been expressly repealed by Section 102 of Republic
Act No. 409 passed on June 18, 1949, known as the Revised Manila Charter.
84
Passing upon this point the lower Court categorically stated that Republic Act No. 409
expressly repealed the provisions of Chapter 60 of the Revised Administrative Code but in the
opinion of the trial Judge, although Section 2444 (m-2) of the former Manila Charter and
section 18 (o) of the new seemingly differ in the way the legislative intent was expressed, yet
their meaning is practically the same for the purpose of taxing the merchandise mentioned in
both legal provisions and, consequently, Ordinances Nos. 2529 and 3000, as amended, are to
be considered as still in full force and effect uninterruptedly up to the present.
Often the legislature, instead of simply amending the pre-existing statute, will repeal
the old statute in its entirety and by the same enactment re-enact all or certain
portions of the preexisting law. Of course, the problem created by this sort of
legislative action involves mainly the effect of the repeal upon rights and liabilities
which accrued under the original statute. Are those rights and liabilities destroyed or
preserved? The authorities are divided as to the effect of simultaneous repeals and
re-enactments. Some adhere to the view that the rights and liabilities accrued under
the repealed act are destroyed, since the statutes from which they sprang are actually
terminated, even though for only a very short period of time. Others, and they seem
to be in the majority, refuse to accept this view of the situation, and consequently
maintain that all rights an liabilities which have accrued under the original statute
are preserved and may be enforced, since the re-enactment neutralizes the repeal,
therefore, continuing the law in force without interruption. (Crawford-Statutory
Construction, Sec. 322).
Appellant's counsel states that section 18 (o) of Republic Act No, 409 introduces a new and
wider concept of taxation and is different from the provisions of Section 2444(m-2) that the
former cannot be considered as a substantial re-enactment of the provisions of the latter. We
have quoted above the provisions of section 2444(m-2) of the Revised Administrative Code
and We shall now copy hereunder the provisions of Section 18, subdivision (o) of Republic
Act No. 409, which reads as follows:
(o) To tax and fix the license fee on dealers in general merchandise, including
importers and indentors, except those dealers who may be expressly subject to the
payment of some other municipal tax under the provisions of this section.
Dealers in general merchandise shall be classified as (a) wholesale dealers and (b)
retail dealers. For purposes of the tax on retail dealers, general merchandise shall be
classified into four main classes: namely (1) luxury articles, (2) semi-luxury articles,
(3) essential commodities, and (4) miscellaneous articles. A separate license shall be
prescribed for each class but where commodities of different classes are sold in the
same establishment, it shall not be compulsory for the owner to secure more than
one license if he pays the higher or highest rate of tax prescribed by ordinance.
Wholesale dealers shall pay the license tax as such, as may be provided by
ordinance.
For purposes of this section, the term "General merchandise" shall include poultry
and livestock, agricultural products, fish and other allied products.
The only essential difference that We find between these two provisions that may have any
bearing on the case at bar, is that, while subsection (m-2) prescribes that the combined total
tax of any dealer or manufacturer, or both, enumerated under subsections (m-1) and (m-2),
whether dealing in one or all of the articles mentioned therein, shall not be in excess of P500
per annum, the corresponding section 18, subsection (o) of Republic Act No. 409, does not
contain any limitation as to the amount of tax or license fee that the retail dealer has to pay per
annum. Hence, and in accordance with the weight of the authorities above referred to that
maintain that "all rights and liabilities which have accrued under the original statute are
preserved and may be enforced, since the reenactment neutralizes the repeal, therefore
continuing the law in force without interruption", We hold that the questioned ordinances of
the City of Manila are still in force and effect.
Plaintiff, however, argues that the questioned ordinances, to be valid, must first be approved
by the President of the Philippines as per section 18, subsection (ii) of Republic Act No. 409,
which reads as follows:
(ii) To tax, license and regulate any business, trade or occupation being conducted
within the City of Manila, not otherwise enumerated in the preceding subsections,
including percentage taxes based on gross sales or receipts, subject to the approval
of the PRESIDENT, except amusement taxes.
but this requirement of the President's approval was not contained in section 2444 of the
former Charter of the City of Manila under which Ordinance No. 2529 was promulgated.
Anyway, as stated by appellee's counsel, the business of "retail dealers in general
merchandise" is expressly enumerated in subsection (o), section 18 of Republic Act No. 409;
hence, an ordinance prescribing a municipal tax on said business does not have to be approved
by the President to be effective, as it is not among those referred to in said subsection (ii).
Moreover, the questioned ordinances are still in force, having been promulgated by the
Municipal Board of the City of Manila under the authority granted to it by law.
The question that now remains to be determined is whether said ordinances are inapplicable,
invalid or unconstitutional if applied to the alleged business of distribution and sale of bibles
to the people of the Philippines by a religious corporation like the American Bible Society,
plaintiff herein.
With regard to Ordinance No. 2529, as amended by Ordinances Nos. 2779, 2821 and 3028,
appellant contends that it is unconstitutional and illegal because it restrains the free exercise
and enjoyment of the religious profession and worship of appellant.
Article III, section 1, clause (7) of the Constitution of the Philippines aforequoted, guarantees
the freedom of religious profession and worship. "Religion has been spoken of as a profession
of faith to an active power that binds and elevates man to its Creator" (Aglipay vs. Ruiz, 64
Phil., 201).It has reference to one's views of his relations to His Creator and to the obligations
they impose of reverence to His being and character, and obedience to His Will (Davis vs.
Beason, 133 U.S., 342). The constitutional guaranty of the free exercise and enjoyment of
religious profession and worship carries with it the right to disseminate religious information.
Any restraints of such right can only be justified like other restraints of freedom of expression
on the grounds that there is a clear and present danger of any substantive evil which the State
has the right to prevent". (Tañada and Fernando on the Constitution of the Philippines, Vol. 1,
4th ed., p. 297). In the case at bar the license fee herein involved is imposed upon appellant for
its distribution and sale of bibles and other religious literature:
In the case of Murdock vs. Pennsylvania, it was held that an ordinance requiring that
a license be obtained before a person could canvass or solicit orders for goods,
paintings, pictures, wares or merchandise cannot be made to apply to members of
Jehovah's Witnesses who went about from door to door distributing literature and
soliciting people to "purchase" certain religious books and pamphlets, all published
by the Watch Tower Bible & Tract Society. The "price" of the books was twenty-
five cents each, the "price" of the pamphlets five cents each. It was shown that in
making the solicitations there was a request for additional "contribution" of twenty-
five cents each for the books and five cents each for the pamphlets. Lesser sum were
accepted, however, and books were even donated in case interested persons were
without funds.
On the above facts the Supreme Court held that it could not be said that petitioners
were engaged in commercial rather than a religious venture. Their activities could
not be described as embraced in the occupation of selling books and pamphlets.
Then the Court continued:
"We do not mean to say that religious groups and the press are free from all
financial burdens of government. See Grosjean vs. American Press Co., 297 U.S.,
233, 250, 80 L. ed. 660, 668, 56 S. Ct. 444. We have here something quite different,
85
for example, from a tax on the income of one who engages in religious activities or a
tax on property used or employed in connection with activities. It is one thing to
impose a tax on the income or property of a preacher. It is quite another to exact a
tax from him for the privilege of delivering a sermon. The tax imposed by the City
of Jeannette is a flat license tax, payment of which is a condition of the exercise of
these constitutional privileges. The power to tax the exercise of a privilege is the
power to control or suppress its enjoyment. . . . Those who can tax the exercise of
this religious practice can make its exercise so costly as to deprive it of the resources
necessary for its maintenance. Those who can tax the privilege of engaging in this
form of missionary evangelism can close all its doors to all those who do not have a
full purse. Spreading religious beliefs in this ancient and honorable manner would
thus be denied the needy. . . .
It is contended however that the fact that the license tax can suppress or control this
activity is unimportant if it does not do so. But that is to disregard the nature of this
tax. It is a license tax — a flat tax imposed on the exercise of a privilege granted by
the Bill of Rights . . . The power to impose a license tax on the exercise of these
freedom is indeed as potent as the power of censorship which this Court has
repeatedly struck down. . . . It is not a nominal fee imposed as a regulatory measure
to defray the expenses of policing the activities in question. It is in no way
apportioned. It is flat license tax levied and collected as a condition to the pursuit of
activities whose enjoyment is guaranteed by the constitutional liberties of press and
religion and inevitably tends to suppress their exercise. That is almost uniformly
recognized as the inherent vice and evil of this flat license tax."
Nor could dissemination of religious information be conditioned upon the approval
of an official or manager even if the town were owned by a corporation as held in
the case of Marsh vs. State of Alabama (326 U.S. 501), or by the United States itself
as held in the case of Tucker vs. Texas (326 U.S. 517). In the former case the
Supreme Court expressed the opinion that the right to enjoy freedom of the press
and religion occupies a preferred position as against the constitutional right of
property owners.
"When we balance the constitutional rights of owners of property against those of
the people to enjoy freedom of press and religion, as we must here, we remain
mindful of the fact that the latter occupy a preferred position. . . . In our view the
circumstance that the property rights to the premises where the deprivation of
property here involved, took place, were held by others than the public, is not
sufficient to justify the State's permitting a corporation to govern a community of
citizens so as to restrict their fundamental liberties and the enforcement of such
restraint by the application of a State statute." (Tañada and Fernando on the
Constitution of the Philippines, Vol. 1, 4th ed., p. 304-306).
Section 27 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue
Code, provides:
SEC. 27. EXEMPTIONS FROM TAX ON CORPORATIONS. — The following
organizations shall not be taxed under this Title in respect to income received by
them as such —
(e) Corporations or associations organized and operated exclusively for religious,
charitable, . . . or educational purposes, . . .: Provided, however, That the income of
whatever kind and character from any of its properties, real or personal, or from any
activity conducted for profit, regardless of the disposition made of such income,
shall be liable to the tax imposed under this Code;
Appellant's counsel claims that the Collector of Internal Revenue has exempted the plaintiff
from this tax and says that such exemption clearly indicates that the act of distributing and
selling bibles, etc. is purely religious and does not fall under the above legal provisions.
It may be true that in the case at bar the price asked for the bibles and other religious
pamphlets was in some instances a little bit higher than the actual cost of the same but this
cannot mean that appellant was engaged in the business or occupation of selling said
"merchandise" for profit. For this reason We believe that the provisions of City of Manila
Ordinance No. 2529, as amended, cannot be applied to appellant, for in doing so it would
impair its free exercise and enjoyment of its religious profession and worship as well as its
rights of dissemination of religious beliefs.
With respect to Ordinance No. 3000, as amended, which requires the obtention the Mayor's
permit before any person can engage in any of the businesses, trades or occupations
enumerated therein, We do not find that it imposes any charge upon the enjoyment of a right
granted by the Constitution, nor tax the exercise of religious practices. In the case of Coleman
vs. City of Griffin, 189 S.E. 427, this point was elucidated as follows:
An ordinance by the City of Griffin, declaring that the practice of distributing either
by hand or otherwise, circulars, handbooks, advertising, or literature of any kind,
whether said articles are being delivered free, or whether same are being sold within
the city limits of the City of Griffin, without first obtaining written permission from
the city manager of the City of Griffin, shall be deemed a nuisance and punishable
as an offense against the City of Griffin, does not deprive defendant of his
constitutional right of the free exercise and enjoyment of religious profession and
worship, even though it prohibits him from introducing and carrying out a scheme
or purpose which he sees fit to claim as a part of his religious system.
It seems clear, therefore, that Ordinance No. 3000 cannot be considered unconstitutional, even
if applied to plaintiff Society. But as Ordinance No. 2529 of the City of Manila, as amended,
is not applicable to plaintiff-appellant and defendant-appellee is powerless to license or tax the
business of plaintiff Society involved herein for, as stated before, it would impair plaintiff's
right to the free exercise and enjoyment of its religious profession and worship, as well as its
rights of dissemination of religious beliefs, We find that Ordinance No. 3000, as amended is
also inapplicable to said business, trade or occupation of the plaintiff.
Wherefore, and on the strength of the foregoing considerations, We hereby reverse the
decision appealed from, sentencing defendant return to plaintiff the sum of P5,891.45 unduly
collected from it. Without pronouncement as to costs. It is so ordered.
Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion and Endencia,
JJ., concur.

86
 Republic of the Philippines 22232, which was approved by the House of Representatives on August 2, 1989, and S. No.
SUPREME COURT 807, which was approved by the Senate on October 21, 1991.
Manila On the other hand, the Ninth Congress passed revenue laws which were also the result of the
EN BANC consolidation of House and Senate bills. These are the following, with indications of the dates
on which the laws were approved by the President and dates the separate bills of the two
G.R. No. 115455 October 30, 1995 chambers of Congress were respectively passed:
ARTURO M. TOLENTINO, petitioner, 1. R.A. NO. 7642
vs. AN ACT INCREASING THE PENALTIES FOR TAX EVASION,
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL AMENDING FOR THIS PURPOSE THE PERTINENT SECTIONS OF
REVENUE, respondents. THE NATIONAL INTERNAL REVENUE CODE (December 28, 1992).
RESOLUTION House Bill No. 2165, October 5, 1992
Senate Bill No. 32, December 7, 1992
MENDOZA, J.: 2. R.A. NO. 7643
These are motions seeking reconsideration of our decision dismissing the petitions filed in AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL
these cases for the declaration of unconstitutionality of R.A. No. 7716, otherwise known as the REVENUE TO REQUIRE THE PAYMENT OF THE VALUE-ADDED
Expanded Value-Added Tax Law. The motions, of which there are 10 in all, have been filed TAX EVERY MONTH AND TO ALLOW LOCAL GOVERNMENT
by the several petitioners in these cases, with the exception of the Philippine Educational UNITS TO SHARE IN VAT REVENUE, AMENDING FOR THIS
Publishers Association, Inc. and the Association of Philippine Booksellers, petitioners in G.R. PURPOSE CERTAIN SECTIONS OF THE NATIONAL INTERNAL
No. 115931. REVENUE CODE (December 28, 1992)
The Solicitor General, representing the respondents, filed a consolidated comment, to which House Bill No. 1503, September 3, 1992
the Philippine Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine Press Institute, Senate Bill No. 968, December 7, 1992
Inc., petitioner in G.R. No. 115544, and Juan T. David, petitioner in G.R. No. 115525, each 3. R.A. NO. 7646
filed a reply. In turn the Solicitor General filed on June 1, 1995 a rejoinder to the PPI's reply. AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL
On June 27, 1995 the matter was submitted for resolution. REVENUE TO PRESCRIBE THE PLACE FOR PAYMENT OF
I. Power of the Senate to propose amendments to revenue bills. Some of the petitioners INTERNAL REVENUE TAXES BY LARGE TAXPAYERS,
(Tolentino, Kilosbayan, Inc., Philippine Airlines (PAL), Roco, and Chamber of Real Estate AMENDING FOR THIS PURPOSE CERTAIN PROVISIONS OF THE
and Builders Association (CREBA)) reiterate previous claims made by them that R.A. No. NATIONAL INTERNAL REVENUE CODE, AS AMENDED (February
7716 did not "originate exclusively" in the House of Representatives as required by Art. VI, 24, 1993)
§24 of the Constitution. Although they admit that H. No. 11197 was filed in the House of House Bill No. 1470, October 20, 1992
Representatives where it passed three readings and that afterward it was sent to the Senate Senate Bill No. 35, November 19, 1992
where after first reading it was referred to the Senate Ways and Means Committee, they 4. R.A. NO. 7649
complain that the Senate did not pass it on second and third readings. Instead what the Senate AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS
did was to pass its own version (S. No. 1630) which it approved on May 24, 1994. Petitioner POLITICAL SUBDIVISIONS, INSTRUMENTALITIES OR AGENCIES
Tolentino adds that what the Senate committee should have done was to amend H. No. 11197 INCLUDING GOVERNMENT-OWNED OR CONTROLLED
by striking out the text of the bill and substituting it with the text of S. No. 1630. That way, it CORPORATIONS (GOCCS) TO DEDUCT AND WITHHOLD THE
is said, "the bill remains a House bill and the Senate version just becomes the text (only the VALUE-ADDED TAX DUE AT THE RATE OF THREE PERCENT
text) of the House bill." (3%) ON GROSS PAYMENT FOR THE PURCHASE OF GOODS AND
The contention has no merit. SIX PERCENT (6%) ON GROSS RECEIPTS FOR SERVICES
The enactment of S. No. 1630 is not the only instance in which the Senate proposed an RENDERED BY CONTRACTORS (April 6, 1993)
amendment to a House revenue bill by enacting its own version of a revenue bill. On at least House Bill No. 5260, January 26, 1993
two occasions during the Eighth Congress, the Senate passed its own version of revenue bills, Senate Bill No. 1141, March 30, 1993
which, in consolidation with House bills earlier passed, became the enrolled bills. These were: 5. R.A. NO. 7656
R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987 AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED
BY EXTENDING FROM FIVE (5) YEARS TO TEN YEARS THE PERIOD FOR TAX CORPORATIONS TO DECLARE DIVIDENDS UNDER CERTAIN
AND DUTY EXEMPTION AND TAX CREDIT ON CAPITAL EQUIPMENT) which was CONDITIONS TO THE NATIONAL GOVERNMENT, AND FOR
approved by the President on April 10, 1992. This Act is actually a consolidation of H. No. OTHER PURPOSES (November 9, 1993)
34254, which was approved by the House on January 29, 1992, and S. No. 1920, which was House Bill No. 11024, November 3, 1993
approved by the Senate on February 3, 1992. Senate Bill No. 1168, November 3, 1993
R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE 6. R.A. NO. 7660
REWARD TO ANY FILIPINO ATHLETE WINNING A MEDAL IN OLYMPIC GAMES) AN ACT RATIONALIZING FURTHER THE STRUCTURE AND
which was approved by the President on May 22, 1992. This Act is a consolidation of H. No. ADMINISTRATION OF THE DOCUMENTARY STAMP TAX,
AMENDING FOR THE PURPOSE CERTAIN PROVISIONS OF THE
87
 NATIONAL INTERNAL REVENUE CODE, AS AMENDED,
ALLOCATING FUNDS FOR SPECIFIC PROGRAMS, AND FOR
OTHER PURPOSES (December 23, 1993)
House Bill No. 7789, May 31, 1993
Senate Bill No. 1330, November 18, 1993
7. R.A. NO. 7717
AN ACT IMPOSING A TAX ON THE SALE, BARTER OR
EXCHANGE OF SHARES OF STOCK LISTED AND TRADED
THROUGH THE LOCAL STOCK EXCHANGE OR THROUGH
INITIAL PUBLIC OFFERING, AMENDING FOR THE PURPOSE THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, BY
INSERTING A NEW SECTION AND REPEALING CERTAIN
SUBSECTIONS THEREOF (May 5, 1994)
House Bill No. 9187, November 3, 1993
Senate Bill No. 1127, March 23, 1994
Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the
exercise of its power to propose amendments to bills required to originate in the House, passed
its own version of a House revenue measure. It is noteworthy that, in the particular case of S.
No. 1630, petitioners Tolentino and Roco, as members of the Senate, voted to approve it on
second and third readings.
On the other hand, amendment by substitution, in the manner urged by petitioner Tolentino,
concerns a mere matter of form. Petitioner has not shown what substantial difference it would
make if, as the Senate actually did in this case, a separate bill like S. No. 1630 is instead
enacted as a substitute measure, "taking into Consideration . . . H.B. 11197."
Indeed, so far as pertinent, the Rules of the Senate only provide:
RULE XXIX
AMENDMENTS
xxx xxx xxx
§68. Not more than one amendment to the original amendment shall be
considered.
No amendment by substitution shall be entertained unless the text thereof
is submitted in writing.
Any of said amendments may be withdrawn before a vote is taken thereon.
§69. No amendment which seeks the inclusion of a legislative provision
foreign to the subject matter of a bill (rider) shall be entertained.
xxx xxx xxx
§70-A. A bill or resolution shall not be amended by substituting it with
another which covers a subject distinct from that proposed in the original
bill or resolution. (emphasis added).
Nor is there merit in petitioners' contention that, with regard to revenue bills, the Philippine
Senate possesses less power than the U.S. Senate because of textual differences between
constitutional provisions giving them the power to propose or concur with amendments.
Art. I, §7, cl. 1 of the U.S. Constitution reads:
All Bills for raising Revenue shall originate in the House of
Representatives; but the Senate may propose or concur with amendments
as on other Bills.
Art. VI, §24 of our Constitution reads:
All appropriation, revenue or tariff bills, bills authorizing increase of the
public debt, bills of local application, and private bills shall originate
exclusively in the House of Representatives, but the Senate may propose
or concur with amendments.
88
The addition of the word "exclusively" in the Philippine Constitution and the decision to drop
the phrase "as on other Bills" in the American version, according to petitioners, shows the
intention of the framers of our Constitution to restrict the Senate's power to propose
amendments to revenue bills. Petitioner Tolentino contends that the word "exclusively" was
inserted to modify "originate" and "the words 'as in any other bills' (sic) were eliminated so as
to show that these bills were not to be like other bills but must be treated as a special kind."
The history of this provision does not support this contention. The supposed indicia of
constitutional intent are nothing but the relics of an unsuccessful attempt to limit the power of
the Senate. It will be recalled that the 1935 Constitution originally provided for a unicameral
National Assembly. When it was decided in 1939 to change to a bicameral legislature, it
became necessary to provide for the procedure for lawmaking by the Senate and the House of
Representatives. The work of proposing amendments to the Constitution was done by the
National Assembly, acting as a constituent assembly, some of whose members, jealous of
preserving the Assembly's lawmaking powers, sought to curtail the powers of the proposed
Senate. Accordingly they proposed the following provision:
All bills appropriating public funds, revenue or tariff bills, bills of local
application, and private bills shall originate exclusively in the Assembly,
but the Senate may propose or concur with amendments. In case of
disapproval by the Senate of any such bills, the Assembly may repass the
same by a two-thirds vote of all its members, and thereupon, the bill so
repassed shall be deemed enacted and may be submitted to the President
for corresponding action. In the event that the Senate should fail to finally
act on any such bills, the Assembly may, after thirty days from the
opening of the next regular session of the same legislative term, reapprove
the same with a vote of two-thirds of all the members of the Assembly.
And upon such reapproval, the bill shall be deemed enacted and may be
submitted to the President for corresponding action.
The special committee on the revision of laws of the Second National Assembly vetoed the
proposal. It deleted everything after the first sentence. As rewritten, the proposal was approved
by the National Assembly and embodied in Resolution No. 38, as amended by Resolution No.
73. (J. ARUEGO, KNOW YOUR CONSTITUTION 65-66 (1950)). The proposed amendment
was submitted to the people and ratified by them in the elections held on June 18, 1940.
This is the history of Art. VI, §18 (2) of the 1935 Constitution, from which Art. VI, §24 of the
present Constitution was derived. It explains why the word "exclusively" was added to the
American text from which the framers of the Philippine Constitution borrowed and why the
phrase "as on other Bills" was not copied. Considering the defeat of the proposal, the power of
the Senate to propose amendments must be understood to be full, plenary and complete "as on
other Bills." Thus, because revenue bills are required to originate exclusively in the House of
Representatives, the Senate cannot enact revenue measures of its own without such bills. After
a revenue bill is passed and sent over to it by the House, however, the Senate certainly can
pass its own version on the same subject matter. This follows from the coequality of the two
chambers of Congress.
That this is also the understanding of book authors of the scope of the Senate's power to
concur is clear from the following commentaries:
The power of the Senate to propose or concur with amendments is
apparently without restriction. It would seem that by virtue of this power,
the Senate can practically re-write a bill required to come from the House
and leave only a trace of the original bill. For example, a general revenue
bill passed by the lower house of the United States Congress contained
provisions for the imposition of an inheritance tax . This was changed by
the Senate into a corporation tax. The amending authority of the Senate
was declared by the United States Supreme Court to be sufficiently broad
 to enable it to make the alteration. [Flint v. Stone Tracy Company, 220
U.S. 107, 55 L. ed. 389].
(L. TAÑADA AND F. CARREON, POLITICAL LAW OF THE
PHILIPPINES 247 (1961))
The above-mentioned bills are supposed to be initiated by the House of
Representatives because it is more numerous in membership and therefore
also more representative of the people. Moreover, its members are
presumed to be more familiar with the needs of the country in regard to
the enactment of the legislation involved.
The Senate is, however, allowed much leeway in the exercise of its power
to propose or concur with amendments to the bills initiated by the House
of Representatives. Thus, in one case, a bill introduced in the U.S. House
of Representatives was changed by the Senate to make a proposed
inheritance tax a corporation tax. It is also accepted practice for the Senate
to introduce what is known as an amendment by substitution, which may
entirely replace the bill initiated in the House of Representatives.
(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).
In sum, while Art. VI, §24 provides that all appropriation, revenue or tariff bills, bills
authorizing increase of the public debt, bills of local application, and private bills must
"originate exclusively in the House of Representatives," it also adds, "but the Senate may
propose or concur with amendments." In the exercise of this power, the Senate may propose
an entirely new bill as a substitute measure. As petitioner Tolentino states in a high school
text, a committee to which a bill is referred may do any of the following:
(1) to endorse the bill without changes; (2) to make changes in the bill
omitting or adding sections or altering its language; (3) to make and
endorse an entirely new bill as a substitute, in which case it will be known
as a committee bill; or (4) to make no report at all.
(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258
(1950))
To except from this procedure the amendment of bills which are required to originate in the
House by prescribing that the number of the House bill and its other parts up to the enacting
clause must be preserved although the text of the Senate amendment may be incorporated in
place of the original body of the bill is to insist on a mere technicality. At any rate there is no
rule prescribing this form. S. No. 1630, as a substitute measure, is therefore as much an
amendment of H. No. 11197 as any which the Senate could have made.
II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they assume
that S. No. 1630 is an independent and distinct bill. Hence their repeated references to its
certification that it was passed by the Senate "in substitution of S.B. No. 1129, taking into
consideration P.S. Res. No. 734 and H.B. No. 11197," implying that there is something
substantially different between the reference to S. No. 1129 and the reference to H. No. 11197.
From this premise, they conclude that R.A. No. 7716 originated both in the House and in the
Senate and that it is the product of two "half-baked bills because neither H. No. 11197 nor S.
No. 1630 was passed by both houses of Congress."
In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be mere
amendments of the corresponding provisions of H. No. 11197. The very tabular comparison of
the provisions of H. No. 11197 and S. No. 1630 attached as Supplement A to the basic petition
of petitioner Tolentino, while showing differences between the two bills, at the same time
indicates that the provisions of the Senate bill were precisely intended to be amendments to
the House bill.
Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the Senate bill
was a mere amendment of the House bill, H. No. 11197 in its original form did not have to
pass the Senate on second and three readings. It was enough that after it was passed on first
89
reading it was referred to the Senate Committee on Ways and Means. Neither was it required
that S. No. 1630 be passed by the House of Representatives before the two bills could be
referred to the Conference Committee.
There is legislative precedent for what was done in the case of H. No. 11197 and S. No. 1630.
When the House bill and Senate bill, which became R.A. No. 1405 (Act prohibiting the
disclosure of bank deposits), were referred to a conference committee, the question was raised
whether the two bills could be the subject of such conference, considering that the bill from
one house had not been passed by the other and vice versa. As Congressman Duran put the
question:
MR. DURAN. Therefore, I raise this question of order as to procedure: If
a House bill is passed by the House but not passed by the Senate, and a
Senate bill of a similar nature is passed in the Senate but never passed in
the House, can the two bills be the subject of a conference, and can a law
be enacted from these two bills? I understand that the Senate bill in this
particular instance does not refer to investments in government securities,
whereas the bill in the House, which was introduced by the Speaker,
covers two subject matters: not only investigation of deposits in banks but
also investigation of investments in government securities. Now, since the
two bills differ in their subject matter, I believe that no law can be enacted.
Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:
THE SPEAKER. The report of the conference committee is in order. It is
precisely in cases like this where a conference should be had. If the House
bill had been approved by the Senate, there would have been no need of a
conference; but precisely because the Senate passed another bill on the
same subject matter, the conference committee had to be created, and we
are now considering the report of that committee.
(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))
III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No. 1630
are distinct and unrelated measures also accounts for the petitioners' (Kilosbayan's and PAL's)
contention that because the President separately certified to the need for the immediate
enactment of these measures, his certification was ineffectual and void. The certification had
to be made of the version of the same revenue bill which at the moment was being considered.
Otherwise, to follow petitioners' theory, it would be necessary for the President to certify as
many bills as are presented in a house of Congress even though the bills are merely versions of
the bill he has already certified. It is enough that he certifies the bill which, at the time he
makes the certification, is under consideration. Since on March 22, 1994 the Senate was
considering S. No. 1630, it was that bill which had to be certified. For that matter on June 1,
1993 the President had earlier certified H. No. 9210 for immediate enactment because it was
the one which at that time was being considered by the House. This bill was later substituted,
together with other bills, by H. No. 11197.
As to what Presidential certification can accomplish, we have already explained in the main
decision that the phrase "except when the President certifies to the necessity of its immediate
enactment, etc." in Art. VI, §26 (2) qualifies not only the requirement that "printed copies [of a
bill] in its final form [must be] distributed to the members three days before its passage" but
also the requirement that before a bill can become a law it must have passed "three readings on
separate days." There is not only textual support for such construction but historical basis as
well.
Art. VI, §21 (2) of the 1935 Constitution originally provided:
(2) No bill shall be passed by either House unless it shall have been
printed and copies thereof in its final form furnished its Members at least
three calendar days prior to its passage, except when the President shall
have certified to the necessity of its immediate enactment. Upon the last
 reading of a bill, no amendment thereof shall be allowed and the question
upon its passage shall be taken immediately thereafter, and
the yeas and nays entered on the Journal.
When the 1973 Constitution was adopted, it was provided in Art. VIII, §19 (2):
(2) No bill shall become a law unless it has passed three readings on
separate days, and printed copies thereof in its final form have been
distributed to the Members three days before its passage, except when the
Prime Minister certifies to the necessity of its immediate enactment to
meet a public calamity or emergency. Upon the last reading of a bill, no
amendment thereto shall be allowed, and the vote thereon shall be taken
immediately thereafter, and the yeas and nays entered in the Journal.
This provision of the 1973 document, with slight modification, was adopted in Art. VI, §26 (2)
of the present Constitution, thus:
(2) No bill passed by either House shall become a law unless it has passed
three readings on separate days, and printed copies thereof in its final form
have been distributed to its Members three days before its passage, except
when the President certifies to the necessity of its immediate enactment to
meet a public calamity or emergency. Upon the last reading of a bill, no
amendment thereto shall be allowed, and the vote thereon shall be taken
immediately thereafter, and the yeas and nays entered in the Journal.
The exception is based on the prudential consideration that if in all cases three readings on
separate days are required and a bill has to be printed in final form before it can be passed, the
need for a law may be rendered academic by the occurrence of the very emergency or public
calamity which it is meant to address.
Petitioners further contend that a "growing budget deficit" is not an emergency, especially in a
country like the Philippines where budget deficit is a chronic condition. Even if this were the
case, an enormous budget deficit does not make the need for R.A. No. 7716 any less urgent or
the situation calling for its enactment any less an emergency.
Apparently, the members of the Senate (including some of the petitioners in these cases)
believed that there was an urgent need for consideration of S. No. 1630, because they
responded to the call of the President by voting on the bill on second and third readings on the
same day. While the judicial department is not bound by the Senate's acceptance of the
President's certification, the respect due coequal departments of the government in matters
committed to them by the Constitution and the absence of a clear showing of grave abuse of
discretion caution a stay of the judicial hand.
At any rate, we are satisfied that S. No. 1630 received thorough consideration in the Senate
where it was discussed for six days. Only its distribution in advance in its final printed form
was actually dispensed with by holding the voting on second and third readings on the same
day (March 24, 1994). Otherwise, sufficient time between the submission of the bill on
February 8, 1994 on second reading and its approval on March 24, 1994 elapsed before it was
finally voted on by the Senate on third reading.
The purpose for which three readings on separate days is required is said to be two-fold: (1) to
inform the members of Congress of what they must vote on and (2) to give them notice that a
measure is progressing through the enacting process, thus enabling them and others interested
in the measure to prepare their positions with reference to it. (1 J. G. SUTHERLAND,
STATUTES AND STATUTORY CONSTRUCTION §10.04, p. 282 (1972)). These purposes
were substantially achieved in the case of R.A. No. 7716.
IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and the
Movement of Attorneys for Brotherhood, Integrity and Nationalism, Inc. (MABINI)) that in
violation of the constitutional policy of full public disclosure and the people's right to know
(Art. II, §28 and Art. III, §7) the Conference Committee met for two days in executive session
with only the conferees present.
90
As pointed out in our main decision, even in the United States it was customary to hold such
sessions with only the conferees and their staffs in attendance and it was only in 1975 when a
new rule was adopted requiring open sessions. Unlike its American counterpart, the Philippine
Congress has not adopted a rule prescribing open hearings for conference committees.
It is nevertheless claimed that in the United States, before the adoption of the rule in 1975, at
least staff members were present. These were staff members of the Senators and
Congressmen, however, who may be presumed to be their confidential men, not stenographers
as in this case who on the last two days of the conference were excluded. There is no showing
that the conferees themselves did not take notes of their proceedings so as to give petitioner
Kilosbayan basis for claiming that even in secret diplomatic negotiations involving state
interests, conferees keep notes of their meetings. Above all, the public's right to know was
fully served because the Conference Committee in this case submitted a report showing the
changes made on the differing versions of the House and the Senate.
Petitioners cite the rules of both houses which provide that conference committee reports must
contain "a detailed, sufficiently explicit statement of the changes in or other amendments."
These changes are shown in the bill attached to the Conference Committee Report. The
members of both houses could thus ascertain what changes had been made in the original bills
without the need of a statement detailing the changes.
The same question now presented was raised when the bill which became R.A. No. 1400
(Land Reform Act of 1955) was reported by the Conference Committee. Congressman
Bengzon raised a point of order. He said:
MR. BENGZON. My point of order is that it is out of order to consider the
report of the conference committee regarding House Bill No. 2557 by
reason of the provision of Section 11, Article XII, of the Rules of this
House which provides specifically that the conference report must be
accompanied by a detailed statement of the effects of the amendment on
the bill of the House. This conference committee report is not
accompanied by that detailed statement, Mr. Speaker. Therefore it is out of
order to consider it.
Petitioner Tolentino, then the Majority Floor Leader, answered:
MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in
connection with the point of order raised by the gentleman from
Pangasinan.
There is no question about the provision of the Rule cited by the
gentleman from Pangasinan, but this provision applies to those cases
where only portions of the bill have been amended. In this case before us
an entire bill is presented; therefore, it can be easily seen from the reading
of the bill what the provisions are. Besides, this procedure has been an
established practice.
After some interruption, he continued:
MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into
the reason for the provisions of the Rules, and the reason for the
requirement in the provision cited by the gentleman from Pangasinan is
when there are only certain words or phrases inserted in or deleted from
the provisions of the bill included in the conference report, and we cannot
understand what those words and phrases mean and their relation to the
bill. In that case, it is necessary to make a detailed statement on how those
words and phrases will affect the bill as a whole; but when the entire bill
itself is copied verbatim in the conference report, that is not necessary. So
when the reason for the Rule does not exist, the Rule does not exist.
(2 CONG. REC. NO. 2, p. 4056. (emphasis added))
Congressman Tolentino was sustained by the chair. The record shows that when the ruling
was appealed, it was upheld by viva voce and when a division of the House was called, it was
sustained by a vote of 48 to 5. (Id.,
p. 4058)
Nor is there any doubt about the power of a conference committee to insert new provisions as
long as these are germane to the subject of the conference. As this Court held in Philippine
Judges Association v. Prado, 227 SCRA 703 (1993), in an opinion written by then Justice
Cruz, the jurisdiction of the conference committee is not limited to resolving differences
between the Senate and the House. It may propose an entirely new provision. What is
important is that its report is subsequently approved by the respective houses of Congress.
This Court ruled that it would not entertain allegations that, because new provisions had been
added by the conference committee, there was thereby a violation of the constitutional
injunction that "upon the last reading of a bill, no amendment thereto shall be allowed."
Applying these principles, we shall decline to look into the petitioners'
charges that an amendment was made upon the last reading of the bill that
eventually became R.A. No. 7354 and that copies thereof in its final
form were not distributed among the members of each House. Both the
enrolled bill and the legislative journals certify that the measure was duly
enacted i.e., in accordance with Article VI, Sec. 26 (2) of the Constitution.
We are bound by such official assurances from a coordinate department of
the government, to which we owe, at the very least, a becoming courtesy.
(Id. at 710. (emphasis added))
It is interesting to note the following description of conference committees in the Philippines
in a 1979 study:
Conference committees may be of two types: free or instructed. These
committees may be given instructions by their parent bodies or they may
be left without instructions. Normally the conference committees are
without instructions, and this is why they are often critically referred to as
"the little legislatures." Once bills have been sent to them, the conferees
have almost unlimited authority to change the clauses of the bills and in
fact sometimes introduce new measures that were not in the original
legislation. No minutes are kept, and members' activities on conference
committees are difficult to determine. One congressman known for his
idealism put it this way: "I killed a bill on export incentives for my interest
group [copra] in the conference committee but I could not have done so
anywhere else." The conference committee submits a report to both
houses, and usually it is accepted. If the report is not accepted, then the
committee is discharged and new members are appointed.
(R. Jackson, Committees in the Philippine Congress, in COMMITTEES
AND LEGISLATURES: A COMPARATIVE ANALYSIS 163 (J. D.
LEES AND M. SHAW, eds.)).
In citing this study, we pass no judgment on the methods of conference committees. We cite it
only to say that conference committees here are no different from their counterparts in the
United States whose vast powers we noted in Philippine Judges Association v. Prado, supra.
At all events, under Art. VI, §16(3) each house has the power "to determine the rules of its
proceedings," including those of its committees. Any meaningful change in the method and
procedures of Congress or its committees must therefore be sought in that body itself.
V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716 violates Art.
VI, §26 (1) of the Constitution which provides that "Every bill passed by Congress shall
embrace only one subject which shall be expressed in the title thereof." PAL contends that the
amendment of its franchise by the withdrawal of its exemption from the VAT is not expressed
in the title of the law.
91
Pursuant to §13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue "in lieu
of all other taxes, duties, royalties, registration, license and other fees and charges of any kind,
nature, or description, imposed, levied, established, assessed or collected by any municipal,
city, provincial or national authority or government agency, now or in the future."
PAL was exempted from the payment of the VAT along with other entities by §103 of the
National Internal Revenue Code, which provides as follows:
§103. Exempt transactions. — The following shall be exempt from the
value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws or international
agreements to which the Philippines is a signatory.
R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by
amending §103, as follows:
§103. Exempt transactions. — The following shall be exempt from the
value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws, except those
granted under Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .
The amendment of §103 is expressed in the title of R.A. No. 7716 which reads:
AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT)
SYSTEM, WIDENING ITS TAX BASE AND ENHANCING ITS
ADMINISTRATION, AND FOR THESE PURPOSES AMENDING
AND REPEALING THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND
FOR OTHER PURPOSES.
By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX
(VAT) SYSTEM [BY] WIDENING ITS TAX BASE AND ENHANCING ITS
ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND REPEALING
THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED AND FOR OTHER PURPOSES," Congress thereby clearly expresses its
intention to amend any provision of the NIRC which stands in the way of accomplishing the
purpose of the law.
PAL asserts that the amendment of its franchise must be reflected in the title of the law by
specific reference to P.D. No. 1590. It is unnecessary to do this in order to comply with the
constitutional requirement, since it is already stated in the title that the law seeks to amend the
pertinent provisions of the NIRC, among which is §103(q), in order to widen the base of the
VAT. Actually, it is the bill which becomes a law that is required to express in its title the
subject of legislation. The titles of H. No. 11197 and S. No. 1630 in fact specifically referred
to §103 of the NIRC as among the provisions sought to be amended. We are satisfied that
sufficient notice had been given of the pendency of these bills in Congress before they were
enacted into what is now R.A.
No. 7716.
In Philippine Judges Association v. Prado, supra, a similar argument as that now made by
PAL was rejected. R.A. No. 7354 is entitled AN ACT CREATING THE PHILIPPINE
POSTAL CORPORATION, DEFINING ITS POWERS, FUNCTIONS AND
RESPONSIBILITIES, PROVIDING FOR REGULATION OF THE INDUSTRY AND FOR
OTHER PURPOSES CONNECTED THEREWITH. It contained a provision repealing all
franking privileges. It was contended that the withdrawal of franking privileges was not
expressed in the title of the law. In holding that there was sufficient description of the subject
of the law in its title, including the repeal of franking privileges, this Court held:
To require every end and means necessary for the accomplishment of the
general objectives of the statute to be expressed in its title would not only
 be unreasonable but would actually render legislation impossible. [Cooley,
Constitutional Limitations, 8th Ed., p. 297] As has been correctly
explained:
The details of a legislative act need not be specifically
stated in its title, but matter germane to the subject as
expressed in the title, and adopted to the
accomplishment of the object in view, may properly
be included in the act. Thus, it is proper to create in
the same act the machinery by which the act is to be
enforced, to prescribe the penalties for its infraction,
and to remove obstacles in the way of its execution. If
such matters are properly connected with the subject
as expressed in the title, it is unnecessary that they
should also have special mention in the title. (Southern
Pac. Co. v. Bartine, 170 Fed. 725)
(227 SCRA at 707-708)
VI. Claims of press freedom and religious liberty. We have held that, as a general proposition,
the press is not exempt from the taxing power of the State and that what the constitutional
guarantee of free press prohibits are laws which single out the press or target a group
belonging to the press for special treatment or which in any way discriminate against the press
on the basis of the content of the publication, and R.A. No. 7716 is none of these.
Now it is contended by the PPI that by removing the exemption of the press from the VAT
while maintaining those granted to others, the law discriminates against the press. At any rate,
it is averred, "even nondiscriminatory taxation of constitutionally guaranteed freedom is
unconstitutional."
With respect to the first contention, it would suffice to say that since the law granted the press
a privilege, the law could take back the privilege anytime without offense to the Constitution.
The reason is simple: by granting exemptions, the State does not forever waive the exercise of
its sovereign prerogative.
Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax
burden to which other businesses have long ago been subject. It is thus different from the tax
involved in the cases invoked by the PPI. The license tax in Grosjean v. American Press Co.,
297 U.S. 233, 80 L. Ed. 660 (1936) was found to be discriminatory because it was laid on the
gross advertising receipts only of newspapers whose weekly circulation was over 20,000, with
the result that the tax applied only to 13 out of 124 publishers in Louisiana. These large papers
were critical of Senator Huey Long who controlled the state legislature which enacted the
license tax. The censorial motivation for the law was thus evident.
On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460
U.S. 575, 75 L. Ed. 2d 295 (1983), the tax was found to be discriminatory because although it
could have been made liable for the sales tax or, in lieu thereof, for the use tax on the privilege
of using, storing or consuming tangible goods, the press was not. Instead, the press was
exempted from both taxes. It was, however, later made to pay a special use tax on the cost of
paper and ink which made these items "the only items subject to the use tax that were
component of goods to be sold at retail." The U.S. Supreme Court held that the differential
treatment of the press "suggests that the goal of regulation is not related to suppression of
expression, and such goal is presumptively unconstitutional." It would therefore appear that
even a law that favors the press is constitutionally suspect. (See the dissent of Rehnquist, J. in
that case)
Nor is it true that only two exemptions previously granted by E.O. No. 273 are withdrawn
"absolutely and unqualifiedly" by R.A. No. 7716. Other exemptions from the VAT, such as
those previously granted to PAL, petroleum concessionaires, enterprises registered with the
92
Export Processing Zone Authority, and many more are likewise totally withdrawn, in addition
to exemptions which are partially withdrawn, in an effort to broaden the base of the tax.
The PPI says that the discriminatory treatment of the press is highlighted by the fact that
transactions, which are profit oriented, continue to enjoy exemption under R.A. No. 7716. An
enumeration of some of these transactions will suffice to show that by and large this is not so
and that the exemptions are granted for a purpose. As the Solicitor General says, such
exemptions are granted, in some cases, to encourage agricultural production and, in other
cases, for the personal benefit of the end-user rather than for profit. The exempt transactions
are:
(a) Goods for consumption or use which are in their original state
(agricultural, marine and forest products, cotton seeds in their original
state, fertilizers, seeds, seedlings, fingerlings, fish, prawn livestock and
poultry feeds) and goods or services to enhance agriculture (milling of
palay, corn, sugar cane and raw sugar, livestock, poultry feeds, fertilizer,
ingredients used for the manufacture of feeds).
(b) Goods used for personal consumption or use (household and personal
effects of citizens returning to the Philippines) or for professional use, like
professional instruments and implements, by persons coming to the
Philippines to settle here.
(c) Goods subject to excise tax such as petroleum products or to be used
for manufacture of petroleum products subject to excise tax and services
subject to percentage tax.
(d) Educational services, medical, dental, hospital and veterinary services,
and services rendered under employer-employee relationship.
(e) Works of art and similar creations sold by the artist himself.
(f) Transactions exempted under special laws, or international agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not
exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for
Reconsideration, pp. 58-60)
The PPI asserts that it does not really matter that the law does not discriminate against the
press because "even nondiscriminatory taxation on constitutionally guaranteed freedom is
unconstitutional." PPI cites in support of this assertion the following statement in Murdock
v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):
The fact that the ordinance is "nondiscriminatory" is immaterial. The
protection afforded by the First Amendment is not so restricted. A license
tax certainly does not acquire constitutional validity because it classifies
the privileges protected by the First Amendment along with the wares and
merchandise of hucksters and peddlers and treats them all alike. Such
equality in treatment does not save the ordinance. Freedom of press,
freedom of speech, freedom of religion are in preferred position.
The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly
for regulation. Its imposition on the press is unconstitutional because it lays a prior restraint on
the exercise of its right. Hence, although its application to others, such those selling goods, is
valid, its application to the press or to religious groups, such as the Jehovah's Witnesses, in
connection with the latter's sale of religious books and pamphlets, is unconstitutional. As the
U.S. Supreme Court put it, "it is one thing to impose a tax on income or property of a
preacher. It is quite another thing to exact a tax on him for delivering a sermon."
A similar ruling was made by this Court in American Bible Society v. City of Manila, 101 Phil.
386 (1957) which invalidated a city ordinance requiring a business license fee on those
engaged in the sale of general merchandise. It was held that the tax could not be imposed on
the sale of bibles by the American Bible Society without restraining the free exercise of its
right to propagate.
The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a
privilege, much less a constitutional right. It is imposed on the sale, barter, lease or exchange
of goods or properties or the sale or exchange of services and the lease of properties purely for
revenue purposes. To subject the press to its payment is not to burden the exercise of its right
any more than to make the press pay income tax or subject it to general regulation is not to
violate its freedom under the Constitution.
Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the
proceeds derived from the sales are used to subsidize the cost of printing copies which are
given free to those who cannot afford to pay so that to tax the sales would be to increase the
price, while reducing the volume of sale. Granting that to be the case, the resulting burden on
the exercise of religious freedom is so incidental as to make it difficult to differentiate it from
any other economic imposition that might make the right to disseminate religious doctrines
costly. Otherwise, to follow the petitioner's argument, to increase the tax on the sale of
vestments would be to lay an impermissible burden on the right of the preacher to make a
sermon.
On the other hand the registration fee of P1,000.00 imposed by §107 of the NIRC, as amended
by §7 of R.A. No. 7716, although fixed in amount, is really just to pay for the expenses of
registration and enforcement of provisions such as those relating to accounting in §108 of the
NIRC. That the PBS distributes free bibles and therefore is not liable to pay the VAT does not
excuse it from the payment of this fee because it also sells some copies. At any rate whether
the PBS is liable for the VAT must be decided in concrete cases, in the event it is assessed this
tax by the Commissioner of Internal Revenue.
VII. Alleged violations of the due process, equal protection and contract clauses and the rule
on taxation. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2)
classifies transactions as covered or exempt without reasonable basis and (3) violates the rule
that taxes should be uniform and equitable and that Congress shall "evolve a progressive
system of taxation."
With respect to the first contention, it is claimed that the application of the tax to existing
contracts of the sale of real property by installment or on deferred payment basis would result
in substantial increases in the monthly amortizations to be paid because of the 10% VAT. The
additional amount, it is pointed out, is something that the buyer did not anticipate at the time
he entered into the contract.
The short answer to this is the one given by this Court in an early case: "Authorities from
numerous sources are cited by the plaintiffs, but none of them show that a lawful tax on a new
subject, or an increased tax on an old one, interferes with a contract or impairs its obligation,
within the meaning of the Constitution. Even though such taxation may affect particular
contracts, as it may increase the debt of one person and lessen the security of another, or may
impose additional burdens upon one class and release the burdens of another, still the tax must
be paid unless prohibited by the Constitution, nor can it be said that it impairs the obligation of
any existing contract in its true legal sense." (La Insular v. Machuca Go-Tauco and Nubla Co-
Siong, 39 Phil. 567, 574 (1919)). Indeed not only existing laws but also "the reservation of the
essential attributes of sovereignty, is . . . read into contracts as a postulate of the legal order."
(Philippine-American Life Ins. Co. v. Auditor General, 22 SCRA 135, 147 (1968)) Contracts
must be understood as having been made in reference to the possible exercise of the rightful
authority of the government and no obligation of contract can extend to the defeat of that
authority. (Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885 (1935)).
It is next pointed out that while §4 of R.A. No. 7716 exempts such transactions as the sale of
agricultural products, food items, petroleum, and medical and veterinary services, it grants no
exemption on the sale of real property which is equally essential. The sale of real property for
socialized and low-cost housing is exempted from the tax, but CREBA claims that real estate
93
transactions of "the less poor," i.e., the middle class, who are equally homeless, should
likewise be exempted.
The sale of food items, petroleum, medical and veterinary services, etc., which are essential
goods and services was already exempt under §103, pars. (b) (d) (1) of the NIRC before the
enactment of R.A. No. 7716. Petitioner is in error in claiming that R.A. No. 7716 granted
exemption to these transactions, while subjecting those of petitioner to the payment of the
VAT. Moreover, there is a difference between the "homeless poor" and the "homeless less
poor" in the example given by petitioner, because the second group or middle class can afford
to rent houses in the meantime that they cannot yet buy their own homes. The two social
classes are thus differently situated in life. "It is inherent in the power to tax that the State be
free to select the subjects of taxation, and it has been repeatedly held that 'inequalities which
result from a singling out of one particular class for taxation, or exemption infringe no
constitutional limitation.'" (Lutz v. Araneta, 98 Phil. 148, 153 (1955). Accord, City of Baguio
v. De Leon, 134 Phil. 912 (1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984);
Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 371
(1988)).
Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI,
§28(1) which provides that "The rule of taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation."
Equality and uniformity of taxation means that all taxable articles or kinds of property of the
same class be taxed at the same rate. The taxing power has the authority to make reasonable
and natural classifications for purposes of taxation. To satisfy this requirement it is enough
that the statute or ordinance applies equally to all persons, forms and corporations placed in
similar situation. (City of Baguio v. De Leon, supra; Sison, Jr. v. Ancheta, supra)
Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was
enacted. R.A. No. 7716 merely expands the base of the tax. The validity of the original VAT
Law was questioned in Kapatiran ng Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan,
163 SCRA 383 (1988) on grounds similar to those made in these cases, namely, that the law
was "oppressive, discriminatory, unjust and regressive in violation of Art. VI, §28(1) of the
Constitution." (At 382) Rejecting the challenge to the law, this Court held:
As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It
is uniform. . . .
The sales tax adopted in EO 273 is applied similarly on all goods and
services sold to the public, which are not exempt, at the constant rate of
0% or 10%.
The disputed sales tax is also equitable. It is imposed only on sales of
goods or services by persons engaged in business with an aggregate gross
annual sales exceeding P200,000.00. Small corner sari-sari stores are
consequently exempt from its application. Likewise exempt from the tax
are sales of farm and marine products, so that the costs of basic food and
other necessities, spared as they are from the incidence of the VAT, are
expected to be relatively lower and within the reach of the general public.
(At 382-383)
The CREBA claims that the VAT is regressive. A similar claim is made by the Cooperative
Union of the Philippines, Inc. (CUP), while petitioner Juan T. David argues that the law
contravenes the mandate of Congress to provide for a progressive system of taxation because
the law imposes a flat rate of 10% and thus places the tax burden on all taxpayers without
regard to their ability to pay.
The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT,
are regressive. What it simply provides is that Congress shall "evolve a progressive system of
taxation." The constitutional provision has been interpreted to mean simply that "direct taxes
are . . . to be preferred [and] as much as possible, indirect taxes should be minimized." (E.
FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. (1977)).
Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax system.
Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes, would have been
prohibited with the proclamation of Art. VIII, §17(1) of the 1973 Constitution from which the
present Art. VI, §28(1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if
not impossible, to avoid them by imposing such taxes according to the taxpayers' ability to
pay. In the case of the VAT, the law minimizes the regressive effects of this imposition by
providing for zero rating of certain transactions (R.A. No. 7716, §3, amending §102 (b) of the
NIRC), while granting exemptions to other transactions. (R.A. No. 7716, §4, amending §103
of the NIRC).
Thus, the following transactions involving basic and essential goods and services are
exempted from the VAT:
(a) Goods for consumption or use which are in their original state (agricultural, marine
and forest products, cotton seeds in their original state, fertilizers, seeds, seedlings,
fingerlings, fish, prawn livestock and poultry feeds) and goods or services to enhance
agriculture (milling of palay, corn sugar cane and raw sugar, livestock, poultry feeds,
fertilizer, ingredients used for the manufacture of feeds).
(b) Goods used for personal consumption or use (household and personal effects of
citizens returning to the Philippines) and or professional use, like professional
instruments and implements, by persons coming to the Philippines to settle here.
(c) Goods subject to excise tax such as petroleum products or to be used for
manufacture of petroleum products subject to excise tax and services subject to
percentage tax.
(d) Educational services, medical, dental, hospital and veterinary services, and services
rendered under employer-employee relationship.
(e) Works of art and similar creations sold by the artist himself.
(f) Transactions exempted under special laws, or international agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)
On the other hand, the transactions which are subject to the VAT are those which involve
goods and services which are used or availed of mainly by higher income groups. These
include real properties held primarily for sale to customers or for lease in the ordinary course
of trade or business, the right or privilege to use patent, copyright, and other similar property
or right, the right or privilege to use industrial, commercial or scientific equipment, motion
picture films, tapes and discs, radio, television, satellite transmission and cable television time,
hotels, restaurants and similar places, securities, lending investments, taxicabs, utility cars for
rent, tourist buses, and other common carriers, services of franchise grantees of telephone and
telegraph.
The problem with CREBA's petition is that it presents broad claims of constitutional violations
by tendering issues not at retail but at wholesale and in the abstract. There is no fully
developed record which can impart to adjudication the impact of actuality. There is no factual
foundation to show in the concrete the application of the law to actual contracts and
exemplify its effect on property rights. For the fact is that petitioner's members have not even
been assessed the VAT. Petitioner's case is not made concrete by a series of hypothetical
questions asked which are no different from those dealt with in advisory opinions.
The difficulty confronting petitioner is thus apparent. He alleges
arbitrariness. A mere allegation, as here, does not suffice. There must be a
factual foundation of such unconstitutional taint. Considering that
petitioner here would condemn such a provision as void on its face, he has
not made out a case. This is merely to adhere to the authoritative doctrine
94
that where the due process and equal protection clauses are invoked,
considering that they are not fixed rules but rather broad standards, there is
a need for proof of such persuasive character as would lead to such a
conclusion. Absent such a showing, the presumption of validity must
prevail.
(Sison, Jr. v. Ancheta, 130 SCRA at 661)
Adjudication of these broad claims must await the development of a concrete case. It may be
that postponement of adjudication would result in a multiplicity of suits. This need not be the
case, however. Enforcement of the law may give rise to such a case. A test case, provided it is
an actual case and not an abstract or hypothetical one, may thus be presented.
Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract issues.
Otherwise, adjudication would be no different from the giving of advisory opinion that does
not really settle legal issues.
We are told that it is our duty under Art. VIII, §1, ¶2 to decide whenever a claim is made that
"there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the
part of any branch or instrumentality of the government." This duty can only arise if an actual
case or controversy is before us. Under Art . VIII, §5 our jurisdiction is defined in terms of
"cases" and all that Art. VIII, §1, ¶2 can plausibly mean is that in the exercise of
that jurisdiction we have the judicial power to determine questions of grave abuse of
discretion by any branch or instrumentality of the government.
Put in another way, what is granted in Art. VIII, §1, ¶2 is "judicial power," which is "the
power of a court to hear and decide cases pending between parties who have the right to sue
and be sued in the courts of law and equity" (Lamb v. Phipps, 22 Phil. 456, 559 (1912)), as
distinguished from legislative and executive power. This power cannot be directly
appropriated until it is apportioned among several courts either by the Constitution, as in the
case of Art. VIII, §5, or by statute, as in the case of the Judiciary Act of 1948 (R.A. No. 296)
and the Judiciary Reorganization Act of 1980 (B.P. Blg. 129). The power thus apportioned
constitutes the court's "jurisdiction," defined as "the power conferred by law upon a court or
judge to take cognizance of a case, to the exclusion of all others." (United States v. Arceo, 6
Phil. 29 (1906)) Without an actual case coming within its jurisdiction, this Court cannot
inquire into any allegation of grave abuse of discretion by the other departments of the
government.
VIII. Alleged violation of policy towards cooperatives. On the other hand, the Cooperative
Union of the Philippines (CUP), after briefly surveying the course of legislation, argues that it
was to adopt a definite policy of granting tax exemption to cooperatives that the present
Constitution embodies provisions on cooperatives. To subject cooperatives to the VAT would
therefore be to infringe a constitutional policy. Petitioner claims that in 1973, P.D. No. 175
was promulgated exempting cooperatives from the payment of income taxes and sales taxes
but in 1984, because of the crisis which menaced the national economy, this exemption was
withdrawn by P.D. No. 1955; that in 1986, P.D. No. 2008 again granted cooperatives
exemption from income and sales taxes until December 31, 1991, but, in the same year, E.O.
No. 93 revoked the exemption; and that finally in 1987 the framers of the Constitution
"repudiated the previous actions of the government adverse to the interests of the
cooperatives, that is, the repeated revocation of the tax exemption to cooperatives and instead
upheld the policy of strengthening the cooperatives by way of the grant of tax exemptions," by
providing the following in Art. XII:
§1. The goals of the national economy are a more equitable distribution of
opportunities, income, and wealth; a sustained increase in the amount of
goods and services produced by the nation for the benefit of the people;
and an expanding productivity as the key to raising the quality of life for
all, especially the underprivileged.
 The State shall promote industrialization and full employment based on by voting for it in Congress should later thrust to the courts the burden of reviewing measures
sound agricultural development and agrarian reform, through industries in the flush of enactment. This Court does not sit as a third branch of the legislature, much less
that make full and efficient use of human and natural resources, and which exercise a veto power over legislation.
are competitive in both domestic and foreign markets. However, the State WHEREFORE, the motions for reconsideration are denied with finality and the temporary
shall protect Filipino enterprises against unfair foreign competition and restraining order previously issued is hereby lifted.
trade practices. SO ORDERED.
In the pursuit of these goals, all sectors of the economy and all regions of
the country shall be given optimum opportunity to develop. Private
enterprises, including corporations, cooperatives, and similar collective
organizations, shall be encouraged to broaden the base of their ownership.
§15. The Congress shall create an agency to promote the viability and
growth of cooperatives as instruments for social justice and economic
development.
Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955 singled
out cooperatives by withdrawing their exemption from income and sales taxes under P.D. No.
175, §5. What P.D. No. 1955, §1 did was to withdraw the exemptions and preferential
treatments theretofore granted to private business enterprises in general, in view of the
economic crisis which then beset the nation. It is true that after P.D. No. 2008, §2 had restored
the tax exemptions of cooperatives in 1986, the exemption was again repealed by E.O. No. 93,
§1, but then again cooperatives were not the only ones whose exemptions were
withdrawn. The withdrawal of tax incentives applied to all, including government and private
entities. In the second place, the Constitution does not really require that cooperatives be
granted tax exemptions in order to promote their growth and viability. Hence, there is no basis
for petitioner's assertion that the government's policy toward cooperatives had been one of
vacillation, as far as the grant of tax privileges was concerned, and that it was to put an end to
this indecision that the constitutional provisions cited were adopted. Perhaps as a matter of
policy cooperatives should be granted tax exemptions, but that is left to the discretion of
Congress. If Congress does not grant exemption and there is no discrimination to cooperatives,
no violation of any constitutional policy can be charged.
Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives are
exempt from taxation. Such theory is contrary to the Constitution under which only the
following are exempt from taxation: charitable institutions, churches and parsonages, by
reason of Art. VI, §28 (3), and non-stock, non-profit educational institutions by reason of Art.
XIV, §4 (3).
CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies
cooperatives the equal protection of the law because electric cooperatives are exempted from
the VAT. The classification between electric and other cooperatives (farmers cooperatives,
producers cooperatives, marketing cooperatives, etc.) apparently rests on a congressional
determination that there is greater need to provide cheaper electric power to as many people as
possible, especially those living in the rural areas, than there is to provide them with other
necessities in life. We cannot say that such classification is unreasonable.
We have carefully read the various arguments raised against the constitutional validity of R.A.
No. 7716. We have in fact taken the extraordinary step of enjoining its enforcement pending
resolution of these cases. We have now come to the conclusion that the law suffers from none
of the infirmities attributed to it by petitioners and that its enactment by the other branches of
the government does not constitute a grave abuse of discretion. Any question as to its
necessity, desirability or expediency must be addressed to Congress as the body which is
electorally responsible, remembering that, as Justice Holmes has said, "legislators are the
ultimate guardians of the liberties and welfare of the people in quite as great a degree as are
the courts." (Missouri, Kansas & Texas Ry. Co. v. May, 194 U.S. 267, 270, 48 L. Ed. 971, 973
(1904)). It is not right, as petitioner in G.R. No. 115543 does in arguing that we should enforce
the public accountability of legislators, that those who took part in passing the law in question
95
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 204142 November 19, 2014
HONDA CARS PHILIPPINES, INC., Petitioner,
vs.
HONDA CARS TECHNICAL SPECIALIST AND SUPERVISORS UNION, Respondent.
DECISION
BRION, J.:
We resolve the present petition for review on certiorari1 seeking to nullify the March 30, 2012
decision2 and October 25, 2012 resolution3 of the Court of Appeals (CA) in CA-G.R. SP No.
109297. These rulings were penned by Associate Justice Noel G. Tijam and concurred in by
Associate Justices Romeo F. Barza and Edwin D. Sorongon.
The Factual Antecedents
On December 8, 2006, petitioner Honda Cars Philippines, Inc., (company) and respondent
Honda Cars Technical Specialists and Supervisory Union (union), the exclusive collective
bargaining representative of the company’s supervisors and technical specialists, entered into a
collective bargaining agreement (CBA) effective April 1, 2006 to March 31, 2011. 4
Prior to April 1, 2005, the union members were receiving a transportation allowance of
3,300.00 a month. On September 3, 2005, the company and the union entered into a
Memorandum of Agreement5 (MOA) converting the transportation allowance into a monthly
gasoline allowance starting at 125 liters effective April 1,2005. The allowance answers for the
gasoline consumed by the union members for official business purposes and for home to office
travel and vice-versa. The company claimed that the grant of the gasoline allowance is tied up
to a similar company policy for managers and assistant vice-presidents (AVPs), which
provides that in the event the amount of gasoline is not fully consumed, the gasoline not used
may be converted into cash, subject to whatever tax may be applicable. Since the cash
conversion is paid in the monthly payroll as an excess gas allowance, the company considers
the amount as part of the managers’ and AVPs’ compensation that is subject to income tax on
compensation.
Accordingly, the company deducted from the union members’ salaries the withholding tax
corresponding to the conversion to cash of their unused gasoline allowance.
The union, on the other hand, argued that the gasoline allowance for its members is a
"negotiated item" under Article XV, Section 15 of the new CBA on fringe benefits. It thus
opposed the company’s practice of treating the gasoline allowance that, when converted into
cash, is considered as compensation income that is subject to withholding tax.
The disagreement between the company and the union on the matter resulted in a grievance
which they referred to the CBA grievance procedure for resolution. As it remained unsettled
there, they submitted the issue to a panel of voluntary arbitrators as required by the CBA.
The Voluntary Arbitration Decision
On February 6, 2009, the Panel of Voluntary Arbitrators6 rendered a decision/award7 declaring
that the cash conversion of the unused gasoline allowance enjoyed by the members of the
union is a fringe benefit subject to the fringe benefit tax, not to income tax. The panel held that
the deductions made by the company shall be considered as advances subject to refund in
future remittances of withholding taxes.
The company moved for partial reconsideration of the decision, but the panel denied the
motion in its June 3, 2009 order,8 prompting the company to appeal to the CA through a Rule
43 petition for review. The core issue in this appeal was whether the cash conversion of the
unused gasoline allowance is a fringe benefit subject to the fringe benefit tax, and not to a
compensation income subject to withholding tax.
The CA Ruling
96
The CA Eight Division denied the petition and upheld with modification the voluntary
arbitration decision. It agreed with the panel’s ruling that the cash conversion of the unused
gasoline allowance is a fringe benefit granted under Section 15, Article XV of the CBA on
"Fringe Benefits." Accordingly, the CA held that the benefit is not compensation income
subject to withholding tax.
This conclusion notwithstanding, the CA clarified that while the gasoline allowance or the
cash conversion of its unused portion is a fringe benefit, it is "not necessarily subject to fringe
benefit tax."9 It explained that Section 33 (A) of the National Internal Revenue Code (NIRC)
of 1997 imposed a fringe benefit tax, effective January 1, 2000 and thereafter, on the grossed-
up monetary value of fringe benefit furnished or granted to the employee (except rank-and-file
employees) by the employer (unless the fringe benefit is required by the nature of, or
necessary to the trade, business or profession of the employer, or when the fringe benefit is for
the convenience or advantage of the employer).
According to the CA, "it is undisputed that the reason behind the grant of the gasoline
allowance to the union members is primarily for the convenience and advantage of Honda,
their employer."10 It thus declared that the gasoline allowance or the cash conversion of the
unused portion thereof is not subject to fringe benefit tax. 11
The Petition
Its motion for reconsideration denied, the company appeals to this Court to set aside the CA’s
dispositions, raising the very same issue it brought to the appellate court — whether the cash
conversion of the gasoline allowance of the union members is a fringe benefit or compensation
income, for taxation purposes.
The company reiterates its position that the cash conversion of the union members’ gasoline
allowance is compensation income subject to income tax, and not to a fringe benefit tax. It
argues that the tax treatment of a benefit extended by the employer to the employees is
governed by law and the applicable tax regulations, and notby the nomenclature or definition
provided by the parties. The fact that the CBA erroneously classified the gasoline allowance as
a fringe benefit is immaterial as it is the law – Section 33 of the NIRC – that provides for the
legal classification of the benefit.
It adds that there is no basis for the CA conclusion that the cash conversion of the unused
gasoline allowance redounds to the benefit of management. Common sense dictates that it is
the individual union members who solely benefit from the cash conversion of the gasoline
allowance as it goes into their compensation income.
In any event, the company submits that even assuming that the cash conversion of the unused
gasoline allowance is a tax-exempt fringe benefit and that it erred in withholding the income
taxes due, still the union members would have no cause of action against it for the refund of
the amounts withheld from them and remitted to the Bureau of Internal Revenue (BIR).
Citing Section 204 of the NIRC, the company contends that an action for the refund of an
erroneous withholding and payment of taxes should be in the nature of a tax refund claim with
the BIR. It further contends that when it withheld the income tax due from the cash conversion
of the unused gasoline allowance of the union members, it was simply acting as an agent of
the government for the collection and payment of taxes due from the members.
The Union’s Position
In its Comment12 dated April 19, 2013, the union argues for the denial of the petition for lack
of merit. Itposits that its members’ gasoline allowance and its unused gas equivalent are fringe
benefits under the CBA and the law [Section 33 (A) of NIRC] and is therefore not subject to
withholding tax on compensation income. Moreover, under that law and BIR Revenue
Regulations 2-98, the same benefit is not subject to the fringe benefit tax because it is required
by the nature of, or necessary to the trade or business of the company.
The union further submits that in 2007, the BIR ruled that fixed and/or pre-computed
transportation allowance given to supervisory employees in pursuit of the business of the
company, shall not be taxable as compensation or fringe benefits of the employees. 13 It
maintains that the gasoline allowance is already pre-computed by the company as sufficient to the CIR’s recommendation.19 As the Government’s agent, the employer collects tax and serves
cover the gasoline consumption of the supervisors whenever they perform work for the as the payee by fiction of law.20 As the employee’s agent, the employer files the necessary
company. The fact that the company allowed its members to convert it to cash when not fully income tax return and remits the tax to the Government. 21
consumed is no longer their problem because the benefit was already given. Based on these considerations, we hold that the union has no cause of action against the
Our Ruling company.1âwphi1 The company merely performed its statutory duty to withhold tax based on
We partly grant the petition. its interpretation of the NIRC, albeit that interpretation may later be found to be erroneous.
The Voluntary Arbitrator has no The employer did not violate the employee's right by the mere act of withholding the tax that
jurisdiction to settle tax matters may be due the government.22
The Labor Code vests the Voluntary Arbitrator original and exclusive jurisdiction to hear and Moreover, the NIRC only holds the withholding agent personally liable for the tax arising
decide all unresolved grievances arising from the interpretation or implementation of the from the breach of his legal duty to withhold, as distinguished from his duty to pay
Collective Bargaining Agreement and those arising from the interpretation or enforcement of tax.23 Under Section 79 (B) of the NIRC, if the tax required to be deducted and withheld is not
company personnel policies.14 Upon agreement of the parties, the Voluntary Arbitrator shall collected from the employer, the employer shall not be relieved from liability for any penalty
also hear and decide allother labor disputes, including unfair labor practices and bargaining or addition to the unwithheld tax.
deadlocks.15 Thus, if the BIR illegally or erroneously collected tax, the recourse of the taxpayer, and in
In short, the Voluntary Arbitrator’s jurisdiction is limited to labor disputes. Labor dispute proper cases, the withholding agent, is against the BIR, and not against the withholding
means "any controversy or matter concerning terms and conditions of employment or the agent.24 The union's cause of action for the refund or non-withholding of tax is against the
association or representation of persons in negotiating, fixing, maintaining, changing, or taxing authority, and not against the employer. Section 229 of the NIRC provides:
arranging the terms and conditions of employment, regardless of whether the disputants stand Sec. 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or proceeding shall be
in the proximate relation of employer and employee."16 maintained in any court for the recovery of any national internal revenue tax hereafter alleged
The issues raised before the Panel of Voluntary Arbitrators are: (1) whether the cash to have been erroneously or illegally assessed or collected, or of any penalty claimed to have
conversion of the gasoline allowance shall be subject to fringe benefit tax or the graduated been collected without authority, or of any sum alleged to have been excessively or in any
income tax rate on compensation; and (2) whether the company wrongfully withheld income manner wrongfully collected, until a claim for refund or credit has been duly filed with the
tax on the converted gas allowance. Commissioner; but such suit or proceeding may be maintained, whether or not such tax,
The Voluntary Arbitrator has no competence to rule on the taxability of the gas allowance and penalty, or sum has been paid under protest or duress.
on the propriety of the withholding of tax. These issues are clearly tax matters, and do not WHEREFORE, premises considered, we PARTLY GRANT the petition for review on
involve labor disputes. To be exact, they involve tax issues within a labor relations setting as certiorari filed by Honda Cars Philippines, Inc. We REVERSE AND SET ASIDE the March
they pertain to questions of law on the application of Section 33 (A) of the NIRC. They do not 30, 2012 decision and the October 25, 2012 resolution of the Court of Appeals in CA-G.R. SP
require the application of the Labor Code or the interpretation of the MOA and/or company No. 109297. We declare NULL AND VOID the February 6, 2009 decision and June 3, 2009
personnel policies. Furthermore, the company and the union cannot agree or compromise on resolution of the Panel of Voluntary Arbitrators. No costs.
the taxability of the gas allowance. Taxation is the State’s inherent power; its imposition SO ORDERED.
cannot be subject to the will of the parties.
Under paragraph 1, Section 4 of the NIRC, the CIR shall have the exclusive and original
jurisdiction to interpret the provisions of the NIRC and other tax laws, subject to review by the
Secretary of Finance. Consequently, if the company and/or the union desire/s to seek
clarification of these issues, it/they should have requested for a tax ruling17 from the Bureau of
Internal Revenue (BIR). Any revocation, modification or reversal of the CIR’s ruling shall not
be given retroactive application if the revocation, modification or reversal will be prejudicial
to the taxpayers, except in the following cases:
(a) Where the taxpayer deliberately misstates or omits material facts from his return
or any document required of him by the BIR;
(b) Where the facts subsequently gathered by the BIR are materially different from
the facts on which the ruling is based; or
(c) Where the taxpayer acted in bad faith.18
On the other hand, if the union disputes the withholding of tax and desires a refund of the
withheld tax, it should have filed an administrative claim for refund with the CIR. Paragraph
2, Section 4 of the NIRC expressly vests the CIR original jurisdiction over refunds of internal
revenue taxes, fees or other charges, penalties imposed in relation thereto, or other tax matters.
The union has no cause of action against the company
Under the withholding tax system, the employer as the withholding agent acts as both the
government and the taxpayer’s agent. Except in the case of a minimum wage earner, every
employer has the duty to deduct and withhold upon the employee’s wages a tax determined in
accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon
97
 EN BANC
G.R. No. 198756 January 13, 2015
BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION,
METROPOLITAN BANK & TRUST COMPANY, PHILIPPINE BANK OF
COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS BANK AND
PLANTERS DEVELOPMENT BANK, Petitioners,
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL
CORPORATION, Petitioners-Intervenors,
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor,
vs.
REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF INTERNAL REVENUE,
BUREAU OF INTERNAL REVENUE, SECRETARY OF FINANCE, DEPARTMENT OF
FINANCE, THE NATIONAL TREASURER AND BUREAU OF TREASURY, Respondent.
DECISION
LEONEN, J.:
The case involves the proper tax treatment of the discount or interest income arising from the
₱35 billion worth of 10-year zero-coupon treasury bonds issued by the Bureau of Treasury on
October 18, 2001 (denominated as the Poverty Eradication and Alleviation Certificates or the
PEA Ce Bonds by the Caucus of Development NGO Networks).
On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-
20111 (2011 BIR Ruling), declaring that the PEACe Bonds being deposit substitutes are
subject to the 20% final withholding tax. Pursuant to this ruling, the Secretary of Finance
directed the Bureau of Treasury to withhold a 20% final tax from the face value of the PEACe
Bonds upon their payment at maturity on October 18, 2011.
This is a petition for certiorari, prohibition and/or mandamus2 filed by petitioners under Rule
65 of the Rules of Court seeking to:
a. ANNUL Respondent BIR's Ruling No. 370-2011 dated 7 October 2011 [and]
other related rulings issued by BIR of similar tenor and import, for being
unconstitutional and for having been issued without jurisdiction or with grave abuse
of discretion amounting to lack or· excess of jurisdiction ... ;
b. PROHIBIT Respondents, particularly the BTr; from withholding or collecting the
20% FWT from the payment of the face value of the Government Bonds upon their
maturity;
c. COMMAND Respondents, particularly the BTr, to pay the full amount of the face
value of the Government Bonds upon maturity ... ; and
d. SECURE a temporary restraining order (TRO), and subsequently a writ of
preliminary injunction, enjoining Respondents, particularly the BIR and the BTr,
from withholding or collecting 20% FWT on the Government Bonds and the
respondent BIR from enforcing the assailed 2011 BIR Ruling, as well asother
related rulings issued by the BIR of similar tenor and import, pending the resolution
by [the court] of the merits of [the] Petition.3
Factual background
By letter4 dated March 23, 2001, the Caucus of Development NGO Networks (CODE-NGO)
"with the assistance of its financial advisors, Rizal Commercial Banking Corp. ("RCBC"),
RCBC Capital Corp. ("RCBC Capital"), CAPEX Finance and Investment Corp. ("CAPEX")
and SEED Capital Ventures, Inc. (SEED),"5 requested an approval from the Department of
Finance for the issuance by the Bureau of Treasury of 10-year zerocoupon Treasury
Certificates (T-notes).6 The T-notes would initially be purchased by a special purpose vehicle
on behalf of CODE-NGO, repackaged and sold at a premium to investors as the PEACe
Bonds.7 The net proceeds from the sale of the Bonds"will be used to endow a permanent fund
(Hanapbuhay® Fund) to finance meritorious activities and projects of accredited non-
government organizations (NGOs) throughout the country."8
98
Prior to and around the time of the proposal of CODE-NGO, other proposals for the issuance
of zero-coupon bonds were also presented by banks and financial institutions, such as First
Metro Investment Corporation (proposal dated March 1, 2001),9 International Exchange Bank
(proposal dated July 27, 2000),10 Security Bank Corporation and SB Capital Investment
Corporation (proposal dated July 25, 2001),11 and ATR-Kim Eng Fixed Income, Inc. (proposal
dated August 25, 1999).12 "[B]oth the proposals of First Metro Investment Corp. and ATR-
Kim Eng Fixed Income indicate that the interest income or discount earned on the proposed
zerocoupon bonds would be subject to the prevailing withholding tax."13
A zero-coupon bondis a bond bought at a price substantially lower than its face value (or at a
deep discount), with the face value repaid at the time of maturity. 14 It does not make periodic
interest payments, or have socalled "coupons," hence the term zero-coupon bond.15 However,
the discount to face value constitutes the return to the bondholder. 16
On May 31, 2001, the Bureau of Internal Revenue, in reply to CODENGO’s letters dated May
10, 15, and 25, 2001, issued BIR Ruling No. 020-200117 on the tax treatment of the proposed
PEACe Bonds. BIR Ruling No. 020-2001, signed by then Commissioner ofInternal Revenue
René G. Bañez confirmed that the PEACe Bonds would not be classified as deposit substitutes
and would not be subject to the corresponding withholding tax:
Thus, to be classified as "deposit substitutes", the borrowing of funds must be obtained from
twenty (20) or more individuals or corporate lenders at any one time. In the light of your
representation that the PEACe Bonds will be issued only to one entity, i.e., Code NGO, the
same shall not be considered as "deposit substitutes" falling within the purview of the above
definition. Hence, the withholding tax on deposit substitutes will not apply.18 (Emphasis
supplied)
The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was
subsequently reiterated in BIR Ruling No. 035-200119 dated August 16, 2001 and BIR Ruling
No. DA-175-0120 dated September 29, 2001 (collectively, the 2001 Rulings). In sum, these
rulings pronounced that to be able to determine whether the financial assets, i.e., debt
instruments and securities are deposit substitutes, the "20 or more individual or corporate
lenders" rule must apply. Moreover, the determination of the phrase "at any one time" for
purposes of determining the "20 or more lenders" is to be determined at the time of the
original issuance. Such being the case, the PEACe Bonds were not to be treated as deposit
substitutes.
Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo Sergio G.
Edeza (Former Treasurer Edeza) questioned the propriety of issuing the bonds directly to a
special purpose vehicle considering that the latter was not a Government Securities Eligible
Dealer (GSED).22 Former Treasurer Edeza recommended that the issuance of the Bonds "be
done through the ADAPS"23 and that CODE-NGO "should get a GSED to bid in [sic] its
behalf."24
Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury Bonds 25 (Public
Offering) dated October 9, 2001, the Bureau of Treasury announced that "₱30.0B worth of 10-
year Zero[-] Coupon Bonds [would] be auctioned on October 16, 2001[.]"26 The notice stated
that the Bonds "shall be issued to not morethan 19 buyers/lenders hence, the necessity of a
manual auction for this maiden issue."27 It also required the GSEDs to submit their bids not
later than 12 noon on auction date and to disclose in their bid submissions the names of the
institutions bidding through them to ensure strict compliance with the 19 lender limit.28 Lastly,
it stated that "the issue being limitedto 19 lenders and while taxable shall not be subject to the
20% final withholding [tax]."29
On October 12, 2001, the Bureau of Treasury released a memo 30 on the "Formula for the Zero-
Coupon Bond." The memo stated inpart that the formula (in determining the purchase price
and settlement amount) "is only applicable to the zeroes that are not subject to the 20% final
withholding due to the 19 buyer/lender limit."31
A day before the auction date or on October 15, 2001, the Bureau of Treasury issued the
"Auction Guidelines for the 10-year Zero-Coupon Treasury Bond to be Issued on October 16,
2001" (Auction Guidelines).32 The Auction Guidelines reiterated that the Bonds to be
auctioned are "[n]ot subject to 20% withholding tax as the issue will be limited to a maximum
of 19 lenders in the primary market (pursuant to BIR Revenue Regulation No. 020
2001)."33The Auction Guidelines, for the first time, also stated that the Bonds are "[e]ligible as
liquidity reserves (pursuant to MB Resolution No. 1545 dated 27 September 2001)[.]"34
On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-coupon
bonds.35 Also on the same date, the Bureau of Treasury issued another memorandum36 quoting
excerpts of the ruling issued by the Bureau of Internal Revenue concerning the Bonds’
exemption from 20% final withholding tax and the opinion of the Monetary Board on reserve
eligibility.37
During the auction, there were 45 bids from 15 GSEDs.38 The bidding range was very wide,
from as low as 12.248% to as high as 18.000%.39 Nonetheless, the Bureau of Treasury
accepted the auction results.40 The cut-off was at 12.75%.41
After the auction, RCBC which participated on behalf of CODE-NGO was declared as the
winning bidder having tendered the lowest bids.42 Accordingly, on October 18, 2001, the
Bureau of Treasury issued ₱35 billion worth of Bonds at yield-to-maturity of 12.75% to
RCBC for approximately ₱10.17 billion,43 resulting in a discount of approximately ₱24.83
billion.
Also on October 16, 2001, RCBC Capital entered into an underwriting Agreement 44 with
CODE-NGO, whereby RCBC Capital was appointed as the Issue Manager and Lead
Underwriter for the offering of the PEACe Bonds.45RCBC Capital agreed to underwrite46 on a
firm basis the offering, distribution and sale of the 35 billion Bonds at the price of
₱11,995,513,716.51.47 In Section 7(r) of the underwriting agreement, CODE-NGO
represented that "[a]ll income derived from the Bonds, inclusive of premium on redemption
and gains on the trading of the same, are exempt from all forms of taxation as confirmed by
Bureau of Internal Revenue (BIR) letter rulings dated 31 May 2001 and 16 August 2001,
respectively."48
RCBC Capital sold the Government Bonds in the secondary market for an issue price of
₱11,995,513,716.51. Petitioners purchased the PEACe Bonds on different dates. 49
BIR rulings
On October 7, 2011, "the BIR issued the assailed 2011 BIR Ruling imposing a 20% FWT on
the Government Bonds and directing the BTr to withhold said final tax at the maturity thereof,
[allegedly without] consultation with Petitioners as bond holders, and without conducting any
hearing."50
"It appears that the assailed 2011 BIR Ruling was issued in response to a query of the
Secretary of Finance on the proper tax treatment of the discount or interest income derived
from the Government Bonds."51 The Bureau of Internal Revenue, citing three (3) of its rulings
rendered in 2004 and 2005, namely: BIR Ruling No. 007-0452 dated July 16, 2004; BIR
Ruling No. DA-491-0453 dated September 13, 2004; and BIR Ruling No. 008-0554 dated July
28, 2005, declared the following:
The Php 24.3 billion discount on the issuance of the PEACe Bonds should be subject to 20%
Final Tax on interest income from deposit substitutes. It is now settled that all treasury bonds
(including PEACe Bonds), regardless of the number of purchasers/lenders at the time of
origination/issuance are considered deposit substitutes. In the case of zero-coupon bonds, the
discount (i.e. difference between face value and purchase price/discounted value of the bond)
is treated as interest income of the purchaser/holder. Thus, the Php 24.3 interest income should
have been properly subject to the 20% Final Tax as provided in Section 27(D)(1) of the Tax
Code of 1997. . . .
....
99
However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was not able
tocollect the final tax on the discount/interest income realized by RCBC as a result of the 2001
Rulings. Subsequently, the issuance of BIR Ruling No. 007-04 dated July 16, 2004 effectively
modifies and supersedes the 2001 Rulings by stating that the [1997] Tax Code is clear that the
"term public means borrowing from twenty (20) or more individual or corporate lenders at any
one time." The word "any" plainly indicates that the period contemplated is the entire term of
the bond, and not merely the point of origination or issuance. . . . Thus, by taking the PEACe
bonds out of the ambit of deposits [sic] substitutes and exempting it from the 20% Final Tax,
an exemption in favour of the PEACe Bonds was created when no such exemption is found in
the law.55
On October 11, 2011, a "Memo for Trading Participants No. 58-2011 was issued by the
Philippine Dealing System Holdings Corporation and Subsidiaries ("PDS Group"). The Memo
provides that in view of the pronouncement of the DOF and the BIR on the applicability of the
20% FWT on the Government Bonds, no transferof the same shall be allowed to be recorded
in the Registry of Scripless Securities ("ROSS") from 12 October 2011 until the redemption
payment date on 18 October 2011. Thus, the bondholders of record appearing on the ROSS as
of 18 October 2011, which include the Petitioners, shall be treated by the BTr asthe beneficial
owners of such securities for the relevant [tax] payments to be imposed thereon."56
On October 17, 2011, replying to anurgent query from the Bureau of Treasury, the Bureau of
Internal Revenue issued BIR Ruling No. DA 378-201157 clarifying that the final withholding
tax due on the discount or interest earned on the PEACe Bonds should "be imposed and
withheld not only on RCBC/CODE NGO but also [on] ‘all subsequent holders of the
Bonds.’"58
On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or mandamus
(with urgent application for a temporary restraining order and/or writ of preliminary
injunction)59 before this court.
On October 18, 2011, this court issued a temporary restraining order (TRO)60 "enjoining the
implementation of BIR Ruling No. 370-2011 against the [PEACe Bonds,] . . . subject to the
condition that the 20% final withholding tax on interest income there from shall be withheld
by the petitioner banks and placed in escrow pending resolution of [the] petition."61
On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to intervene
and to admit petition-in-intervention62 dated October 27, 2011, which was granted by this
court on November 15, 2011.63
Meanwhile, on November 9, 2011, petitioners filed their "Manifestation with Urgent Ex Parte
Motion to Direct Respondents to Comply with the TRO."64 They alleged that on the same day
that the temporary restraining order was issued, the Bureau of Treasury paid to petitioners and
other bondholders the amounts representing the face value of the Bonds, net however of the
amounts corresponding to the 20% final withholding tax on interest income, and that the
Bureau of Treasury refused to release the amounts corresponding to the 20% final withholding
tax.65On November 15, 2011, this court directed respondents to: "(1) SHOW CAUSE why
they failed to comply with the October 18, 2011 resolution; and (2) COMPLY with the
Court’s resolution in order that petitioners may place the corresponding funds in escrow
pending resolution of the petition."66
On the same day, CODE-NGO filed a motion for leave to intervene (and to admit attached
petition-in-intervention with comment on the petitionin-intervention of RCBC and RCBC
Capital).67 The motion was granted by this court on November 22, 2011.68
On December 1, 2011, public respondents filed their compliance. 69 They explained that: 1)
"the implementation of [BIR Ruling No. 370-2011], which has already been performed on
October 18, 2011 with the withholding of the 20% final withholding tax on the face value of
the PEACe bonds, is already fait accompli . . . when the Resolution and TRO were served to
and received by respondents BTr and National Treasurer [on October 19, 2011]"; 70 and 2) the
withheld amount has ipso facto become public funds and cannot be disbursed or released to
petitioners without congressional appropriation.71 Respondents further aver that"[i]nasmuch as
the . . . TRO has already become moot . . . the condition attached to it, i.e., ‘that the 20% final
withholding tax on interest income therefrom shall be withheld by the banks and placed in
escrow . . .’has also been rendered moot[.]"72
On December 6, 2011, this court noted respondents' compliance. 73
On February 22, 2012, respondents filed their consolidated comment 74 on the petitions-in-
intervention filed by RCBC and RCBC Capital and On November 27, 2012, petitioners filed
their "Manifestation with Urgent Reiterative Motion (To Direct Respondents to Comply with
the Temporary Restraining Order)."75
On December 4, 2012, this court: (a) noted petitioners’ manifestation with urgent reiterative
motion (to direct respondents to comply with the temporary restraining order); and (b)
required respondents to comment thereon.76
Respondents’ comment77 was filed on April 15,2013, and petitioners filed their reply78 on June
5, 2013.
Issues
The main issues to be resolved are:
I. Whether the PEACe Bonds are "deposit substitutes" and thus subject to 20% final
withholding tax under the 1997 National Internal Revenue Code. Related to this
question is the interpretation of the phrase "borrowing from twenty (20) or more
individual or corporate lenders at any one time" under Section 22(Y) of the 1997
National Internal Revenue Code, particularly on whether the reckoning of the 20
lenders includes trading of the bonds in the secondary market; and
II. If the PEACe Bonds are considered "deposit substitutes," whether the
government or the Bureau of Internal Revenue is estopped from imposing and/or
collecting the 20% final withholding tax from the face value of these Bonds
a. Will the imposition of the 20% final withholding tax violate the non-
impairment clause of the Constitution?
b. Will it constitute a deprivation of property without due process of law?
c. Will it violate Section 245 of the 1997 National Internal Revenue Code
on non-retroactivity of rulings?
Arguments of petitioners, RCBC and RCBC
Capital, and CODE-NGO
Petitioners argue that "[a]s the issuer of the Government Bonds acting through the BTr, the
Government is obligated . . . to pay the face value amount of Ph₱35 Billion upon maturity
without any deduction whatsoever."79 They add that "the Government cannot impair the
efficacy of the [Bonds] by arbitrarily, oppressively and unreasonably imposing the
withholding of 20% FWT upon the [Bonds] a mere eleven (11) days before maturity and after
several, consistent categorical declarations that such bonds are exempt from the 20% FWT,
without violating due process"80 and the constitutional principle on non-impairment of
contracts.81 Petitioners aver that at the time they purchased the Bonds, they had the right to
expect that they would receive the full face value of the Bonds upon maturity, in view of the
2001 BIR Rulings.82 "[R]egardless of whether or not the 2001 BIR Rulings are correct, the
fact remains that [they] relied [on] good faith thereon."83
At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes as defined
under Section 22(Y) of the 1997 National Internal Revenue Code because there was only one
lender (RCBC) to whom the Bureau of Treasury issued the Bonds. 84 They allege that the 2004,
2005, and 2011 BIR Rulings "erroneously interpreted that the number of investors that
participate in the ‘secondary market’ is the determining factor in reckoning the existence or
non-existence of twenty (20) or more individual or corporate lenders."85 Furthermore, they
contend that the Bureau of Internal Revenue unduly expanded the definition of deposit
substitutes under Section 22 of the 1997 National Internal Revenue Code in concluding that
"the mere issuance of government debt instruments and securities is deemed as falling within
100
the coverage of ‘deposit substitutes[.]’"86 Thus, "[t]he 2011 BIR Ruling clearly amount[ed] to
an unauthorized act of administrative legislation[.]"87
Petitioners further argue that their income from the Bonds is a "trading gain," which is exempt
from income tax.88They insist that "[t]hey are not lenders whose income is considered as
‘interest income or yield’ subject to the 20% FWT under Section 27 (D)(1) of the [1997
National Internal Revenue Code]"89 because they "acquired the Government Bonds in the
secondary or tertiary market."90
Even assuming without admitting that the Government Bonds are deposit substitutes,
petitioners argue that the collection of the final tax was barred by prescription. 91 They point
out that under Section 7 of DOF Department Order No. 141-95,92 the final withholding tax
"should have been withheld at the time of their issuance[.]"93 Also, under Section 203 of the
1997 National Internal Revenue Code, "internal revenuetaxes, such as the final tax, [should]
be assessed within three (3) years after the last day prescribed by law for the filing of the
return."94
Moreover, petitioners contend that the retroactive application of the 2011 BIR Ruling without
prior notice to them was in violation of their property rights,95 their constitutional right to due
process96 as well as Section 246 of the 1997 National Internal Revenue Code on non-
retroactivity of rulings.97 Allegedly, it would also have "an adverse effect of colossal
magnitude on the investors, both localand foreign, the Philippine capital market, and most
importantly, the country’s standing in the international commercial community."98 Petitioners
explained that "unless enjoined, the government’s threatened refusal to pay the full value of
the Government Bonds will negatively impact on the image of the country in terms of
protection for property rights (including financial assets), degree of legal protection for
lender’s rights, and strength of investor protection."99 They cited the country’s ranking in the
World Economic Forum: 75th in the world in its 2011–2012 Global Competitiveness Index,
111th out of 142 countries worldwide and 2nd to the last among ASEAN countries in terms of
Strength of Investor Protection, and 105th worldwide and last among ASEAN countries in
terms of Property Rights Index and Legal Rights Index.100 It would also allegedly "send a
reverberating message to the whole world that there is no certainty, predictability, and stability
of financial transactions in the capital markets[.]"101 "[T]he integrity of Government-issued
bonds and notes will be greatly shattered and the credit of the Philippine Government will
suffer"102 if the sudden turnaround of the government will be allowed, 103 and it will reinforce
"investors’ perception that the level of regulatory risk for contracts entered into by the
Philippine Government is high,"104 thus resulting in higher interestrate for government-issued
debt instruments and lowered credit rating.105
Petitioners-intervenors RCBC and RCBC Capital contend that respondent Commissioner of
Internal Revenue "gravely and seriously abused her discretion in the exercise of her rule-
making power"106 when she issued the assailed 2011 BIR Ruling which ruled that "all treasury
bonds are ‘deposit substitutes’ regardless of the number of lenders, in clear disregard of the
requirement of twenty (20)or more lenders mandated under the NIRC."107 They argue that
"[b]y her blanket and arbitrary classification of treasury bonds as deposit substitutes,
respondent CIR not only amended and expanded the NIRC, but effectively imposed a new tax
on privately-placed treasury bonds."108Petitioners-intervenors RCBC and RCBC Capital
further argue that the 2011 BIR Ruling will cause substantial impairment of their vested
rights109 under the Bonds since the ruling imposes new conditions by "subjecting the PEACe
Bonds to the twenty percent (20%) final withholding tax notwithstanding the fact that the
terms and conditions thereof as previously represented by the Government, through
respondents BTr and BIR, expressly state that it is not subject to final withholding tax upon
their maturity."110 They added that "[t]he exemption from the twenty percent (20%) final
withholding tax [was] the primary inducement and principal consideration for [their]
participat[ion] in the auction and underwriting of the PEACe Bonds."111
Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend that
respondent Commissioner of Internal Revenue violated their rights to due process when she
arbitrarily issued the 2011 BIR Ruling without prior notice and hearing, and the oppressive
timing of such ruling deprived them of the opportunity to challenge the same. 112
Assuming the 20% final withholding tax was due on the PEACe Bonds, petitioners-
intervenors RCBC and RCBC Capital claim that respondents Bureau of Treasury and CODE-
NGO should be held liable "as [these] parties explicitly represented . . . that the said bonds are
exempt from the final withholding tax."113
Finally, petitioners-intervenors RCBC and RCBC Capital argue that "the implementation of
the [2011 assailed BIR Ruling and BIR Ruling No. DA 378-2011] will have pernicious effects
on the integrity of existing securities, which is contrary to the State policies of stabilizing the
financial system and of developing capital markets."114
For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No. DA 378-
2011 are "invalid because they contravene Section 22(Y) of the 1997 [NIRC] when the said
rulings disregarded the applicability of the ‘20 or more lender’ rule to government debt
instruments"[;]115 (b) "when [it] sold the PEACe Bonds in the secondary market instead of
holding them until maturity, [it] derived . . . long-term trading gain[s], not interest income,
which [are] exempt . . . under Section 32(B)(7)(g) of the 1997 NIRC"[;] 116 (c) "the tax
exemption privilege relating to the issuance of the PEACe Bonds . . . partakes of a contractual
commitment granted by the Government in exchange for a valid and material consideration
[i.e., the issue price paid and savings in borrowing cost derived by the Government,] thus
protected by the non-impairment clause of the 1987 Constitution"[;] 117 and (d) the 2004, 2005,
and 2011 BIR Rulings "did not validly revoke the 2001 BIR Rulings since no notice of
revocation was issued to [it], RCBC and [RCBC Capital] and petitioners[-bondholders], nor
was there any BIR administrative guidance issued and published[.]"118CODE-NGO
additionally argues that impleading it in a Rule 65 petition was improper because: (a) it
involves determination of a factual question;119 and (b) it is premature and states no cause of
action as it amounts to an anticipatory third-party claim.120
Arguments of respondents
Respondents argue that petitioners’ direct resort to this court to challenge the 2011 BIR Ruling
violates the doctrines of exhaustion of administrative remedies and hierarchy ofcourts,
resulting in a lack of cause of action that justifies the dismissal of the petition. 121 According to
them, "the jurisdiction to review the rulings of the [Commissioner of Internal Revenue], after
the aggrieved party exhausted the administrative remedies, pertains to the Court of Tax
Appeals."122 They point out that "a case similar to the present Petition was [in fact] filed with
the CTA on October 13, 2011[,] [docketed as] CTA Case No. 8351 [and] entitled, ‘Rizal
Commercial Banking Corporation and RCBC Capital Corporation vs. Commissioner of
Internal Revenue, et al.’"123
Respondents further take issue on the timeliness of the filing of the petition and petitions-in-
intervention.124 They argue that under the guise of mainly assailing the 2011 BIR Ruling,
petitioners are indirectly attacking the 2004 and 2005 BIR Rulings, of which the attack is
legally prohibited, and the petition insofar as it seeks to nullify the 2004 and 2005 BIR
Rulings was filed way out of time pursuant to Rule 65, Section 4. 125
Respondents contend that the discount/interest income derived from the PEACe Bonds is not a
trading gain but interest income subject to income tax.126 They explain that "[w]ith the
payment of the Ph₱35 Billion proceeds on maturity of the PEACe Bonds, Petitioners receive
an amount of money equivalent to about Ph₱24.8 Billion as payment for interest. Such interest
is clearly an income of the Petitioners considering that the same is a flow of wealth and not
merely a return of capital – the capital initially invested in the Bonds being approximately
Ph₱10.2 Billion[.]"127
Maintaining that the imposition of the 20% final withholding tax on the PEACe Bonds does
not constitute an impairment of the obligations of contract, respondents aver that: "The BTr
101
has no power to contractually grant a tax exemption in favour of Petitioners thus the 2001 BIR
Rulings cannot be considered a material term of the Bonds"[;] 128 "[t]here has been no change
in the laws governing the taxability of interest income from deposit substitutes and said laws
are read into every contract"[;]129 "[t]he assailed BIR Rulings merely interpret the term
"deposit substitute" in accordance with the letter and spirit of the Tax Code"[;] 130 "[t]he
withholding of the 20% FWT does not result in a default by the Government as the latter
performed its obligations to the bondholders in full"[;] 131 and "[i]f there was a breach of
contract or a misrepresentation it was between RCBC/CODE-NGO/RCBC Cap and the
succeeding purchasers of the PEACe Bonds."132
Similarly, respondents counter that the withholding of "[t]he 20% final withholding tax on the
PEACe Bonds does not amount to a deprivation of property without due process of
law."133 Their imposition of the 20% final withholding tax is not arbitrary because they were
only performing a duty imposed by law;134 "[t]he 2011 BIR Ruling is aninterpretative rule
which merely interprets the meaning of deposit substitutes [and upheld] the earlier
construction given to the termby the 2004 and 2005 BIR Rulings."135 Hence, respondents
argue that "there was no need to observe the requirements of notice, hearing, and
publication[.]"136
Nonetheless, respondents add that "there is every reason to believe that Petitioners — all
major financial institutions equipped with both internal and external accounting and
compliance departments as wellas access to both internal and external legal counsel; actively
involved in industry organizations such as the Bankers Association of the Philippines and the
Capital Market Development Council; all actively taking part in the regular and special debt
issuances of the BTr and indeed regularly proposing products for issue by BTr — had actual
notice of the 2004 and 2005 BIR Rulings."137 Allegedly, "the sudden and drastic drop —
including virtually zero trading for extended periods of six months to almost a year — in the
trading volume of the PEACe Bonds after the release of BIR Ruling No. 007-04 on July 16,
2004 tend to indicate that market participants, including the Petitioners herein, were aware of
the ruling and its consequences for the PEACe Bonds."138
Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of the
Commissioner of Internal Revenue’s rule-making power;139 that it and the 2004 and 2005 BIR
Rulings did not unduly expand the definition of deposit substitutes by creating an unwarranted
exception to the requirement of having 20 or more lenders/purchasers;140 and the word "any"
in Section 22(Y) of the National Internal Revenue Code plainly indicates that the period
contemplated is the entire term of the bond and not merely the point of origination or
issuance.141
Respondents further argue that a retroactive application of the 2011 BIR Ruling will not
unjustifiably prejudice petitioners.142 "[W]ith or without the 2011 BIR Ruling, Petitioners
would be liable topay a 20% final withholding tax just the same because the PEACe Bonds in
their possession are legally in the nature of deposit substitutes subject to a 20% final
withholding tax under the NIRC."143 Section 7 of DOF Department Order No. 141-95 also
provides that incomederived from Treasury bonds is subject to the 20% final withholding
tax.144 "[W]hile revenue regulations as a general rule have no retroactive effect, if the
revocation is due to the fact that the regulation is erroneous or contrary to law, such revocation
shall have retroactive operation as to affect past transactions, because a wrong construction of
the law cannot give rise to a vested right that can be invoked by a taxpayer."145
Finally, respondents submit that "there are a number of variables and factors affecting a capital
market."146 "[C]apital market itself is inherently unstable."147 Thus, "[p]etitioners’ argument
that the 20% final withholding tax . . . will wreak havoc on the financial stability of the
country is a mere supposition that is not a justiciable issue."148
On the prayer for the temporary restraining order, respondents argue that this order "could no
longer be implemented [because] the acts sought to be enjoined are already fait
accompli."149 They add that "to disburse the funds withheld to the Petitioners at this time
would violate Section 29[,] Article VI of the Constitution prohibiting ‘money being paid out
of the Treasury except in pursuance of an appropriation made by law[.]’"150 "The remedy of
petitioners is to claim a tax refund under Section 204(c) of the Tax Code should their position
be upheld by the Honorable Court."151
Respondents also argue that "the implementation of the TRO would violate Section 218 of the
Tax Code in relation to Section 11 of Republic Act No. 1125 (as amended by Section 9 of
Republic Act No. 9282) which prohibits courts, except the Court of Tax Appeals, from issuing
injunctions to restrain the collection of any national internal revenue tax imposed by the Tax
Code."152
Summary of arguments
In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and CODE-
NGO argue that:
1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997 National
Internal Revenue Code when it declared that all government debt instruments are
deposit substitutes regardless of the 20-lender rule; and
2. The 2011 BIR Ruling cannot be applied retroactively because:
a) It will violate the contract clause;
● It constitutes a unilateral amendment of a material term (tax exempt
status) in the Bonds, represented by the government as an inducement and
important consideration for the purchase of the Bonds;
b) It constitutes deprivation ofproperty without due process because there
was no prior notice to bondholders and hearing and publication;
c) It violates the rule on non-retroactivity under the 1997 National Internal
Revenue Code;
d) It violates the constitutional provision on supporting activities of non-
government organizations and development of the capital market; and
e) The assessment had already prescribed.
Respondents counter that:
1) Respondent Commissioner of Internal Revenue did not act with grave abuse of discretion in
issuing the challenged 2011 BIR Ruling:
a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the
Commissioner of Internal Revenue’s power to interpret the provisions of the 1997
National Internal Revenue Code and other tax laws;
b. Commissioner of Internal Revenue merely restates and confirms the
interpretations contained in previously issued BIR Ruling Nos. 007-2004, DA-491-
04,and 008-05, which have already effectively abandoned or revoked the 2001 BIR
Rulings;
c. Commissioner of Internal Revenue is not bound by his or her predecessor’s
rulings especially when the latter’s rulings are not in harmony with the law; and
d. The wrong construction of the law that the 2001 BIR Rulings have perpetrated
cannot give rise to a vested right. Therefore, the 2011 BIR Ruling can be given
retroactive effect.
2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and adequate
remedy in the ordinary course of law:
a. Petitioners had the basic remedy offiling a claim for refund of the 20% final withholding tax
they allege to have been wrongfully collected; and
b. Non-observance of the doctrine of exhaustion of administrative remedies and of hierarchy
of courts.
Court’s ruling
Procedural Issues
Non-exhaustion of
administrative remedies proper
102
Under Section 4 of the 1997 National Internal Revenue Code, interpretative rulings are
reviewable by the Secretary of Finance.
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. -The
power to interpret the provisions of this Code and other tax laws shall be under the exclusive
and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.
(Emphasis supplied)
Thus, it was held that "[i]f superior administrative officers [can] grant the relief prayed for,
[then] special civil actions are generally not entertained."153 The remedy within the
administrative machinery must be resorted to first and pursued to its appropriate conclusion
before the court’s judicial power can be sought.154
Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of
administrative remedies:
[The doctrine of exhaustion of administrative remedies] is a relative one and its flexibility is
called upon by the peculiarity and uniqueness of the factual and circumstantial settings of a
case. Hence, it is disregarded (1) when there is a violation of due process, (2) when the issue
involved is purely a legal question,155 (3) when the administrative action is patently illegal
amounting to lack or excess of jurisdiction,(4) when there is estoppel on the part of the
administrative agency concerned,(5) when there is irreparable injury, (6) when the respondent
is a department secretary whose acts as an alter ego of the President bears the implied and
assumed approval of the latter, (7) when to require exhaustion of administrative remedies
would be unreasonable, (8) when it would amount to a nullification of a claim, (9) when the
subject matter is a private land in land case proceedings, (10) when the rule does not provide a
plain, speedy and adequate remedy, (11) when there are circumstances indicating the urgency
of judicial intervention.156 (Emphasis supplied, citations omitted)
The exceptions under (2) and (11)are present in this case. The question involved is purely
legal, namely: (a) the interpretation of the 20-lender rule in the definition of the terms public
and deposit substitutes under the 1997 National Internal Revenue Code; and (b) whether the
imposition of the 20% final withholding tax on the PEACe Bonds upon maturity violates the
constitutional provisions on non-impairment of contracts and due process. Judicial
intervention is likewise urgent with the impending maturity of the PEACe Bonds on October
18, 2011.
The rule on exhaustion of administrative remedies also finds no application when the
exhaustion will result in an exercise in futility.157
In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR Ruling would
be a futile exercise because it was upon the request of the Secretary of Finance that the 2011
BIR Ruling was issued by the Bureau of Internal Revenue. It appears that the Secretary of
Finance adopted the Commissioner of Internal Revenue’s opinions as his own. 158 This position
was in fact confirmed in the letter159 dated October 10, 2011 where he ordered the Bureau of
Treasury to withhold the amount corresponding to the 20% final withholding tax on the
interest or discounts allegedly due from the bondholders on the strength of the 2011 BIR
Ruling. Doctrine on hierarchy of courts
We agree with respondents that the jurisdiction to review the rulings of the Commissioner of
Internal Revenue pertains to the Court of Tax Appeals. The questioned BIR Ruling Nos. 370-
2011 and DA 378-2011 were issued in connection with the implementation of the 1997
National Internal Revenue Code on the taxability of the interest income from zero-coupon
bonds issued by the government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by
Republic Act No. 9282,160such rulings of the Commissioner of Internal Revenue are
appealable to that court, thus:
SEC. 7.Jurisdiction.- The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation
thereto, or other matters arising under the National Internal Revenue or other laws
administered by the Bureau of Internal Revenue;
....
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected
by a decision, ruling or inaction of the Commissioner of Internal Revenue, the Commissioner
of Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of
Agriculture or the Central Board of Assessment Appeals or the Regional Trial Courts may file
an appeal with the CTA within thirty (30) days after the receipt of such decision or rulingor
after the expiration of the period fixed by law for action as referred toin Section 7(a)(2) herein.
....
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving
matters arising under the National Internal Revenue Code, the Tariff and Customs Code or the
Local Government Code shall be maintained, except as herein provided, until and unless an
appeal has been previously filed with the CTA and disposed of in accordance with the
provisions of this Act.
In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v. Blaquera,162 this court
emphasized the jurisdiction of the Court of Tax Appeals over rulings of the Bureau of Internal
Revenue, thus:
While the Court of Appeals correctly took cognizance of the petition for certiorari, however,
let it be stressed that the jurisdiction to review the rulings of the Commissioner of Internal
Revenue pertains to the Court of Tax Appeals, not to the RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the
Commissioner implementing the Tax Code on the taxability of pawnshops.. . .
....
Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax
Code, which states:
"SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. — The
Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all
needful rules and regulations for the effective enforcement of the provisions of this Code.
The authority of the Secretary of Finance to determine articles similar or analogous to those
subject to a rate of sales tax under certain category enumerated in Section 163 and 165 of this
Code shall be without prejudice to the power of the Commissioner of Internal Revenue to
make rulings or opinions in connection with the implementation of the provisionsof internal
revenue laws, including ruling on the classification of articles of sales and similar purposes."
(Emphasis in the original)
....
The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:
"Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal
Revenue, but merely an attempt to nullify General Circular No. V-148, which does not
adjudicate or settle any controversy, and that, accordingly, this case is not within the
jurisdiction of the Court of Tax Appeals.
We find no merit in this pretense. General Circular No. V-148 directs the officers charged
with the collection of taxes and license fees to adhere strictly to the interpretation given by the
defendant tothe statutory provisions abovementioned, as set forth in the Circular. The same
incorporates, therefore, a decision of the Collector of Internal Revenue (now Commissioner of
Internal Revenue) on the manner of enforcement of the said statute, the administration of
which is entrusted by law to the Bureau of Internal Revenue. As such, it comes within the
purview of Republic Act No. 1125, Section 7 of which provides that the Court of Tax Appeals
‘shall exercise exclusive appellate jurisdiction to review by appeal . . . decisions of the
103
Collector of Internal Revenue in . . . matters arising under the National Internal Revenue Code
or other law or part of the law administered by the Bureau of Internal Revenue.’"163
In exceptional cases, however, this court entertained direct recourse to it when "dictated by
public welfare and the advancement of public policy, or demanded by the broader interest of
justice, or the orders complained of were found to be patent nullities, or the appeal was
considered as clearly an inappropriate remedy."164
In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary,
Department of Interior and Local Government,165 this court noted that the petition for
prohibition was filed directly before it "in disregard of the rule on hierarchy of courts.
However, [this court] opt[ed] to take primary jurisdiction over the . . . petition and decide the
same on its merits in viewof the significant constitutional issues raised by the parties dealing
with the tax treatment of cooperatives under existing laws and in the interest of speedy justice
and prompt disposition of the matter."166
Here, the nature and importance of the issues raised167 to the investment and banking industry
with regard to a definitive declaration of whether government debt instruments are deposit
substitutes under existing laws, and the novelty thereof, constitute exceptional and compelling
circumstances to justify resort to this court in the first instance.
The tax provision on deposit substitutes affects not only the PEACe Bonds but also any other
financial instrument or product that may be issued and traded in the market. Due to the
changing positions of the Bureau of Internal Revenue on this issue, there isa need for a final
ruling from this court to stabilize the expectations in the financial market.
Finally, non-compliance with the rules on exhaustion of administrative remedies and hierarchy
of courts had been rendered moot by this court’s issuance of the temporary restraining order
enjoining the implementation of the 2011 BIR Ruling. The temporary restraining order
effectively recognized the urgency and necessity of direct resort to this court.
Substantive issues
Tax treatment of deposit
substitutes
Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997 National Internal Revenue Code,
a final withholdingtax at the rate of 20% is imposed on interest on any currency bank deposit
and yield or any other monetary benefit from deposit substitutes and from trust funds and
similar arrangements. These provisions read:
SEC. 24. Income Tax Rates.
....
(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent
(20%) is hereby imposed upon the amount of interest fromany currency bank deposit and yield
or any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements; . . . Provided, further, That interest income from long-term deposit or
investment in the form of savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments evidenced by certificates in such
form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax
imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-
terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on
the entire income and shall be deducted and withheld by the depository bank from the
proceeds of the long-term deposit or investment certificate based on the remaining maturity
thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%. (Emphasis supplied)
SEC. 27. Rates of Income Tax on Domestic Corporations. -
....
(D) Rates of Tax on Certain Passive Incomes. -
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes
and from Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of
twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit
and yield or any other monetary benefit from deposit substitutes and from trust funds and
similar arrangements received by domestic corporations, and royalties, derived from sources
within the Philippines: Provided, however, That interest income derived by a domestic
corporation from a depository bank under the expanded foreign currency deposit system shall
be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such
interest income. (Emphasis supplied)
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
....
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -
(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes,
Trust Funds and Similar Arrangements and Royalties. - Interest from any currency bank
deposit and yield or any other monetary benefit from deposit substitutes and from trust funds
and similar arrangements and royalties derived from sources within the Philippines shall be
subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided,
however, That interest income derived by a resident foreign corporation from a depository
bank under the expanded foreign currency deposit system shall be subject to a final income tax
at the rate of seven and one-half percent (7 1/2%) of such interest income. (Emphasis
supplied)
This tax treatment of interest from bank deposits and yield from deposit substitutes was first
introduced in the 1977 National Internal Revenue Code through Presidential Decree No.
1739168 issued in 1980. Later, Presidential Decree No. 1959, effective on October 15, 1984,
formally added the definition of deposit substitutes, viz:
(y) ‘Deposit substitutes’ shall mean an alternative form of obtaining funds from the public,
other than deposits, through the issuance, endorsement, or acceptance of debt instruments for
the borrower's own account, for the purpose of relending or purchasing of receivables and
other obligations, or financing their own needs or the needs of their agent or dealer.These
promissory notes, repurchase agreements, certificates of assignment or participation and
similar instrument with recourse as may be authorized by the Central Bank of the Philippines,
for banks and non-bank financial intermediaries or by the Securities and Exchange
Commission of the Philippines for commercial, industrial, finance companies and either non-
financial companies: Provided, however, that only debt instruments issued for inter-bank call
loans to cover deficiency in reserves against deposit liabilities including those between or
among banks and quasi-banks shall not be considered as deposit substitute debt instruments.
(Emphasis supplied)
Revenue Regulations No. 17-84, issued to implement Presidential Decree No. 1959, adopted
verbatim the same definition and specifically identified the following borrowings as "deposit
substitutes":
SECTION 2. Definitions of Terms. . . .
(h) "Deposit substitutes" shall mean –
....
(a) All interbank borrowings by or among banks and non-bank financial institutions
authorized to engage in quasi-banking functions evidenced by deposit substitutes
instruments, except interbank call loans to cover deficiency in reserves against
deposit liabilities as evidenced by interbank loan advice or repayment transfer
tickets.
(b) All borrowings of the national and local government and its instrumentalities
including the Central Bank of the Philippines, evidenced by debt instruments
104
denoted as treasury bonds, bills, notes, certificates of indebtedness and similar
instruments.
(c) All borrowings of banks, non-bank financial intermediaries, finance companies,
investment companies, trust companies, including the trust department of banks and
investment houses, evidenced by deposit substitutes instruments. (Emphasis
supplied)
The definition of deposit substitutes was amended under the 1997 National Internal Revenue
Code with the addition of the qualifying phrase for public – borrowing from 20 or more
individual or corporate lenders at any one time. Under Section 22(Y), deposit substitute is
defined thus: SEC. 22. Definitions- When used in this Title:
....
(Y) The term ‘deposit substitutes’ shall mean an alternative form of obtaining funds from the
public(the term 'public' means borrowing from twenty (20) or more individual or corporate
lenders at any one time) other than deposits, through the issuance, endorsement, or acceptance
of debt instruments for the borrower’s own account, for the purpose of relending or purchasing
of receivables and other obligations, or financing their own needs or the needs of their agent or
dealer. These instruments may include, but need not be limited to, bankers’ acceptances,
promissory notes, repurchase agreements, including reverse repurchase agreements entered
into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank,
certificates of assignment or participation and similar instruments with recourse: Provided,
however, That debt instruments issued for interbank call loans with maturity of not more than
five (5) days to cover deficiency in reserves against deposit liabilities, including those between
or among banks and quasi-banks, shall not be considered as deposit substitute debt
instruments. (Emphasis supplied)
Under the 1997 National Internal Revenue Code, Congress specifically defined "public" to
mean "twenty (20) or more individual or corporate lenders at any one time." Hence, the
number of lenders is determinative of whether a debt instrument should be considered a
deposit substitute and consequently subject to the 20% final withholding tax.
20-lender rule
Petitioners contend that "there [is]only one (1) lender (i.e. RCBC) to whom the BTr issued the
Government Bonds."169 On the other hand, respondents theorize that the word "any" "indicates
that the period contemplated is the entire term of the bond and not merely the point of
origination or issuance[,]"170 such that if the debt instruments "were subsequently sold in
secondary markets and so on, insuch a way that twenty (20) or more buyers eventually own
the instruments, then it becomes indubitable that funds would be obtained from the "public" as
defined in Section 22(Y) of the NIRC."171 Indeed, in the context of the financial market, the
words "at any one time" create an ambiguity.
Financial markets
Financial markets provide the channel through which funds from the surplus units (households
and business firms that have savings or excess funds) flow to the deficit units (mainly business
firms and government that need funds to finance their operations or growth). They bring
suppliers and users of funds together and provide the means by which the lenders transform
their funds into financial assets, and the borrowers receive these funds now considered as their
financial liabilities. The transfer of funds is represented by a security, such as stocks and
bonds. Fund suppliers earn a return on their investment; the return is necessary to ensure that
funds are supplied to the financial markets.172
"The financial markets that facilitate the transfer of debt securities are commonly classified by
the maturity of the securities[,]"173 namely: (1) the money market, which facilitates the flow of
short-term funds (with maturities of one year or less); and (2) the capital market, which
facilitates the flow of long-term funds (with maturities of more than one year).174
Whether referring to money marketsecurities or capital market securities, transactions occur
either in the primary market or in the secondary market.175 "Primary markets facilitate the
issuance of new securities. Secondary markets facilitate the trading of existing securities,
which allows for a change in the ownership of the securities."176 The transactions in primary
markets exist between issuers and investors, while secondary market transactions exist among
investors.177
"Over time, the system of financial markets has evolved from simple to more complex ways of
carrying out financial transactions."178 Still, all systems perform one basic function: the quick
mobilization of money from the lenders/investors to the borrowers. 179
Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect finance; and
(3) indirect finance.180
With direct financing, the "borrower and lender meet each other and exchange funds in
returnfor financial assets"181(e.g., purchasing bonds directly from the company issuing them).
This method provides certain limitations such as: (a) "both borrower and lender must desire to
exchange the same amount of funds at the same time"[;] 182 and (b) "both lender and borrower
must frequently incur substantial information costs simply to find each other."183
In semidirect financing, a securities broker or dealer brings surplus and deficit units together,
thereby reducing information costs.184 A Broker185 is "an individual or financial institution
who provides information concerning possible purchases and sales of securities. Either a buyer
or a seller of securities may contact a broker, whose job is simply to bring buyers and sellers
together."186 A dealer187 "also serves as a middleman between buyers and sellers, but the
dealer actually acquires the seller’s securities in the hope of selling them at a later time at a
more favorable price."188 Frequently, "a dealer will split up a large issue of primary securities
into smaller units affordable by . . . buyers . . . and thereby expand the flow of savings into
investment."189 In semi direct financing, "[t]he ultimate lender still winds up holding the
borrower’s securities, and therefore the lender must be willing to accept the risk, liquidity, and
maturity characteristics of the borrower’s [debt security]. There still must be a fundamental
coincidence of wants and needs between [lenders and borrowers] for semidirect financial
transactions to take place."190
"The limitations of both direct and semidirect finance stimulated the development of indirect
financial transactions, carried out with the help of financial intermediaries"191 or financial
institutions, like banks, investment banks, finance companies, insurance companies, and
mutual funds.192 Financial intermediaries accept funds from surplus units and channel the
funds to deficit units.193 "Depository institutions [such as banks] accept deposits from surplus
units and provide credit to deficit units through loans and purchase of [debt]
securities."194 Nondepository institutions, like mutual funds, issue securities of their own
(usually in smaller and affordable denominations) to surplus units and at the same time
purchase debt securities of deficit units.195 "By pooling the resources of[small savers, a
financial intermediary] can service the credit needs of large firms simultaneously."196
The financial market, therefore, is an agglomeration of financial transactions in securities
performed by market participants that works to transfer the funds from the surplus units (or
investors/lenders) to those who need them (deficit units or borrowers).
Meaning of "at any one time"
Thus, from the point of view of the financial market, the phrase "at any one time" for purposes
of determining the "20 or more lenders" would mean every transaction executed in the primary
or secondary market in connection with the purchase or sale of securities.
For example, where the financial assets involved are government securities like bonds, the
reckoning of "20 or more lenders/investors" is made at any transaction in connection with the
purchase or sale of the Government Bonds, such as:
1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary market;
2. Sale and distribution by GSEDs to various lenders/investors in the secondary
market;
3. Subsequent sale or trading by a bondholder to another lender/investor in the
secondary market usually through a broker or dealer; or
105
4. Sale by a financial intermediary-bondholder of its participation interests in the
bonds to individual or corporate lenders in the secondary market.
When, through any of the foregoing transactions, funds are simultaneously obtained from 20
or morelenders/investors, there is deemed to be a public borrowing and the bonds at that point
intime are deemed deposit substitutes. Consequently, the seller is required to withhold the
20% final withholding tax on the imputed interest income from the bonds.
For debt instruments that are
not deposit substitutes, regular
income tax applies
It must be emphasized, however, that debt instruments that do not qualify as deposit
substitutes under the 1997 National Internal Revenue Code are subject to the regular income
tax.
The phrase "all income derived from whatever source" in Chapter VI, Computation of Gross
Income, Section 32(A) of the 1997 National Internal Revenue Code discloses a legislative
policy to include all income not expressly exempted as within the class of taxable income
under our laws.
"The definition of gross income isbroad enough to include all passive incomes subject to
specific tax rates or final taxes."197 Hence, interest income from deposit substitutes are
necessarily part of taxable income. "However, since these passive incomes are already subject
to different rates and taxed finally at source, they are no longer included in the computation of
gross income, which determines taxable income."198 "Stated otherwise . . . if there were no
withholding tax system in place in this country, this 20 percent portion of the ‘passive’ income
of [creditors/lenders] would actually be paid to the [creditors/lenders] and then remitted by
them to the government in payment of their income tax."199
This court, in Chamber of Real Estate and Builders’ Associations, Inc. v.
Romulo,200 explained the rationale behind the withholding tax system:
The withholding [of tax at source] was devised for three primary reasons: first, to provide the
taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the
collection of income tax which can otherwise be lost or substantially reduced through failure
to file the corresponding returns[;] and third, to improve the government’s cash flow. This
results in administrative savings, prompt and efficient collection of taxes, prevention of
delinquencies and reduction of governmental effort to collect taxes through more complicated
means and remedies.201 (Citations omitted)
"The application of the withholdings system to interest on bank deposits or yield from deposit
substitutes is essentially to maximize and expedite the collection of income taxes by requiring
its payment at the source."202
Hence, when there are 20 or more lenders/investors in a transaction for a specific bond issue,
the seller isrequired to withhold the 20% final income tax on the imputed interest income from
the bonds.
Interest income v. gains from sale or redemption
The interest income earned from bonds is not synonymous with the "gains" contemplated
under Section 32(B)(7)(g)203 of the 1997 National Internal Revenue Code, which exempts
gains derived from trading, redemption, or retirement of long-term securities from ordinary
income tax.
The term "gain" as used in Section 32(B)(7)(g) does not include interest, which represents
forbearance for the use of money. Gains from sale or exchange or retirement of bonds orother
certificate of indebtedness fall within the general category of "gainsderived from dealings in
property" under Section 32(A)(3), while interest from bonds or other certificate of
indebtedness falls within the category of "interests" under Section 32(A)(4). 204 The use of the
term "gains from sale" in Section 32(B)(7)(g) shows the intent of Congress not toinclude
interest as referred under Sections 24, 25, 27, and 28 in the exemption. 205
Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: (1) gain realized from the
trading of the bonds before their maturity date, which is the difference between the selling
price of the bonds in the secondary market and the price at which the bonds were purchased by
the seller; and (2) gain realized by the last holder of the bonds when the bonds are redeemed at
maturity, which is the difference between the proceeds from the retirement of the bonds and
the price atwhich such last holder acquired the bonds. For discounted instruments,like the
zero-coupon bonds, the trading gain shall be the excess of the selling price over the book value
or accreted value (original issue price plus accumulated discount from the time of purchase up
to the time of sale) of the instruments.206
The Bureau of Internal
Revenue rulings
The Bureau of Internal Revenue’s interpretation as expressed in the three 2001 BIR Rulings is
not consistent with law.207 Its interpretation of "at any one time" to mean at the point of
origination alone is unduly restrictive.
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the 2004 and
2005 BIR Rulings) that "all treasury bonds . . . regardlessof the number of purchasers/lenders
at the time of origination/issuance are considered deposit substitutes."208 Being the subject of
this petition, it is, thus, declared void because it completely disregarded the 20 or more lender
rule added by Congress in the 1997 National Internal Revenue Code. It also created a
distinction for government debt instruments as against those issued by private corporations
when there was none in the law.
Tax statutes must be reasonably construed as to give effect to the whole act. Their constituent
provisions must be read together, endeavoring to make every part effective, harmonious, and
sensible.209 That construction which will leave every word operative will be favored over one
that leaves some word, clause, or sentence meaningless and insignificant.210
It may be granted that the interpretation of the Commissioner of Internal Revenue in charge of
executing the 1997 National Internal Revenue Code is an authoritative construction ofgreat
weight, but the principle is not absolute and may be overcome by strong reasons to the
contrary. If through a misapprehension of law an officer has issued an erroneous
interpretation, the error must be corrected when the true construction is ascertained.
In Philippine Bank of Communications v. Commissioner of Internal Revenue, 211 this court
upheld the nullification of Revenue Memorandum Circular (RMC) No. 7-85 issued by the
Acting Commissioner of Internal Revenue because it was contrary to the express provision of
Section 230 of the 1977 National Internal Revenue Codeand, hence, "[cannot] be given weight
for to do so would, in effect, amend the statute."212 Thus:
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the
prescriptive period of two years to ten years on claims of excess quarterly income tax
payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977
NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines
contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered administrative rulings
(in the sense of more specific and less general interpretations of tax laws) which are issued
from time to time by the Commissioner of Internal Revenue. It is widely accepted that the
interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is
entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and
will be ignored if judicially found to be erroneous. Thus, courts will not countenance
administrative issuances that override, instead of remaining consistent and in harmony with,
the law they seek to apply and implement.213(Citations omitted)
This court further held that "[a] memorandum-circular of a bureau head could not operate to
vest a taxpayer with a shield against judicial action [because] there are no vested rights to
speak of respecting a wrong construction of the law by the administrative officials and such
wrong interpretation could not place the Government in estoppel to correct or overrule the
106
same."214 In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc., 215 this
court nullified Revenue Memorandum Order (RMO) No. 15-91 and RMC No. 43-91, which
imposed a 5% lending investor's tax on pawnshops.216 It was held that "the [Commissioner]
cannot, in the exercise of [its interpretative] power, issue administrative rulings or circulars
not consistent with the law sought to be applied. Indeed, administrative issuances must not
override, supplant or modify the law, but must remain consistent with the law they intend to
carry out. Only Congress can repeal or amend the law."217
In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance
Secretary,218 this court stated that the Commissioner of Internal Revenue is not bound by the
ruling of his predecessors,219 but, to the contrary, the overruling of decisions is inherent in the
interpretation of laws:
[I]n 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 itis 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.
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.
To the contrary, the overruling of decisions is inherent in the interpretation of
laws.220 (Emphasis supplied, citations omitted)
Tax treatment of income
derived from the PEACe Bonds
The transactions executed for the sale of the PEACe Bonds are:
1. The issuance of the 35 billion Bonds by the Bureau of Treasury to RCBC/CODE-
NGO at 10.2 billion; and
2. The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-
NGO of the PEACe Bonds to undisclosed investors at ₱11.996 billion.
It may seem that there was only one lender — RCBC on behalf of CODE-NGO — to whom
the PEACe Bonds were issued at the time of origination. However, a reading of the
underwriting agreement221 and RCBC term sheet222reveals that the settlement dates for the sale
and distribution by RCBC Capital (as underwriter for CODE-NGO) of the PEACe Bonds to
various undisclosed investors at a purchase price of approximately ₱11.996 would fall on the
same day, October 18, 2001, when the PEACe Bonds were supposedly issued to CODE-
NGO/RCBC. In reality, therefore, the entire ₱10.2 billion borrowing received by the Bureau
of Treasury in exchange for the ₱35 billion worth of PEACe Bonds was sourced directly from
the undisclosed number of investors to whom RCBC Capital/CODE-NGO distributed the
PEACe Bonds — all at the time of origination or issuance. At this point, however, we do not
know as to how many investors the PEACe Bonds were sold to by RCBC Capital.
Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds
are deemed deposit substitutes within the meaning of Section 22(Y) of the 1997 National
Internal Revenue Code and RCBC Capital/CODE-NGO would have been obliged to pay the
20% final withholding tax on the interest or discount from the PEACe Bonds. Further, the
obligation to withhold the 20% final tax on the corresponding interest from the PEACe Bonds
would likewise be required of any lender/investor had the latter turnedaround and sold said
PEACe Bonds, whether in whole or part, simultaneously to 20 or more lenders or investors.
We note, however, that under Section 24223 of the 1997 National Internal Revenue Code,
interest income received by individuals from longterm deposits or investments with a holding
period of not less than five (5) years is exempt from the final tax.
Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes, the
proper procedure was for the Bureau of Treasury to pay the face value of the PEACe Bonds to
the bondholders and for the Bureau of Internal Revenue to collect the unpaid final withholding
tax directly from RCBC Capital/CODE-NGO, orany lender or investor if such be the case, as
the withholding agents.
The collection of tax is not
barred by prescription
The three (3)-year prescriptive period under Section 203 of the 1997 National Internal
Revenue Code to assess and collect internal revenue taxes is extended to 10 years in cases of
(1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failureto file a return,
to be computed from the time of discovery of the falsity, fraud, or omission. Section 203
states:
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in
Section 222, internal revenue taxes shall be assessed within three (3) years after the last day
prescribed by law for the filing of the return, and no proceeding in court without assessment
for the collection of such taxes shall be begun after the expiration of such period: Provided,
That in a case where a return is filed beyond the period prescribed by law, the three (3)-year
period shall be counted from the day the return was filed. For purposes of this Section, a return
filed before the last day prescribed by law for the filing thereof shall be considered as filed on
such last day. (Emphasis supplied)
....
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a
return, the tax may be assessed, or a proceeding in court for the collection of such tax may be
filed without assessment, at any time within ten (10) years after the discovery of the falsity,
fraud or omission: Provided, That in a fraud assessment which has become final and
executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal
action for the collection thereof.
Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to 20 or
more lenders/investors, the Bureau of Internal Revenue may still collect the unpaid tax from
RCBC Capital/CODE-NGO within 10 years after the discovery of the omission.
In view of the foregoing, there is no need to pass upon the other issues raised by petitioners
and petitioners-intervenors.
Reiterative motion on the temporary restraining order
Respondents’ withholding of the
20% final withholding tax on
October 18, 2011 was justified
Under the Rules of Court, court orders are required to be "served upon the parties
affected."224 Moreover, service may be made personally or by mail. 225 And, "[p]ersonal
service is complete upon actual delivery [of the order.]"226This court’s temporary restraining
order was received only on October 19, 2011, or a day after the PEACe Bonds had matured
and the 20% final withholding tax on the interest income from the same was withheld.
Publication of news reports in the print and broadcast media, as well as on the internet, is not a
recognized mode of service of pleadings, court orders, or processes. Moreover, the news
reports227 cited by petitioners were posted minutes before the close of office hours or late in
the evening of October 18, 2011, and they did not givethe exact contents of the temporary
restraining order.
107
"[O]ne cannot be punished for violating an injunction or an order for an injunction unless it is
shown that suchinjunction or order was served on him personally or that he had notice of the
issuance or making of such injunction or order."228
At any rate, "[i]n case of doubt, a withholding agent may always protect himself or herself by
withholding the tax due"229 and return the amount of the tax withheld should it be finally
determined that the income paid is not subject to withholding. 230 Hence, respondent Bureau of
Treasury was justified in withholding the amount corresponding to the 20% final withholding
tax from the proceeds of the PEACe Bonds, as it received this court’s temporary restraining
order only on October 19, 2011, or the day after this tax had been withheld.
Respondents’ retention of the
amounts withheld is a defiance
of the temporary restraining
order
Nonetheless, respondents’ continued failure to release to petitioners the amount corresponding
to the 20% final withholding tax in order that it may be placed in escrow as directed by this
court constitutes a defiance of this court’s temporary restraining order. 231
The temporary restraining order is not moot. The acts sought to be enjoined are not fait
accompli. For an act to be considered fait accompli, the act must have already been fully
accomplished and consummated.232 It must be irreversible, e.g., demolition of
properties,233 service of the penalty of imprisonment,234 and hearings on cases.235When the act
sought to be enjoined has not yet been fully satisfied, and/or is still continuing in nature, 236 the
defense of fait accomplicannot prosper.
The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that
constitutes both the withholding and remittance of the 20% final withholding tax to the Bureau
of Internal Revenue. Even though the Bureau of Treasury had already withheld the 20% final
withholding tax237 when it received the temporary restraining order, it had yet to remit the
monies it withheld to the Bureau of Internal Revenue, a remittance which was due only on
November 10, 2011.238 The act enjoined by the temporary restraining order had not yet been
fully satisfied and was still continuing.
Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which prescribes to
national government agencies such as the Bureau of Treasury the procedure for the remittance
of all taxes it withheld to the Bureau of Internal Revenue, a national agency shall file before
the Bureau of Internal Revenue a Tax Remittance Advice (TRA) supported by withholding tax
returns on or before the 10th day of the following month after the said taxes had been
withheld.240 The Bureau of Internal Revenue shall transmit an original copy of the TRA to the
Bureau of Treasury,241which shall be the basis for recording the remittance of the tax
collection.242 The Bureau of Internal Revenue will then record the amount of taxes reflected in
the TRA as tax collection in the Journal ofTax Remittance by government agencies based on
its copies of the TRA.243 Respondents did not submit any withholding tax return or TRA to
provethat the 20% final withholding tax was indeed remitted by the Bureau of Treasury to the
Bureau of Internal Revenue on October 18, 2011.
Respondent Bureau of Treasury’s Journal Entry Voucher No. 11-10-10395244 dated October
18, 2011 submitted to this court shows:
Account Debit Amount Credit
Code Amount
Bonds Payable-L/T, Dom- 442-360 35,000,000,000.00
Zero
Coupon T/Bonds
(Peace Bonds) – 10 yr
 Sinking Fund-Cash (BSF) 198-001 30,033,792,203.59
Due to BIR 412-002 4,966,207,796.41
To record redemption of 10yr
Zero
coupon (Peace Bond) net of
the 20% final
withholding tax pursuant to
BIR Ruling No.
378-2011, value date, October
18, 2011 per
BTr letter authority and BSP
Bank
Statements.
The foregoing journal entry, however, does not prove that the amount of ₱4,966,207,796.41,
representing the 20% final withholding tax on the PEACe Bonds, was disbursed by it and
remitted to the Bureau of Internal Revenue on October 18, 2011. The entries merely show that
the monies corresponding to 20% final withholding tax was set aside for remittance to the
Bureau of Internal Revenue.
We recall the November 15, 2011 resolution issued by this court directing respondents to
"show cause why they failed to comply with the [TRO]; and [to] comply with the [TRO] in
order that petitioners may place the corresponding funds in escrow pending resolution of the
petition."245 The 20% final withholding tax was effectively placed in custodia legiswhen this
court ordered the deposit of the amount in escrow. The Bureau of Treasury could still release
the money withheld to petitioners for the latter to place in escrow pursuant to this court’s
directive. There was no legal obstacle to the release of the 20% final withholding tax to
petitioners. Congressional appropriation is not required for the servicing of public debts in
view of the automatic appropriations clause embodied in Presidential Decree Nos. 1177 and
1967.
Section 31 of Presidential Decree No. 1177 provides:
Section 31. Automatic Appropriations. All expenditures for (a) personnel retirement
premiums, government service insurance, and other similar fixed expenditures, (b) principal
and interest on public debt, (c) national government guarantees of obligations which are drawn
upon, are automatically appropriated: provided, that no obligations shall be incurred or
payments made from funds thus automatically appropriated except as issued in the form of
regular budgetary allotments.
Section 1 of Presidential Decree No. 1967 states:
Section 1. There is hereby appropriated, out of any funds in the National Treasury not
otherwise appropriated, such amounts as may be necessary to effect payments on foreign or
domestic loans, or foreign or domestic loans whereon creditors make a call on the direct and
indirect guarantee of the Republic of the Philippines, obtained by:
a. the Republic of the Philippines the proceeds of which were relent to government-owned
or controlled corporations and/or government financial institutions;
b. government-owned or controlled corporations and/or government financial institutions
the proceeds of which were relent to public or private institutions;
c. government-owned or controlled corporations and/or financial institutions and
guaranteed by the Republic of the Philippines;
d. other public or private institutions and guaranteed by government owned or controlled
corporations and/or government financial institutions.
The amount of ₱35 billion that includes the monies corresponding to 20% final withholding
tax is a lawfuland valid obligation of the Republic under the Government Bonds. Since said
108
obligation represents a public debt, the release of the monies requires no legislative
appropriation.
Section 2 of Republic Act No. 245 likewise provides that the money to be used for the
payment of Government Bonds may be lawfully taken from the continuing appropriation out
of any monies in the National Treasury and is not required to be the subject of another
appropriation legislation: SEC. 2. The Secretary of Finance shall cause to be paid out of any
moneys in the National Treasury not otherwise appropriated, or from any sinking funds
provided for the purpose by law, any interest falling due, or accruing, on any portion of the
public debt authorized by law. He shall also cause to be paid out of any such money, or from
any such sinking funds the principal amount of any obligations which have matured, or which
have been called for redemption or for which redemption has been demanded in accordance
with terms prescribed by him prior to date of issue. . . In the case of interest-bearing
obligations, he shall pay not less than their face value; in the case of obligations issued at a
discount he shall pay the face value at maturity; or if redeemed prior to maturity, such portion
of the face value as is prescribed by the terms and conditions under which such obligations
were originally issued. There are hereby appropriated as a continuing appropriation out of any
moneys in the National Treasury not otherwise appropriated, such sums as may be necessary
from time to time to carry out the provisions of this section. The Secretary of Finance shall
transmit to Congress during the first month of each regular session a detailed statement of all
expenditures made under this section during the calendar year immediately preceding.
Thus, DOF Department Order No. 141-95, as amended, states that payment for Treasury bills
and bonds shall be made through the National Treasury’s account with the Bangko Sentral ng
Pilipinas, to wit:
Section 38. Demand Deposit Account.– The Treasurer of the Philippines maintains a Demand
Deposit Account with the Bangko Sentral ng Pilipinas to which all proceeds from the sale of
Treasury Bills and Bonds under R.A. No. 245, as amended, shall be credited and all payments
for redemption of Treasury Bills and Bonds shall be charged.1âwphi1
Regarding these legislative enactments ordaining an automatic appropriations provision for
debt servicing, this court has held:
Congress . . . deliberates or acts on the budget proposals of the President, and Congress in the
exercise of its own judgment and wisdom formulates an appropriation act precisely following
the process established by the Constitution, which specifies that no money may be paid from
the Treasury except in accordance with an appropriation made by law.
Debt service is not included inthe General Appropriation Act, since authorization therefor
already exists under RA Nos. 4860 and 245, as amended, and PD 1967. Precisely in the light
of this subsisting authorization as embodied in said Republic Acts and PD for debt service,
Congress does not concern itself with details for implementation by the Executive, butlargely
with annual levels and approval thereof upon due deliberations as part of the whole obligation
program for the year. Upon such approval, Congress has spoken and cannot be said to
havedelegated its wisdom to the Executive, on whose part lies the implementation or
execution of the legislative wisdom.246 (Citation omitted)
Respondent Bureau of Treasury had the duty to obey the temporary restraining order issued by
this court, which remained in full force and effect, until set aside, vacated, or modified. Its
conduct finds no justification and is reprehensible.247
WHEREFORE, the petition for review and petitions-in-intervention are GRANTED. BIR
Ruling Nos. 370-2011 and DA 378-2011 are NULLIFIED.
Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention of
the amount corresponding to the 20% final withholding tax despite this court's directive in the
temporary restraining order and in the resolution dated November 15, 2011 to deliver the
amounts to the banks to be placed in escrow pending resolution of this case.
Respondent Bureau of Treasury is hereby ORDERED to immediately ·release and pay to the
bondholders the amount corresponding-to the 20% final withholding tax that it withheld on
October 18, 2011.
MARVIC M.V.F. LEONEN
Associate Justice

109
 Meanwhile, on January 1, 1996, Republic Act (R.A.) No. 7716 (Expanded VAT or E-VAT
FIRST DIVISION Law) took effect, amending further the National Internal Revenue Code of 1977. Then
on January 1, 1998, R.A. No. 8424 (National Internal Revenue Code of 1997) became
effective. This new Tax Code substantially adopted and reproduced the provisions of E.O. No.
COMMISSIONER OF G.R. No. 168129 273 on VAT and R.A. No. 7716 on E-VAT.
INTERNAL REVENUE,
Petitioner, In the interim, on October 1, 1999, the BIR sent respondent a Preliminary Assessment Notice
for deficiency in its payment of the VAT and documentary stamp taxes (DST) for taxable
- versus - years 1996 and 1997.

PHILIPPINE HEALTH Promulgated:
CARE PROVIDERS, INC.,
Respondent. April 24, 2007
x --------------------------------------------------------------------------------------x
DECISION
SANDOVAL-GUTIERREZ, J.:
For our resolution is the instant Petition for Review on Certiorari under Rule 45 of the 1997
Rules of Civil Procedure, as amended, seeking to reverse the Decision [1] dated February 18,
2005 and Resolution dated May 9, 2005 of the Court of Appeals (Fifteenth Division) in CA-
G.R. SP No. 76449.
The factual antecedents of this case, as culled from the records, are:
The Philippine Health Care Providers, Inc., herein respondent, is a
corporation organized and existing under the laws of the Republic of the Philippines. Pursuant
to its Articles of Incorporation,[2] its primary purpose is To establish, maintain, conduct and
operate a prepaid group practice health care delivery system or a health maintenance
organization to take care of the sick and disabled persons enrolled in the health care plan and
to provide for the administrative, legal, and financial responsibilities of the organization.
On July 25, 1987, President Corazon C. Aquino issued Executive Order (E.O.) No. 273,
amending the National Internal Revenue Code of 1977 (Presidential Decree No. 1158) by
imposing Value-Added Tax (VAT) on the sale of goods and services. This E.O. took effect
on January 1, 1988.
Before the effectivity of E.O. No. 273, or on December 10, 1987, respondent wrote the
Commissioner of Internal Revenue (CIR), petitioner, inquiring whether the services it
provides to the participants in its health care program are exempt from the payment of the
VAT.
On June 8, 1988, petitioner CIR, through the VAT Review Committee of the Bureau of
Internal Revenue (BIR), issued VAT Ruling No. 231-88 stating that respondent, as a provider
of medical services, is exempt from the VAT coverage. This Ruling was subsequently
confirmed by Regional Director Osmundo G. Umali of Revenue Region No. 8 in a letter
dated April 22, 1994.
On October 20, 1999, respondent filed a protest with the BIR.
On January 27, 2000, petitioner CIR sent respondent a letter demanding payment of deficiency
VAT in the amount of P100,505,030.26 and DST in the amount of P124,196,610.92, or a total
of P224,702,641.18 for taxable years 1996 and 1997. Attached to the demand letter were four
(4) assessment notices.
On February 23, 2000, respondent filed another protest questioning the assessment notices.
Petitioner CIR did not take any action on respondents protests. Hence, on September 21, 2000,
respondent filed with the Court of Tax Appeals (CTA) a petition for review, docketed as CTA
Case No. 6166.
On April 5, 2002, the CTA rendered its Decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, the instant Petition for Review
is PARTIALLY GRANTED. Petitioner is hereby ORDERED TO PAY
the deficiency VAT amounting to P22,054,831.75 inclusive of 25%
surcharge plus 20% interest from January 20, 1997 until fully paid for the
1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge
plus 20% interest from January 20, 1998 until paid for the 1997 VAT
deficiency. Accordingly, VAT Ruling No. 231-88 is declared void and
without force and effect. The 1996 and 1997 deficiency DST assessment
against petitioner is hereby CANCELLED AND SET ASIDE.
Respondent is ORDERED to DESIST from collecting the said DST
deficiency tax.
SO ORDERED.
Respondent filed a motion for partial reconsideration of the above judgment concerning its
liability to pay the deficiency VAT.
In its Resolution[3] dated March 23, 2003, the CTA granted respondents motion, thus:
WHEREFORE, in view of the foregoing, the instant Motion for Partial
Reconsideration is GRANTED. Accordingly, the VAT assessment issued
by herein respondent against petitioner for the taxable years 1996 and
1997 is hereby WITHDRAWN and SET ASIDE.
SO ORDERED.
The CTA held:

110
 Moreover, this court adheres to its conclusion that petitioner is a service
contractor subject to VAT since it does not actually render medical
service but merely acts as a conduit between the members and petitioners
accredited and recognized hospitals and clinics.
However, after a careful review of the facts of the case as well as the
Law and jurisprudence applicable, this court resolves to grant petitioners
Motion for Partial Reconsideration. We are in accord with the view of
petitioner that it is entitled to the benefit of non-retroactivity of rulings
guaranteed under Section 246 of the Tax Code, in the absence of
showing of bad faith on its part. Section 246 of the Tax Code provides:
Sec. 246. Non-Retroactivity of Rulings. Any
revocation, modification or reversal of any of the rules
and regulations promulgated in accordance with the
preceding Sections or any of the rulings or circulars
promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification
or reversal will be prejudicial to the taxpayers, x x x.
Clearly, undue prejudice will be caused to petitioner if the revocation of
VAT Ruling No. 231-88 will be retroactively applied to its case. VAT
Ruling No. 231-88 issued by no less than the respondent itself has
confirmed petitioners entitlement to VAT exemption under Section 103
of the Tax Code. In saying so, respondent has actually broadened the
scope of medical services to include the case of the petitioner. This VAT
ruling was even confirmed subsequently by Regional
Director Ormundo G. Umali in his letter dated April 22, 1994 (Exhibit
M). Exhibit P, which served as basis for the issuance of the said VAT
ruling in favor of the petitioner sufficiently described the business of
petitioner and there is no way BIR could be misled by the said
representation as to the real nature of petitioners business. Such being the
case, this court is convinced that petitioners reliance on the said ruling is
premised on good faith. The facts of the case do not show that petitioner
deliberately committed mistakes or omitted material facts when it
obtained the said ruling from the Bureau of Internal Revenue. Thus, in
the absence of such proof, this court upholds the application of Section
246 of the Tax Code. Consequently, the pronouncement made by the BIR
in VAT Ruling No. 231-88 as to the VAT exemption of petitioner should
be upheld.
Petitioner seasonably filed with the Court of Appeals a petition for review, docketed as CA-
G.R. SP No. 76449.
In its Decision dated February 18, 2005, the Court of Appeals affirmed the CTA Resolution.
Petitioner CIR filed a motion for reconsideration, but it was denied by the appellate court in its
Resolution[4] dated May 9, 2005.
Hence, the instant petition for review on certiorari raising these two issues: (1) whether
respondents services are subject to VAT; and (2) whether VAT Ruling No. 231-88 exempting
respondent from payment of VAT has retroactive application.
111
On the first issue, respondent is contesting petitioners assessment of its VAT liabilities for
taxable years 1996 and 1997.
Section 102[5] of the National Internal Revenue Code of 1977, as amended by E.O. No. 273
(VAT Law) and R.A. No. 7716 (E-VAT Law), provides:
SEC. 102. Value-added tax on sale of services and use or lease of
properties. (a) Rate and base of tax. There shall be levied, assessed and
collected, a value-added tax equivalent to 10% of gross receipts derived
from the sale or exchange of services, including the use or lease of
properties.
The phrase sale or exchange of service means the performance of all
kinds of services in the Philippines for a fee, remuneration or
consideration, including those performed or rendered by construction and
service contractors x x x.
Section 103[6] of the same Code specifies the exempt transactions from the provision of
Section 102, thus:
SEC. 103. Exempt Transactions. The following shall be exempt from the
value-added tax:
xxx
(l) Medical, dental, hospital and veterinary services except those
rendered by professionals
xxx
The import of the above provision is plain. It requires no interpretation. It
contemplates the exemption from VAT of taxpayers engaged in the performance of medical,
dental, hospital, and veterinary services. In Commissioner of International Revenue v. Seagate
Technology (Philippines),[7] we defined an exempt transaction as one involving 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 of the party in the
transaction. In Commissioner of Internal Revenue v. Toshiba Information Equipment
(Phils.) Inc.,[8] we reiterated this definition.
In its letter to the BIR requesting confirmation of its VAT-exempt status, respondent described
its services as follows:
Under the prepaid group practice health care delivery system adopted by
Health Care, individuals enrolled in Health Cares health care program are
entitled to preventive, diagnostic, and corrective medical services to be
dispensed by Health Cares duly licensed physicians, specialists, and
other professional technical staff participating in said group practice
health care delivery system established and operated by Health Care.
Such medical services will be dispensed in a hospital or clinic owned,
operated, or accredited by Health Care. To be entitled to receive such
medical services from Health Care, an individual must enroll in Health
Cares health care program and pay an annual fee. Enrollment in Health
Cares health care program is on a year-to-year basis and enrollees are
issued identification cards.

From the foregoing, the CTA made the following conclusions:
a) Respondent is not actually rendering medical service but merely
acting as a conduit between the members and their accredited
and recognized hospitals and clinics.
b) It merely provides and arranges for the provision of pre-need
health care services to its members for a fixed prepaid fee for a
specified period of time.
c) It then contracts the services of physicians, medical and dental
practitioners, clinics and hospitals to perform such services to its
enrolled members; and
d) Respondent also enters into contract with clinics, hospitals,
medical professionals and then negotiates with them regarding
payment schemes, financing and other procedures in the
delivery of health services.
We note that these factual findings of the CTA were neither modified nor reversed
by the Court of Appeals. It is a doctrine that findings of fact of the CTA, a special court
exercising particular expertise on the subject of tax, are generally regarded as final, binding,
and conclusive upon this Court, more so where these do not conflict with the findings of the
Court of Appeals.[9] Perforce, as respondent does not actually provide medical and/or
hospital services, as provided under Section 103 on exempt transactions, but merely
arranges for the same, its services are not VAT-exempt.
Relative to the second issue, Section 246 of the 1997 Tax Code, as amended,
provides that rulings, circulars, rules and regulations promulgated by the Commissioner of
Internal Revenue have no retroactive application if to apply them would prejudice the
taxpayer. The exceptions to this rule are: (1) where the taxpayer deliberately misstates or
omits material facts from his return or in any document required of him by the Bureau of
Internal Revenue; (2) where the facts subsequently gathered by the Bureau of Internal
Revenue are materially different from the facts on which the ruling is based, or (3) where the
taxpayer acted in bad faith.
We must now determine whether VAT Ruling No. 231-88 exempting respondent
from paying its VAT liabilities has retroactive application.
In its Resolution dated March 23, 2003, the CTA found that there is no showing that
respondent deliberately committed mistakes or omitted material facts when it obtained VAT
Ruling No. 231-88 from the BIR. The CTA held that respondents letter which served as the
basis for the VAT ruling sufficiently described its business and there is no way the BIR could
be misled by the said representation as to the real nature of said business.
In sustaining the CTA, the Court of Appeals found that the failure of respondent to
refer to itself as a health maintenance organization is not an indication of bad faith or a
deliberate attempt to make false representations. As the term health maintenance organization
did not as yet have any particular significance for tax purposes, respondents failure to include
a term that has yet to acquire its present definition and significance cannot be equated with bad
faith.
112
We agree with both the Tax Court and the Court of Appeals that respondent acted in
good faith. In Civil Service Commission v. Maala,[10] we described good faith as that state of
mind denoting honesty of intention and freedom from knowledge of circumstances which
ought to put the holder upon inquiry; an honest intention to abstain from taking
any unconscientious advantage of another, even through technicalities of law, together with
absence of all information, notice, or benefit or belief of facts which render
transaction unconscientious.
According to the Court of Appeals, respondents failure to describe itself as a health
maintenance organization, which is subject to VAT, is not tantamount to bad faith. We note
that the term health maintenance organization was first recorded in the Philippine statute
books only upon the passage of The National Health Insurance Act of 1995 (Republic Act No.
7875). Section 4 (o) (3) thereof defines a health maintenance organization as an entity that
provides, offers, or arranges for coverage of designated health services needed by plan
members for a fixed prepaid premium. Under this law, a health maintenance organization is
one of the classes of a health care provider.
It is thus apparent that when VAT Ruling No. 231-88 was issued in respondents
favor, the term health maintenance organization was yet unknown or had no significance for
taxation purposes. Respondent, therefore, believed in good faith that it was VAT exempt for
the taxable years 1996 and 1997 on the basis of VAT Ruling No. 231-88.
In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals,[11] this Court held that
under Section 246 of the 1997 Tax Code, the Commissioner of Internal Revenue is
precluded from adopting a position contrary to one previously taken where injustice
would result to the taxpayer. Hence, where an assessment for deficiency withholding income
taxes was made, three years after a new BIR Circular reversed a previous one upon which the
taxpayer had relied upon, such an assessment was prejudicial to the taxpayer. To rule
otherwise, opined the Court, would be contrary to the tenets of good faith, equity, and fair
play.
This Court has consistently reaffirmed its ruling in ABS-CBN Broadcasting Corp. in
the later cases of Commissioner of Internal Revenue v. Borroughs, Ltd.,[12]Commissioner of
Internal Revenue v. Mega Gen. Mdsg. Corp.[13] Commissioner of Internal Revenue
v. Telefunken Semiconductor
(Phils.) Inc.,[14] and Commissioner of Internal Revenue v. Court of Appeals.[15] The rule is that
the BIR rulings have no retroactive effect where a grossly unfair deal would result to the
prejudice of the taxpayer, as in this case.
More recently, in Commissioner of Internal Revenue v. Benguet
Corporation,[16] wherein the taxpayer was entitled to tax refunds or credits based on
the BIRs own issuances but later was suddenly saddled with deficiency taxes due to its
subsequent ruling changing the category of the taxpayers transactions for the purpose of
paying its VAT, this Court ruled that applying such ruling retroactively would be prejudicial
to the taxpayer.
WHEREFORE, we DENY the petition and AFFIRM the assailed Decision and
Resolution of the Court of Appeals in CA-G.R. SP No. 76449. No costs.
SO ORDERED.
 SECOND DIVISION BWSC-Denmark established [respondent] which subcontracted the actual
operation and maintenance of NAPOCORs two power barges as well as
the performance of other duties and acts which necessarily have to be done
COMMISSIONER OF G.R. No. 153205 in the Philippines.
INTERNAL REVENUE,
Petitioner, Present: NAPOCOR paid capacity and energy fees to the Consortium in a mixture
of currencies (Mark, Yen, and Peso). The freely convertible non-Peso
QUISUMBING, J. component is deposited directly to the Consortiums bank accounts
- versus - Chairperson, in Denmark and Japan, while the Peso-denominated component is
CARPIO, deposited in a separate and special designated bank account in
CARPIO MORALES, the Philippines. On the other hand, the Consortium pays [respondent] in
TINGA, and foreign currency inwardly remitted to the Philippines through the banking
BURMEISTER AND WAIN VELASCO, JR., JJ. system.
SCANDINAVIAN CONTRACTOR
MINDANAO, INC., Promulgated: In order to ascertain the tax implications of the above transactions,
Respondent. [respondent] sought a ruling from the BIR which responded with BIR
January 22, 2007 Ruling No. 023-95 dated February 14, 1995, declaring therein that if
[respondent] chooses to register as a VAT person and the consideration for
x----------------------------------------------------------------------------------------x its services is paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to
DECISION VAT at zero-rate.

CARPIO, J.: [Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the
Certificate of Registration bearing RDO Control No. 95-113-007556 was
issued in favor of [respondent] by the Revenue District Office No. 113
The Case of Davao City.

For the year 1996, [respondent] seasonably filed its quarterly Value-
This petition for review[1] seeks to set aside the 16 April 2002 Decision[2] of the Court of Added Tax Returns reflecting, among others, a total zero-rated sales
Appeals in CA-G.R. SP No. 66341 affirming the 8 August 2001 Decision[3] of the Court of of P147,317,189.62 with VAT input taxes of P3,361,174.14, detailed as
Tax Appeals (CTA). The CTA ordered the Commissioner of Internal Revenue (petitioner) to follows:
issue a tax credit certificate for P6,994,659.67 in favor of Burmeister and Wain Scandinavian Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax
Contractor Mindanao, Inc. (respondent). ----------------------------------------------------------------------------------
1st E 04-18-96 P 33,019,651.07 P608,953.48
2nd F 07-16-96 37,108,863.33 756,802.66
The Antecedents 3rd G 10-14-96 34,196,372.35 930,279.14
4th H 01-20-97 42,992,302.87 1,065,138.86
The CTA summarized the facts, which the Court of Appeals adopted, as follows: Totals P147,317,189.62 P3,361,174.14

[Respondent] is a domestic corporation duly organized and existing under On December 29, 1997, [respondent] availed of the Voluntary Assessment
and by virtue of the laws of the Philippines with principal address located Program (VAP) of the BIR. It allegedly misinterpreted Revenue
at Daruma Building, Jose P. Laurel Avenue, Lanang, Davao City. Regulations No. 5-96 dated February 20, 1996 to be applicable to its
case. Revenue Regulations No. 5-96 provides in part thus:
It is represented that a foreign consortium
composed of Burmeister and Wain Scandinavian Contractor A/S (BWSC- SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of
Denmark), Mitsui Engineering and Shipbuilding, Ltd., and Mitsui and Co., Revenue Regulations No. 7-95 are hereby amended to
Ltd. entered into a contract with the National Power Corporation read as follows:
(NAPOCOR) for the operation and maintenance of [NAPOCORs] two
power barges. The Consortium appointed BWSC-Denmark as its Section 4.102-2(b)(2) Services other than processing,
coordination manager. manufacturing or repacking for other persons doing
113
 business outside the Philippines for goods which are
subsequently exported, as well as services by a
resident to a non-resident foreign client such as
project studies, information services, engineering and
architectural designs and other similar services, the
consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with
the rules and regulations of the BSP.
x x x x x x x x x x.
In [conformity] with the aforecited Revenue Regulations, [respondent]
subjected its sale of services to the Consortium to the 10% VAT in the
total amount of P103,558,338.11 representing April to December 1996
sales since said Revenue Regulations No. 5-96 became effective only on
April 1996. The sum of P43,893,951.07, representing January to March
1996 sales was subjected to zero rate. Consequently, [respondent] filed its
1996 amended VAT return consolidating therein the VAT output and
input taxes for the four calendar quarters of 1996. It paid the amount
of P6,994,659.67 through BIRs collecting agent, PCIBank, as its output
tax liability for the year 1996, computed as follows:
Amount subject to 10% VAT P103,558,338.11
Multiply by 10%
VAT Output Tax P 10,355,833.81
Less: 1996 Input VAT P 3,361,174.14
VAT Output Tax Payable P 6,994,659.67
On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-
99 from the VAT Review Committee which reconfirmed BIR Ruling No.
023-95 insofar as it held that the services being rendered by BWSCMI is
subject to VAT at zero percent (0%).
On the strength of the aforementioned rulings, [respondent]
on April 22,1999, filed a claim for the issuance of a tax credit certificate
with Revenue District No. 113 of the BIR. [Respondent] believed that it
erroneously paid the output VAT for 1996 due to its availment of the
Voluntary Assessment Program (VAP) of the BIR.[4]
On 27 December 1999, respondent filed a petition for review with the CTA in order to toll the
running of the two-year prescriptive period under the Tax Code.
The Ruling of the Court of Tax Appeals
In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit certificate
for P6,994,659.67 in favor of respondent. The CTAs ruling stated:
114
[Respondents] sale of services to the Consortium [was] paid for in
acceptable foreign currency inwardly remitted to the Philippines and
accounted for in accordance with the rules and regulations
of Bangko Sentral ng Pilipinas. These were established by various BPI
Credit Memos showing remittances in Danish Kroner (DKK) and US
dollars (US$) as payments for the specific invoices billed by [respondent]
to the consortium. These remittances were further certified by the Branch
Manager x x x of BPI-Davao Lanang Branch to represent payments for
sub-contract fees that came from Den Danske Aktieselskab Bank-
Denmark for the account of [respondent]. Clearly, [respondents] sale of
services to the Consortium is subject to VAT at 0% pursuant to Section
108(B)(2) of the Tax Code.
xxxx
The zero-rating of [respondents] sale of services to the Consortium was
even confirmed by the [petitioner] in BIR Ruling No. 023-95 dated
February 15, 1995, and later by VAT Ruling No. 003-99 dated January
7,1999, x x x.
Since it is apparent that the payments for the services rendered by
[respondent] were indeed subject to VAT at zero percent, it follows that it
mistakenly availed of the Voluntary Assessment Program by paying
output tax for its sale of services. x x x
x x x Considering the principle of solutio indebiti which requires the
return of what has been delivered by mistake, the [petitioner] is obligated
to issue the tax credit certificate prayed for by [respondent]. x x x[5]
Petitioner filed a petition for review with the Court of Appeals, which dismissed the petition
for lack of merit and affirmed the CTA decision.[6]
Hence, this petition.
The Court of Appeals Ruling
In affirming the CTA, the Court of Appeals rejected petitioners view that since
respondents services are not destined for consumption abroad, they are not of the same nature
as project studies, information services, engineering and architectural designs, and other
similar services mentioned in Section 4.102-2(b)(2) of Revenue Regulations No. 5-96[7] as
subject to 0% VAT. Thus, according to petitioner, respondents services cannot legally qualify
for 0% VAT but are subject to the regular 10% VAT.[8]
The Court of Appeals found untenable petitioners contention that under VAT Ruling No. 040-
98, respondents services should be destined for consumption abroad to enjoy zero-
rating. Contrary to petitioners interpretation, there are two kinds of transactions or services
subject to zero percent VAT under VAT Ruling No. 040-98. These are (a) services other than
repacking goods for other persons doing business outside the Philippines which goods are
subsequently exported; and (b) services by a resident to a non-resident foreign client, such as
project studies, information services, engineering and architectural designs and other similar
services, the consideration for which is paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).[9]
The Court of Appeals stated that only the first classification is required by the provision to be
consumed abroad in order to be taxed at zero rate. In x x x the absence of such express or
implied stipulation in the statute, the second classification need not be consumed abroad.[10]
The Court of Appeals further held that assuming petitioners interpretation of Section 4.102-
2(b)(2) of Revenue Regulations No. 5-96 is correct, such administrative provision is void
being an amendment to the Tax Code. Petitioner went beyond merely providing the
implementing details by adding another requirement to zero-rating. This is indicated by the
additional phrase as well as services by a resident to a non-resident foreign client, such
as project studies, information services and engineering and architectural designs and other
similar services. In effect, this phrase adds not just one but two requisites: (a) services must be
rendered by a resident to a non-resident; and (b) these must be in the nature of project studies,
information services, etc.[11]
The Court of Appeals explained that under Section 108(b)(2) of the Tax Code,[12] for services
which were performed in the Philippines to enjoy zero-rating, these must comply only with
two requisites, to wit: (1) payment in acceptable foreign currency and (2) accounted for in
accordance with the rules of the BSP. Section 108(b)(2) of the Tax Code does not provide that
services must be destined for consumption abroad in order to be VAT zero-rated.[13]
The Court of Appeals disagreed with petitioners argument that our VAT law generally follows
the destination principle (i.e., exports exempt, imports taxable). [14] The Court of Appeals
stated that if indeed the destination principle underlies and is the basis of the VAT laws, then
petitioners proper remedy would be to recommend an amendment of Section 108(b)(2) to
Congress. Without such amendment, however, petitioner should apply the terms of the basic
law. Petitioner could not resort to administrative legislation, as what [he] had done in this
case.[15]
The Issue
The lone issue for resolution is whether respondent is entitled to the refund
of P6,994,659.67 as erroneously paid output VAT for the year 1996.[16]
The Ruling of the Court
We deny the petition.
At the outset, the Court declares that the denial of the instant petition is not on the ground that
respondents services are subject to 0% VAT. Rather, it is based on the non-retroactivity of the
prejudicial revocation of BIR Ruling No. 023-95[17] and VAT Ruling No. 003-99,[18] which
held that respondents services are subject to 0% VAT and which respondent invoked in
applying for refund of the output VAT.
Section 102(b) of the Tax Code,[19] the applicable provision in 1996 when respondent rendered
the services and paid the VAT in question, enumerates which services are zero-rated, thus:
115
(b) Transactions subject to zero-rate. ― The following services performed
in the Philippines by VAT-registered persons shall be subject to 0%:
(1) Processing, manufacturing or repacking goods for other persons
doing business outside the Philippines which goods are subsequently
exported, where the services are paid for in acceptable foreign
currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding sub-
paragraph, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(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 rate;
(4) Services rendered to vessels engaged exclusively in international
shipping; and
(5) Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an enterprise
whose export sales exceed seventy percent (70%) of total annual
production. (Emphasis supplied)
In insisting that its services should be zero-rated, respondent claims that it complied with the
requirements of the Tax Code for zero rating under the second paragraph of Section
102(b). Respondent asserts that (1) the payment of its service fees was in acceptable foreign
currency, (2) there was inward remittance of the foreign currency into the Philippines, and (3)
accounting of such remittance was in accordance with BSP rules. Moreover, respondent
contends that its services which constitute the actual operation and management of two (2)
power barges in Mindanao are not even remotely similar to project studies, information
services and engineering and architectural designs under Section 4.102-2(b)(2) of Revenue
Regulations No. 5-96. As such, respondents services need not be destined to be consumed
abroad in order to be VAT zero-rated.
Respondent is mistaken.
The Tax Code not only requires that the services be other than processing,
manufacturing or repacking of goods and that payment for such services be in acceptable
foreign currency accounted for in accordance with BSP rules. Another essential condition for
qualification to zero-rating under Section 102(b)(2) is that the recipient of such services is
doing business outside the Philippines. While this requirement is not expressly stated in the
second paragraph of Section 102(b), this is clearly provided in the first paragraph of Section
102(b) where the listed services must be for other persons doing business outside the
Philippines. The phrase for other persons doing business outside the Philippines not only
refers to the services enumerated in the first paragraph of Section 102(b), but also pertains to
the general term services appearing in the second paragraph of Section 102(b). In short,
services other than processing, manufacturing, or repacking of goods must likewise be
performed for persons doing business outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2). If the provider and
recipient of the other services are both doing business in the Philippines, the payment of
foreign currency is irrelevant. Otherwise, those subject to the regular VAT under Section
102(a) can avoid paying the VAT by simply stipulating payment in foreign currency inwardly
remitted by the recipient of services. To interpret Section 102(b)(2) to apply to a payer-
recipient of services doing business in the Philippines is to make the payment of the regular
VAT under Section 102(a) dependent on the generosity of the taxpayer. The provider of
services can choose to pay the regular VAT or avoid it by stipulating payment in foreign
currency inwardly remitted by the payer-recipient. Such interpretation removes Section 102(a)
as a tax measure in the Tax Code, an interpretation this Court cannot sanction. A tax is a
mandatory exaction, not a voluntary contribution.
When Section 102(b)(2) stipulates payment in acceptable foreign currency under
BSP rules, the law clearly envisions the payer-recipient of services to be doing business
outside the Philippines. Only those not doing business in the Philippines can be required under
BSP rules[20] to pay in acceptable foreign currency for their purchase of goods or services from
the Philippines. In a domestic transaction, where the provider and recipient of services are
both doing business in the Philippines, the BSP cannot require any party to make payment in
foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature of export sales since
the payer-recipient of services is doing business outside the Philippines. Under BSP
rules,[21] the proceeds of export sales must be reported to
the Bangko Sentral ng Pilipinas. Thus, there is reason to require the provider of services under
Section 102(b) (1) and (2) to account for the foreign currency proceeds to the BSP. The same
rationale does not apply if the provider and recipient of the services are both doing business in
the Philippines since their transaction is not in the nature of an export sale even if payment is
denominated in foreign currency.
Further, when the provider and recipient of services are both doing business in the
Philippines, their transaction falls squarely under Section 102(a) governing domesticsale or
exchange of services. Indeed, this is a purely local sale or exchange of services subject to the
regular VAT, unless of course the transaction falls under the other provisions of Section
102(b).
Thus, when Section 102(b)(2) speaks of [s]ervices other than those mentioned in
the preceding subparagraph, the legislative intent is that only the services are different
between subparagraphs 1 and 2. The requirements for zero-rating, including the essential
condition that the recipient of services is doing business outside the Philippines, remain the
same under both subparagraphs.
Significantly, the amended Section 108(b)[22] [previously Section 102(b)] of the present Tax
Code clarifies this legislative intent. Expressly included among the transactions subject to 0%
VAT are [s]ervices other than those mentioned in the [first] paragraph [of Section 108(b)]
rendered to a person engaged in business conducted outside the Philippines or to a
nonresident person not engaged in business who is outside the Philippines when the
services are performed, the consideration for which is paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the BSP.
116
In this case, the payer-recipient of respondents services is the Consortium which is a joint-
venture doing business in the Philippines. While the Consortiums principal members are non-
resident foreign corporations, the Consortium itself is doing business in the
Philippines. This is shown clearly in BIR Ruling No. 023-95 which states that the contract
between the Consortium and NAPOCOR is for a 15-year term, thus:
This refers to your letter dated January 14, 1994 requesting for a
clarification of the tax implications of a contract between a consortium
composed of Burmeister & Wain Scandinavian Contractor A/S (BWSC),
Mitsui Engineering & Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd.
(MITSUI), all referred to hereinafter as the Consortium, and the National
Power Corporation (NAPOCOR) for the operation and maintenance of
two 100-Megawatt power barges (Power Barges) acquired by
NAPOCOR for a 15-year term.[23] (Emphasis supplied)
Considering this length of time, the Consortiums operation and
maintenance of NAPOCORs power barges cannot be classified as a single or isolated
transaction. The Consortium does not fall under Section 102(b)(2) which requires that the
recipient of the services must be a person doing business outside the Philippines. Therefore,
respondents services to the Consortium, not being supplied to a person doing business outside
the Philippines, cannot legally qualify for 0% VAT.
Respondent, as subcontractor of the Consortium, operates and maintains NAPOCORs power
barges in the Philippines. NAPOCOR pays the Consortium, through its non-resident partners,
partly in foreign currency outwardly remitted. In turn, the Consortium pays respondent also in
foreign currency inwardly remitted and accounted for in accordance with BSP rules. This
payment scheme does not entitle respondent to 0% VAT. As the Court held in Commissioner
of Internal Revenue v. American Express International, Inc. (Philippine Branch),[24] the place
of payment is immaterial, much less is the place where the output of the service is ultimately
used. An essential condition for entitlement to 0% VAT under Section 102(b)(1) and (2) is that
the recipient of the services is a person doing business outside the Philippines. In this case,
the recipient of the services is the Consortium, which is doing business not outside, but
within the Philippines because it has a 15-year contract to operate and
maintain NAPOCORs two 100-megawatt power barges in Mindanao.
The Court recognizes the rule that the VAT system generally follows the destination
principle (exports are zero-rated whereas imports are taxed). However, as the Court stated
in American Express, there is an exception to this rule.[25] This exception refers to the 0%
VAT on services enumerated in Section 102 and performed in the Philippines. For services
covered by Section 102(b)(1) and (2), the recipient of the services must be a person doing
business outside the Philippines. Thus, to be exempt from the destination principle under
Section 102(b)(1) and (2), the services must be (a) performed in the Philippines; (b) for a
person doing business outside the Philippines; and (c) paid in acceptable foreign currency
accounted for in accordance with BSP rules.
Respondents reliance on the ruling in American Express[26] is misplaced. That case involved a
recipient of services, specifically American Express International, Inc. (HongkongBranch),
doing business outside the Philippines. There, the Court stated:
Respondent [American Express International, Inc. (Philippine Branch)] is
a VAT-registered person that facilitates the collection and payment of
receivables belonging to its non-resident foreign client [American
 Express International, Inc. (Hongkong Branch)], for which it gets paid in
acceptable foreign currency inwardly remitted and accounted for in
accordance with BSP rules and regulations. x x x x[27] (Emphasis supplied)

In contrast, this case involves a recipient of services the Consortium which is doing business
in the Philippines. Hence, American Express services were subject to 0% VAT, while
respondents services should be subject to 10% VAT.

Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT Ruling
No. 003-99,[28] which reconfirmed BIR Ruling No. 023-95[29] insofar as it held that the
services being rendered by BWSCMI is subject to VAT at zero percent (0%). Respondents
reliance on these BIR rulings binds petitioner.

Petitioners filing of his Answer before the CTA challenging respondents claim for refund
effectively serves as a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95.
However, such revocation cannot be given retroactive effect since it will prejudice respondent.
Changing respondents status will deprive respondent of a refund of a substantial amount
representing excess output tax.[30] Section 246 of the Tax Code provides that any revocation of
a ruling by the Commissioner of Internal Revenue shall not be given retroactive application if
the revocation will prejudice the taxpayer. Further, there is no showing of the existence of any
of the exceptions enumerated in Section 246 of the Tax Code for the retroactive application of
such revocation.
However, upon the filing of petitioners Answer dated 2 March 2000 before the CTA
contesting respondents claim for refund, respondents services shall be subject to the regular
10% VAT.[31] Such filing is deemed a revocation of VAT Ruling No. 003-99 and BIR Ruling
No. 023-95.
WHEREFORE, the Court DENIES the petition.

SO ORDERED.

117
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 117982 February 6, 1997
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and ALHAMBRA INDUSTRIES,
INC., respondents.
BELLOSILLO, J.:
ALHAMBRA INDUSTRIES, INC., is a domestic corporation engaged in the manufacture and
sale of cigar and cigarette products. On 7 May 1991 private respondent received a letter dated
26 April 1991 from the Commissioner of Internal Revenue assessing it deficiency Ad Valorem
Tax (AVT) in the total amount of Four Hundred Eighty-Eight Thousand Three Hundred
Ninety-Six Pesos and Sixty-Two Centavos (P488,396.62), inclusive of increments, on the
removals of cigarette products from their place of production during the period 2 November
1990 to 22 January 1991.1 Petitioner computes the deficiency thus —
Total AVT due per manufacturer's declaration P 4,279,042.33
Less: AVT paid under BIR Ruling No. 473-88 3,905,348.85
——————
Deficiency AVT 373,693.48
Add: Penalties:
25% Surcharge (Sec. 248[c][3] NIRC) 93,423.37
20% Interest (P467,116.85 x 82/360 days) 21,279.27
——————
Total Amount Due P 488,396.62
In a letter dated 22 May 1991 received by petitioner on even date, private respondent thru
counsel filed a protest against the proposed assessment with a request that the same be
withdrawn and cancelled. On 31 May 1991 private respondent received petitioner's reply dated
27 May 1991 denying its protest and request for cancellation stating that the decision was
final, and at the same time requesting payment of the revised amount of Five Hundred Twenty
Thousand Eight Hundred Thirty-Five Pesos and Twenty-Nine Centavos (P520,835.29), with
interest updated, within ten (10) days from receipt thereof. In a letter dated 10 June 1991
which petitioner received on the same day, private respondent requested for the
reconsideration of petitioner's denial of its protest. Without waiting for petitioner's reply to its
request for reconsideration, private respondent filed on 19 June 1991 a petition for review with
the Court of Tax Appeals. On 25 June 1991 private respondent received from petitioner a
letter dated 21 June 1991 denying its request for reconsideration declaring again that its
decision was final. On 8 July 1991 private respondent paid under protest the disputed ad
valorem tax in the sum of P520,835.29.2
In its Decision3 of 1 December 1993 the Court of Tax Appeals ordered petitioner to refund to
private respondent the amount of Five Hundred Twenty Thousand Eight Hundred Thirty-Five
Pesos and Twenty-Nine Centavos (P520,835.29) representing erroneously paid ad valorem tax
for the period 2 November 1990 to 22 January 1991.
The Court of Tax Appeals explained that the subject deficiency excise tax assessment resulted
from private respondent's use of the computation mandated by BIR Ruling 473-88 dated 4
October 1988 as basis for computing the fifteen percent (15%) ad valorem tax due on its
removals of cigarettes from 2 November 1990 to 22 January 1991. BIR Circular 473-88 was
issued by Deputy Commissioner Eufracio D. Santos to Insular-Yebana Tobacco Corporation
allowing the latter to exclude the value-added tax (VAT) in the determination of the gross
118
selling price for purposes of computing the ad valorem tax of its cigar and cigarette products
in accordance with Sec. 127 of the Tax Code as amended by Executive Order No. 273 which
provides as follows:
Sec. 127. Payment of excise taxes on domestic products. — . . . . (b)
Determination of gross selling price of goods subject to ad valorem tax. —
Unless otherwise provided, the price, excluding the value-added tax, at
which the goods are sold at wholesale in the place of production or
through their sales agents to the public shall constitute the gross selling
price.
The computation, pursuant to the ruling, is illustrated by way of example thus —
P 44.00x1/1 = P 4.00 VAT
P 44.00 - P 4.00 = P 40.00 price without VAT
P 40.00 x 15% = P 6.00 Ad Valorem Tax
For the period 2 November 1990 to 22 January 1991 private respondent paid
P3,905,348.85 ad valorem tax, applying Sec. 127 (b) of the NIRC as interpreted by
BIR Ruling 473-88 by excluding the VAT in the determination of the gross selling
price.
Thereafter, on 11 February 1991, petitioner issued BIR Ruling 017-91 to Insular-Yebana
Tobacco Corporation revoking BIR Ruling 473-88 for being violative of Sec. 142 of the Tax
Code. It included back the VAT to the gross selling price in determining the tax base for
computing the ad valorem tax on cigarettes. Cited as basis by petitioner is Sec. 142 of the Tax
Code, as amended by E.O. No. 273 —
Sec. 142. Cigar and cigarettes — . . . For purposes of this section,
manufacturer's or importer's registered. wholesale price shall include the
ad valorem tax imposed in paragraphs (a), (b), (c) or (d) hereof and the
amount intended to cover the value added tax imposed under Title IV of
this Code.
Petitioner sought to apply the revocation retroactively to private respondent's removals of
cigarettes for the period starting 2 November 1990 to 22 January 1991 on the ground that
private respondent allegedly acted in bad faith which is an exception to the rule on non-
retroactivity of BIR Rulings. 4
On appeal, the Court of Appeals affirmed the Court of Tax Appeals holding that the
retroactive application of BIR Ruling 017-91 cannot be allowed since private respondent did
not act in bad faith; private respondent's computation under BIR Ruling 473-88 was not shown
to be motivated by ill will or dishonesty partaking the nature of fraud; hence, this petition.
Petitioner imputes error to the Court of Appeals: (1) in failing to consider that private
respondent's reliance on BIR Ruling 473-88 being contrary to Sec. 142 of the Tax Code does
not confer vested rights to private respondent in the computation of its ad valorem tax; (2) in
failing to consider that good faith and prejudice to the taxpayer in cases of reliance on a void
BIR Ruling is immaterial and irrelevant and does not place the government in estoppel in
collecting taxes legally due; (3) in holding that private respondent acted in good faith in
applying BIR Ruling 473-88; and, (4) in failing to consider that the assessment of petitioner is
presumed to be regular and the claim for tax refund must be strictly construed against private
respondent for being in derogation of sovereign authority.
Petitioner claims that the main issue before us is whether private respondent's reliance on a
void BIR ruling conferred upon the latter a vested right to apply the same in the computation
of its ad valorem tax and claim for tax refund. Sec. 142 (d) of the Tax Code, which provides
for the inclusion of the VAT in the tax base for purposes of computing the 15% ad valorem
tax, is the applicable law in the instant case as it specifically applies to the manufacturer's
wholesale price of cigar and cigarette products and not Sec. 127 (b) of the Tax Code which
applies in general to the wholesale of goods or domestic products. Sec. 142 being a specific
provision applicable to cigar and cigarettes must perforce prevail over Sec. 127 (b), a general
provision of law insofar as the imposition of the ad valorem tax on cigar and cigarettes is
concerned.5 Consequently, the application of Sec. 127 (b) to the wholesale price of cigar and
cigarette products for purposes of computing the ad valorem tax is patently erroneous.
Accordingly, BIR Ruling 473-88 is void ab initio as it contravenes the express provisions of
Sec. 142 (d) of the Tax Code.6
Petitioner contends that BIR Ruling 473-88 being an erroneous interpretation of Sec. 142 (b)
of the Tax Code does not confer any vested right to private respondent as to exempt it from the
retroactive application of BIR Ruling 017-91. Thus Art. 2254 of the New Civil Code is
explicit that "(n)o vested or acquired right can arise from acts or omissions which are against
the law . . . "7 It is argued that the Court of Appeals erred in ruling that retroactive application
cannot be made since private respondent acted in good faith. The following circumstances
would show that private respondent's reliance on BIR Ruling 473-88 was induced by ill
will: first, private respondent despite knowledge that Sec. 142 of the Tax Code was the
specific provision applicable still shifted its accounting method pursuant to Sec. 127 (b) of the
Tax Code; and, second, the shift in accounting method was made without any prior
consultation with the BIR.8
It is further contended by petitioner that claims for tax refund must be construed against
private respondent. A tax refund being in the nature of a tax exemption is regarded as in
derogation of the sovereign authority and is strictly construed against private respondent as the
same partakes the nature of a tax exemption. Tax exemptions cannot merely be implied but
must be categorically and unmistakably expressed.9
We cannot sustain petitioner. The deficiency tax assessment issued by petitioner against
private respondent is without legal basis because of the prohibition against the retroactive
application of the revocation of BIR rulings in the absence of bad faith on the part of private
respondent.
The present dispute arose from the discrepancy in the taxable base on which the excise tax is
to apply on account of two incongruous BIR Rulings: (1) BIR Ruling 473-88 dated 4 October
1988 which excluded the VAT from the tax base in computing the fifteen percent (15%)
excise tax due; and, (2) BIR Ruling 017-91 dated 11 February 1991 which included back the
VAT in computing the tax base for purposes of the fifteen percent (15%) ad valorem tax.
The question as to the correct computation of the excise tax on cigarettes in the case at bar has
been sufficiently addressed by BIR Ruling 017-91 dated 11 February 1991 which revoked BIR
Ruling 473-88 dated 4 October 1988 —
It is to be noted that Section 127 (b) of the Tax Code as amended applies
in general to domestic products and excludes the value-added tax in the
determination of the gross selling price, which is the tax base for purposes
of the imposition of ad valorem tax. On the other hand, the last paragraph
of Section 142 of the same Code which includes the value-added tax in the
computation of the ad valorem tax, refers specifically to cigar and
cigarettes only. It does not include/apply to any other articles or goods
subject to the ad valorem tax. Accordingly, Section 142 must perforce
prevail over Section 127 (b) which is a general provision of law insofar as
the imposition of the ad valorem tax on cigar and cigarettes is concerned.
Moreover, the phrase unless otherwise provided in Section 127 (b)
purports of exceptions to the general rule contained therein, such as that of
Section 142, last paragraph thereof which explicitly provides that in the
case of cigarettes, the tax base for purposes of the ad valorem tax shall
include, among others, the value-added tax.
Private respondent did not question the correctness of the above BIR ruling. In fact, upon
knowledge of the effectivity of BIR Ruling No. 017-91, private respondent immediately
implemented the method of computation mandated therein by restoring the VAT in computing
the tax base for purposes of the 15% ad valorem tax.
119
However, well-entrenched is the rule that rulings and circulars, rules and regulations
promulgated by the Commissioner of Internal Revenue would have no retroactive application
if to so apply them would be prejudicial to the taxpayers. 10
The applicable law is Sec. 246 of the Tax Code which provides —
Sec. 246. Non-retroactivity of rulings. — Any revocation, modification, or
reversal of any rules and regulations promulgated in accordance with the
preceding section or any of the rulings or circulars promulgated by the
Commissioner of Internal Revenue shall not be given retroactive
application if the revocation, modification, or reversal will be prejudicial
to the taxpayers except in the following cases: a) where the taxpayer
deliberately misstates or omits material facts from his return or in any
document required of him by the Bureau of Internal Revenue; b) where the
facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or c)
where the taxpayer acted in bad faith.
Without doubt, private respondent would be prejudiced by the retroactive application of the
revocation as it would be assessed deficiency excise tax.
What is left to be resolved is petitioner's claim that private respondent falls under the third
exception in Sec. 246, i.e., that the taxpayer has acted in bad faith.
Bad faith imports a dishonest purpose or some moral obliquity and conscious doing of wrong.
It partakes of the nature of fraud; a breach of a known duty through some motive of interest or
ill will. 11 We find no convincing evidence that private respondent's implementation of the
computation mandated by BIR Ruling 473-88 was ill-motivated or attended with a dishonest
purpose. To the contrary, as a sign of good faith, private respondent immediately reverted to
the computation mandated by BIR Ruling 017-91 upon knowledge of its issuance on 11
February 1991.
As regards petitioner's argument that private respondent should have made consultations with
it before private respondent used the computation mandated by BIR Ruling 473-88, suffice it
to state that the aforesaid BIR Ruling was clear and categorical thus leaving no room for
interpretation. The failure of private respondent to consult petitioner does not imply bad faith
on the part of the former.
Admittedly the government is not estopped from collecting taxes legally due because of
mistakes or errors of its agents. But like other principles of law, this admits of exceptions in
the interest of justice and fair play, as where injustice will result to the taxpayer. 12
WHEREFORE, there being no reversible error committed by respondent Court of Appeals, the
petition is DENIED and petitioner COMMISSIONER OF INTERNAL REVENUE is ordered
to refund private respondent ALHAMBRA INDUSTRIES, INC., the amount of P520,835.29
upon finality of this Decision.
SO ORDERED.
Separate Opinions
VITUG, J., concurring:
I concur in the ponencia written by my esteemed colleague, Mr. Justice Josue N. Bellosillo. I
only would like to stress that the 1988 opinion of the Commissioner of Internal Revenue
cannot be considered void, considering that it evinces what the former Commissioner must
have felt to be a real inconsistency between Section 127 and Section 142 of the Tax Code. The
non-retroactivity proscription under Section 246 of the Tax Code can thus aptly apply. I
reserve my vote, however, in a situation where, as the Solicitor General so points out, the
revoked ruling is patently null and void in which case it could possibly be disregarded as being
in existent from the very beginning.
 EN BANC
On 13 January 1997, FLI requested a ruling from the Bureau of Internal Revenue (BIR) to the
COMMISSIONER OF INTERNAL G. R. No. 163653 effect that no gain or loss should be recognized in the aforesaid transfer of real
REVENUE, properties. Acting on the request, the BIR issued Ruling No. S-34-046-97 dated 3 February
Petitioner, 1997, finding that the exchange is among those contemplated under Section 34 (c) (2) of the
old National Internal Revenue Code (NIRC)[4] which provides that (n)o gain or loss shall be
-versus- recognized if property is transferred to a corporation by a person in exchange for a stock in
such corporation of which as a result of such exchange said person, alone or together with
others, not exceeding four (4) persons, gains control of said corporation."[5] With the BIRs
FILINVEST DEVELOPMENT Promulgated: reiteration of the foregoing ruling upon the 10 February 1997 request for clarification filed by
CORPORATION, FLI,[6] the latter, together with FDC and FAI, complied with all the requirements imposed in
Respondent. July 19, 2011 the ruling.[7]

x----------------------------------------------------------------------------------------------- x
DECISION
PEREZ, J.:
Assailed in these twin petitions for review on certiorari filed pursuant to Rule 45 of
the 1997 Rules of Civil Procedure are the decisions rendered by the Court of Appeals (CA) in
the following cases: (a) Decision dated 16 December 2003 of the then Special Fifth Division
in CA-G.R. SP No. 72992;[1] and, (b) Decision dated 26 January 2005 of the then Fourteenth
Division in CA-G.R. SP No. 74510.[2]
The Facts
On various dates during the years 1996 and 1997, in the meantime, FDC also extended
advances in favor of its affiliates, namely, FAI, FLI, Davao Sugar Central Corporation
(DSCC) and Filinvest Capital, Inc. (FCI).[8] Duly evidenced by instructional letters as well as
cash and journal vouchers, said cash advances amounted to P2,557,213,942.60 in
1996[9] and P3,360,889,677.48 in 1997.[10] On 15 November 1996, FDC also entered into a
Shareholders Agreement with Reco Herrera PTE Ltd. (RHPL) for the formation of a
Singapore-based joint venture company called Filinvest Asia Corporation (FAC), tasked to
develop and manage FDCs 50% ownership of its PBCom Office Tower Project (the
Project). With their equity participation in FAC respectively pegged at 60% and 40% in the
Shareholders Agreement, FDC subscribed to P500.7 million worth of shares in said joint
venture company to RHPLs subscription worth P433.8 million. Having paid its subscription
by executing a Deed of Assignment transferring to FAC a portion of its rights and interest in
the Project worth P500.7 million, FDC eventually reported a net loss of P190,695,061.00 in its
Annual Income Tax Return for the taxable year 1996.[11]

The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc. (FAI), On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to pay deficiency
respondent Filinvest Development Corporation (FDC) is a holding company which also income and documentary stamp taxes, plus interests and compromise penalties,[12] covered by
owned 67.42% of the outstanding shares of Filinvest Land, Inc. (FLI). On 29 November 1996, the following Assessment Notices, viz.: (a) Assessment Notice No. SP-INC-96-00018-2000
FDC and FAI entered into a Deed of Exchange with FLI whereby the former both transferred for deficiency income taxes in the sum of P150,074,066.27 for 1996; (b) Assessment Notice
in favor of the latter parcels of land appraised at P4,306,777,000.00. In exchange for said No. SP-DST-96-00020-2000 for deficiency documentary stamp taxes in the sum
parcels which were intended to facilitate development of medium-rise residential and of P10,425,487.06 for 1996; (c) Assessment Notice No. SP-INC-97-00019-2000 for
commercial buildings, 463,094,301 shares of stock of FLI were issued to FDC and FAI. [3] As deficiency income taxes in the sum of P5,716,927.03 for 1997; and (d) Assessment Notice No.
a result of the exchange, FLIs ownership structure was changed to the extent reflected in the SP-DST-97-00021-2000 for deficiency documentary stamp taxes in the sum of P5,796,699.40
following tabular prcis, viz.: for 1997.[13] The foregoing deficiency taxes were assessed on the taxable gain supposedly
realized by FDC from the Deed of Exchange it executed with FAI and FLI, on the dilution
Stockholder Number and Percentage of Number of Number and Percentage of resulting from the Shareholders Agreement FDC executed with RHPL as well as the arms-
Shares Held Prior to the Additional Shares Held After the length interest rate and documentary stamp taxes imposable on the advances FDC extended to
Exchange Shares Issued Exchange its affiliates.[14]

FDC 2,537,358,000 67.42% 42,217,000 2,579,575,000 61.03% On 3 January 2000, FAI similarly received from the BIR a Formal Letter of Demand for
deficiency income taxes in the sum of P1,477,494,638.23 for the year 1997.[15] Covered by
FAI 00 420,877,000 420,877,000 9.96% Assessment Notice No. SP-INC-97-0027-2000,[16] said deficiency tax was also assessed on the
taxable gain purportedly realized by FAI from the Deed of Exchange it executed with FDC
OTHERS 1,226,177,000 32.58% 0 1,226,177,000 29.01% and FLI.[17] On 26 January 2000 or within the reglementary period of thirty (30) days from
notice of the assessment, both FDC and FAI filed their respective requests for
----------------- ----------- -------------- --------------- reconsideration/protest, on the ground that the deficiency income and documentary stamp
taxes assessed by the BIR were bereft of factual and legal basis.[18]Having submitted the
3,763,535,000 100% 463,094,301 4,226,629,000 (100%) relevant supporting documents pursuant to the 31 January 2000 directive from the BIR
120
Appellate Division, FDC and FAI filed on 11 September 2000 a letter requesting an early
resolution of their request for reconsideration/protest on the ground that the 180 days
prescribed for the resolution thereof under Section 228 of the NIRC was going to expire on 20
September 2000.[19]
In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to resolve their
request for reconsideration/protest within the aforesaid period, FDC and FAI filed on 17
October 2000 a petition for review with the Court of Tax Appeals (CTA) pursuant to Section
228 of the 1997 NIRC. Docketed before said court as CTA Case No. 6182, the petition
alleged, among other matters, that as previously opined in BIR Ruling No. S-34-046-97, no
taxable gain should have been assessed from the subject Deed of Exchange since FDC and
FAI collectively gained further control of FLI as a consequence of the exchange; that
correlative to the CIR's lack of authority to impute theoretical interests on the cash advances
FDC extended in favor of its affiliates, the rule is settled that interests cannot be demanded in
the absence of a stipulation to the effect; that not being promissory notes or certificates of
obligations, the instructional letters as well as the cash and journal vouchers evidencing said
cash advances were not subject to documentary stamp taxes; and, that no income tax may be
imposed on the prospective gain from the supposed appreciation of FDC's shareholdings in
FAC. As a consequence, FDC and FAC both prayed that the subject assessments for
deficiency income and documentary stamp taxes for the years 1996 and 1997 be cancelled and
annulled.[20]
On 4 December 2000, the CIR filed its answer, claiming that the transfer of property in
question should not be considered tax free since, with the resultant diminution of its shares in
FLI, FDC did not gain further control of said corporation. Likewise calling attention to the fact
that the cash advances FDC extended to its affiliates were interest free despite the interest
bearing loans it obtained from banking institutions, the CIR invoked Section 43 of the old
NIRC which, as implemented by Revenue Regulations No. 2, Section 179 (b) and (c), gave
him "the power to allocate, distribute or apportion income or deductions between or among
such organizations, trades or business in order to prevent evasion of taxes." The CIR justified
the imposition of documentary stamp taxes on the instructional letters as well as cash and
journal vouchers for said cash advances on the strength of Section 180 of the NIRC and
Revenue Regulations No. 9-94 which provide that loan transactions are subject to said tax
irrespective of whether or not they are evidenced by a formal agreement or by mere office
memo. The CIR also argued that FDC realized taxable gain arising from the dilution of its
shares in FAC as a result of its Shareholders' Agreement with RHPL. [21]
At the pre-trial conference, the parties filed a Stipulation of Facts, Documents and
Issues[22] which was admitted in the 16 February 2001 resolution issued by the CTA. With the
further admission of the Formal Offer of Documentary Evidence subsequently filed by FDC
and FAI[23] and the conclusion of the testimony of Susana Macabelda anent the cash advances
FDC extended in favor of its affiliates,[24] the CTA went on to render the Decision dated 10
September 2002 which, with the exception of the deficiency income tax on the interest income
FDC supposedly realized from the advances it extended in favor of its affiliates, cancelled the
rest of deficiency income and documentary stamp taxes assessed against FDC and FAI for the
years 1996 and 1997,[25] thus:
WHEREFORE, in view of all the foregoing, the court finds the
instant petition partly meritorious. Accordingly, Assessment Notice No.
SP-INC-96-00018-2000 imposing deficiency income tax on FDC for
taxable year 1996, Assessment Notice No. SP-DST-96-00020-2000 and
SP-DST-97-00021-2000 imposing deficiency documentary stamp tax on
121
FDC for taxable years 1996 and 1997, respectively and Assessment Notice
No. SP-INC-97-0027-2000 imposing deficiency income tax on FAI for the
taxable year 1997 are hereby CANCELLED and SET ASIDE.However,
[FDC] is hereby ORDERED to PAY the amount of P5,691,972.03 as
deficiency income tax for taxable year 1997. In addition, petitioner is
also ORDERED to PAY 20% delinquency interest computed from
February 16, 2000 until full payment thereof pursuant to Section 249 (c)
(3) of the Tax Code.[26]
Finding that the collective increase of the equity participation of FDC and FAI in
FLI rendered the gain derived from the exchange tax-free, the CTA also ruled that the increase
in the value of FDC's shares in FAC did not result in economic advantage in the absence of
actual sale or conversion thereof. While likewise finding that the documents evidencing the
cash advances FDC extended to its affiliates cannot be considered as loan agreements that are
subject to documentary stamp tax, the CTA enunciated, however, that the CIR was justified in
assessing undeclared interests on the same cash advances pursuant to his authority under
Section 43 of the NIRC in order to forestall tax evasion. For persuasive effect, the CTA
referred to the equivalent provision in the Internal Revenue Code of the United States (IRC-
US), i.e., Sec. 482, as implemented by Section 1.482-2 of 1965-1969 Regulations of the Law
of Federal Income Taxation.[27]
Dissatisfied with the foregoing decision, FDC filed on 5 November 2002 the petition for
review docketed before the CA as CA-G.R. No. 72992, pursuant to Rule 43 of the 1997 Rules
of Civil Procedure. Calling attention to the fact that the cash advances it extended to its
affiliates were interest-free in the absence of the express stipulation on interest required under
Article 1956 of the Civil Code, FDC questioned the imposition of an arm's-length interest rate
thereon on the ground, among others, that the CIR's authority under Section 43 of the NIRC:
(a) does not include the power to impute imaginary interest on said transactions; (b) is directed
only against controlled taxpayers and not against mother or holding corporations; and, (c) can
only be invoked in cases of understatement of taxable net income or evident tax
evasion.[28] Upholding FDC's position, the CA's then Special Fifth Division rendered the
herein assailed decision dated 16 December 2003,[29] the decretal portion of which states:
WHEREFORE, premises considered, the instant petition is
hereby GRANTED. The assailed Decision dated September 10, 2002
rendered by the Court of Tax Appeals in CTA Case No. 6182 directing
petitioner Filinvest Development Corporation to pay the amount
of P5,691,972.03 representing deficiency income tax on allegedly
undeclared interest income for the taxable year 1997, plus 20%
delinquency interest computed from February 16, 2000 until full payment
thereof is REVERSED and SET ASIDE and, a new one entered
annulling Assessment Notice No. SP-INC-97-00019-2000 imposing
deficiency income tax on petitioner for taxable year 1997. No
pronouncement as to costs.[30]
With the denial of its partial motion for reconsideration of the same 11 December
2002 resolution issued by the CTA,[31] the CIR also filed the petition for review docketed
before the CA as CA-G.R. No. 74510. In essence, the CIR argued that the CTA reversibly
erred in cancelling the assessment notices: (a) for deficiency income taxes on the exchange of
property between FDC, FAI and FLI; (b) for deficiency documentary stamp taxes on the
documents evidencing FDC's cash advances to its affiliates; and (c) for deficiency income tax
on the gain FDC purportedly realized from the increase of the value of its shareholdings in DEVELOPMENT CORPORATION (FDC), FILINVEST
FAC.[32] The foregoing petition was, however, denied due course and dismissed for lack of ALABANG, INCORPORATED (FAI) AND FILINVEST LAND
merit in the herein assailed decision dated 26 January 2005[33] rendered by the CA's then INCORPORATED (FLI) MET ALL THE REQUIREMENTS FOR
Fourteenth Division, upon the following findings and conclusions, to wit: THE NON-RECOGNITION OF TAXABLE GAIN UNDER
SECTION 34 (c) (2) OF THE OLD NATIONAL INTERNAL
1. As affirmed in the 3 February 1997 BIR Ruling No. S-34-046-97, the REVENUE CODE (NIRC) (NOW SECTION 40 (C) (2) (c) OF THE
29 November 1996 Deed of Exchange resulted in the combined NIRC.
control by FDC and FAI of more than 51% of the outstanding
shares of FLI, hence, no taxable gain can be recognized from the II
transaction under Section 34 (c) (2) of the old NIRC;
2. The instructional letters as well as the cash and journal vouchers THE HONORABLE COURT OF APPEALS COMMITTED
evidencing the advances FDC extended to its affiliates are not REVERSIBLE ERROR IN HOLDING THAT THE LETTERS OF
subject to documentary stamp taxes pursuant to BIR Ruling No. INSTRUCTION OR CASH VOUCHERS EXTENDED BY FDC TO
116-98, dated 30 July 1998, since they do not partake the nature ITS AFFILIATES ARE NOT DEEMED LOAN AGREEMENTS
of loan agreements; SUBJECT TO DOCUMENTARY STAMP TAXES UNDER
SECTION 180 OF THE NIRC.
3. Although BIR Ruling No. 116-98 had been subsequently modified by
BIR Ruling No. 108-99, dated 15 July 1999, to the effect that III
documentary stamp taxes are imposable on inter-office memos
evidencing cash advances similar to those extended by FDC, THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
said latter ruling cannot be given retroactive application if to do HOLDING THAT GAIN ON DILUTION AS A RESULT OF THE
so would be prejudicial to the taxpayer; INCREASE IN THE VALUE OF FDCS SHAREHOLDINGS IN FAC
IS NOT TAXABLE.[36]
4. FDC's alleged gain from the increase of its shareholdings in FAC as a
consequence of the Shareholders' Agreement it executed with The Courts Ruling
RHPL cannot be considered taxable income since, until actually
converted thru sale or disposition of said shares, they merely While the petition in G.R. No. 163653 is bereft of merit, we find the CIRs petition in G.R. No.
represent unrealized increase in capital.[34] 167689 impressed with partial merit.

Respectively docketed before this Court as G.R. Nos. 163653 and 167689, the CIR's In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTAs finding that
petitions for review on certiorari assailing the 16 December 2003 decision in CA-G.R. No. theoretical interests can be imputed on the advances FDC extended to its affiliates in 1996 and
72992 and the 26 January 2005 decision in CA-G.R. SP No. 74510 were consolidated 1997 considering that, for said purpose, FDC resorted to interest-bearing fund borrowings
pursuant to the 1 March 2006 resolution issued by this Courts Third Division. from commercial banks. Since considerable interest expenses were deducted by FDC when
said funds were borrowed, the CIR theorizes that interest income should likewise be declared
The Issues when the same funds were sourced for the advances FDC extended to its affiliates. Invoking
Section 43 of the 1993 NIRC in relation to Section 179(b) of Revenue Regulation No. 2, the
CIR maintains that it is vested with the power to allocate, distribute or apportion income or
In G.R. No. 163653, the CIR urges the grant of its petition on the following ground: deductions between or among controlled organizations, trades or businesses even in the
absence of fraud, since said power is intended to prevent evasion of taxes or clearly to reflect
THE COURT OF APPEALS ERRED IN REVERSING THE the income of any such organizations, trades or businesses. In addition, the CIR asseverates
DECISION OF THE COURT OF TAX APPEALS AND IN that the CA should have accorded weight and respect to the findings of the CTA which, as the
HOLDING THAT THE ADVANCES EXTENDED BY specialized court dedicated to the study and consideration of tax matters, can take judicial
RESPONDENT TO ITS AFFILIATES ARE NOT SUBJECT TO notice of US income tax laws and regulations.[37]
INCOME TAX.[35]
Admittedly, Section 43 of the 1993 NIRC[38] provides that, (i)n any case of two or
In G.R. No. 167689, on the other hand, petitioner proffers the following issues for resolution: more organizations, trades or businesses (whether or not incorporated and whether or not
organized in the Philippines) owned or controlled directly or indirectly by the same interests,
I the Commissioner of Internal Revenue is authorized to distribute, apportion or allocate gross
income or deductions between or among such organization, trade or business, if he determines
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE that such distribution, apportionment or allocation is necessary in order to prevent evasion of
ABUSE OF DISCRETION IN HOLDING THAT THE EXCHANGE taxes or clearly to reflect the income of any such organization, trade or business. In
OF SHARES OF STOCK FOR PROPERTY AMONG FILINVEST
122
amplification of the equivalent provision[39] under Commonwealth Act No. 466,[40] Sec. 179(b)
of Revenue Regulation No. 2 states as follows:
Determination of the taxable net income of controlled
taxpayer. (A) DEFINITIONS. When used in this section
(1) The term organization includes any kind, whether it
be a sole proprietorship, a partnership, a trust, an estate, or a corporation
or association, irrespective of the place where organized, where operated,
or where its trade or business is conducted, and regardless of whether
domestic or foreign, whether exempt or taxable, or whether affiliated or
not.
(2) The terms trade or business include any trade or
business activity of any kind, regardless of whether or where organized,
whether owned individually or otherwise, and regardless of the place
where carried on.
(3) The term controlled includes any kind of control,
direct or indirect, whether legally enforceable, and however exercisable or
exercised. It is the reality of the control which is decisive, not its form or
mode of exercise. A presumption of control arises if income or deductions
have been arbitrarily shifted.
(4) The term controlled taxpayer means any one of two
or more organizations, trades, or businesses owned or controlled directly
or indirectly by the same interests.
(5) The term group and group of controlled taxpayers
means the organizations, trades or businesses owned or controlled by the
same interests.
(6) The term true net income means, in the case of a
controlled taxpayer, the net income (or as the case may be, any item or
element affecting net income) which would have resulted to the controlled
taxpayer, had it in the conduct of its affairs (or, as the case may be, any
item or element affecting net income) which would have resulted to the
controlled taxpayer, had it in the conduct of its affairs (or, as the case may
be, in the particular contract, transaction, arrangement or other act) dealt
with the other members or members of the group at arms length.It does not
mean the income, the deductions, or the item or element of either,
resulting to the controlled taxpayer by reason of the particular contract,
transaction, or arrangement, the controlled taxpayer, or the interest
controlling it, chose to make (even though such contract, transaction, or
arrangement be legally binding upon the parties thereto).
(B) SCOPE AND PURPOSE. - The purpose of Section 44 of the
Tax Code is to place a controlled taxpayer on a tax parity with an
uncontrolled taxpayer, by determining, according to the standard of an
uncontrolled taxpayer, the true net income from the property and business
of a controlled taxpayer. The interests controlling a group of controlled
taxpayer are assumed to have complete power to cause each controlled
taxpayer so to conduct its affairs that its transactions and accounting
records truly reflect the net income from the property and business of each
of the controlled taxpayers. If, however, this has not been done and the
taxable net income are thereby understated, the statute contemplates that
the Commissioner of Internal Revenue shall intervene, and, by making
such distributions, apportionments, or allocations as he may deem
123
necessary of gross income or deductions, or of any item or element
affecting net income, between or among the controlled taxpayers
constituting the group, shall determine the true net income of each
controlled taxpayer. The standard to be applied in every case is that of an
uncontrolled taxpayer. Section 44 grants no right to a controlled taxpayer
to apply its provisions at will, nor does it grant any right to compel the
Commissioner of Internal Revenue to apply its provisions.
(C) APPLICATION Transactions between controlled taxpayer
and another will be subjected to special scrutiny to ascertain whether the
common control is being used to reduce, avoid or escape taxes. In
determining the true net income of a controlled taxpayer, the
Commissioner of Internal Revenue is not restricted to the case of improper
accounting, to the case of a fraudulent, colorable, or sham transaction, or
to the case of a device designed to reduce or avoid tax by shifting or
distorting income or deductions. The authority to determine true net
income extends to any case in which either by inadvertence or design the
taxable net income in whole or in part, of a controlled taxpayer, is other
than it would have been had the taxpayer in the conduct of his affairs been
an uncontrolled taxpayer dealing at arms length with another uncontrolled
taxpayer.[41]
As may be gleaned from the definitions of the terms controlled and "controlled
taxpayer" under paragraphs (a) (3) and (4) of the foregoing provision, it would appear that
FDC and its affiliates come within the purview of Section 43 of the 1993 NIRC. Aside from
owning significant portions of the shares of stock of FLI, FAI, DSCC and FCI, the fact that
FDC extended substantial sums of money as cash advances to its said affiliates for the purpose
of providing them financial assistance for their operational and capital expenditures seemingly
indicate that the situation sought to be addressed by the subject provision exists. From the
tenor of paragraph (c) of Section 179 of Revenue Regulation No. 2, it may also be seen that
the CIR's power to distribute, apportion or allocate gross income or deductions between or
among controlled taxpayers may be likewise exercised whether or not fraud inheres in the
transaction/s under scrutiny. For as long as the controlled taxpayer's taxable income is not
reflective of that which it would have realized had it been dealing at arm's length with an
uncontrolled taxpayer, the CIR can make the necessary rectifications in order to prevent
evasion of taxes.
Despite the broad parameters provided, however, we find that the CIR's powers of
distribution, apportionment or allocation of gross income and deductions under Section 43 of
the 1993 NIRC and Section 179 of Revenue Regulation No. 2 does not include the power to
impute "theoretical interests" to the controlled taxpayer's transactions. Pursuant to Section 28
of the 1993 NIRC,[42] after all, the term gross income is understood to mean all income from
whatever source derived, including, but not limited to the following items: compensation for
services, including fees, commissions, and similar items; gross income derived from business;
gains derived from dealings in property; interest; rents; royalties; dividends; annuities; prizes
and winnings; pensions; and partners distributive share of the gross income of general
professional partnership.[43] While it has been held that the phrase "from whatever source
derived" indicates a legislative policy to include all income not expressly exempted within the
class of taxable income under our laws, the term "income" has been variously interpreted to
mean "cash received or its equivalent", "the amount of money coming to a person within a
specific time" or "something distinct from principal or capital."[44] Otherwise stated, there
must be proof of the actual or, at the very least, probable receipt or realization by the
controlled taxpayer of the item of gross income sought to be distributed, apportioned or
allocated by the CIR.
Our circumspect perusal of the record yielded no evidence of actual or possible
showing that the advances FDC extended to its affiliates had resulted to the interests
subsequently assessed by the CIR. For all its harping upon the supposed fact that FDC had
resorted to borrowings from commercial banks, the CIR had adduced no concrete proof that
said funds were, indeed, the source of the advances the former provided its affiliates. While
admitting that FDC obtained interest-bearing loans from commercial banks,[45] Susan
Macabelda - FDC's Funds Management Department Manager who was the sole witness
presented before the CTA - clarified that the subject advances were sourced from the
corporation's rights offering in 1995 as well as the sale of its investment in Bonifacio Land in
1997.[46] More significantly, said witness testified that said advances: (a) were extended to
give FLI, FAI, DSCC and FCI financial assistance for their operational and capital
expenditures; and, (b) were all temporarily in nature since they were repaid within the duration
of one week to three months and were evidenced by mere journal entries, cash vouchers and
instructional letters.[47]
Even if we were, therefore, to accord precipitate credulity to the CIR's bare assertion
that FDC had deducted substantial interest expense from its gross income, there would still be
no factual basis for the imputation of theoretical interests on the subject advances and assess
deficiency income taxes thereon. More so, when it is borne in mind that, pursuant to Article
1956 of the Civil Code of the Philippines, no interest shall be due unless it has been expressly
stipulated in writing. Considering that taxes, being burdens, are not to be presumed beyond
what the applicable statute expressly and clearly declares,[48] the rule is likewise settled that
tax statutes must be construed strictly against the government and liberally in favor of the
taxpayer.[49] Accordingly, the general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to
be extended by implication.[50] While it is true that taxes are the lifeblood of the government, it
has been held that their assessment and collection should be in accordance with law as any
arbitrariness will negate the very reason for government itself. [51]
In G.R. No. 167689, we also find a dearth of merit in the CIR's insistence on the
imposition of deficiency income taxes on the transfer FDC and FAI effected in exchange for
the shares of stock of FLI. With respect to the Deed of Exchange executed between FDC, FAI
and FLI, Section 34 (c) (2) of the 1993 NIRC pertinently provides as follows:
Sec. 34. Determination of amount of and recognition of gain
or loss.-
xxxx
(c) Exception x x x x
No gain or loss shall also be recognized if property is transferred to a
corporation by a person in exchange for shares of stock in such
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; Provided, That stocks issued for services shall not be
considered as issued in return of property.
124
As even admitted in the 14 February 2001 Stipulation of Facts submitted by the parties, [52] the
requisites for the non-recognition of gain or loss under the foregoing provision are as follows:
(a) the transferee is a corporation; (b) the transferee exchanges its shares of stock for
property/ies of the transferor; (c) the transfer is made by a person, acting alone or together
with others, not exceeding four persons; and, (d) as a result of the exchange the transferor,
alone or together with others, not exceeding four, gains control of the transferee. [53] Acting on
the 13 January 1997 request filed by FLI, the BIR had, in fact, acknowledged the concurrence
of the foregoing requisites in the Deed of Exchange the former executed with FDC and FAI by
issuing BIR Ruling No. S-34-046-97.[54] With the BIR's reiteration of said ruling upon the
request for clarification filed by FLI,[55] there is also no dispute that said transferee and
transferors subsequently complied with the requirements provided for the non-recognition of
gain or loss from the exchange of property for tax, as provided under Section 34 (c) (2) of the
1993 NIRC.[56]
Then as now, the CIR argues that taxable gain should be recognized for the exchange
considering that FDC's controlling interest in FLI was actually decreased as a result
thereof.For said purpose, the CIR calls attention to the fact that, prior to the exchange, FDC
owned 2,537,358,000 or 67.42% of FLI's 3,763,535,000 outstanding capital stock. Upon the
issuance of 443,094,000 additional FLI shares as a consequence of the exchange and with only
42,217,000 thereof accruing in favor of FDC for a total of 2,579,575,000 shares, said
corporations controlling interest was supposedly reduced to 61%.03 when reckoned from the
transferee's aggregate 4,226,629,000 outstanding shares. Without owning a share from FLI's
initial 3,763,535,000 outstanding shares, on the other hand, FAI's acquisition of 420,877,000
FLI shares as a result of the exchange purportedly resulted in its control of only 9.96% of said
transferee corporation's 4,226,629,000 outstanding shares. On the principle that the transaction
did not qualify as a tax-free exchange under Section 34 (c) (2) of the 1993 NIRC, the CIR
asseverates that taxable gain in the sum of P263,386,921.00 should be recognized on the part
of FDC and in the sum of P3,088,711,367.00 on the part of FAI.[57]
The paucity of merit in the CIR's position is, however, evident from the categorical language
of Section 34 (c) (2) of the 1993 NIRC which provides that gain or loss will not be recognized
in case the exchange of property for stocks results in the control of the transferee by the
transferor, alone or with other transferors not exceeding four persons. Rather than isolating the
same as proposed by the CIR, FDC's 2,579,575,000 shares or 61.03% control of FLI's
4,226,629,000 outstanding shares should, therefore, be appreciated in combination with the
420,877,000 new shares issued to FAI which represents 9.96% control of said transferee
corporation. Together FDC's 2,579,575,000 shares (61.03%) and FAI's 420,877,000 shares
(9.96%) clearly add up to 3,000,452,000 shares or 70.99% of FLI's 4,226,629,000
shares. Since the term "control" is clearly defined as "ownership of stocks in a corporation
possessing at least fifty-one percent of the total voting power of classes of stocks entitled to
one vote" under Section 34 (c) (6) [c] of the 1993 NIRC, the exchange of property for stocks
between FDC FAI and FLI clearly qualify as a tax-free transaction under paragraph 34 (c) (2)
of the same provision.
Against the clear tenor of Section 34(c) (2) of the 1993 NIRC, the CIR cites then Supreme
Court Justice Jose Vitug and CTA Justice Ernesto D. Acosta who, in their book Tax Law and
Jurisprudence, opined that said provision could be inapplicable if control is already vested in
the exchangor prior to exchange.[58] Aside from the fact that that the 10 September 2002
Decision in CTA Case No. 6182 upholding the tax-exempt status of the exchange between
FDC, FAI and FLI was penned by no less than Justice Acosta himself,[59] FDC and FAI
significantly point out that said authors have acknowledged that the position taken by the BIR
is to the effect that "the law would apply even when the exchangor already has control of the
corporation at the time of the exchange."[60] This was confirmed when, apprised in FLI's
request for clarification about the change of percentage of ownership of its outstanding capital
stock, the BIR opined as follows:
Please be informed that regardless of the foregoing, the
transferors, Filinvest Development Corp. and Filinvest Alabang, Inc. still
gained control of Filinvest Land, Inc. The term 'control' shall mean
ownership of stocks in a corporation by possessing at least 51% of the
total voting power of all classes of stocks entitled to vote. Control is
determined by the amount of stocks received, i.e., total subscribed,
whether for property or for services by the transferor or transferors. In
determining the 51% stock ownership, only those persons who transferred
property for stocks in the same transaction may be counted up to the
maximum of five (BIR Ruling No. 547-93 dated December 29, 1993.[61]
At any rate, it also appears that the supposed reduction of FDC's shares in FLI posited by the
CIR is more apparent than real. As the uncontested owner of 80% of the outstanding shares of
FAI, it cannot be gainsaid that FDC ideally controls the same percentage of the 420,877,000
shares issued to its said co-transferor which, by itself, represents 7.968% of the outstanding
shares of FLI. Considered alongside FDC's 61.03% control of FLI as a consequence of the 29
November 1996 Deed of Transfer, said 7.968% add up to an aggregate of 68.998% of said
transferee corporation's outstanding shares of stock which is evidently still greater than the
67.42% FDC initially held prior to the exchange. This much was admitted by the parties in the
14 February 2001 Stipulation of Facts, Documents and Issues they submitted to the
CTA.[62] Inasmuch as the combined ownership of FDC and FAI of FLI's outstanding capital
stock adds up to a total of 70.99%, it stands to reason that neither of said transferors can be
held liable for deficiency income taxes the CIR assessed on the supposed gain which resulted
from the subject transfer.
On the other hand, insofar as documentary stamp taxes on loan agreements and promissory
notes are concerned, Section 180 of the NIRC provides follows:
Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of
exchange, drafts, instruments and securities issued by the government
or any of its instrumentalities, certificates of deposit bearing interest
and others not payable on sight or demand. On all loan agreements
signed abroad wherein the object of the contract is located or used in the
Philippines; bill of exchange (between points within the Philippines),
drafts, instruments and securities issued by the Government or any of its
instrumentalities or certificates of deposits drawing interest, or orders for
the payment of any sum of money otherwise than at sight or on demand, or
on all promissory notes, whether negotiable or non-negotiable, except
bank notes issued for circulation, and on each renewal of any such note,
there shall be collected a documentary stamp tax of Thirty centavos
(P0.30) on each two hundred pesos, or fractional part thereof, of the face
value of any such agreement, bill of exchange, draft, certificate of deposit
or note: Provided, That only one documentary stamp tax shall be imposed
on either loan agreement, or promissory notes issued to secure such loan,
whichever will yield a higher tax: Provided however, That loan
agreements or promissory notes the aggregate of which does not exceed
Two hundred fifty thousand pesos (P250,000.00) executed by an
individual for his purchase on installment for his personal use or that of
125
his family and not for business, resale, barter or hire of a house, lot, motor
vehicle, appliance or furniture shall be exempt from the payment of
documentary stamp tax provided under this Section.
When read in conjunction with Section 173 of the 1993 NIRC,[63] the foregoing provision
concededly applies to "(a)ll loan agreements, whether made or signed in the Philippines, or
abroad when the obligation or right arises from Philippine sources or the property or object of
the contract is located or used in the Philippines." Correlatively, Section 3 (b) and Section 6 of
Revenue Regulations No. 9-94 provide as follows:
Section 3. Definition of Terms. For purposes of these Regulations, the
following term shall mean:
(b) 'Loan agreement' refers to a contract in writing where one of the parties
delivers to another money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall be paid. The term
shall include credit facilities, which may be evidenced by credit memo,
advice or drawings.
The terms 'Loan Agreement" under Section 180 and "Mortgage' under
Section 195, both of the Tax Code, as amended, generally refer to distinct
and separate instruments. A loan agreement shall be taxed under Section
180, while a deed of mortgage shall be taxed under Section 195."
"Section 6. Stamp on all Loan Agreements. All loan agreements whether
made or signed in the Philippines, or abroad when the obligation or right
arises from Philippine sources or the property or object of the contract is
located in the Philippines shall be subject to the documentary stamp tax of
thirty centavos (P0.30) on each two hundred pesos, or fractional part
thereof, of the face value of any such agreements, pursuant to Section 180
in relation to Section 173 of the Tax Code.
In cases where no formal agreements or promissory notes have
been executed to cover credit facilities, the documentary stamp tax shall
be based on the amount of drawings or availment of the facilities, which
may be evidenced by credit/debit memo, advice or drawings by any form
of check or withdrawal slip, under Section 180 of the Tax Code.
Applying the aforesaid provisions to the case at bench, we find that the instructional
letters as well as the journal and cash vouchers evidencing the advances FDC extended to its
affiliates in 1996 and 1997 qualified as loan agreements upon which documentary stamp taxes
may be imposed. In keeping with the caveat attendant to every BIR Ruling to the effect that it
is valid only if the facts claimed by the taxpayer are correct, we find that the CA reversibly
erred in utilizing BIR Ruling No. 116-98, dated 30 July 1998 which, strictly speaking, could
be invoked only by ASB Development Corporation, the taxpayer who sought the same. In said
ruling, the CIR opined that documents like those evidencing the advances FDC extended to its
affiliates are not subject to documentary stamp tax, to wit:
On the matter of whether or not the inter-office memo covering the
advances granted by an affiliate company is subject to documentary stamp
tax, it is informed that nothing in Regulations No. 26 (Documentary
Stamp Tax Regulations) and Revenue Regulations No. 9-94 states that the
same is subject to documentary stamp tax. Such being the case, said inter-
office memo evidencing the lendings or borrowings which is neither a
form of promissory note nor a certificate of indebtedness issued by the
corporation-affiliate or a certificate of obligation, which are, more or less,
categorized as 'securities', is not subject to documentary stamp tax
 imposed under Section 180, 174 and 175 of the Tax Code of 1997,
respectively. Rather, the inter-office memo is being prepared for
accounting purposes only in order to avoid the co-mingling of funds of the
corporate affiliates.
In its appeal before the CA, the CIR argued that the foregoing ruling was later modified in
BIR Ruling No. 108-99 dated 15 July 1999, which opined that inter-office memos evidencing
lendings or borrowings extended by a corporation to its affiliates are akin to promissory notes,
hence, subject to documentary stamp taxes.[64] In brushing aside the foregoing argument,
however, the CA applied Section 246 of the 1993 NIRC[65] from which proceeds the settled
principle that rulings, circulars, rules and regulations promulgated by the BIR have no
retroactive application if to so apply them would be prejudicial to the
taxpayers.[66] Admittedly, this rule does not apply: (a) where the taxpayer deliberately
misstates or omits material facts from his return or in any document required of him by the
Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on which the ruling is based; or (c)
where the taxpayer acted in bad faith.[67] Not being the taxpayer who, in the first instance,
sought a ruling from the CIR, however, FDC cannot invoke the foregoing principle on non-
retroactivity of BIR rulings.
Viewed in the light of the foregoing considerations, we find that both the CTA and the CA
erred in invalidating the assessments issued by the CIR for the deficiency documentary stamp
taxes due on the instructional letters as well as the journal and cash vouchers evidencing the
advances FDC extended to its affiliates in 1996 and 1997. In Assessment Notice No. SP-DST-
96-00020-2000, the CIR correctly assessed the sum of P6,400,693.62 for documentary stamp
tax, P3,999,793.44 in interests and P25,000.00 as compromise penalty, for a total
of P10,425,487.06. Alongside the sum of P4,050,599.62 for documentary stamp tax, the CIR
similarly assessed P1,721,099.78 in interests and P25,000.00 as compromise penalty in
Assessment Notice No. SP-DST-97-00021-2000 or a total of P5,796,699.40. The imposition
of deficiency interest is justified under Sec. 249 (a) and (b) of the NIRC which authorizes the
assessment of the same at the rate of twenty percent (20%), or such higher rate as may be
prescribed by regulations, from the date prescribed for the payment of the unpaid amount of
tax until full payment.[68] The imposition of the compromise penalty is, in turn, warranted
under Sec. 250[69] of the NIRC which prescribes the imposition thereof in case of each failure
to file an information or return, statement or list, or keep any record or supply any information
required on the date prescribed therefor.
To our mind, no reversible error can, finally, be imputed against both the CTA and the CA for
invalidating the Assessment Notice issued by the CIR for the deficiency income taxes FDC is
supposed to have incurred as a consequence of the dilution of its shares in FAC. Anent FDCs
Shareholders Agreement with RHPL, the record shows that the parties were in agreement
about the following factual antecedents narrated in the 14 February 2001 Stipulation of Facts,
Documents and Issues they submitted before the CTA,[70] viz.:
1.11. On November 15, 1996, FDC entered into a Shareholders Agreement
(SA) with Reco Herrera Pte. Ltd. (RHPL) for the formation of a joint
venture company named Filinvest Asia Corporation (FAC) which is based
in Singapore (pars. 1.01 and 6.11, Petition, pars. 1 and 7, Answer).
1.12. FAC, the joint venture company formed by FDC and RHPL, is
tasked to develop and manage the 50% ownership interest of FDC in its
PBCom Office Tower Project (Project) with the Philippine Bank of
Communications (par. 6.12, Petition; par. 7, Answer).
1.13. Pursuant to the SA between FDC and RHPL, the equity participation
of FDC and RHPL in FAC was 60% and 40% respectively.
126
1.14. In accordance with the terms of the SA, FDC subscribed to P500.7
million worth of shares of stock representing a 60% equity participation in
FAC. In turn, RHPL subscribed to P433.8 million worth of shares of stock
of FAC representing a 40% equity participation in FAC.
1.15. In payment of its subscription in FAC, FDC executed a
Deed of Assignment transferring to FAC a portion of FDCs right and
interests in the Project to the extent of P500.7 million.
1.16. FDC reported a net loss of P190,695,061.00 in its Annual
Income Tax Return for the taxable year 1996.[71]
Alongside the principle that tax revenues are not intended to be liberally
construed,[72] the rule is settled that the findings and conclusions of the CTA are accorded
great respect and are generally upheld by this Court, unless there is a clear showing of a
reversible error or an improvident exercise of authority.[73] Absent showing of such error here,
we find no strong and cogent reasons to depart from said rule with respect to the CTA's
finding that no deficiency income tax can be assessed on the gain on the supposed dilution
and/or increase in the value of FDC's shareholdings in FAC which the CIR, at any rate, failed
to establish. Bearing in mind the meaning of "gross income" as above discussed, it cannot be
gainsaid, even then, that a mere increase or appreciation in the value of said shares cannot be
considered income for taxation purposes. Since a mere advance in the value of the property of
a person or corporation in no sense constitute the income specified in the revenue law, it has
been held in the early case of Fisher vs. Trinidad,[74] that it constitutes and can be treated
merely as an increase of capital. Hence, the CIR has no factual and legal basis in assessing
income tax on the increase in the value of FDC's shareholdings in FAC until the same is
actually sold at a profit.
WHEREFORE, premises considered, the CIR's petition for review on certiorari in G.R. No.
163653 is DENIED for lack of merit and the CAs 16 December 2003 Decision in G.R. No.
72992 is AFFIRMED in toto. The CIRs petition in G.R. No. 167689 is PARTIALLY
GRANTED and the CAs 26 January 2005 Decision in CA-G.R. SP No. 74510
is MODIFIED.
Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SP-DST-97-00021-2000
issued for deficiency documentary stamp taxes due on the instructional letters as well as
journal and cash vouchers evidencing the advances FDC extended to its affiliates are declared
valid.
The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SP-INC-97-
00019-2000 and SP-INC-97-0027-2000 issued for deficiency income assessed on (a) the arms-
length interest from said advances; (b) the gain from FDCs Deed of Exchange with FAI and
FLI; and (c) income from the dilution resulting from FDCs Shareholders Agreement with
RHPL is, however, upheld.
SO ORDERED.
 Republic of the Philippines [CIR] is the duly appointed Commissioner of Internal Revenue, empowered, among others, to
SUPREME COURT act upon and approve claims for refund or tax credit, with office at the Bureau of Internal
Manila Revenue ("BIR") National Office Building, Diliman, Quezon City.
EN BANC [San Roque] is a domestic corporation duly organized and existing under and by virtue of the
G.R. No. 187485 February 12, 2013 laws of the Philippines with principal office at Barangay San Roque, San Manuel, Pangasinan.
COMMISSIONER OF INTERNAL REVENUE, Petitioner, It was incorporated in October 1997 to design, construct, erect, assemble, own, commission
vs. and operate power-generating plants and related facilities pursuant to and under contract with
SAN ROQUE POWER CORPORATION, Respondent. the Government of the Republic of the Philippines, or any subdivision, instrumentality or
X----------------------------X agency thereof, or any governmentowned or controlled corporation, or other entity engaged in
G.R. No. 196113 the development, supply, or distribution of energy.
TAGANITO MINING CORPORATION, Petitioner, As a seller of services, [San Roque] is duly registered with the BIR with TIN/VAT No. 005-
vs. 017-501. It is likewise registered with the Board of Investments ("BOI") on a preferred
COMMISSIONER OF INTERNAL REVENUE, Respondent. pioneer status, to engage in the design, construction, erection, assembly, as well as to own,
x----------------------------x commission, and operate electric power-generating plants and related activities, for which it
G.R. No. 197156 was issued Certificate of Registration No. 97-356 on February 11, 1998.
PHILEX MINING CORPORATION, Petitioner, On October 11, 1997, [San Roque] entered into a Power Purchase Agreement ("PPA") with
vs. the National Power Corporation ("NPC") to develop hydro-potential of the Lower Agno River
COMMISSIONER OF INTERNAL REVENUE, Respondent. and generate additional power and energy for the Luzon Power Grid, by building the San
DECISION Roque Multi-Purpose Project located in San Manuel, Pangasinan. The PPA provides, among
CARPIO, J.: others, that [San Roque] shall be responsible for the design, construction, installation,
The Cases completion, testing and commissioning of the Power Station and shall operate and maintain
G.R. No. 187485 is a petitiOn for review1 assailing the Decision2 promulgated on 25 March the same, subject to NPC instructions. During the cooperation period of twenty-five (25) years
2009 as well as the Resolution3 promulgated on 24 April 2009 by the Court of Tax Appeals En commencing from the completion date of the Power Station, NPC will take and pay for all
Banc (CTA EB) in CTA EB No. 408. The CTA EB affirmed the 29 November 2007 Amended electricity available from the Power Station.
Decision4 as well as the 11 July 2008 Resolution5 of the Second Division of the Court of Tax On the construction and development of the San Roque Multi- Purpose Project which
Appeals (CTA Second Division) in CTA Case No. 6647. The CTA Second Division ordered comprises of the dam, spillway and power plant, [San Roque] allegedly incurred, excess input
the Commissioner of Internal Revenue (Commissioner) to refund or issue a tax credit for VAT in the amount of ₱559,709,337.54 for taxable year 2001 which it declared in its
P483,797,599.65 to San Roque Power Corporation (San Roque) for unutilized input value- Quarterly VAT Returns filed for the same year. [San Roque] duly filed with the BIR separate
added tax (VAT) on purchases of capital goods and services for the taxable year 2001. claims for refund, in the total amount of ₱559,709,337.54, representing unutilized input taxes
G.R. No. 196113 is a petition for review6 assailing the Decision7 promulgated on 8 December as declared in its VAT returns for taxable year 2001.
2010 as well as the Resolution8 promulgated on 14 March 2011 by the CTA EB in CTA EB However, on March 28, 2003, [San Roque] filed amended Quarterly VAT Returns for the year
No. 624. In its Decision, the CTA EB reversed the 8 January 2010 Decision 9 as well as the 7 2001 since it increased its unutilized input VAT to the amount of ₱560,200,283.14.
April 2010 Resolution10of the CTA Second Division and granted the CIR’s petition for review Consequently, [San Roque] filed with the BIR on even date, separate amended claims for
in CTA Case No. 7574. The CTA EB dismissed, for having been prematurely filed, Taganito refund in the aggregate amount of ₱560,200,283.14.
Mining Corporation’s (Taganito) judicial claim for P8,365,664.38 tax refund or credit. [CIR’s] inaction on the subject claims led to the filing by [San Roque] of the Petition for
G.R. No. 197156 is a petition for review11 assailing the Decision12promulgated on 3 December Review with the Court [of Tax Appeals] in Division on April 10, 2003.
2010 as well as the Resolution13 promulgated on 17 May 2011 by the CTA EB in CTA EB Trial of the case ensued and on July 20, 2005, the case was submitted for decision. 15
No. 569. The CTA EB affirmed the 20 July 2009 Decision as well as the 10 November 2009 The Court of Tax Appeals’ Ruling: Division
Resolution of the CTA Second Division in CTA Case No. 7687. The CTA Second Division The CTA Second Division initially denied San Roque’s claim. In its Decision 16 dated 8 March
denied, due to prescription, Philex Mining Corporation’s (Philex) judicial claim for 2006, it cited the following as bases for the denial of San Roque’s claim: lack of recorded
P23,956,732.44 tax refund or credit. zero-rated or effectively zero-rated sales; failure to submit documents specifically identifying
On 3 August 2011, the Second Division of this Court resolved 14 to consolidate G.R. No. the purchased goods/services related to the claimed input VAT which were included in its
197156 with G.R. No. 196113, which were pending in the same Division, and with G.R. No. Property, Plant and Equipment account; and failure to prove that the related construction costs
187485, which was assigned to the Court En Banc. The Second Division also resolved to refer were capitalized in its books of account and subjected to depreciation.
G.R. Nos. 197156 and 196113 to the Court En Banc, where G.R. No. 187485, the lower- The CTA Second Division required San Roque to show that it complied with the following
numbered case, was assigned. requirements of Section 112(B) of Republic Act No. 8424 (RA 8424) 17 to be entitled to a tax
G.R. No. 187485 refund or credit of input VAT attributable to capital goods imported or locally purchased: (1)
CIR v. San Roque Power Corporation it is a VAT-registered entity; (2) its input taxes claimed were paid on capital goods duly
The Facts supported by VAT invoices and/or official receipts; (3) it did not offset or apply the claimed
The CTA EB’s narration of the pertinent facts is as follows: input VAT payments on capital goods against any output VAT liability; and (4) its claim for
refund was filed within the two-year prescriptive period both in the administrative and judicial
levels.
127
The CTA Second Division found that San Roque complied with the first, third, and fourth
requirements, thus:
The fact that [San Roque] is a VAT registered entity is admitted (par. 4, Facts Admitted, Joint
Stipulation of Facts, Records, p. 157). It was also established that the instant claim of
₱560,200,823.14 is already net of the ₱11,509.09 output tax declared by [San Roque] in its
amended VAT return for the first quarter of 2001. Moreover, the entire amount of
₱560,200,823.14 was deducted by [San Roque] from the total available input tax reflected in
its amended VAT returns for the last two quarters of 2001 and first two quarters of 2002
(Exhibits M-6, O-6, OO-1 & QQ-1). This means that the claimed input taxes of
₱560,200,823.14 did not form part of the excess input taxes of ₱83,692,257.83, as of the
second quarter of 2002 that was to be carried-over to the succeeding quarters. Further, [San
Roque’s] claim for refund/tax credit certificate of excess input VAT was filed within the two-
year prescriptive period reckoned from the dates of filing of the corresponding quarterly VAT
returns.
For the first, second, third, and fourth quarters of 2001, [San Roque] filed its VAT returns on
April 25, 2001, July 25, 2001, October 23, 2001 and January 24, 2002, respectively (Exhibits
"H, J, L, and N"). These returns were all subsequently amended on March 28, 2003 (Exhibits
"I, K, M, and O"). On the other hand, [San Roque] originally filed its separate claims for
refund on July 10, 2001, October 10, 2001, February 21, 2002, and May 9, 2002 for the first,
second, third, and fourth quarters of 2001, respectively, (Exhibits "EE, FF, GG, and HH") and
subsequently filed amended claims for all quarters on March 28, 2003 (Exhibits "II, JJ, KK,
and LL"). Moreover, the Petition for Review was filed on April 10, 2003. Counting from the
respective dates when [San Roque] originally filed its VAT returns for the first, second, third
and fourth quarters of 2001, the administrative claims for refund (original and amended) and
the Petition for Review fall within the two-year prescriptive period.18
San Roque filed a Motion for New Trial and/or Reconsideration on 7 April 2006. In its 29
November 2007 Amended Decision,19 the CTA Second Division found legal basis to partially
grant San Roque’s claim. The CTA Second Division ordered the Commissioner to refund or
issue a tax credit in favor of San Roque in the amount of ₱483,797,599.65, which represents
San Roque’s unutilized input VAT on its purchases of capital goods and services for the
taxable year 2001. The CTA based the adjustment in the amount on the findings of the
independent certified public accountant. The following reasons were cited for the disallowed
claims: erroneous computation; failure to ascertain whether the related purchases are in the
nature of capital goods; and the purchases pertain to capital goods. Moreover, the reduction of
claims was based on the following: the difference between San Roque’s claim and that
appearing on its books; the official receipts covering the claimed input VAT on purchases of
local services are not within the period of the claim; and the amount of VAT cannot be
determined from the submitted official receipts and invoices. The CTA Second Division
denied San Roque’s claim for refund or tax credit of its unutilized input VAT attributable to its
zero-rated or effectively zero-rated sales because San Roque had no record of such sales for
the four quarters of 2001.
The dispositive portion of the CTA Second Division’s 29 November 2007 Amended Decision
reads:
WHEREFORE, [San Roque’s] "Motion for New Trial and/or Reconsideration" is hereby
PARTIALLY GRANTED and this Court’s Decision promulgated on March 8, 2006 in the
instant case is hereby MODIFIED.
Accordingly, [the CIR] is hereby ORDERED to REFUND or in the alternative, to ISSUE A
TAX CREDIT CERTIFICATE in favor of [San Roque] in the reduced amount of Four
Hundred Eighty Three Million Seven Hundred Ninety Seven Thousand Five Hundred Ninety
Nine Pesos and Sixty Five Centavos (₱483,797,599.65) representing unutilized input VAT on
purchases of capital goods and services for the taxable year 2001.
SO ORDERED.20
128
The Commissioner filed a Motion for Partial Reconsideration on 20 December 2007. The
CTA Second Division issued a Resolution dated 11 July 2008 which denied the CIR’s motion
for lack of merit.
The Court of Tax Appeals’ Ruling: En Banc
The Commissioner filed a Petition for Review before the CTA EB praying for the denial of
San Roque’s claim for refund or tax credit in its entirety as well as for the setting aside of the
29 November 2007 Amended Decision and the 11 July 2008 Resolution in CTA Case No.
6647.
The CTA EB dismissed the CIR’s petition for review and affirmed the challenged decision
and resolution.
The CTA EB cited Commissioner of Internal Revenue v. Toledo Power, Inc.21 and Revenue
Memorandum Circular No. 49-03,22 as its bases for ruling that San Roque’s judicial claim was
not prematurely filed. The pertinent portions of the Decision state:
More importantly, the Court En Banc has squarely and exhaustively ruled on this issue in this
wise:
It is true that Section 112(D) of the abovementioned provision applies to the present case.
However, what the petitioner failed to consider is Section 112(A) of the same
provision. The respondent is also covered by the two (2) year prescriptive period. We have
repeatedly held that the claim for refund with the BIR and the subsequent appeal to the Court
of Tax Appeals must be filed within the two-year period.
Accordingly, the Supreme Court held in the case of Atlas Consolidated Mining and
Development Corporation vs. Commissioner of Internal Revenue that the two-year
prescriptive period for filing a claim for input tax is reckoned from the date of the filing of the
quarterly VAT return and payment of the tax due. If the said period is about to expire but
the BIR has not yet acted on the application for refund, the taxpayer may interpose a
petition for review with this Court within the two year period.
In the case of Gibbs vs. Collector, the Supreme Court held that if, however, the Collector (now
Commissioner) takes time in deciding the claim, and the period of two years is about to end,
the suit or proceeding must be started in the Court of Tax Appeals before the end of the two-
year period without awaiting the decision of the Collector.
Furthermore, in the case of Commissioner of Customs and Commissioner of Internal Revenue
vs. The Honorable Court of Tax Appeals and Planters Products, Inc., the Supreme Court
held that the taxpayer need not wait indefinitely for a decision or ruling which may or
may not be forthcoming and which he has no legal right to expect. It is disheartening
enough to a taxpayer to keep him waiting for an indefinite period of time for a ruling or
decision of the Collector (now Commissioner) of Internal Revenue on his claim for refund. It
would make matters more exasperating for the taxpayer if we were to close the doors of the
courts of justice for such a relief until after the Collector (now Commissioner) of Internal
Revenue, would have, at his personal convenience, given his go signal.
This Court ruled in several cases that once the petition is filed, the Court has already acquired
jurisdiction over the claims and the Court is not bound to wait indefinitely for no reason for
whatever action respondent (herein petitioner) may take. At stake are claims for refund and
unlike disputed assessments, no decision of respondent (herein petitioner) is required
before one can go to this Court. (Emphasis supplied and citations omitted)
Lastly, it is apparent from the following provisions of Revenue Memorandum Circular No. 49-
03 dated August 18, 2003, that [the CIR] knows that claims for VAT refund or tax credit filed
with the Court [of Tax Appeals] can proceed simultaneously with the ones filed with the BIR
and that taxpayers need not wait for the lapse of the subject 120-day period, to wit:
In response to [the] request of selected taxpayers for adoption of procedures in handling
refund cases that are aligned to the statutory requirements that refund cases should be elevated
to the Court of Tax Appeals before the lapse of the period prescribed by law, certain
provisions of RMC No. 42-2003 are hereby amended and new provisions are added thereto.
In consonance therewith, the following amendments are being introduced to RMC No. 42- spare parts, tools, implements and other works, conveniences and properties of any description
2003, to wit: in connection with or which may be directly or indirectly conducive to any of the objects of
I.) A-17 of Revenue Memorandum Circular No. 42-2003 is hereby revised to read as follows: the corporation, and to contribute to, subsidize or otherwise aid or take part in any operations;
In cases where the taxpayer has filed a "Petition for Review" with the Court of Tax and is a VAT-registered entity, with Certificate of Registration (BIR Form No. 2303) No.
Appeals involving a claim for refund/TCC that is pending at the administrative agency OCN 8RC0000017494. Likewise, [Taganito] is registered with the Board of Investments
(Bureau of Internal Revenue or OSS-DOF), the administrative agency and the tax court (BOI) as an exporter of beneficiated nickel silicate and chromite ores, with BOI Certificate of
may act on the case separately. While the case is pending in the tax court and at the same Registration No. EP-88-306.
time is still under process by the administrative agency, the litigation lawyer of the BIR, upon Respondent, on the other hand, is the duly appointed Commissioner of Internal Revenue
receipt of the summons from the tax court, shall request from the head of the vested with authority to exercise the functions of the said office, including inter alia, the
investigating/processing office for the docket containing certified true copies of all the power to decide refunds of internal revenue taxes, fees and other charges, penalties imposed in
documents pertinent to the claim. The docket shall be presented to the court as evidence for relation thereto, or other matters arising under the National Internal Revenue Code (NIRC) or
the BIR in its defense on the tax credit/refund case filed by the taxpayer. In the meantime, the other laws administered by Bureau of Internal Revenue (BIR) under Section 4 of the NIRC.
investigating/processing office of the administrative agency shall continue processing the He holds office at the BIR National Office Building, Diliman, Quezon City.
refund/TCC case until such time that a final decision has been reached by either the CTA or [Taganito] filed all its Monthly VAT Declarations and Quarterly Vat Returns for the period
the administrative agency. January 1, 2005 to December 31, 2005. For easy reference, a summary of the filing dates of
If the CTA is able to release its decision ahead of the evaluation of the administrative the original and amended Quarterly VAT Returns for taxable year 2005 of [Taganito] is as
agency, the latter shall cease from processing the claim. On the other hand, if the follows:
administrative agency is able to process the claim of the taxpayer ahead of the CTA and the As can be gleaned from its amended Quarterly VAT Returns, [Taganito] reported zero-rated
taxpayer is amenable to the findings thereof, the concerned taxpayer must file a motion to sales amounting to P1,446,854,034.68; input VAT on its domestic purchases and importations
withdraw the claim with the CTA.23 (Emphasis supplied) of goods (other than capital goods) and services amounting to P2,314,730.43; and input VAT
G.R. No. 196113
Taganito Mining Corporation v. CIR Exhibit(s) Quarter Nature of Mode of filing Filing Date
The Facts the Return
The CTA Second Division’s narration of the pertinent facts is as follows: L to L-4 1st Original Electronic April 15, 2005
Petitioner, Taganito Mining Corporation, is a corporation duly organized and existing under
and by virtue of the laws of the Philippines, with principal office at 4th Floor, Solid Mills M to M-3 Amended Electronic July 20, 2005
Building, De La Rosa St., Lega[s]pi Village, Makati City. It is duly registered with the
Securities and Exchange Commission with Certificate of Registration No. 138682 issued on N to N-4 Amended Electronic October 18, 2006
March 4, 1987 with the following primary purpose: Q to Q-3 2nd Original Electronic July 20, 2005
To carry on the business, for itself and for others, of mining lode and/or placer mining,
developing, exploiting, extracting, milling, concentrating, converting, smelting, treating, R to R-4 Amended Electronic October 18, 2006
refining, preparing for market, manufacturing, buying, selling, exchanging, shipping,
U to U-4 3rd Original Electronic October 19, 2005
transporting, and otherwise producing and dealing in nickel, chromite, cobalt, gold, silver,
copper, lead, zinc, brass, iron, steel, limestone, and all kinds of ores, metals and their by- V to V-4 Amended Electronic October 18, 2006
products and which by-products thereof of every kind and description and by whatsoever
process the same can be or may hereafter be produced, and generally and without limit as to Y to Y-4 4th Original Electronic January 20, 2006
amount, to buy, sell, locate, exchange, lease, acquire and deal in lands, mines, and mineral Z to Z-4 Amended Electronic October 18, 2006
rights and claims and to conduct all business appertaining thereto, to purchase, locate, lease or
otherwise acquire, mining claims and rights, timber rights, water rights, concessions and on its domestic purchases and importations of capital goods amounting to P6,050,933.95, the
mines, buildings, dwellings, plants machinery, spare parts, tools and other properties details of which are summarized as follows:
whatsoever which this corporation may from time to time find to be to its advantage to mine
lands, and to explore, work, exercise, develop or turn to account the same, and to acquire,
develop and utilize water rights in such manner as may be authorized or permitted by law; to
purchase, hire, make, construct or otherwise, acquire, provide, maintain, equip, alter, erect,
improve, repair, manage, work and operate private roads, barges, vessels, aircraft and vehicles,
private telegraph and telephone lines, and other communication media, as may be needed by
the corporation for its own purpose, and to purchase, import, construct, machine, fabricate, or
otherwise acquire, and maintain and operate bridges, piers, wharves, wells, reservoirs, plumes,
watercourses, waterworks, aqueducts, shafts, tunnels, furnaces, cook ovens, crushing works,
gasworks, electric lights and power plants and compressed air plants, chemical works of all
kinds, concentrators, smelters, smelting plants, and refineries, matting plants, warehouses,
workshops, factories, dwelling houses, stores, hotels or other buildings, engines, machinery,
129
 Period Zero-Rated Sales Input VAT on Input VAT on Total Input VAT
compliance with the above-stated requirements warrants immediate dismissal of the
Covered Domestic Domestic petition for review.
Purchases and Purchases and 8. [Taganito] must prove that it has complied with the invoicing requirements
Importations Importations mentioned in Sections 110 and 113 of the 1997 Tax Code, as amended, in relation to
of Goods and of Capital provisions of Revenue Regulations No. 7-95.
Services Goods 9. In an action for refund/credit, the burden of proof is on the taxpayer to establish
its right to refund, and failure to sustain the burden is fatal to the claim for
01/01/05 - P551,179,871.58 P1,491,880.56 P239,803.22 P1,731,683.78
03/31/05 refund/credit (Asiatic Petroleum Co. vs. Llanes, 49 Phil. 466 cited in Collector of
Internal Revenue vs. Manila Jockey Club, Inc., 98 Phil. 670);
04/01/05 - 64,677,530.78 204,364.17 5,811,130.73 6,015,494.90 10. Claims for refund are construed strictly against the claimant for the same partake
06/30/05 the nature of exemption from taxation (Commissioner of Internal Revenue vs.
Ledesma, 31 SCRA 95) and as such, they are looked upon with disfavor (Western
07/01/05 - 480,784,287.30 144,887.67 - 144,887.67
09/30/05 Minolco Corp. vs. Commissioner of Internal Revenue, 124 SCRA 1211).
SPECIAL AND AFFIRMATIVE DEFENSES
10/01/05 - 350,212,345.02 473,598.03 - 473,598.03 11. The Court of Tax Appeals has no jurisdiction to entertain the instant petition for review for
12/31/05 failure on the part of [Taganito] to comply with the provision of Section 112 (D) of the 1997
Tax Code which provides, thus:
TOTAL P1,446,854,034.68 P2,314,730.43 P6,050,933.95 P8,365,664.38
Section 112. Refunds or Tax Credits of Input Tax. –
On November 14, 2006, [Taganito] filed with [the CIR], through BIR’s Large Taxpayers xxx xxx xxx
Audit and Investigation Division II (LTAID II), a letter dated November 13, 2006 claiming a (D) Period within which refund or Tax Credit of Input Taxes shall be Made. – In proper cases,
tax credit/refund of its supposed input VAT amounting to ₱8,365,664.38 for the period the Commissioner shall grant a refund or issue the tax credit certificate for creditable input
covering January 1, 2004 to December 31, 2004. On the same date, [Taganito] likewise filed taxes within one hundred (120) days from the date of submission of complete documents
an Application for Tax Credits/Refunds for the period covering January 1, 2005 to December in support of the application filed in accordance with Subsections (A) and (B) hereof.
31, 2005 for the same amount. In cases of full or partial denial for tax refund or tax credit, or the failure on the part of the
On November 29, 2006, [Taganito] sent again another letter dated November 29, 2004 to [the Commissioner to act on the application within the period prescribed above, the taxpayer
CIR], to correct the period of the above claim for tax credit/refund in the said amount of affected may, within thirty (30) days from the receipt of the decision denying the claim or
₱8,365,664.38 as actually referring to the period covering January 1, 2005 to December 31, after the expiration of the one hundred twenty dayperiod, appeal the decision or the
2005. unacted claim with the Court of Tax Appeals. (Emphasis supplied.)
As the statutory period within which to file a claim for refund for said input VAT is about to 12. As stated, [Taganito] filed the administrative claim for refund with the Bureau of Internal
lapse without action on the part of the [CIR], [Taganito] filed the instant Petition for Review Revenue on November 14, 2006. Subsequently on February 14, 2007, the instant petition was
on February 17, 2007. filed. Obviously the 120 days given to the Commissioner to decide on the claim has not yet
In his Answer filed on March 28, 2007, [the CIR] interposes the following defenses: lapsed when the petition was filed. The petition was prematurely filed, hence it must be
4. [Taganito’s] alleged claim for refund is subject to administrative dismissed for lack of jurisdiction.
investigation/examination by the Bureau of Internal Revenue (BIR); During trial, [Taganito] presented testimonial and documentary evidence primarily aimed at
5. The amount of ₱8,365,664.38 being claimed by [Taganito] as alleged unutilized proving its supposed entitlement to the refund in the amount of ₱8,365,664.38, representing
input VAT on domestic purchases of goods and services and on importation of input taxes for the period covering January 1, 2005 to December 31, 2005. [The CIR], on the
capital goods for the period January 1, 2005 to December 31, 2005 is not properly other hand, opted not to present evidence. Thus, in the Resolution promulgated on January 22,
documented; 2009, this case was submitted for decision as of such date, considering [Taganito’s]
6. [Taganito] must prove that it has complied with the provisions of Sections 112 "Memorandum" filed on January 19, 2009 and [the CIR’s] "Memorandum" filed on December
(A) and (D) and 229 of the National Internal Revenue Code of 1997 (1997 Tax 19, 2008.24
Code) on the prescriptive period for claiming tax refund/credit; The Court of Tax Appeals’ Ruling: Division
7. Proof of compliance with the prescribed checklist of requirements to be submitted The CTA Second Division partially granted Taganito’s claim. In its Decision25 dated 8
involving claim for VAT refund pursuant to Revenue Memorandum Order No. 53- January 2010, the CTA Second Division found that Taganito complied with the requirements
98, otherwise there would be no sufficient compliance with the filing of of Section 112(A) of RA 8424, as amended, to be entitled to a tax refund or credit of input
administrative claim for refund, the administrative claim thereof being mere VAT attributable to zero-rated or effectively zero-rated sales.26
proforma, which is a condition sine qua non prior to the filing of judicial The pertinent portions of the CTA Second Division’s Decision read:
claim in accordance with the provision of Section 229 of the 1997 Tax Code. Finally, records show that [Taganito’s] administrative claim filed on November 14, 2006,
Further, Section 112 (D) of the Tax Code, as amended, requires the submission of which was amended on November 29, 2006, and the Petition for Review filed with this Court
complete documents in support of the application filed with the BIR before the on February 14, 2007 are well within the two-year prescriptive period, reckoned from March
120-day audit period shall apply, and before the taxpayer could avail of judicial 31, 2005, June 30, 2005, September 30, 2005, and December 31, 2005, respectively, the close
remedies as provided for in the law. Hence, [Taganito’s] failure to submit proof of of each taxable quarter covering the period January 1, 2005 to December 31, 2005.

130
In fine, [Taganito] sufficiently proved that it is entitled to a tax credit certificate in the amount
of ₱8,249,883.33 representing unutilized input VAT for the four taxable quarters of 2005.
WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY
GRANTED. Accordingly, [the CIR] is hereby ORDERED to REFUND to [Taganito] the
amount of EIGHT MILLION TWO HUNDRED FORTY NINE THOUSAND EIGHT
HUNDRED EIGHTY THREE PESOS AND THIRTY THREE CENTAVOS (P8,249,883.33)
representing its unutilized input taxes attributable to zero-rated sales from January 1, 2005 to
December 31, 2005.
SO ORDERED.27
The Commissioner filed a Motion for Partial Reconsideration on 29 January 2010. Taganito,
in turn, filed a Comment/Opposition on the Motion for Partial Reconsideration on 15 February
2010.
In a Resolution28 dated 7 April 2010, the CTA Second Division denied the CIR’s motion. The
CTA Second Division ruled that the legislature did not intend that Section 112 (Refunds or
Tax Credits of Input Tax) should be read in isolation from Section 229 (Recovery of Tax
Erroneously or Illegally Collected) or vice versa. The CTA Second Division applied the
mandatory statute of limitations in seeking judicial recourse prescribed under Section 229 to
claims for refund or tax credit under Section 112.
The Court of Tax Appeals’ Ruling: En Banc
On 29 April 2010, the Commissioner filed a Petition for Review before the CTA EB assailing
the 8 January 2010 Decision and the 7 April 2010 Resolution in CTA Case No. 7574 and
praying that Taganito’s entire claim for refund be denied.
In its 8 December 2010 Decision,29 the CTA EB granted the CIR’s petition for review and
reversed and set aside the challenged decision and resolution.
The CTA EB declared that Section 112(A) and (B) of the 1997 Tax Code both set forth the
reckoning of the two-year prescriptive period for filing a claim for tax refund or credit over
input VAT to be the close of the taxable quarter when the sales were made. The CTA EB also
relied on this Court’s rulings in the cases of Commissioner of Internal Revenue v. Aichi
Forging Company of Asia, Inc. (Aichi)30 and Commisioner of Internal Revenue v. Mirant
Pagbilao Corporation (Mirant).31 Both Aichi and Mirant ruled that the two-year prescriptive
period to file a refund for input VAT arising from zero-rated sales should be reckoned from
the close of the taxable quarter when the sales were made. Aichi further emphasized that the
failure to await the decision of the Commissioner or the lapse of 120-day period prescribed in
Section 112(D) amounts to a premature filing.
The CTA EB found that Taganito filed its administrative claim on 14 November 2006, which
was well within the period prescribed under Section 112(A) and (B) of the 1997 Tax Code.
However, the CTA EB found that Taganito’s judicial claim was prematurely filed. Taganito
filed its Petition for Review before the CTA Second Division on 14 February 2007. The
judicial claim was filed after the lapse of only 92 days from the filing of its administrative
claim before the CIR, in violation of the 120-day period prescribed in Section 112(D) of the
1997 Tax Code.
The dispositive portion of the Decision states:
WHEREFORE, the instant Petition for Review is hereby GRANTED. The assailed Decision
dated January 8, 2010 and Resolution dated April 7, 2010 of the Special Second Division of
this Court are hereby REVERSED and SET ASIDE. Another one is hereby entered
DISMISSING the Petition for Review filed in CTA Case No. 7574 for having been
prematurely filed.
SO ORDERED.32
In his dissent,33 Associate Justice Lovell R. Bautista insisted that Taganito timely filed its
claim before the CTA. Justice Bautista read Section 112(C) of the 1997 Tax Code (Period
within which Refund or Tax Credit of Input Taxes shall be Made) in conjunction with Section
229 (Recovery of Tax Erroneously or Illegally Collected). Justice Bautista also relied on this
131
Court’s ruling in Atlas Consolidated Mining and Development Corporation v. Commissioner
of Internal Revenue (Atlas),34 which stated that refundable or creditable input VAT and
illegally or erroneously collected national internal revenue tax are the same, insofar as both are
monetary amounts which are currently in the hands of the government but must rightfully be
returned to the taxpayer. Justice Bautista concluded:
Being merely permissive, a taxpayer claimant has the option of seeking judicial redress for
refund or tax credit of excess or unutilized input tax with this Court, either within 30 days
from receipt of the denial of its claim, or after the lapse of the 120-day period in the event of
inaction by the Commissioner, provided that both administrative and judicial remedies must
be undertaken within the 2-year period.35
Taganito filed its Motion for Reconsideration on 29 December 2010. The Commissioner filed
an Opposition on 26 January 2011. The CTA EB denied for lack of merit Taganito’s motion in
a Resolution36 dated 14 March 2011. The CTA EB did not see any justifiable reason to depart
from this Court’s rulings in Aichi and Mirant.
G.R. No. 197156
Philex Mining Corporation v. CIR
The Facts
The CTA EB’s narration of the pertinent facts is as follows:
[Philex] is a corporation duly organized and existing under the laws of the Republic of the
Philippines, which is principally engaged in the mining business, which includes the
exploration and operation of mine properties and commercial production and marketing of
mine products, with office address at 27 Philex Building, Fairlaine St., Kapitolyo, Pasig City.
[The CIR], on the other hand, is the head of the Bureau of Internal Revenue ("BIR"), the
government entity tasked with the duties/functions of assessing and collecting all national
internal revenue taxes, fees, and charges, and enforcement of all forfeitures, penalties and
fines connected therewith, including the execution of judgments in all cases decided in its
favor by [the Court of Tax Appeals] and the ordinary courts, where she can be served with
court processes at the BIR Head Office, BIR Road, Quezon City.
On October 21, 2005, [Philex] filed its Original VAT Return for the third quarter of taxable
year 2005 and Amended VAT Return for the same quarter on December 1, 2005.
On March 20, 2006, [Philex] filed its claim for refund/tax credit of the amount of
₱23,956,732.44 with the One Stop Shop Center of the Department of Finance. However, due
to [the CIR’s] failure to act on such claim, on October 17, 2007, pursuant to Sections 112 and
229 of the NIRC of 1997, as amended, [Philex] filed a Petition for Review, docketed as C.T.A.
Case No. 7687.
In [her] Answer, respondent CIR alleged the following special and affirmative defenses:
4. Claims for refund are strictly construed against the taxpayer as the same partake
the nature of an exemption;
5. The taxpayer has the burden to show that the taxes were erroneously or illegally
paid. Failure on the part of [Philex] to prove the same is fatal to its cause of action;
6. [Philex] should prove its legal basis for claiming for the amount being refunded. 37
The Court of Tax Appeals’ Ruling: Division
The CTA Second Division, in its Decision dated 20 July 2009, denied Philex’s claim due to
prescription. The CTA Second Division ruled that the two-year prescriptive period specified in
Section 112(A) of RA 8424, as amended, applies not only to the filing of the administrative
claim with the BIR, but also to the filing of the judicial claim with the CTA. Since Philex’s
claim covered the 3rd quarter of 2005, its administrative claim filed on 20 March 2006 was
timely filed, while its judicial claim filed on 17 October 2007 was filed late and therefore
barred by prescription.
On 10 November 2009, the CTA Second Division denied Philex’s Motion for
Reconsideration.
The Court of Tax Appeals’ Ruling: En Banc
Philex filed a Petition for Review before the CTA EB praying for a reversal of the 20 July
2009 Decision and the 10 November 2009 Resolution of the CTA Second Division in CTA
Case No. 7687.
The CTA EB, in its Decision38 dated 3 December 2010, denied Philex’s petition and affirmed
the CTA Second Division’s Decision and Resolution.
The pertinent portions of the Decision read:
In this case, while there is no dispute that [Philex’s] administrative claim for refund was filed
within the two-year prescriptive period; however, as to its judicial claim for refund/credit,
records show that on March 20, 2006, [Philex] applied the administrative claim for refund of
unutilized input VAT in the amount of ₱23,956,732.44 with the One Stop Shop Center of the
Department of Finance, per Application No. 52490. From March 20, 2006, which is also
presumably the date [Philex] submitted supporting documents, together with the aforesaid
application for refund, the CIR has 120 days, or until July 18, 2006, within which to decide the
claim. Within 30 days from the lapse of the 120-day period, or from July 19, 2006 until
August 17, 2006, [Philex] should have elevated its claim for refund to the CTA. However,
[Philex] filed its Petition for Review only on October 17, 2007, which is 426 days way beyond
the 30- day period prescribed by law.
Evidently, the Petition for Review in CTA Case No. 7687 was filed 426 days late. Thus, the
Petition for Review in CTA Case No. 7687 should have been dismissed on the ground that the
Petition for Review was filed way beyond the 30-day prescribed period; thus, no jurisdiction
was acquired by the CTA in Division; and not due to prescription.
WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED DUE
COURSE, and accordingly, DISMISSED. The assailed Decision dated July 20, 2009,
dismissing the Petition for Review in CTA Case No. 7687 due to prescription, and Resolution
dated November 10, 2009 denying [Philex’s] Motion for Reconsideration are hereby
AFFIRMED, with modification that the dismissal is based on the ground that the Petition for
Review in CTA Case No. 7687 was filed way beyond the 30-day prescribed period to appeal.
SO ORDERED.39
G.R. No. 187485
CIR v. San Roque Power Corporation
The Commissioner raised the following grounds in the Petition for Review:
I. The Court of Tax Appeals En Banc erred in holding that [San Roque’s] claim for refund
was not prematurely filed.
II. The Court of Tax Appeals En Banc erred in affirming the amended decision of the Court
of Tax Appeals (Second Division) granting [San Roque’s] claim for refund of alleged
unutilized input VAT on its purchases of capital goods and services for the taxable year
2001 in the amount of P483,797,599.65. 40
G.R. No. 196113
Taganito Mining Corporation v. CIR
Taganito raised the following grounds in its Petition for Review:
I. The Court of Tax Appeals En Banc committed serious error and acted with grave abuse of
discretion tantamount to lack or excess of jurisdiction in erroneously applying
the Aichi doctrine in violation of [Taganito’s] right to due process.
II. The Court of Tax Appeals committed serious error and acted with grave abuse of
discretion amounting to lack or excess of jurisdiction in erroneously interpreting the
provisions of Section 112 (D).41
G.R. No. 197156
Philex Mining Corporation v. CIR
Philex raised the following grounds in its Petition for Review:
I. The CTA En Banc erred in denying the petition due to alleged prescription. The fact is
that the petition was filed with the CTA within the period set by prevailing court rulings at
the time it was filed.
132
II. The CTA En Banc erred in retroactively applying the Aichi ruling in denying the petition
in this instant case.42
The Court’s Ruling
For ready reference, the following are the provisions of the Tax Code applicable to the present
cases:
Section 105:
Persons Liable. — Any person who, in the course of trade or business, sells, barters,
exchanges, leases goods or properties, renders services, and any person who imports
goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this
Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on
to the buyer, transferee or lessee of the goods, properties or services. This rule shall
likewise apply to existing contracts of sale or lease of goods, properties or services at the time
of the effectivity of Republic Act No. 7716.
xxxx
Section 110(B):
Sec. 110. Tax Credits. —
(B) Excess Output or Input Tax. — If at the end of any taxable quarter the output tax exceeds
the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds
the output tax, the excess shall be carried over to the succeeding quarter or quarters:
[Provided, That the input tax inclusive of input VAT carried over from the previous quarter
that may be credited in every quarter shall not exceed seventy percent (70%) of the output
VAT:]43 Provided, however, That any input tax attributable to zero-rated sales by a VAT-
registered person may at his option be refunded or credited against other internal
revenue taxes, subject to the provisions of Section 112.
Section 112:44
Sec. 112. Refunds or Tax Credits of Input Tax. —
(A) Zero-Rated or Effectively Zero-Rated Sales.— Any VAT-registered person,
whose sales are zero-rated or effectively zero-rated may, within two (2) years
after the close of the taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the extent that such input
tax has not been applied against output tax: Provided, however, That in the case of
zero-rated sales under Section 106(A)(2) (a)(1), (2) and (B) and Section 108(B)(1)
and (2), the acceptable foreign currency exchange proceeds thereof had been duly
accounted for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated
or effectively zero-rated sale and also in taxable or exempt sale of goods or
properties or services, and the amount of creditable input tax due or paid cannot be
directly and entirely attributed to any one of the transactions, it shall be allocated
proportionately on the basis of the volume of sales.
(B) Capital Goods.- A VAT — registered person may apply for the issuance of a tax
credit certificate or refund of input taxes paid on capital goods imported or locally
purchased, to the extent that such input taxes have not been applied against output
taxes. The application may be made only within two (2) years after the close of the
taxable quarter when the importation or purchase was made.
(C) Cancellation of VAT Registration. — A person whose registration has been
cancelled due to retirement from or cessation of business, or due to changes in or
cessation of status under Section 106(C) of this Code may, within two (2) years
from the date of cancellation, apply for the issuance of a tax credit certificate for any
unused input tax which may be used in payment of his other internal revenue taxes
 (D) Period within which Refund or Tax Credit of Input Taxes shall be Made. — In
proper cases, the Commissioner shall grant a refund or issue the tax credit certificate
for creditable input taxes within one hundred twenty (120) days from the date of
submission of complete documents in support of the application filed in
accordance with Subsection (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure
on the part of the Commissioner to act on the application within the period
prescribed above, the taxpayer affected may, within thirty (30) days from the
receipt of the decision denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the unacted claim with the
Court of Tax Appeals.
(E) Manner of Giving Refund. — Refunds shall be made upon warrants drawn by
the Commissioner or by his duly authorized representative without the necessity of
being countersigned by the Chairman, Commission on Audit, the provisions of the
Administrative Code of 1987 to the contrary notwithstanding: Provided, that refunds
under this paragraph shall be subject to post audit by the Commission on Audit.
Section 229:
Recovery of Tax Erroneously or Illegally Collected. — No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged
to have been erroneously or illegally assessed or collected, or of any penalty claimed to have
been collected without authority, or of any sum alleged to have been excessively or in any
manner wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax,
penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years
from the date of payment of the tax or penalty regardless of any supervening cause that may
arise after payment: Provided, however, That the Commissioner may, even without a written
claim therefor, refund or credit any tax, where on the face of the return upon which payment
was made, such payment appears clearly to have been erroneously paid.
(All emphases supplied)
I. Application of the 120+30 Day Periods
a. G.R. No. 187485 - CIR v. San Roque Power Corporation
On 10 April 2003, a mere 13 days after it filed its amended administrative claim with the
Commissioner on 28 March 2003, San Roque filed a Petition for Review with the CTA
docketed as CTA Case No. 6647. From this we gather two crucial facts: first, San Roque did
not wait for the 120-day period to lapse before filing its judicial claim; second, San Roque
filed its judicial claim more than four (4) years before the Atlas45 doctrine, which was
promulgated by the Court on 8 June 2007.
Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly given
by law to the Commissioner to decide whether to grant or deny San Roque’s application for
tax refund or credit. It is indisputable that compliance with the 120-day waiting period
is mandatory and jurisdictional. The waiting period, originally fixed at 60 days only, was
part of the provisions of the first VAT law, Executive Order No. 273, which took effect on 1
January 1988. The waiting period was extended to 120 days effective 1 January 1998 under
RA 8424 or the Tax Reform Act of 1997. Thus, the waiting period has been in our statute
books for more than fifteen (15) years before San Roque filed its judicial claim.
Failure to comply with the 120-day waiting period violates a mandatory provision of law. It
violates the doctrine of exhaustion of administrative remedies and renders the petition
premature and thus without a cause of action, with the effect that the CTA does not acquire
jurisdiction over the taxpayer’s petition. Philippine jurisprudence is replete with cases
upholding and reiterating these doctrinal principles.46
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The charter of the CTA expressly provides that its jurisdiction is to review on appeal
"decisions of the Commissioner of Internal Revenue in cases involving x x x refunds of
internal revenue taxes."47 When a taxpayer prematurely files a judicial claim for tax refund or
credit with the CTA without waiting for the decision of the Commissioner, there is no
"decision" of the Commissioner to review and thus the CTA as a court of special jurisdiction
has no jurisdiction over the appeal. The charter of the CTA also expressly provides that if the
Commissioner fails to decide within "a specific period" required by law, such "inaction shall
be deemed a denial"48 of the application for tax refund or credit. It is the Commissioner’s
decision, or inaction "deemed a denial," that the taxpayer can take to the CTA for review.
Without a decision or an "inaction x x x deemed a denial" of the Commissioner, the CTA has
no jurisdiction over a petition for review.49
San Roque’s failure to comply with the 120-day mandatory period renders its petition for
review with the CTA void. Article 5 of the Civil Code provides, "Acts executed against
provisions of mandatory or prohibitory laws shall be void, except when the law itself
authorizes their validity." San Roque’s void petition for review cannot be legitimized by the
CTA or this Court because Article 5 of the Civil Code states that such void petition cannot be
legitimized "except when the law itself authorizes [its] validity." There is no law authorizing
the petition’s validity.
It is hornbook doctrine that a person committing a void act contrary to a mandatory provision
of law cannot claim or acquire any right from his void act. A right cannot spring in favor of a
person from his own void or illegal act. This doctrine is repeated in Article 2254 of the Civil
Code, which states, "No vested or acquired right can arise from acts or omissions which are
against the law or which infringe upon the rights of others."50 For violating a mandatory
provision of law in filing its petition with the CTA, San Roque cannot claim any right arising
from such void petition. Thus, San Roque’s petition with the CTA is a mere scrap of paper.
This Court cannot brush aside the grave issue of the mandatory and jurisdictional nature of the
120-day period just because the Commissioner merely asserts that the case was prematurely
filed with the CTA and does not question the entitlement of San Roque to the refund. The
mere fact that a taxpayer has undisputed excess input VAT, or that the tax was admittedly
illegally, erroneously or excessively collected from him, does not entitle him as a matter of
right to a tax refund or credit. Strict compliance with the mandatory and jurisdictional
conditions prescribed by law to claim such tax refund or credit is essential and necessary for
such claim to prosper. Well-settled is the rule that tax refunds or credits, just like tax
exemptions, are strictly construed against the taxpayer.51 The burden is on the taxpayer to
show that he has strictly complied with the conditions for the grant of the tax refund or credit.
This Court cannot disregard mandatory and jurisdictional conditions mandated by law simply
because the Commissioner chose not to contest the numerical correctness of the claim for tax
refund or credit of the taxpayer. Non-compliance with mandatory periods, non-observance of
prescriptive periods, and non-adherence to exhaustion of administrative remedies bar a
taxpayer’s claim for tax refund or credit, whether or not the Commissioner questions the
numerical correctness of the claim of the taxpayer. This Court should not establish the
precedent that non-compliance with mandatory and jurisdictional conditions can be excused if
the claim is otherwise meritorious, particularly in claims for tax refunds or credit. Such
precedent will render meaningless compliance with mandatory and jurisdictional
requirements, for then every tax refund case will have to be decided on the numerical
correctness of the amounts claimed, regardless of non-compliance with mandatory and
jurisdictional conditions.
San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine
because San Roque filed its petition for review with the CTA more than four years
before Atlas was promulgated. The Atlas doctrine did not exist at the time San Roque failed
to comply with the 120- day period. Thus, San Roque cannot invoke the Atlas doctrine as an
excuse for its failure to wait for the 120-day period to lapse. In any event, the Atlas doctrine
merely stated that the two-year prescriptive period should be counted from the date of within which to decide the taxpayer’s claim. The law is clear, plain, and unequivocal: "x x x
payment of the output VAT, not from the close of the taxable quarter when the sales involving the Commissioner shall grant a refund or issue the tax credit certificate for creditable input
the input VAT were made. The Atlas doctrine does not interpret, expressly or impliedly, taxes within one hundred twenty (120) days from the date of submission of complete
the 120+3052 day periods. documents." Following the verba legis doctrine, this law must be applied exactly as worded
In fact, Section 106(b) and (e) of the Tax Code of 1977 as amended, which was the law cited since it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition with the
by the Court in Atlas as the applicable provision of the law did not yet provide for the 30-day CTA without waiting for the Commissioner’s decision within the 120-day mandatory and
period for the taxpayer to appeal to the CTA from the decision or inaction of the jurisdictional period. The CTA will have no jurisdiction because there will be no "decision" or
Commissioner.53 Thus, the Atlas doctrine cannot be invoked by anyone to disregard "deemed a denial" decision of the Commissioner for the CTA to review. In San Roque’s case,
compliance with the 30-day mandatory and jurisdictional period. Also, the difference it filed its petition with the CTA a mere 13 days after it filed its administrative claim with the
between the Atlas doctrine on one hand, and the Mirant54 doctrine on the other hand, is a mere Commissioner. Indisputably, San Roque knowingly violated the mandatory 120-day period,
20 days. The Atlas doctrine counts the two-year prescriptive period from the date of payment and it cannot blame anyone but itself.
of the output VAT, which means within 20 days after the close of the taxable quarter. The Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the
output VAT at that time must be paid at the time of filing of the quarterly tax returns, which decision or inaction of the Commissioner, thus:
were to be filed "within 20 days following the end of each quarter." x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision
Thus, in Atlas, the three tax refund claims listed below were deemed timely filed because the denying the claim or after the expiration of the one hundred twenty day-period, appeal
administrative claims filed with the Commissioner, and the petitions for review filed with the the decision or the unacted claim with the Court of Tax Appeals. (Emphasis supplied)
CTA, were all filed within two years from the date of payment of the output VAT, following This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this
Section 229: law should be applied exactly as worded since it is clear, plain, and unequivocal. As this law
Date of Filing states, the taxpayer may, if he wishes, appeal the decision of the Commissioner to the CTA
Return Date of Filing
Date of Filing within 30 days from receipt of the Commissioner’s decision, or if the Commissioner does not
Period Covered
& Payment of Administrative Claim
Petition With act on the taxpayer’s claim within the 120-day period, the taxpayer may appeal to the CTA
CTA within 30 days from the expiration of the 120-day period.
Tax
b. G.R. No. 196113 - Taganito Mining Corporation v. CIR
2nd Quarter, 1990 20 July 1990 21 August 1990 20 July 1992 Like San Roque, Taganito also filed its petition for review with the CTA without waiting for
Close of Quarter the 120-day period to lapse. Also, like San Roque, Taganito filed its judicial claim before the
30 June 1990 promulgation of the Atlas doctrine. Taganito filed a Petition for Review on 14 February 2007
with the CTA. This is almost four months before the adoption of the Atlas doctrine on 8 June
3rd Quarter, 1990 18 October 21 November 1990 9 October 1992 2007. Taganito is similarly situated as San Roque - both cannot claim being misled,
Close of Quarter 1990 misguided, or confused by the Atlas doctrine.
30 September 1990 However, Taganito can invoke BIR Ruling No. DA-489-0357 dated 10 December 2003, which
expressly ruled that the "taxpayer-claimant need not wait for the lapse of the 120-day
4th Quarter, 1990 20 January 19 February 1991 14 January
period before it could seek judicial relief with the CTA by way of Petition for Review."
Close of Quarter 1991 1993
Taganito filed its judicial claim after the issuance of BIR Ruling No. DA-489-03 but before
31 December 1990
the adoption of the Aichi doctrine. Thus, as will be explained later, Taganito is deemed to have
Atlas paid the output VAT at the time it filed the quarterly tax returns on the 20th, 18th, and filed its judicial claim with the CTA on time.
20th day after the close of the taxable quarter. Had the twoyear prescriptive period been c. G.R. No. 197156 – Philex Mining Corporation v. CIR
counted from the "close of the taxable quarter" as expressly stated in the law, the tax refund Philex (1) filed on 21 October 2005 its original VAT Return for the third quarter of taxable
claims of Atlas would have already prescribed. In contrast, the Mirant doctrine counts the two- year 2005; (2) filed on 20 March 2006 its administrative claim for refund or credit; (3) filed on
year prescriptive period from the "close of the taxable quarter when the sales were made" as 17 October 2007 its Petition for Review with the CTA. The close of the third taxable quarter
expressly stated in the law, which means the last day of the taxable quarter. The 20-day in 2005 is 30 September 2005, which is the reckoning date in computing the two-year
difference55 between the Atlas doctrine and the later Mirant doctrine is not material to prescriptive period under Section 112(A).
San Roque’s claim for tax refund. Philex timely filed its administrative claim on 20 March 2006, within the two-year prescriptive
Whether the Atlas doctrine or the Mirant doctrine is applied to San Roque is immaterial period. Even if the two-year prescriptive period is computed from the date of payment of the
because what is at issue in the present case is San Roque’s non-compliance with the 120-day output VAT under Section 229, Philex still filed its administrative claim on time. Thus,
mandatory and jurisdictional period, which is counted from the date it filed its administrative the Atlas doctrine is immaterial in this case. The Commissioner had until 17 July 2006, the
claim with the Commissioner. The 120-day period may extend beyond the two-year last day of the 120-day period, to decide Philex’s claim. Since the Commissioner did not act
prescriptive period, as long as the administrative claim is filed within the two-year prescriptive on Philex’s claim on or before 17 July 2006, Philex had until 17 August 2006, the last day of
period. However, San Roque’s fatal mistake is that it did not wait for the Commissioner to the 30-day period, to file its judicial claim. The CTA EB held that 17 August 2006 was
decide within the 120-day period, a mandatory period whether the Atlas or the Mirant doctrine indeed the last day for Philex to file its judicial claim. However, Philex filed its Petition for
is applied. Review with the CTA only on 17 October 2007, or four hundred twenty-six (426) days after
At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory the last day of filing. In short, Philex was late by one year and 61 days in filing its judicial
periods were already in the law. Section 112(C)56 expressly grants the Commissioner 120 days claim. As the CTA EB correctly found:
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Evidently, the Petition for Review in C.T.A. Case No. 7687 was filed 426 days late. Thus,
the Petition for Review in C.T.A. Case No. 7687 should have been dismissed on the ground
that the Petition for Review was filed way beyond the 30-day prescribed period; thus, no
jurisdiction was acquired by the CTA Division; x x x58 (Emphasis supplied)
Unlike San Roque and Taganito, Philex’s case is not one of premature filing but of late filing.
Philex did not file any petition with the CTA within the 120-day period. Philex did not also
file any petition with the CTA within 30 days after the expiration of the 120-day period.
Philex filed its judicial claim long after the expiration of the 120-day period, in fact 426 days
after the lapse of the 120-day period. In any event, whether governed by jurisprudence
before, during, or after the Atlas case, Philex’s judicial claim will have to be rejected
because of late filing. Whether the two-year prescriptive period is counted from the date of
payment of the output VAT following the Atlas doctrine, or from the close of the taxable
quarter when the sales attributable to the input VAT were made following
the Mirant and Aichi doctrines, Philex’s judicial claim was indisputably filed late.
The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inaction of
the Commissioner on Philex’s claim during the 120-day period is, by express provision of law,
"deemed a denial" of Philex’s claim. Philex had 30 days from the expiration of the 120-day
period to file its judicial claim with the CTA. Philex’s failure to do so rendered the "deemed a
denial" decision of the Commissioner final and inappealable. The right to appeal to the CTA
from a decision or "deemed a denial" decision of the Commissioner is merely a statutory
privilege, not a constitutional right. The exercise of such statutory privilege requires strict
compliance with the conditions attached by the statute for its exercise. 59 Philex failed to
comply with the statutory conditions and must thus bear the consequences.
II. Prescriptive Periods under Section 112(A) and (C)
There are three compelling reasons why the 30-day period need not necessarily fall within the
two-year prescriptive period, as long as the administrative claim is filed within the two-year
prescriptive period.
First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer
"may, within two (2) years after the close of the taxable quarter when the sales were
made, apply for the issuance of a tax credit certificate or refund of the creditable input
tax due or paid to such sales." In short, the law states that the taxpayer may apply with the
Commissioner for a refund or credit "within two (2) years," which means at anytime
within two years. Thus, the application for refund or credit may be filed by the taxpayer
with the Commissioner on the last day of the two-year prescriptive period and it will still
strictly comply with the law. The twoyear prescriptive period is a grace period in favor of
the taxpayer and he can avail of the full period before his right to apply for a tax refund or
credit is barred by prescription.
Second, Section 112(C) provides that the Commissioner shall decide the application for
refund or credit "within one hundred twenty (120) days from the date of submission of
complete documents in support of the application filed in accordance with Subsection (A)."
The reference in Section 112(C) of the submission of documents "in support of the
application filed in accordance with Subsection A" means that the application in Section
112(A) is the administrative claim that the Commissioner must decide within the 120-day
period. In short, the two-year prescriptive period in Section 112(A) refers to the period
within which the taxpayer can file an administrative claim for tax refund or credit. Stated
otherwise, the two-year prescriptive period does not refer to the filing of the judicial
claim with the CTA but to the filing of the administrative claim with the
Commissioner. As held in Aichi, the "phrase ‘within two years x x x apply for the issuance
of a tax credit or refund’ refers to applications for refund/credit with the CIR and not to
appeals made to the CTA."
Third, if the 30-day period, or any part of it, is required to fall within the two-year
prescriptive period (equivalent to 730 days60), then the taxpayer must file his administrative
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claim for refund or credit within the first 610 days of the two-year prescriptive
period. Otherwise, the filing of the administrative claim beyond the first 610 days will
result in the appeal to the CTA being filed beyond the two-year prescriptive period.
Thus, if the taxpayer files his administrative claim on the 611th day, the Commissioner,
with his 120-day period, will have until the 731st day to decide the claim. If the
Commissioner decides only on the 731st day, or does not decide at all, the taxpayer can no
longer file his judicial claim with the CTA because the two-year prescriptive period
(equivalent to 730 days) has lapsed. The 30-day period granted by law to the taxpayer to file
an appeal before the CTA becomes utterly useless, even if the taxpayer complied with the
law by filing his administrative claim within the two-year prescriptive period.
The theory that the 30-day period must fall within the two-year prescriptive period adds a
condition that is not found in the law. It results in truncating 120 days from the 730 days that
the law grants the taxpayer for filing his administrative claim with the Commissioner. This
Court cannot interpret a law to defeat, wholly or even partly, a remedy that the law expressly
grants in clear, plain, and unequivocal language.
Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal
language. The taxpayer can file his administrative claim for refund or credit at anytime within
the two-year prescriptive period. If he files his claim on the last day of the two-year
prescriptive period, his claim is still filed on time. The Commissioner will have 120 days from
such filing to decide the claim. If the Commissioner decides the claim on the 120th day, or
does not decide it on that day, the taxpayer still has 30 days to file his judicial claim with the
CTA. This is not only the plain meaning but also the only logical interpretation of Section
112(A) and (C).
III. "Excess" Input VAT and "Excessively" Collected Tax
The input VAT is not "excessively" collected as understood under Section 229 because at the
time the input VAT is collected the amount paid is correct and proper. The input VAT is
a tax liability of, and legally paid by, a VAT-registered seller61 of goods, properties or services
used as input by another VAT-registered person in the sale of his own goods, properties, or
services. This tax liability is true even if the seller passes on the input VAT to the buyer as part
of the purchase price. The second VAT-registered person, who is not legally liable for the
input VAT, is the one who applies the input VAT as credit for his own output VAT. 62 If the
input VAT is in fact "excessively" collected as understood under Section 229, then it is the
first VAT-registered person - the taxpayer who is legally liable and who is deemed to have
legally paid for the input VAT - who can ask for a tax refund or credit under Section 229 as an
ordinary refund or credit outside of the VAT System. In such event, the second VAT-
registered taxpayer will have no input VAT to offset against his own output VAT.
In a claim for refund or credit of "excess" input VAT under Section 110(B) and Section
112(A), the input VAT is not "excessively" collected as understood under Section 229. At the
time of payment of the input VAT the amount paid is the correct and proper amount. Under
the VAT System, there is no claim or issue that the input VAT is "excessively" collected, that
is, that the input VAT paid is more than what is legally due. The person legally liable for the
input VAT cannot claim that he overpaid the input VAT by the mere existence of an "excess"
input VAT. The term "excess" input VAT simply means that the input VAT available as credit
exceeds the output VAT, not that the input VAT is excessively collected because it is more
than what is legally due. Thus, the taxpayer who legally paid the input VAT cannot claim for
refund or credit of the input VAT as "excessively" collected under Section 229.
Under Section 229, the prescriptive period for filing a judicial claim for refund is two years
from the date of payment of the tax "erroneously, x x x illegally, x x x excessively or in any
manner wrongfully collected." The prescriptive period is reckoned from the date the person
liable for the tax pays the tax. Thus, if the input VAT is in fact "excessively" collected, that is,
the person liable for the tax actually pays more than what is legally due, the taxpayer must file
a judicial claim for refund within two years from his date of payment. Only the person
legally liable to pay the tax can file the judicial claim for refund. The person to whom the
tax is passed on as part of the purchase price has no personality to file the judicial claim
under Section 229.63
Under Section 110(B) and Section 112(A), the prescriptive period for filing a judicial claim
for "excess" input VAT is two years from the close of the taxable quarter when the sale was
made by the person legally liable to pay the output VAT. This prescriptive period has no
relation to the date of payment of the "excess" input VAT. The "excess" input VAT may have
been paid for more than two years but this does not bar the filing of a judicial claim for
"excess" VAT under Section 112(A), which has a different reckoning period from Section
229. Moreover, the person claiming the refund or credit of the input VAT is not the person
who legally paid the input VAT. Such person seeking the VAT refund or credit does not claim
that the input VAT was "excessively" collected from him, or that he paid an input VAT that is
more than what is legally due. He is not the taxpayer who legally paid the input VAT.
As its name implies, the Value-Added Tax system is a tax on the value added by the taxpayer
in the chain of transactions. For simplicity and efficiency in tax collection, the VAT is
imposed not just on the value added by the taxpayer, but on the entire selling price of his
goods, properties or services. However, the taxpayer is allowed a refund or credit on the VAT
previously paid by those who sold him the inputs for his goods, properties, or services. The net
effect is that the taxpayer pays the VAT only on the value that he adds to the goods,
properties, or services that he actually sells.
Under Section 110(B), a taxpayer can apply his input VAT only against his output VAT. The
only exception is when the taxpayer is expressly "zero-rated or effectively zero-rated" under
the law, like companies generating power through renewable sources of energy. 64 Thus,
a non zero-rated VAT-registered taxpayer who has no output VAT because he has no sales
cannot claim a tax refund or credit of his unused input VAT under the VAT System. Even if
the taxpayer has sales but his input VAT exceeds his output VAT, he cannot seek a tax refund
or credit of his "excess" input VAT under the VAT System. He can only carry-over and
apply his "excess" input VAT against his future output VAT. If such "excess" input VAT
is an "excessively" collected tax, the taxpayer should be able to seek a refund or credit for
such "excess" input VAT whether or not he has output VAT. The VAT System does not allow
such refund or credit. Such "excess" input VAT is not an "excessively" collected tax under
Section 229. The "excess" input VAT is a correctly and properly collected tax. However, such
"excess" input VAT can be applied against the output VAT because the VAT is a tax imposed
only on the value added by the taxpayer. If the input VAT is in fact "excessively" collected
under Section 229, then it is the person legally liable to pay the input VAT, not the person to
whom the tax was passed on as part of the purchase price and claiming credit for the input
VAT under the VAT System, who can file the judicial claim under Section 229.
Any suggestion that the "excess" input VAT under the VAT System is an "excessively"
collected tax under Section 229 may lead taxpayers to file a claim for refund or credit for such
"excess" input VAT under Section 229 as an ordinary tax refund or credit outside of the VAT
System. Under Section 229, mere payment of a tax beyond what is legally due can be claimed
as a refund or credit. There is no requirement under Section 229 for an output VAT or
subsequent sale of goods, properties, or services using materials subject to input VAT.
From the plain text of Section 229, it is clear that what can be refunded or credited is a tax that
is "erroneously, x x x illegally, x x x excessively or in any manner wrongfully collected." In
short, there must be a wrongful payment because what is paid, or part of it, is not legally due.
As the Court held in Mirant, Section 229 should "apply only to instances of erroneous
payment or illegal collection of internal revenue taxes." Erroneous or wrongful payment
includes excessive payment because they all refer to payment of taxes not legally due.
Under the VAT System, there is no claim or issue that the "excess" input VAT is "excessively
or in any manner wrongfully collected." In fact, if the "excess" input VAT is an "excessively"
collected tax under Section 229, then the taxpayer claiming to apply such "excessively"
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collected input VAT to offset his output VAT may have no legal basis to make such offsetting.
The person legally liable to pay the input VAT can claim a refund or credit for such
"excessively" collected tax, and thus there will no longer be any "excess" input VAT. This will
upend the present VAT System as we know it.
IV. Effectivity and Scope of the Atlas , Mirant and Aichi Doctrines
The Atlas doctrine, which held that claims for refund or credit of input VAT must comply with
the two-year prescriptive period under Section 229, should be effective only from its
promulgation on 8 June 2007 until its abandonment on 12 September 2008
in Mirant. The Atlas doctrine was limited to the reckoning of the two-year prescriptive period
from the date of payment of the output VAT. Prior to the Atlas doctrine, the two-year
prescriptive period for claiming refund or credit of input VAT should be governed by Section
112(A) following the verba legis rule. The Mirant ruling, which abandoned the Atlas doctrine,
adopted the verba legis rule, thus applying Section 112(A) in computing the two-year
prescriptive period in claiming refund or credit of input VAT.
The Atlas doctrine has no relevance to the 120+30 day periods under Section 112(C) because
the application of the 120+30 day periods was not in issue in Atlas. The application of the
120+30 day periods was first raised in Aichi, which adopted the verba legis rule in holding
that the 120+30 day periods are mandatory and jurisdictional. The language of Section 112(C)
is plain, clear, and unambiguous. When Section 112(C) states that "the Commissioner shall
grant a refund or issue the tax credit within one hundred twenty (120) days from the date of
submission of complete documents," the law clearly gives the Commissioner 120 days within
which to decide the taxpayer’s claim. Resort to the courts prior to the expiration of the 120-
day period is a patent violation of the doctrine of exhaustion of administrative remedies, a
ground for dismissing the judicial suit due to prematurity. Philippine jurisprudence is awash
with cases affirming and reiterating the doctrine of exhaustion of administrative
remedies.65 Such doctrine is basic and elementary.
When Section 112(C) states that "the taxpayer affected may, within thirty (30) days from
receipt of the decision denying the claim or after the expiration of the one hundred twenty-day
period, appeal the decision or the unacted claim with the Court of Tax Appeals," the law does
not make the 120+30 day periods optional just because the law uses the word "may." The
word "may" simply means that the taxpayer may or may not appeal the decision of the
Commissioner within 30 days from receipt of the decision, or within 30 days from the
expiration of the 120-day period. Certainly, by no stretch of the imagination can the word
"may" be construed as making the 120+30 day periods optional, allowing the taxpayer to file a
judicial claim one day after filing the administrative claim with the Commissioner.
The old rule66 that the taxpayer may file the judicial claim, without waiting for the
Commissioner’s decision if the two-year prescriptive period is about to expire, cannot apply
because that rule was adopted before the enactment of the 30-day period. The 30-day period
was adopted precisely to do away with the old rule, so that under the VAT System the
taxpayer will always have 30 days to file the judicial claim even if the Commissioner acts
only on the 120th day, or does not act at all during the 120-day period. With the 30-day
period always available to the taxpayer, the taxpayer can no longer file a judicial claim for
refund or credit of input VAT without waiting for the Commissioner to decide until the
expiration of the 120-day period.
To repeat, a claim for tax refund or credit, like a claim for tax exemption, is construed strictly
against the taxpayer. One of the conditions for a judicial claim of refund or credit under the
VAT System is compliance with the 120+30 day mandatory and jurisdictional periods. Thus,
strict compliance with the 120+30 day periods is necessary for such a claim to prosper,
whether before, during, or after the effectivity of the Atlas doctrine, except for the period from
the issuance of BIR Ruling No. DA-489-03 on 10 December 2003 to 6 October 2010 when
the Aichi doctrine was adopted, which again reinstated the 120+30 day periods as mandatory
and jurisdictional.
V. Revenue Memorandum Circular No. 49-03 (RMC 49-03) dated 15 April 2003
There is nothing in RMC 49-03 that states, expressly or impliedly, that the taxpayer need not
wait for the 120-day period to expire before filing a judicial claim with the CTA. RMC 49-03
merely authorizes the BIR to continue processing the administrative claim even after the
taxpayer has filed its judicial claim, without saying that the taxpayer can file its judicial claim
before the expiration of the 120-day period. RMC 49-03 states: "In cases where the taxpayer
has filed a ‘Petition for Review’ with the Court of Tax Appeals involving a claim for
refund/TCC that is pending at the administrative agency (either the Bureau of Internal
Revenue or the One- Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the
Department of Finance), the administrative agency and the court may act on the case
separately." Thus, if the taxpayer files its judicial claim before the expiration of the 120-day
period, the BIR will nevertheless continue to act on the administrative claim because such
premature filing cannot divest the Commissioner of his statutory power and jurisdiction to
decide the administrative claim within the 120-day period.
On the other hand, if the taxpayer files its judicial claim after the 120- day period, the
Commissioner can still continue to evaluate the administrative claim. There is nothing new in
this because even after the expiration of the 120-day period, the Commissioner should still
evaluate internally the administrative claim for purposes of opposing the taxpayer’s judicial
claim, or even for purposes of determining if the BIR should actually concede to the
taxpayer’s judicial claim. The internal administrative evaluation of the taxpayer’s claim
must necessarily continue to enable the BIR to oppose intelligently the judicial claim or, if the
facts and the law warrant otherwise, for the BIR to concede to the judicial claim, resulting in
the termination of the judicial proceedings.
What is important, as far as the present cases are concerned, is that the mere filing by a
taxpayer of a judicial claim with the CTA before the expiration of the 120-day period
cannot operate to divest the Commissioner of his jurisdiction to decide an administrative
claim within the 120-day mandatory period, unless the Commissioner has clearly given
cause for equitable estoppel to apply as expressly recognized in Section 246 of the Tax
Code.67
VI. BIR Ruling No. DA-489-03 dated 10 December 2003
BIR Ruling No. DA-489-03 does provide a valid claim for equitable estoppel under Section
246 of the Tax Code. BIR Ruling No. DA-489-03 expressly states that the "taxpayer-
claimant need not wait for the lapse of the 120-day period before it could seek judicial
relief with the CTA by way of Petition for Review." Prior to this ruling, the BIR held, as
shown by its position in the Court of Appeals,68 that the expiration of the 120-day period is
mandatory and jurisdictional before a judicial claim can be filed.
There is no dispute that the 120-day period is mandatory and jurisdictional, and that the CTA
does not acquire jurisdiction over a judicial claim that is filed before the expiration of the 120-
day period. There are, however, two exceptions to this rule. The first exception is if the
Commissioner, through a specific ruling, misleads a particular taxpayer to prematurely file a
judicial claim with the CTA. Such specific ruling is applicable only to such particular
taxpayer. The second exception is where the Commissioner, through a general interpretative
rule issued under Section 4 of the Tax Code, misleads all taxpayers into filing prematurely
judicial claims with the CTA. In these cases, the Commissioner cannot be allowed to later on
question the CTA’s assumption of jurisdiction over such claim since equitable estoppel has set
in as expressly authorized under Section 246 of the Tax Code.
Section 4 of the Tax Code, a new provision introduced by RA 8424, expressly grants to the
Commissioner the power to interpret tax laws, thus:
Sec. 4. Power of the Commissioner To Interpret Tax Laws and To Decide Tax Cases. — The
power to interpret the provisions of this Code and other tax laws shall be under the exclusive
and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.
137
The power to decide disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under this Code or other
laws or portions thereof administered by the Bureau of Internal Revenue is vested in the
Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.
Since the Commissioner has exclusive and original jurisdiction to interpret tax laws,
taxpayers acting in good faith should not be made to suffer for adhering to general
interpretative rules of the Commissioner interpreting tax laws, should such interpretation later
turn out to be erroneous and be reversed by the Commissioner or this Court. Indeed, Section
246 of the Tax Code expressly provides that a reversal of a BIR regulation or ruling cannot
adversely prejudice a taxpayer who in good faith relied on the BIR regulation or ruling prior to
its reversal. Section 246 provides as follows:
Sec. 246. Non-Retroactivity of Rulings. — Any revocation, modification or reversal of any of
the rules and regulations promulgated in accordance with the preceding Sections or any of
the rulings or circulars promulgated by the Commissioner shall not be given retroactive
application if the revocation, modification or reversal will be prejudicial to the
taxpayers, except in the following cases:
(a) Where the taxpayer deliberately misstates or omits material facts from his return
or any document required of him by the Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or
(c) Where the taxpayer acted in bad faith. (Emphasis supplied)
Thus, a general interpretative rule issued by the Commissioner may be relied upon by
taxpayers from the time the rule is issued up to its reversal by the Commissioner or this Court.
Section 246 is not limited to a reversal only by the Commissioner because this Section
expressly states, "Any revocation, modification or reversal" without specifying who made the
revocation, modification or reversal. Hence, a reversal by this Court is covered under Section
246.
Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner,
particularly on a difficult question of law. The abandonment of the Atlas doctrine
by Mirant and Aichi69 is proof that the reckoning of the prescriptive periods for input VAT tax
refund or credit is a difficult question of law. The abandonment of the Atlas doctrine did not
result in Atlas, or other taxpayers similarly situated, being made to return the tax refund or
credit they received or could have received under Atlas prior to its abandonment. This Court is
applying Mirant and Aichi prospectively. Absent fraud, bad faith or misrepresentation, the
reversal by this Court of a general interpretative rule issued by the Commissioner, like the
reversal of a specific BIR ruling under Section 246, should also apply prospectively. As held
by this Court in CIR v. Philippine Health Care Providers, Inc.:70
In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, this Court held that under Section
246 of the 1997 Tax Code, the Commissioner of Internal Revenue is precluded from
adopting a position contrary to one previously taken where injustice would result to the
taxpayer. Hence, where an assessment for deficiency withholding income taxes was made,
three years after a new BIR Circular reversed a previous one upon which the taxpayer had
relied upon, such an assessment was prejudicial to the taxpayer. To rule otherwise, opined the
Court, would be contrary to the tenets of good faith, equity, and fair play.
This Court has consistently reaffirmed its ruling in ABS-CBN Broadcasting Corp.1âwphi1 in
the later cases of Commissioner of Internal Revenue v. Borroughs, Ltd., Commissioner of
Internal Revenue v. Mega Gen. Mdsg. Corp., Commissioner of Internal Revenue v. Telefunken
Semiconductor (Phils.) Inc., and Commissioner of Internal Revenue v. Court of Appeals. The
rule is that the BIR rulings have no retroactive effect where a grossly unfair deal would
result to the prejudice of the taxpayer, as in this case.
More recently, in Commissioner of Internal Revenue v. Benguet Corporation, wherein the
taxpayer was entitled to tax refunds or credits based on the BIR’s own issuances but later was
suddenly saddled with deficiency taxes due to its subsequent ruling changing the category of
the taxpayer’s transactions for the purpose of paying its VAT, this Court ruled that applying
such ruling retroactively would be prejudicial to the taxpayer. (Emphasis supplied)
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule
applicable to all taxpayers or a specific ruling applicable only to a particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a
query made, not by a particular taxpayer, but by a government agency tasked with processing
tax refunds and credits, that is, the One Stop Shop Inter-Agency Tax Credit and Drawback
Center of the Department of Finance. This government agency is also the addressee, or the
entity responded to, in BIR Ruling No. DA-489-03. Thus, while this government agency
mentions in its query to the Commissioner the administrative claim of Lazi Bay Resources
Development, Inc., the agency was in fact asking the Commissioner what to do in cases like
the tax claim of Lazi Bay Resources Development, Inc., where the taxpayer did not wait for
the lapse of the 120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can
rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to
its reversal by this Court in Aichi on 6 October 2010, where this Court held that the 120+30
day periods are mandatory and jurisdictional
However, BIR Ruling No. DA-489-03 cannot be given retroactive effect for four reasons: first,
it is admittedly an erroneous interpretation of the law; second, prior to its issuance, the BIR
held that the 120-day period was mandatory and jurisdictional, which is the correct
interpretation of the law; third, prior to its issuance, no taxpayer can claim that it was misled
by the BIR into filing a judicial claim prematurely; and fourth, a claim for tax refund or credit,
like a claim for tax exemption, is strictly construed against the taxpayer.
San Roque, therefore, cannot benefit from BIR Ruling No. DA-489-03 because it filed its
judicial claim prematurely on 10 April 2003, before the issuance of BIR Ruling No. DA-489-
03 on 10 December 2003. To repeat, San Roque cannot claim that it was misled by the BIR
into filing its judicial claim prematurely because BIR Ruling No. DA-489-03 was issued only
after San Roque filed its judicial claim. At the time San Roque filed its judicial claim, the law
as applied and administered by the BIR was that the Commissioner had 120 days to act on
administrative claims. This was in fact the position of the BIR prior to the issuance of BIR
Ruling No. DA-489-03. Indeed, San Roque never claimed the benefit of BIR Ruling No.
DA-489-03 or RMC 49-03, whether in this Court, the CTA, or before the Commissioner.
Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the
issuance of BIR Ruling No. DA-489-03 on 10 December 2003. Truly, Taganito can claim that
in filing its judicial claim prematurely without waiting for the 120-day period to expire, it was
misled by BIR Ruling No. DA-489-03. Thus, Taganito can claim the benefit of BIR Ruling
No. DA-489-03, which shields the filing of its judicial claim from the vice of prematurity.
Philex’s situation is not a case of premature filing of its judicial claim but of late filing,
indeed very late filing. BIR Ruling No. DA-489-03 allowed premature filing of a judicial
claim, which means non-exhaustion of the 120-day period for the Commissioner to act on an
administrative claim. Philex cannot claim the benefit of BIR Ruling No. DA-489-03 because
Philex did not file its judicial claim prematurely but filed it long after the lapse of the 30-day
period following the expiration of the 120-day period. In fact, Philex filed its judicial claim
426 days after the lapse of the 30-day period.
VII. Existing Jurisprudence
There is no basis whatsoever to the claim that in five cases this Court had already made a
ruling that the filing dates of the administrative and judicial claims are inconsequential, as
long as they are within the two-year prescriptive period. The effect of the claim of the
dissenting opinions is that San Roque’s failure to wait for the 120-day mandatory period to
lapse is inconsequential, thus allowing San Roque to claim the tax refund or credit. However,
the five cases cited by the dissenting opinions do not support even remotely the claim that this
138
Court had already made such a ruling. None of these five cases mention, cite, discuss, rule
or even hint that compliance with the 120-day mandatory period is inconsequential as
long as the administrative and judicial claims are filed within the two-year prescriptive
period.
In CIR v. Toshiba Information Equipment (Phils.), Inc.,71 the issue was whether any output
VAT was actually passed on to Toshiba that it could claim as input VAT subject to tax credit
or refund. The Commissioner argued that "although Toshiba may be a VAT-registered
taxpayer, it is not engaged in a VAT-taxable business." The Commissioner cited Section
4.106-1 of Revenue Regulations No. 75 that "refund of input taxes on capital goods shall be
allowed only to the extent that such capital goods are used in VAT-taxable business." In the
words of the Court, "Ultimately, however, the issue still to be resolved herein shall be whether
respondent Toshiba is entitled to the tax credit/refund of its input VAT on its purchases of
capital goods and services, to which this Court answers in the affirmative." Nowhere in this
case did the Court discuss, state, or rule that the filing dates of the administrative and judicial
claims are inconsequential, as long as they are within the two-year prescriptive period.
In Intel Technology Philippines, Inc. v. CIR,72 the Court stated: "The issues to be resolved in
the instant case are (1) whether the absence of the BIR authority to print or the absence of the
TIN-V in petitioner’s export sales invoices operates to forfeit its entitlement to a tax
refund/credit of its unutilized input VAT attributable to its zero-rated sales; and (2) whether
petitioner’s failure to indicate "TIN-V" in its sales invoices automatically invalidates its claim
for a tax credit certification." Again, nowhere in this case did the Court discuss, state, or rule
that the filing dates of the administrative and judicial claims are inconsequential, as long as
they are within the two-year prescriptive period.
In AT&T Communications Services Philippines, Inc. v. CIR,73 the Court stated: "x x x the CTA
First Division, conceding that petitioner’s transactions fall under the classification of zero-
rated sales, nevertheless denied petitioner’s claim ‘for lack of substantiation,’ x x x." The
Court quoted the ruling of the First Division that "valid VAT official receipts, and not mere
sale invoices, should have been submitted" by petitioner to substantiate its claim. The Court
further stated: "x x x the CTA En Banc, x x x affirmed x x x the CTA First Division," and
"petitioner’s motion for reconsideration having been denied x x x, the present petition for
review was filed." Clearly, the sole issue in this case is whether petitioner complied with the
substantiation requirements in claiming for tax refund or credit. Again, nowhere in this case
did the Court discuss, state, or rule that the filing dates of the administrative and judicial
claims are inconsequential, as long as they are within the two-year prescriptive period.
In CIR v. Ironcon Builders and Development Corporation,74 the Court put the issue in this
manner: "Simply put, the sole issue the petition raises is whether or not the CTA erred in
granting respondent Ironcon’s application for refund of its excess creditable VAT withheld."
The Commissioner argued that "since the NIRC does not specifically grant taxpayers the
option to refund excess creditable VAT withheld, it follows that such refund cannot be
allowed." Thus, this case is solely about whether the taxpayer has the right under the NIRC to
ask for a cash refund of excess creditable VAT withheld. Again, nowhere in this case did the
Court discuss, state, or rule that the filing dates of the administrative and judicial claims are
inconsequential, as long as they are within the two-year prescriptive period.
In CIR v. Cebu Toyo Corporation,75 the issue was whether Cebu Toyo was exempt or subject
to VAT. Compliance with the 120-day period was never an issue in Cebu Toyo. As the Court
explained:
Both the Commissioner of Internal Revenue and the Office of the Solicitor General argue that
respondent Cebu Toyo Corporation, as a PEZA-registered enterprise, is exempt from
national and local taxes, including VAT, under Section 24 of Rep. Act No. 7916 and Section
109 of the NIRC. Thus, they contend that respondent Cebu Toyo Corporation is not entitled to
any refund or credit on input taxes it previously paid as provided under Section 4.103-1 of
Revenue Regulations No. 7-95, notwithstanding its registration as a VAT taxpayer. For
petitioner claims that said registration was erroneous and did not confer upon the respondent
any right to claim recognition of the input tax credit.
The respondent counters that it availed of the income tax holiday under E.O. No. 226 for four
years from August 7, 1995 making it exempt from income tax but not from other taxes such as
VAT. Hence, according to respondent, its export sales are not exempt from VAT,
contrary to petitioner’s claim, but its export sales is subject to 0% VAT. Moreover, it
argues that it was able to establish through a report certified by an independent Certified
Public Accountant that the input taxes it incurred from April 1, 1996 to December 31, 1997
were directly attributable to its export sales. Since it did not have any output tax against which
said input taxes may be offset, it had the option to file a claim for refund/tax credit of its
unutilized input taxes.
Considering the submission of the parties and the evidence on record, we find the petition
bereft of merit.
Petitioner’s contention that respondent is not entitled to refund for being exempt from
VAT is untenable. This argument turns a blind eye to the fiscal incentives granted to PEZA-
registered enterprises under Section 23 of Rep. Act No. 7916. Note that under said statute, the
respondent had two options with respect to its tax burden. It could avail of an income tax
holiday pursuant to provisions of E.O. No. 226, thus exempt it from income taxes for a
number of years but not from other internal revenue taxes such as VAT; or it could avail of the
tax exemptions on all taxes, including VAT under P.D. No. 66 and pay only the preferential
tax rate of 5% under Rep. Act No. 7916. Both the Court of Appeals and the Court of Tax
Appeals found that respondent availed of the income tax holiday for four (4) years starting
from August 7, 1995, as clearly reflected in its 1996 and 1997 Annual Corporate Income Tax
Returns, where respondent specified that it was availing of the tax relief under E.O. No.
226. Hence, respondent is not exempt from VAT and it correctly registered itself as a
VAT taxpayer. In fine, it is engaged in taxable rather than exempt transactions.
(Emphasis supplied)
Clearly, the issue in Cebu Toyo was whether the taxpayer was exempt from VAT or
subject to VAT at 0% tax rate. If subject to 0% VAT rate, the taxpayer could claim a refund
or credit of its input VAT. Again, nowhere in this case did the Court discuss, state, or rule that
the filing dates of the administrative and judicial claims are inconsequential, as long as they
are within the two-year prescriptive period.
While this Court stated in the narration of facts in Cebu Toyo that the taxpayer "did not bother
to wait for the Resolution of its (administrative) claim by the CIR" before filing its judicial
claim with the CTA, this issue was not raised before the Court. Certainly, this statement of the
Court is not a binding precedent that the taxpayer need not wait for the 120-day period to
lapse.
Any issue, whether raised or not by the parties, but not passed upon by the Court, does
not have any value as precedent. As this Court has explained as early as 1926:
It is contended, however, that the question before us was answered and resolved against the
contention of the appellant in the case of Bautista vs. Fajardo (38 Phil. 624). In that case no
question was raised nor was it even suggested that said section 216 did not apply to a public
officer. That question was not discussed nor referred to by any of the parties interested in that
case. It has been frequently decided that the fact that a statute has been accepted as valid, and
invoked and applied for many years in cases where its validity was not raised or passed on,
does not prevent a court from later passing on its validity, where that question is squarely and
properly raised and presented. Where a question passes the Court sub silentio, the case in
which the question was so passed is not binding on the Court (McGirr vs. Hamilton and
Abreu, 30 Phil. 563), nor should it be considered as a precedent. (U.S. vs. Noriega and
Tobias, 31 Phil. 310; Chicote vs. Acasio, 31 Phil. 401; U.S. vs. More, 3 Cranch [U.S.] 159,
172; U.S. vs. Sanges, 144 U.S. 310, 319; Cross vs. Burke, 146 U.S. 82.) For the reasons given
in the case of McGirr vs. Hamilton and Abreu, supra, the decision in the case of Bautista vs.
139
Fajardo, supra, can have no binding force in the interpretation of the question presented
here.76 (Emphasis supplied)
In Cebu Toyo, the nature of the 120-day period, whether it is mandatory or optional, was not
even raised as an issue by any of the parties. The Court never passed upon this issue.
Thus, Cebu Toyo does not constitute binding precedent on the nature of the 120-day period.
There is also the claim that there are numerous CTA decisions allegedly supporting the
argument that the filing dates of the administrative and judicial claims are inconsequential, as
long as they are within the two-year prescriptive period. Suffice it to state that CTA decisions
do not constitute precedents, and do not bind this Court or the public. That is why CTA
decisions are appealable to this Court, which may affirm, reverse or modify the CTA decisions
as the facts and the law may warrant. Only decisions of this Court constitute binding
precedents, forming part of the Philippine legal system.77 As held by this Court in The
Philippine Veterans Affairs Office v. Segundo:78
x x x Let it be admonished that decisions of the Supreme Court "applying or interpreting the
laws or the Constitution . . . form part of the legal system of the Philippines," and, as it were,
"laws" by their own right because they interpret what the laws say or mean. Unlike rulings of
the lower courts, which bind the parties to specific cases alone, our judgments are
universal in their scope and application, and equally mandatory in character. Let it be
warned that to defy our decisions is to court contempt. (Emphasis supplied)
The same basic doctrine was reiterated by this Court in De Mesa v. Pepsi Cola Products
Phils., Inc.:79
The principle of stare decisis et non quieta movere is entrenched in Article 8 of the Civil
Code, to wit:
ART. 8. Judicial decisions applying or interpreting the laws or the Constitution shall form a
part of the legal system of the Philippines.
It enjoins adherence to judicial precedents. It requires our courts to follow a rule already
established in a final decision of the Supreme Court. That decision becomes a judicial
precedent to be followed in subsequent cases by all courts in the land. The doctrine of stare
decisis is based on the principle that once a question of law has been examined and decided, it
should be deemed settled and closed to further argument. (Emphasis supplied)
VIII. Revenue Regulations No. 7-95 Effective 1 January 1996
Section 4.106-2(c) of Revenue Regulations No. 7-95, by its own express terms, applies only if
the taxpayer files the judicial claim "after" the lapse of the 60-day period, a period with which
San Roque failed to comply. Under Section 4.106-2(c), the 60-day period is still mandatory
and jurisdictional.
Moreover, it is a hornbook principle that a prior administrative regulation can never prevail
over a later contrary law, more so in this case where the later law was enacted precisely to
amend the prior administrative regulation and the law it implements.
The laws and regulation involved are as follows:
1977 Tax Code, as amended by Republic Act No. 7716 (1994)
Sec. 106. Refunds or tax credits of creditable input tax. —
(a) x x x x
(d) Period within which refund or tax credit of input tax shall be made - In proper cases,
the Commissioner shall grant a refund or issue the tax credit for creditable input
taxes within sixty (60) days from the date of submission of complete documents in
support of the application filed in accordance with subparagraphs (a) and (b) hereof. In
case of full or partial denial of the claim for tax refund or tax credit, or the failure on the
part of the Commissioner to act on the application within the period prescribed
above, the taxpayer affected may, within thirty (30) days from receipt of the
decision denying the claim or after the expiration of the sixty-day period, appeal the
decision or the unacted claim with the Court of Tax Appeals.
Revenue Regulations No. 7-95 (1996)
Section 4.106-2. Procedures for claiming refunds or tax credits of input tax — (a) x x x
xxxx
(c) Period within which refund or tax credit of input taxes shall be made. — In proper cases,
the Commissioner shall grant a tax credit/refund for creditable input taxes within sixty (60)
days from the date of submission of complete documents in support of the application filed in
accordance with subparagraphs (a) and (b) above.
In case of full or partial denial of the claim for tax credit/refund as decided by the
Commissioner of Internal Revenue, the taxpayer may appeal to the Court of Tax Appeals
within thirty (30) days from the receipt of said denial, otherwise the decision will become
final. However, if no action on the claim for tax credit/refund has been taken by the
Commissioner of Internal Revenue after the sixty (60) day period from the date of
submission of the application but before the lapse of the two (2) year period from the
date of filing of the VAT return for the taxable quarter, the taxpayer may appeal to the
Court of Tax Appeals.
xxxx
1997 Tax Code
Section 112. Refunds or Tax Credits of Input Tax —
(A) x x x
xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be made. — In proper
cases, the Commissioner shall grant the refund or issue the tax credit certificate for creditable
input taxes within one hundred twenty (120) days from the date of submission of complete
documents in support of the application filed in accordance with Subsections (A) and (B)
hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on
the part of the Commissioner to act on the application within the period prescribed
above, the taxpayer affected may, within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the hundred twenty day-period, appeal the
decision or the unacted claim with the Court of Tax Appeals.
There can be no dispute that under Section 106(d) of the 1977 Tax Code, as amended by RA
7716, the Commissioner has a 60-day period to act on the administrative claim. This 60-day
period is mandatory and jurisdictional.
Did Section 4.106-2(c) of Revenue Regulations No. 7-95 change this, so that the 60-day
period is no longer mandatory and jurisdictional? The obvious answer is no.
Section 4.106-2(c) itself expressly states that if, "after the sixty (60) day period," the
Commissioner fails to act on the administrative claim, the taxpayer may file the judicial claim
even "before the lapse of the two (2) year period." Thus, under Section 4.106-2(c) the 60-
day period is still mandatory and jurisdictional.
Section 4.106-2(c) did not change Section 106(d) as amended by RA 7716, but merely
implemented it, for two reasons. First, Section 4.106-2(c) still expressly requires
compliance with the 60-day period. This cannot be disputed.1âwphi1
Second, under the novel amendment introduced by RA 7716, mere inaction by the
Commissioner during the 60-day period is deemed a denial of the claim. Thus, Section 4.106-
2(c) states that "if no action on the claim for tax refund/credit has been taken by the
Commissioner after the sixty (60) day period," the taxpayer "may" already file the judicial
claim even long before the lapse of the two-year prescriptive period. Prior to the amendment
by RA 7716, the taxpayer had to wait until the two-year prescriptive period was about to
expire if the Commissioner did not act on the claim.80 With the amendment by RA 7716, the
taxpayer need not wait until the two-year prescriptive period is about to expire before filing
the judicial claim because mere inaction by the Commissioner during the 60-day period is
deemed a denial of the claim. This is the meaning of the phrase "but before the lapse of
the two (2) year period" in Section 4.106-2(c). As Section 4.106- 2(c) reiterates that the
140
judicial claim can be filed only "after the sixty (60) day period," this period remains
mandatory and jurisdictional. Clearly, Section 4.106-2(c) did not amend Section 106(d) but
merely faithfully implemented it.
Even assuming, for the sake of argument, that Section 4.106-2(c) of Revenue Regulations No.
7-95, an administrative issuance, amended Section 106(d) of the Tax Code to make the period
given to the Commissioner non-mandatory, still the 1997 Tax Code, a much later law,
reinstated the original intent and provision of Section 106(d) by extending the 60-day period to
120 days and re-adopting the original wordings of Section 106(d). Thus, Section 4.106-2(c),
a mere administrative issuance, becomes inconsistent with Section 112(D), a later law.
Obviously, the later law prevails over a prior inconsistent administrative issuance.
Section 112(D) of the 1997 Tax Code is clear, unequivocal, and categorical that the
Commissioner has 120 days to act on an administrative claim. The taxpayer can file the
judicial claim (1) only within thirty days after the Commissioner partially or fully denies the
claim within the 120- day period, or (2) only within thirty days from the expiration of the
120- day period if the Commissioner does not act within the 120-day period.
There can be no dispute that upon effectivity of the 1997 Tax Code on 1 January 1998,
or more than five years before San Roque filed its administrative claim on 28 March
2003, the law has been clear: the 120- day period is mandatory and jurisdictional. San Roque’s
claim, having been filed administratively on 28 March 2003, is governed by the 1997 Tax
Code, not the 1977 Tax Code. Since San Roque filed its judicial claim before the expiration of
the 120-day mandatory and jurisdictional period, San Roque’s claim cannot prosper.
San Roque cannot also invoke Section 4.106-2(c), which expressly provides that the taxpayer
can only file the judicial claim "after" the lapse of the 60-day period from the filing of the
administrative claim. San Roque filed its judicial claim just 13 days after filing its
administrative claim. To recall, San Roque filed its judicial claim on 10 April 2003, a mere
13 days after it filed its administrative claim.
Even if, contrary to all principles of statutory construction as well as plain common sense, we
gratuitously apply now Section 4.106-2(c) of Revenue Regulations No. 7-95, still San Roque
cannot recover any refund or credit because San Roque did not wait for the 60-day
period to lapse, contrary to the express requirement in Section 4.106-2(c). In short, San
Roque does not even comply with Section 4.106-2(c). A claim for tax refund or credit is
strictly construed against the taxpayer, who must prove that his claim clearly complies with all
the conditions for granting the tax refund or credit. San Roque did not comply with the express
condition for such statutory grant.
A final word. Taxes are the lifeblood of the nation. The Philippines has been struggling to
improve its tax efficiency collection for the longest time with minimal success. Consequently,
the Philippines has suffered the economic adversities arising from poor tax collections, forcing
the government to continue borrowing to fund the budget deficits. This Court cannot turn a
blind eye to this economic malaise by being unduly liberal to taxpayers who do not comply
with statutory requirements for tax refunds or credits. The tax refund claims in the present
cases are not a pittance. Many other companies stand to gain if this Court were to rule
otherwise. The dissenting opinions will turn on its head the well-settled doctrine that tax
refunds are strictly construed against the taxpayer.
WHEREFORE, the Court hereby (1) GRANTS the petition of the Commissioner of Internal
Revenue in G.R. No. 187485 to DENY the P483,797,599.65 tax refund or credit claim of San
Roque Power Corporation; (2) GRANTS the petition of Taganito Mining Corporation in G.R.
No. 196113 for a tax refund or credit of P8,365,664.38; and (3) DENIES the petition of Philex
Mining Corporation in G.R. No. 197156 for a tax refund or credit of P23,956,732.44.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
 EN BANC
August 16, 2016
G.R. No. 198756
BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION,
METROPOLITAN BANK & TRUST COMPANY, PHILIPPINE BANK OF
COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS
BANK, AND PLANTERS DEVELOPMENT BANK, Petitioners
vs.
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL
CORPORATION, Petitioners-Intervenors
x-----------------------x
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intevenor,
vs.
REVENUE, SECRETARY OF FINANCE, DEPARTMENT OF FINANCE, THE
NATIONAL TREASURER, AND BUREAU OF TREASURY, Respondents.
RESOLUTION
LEONEN, J.:
This resolves separate motions for reconsideration and clarification filed by the Office of the
Solicitor General 1 and petitioners-intervenors Rizal Commercial Banking Corporation and
RCBC Capital Corporation2 of our Decision dated January 13, 2015, which: (1) granted the
Petition and Petitions-in-Intervention and nullified Bureau of Internal Revenue (BIR) Ruling
Nos. 370-2011 and DA 378-2011; and (2) reprimanded the Bureau of Treasury for its
continued retention of the amount corresponding to the 20% final withholding tax that it
withheld on October 18, 2011, and ordered it to release the withheld amount to the
bondholders.
In the notice to all Government Securities Eligible Dealers (GSEDs) entitled Public Offering
of Treasury Bonds3(Public Offering) dated October 9, 2001, the Bureau of Treasury
announced that "P30.0 [billion] worth of 10- year Zero[-]Coupon Bonds [would] be auctioned
on October 16, 2001[.]"4 It stated that "the issue being limited to 19 lenders and while taxable
shall not be subject to the 20% final withholding [tax]."5
On October 12, 2001, the Bureau of Treasury released a memo on the Formula for the Zero-
Coupon Bond. 6 The memo stated in part that the formula, in determining the purchase price
and settlement amount, "is only applicable to the zeroes that are not subject to the 20% final
withholding due to the 19 buyer/lender limit."7
On October 15, 2001, one (1) day before the auction date, the Bureau of Treasury issued the
Auction Guidelines for the 10-year Zero-Coupon Treasury Bond to be Issued on October 16,
2001 (Auction Guidelines).8 The Auction Guidelines reiterated that the Bonds to be auctioned
are "[n]ot subject to 20% withholding tax as the issue will be limited to a maximum of 19
lenders in the primary market (pursuant to BIR Revenue Regulation No. 020 2001 )."9
At the auction held on October 16, 2001, Rizal Commercial Banking Corporation (RCBC)
participated on behalf of Caucus of Development NGO Networks (CODE-NGO) and won the
bid. 10 Accordingly, on October 18, 2001, the Bureau of Treasury issued P35 billion worth of
Bonds at yield-tomaturity of 12.75% to RCBC for approximately P10.17 billion, 11 resulting in
a discount of approximately P24.83 billion.
Likewise, on October 16, 2001, RCBC Capital entered into an underwriting agreement12 with
CODE-NGO, where RCBC Capital was appointed as the Issue Manager and Lead Underwriter
for the offering of the PEACe Bonds. 13RCBC Capital agreed to underwrite14 on a firm basis
the offering, distribution, and sale of the P3 5 billion Bonds at the price of
Pll,995,513,716.51. 15 In Section 7(r) of the underwriting agreement, CODE-NGO represented
that "[a]ll income derived from the Bonds, inclusive of premium on redemption and gains on
the trading of the same, are exempt from all forms of taxation as confirmed by [the] Bureau of
Internal Revenue . . . letter rulings dated 31 May 2001 and 16 August 2001, respectively." 16
141
RCBC Capital sold and distributed the Government Bonds for an issue price of
Pll,995,513,716.51. 17 Banco de Oro, et al. purchased the PEACe Bonds on different dates. 18
On October 7, 2011, barely 11 days before maturity of the PEACe Bonds, the Commissioner
of Internal Revenue issued BIR Ruling No. 370- 201119 declaring that the PEACe Bonds,
being deposit substitutes, were subject to 20% final withholding tax. 20 Under this ruling, the
Secretary of Finance directed the Bureau of Treasury to withhold a 20% final tax from the face
value of the PEACe Bonds upon their payment at maturity on October 18, 2011. 21
On October 17, 2011, replying to an urgent query from the Bureau of Treasury, the Bureau of
Internal Revenue issued BIR Ruling No. DA 378-201122 clarifying that the final withholding
tax due on the discount or interest earned on the PEACe Bonds should "be imposed and
withheld not only on RCBC/CODE NGO but also [on] 'all subsequent holders of the Bonds.
"'23
On October 17, 2011, petitioners filed before this Court a Petition for Certiorari, Prohibition,
and/or Mandamus (with urgent application for a temporary restraining order and/or writ of
preliminary injunction).24
On October 18, 2011, this Court issued a temporary restraining order25 "enjoining the
implementation of BIR Ruling No. 370-2011 against the [PEACe Bonds,] ... subject to the
condition that the 20% final withholding tax on interest income therefrom shall be withheld by
the petitioner banks and placed in escrow pending resolution of [the] petition."26
RCBC and RCBC Capital, as well as CODE-NGO separately moved for leave of court to
intervene and to admit the Petition-in-Intervention. The Motions were granted by this Court. 27
Meanwhile, on November 9, 2011, petitioners filed their Manifestation with Urgent Ex Parte
Motion to Direct Respondents to Comply with the TR0.28
On November 15, 2011, this Court directed respondents to: "(1) show cause why they failed to
comply with the October 18, 2011 resolution; and (2) comply with the Court's resolution in
order that petitioners may place the corresponding funds in escrow pending resolution of the
petition. " 29
On December 6, 2011, this Court noted respondents' compliance. 30
On November 27, 2012, petitioners filed their Manifestation with Urgent Reiterative Motion
[To Direct Respondents to Comply with the Temporary Restraining Order]. 31
On December 4, 2012, this Court noted petitioners' Manifestation with Urgent Reiterative
Motion and required respondents to comment. 32 Respondents filed their Comment, 33 to
which petitioners filed their Reply. 34
On January 13, 2015, this Court promulgated the Decision 35 granting the Petition and the
Petitions-in-Intervention. Applying Section 22(Y) of the National Internal Revenue Code, we
held that the number of lenders/investors at every transaction is determinative of whether a
debt instrument is a deposit substitute subject to 20% final withholding tax. When at any
transaction, funds are simultaneously obtained from 20 or more lenders/investors, there is
deemed to be a public borrowing and the bonds at that point in time are deemed deposit
substitutes. Consequently, the seller is required to withhold the 20% final withholding tax on
the imputed interest income from the bonds. We further declared void BIR Rulings Nos. 370-
2011 and DA 378-2011 for having disregarded the 20-lender rule provided in Section 22(Y).
The Decision disposed as follows:
WHEREFORE, the petition for review and petitions-in- intervention are GRANTED. BIR
Ruling Nos. 370-2011 and DA 378- 2011 are NULLIFIED.
Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention
of the amount corresponding to the 20% final withholding tax despite this court's directive in
the temporary restraining order and in the resolution dated November 15, 2011 to deliver the
amounts to the banks to be placed in escrow pending resolution of this case.
Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay to the
bondholders the amount corresponding to the 20% final withholding tax that it withheld on
October 18, 2011. 36
On March 13, 2015, respondents filed by registered mail their Motion for Reconsideration and
Clarification. 37
On March 16, 2015, petitioners-intervenors RCBC and RCBC Capital moved for clarification
and/or partial reconsideration.38
On July 6, 2015, petitioners Banco de Oro, et al. filed their
Consolidated Comment39 on respondents' Motion for Reconsideration and Clarification and
petitioners-intervenors RCBC and RCBC Capital Corporation's Motion for Clarification
and/or Partial Reconsideration.
On October 29, 2015, petitioners Banco de Oro, et al. filed their Urgent Reiterative Motion [to
Direct Respondents to Comply with the Temporary Restraining Order]. 40
The issues raised in the motions revolve around the following:
First, the proper interpretation and application of the 20-lender rule under Section 22(Y) of the
National Internal Revenue Code, particularly in relation to issuances of government debt
instruments;
Second, whether the seller in the secondary market can be the proper withholding agent of the
final withholding tax due on the yield or interest income derived from government debt
instruments considered as deposit substitutes;
Third, assuming the PEACe Bonds are considered "deposit substitutes," whether government
or the Bureau of Internal Revenue is estopped from imposing and/or collecting the 20% final
withholding tax from the face value of these Bonds. Further:
(a) Will the imposition of the 20% final withholding tax violate the non-impairment clause of
the Constitution?
(b) Will it constitute a deprivation of property without due process of law?
Lastly, whether the respondent Bureau of Treasury is liable to pay 6% legal interest.
I ....
Before going into the substance of the motions for reconsideration, we find it necessary to
clarify on the procedural aspects of this case. This is with special emphasis on the jurisdiction
of the Court of Tax Appeals in view of the previous conflicting rulings of this Court.
Earlier, respondents questioned the propriety of petitioners' direct resort to this Court. They
argued that petitioners should have challenged first the 2011 Bureau of Internal Revenue
rulings before the Secretary of Finance, consistent with the doctrine on exhaustion of
administrative remedies.
In the assailed Decision, we agreed that interpretative rulings of the Bureau of Internal
Revenue are reviewable by the Secretary of Finance under Section 441 of the National Internal
Revenue Code. However, we held that because of the special circumstances availing in this
case-namely: the question involved is purely legal; the urgency of judicial intervention given
the impending maturity of the PEA Ce Bonds; and the futility of an appeal to the Secretary of
Finance as the latter appeared to have adopted the challenged Bureau of Internal Revenue
rulings-there was no need for petitioners to exhaust all administrative remedies before seeking
judicial relief.
We also stated that:
[T]he jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to
the Court of Tax Appeals. The questioned BIR Ruling Nos. 370-2011 and DA 378-2011 were
issued in connection with the implementation of the 1997 National Internal Revenue Code on
the taxability of the _interest income from zero-coupon bonds issued by the government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by
Republic Act No. 9282, such rulings of the Commissioner of Internal Revenue are appealable
to that court, thus:
SEC. 7. Jurisdiction. -The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation
142
thereto, or other matters arising under the National Internal Revenue or other laws
administered by the Bureau of Internal Revenue;
....
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected
by a decision, ruling or inaction of the Commissioner of Internal Revenue, the Commissioner
of Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of
Agriculture or the Central Board of Assessment Appeals or the Regional Trial Courts may file
an appeal with the CTA within thirty (30) days after the receipt of such decision or ruling or
after the expiration of the period fixed by law for action as referred to in Section 7(a)(2)
herein.
....
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters
arising under the National Internal Revenue Code, the Tariff and Customs Code or the Local
Government Code shall be maintained, except as ·herein provided, until and unless an appeal
has been previously filed with the CTA and disposed of in accordance with the provisions of
this Act.
In Commissioner of Internal Revenue v. Leal, citing Rodriguez v. Blaquera, this court
emphasized the jurisdiction of the Court of Tax Appeals over rulings of the Bureau of Internal
Revenue, thus:
While the Court of Appeals correctly took cognizance of the petition for certiorari, however,
let it be stressed that the jurisdiction to review the rulings of the Commissioner of Internal
Revenue pertains to the Court of Tax Appeals, not to the RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the
Commissioner implementing the Tax Code on the taxability of pawnshops.
Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax
Code, which states:
"SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. - The
Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all
needful rules and regulations for the effective enforcement of the provisions of this Code.
The authority of the Secretary of Finance to determine articles similar or analogous to those
subject to a rate of sales tax under certain category enumerated in Section 163 and 165 of this
Code shall be without prejudice to the power of the Commissioner of Internal Revenue to
make rulings or opinions in connection with the implementation of the provisions of internal
revenue laws, including ruling on the classification of articles of sales and similar purposes."
....
The Court, in Rodriguez etc. vs. Blaquera, etc., ruled:
"Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal
Revenue, but merely an attempt to nullify General Circular No. V-148, which does not
adjudicate or settle any controversy, and that, accordingly, this case is not within the
jurisdiction of the Court of Tax Appeals.
We find no merit in this pretense. General Circular No. V-148 directs the officers charged
with the collection of taxes and license fees to adhere strictly to the interpretation given by the
defendant to the statutory provisions above mentioned, as set forth in the Circular. The same
incorporates, therefore, a decision of the Collector of Internal Revenue (now Commissioner of
Internal Revenue) on the manner of enforcement of the said statute, the administration of
which is entrusted by law to the Bureau of Internal Revenue. As such, it comes within the
purview of Republic Act No. 1125, Section 7 of which provides that the Court of Tax Appeals
'shall exercise exclusive appellate jurisdiction to review by appeal . . . decisions of the
Collector of Internal Revenue in . . . matters arising under the National Internal Revenue Code
or other law or part of the law administered by the Bureau of Internal Revenue. "[['42]]
In Commissioner of Internal Revenue v. Leal, 43 the Commissioner issued Revenue
Memorandum Order (RMO) No. 15-91 imposing 5% lending investors tax on pawnshops, and
Revenue Memorandum Circular (RMC) No. 43-91 subjecting the pawn ticket to documentary
stamp tax.44 Leal, a pawnshop owner and operator, asked for reconsideration of the revenue
orders, but it was denied by the Commissioner in BIR Ruling No. 221-91.45 Thus, Leal filed
before the Regional Trial Court a petition for prohibition seeking to prohibit the
Commissioner from implementing the revenue orders. 46 This Court held that Leal should have
filed her petition for prohibition before the Court of Tax Appeals, not the Regional Trial
Court, because "the questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or
opinions of the Commissioner implementing the Tax Code on the taxability of
pawnshops."47 This Court held that such rulings in connection with the implementation of
internal revenue laws are appealable to the Court of Tax Appeals under Republic Act No.
1125, as amended.48
Likewise, in Asia International Auctioneers, Inc. v. Hon. Parayno, Jr., 49 this Court upheld the
jurisdiction of the Court of Tax Appeals over the Regional Trial Courts, on the issue of the
validity of revenue memorandum circulars.50 It explained that "the assailed revenue
regulations and revenue memorandum circulars [were] actually rulings or opinions of the
[Commissioner of Internal Revenue] on the tax treatment of motor vehicles sold at public
auction within the [Subic Special Economic Zone] to implement Section 12 of [Republic Act]
No. 7227." This Court further held that the taxpayers' invocation of this Court's intervention
was premature for its failure to first ask the Commissioner of Internal Revenue for
reconsideration of the assailed revenue regulations and revenue memorandum circulars.
However, a few months after the promulgation of Asia International Auctioneers, British
American Tobacco v. Camacho51 pointed out that although Section 7 of Republic Act No.
1125, as amended, confers on the Court of Tax Appeals jurisdiction to resolve tax disputes in
general, this does not include cases where the constitutionality of a law or rule is challenged.
Thus:
The jurisdiction of the Court of Tax Appeals is defined in Republic Act No. 1125, as amended
by Republic Act No. 9282. Section 7 thereof states, in pertinent part:
....
While the above statute confers on the CTA jurisdiction to resolve tax disputes in general, this
does not include cases where the constitutionality of a law or rule is challenged. Where what is
assailed is the validity or constitutionality of a law, or a rule or regulation issued by the
administrative agency in the performance of its quasi-legislative function, the regular courts
have jurisdiction to pass upon the same. The determination of whether a specific rule or set of
rules issued by an administrative agency contravenes the law or the constitution is within the
jurisdiction of the regular courts. Indeed, the Constitution vests the power of judicial review or
the power to declare a law, treaty, international or executive agreement, presidential decree,
order, instruction, ordinance, or regulation in the courts, including the regional trial courts.
This is within the scope of judicial power, which includes the authority of the courts to
determine in an appropriate action the validity of the acts of the political departments. Judicial
power includes the duty of the courts of justice to settle actual controversies involving rights
which are legally demandable and enforceable, and to determin whether or not there has been
a grave abuse of dicretion amounting to lack or execss of jurisdiction on the part of any branch
or instrumentality of the Government.
In Drilon v. Lim, it was held:
We stress at the outset that the lower court had jurisdiction to consider the constitutionality of
Section 187, this authority being embraced in the general definition of the judicial power to
determine what are the valid and binding laws by the criterion of their conformity to the
fundamental law. Specifically, B.P. 129 vests in the regional trial courts jurisdiction over all
civil cases in which the subject of the litigation is incapable of pecuniary estimation, even as
the accused in a criminal action has the right to question in his defense the constitutionality of
143
a law he is charged with violating and of the proceedings taken against him, particularly as
they contravene the Bill of Rights. Moreover, Article X, Section 5(2), of the Constitution vests
in the Supreme Court appellate jurisdiction over final judgments and orders of lower courts in
all cases in which the constitutionality or validity of any treaty, international or executive
agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation
is in question.
The petition for injunction filed by petitioner before the RTC is a direct attack on the
constitutionality of Section 145(C) of the NIRC, as amended, and the validity of its
implementing rules and regulations. In fact, the RTC limited the resolution of the subject case
to the issue of the constitutionality of the assailed provisions. The determination of whether
the assailed law and its implementing rules and regulations contravene the Constitution is
within the jurisdiction of regular courts. The Constitution vests the power of judicial review or
the power to declare a law, treaty, international or executive agreement, presidential decree,
order, instruction, ordinance, or regulation in the courts, including the regional trial courts.
Petitioner, therefore, properly filed the subject case before the RTC. 52(Citations omitted)
British American Tobacco involved the validity of: (1) Section 145 of Republic Act No. 8424;
(2) Republic Act No. 9334, which further amended Section 145 of the National Internal
Revenue Code on January 1, 2005; (3) Revenue Regulations Nos. 1-97, 9-2003, and 22-2003;
and (4) RMO No. 6- 2003.53
A similar ruling was made in Commissioner of Customs v. Hypermix Feeds
Corporation. 54 Central to the case was Customs Memorandum Order (CMO) No. 27-2003
issued by the Commissioner of Customs. This issuance provided for the classification of wheat
for tariff purposes. In anticipation of the implementation of the CMO, Hypermix filed a
Petition for Declaratory Relief before the Regional Trial Court. Hypermix claimed that said
CMO was issued without observing the provisions of the Revised Administrative Code; was
confiscatory; and violated the equal protection clause of the 1987 Constitution. 55 The
Commissioner of Customs moved to dismiss on the ground of lack of jurisdiction. 56On the
issue regarding declaratory relief, this Court ruled that the petition filed by Hypermix had
complied with all the requisites for an action of declaratory relief to prosper. Moreover:
Indeed, the Constitution vests the power of judicial review or the power to declare a law,
treaty, international or executive agreement, presidential decree, order, instruction, ordinance,
or regulation in the courts, including the regional trial courts. This is within the scope of
judicial power, which includes the authority of the courts to determine in an appropriate action
the validity of the acts of the political departments. 57
We revert to the earlier rulings in Rodriguez, Leal, and Asia International Auctioneers,
Inc.The Court of Tax Appeals has exclusive jurisdiction to determine the constitutionality or
validity of tax laws, rules and regulations, and other administrative issuances of the
Commissioner of Internal Revenue.
Article VIII, Section 1 of the 1987 Constitution provides the general definition of judicial
power:
ARTICLE VIII
JUDICIAL DEPARTMENT
Section 1. The judicial power shall be vested in one Supreme Court and in such lower courts
as may be established by law.
Judicial power includes the duty of the courts of justice to settle actual controversies involving
rights which are legally demandable and enforceable, and to determine whether or not there
has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of
any branch or instrumentality of the Government. (Emphasis supplied)
Based on this constitutional provision, this Court recognized, for the first time, in The City of
Manila v. Hon. Grecia-Cuerdo,58 the Court of Tax Appeals' jurisdiction over petitions
for certiorari assailing interlocutory orders issued by the Regional Trial Court in a local tax
case. Thus:
[W]hile there is no express grant of such power, with respect to the CTA, Section 1, Article
VIII of the 1987 Constitution provides, nonetheless, that judicial power shall be vested in one
Supreme Court and in such lower courts as may be established by law and that judicial power
includes the duty of the courts of justice to settle actual controversies involving rights which
are legally demandable and enforceable, and to determine whether or not there has been a
grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any
branch or instrumentality of the Government.
On the strength of the above constitutional provisions, it can be fairly interpreted that the
power of the CTA includes that of determining whether or not there has been grave abuse of
discretion amounting to lack or excess of jurisdiction on the part of the RTC in issuing an
interlocutory order in cases falling within the exclusive appellate jurisdiction of the tax court.
It, thus, fo1lows that the CTA, by constitutional mandate, is vested with jurisdiction to issue
writs of certiorari in these cases. 59 (Emphasis in the original)
This Court further explained that the Court of Tax Appeals' authority to issue writs
of certiorari is inherent in the exercise of its appellate jurisdiction.
A grant of appellate jurisdiction implies that there is included in it the power necessary to
exercise it effectively, to make all orders that will preserve the subject of the action, and to
give effect to the final determination of the appeal. It carries with it the power to protect that
jurisdiction and to make the decisions of the court thereunder effective. The court, in aid of its
appellate jurisdiction, has authority to control all auxiliary and incidental matters necessary to
the efficient and proper exercise of that jurisdiction. For this purpose, it may, when necessary,
prohibit or restrain the performance of any act which might interfere with the proper exercise
of its rightful jurisdiction in cases pending before it.
Lastly, it would not be amiss to point out that a court which is endowed with a particular
jurisdiction should have powers which are necessary to enable it to act effectively within such
jurisdiction. These should be regarded as powers which are inherent in its jurisdiction and the
court must possess them in order to enforce its rules of practice and to suppress any abuses of
its process and to defeat any attempted thwarting of such process.
In this regard, Section 1 of RA 9282 states that the CTA shall be of the same level as the CA
and shall possess all the inherent powers of a court of justice.
Indeed, courts possess certain inherent powers which may be said to be implied from a general
grant of jurisdiction, in addition to those expressly conferred on them. These inherent powers
are such powers as are necessary for the ordinary and efficient exercise of jurisdiction; or are
essential to the existence, dignity and functions of the courts, as well as to the due
administration of justice; or are directly appropriate, convenient and suitable to the execution
of their granted powers; and include the power to maintain the court's jurisdiction and render it
effective in behalf of the litigants.
Thus, this Court has held that "while a court may be expressly granted the incidental powers
necessary to effectuate its jurisdiction, a grant of jurisdiction, in the absence of prohibitive
legislation, implies the necessary and usual incidental powers essential to effectuate it, and,
subject to existing laws and constitutional provisions, every regularly constituted court has
power to do all things that are reasonably necessary for the administration of justice within the
scope of its jurisdiction and for the enforcement of its judgments and mandates." Hence,
demands, matters or questions ancillary or incidental to, or growing out of, the main action,
and coming within the above principles, may be taken cognizance of by the court and
determined, since such jurisdiction is in aid of its authority over the principal matter, even
though the court may thus be called on to consider and decide matters which, as original
causes of action, would not be within its cognizance.60(Citations omitted)
Judicial power likewise authorizes lower courts to determine the constitutionality or validity of
a law or regulation in the first instance.61 This is contemplated in the Constitution when it
speaks of appellate review of final judgments of inferior courts in cases where such
constitutionality is in issue.62
144
On, June 16, 1954, Republic Act No. 1125 created the Court of Tax Appeals not as another
superior administrative agency as was its predecessor-the former Board of Tax Appeals-but as
a part of the judicial system63 with exclusive jurisdiction to act on appeals from:
(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto,
or other matters arising under the National Internal Revenue Code or other law or part of law
administered by the Bureau of Internal Revenue;
(2) Decisions of the Commissioner of Customs in cases involving liability for customs duties,
fees or other money charges; seizure, detention or release of property affected fines,
forfeitures or other penalties imposed in relation thereto; or other matters arising under the
Customs Law or other law or part of law administered by the Bureau of Customs; and
(3) Decisions of provincial or city Boards of Assessment Appeals in cases involving the
assessment and taxation of real property or other matters arising under the Assessment Law,
including rules and regulations relative thereto.
Republic Act No. 1125 transferred to the Court of Tax Appeals jurisdiction over all matters
involving assessments that were previously cognizable by the Regional Trial Courts (then
courts of first instance).64
In 2004, Republic Act No. 9282 was enacted. It expanded the jurisdiction of the Court of Tax
Appeals and elevated its rank to the level of a collegiate court with special jurisdiction.
Section 1 specifically provides that the Court of Tax Appeals is of the same level as the Court
of Appeals and possesses "all the inherent powers of a Court of Justice."65
Section 7, as amended, grants the Court of Tax Appeals the exclusive jurisdiction to resolve
all tax-related issues:
Section 7. Jurisdiction - The CTA shall exercise:
(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:
1) Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation
thereto, or other matters arising under the National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue;
2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific
period of action, in which case the inaction shall be deemed a denial;
3) Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally
decided or resolved by them in the exercise of their original or appellate jurisdiction;
4) Decisions of the Commissioner of Customs in cases involving liability for customs duties,
fees or other money charges, seizure, detention or release of property affected, fines,
forfeitures or other penalties in relation thereto, or other matters arising under the Customs
Law or other laws administered by the Bureau of Customs;
5) Decisions of the Central Board of Assessment Appeals in the exercise of its appellate
jurisdiction over cases involving the assessment and taxation of real property originally
decided by the provincial or city board of assessment appeals;
6) Decisions of the Secretary of Finance on customs cases elevated to him automatically for
review from decisions of the Commissioner of Customs which are adverse to the Government
under Section 2315 of the Tariff and Customs Code;
7) Decisions of the Secretary of Trade and Industry, in the case of nonagricultural product,
commodity or article, and the Secretary of Agriculture in the case of agricultural product,
commodity or article, involving dumping and countervailing duties under Section 301 and
302, respectively, of the Tariff and Customs Code, and safeguard measures under Republic
Act No. 8800, where either party may appeal the decision to impose or not to impose said
duties.
The Court of Tax Appeals has undoubted jurisdiction to pass upon the constitutionality or
validity of a tax law or regulation when raised by the taxpayer as a defense in disputing or
contesting an assessment or claiming a refund. It is only in the lawful exercise of its power to
pass upon all matters brought before it, as sanctioned by Section 7 of Republic Act No. 1125,
as amended.
This Court, however, declares that the Court of Tax Appeals may likewise take cognizance of
cases directly challenging the constitutionality or validity of a tax law or regulation or
administrative issuance (revenue orders, revenue memorandum circulars, rulings).
Section 7 of Republic Act No. 1125, as amended, is explicit that, except for local taxes,
appeals from the decisions of quasi-judicial agencies66 (Commissioner of Internal Revenue,
Commissioner of Customs, Secretary of Finance, Central Board of Assessment Appeals,
Secretary of Trade and Industry) on tax-related problems must be brought exclusively to the
Court of Tax Appeals.
In other words, within the judicial system, the law intends the Court of Tax Appeals to have
exclusive jurisdiction to resolve all tax problems. Petitions for writs of certiorari against the
acts and omissions of the said quasi-judicial agencies should, thus, be filed before the Court of
Tax Appeals. 67
Republic Act No. 9282, a special and later law than Batas Pambansa Blg. 129 68 provides an
exception to the original jurisdiction of the Regional Trial Courts over actions questioning the
constitutionality or validity of tax laws or regulations. Except for local tax cases, actions
directly challenging the constitutionality or validity of a tax law or regulation or administrative
issuance may be filed directly before the Court of Tax Appeals.
Furthermore, with respect to administrative issuances (revenue orders, revenue memorandum
circulars, or rulings), these are issued by the Commissioner under its power to make rulings or
opinions in connection
with the implementation of the provisions of internal revenue laws. Tax rulings, on the other
hand, are official positions of the Bureau on inquiries of taxpayers who request clarification on
certain provisions of the National Internal Revenue Code, other tax laws, or their
implementing regulations.69 Hence, the determination of the validity of these issuances clearly
falls within the exclusive appellate jurisdiction of the Court of Tax Appeals under Section 7(1)
of Republic Act No. 1125, as amended, subject to prior review by the Secretary of Finance, as
required under Republic Act No. 8424.70
We now proceed to the substantive aspects.
II
Respondents contend that the 20-lender rule should not strictly apply to issuances of
government debt instruments, which by nature, are borrowings from the public. 71 Applying
the rule otherwise leads to an absurd result.72 They point out that in BIR Ruling No. 007-
0473 dated July 16, 2004 (the precursor of BIR Ruling Nos. 370-2011 and DA 378-2011), the
Bureau of Treasury's admitted intent to make the government securities freely tradable to an
unlimited number of lenders/investors in the secondary market was considered in place of an
actual head count of lenders/investors due to the limitations brought about by the absolute
confidentiality of investments in government bonds under Section 2 of Republic Act No.
1405, otherwise known as the Bank Secrecy Law. 74
Considering that the PEACe Bonds were intended to be freely tradable in the secondary
market to 20 or more lenders/investors, respondents contend. that they, like other similarly
situated government securities-awarded to 19 or less GSEDs in the primary market but freely
tradable to 20 or more lenders/investors in the secondary market-should be treated as deposit
substitutes subject to the 20% final withholding tax. 75
Petitioners and petitioners-intervenors RCBC and RCBC Capital counter that Section 22(Y) of
the National Internal Revenue Code applies to all types of securities, including those issued by
government. They add that under this provision, it is the actual number of lenders at any one
145
time that is material in determining whether an issuance is to be considered a deposit
substitute and not the intended distribution plan of the issuer.
Moreover, petitioners and petitioners-intervenors RCBC and RCBC Capital argue that the real
intent behind the issuance of the PEACe Bonds, as reflected by the representations and
assurances of government in various issuances and rulings, was to limit the issuance to 19
lenders and below. Hence, they contend that government cannot now take an inconsistent
position.
We find respondents' proposition to consider the intended public distribution of government
securities-in this case, the PEACe Bonds-in place of an actual head count to be untenable.
The general rule of requiring adherence to the letter in construing statutes applies with peculiar
strictness to tax laws and the provisions of a taxing act are not to be extended by
implication. 76
The definition of deposit substitutes in Section 22(Y) specifically defined "public" to mean
"twenty (20) or more individual or corporate lenders at any one time."77 The qualifying phrase
for public introduced78by the National Internal Revenue Code shows that a change in the
meaning of the provision was intended, and this Court should construe the provision as to give
effect to the amendment.79 Hence, in light of Section 22(Y), the reckoning of whether there are
20 or more individuals or corporate lenders is crucial in determining the tax treatment of the
yield from the debt instrument. In other words, if there are 20 or more lenders, the debt
instrument is considered a deposit substitute and subject to 20% final withholding tax.
II.A
The definition of deposit substitutes under the National Internal Revenue Code was lifted from
Section 95 of Republic Act No. 7653, otherwise known as the New Central Bank Act:
SEC. 95. Definition of Deposit Substitutes. The term "deposit substitutes" is defined as an
alternative form of obtaining funds from the public. other than deposits. through the issuance.
endorsement, or acceptance of debt instruments for the borrower's own account, for the
purpose ofrelending or purchasing of receivables and other obligations.These instruments
may include, but need not be limited to, bankers' acceptances, promissory notes,
participations, certificates of assignment and similar instruments with recourse, and repurchase
agreements. The Monetary Board shall determine what specific instruments shall be
considered as deposit substitutes for the purposes of Section 94 of this Act: Provided,
however, That deposit substitutes of commercial, industrial and other nonfinancial companies
issued for the limited purpose of financing their own needs or the needs of their agents or
dealers shall not be covered by the provisions of Section 94 of this Act. (Emphasis supplied)
Banks are entities engaged in the lending of funds obtained from the public in the form of
deposits. 80Deposits of money in banks and similar institutions are considered simple
loans. 81 Hence, the relationship between a depositor and a bank is that of creditor and debtor.
The ownership of the amount deposited is transmitted to the bank upon the perfection of the
contract and it can make use of the amount deposited for its own transactions and other
banking operations. Although the bank has the obligation to return the amount deposited, it
has no obligation to return or deliver the same money that was deposited. 82
The definition of deposit substitutes in the banking laws was brought about by an observation
that banks and non-bank financial intermediaries have increasingly resorted to issuing a
variety of debt instruments, other than bank deposits, to obtain funds from the public. The
definition also laid down the groundwork for the supervision by the Central Bank of quasi-
banking functions.83
As defined in the banking sector, the term "public" refers to 20 or more lenders. 84 "What
controls is the actual number of persons or entities to whom the products or instruments are
issued. If there are at least twenty (20) lenders or creditors, then the funds are considered
obtained from the public."85
If a bank or non-bank financial intermediary sells debt instruments to 20 or more
lenders/placers at any one time, irrespective of outstanding amounts, for the purpose of
releI].ding or purchasing of receivables or obligations, it is considered to be performing a
quasi-banking function and consequently subject to the appropriate regulations of the Bangko
Sentral ng Pilipinas (BSP).
11.B
Under the National Internal Revenue Code, however, deposit substitutes include not only the
issuances and sales of banks and quasi-banks for relending or purchasing receivables and other
similar obligations, but also debt instruments issued by commercial, industrial, and other
nonfinancial companies to finance their own needs or the needs of their agents or dealers. This
can be deduced from a reading together of Section 22(X) and (Y):
Section 22. Definitions - When used in this Title:
....
(X) The term 'quasi-banking activities' means borrowing funds from twenty (20) or more
personal or corporate lenders at any one time, through the issuance, endorsement, or
acceptance of debt instruments of any kind other than deposits for the borrower's own account,
or through the issuance of certificates of assignment or similar instruments, with recourse, or
of repurchase agreements for purposes of re-lending or purchasing receivables and other
similar obligations: Provided, however, That commerciali industrial and other non-financial
companies, which borrow funds through any of these means for the limited purpose of
financing their own needs or the needs of their agents or dealers, shall not be considered as
performing quasi-banking functions.
(Y) The term 'deposit substitutes' shall mean an alternative form of
obtaining funds from the public (the term 'public' means borrowing from twenty (20) or
more individual or corporate lenders at any one time), other than deposits, through the
issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for
the purpose of relending or purchasing of receivables and other obligations, or financing their
own needs or the needs of their agent or dealer. (Emphasis supplied)
For internal re.venue tax purposes, therefore, even debt instruments issued and sold to 20 or
more lenders/investors by commercial or industrial companies to finance their own needs are
considered deposit substitutes, taxable as such.
11.C
The interest income on bank deposits was subjected for the first time to the withholding tax
system under Presidential Decree No. 1156,86 which was promulgated in 1977. The whereas
clauses spell the reasons for the law:
[I]nterest on bank deposit is one of the items includible in gross income .... [M]any bank
depositors fail to declare interest income in their income tax returns. . . . [I]n order to
maximize the collection of the income tax on interest on bank deposits, it is necessary to apply
the withholdings system on this type of fixed or determinable income.
In the same year, Presidential Decree No. 115487 was also promulgated. It imposed a 35%
transaction tax (final tax) on interest income from every commercial paper issued in the
primary market, regardless of whether they are issued to the public or not. 88 Commercial
paper was defined as "an instrument evidencing indebtedness of any person or entity,
including banks and non-banks performing quasi-banking functions, which is issued,
endorsed, sold, transferred or in any manner conveyed to another person or entity, either with
or without recourse and irrespective of maturity." The imposition of a final tax on commercial
papers was "aimed primarily to improve the administrative provisions of the National Internal
Revenue Code to ensure the collection on the tax on interest on commercial papers used as
principal instruments issued in the primary market."89 It was reported that "the [Bureau of
Internal Revenue had] no means of enforcing strictly the taxation on interest income earned in
the money market transactions. " 90
These presidential decrees, as well as other new internal revenue laws and various laws and
decrees that have so far amended the provisions of the 1939 National Internal Revenue Code
were consolidated and codified into the 1977 National Internal Revenue Code. 91
146
In 1980, Presidential Decree No. 173992 was promulgated, which further amended certain
provisions of the 1977 National Internal Revenue Code and repealed Section 210 (the
provision embodying the percentage tax on commercial paper transactions). The Decree
imposed a final tax of 20% on interests from yields on deposit substitutes issued to the
public.93 The tax was required to be withheld by banks and non-bank financial intermediaries
and paid to the Bureau of Internal Revenue in accordance with Section 54 of the 1977
National Internal Revenue Code. Presidential Decree No. 1739, as amended by Presidential
Decree No. 1959 in 1984 (which added the definition of deposit substitutes) was subsequently
incorporated in the National Internal Revenue Code.
These developments in the National Internal Revenue Code reflect the rationale for the
application of the withholding system to yield from deposit substitutes, which is essentially to
maximize and expedite the collection of income taxes by requiring its payment at the
source, 94 as with the case of the interest on bank deposits. When banks sell deposit substitutes
to the public, the final withholding tax is imposed on the interest income because it would be
difficult to collect from the public. Thus, the incipient scheme in the final withholding tax is to
achieve an effective administration in capturing the interest-income windfall from deposit
substitutes as a source of revenue.
It must be emphasized, however, that withholding tax is merely a method of collecting income
tax in advance. The perceived tax is collected at the source of income payment to ensure
collection. Consequently, those subjected to the final withholding tax are no longer subject to
the regular income tax.
III
Respondents maintain that the phrase "at any one time" must be given its ordinary meaning,
i.e. "at any given time" or "during any particular point or moment in the day." 95 They submit
that the correct interpretation of Section 22(Y) does .not look at any specific transaction
concerning the security; instead, it considers the existing number of lenders/investors of such
security at any moment in time, whether in the primary or secondary market. 96 Hence, when
during the lifetime of the security, there was any one instance where twenty or more individual
or corporate lenders held the security, the borrowing becomes "public" in character and is ipso
facto subject to 20% final withholding tax.97
Respondents further submit that Section 10.1(k) of the Securities Regulation Code and its
Implementing Rules and Regulations may be applied by analogy, such that if at any time, (a)
the lenders/investors number 20 or more; or (b) should the issuer merely offer the securities
publicly or to 20 or more lenders/investors, these securities should be deemed deposit
substitutes.98
On the other hand, petitioners-intervenors RCBC and RCBC Capital insist that the phrase "at
any one time" only refers to transactions made in the primary market.1âwphi1 According to
them, the PEACe Bonds are not deposit substitutes since CODE-NGO, through petitioner-
intervenor RCBC, is the sole lender in the primary market, and all subsequent transactions in
the secondary market merely pertain to a sale and/or assignment of credit and not borrowings
from the public.99
Similarly, petitioners contend that for a government security, such as the PEACe Bonds, to be
considered as deposit substitutes, it is an indispensable requirement that there is "borrowing"
between the issuer and the lender/investor in the primary market and between the transferee
and the transferor in the secondary market. Petitioners submit that in the secondary market, the
transferee/buyer must have recourse to the selling investor as required by Section 22(Y) of the
National Internal Revenue Code so that a borrowing "for the borrower's (transferor's) own
account" is created between the buyer and the seller. Should the transferees in the secondary
market who have recourse to the transferor reach 20 or more, the transaction will be subjected
to a-final withholding tax. 100
Petitioners and petitioners-intervenors RCBC and RCBC Capital contend that respondents'
proposed application of Section 10.l(k) of the Securities Regulation Code and its
Implementing Rules is misplaced because: (1) the National Internal Revenue Code clearly
provides the conditions when a security issuance should qualify as a deposit substitute subject
to the 20% final withholding tax; and (2) the two laws govern different matters.
III.A
Generally, a corporation may obtain funds for capital expenditures by floating either shares of
stock (equity) or bonds (debt) in the capital market. Shares of stock or equity securities
represent ownership, interest, or participation in the issuer-corporation. On the other hand,
bonds or debt securities are evidences of indebtedness of the issuer-corporation.
New securities are issued and sold to the investing public for the first time in the primary
market. Transactions in the primary market involve an actual transfer of funds from the
investor to the issuer of the new security. The transfer of funds is evidenced by a security,
which becomes a financial asset in the hands of the buyer/investor.
New issues are usually sold through a registered underwriter, which may be an investment
house or bank registered as an underwriter of securities.101 An underwriter helps the issuer
find buyers for its securities. In some cases, the underwriter buys the whole issue from the
issuer and resells this to other security dealers and the public. 102 When a group of
underwriters pool together their resources to underwrite an issue, they are called the
"underwriting syndicate."103
On the other hand, secondary markets refer to the trading of outstanding or already-issued
securities. In any secondary market trade, the cash proceeds normal_ly go to the selling
investor rather than to the issuer.
To illustrate: A decides to issue bonds to raise capital funds. X buys and is issued A bonds.
The proceeds of the sale go to A, the issuer. The sale between A and Xis a primary market
transaction.
Before maturity, X trades its A bonds to Y. The A bonds sold by X are not X's indebtedness.
The cash paid for the bonds no longer go to A, but remains with X, the s_elling
investor/holder. The transfer of A bonds from X to Y is considered a secondary market
transaction. Any difference between the purchase price of the assets (A bonds) and the sale
price is a trading gain subject to a different tax treatment, as will be explained later.
When Y trades its A bonds to Z, the sale is still considered a secondary market transaction. In
other words, the trades from X to Y, Y to Z, and Z to subsequent holders/investors are
considered secondary market transactions. If Z holds on to the bonds and the bonds mature, Z
will receive from A the face value of the bonds.
A bond is similar to a bank deposit in the sense that the investor lends money to the issuer and
the issuer pays interest on the invested amount. However, unlike bank deposits, bonds are
marketable securities. The market mechanism provides quick mobility of money and
securities. 104 Thus, bondholders can sell their bonds before they mature to other investors, in
tum converting their· financial assets to cash. In contrast, deposits, in the form of savings
accounts for instance, can only be redeemed by the issuing bank.
111.B
An investor in bonds may derive two (2) types of income:
First, the interest or the amount paid by the borrower to the lender/investor for the use of the
lender’s money.105 For interest-bearing bonds, interest is normally earned at the coupon date.
In zero-coupon bonds, the discount is an interest amortized up to maturity.
Second, the gain, if any, that is earned when the bonds are traded before maturity date or when
redeemed at maturity.
The 20% final withholding tax imposed on interest income or yield from deposit substitute
does not apply to the gains derived from trading, retirement, or redemption of the instrument.
It must be stressed that interest income, derived by individuals from long-term deposits or
placements made with banks in the form of deposit substitutes, is exempt from income tax.
Consequently, it is likewise exempt from the final withholding tax under Sections 24(B)(l) and
25(A)(2) of the National Internal Revenue Code. However, when it is pre-terminated by the
147
individual investor, graduated rates of 5%, 12%, or 20%, depending on the remaining maturity
of the instrument, will apply on the entire income, to be deducted and withheld by the
depository bank.
With respect to gains derived from long-term debt instruments, Section 32(B)(7)(g) of the
National Internal Revenue Code provides:
Sec. 32. Gross Income. –
....
(B) Exclusions from Gross Income. - The following items shall not be included in gross
income and shall be exempt from taxation under this title:
....
(7) Miscellaneous Items. -
....
(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains
realized from the sale or exchange or retirement of bonds, debentures or other certificate of
indebtedness with a maturity of more than five (5) years.
Thus, trading gains, or gains realized from the sale or transfer of bonds (i.e., those with a
maturity of more than five years) in the secondary market, are exempt from income tax. These
"gains" refer to the difference between the selling price of the bonds in the secondary market
and the price at which the bonds were purchased by the seller. For discounted instruments
such as the zero-coupon bonds, the trading gain is the excess of the selling price over the book
value or accreted value (original issue price plus accumulated discount from the time of
purchase up to the time of sale) of the instruments.106
Section 32(B)(7)(g) also includes gains realized by the last holder of the bonds when the
bonds are redeemed at maturity, which is the difference between the proceeds from the
retirement of the bonds and the price at which the last holder acquired the bonds.
On the other hand, gains realized from the trading of short-term bonds (i.e., those with a
maturity of less than five years) in the secondary market are subject to regular income tax rates
(ranging from 5% to 32% for individuals, and 30% for corporations) under Section 32 107 of the
National Internal Revenue Code.
111.C
The Secretary of Finance, through the Bureau of Treasury, 108 is authorized under Section 1 of
Republic Act No. 245, as amended, to issue evidences of indebtedness such as treasury bills
and bonds to meet public expenditures or to provide for the purchase, redemption, or
refunding of any obligations.
These treasury bills and bonds are issued and sold by the Bureau of Treasury to
lenders/investors through a network of licensed dealers (called Government Securities Eligible
Dealers or GSEDs ). 109GSEDs are classified into primary and ordinary dealers. 110 A primary
dealer enjoys certain privileges such as eligibility to participate in the competitive bidding of
regular issues, eligibility to participate in the issuance of special issues such as zero-coupon
treasury bonds, and access to tap facility window. 111 On the other hand, ordinary dealers are
only allowed to participate in the noncompetitive bidding. 112Moreover, primary dealers are
required to meet the following obligations:
a. Must submit at least one competitive bid in each scheduled auction.
b. Must have total awards of at least 2% of the total amount of bills or bonds awarded within a
particular quarter. This requirement does not cover special issues.
c. Must be active in the trading of GS [government securities] in the secondary market. 113
A primary dealer who fails to comply with its obligations will be dropped from the roster of
primary dealers and classified as an ordinary dealer.
The auction method is the main channel used for originating government securities. 114 Under
this method, the Bureau of Treasury issues a public notice offering treasury bills and bonds for
sale and inviting tenders. 115 The GSEDs tender their bids electronically; 116 after the cut-off
time, the Auction Committee deliberates on the bids and decide on the award. 117
The Auction Committee then downloads the awarded securities to the winning bidders'
Principal Securities Account in the Registry of Scrip less Securities (RoSS). The RoSS, an
electronic book-entry system established by the Bureau of Treasury, is the official Registry of
ownership of or interest in government securities. 118 All government securities
floated/originated by the National Government under its scripless policy, as well as
subsequent transfers of the same in the secondary market, are recorded in the RoSS in the
Principal Securities Account of the GSED. 119
A GSED is required to open and maintain Client Securities Accounts in the name of its
respective clients for segregating government securities acquired by such clients from the
GSED' s own securities holdings. A GSED may also lump all government securities sold to
clients in one account, provided ·that the GSED maintains complete records of
ownership/other titles of its clients in the GSED's own books. 120
Thus, primary issues of treasury bills and bonds are supposed to be issued only to GSEDs. By
participating in auctions, the GSED acts as a channel between the Bureau of Treasury and
investors in the primary market. The winning GSED bidder acquires the privilege to on-sell
government securities to other financial institutions or final investors who need not be
GSEDs. 121 Further, nothing in the law or the rules of the Bureau of Treasury prevents the
GSED from entering into contract with another entity to further distribute government
securities.
In effecting a sale or distribution of government securities, a GSED acts in a certain sense as
the "agent" of the Bureau of Treasury. In Doles v. Angeles, 122 the basis of an agency is
representation. 123The question of whether an agency has been created may be established by
direct or circumstantial evidence. 124 For an agency to arise, it is not necessary that the
princi~al personally encounter the third person with whom the agent interacts. 125 The law
contemplates impersonal dealings where the principal need not personally know or meet the
third person with whom the agent transacts: precisely, the purpose of agency is to extend the
personality of the principal through the facility of the agent. 126 It was also stressed that the
manner in which the parties designate the relationship is not controlling. 127 If an act done by
one person on behalf of another is in its essential nature one of agency, the former is the agent
of the latter, notwithstanding he or she is not caled.128
Through the use of GSEDs, particularly primary dealers, government is able to ensure the
absorption of newly issued securities and promote activity in the government securities
market. The primary dealer system allows government to access potential investors in the
market by taking advantage of the GSEDs' distribution capacity. The sale transactions
executed by the GSED are indirectly for the benefit of the issuer. An investor who purchases
bonds from the GSED becomes an indirect lender to government. The financial asset in the
hand of the investor represents a claim to future cash, which the borrower-government must
pay at maturity date. 129
Accordingly, the existence of 20 or more lenders should be reckoned at the time when the
successful GSED-bidder distributes (either by itself or through an underwriter) the
government securities to final holders. When the GSED sells the · government securities to 20
or more investors, the government securities are deemed to be in the nature of a deposit
substitute, taxable as such.
On the other hand, trading of bonds between two (2) investors in the secondary market
involves a purchase or sale transaction. The transferee of the bonds becomes the new owner,
who is entitled to recover the face value of the bonds from the issuer at maturity date. Any
profit realized from the purchase or sale transaction is in the nature of a trading gain subject to
a different tax treatment, as explained above.
Respondents contend that the literal application of the "20 or more lenders at any one time" to
government securities would lead to: (1) impossibility of tax enforcement due to limitations
imposed by the Bank Secrecy Law; (2) possible uncertainties130; and (3) loopholes.131These
concerns, however, are not sufficient justification for us to deviate from the text of the
148
law.132 Determining the wisdom, policy, or expediency of a statute is outside the realm of
judicial power.133 These are matters that should be addressed to the legislature. Any other
interpretation looking into the purported effects of the law would be tantamount to judicial
legislation.
IV
Section 57 prescribes the withholding tax on interest or yield on deposit substitutes, among
others, and the person obligated to withhold the same. Section 57 reads:
Section 57. Withholding of Tax at Source. -
(A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations, the
Secretary of Finance may promulgate, upon the recommendation of the Commissioner,
requiring the filing of income tax return by certain income payees, the tax imposed or
prescribed by Sections 24(B)(l), 24(B)(2), 24(C), 24(D)(l); 25(A)(2), 25(A)(3), 25(B), 25(C),
25(D), 25(E); 27(D)(l), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a),
28(A)(7)(b), 28(A)(7)(c), 28(B)(l), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b),
28(B)(5)(c), 33 and 282 of the Code on specified items of income shall be withheld by payor-
corporation and/or person and paid in the same manner and subject to the same conditions as
provided in Section 58 of this Code.
Likewise, Section 2.57 of Revenue Regulations No. 2-98 (implementing the National Internal
Revenue Code relative to the Withholding on Income subject to the Expanded Withholding
Tax and Final Withholding Tax) states that the liability for payment of the tax rests primarily
on the payor as a withholding agent. Section 2.57 reads:
Sec. 2.57. WITHHOLDING OF TAX AT SOURCE. -
(A) Final Withholding Tax - Under the final withholding tax system the amount of income
tax withheld by the withholding agent is constituted as a full and final payment of the income
tax due from the payee of said income. The liability for payment of the tax rests primarily on
the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of
under withhp;ding the deficiency tax shall be collected from the payor/witholding agent[.]
(Emphasis supplied)
From these provisions, it is the payor-borrower who primarily has the duty to withhold and
remit the 20% final tax on interest income or yield from deposit substitutes.
This does not mean, however, that only the payor-borrower can be constituted as withholding
agent. Under Section 59 of the National Internal Revenue Code, any person who has control,
receipt, custody, or disposal of the income may be constituted as withholding agent:
SEC. 59. Tax on Profits Collectible from Owner or Other Persons. - The tax imposed
under this Title upon gains, profits, and income not falling under the foregoing and not
returned and paid by virtue of the foregoing or as otherwise provided by law shall be assessed
by personal return under rules and regulations to be prescribed by the Secretary of Finance,
upon recommendation of the Commissioner. The intent and purpose of the Title is that all
gains, profits and income of a taxable class, as defined in this Title, shall be charged and
assessed with the corresponding tax prescribed by this Title, and said tax shall be paid by the
owners of such gains, profits and income, or the proper person having the receipt, custody,
control or disposal of the same. For purposes of this Title, ownership of such gains, profits
and income or liability to pay the tax shall be determined as of the year for which a return is
required to be rendered. (Emphasis supplied)
The intent and purpose of the National Internal Revenue Code provisions on withholding taxes
is also explicitly stated, i.e., that all gains, profits, and income "re charged and assessed with
the corresponding tax" 134 and said tax paid by "the owners of such gains, profits and income,
or the proper person having the receipt, custody, control or disposal of the same." 135
The obligation to deduct and withhold tax at source arises at the time an income subject to
withholding is paid or payable, whichever comes first. 136 In interest-bearing bonds, the
interest is taxed at every instance that interest is paid (and income is earned) on the bond.
However, in a zerocoupon bond, it is expected that no periodic interest payments will be
made. Rather, the investor will be paid the principal and interest (discount) together when the
bond reaches maturity.
As explained by respondents, "the discount is the imputed interest earned on the security, and
since paymnet is made at maturity, there is an accreted interest that causes the price of a zero
coupon instrument to accordingly increase with time, all things being constant." 137
In a 10-year zero-coupon bond, for instance, the discount (or interest) is not earned in the first
period, i.e., the value of the instrument does not equal par at the end of the first period. The
total discount is earned over the life of the instrument. Nonetheless, the total discount is
considered earned on the year of sale based on current value. 138
In view of this, the successful GSED-bidder, as agent of the Bureau of Treasury, has the
primary responsibility to withhold the 20% final withholding tax on the interest valued at
present value, when its sale and distribution of the government securities constitutes a deposit
substitute transaction. The 20% final tax is deducted by the buyer from the discount of the
bonds and included in the remittance of the purchase price.
The final tax withheld by the withholding agent is considered as a "full and final payment of
the income tax due from the payee on the said income [and the] payee is not required to file an
income tax return for the particular income." 139 Section 10 of Department of Finance
Department Order No. 020-10140 in relation to the National Internal Revenue Code also
provides that no other tax shall be collected on subsequent trading of the securities that have
been subjected to the final tax.
V withholding tax. 149
In this case, the PEACe Bonds were awarded to petitionersintervenors RCBC/CODE-NGO as
the winning bidder in the primary auction. At the same time, CODE-NGO got RCBC Capital
as underwriter, to distribute and sell the bonds to the public.
The Underwriting Agreement141 and RCBC Term Sheet142 for the sale of the PEACe bonds
show that the settlement dates for the issuance by the Bureau of Treasury of the Bonds to
petitioners-intervenors RCBC/CODENGO and the distribution by petitioner-intervenor RCBC
Capital of the PEA Ce Bonds to various investors fall on the same day, October 18, 2001.
This implies that petitioner-intervenor RCBC Capital was authorized to perform a book-
building process, 143 a customary method of initial distribution of securities by underwriters,
where it could collate orders for the securities ahead of the auction or before the securities
were actually issued. Through this activity, the underwriter obtains information about market
conditions and preferences ahead of the auction of the government securities.
The reckoning of the phrase "20 or more lenders" should be at the time when petitioner-
intervenor RCBC Capital sold the PEACe bonds to investors. Should the number of investors
to whom petitioner-intervenor RCBC Capital distributed the PEACe bonds, therefore, be
found to be 20 or more, the PEACe Bonds are considered deposit substitutes subject to the
20% final withholding tax. Petitioner-intervenors RCBC/CODE-NGO and RCBC Capital, as
well as the final bondholders who have recourse to government upon maturity, are liable to
pay the 20% final withholding tax.
We note that although the originally intended negotiated sale of the bonds by government to
CODE-NGO did not materialize, CODE-NGO, a private entity-still through the participation
of petitioners-intervenors RCBC and RCBC Capital-ended up as the winning bidder for the
government securities and was able to use for its projects the profit earned from the sale of the
government securities to final investors.
Giving unwarranted benefits, advantage, or preference to a party and causing undue injury to
government expose the perpetrators or responsible parties to liability under Section 3(e) of
Republic Act No. 3019. Nonetheless, this is not the proper venue to determine and settle any
such liability.
VI
Petitioners-intervenors RCBC and RCBC Capital contend that they cannot be held liable for
the 20% final withholding should have been made, their obligation was not clear since BIR
149
Ruling Nos. 370-2011 and DA 378-2011 stated that the 20% final withholding tax does not
apply to PEACe Bonds. 144Second, to punish them under the circumstances (i.e., when they
secured the PEACe Bonds from the Bureau of Treasury and sold the Bonds to the
lenders/investors, they had no obligation to remit the 20% final withholding tax) would violate
due process of law and the constitutional proscription on ex facto law.145
Petitioner-intervenor RCBC Capital further posits that it cannot be held liable for the 20%
final withholding tax even as a taxpayer because it never earned interest income from the
PEACe Bonds, and any income earned is deemed in the nature of an underwriting
fee. 146 Petitionersintervenors RCBC and RCBC Capital instead argue that the liability falls on
the Bureau of Treasury and CODE-NGO, as withholding agent and taxpayer, respectively,
considering their explicit representation that the PEACe Bonds are exempt from the final
withholding tax. 147
Petitioners-intervenors RCBC and RCBC Capital add that the Bureau of Internal Revenue is
barred from assessing and collecting the 20% final withholding tax, assuming it was due, on
the ground of prescription. 148 They contend that the three (3)-year prescriptive period under
Section 203, rather than the 10-year assessment period under Section 222, is applicable
because they were compliant with the requirement of filing monthly returns that reflect the
final withholding taxes due or remitted for the relevant period. No false or fraudulent return
was made because they relied on the 2001 BIR Rulings and on the representations made by the
Bureau of Treasury and CODE-NGO that the PEACe Bonds were not subject to the 20% final
Finally, petitioners-intervenors RCBC and RCBC Capital argue that this Court's interpretation
of the phrase "at any one time" cannot be applied to the PEACe Bonds and should be given
prospective application only because it would cause prejudice to them, among others. They
cite Section 246 of the National Internal Revenue Code on non-retroactivity of rulings, as well
as Commissioner of Internal Revenue v. San Roque Power Corporation, 150 which held that
taxpayers may rely upon a rule or ruling issued by the Commissioner from the time it was
issued up to its reversal by the Commissioner or the court. According to them, the retroactive
application of the court's decision would impair their vested rights, violate the constitutional
prohibition on non-impairment of contracts, and constitute a substantial breach of obligation
on the part of govemment. 151 In addition, the imposition of the 20% final withholding tax on
the PEA Ce Bonds would allegedly have pernicious effects on the integrity of existing
securities that is I contrary to the state policies of stabilizing the financial system and of
developing the capital markets. 152
CODE-NGO likewise contends that it merely relied in good faith on the 2001 BIR Rulings
confirming that the PEA Ce Bonds were not subject to the 20% final withholding
tax. 153 Therefore, it should not be prejudiced if the BIR Rulings are found to be erroneous and
reversed by the Commissioner or this court.154 CODE-NGO argues that this Court's Decision
construing the phrase "at any one time" to determine the phrase "20 or more lenders" to
include both the primary and secondary market should be applied prospectively. 155
Assuming it is liable for the 20% final withholding tax, CODE-NGO argues that the collection
of the final tax was barred by prescription.156 CODE-NGO points out that under Section 203
of the National Internal Revenue Code, internal revenue taxes such as the final tax, should be
assessed within three (3) years after the last day prescribed by law for the filing of the
return. 157 It further argues that Section 222(a) on exceptions to the prescribed period. for tax
assessment and collection does not apply. 158 It claims that there is no fraud or intent to evade
taxes as it relied in good faith on the assurances of the Bureau of Internal Revenue and Bureau
of Treasury the PEACe Bonds are not subject to the 20% final withholding tax. 159 We find
merit on the claim of petitioners-intervenors RCBC, RCBC Capital, and CODE-NGO for
prospective application of our Decision.
The phrase "at any one time" is ambiguous in the context of the financial market. Hence,
petitioner-intervenor RCBC and the rest of the investors relied on the opinions of the Bureau
of Internal Revenue in BIR Ruling Nos. 020-2001, 035-2001 160 dated August 16, 2001, and
DA-175- 01161 dated September 29, 2001 to vested their rights in the exemption from the final
withholding tax. In sum, these rulings pronounced that to determine whether the financial
assets, i.e., debt instruments and securities, are deposit substitutes, the "20 or more individual
or corporate lenders" rule must apply. Moreover, the determination of the phrase "at any one
time" to determine the "20 or more lenders" is to be determined at the time of the original
issuance. This being the case, the PEACe Bonds were not to be treated as deposit substitutes.
In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals,162 the Commissioner demanded
from petitioner deficiency withholding income tax on film rentals remitted to foreign
corporations for the years 1965 to 1968. The assessment was made under Revised Memo
Circular No. 4-71 issued in 1971, which used gross income as tax basis for the required
withholding tax, instead of one-half of the film rentals as provided under General Circular No.
V-334. In setting aside the assessment, this Court ruled that in the interest of justice and fair
play, rulings or circulars promulgated by the Commissioner of Internal Revenue have no
retroactive application where applying them would prove prejudicial to taxpayers who relied
in good faith on previous issuances of the Commissioner. This Court further held that Section
24(b) of then National Internal Revenue Code sought to be implemented by General Circular
No. V-334 was neither too plain nor simple to understand and was capable of different
interpretations. Thus:
The rationale behind General Circular No. V-334 was clearly stated therein, however: "It ha[
d] been determined that the tax is still imposed on income derived from capital, or labor, or
both combined, in accordance with the basic principle of income taxation ... and that a mere
return of capital or investment is not income .... " "A part of the receipts of a non-resident
foreign film distributor derived from said film represents, therefore, a return of investment."
The circular thus fixed the return of capital at 50% to simplify the administrative chore of
determining the portion of the rentals covering the return of capital.
Were the "gross income" base clear from Sec. 24(b), perhaps, the ratiocination of the Tax
Court could be upheld. It should be noted, however, that said Section was not too plain and
simple to understand. The fact that the issuance of the General Circular in question was
rendered necessary leads to no other conclusion than that it was not easy of comprehension
and could be subjected to different interpretations.
In fact, Republic Act No. 2343, dated June 20, 1959, supra, which was the basis of General
Circular No. V-334, was just one in a series of enactments regarding Sec. 24(b) of the Tax
Code. Republic Act No. 3825 came next on June 22, 1963 without changing the basis but
merely adding a proviso (in bold letters).
(b) Tax on foreign corporation. - (1) Non-resident corporations. - There shall be levied,
collected, and paid for each taxable year, in lieu of the tax imposed by the preceding
paragraph, upon the amount received by every foreign corporation not engaged in trade or
business within the Philippines, from all sources within the Philippines, as interest, dividends,
rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or
other fixed or determinable annual or periodical gains, profits and income, a tax equal to thirty
per centum of such amount: PROVIDED, HOWEVER, THAT PREMIUMS SHALL NOT
INCLUDE REINSURANCE PREMIUMS." (double emphasis ours)
Republic Act No. 3841, dated likewise on June 22, 1963, followed after, omitting the proviso
and inserting some words (also in bold letters).
"(b) Tax on foreign corporations. - (1) Nonresident corporations. - There shall be levied,
collected and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph,
upon the amount received by every foreign corporation not engaged in trade or business within
the Philippines, from all sources within the Philippines, as interest, dividends, rents, salaries,
wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical OR CASUAL gains, profits and income, AND CAP IT AL
GAINS, a tax equal to thirty per centum of such amount."
150
The principle of legislative approval of administrative interpretation by re-enactment clearly
obtains in this case. It provides that "the re-enactment of a statute substantially unchanged is
persuasive indication of the adoption by Congress of a prior executive construction." Note
should be taken of the fact that this case involves not a mere opinion of the Commissioner or
ruling rendered on a mere query, but a Circular formally issued to "all internal revenue
officials" by the then Commissioner of Internal Revenue.
It was only on June 27, 1968 under Republic Act No. 5431, supra, which became the basis of
Revenue Memorandum Circular No. 4-71, that Sec. 24(b2 was amended to refer specifically to
35% of the "gross income."163 (Emphasis supplied)
San Roque has held that the 120-day and the 30-day periods under Section 112 of the National
Internal Revenue Code are mandatory and jurisdictional. Nevertheless, San Roque provided an
exception to the rule, such that judicial claims filed by taxpayers who relied on BIR Ruling
No. DA-489-03-from its issuance on December 10, 2003 until its reversal by this Court
in Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. 164 on October 6,
2010-are shielded from the vice of prematurity. The BIR Ruling declared that the "taxpayer-
claimant need not wait for the lapse of the 120-day period before it could seek judicial relief
with the C[ourt] [of] T[ax] A[ppeals] by way of Petition for Review." The Court reasoned
that:
Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner,
particularly on a difficult question of law. The abandonment of the Atlas doctrine by Mirant
and Aichi is proof that the reckoning of the prescriptive periods for input VAT tax refund or
credit is a difficult question of law. The abandonment of the Atlas doctrine did not result in
Atlas, or other taxpayers similarly situated, being made to return the tax refund or credit they
received or could have received under Atlas prior to its abandonment. This Court is applying
Mirant and Aichi prospectively. Absent fraud, bad faith or misrepresentation, the reversal by
this Court of a general interpretative rule issued by the Commissioner, like the reversal of a
specific BIR ruling under Section 246, should also apply prospectively ....
....
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule
applicable to all taxpayers or a specific ruling applicable only to a particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a
query made, not by a particular taxpayer, but by a government agency tasked with processing
tax refunds and credits, that is, the One Stop Shop Inter-Agency Tax Credit and Drawback
Center of the Department of Finance. This government agency is also the addressee, or the
entity responded to, in BIR Ruling No. DA-489-03. Thus, while this government agency
mentions in its query to the Commissioner the administrative claim of Lazi Bay Resources
Development, Inc., the agency was in fact asking the Commissioner what to do in cases like
the tax claim of Lazi Bay Resources Development, Inc., where the taxpayer did not wait for
the lapse of the 120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can
rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to
its reversal by this Court in Aichi on 6 October 2010, where this Court held that the 120+30
day periods are mandatory and jurisdictional.165 (Emphasis supplied)
The previous interpretations given to an ambiguous law by the Commissioner of Internal
Revenue, who is charged to carry out its provisions, are entitled to great weight, and taxpayers
who relied on the same should not be prejudiced in their rights. 166 Hence, this Court's
construction should be prospective; otherwise, there will be a violation of due process for
failure to accord persons, especially the parties affected by it, fair notice of the special burdens
imposed on them.
VII
Urgent Reiterative Motion [to Direct Respondents to Comply with the
Temporary Restraining Order]
 Petitioners Banco de Oro, et al. allege that the temporary restraining order issued by this Court
To record redemption of 10yr Zero coupon
on October 18, 2011 continues to be effective under Rule 58, Section 5 of the Rules of Court
(Peace Bond) net of the 20% final
and the Decision dated January 13, 2015. Thus, considering respondents' refusal to comply
withholding tax pursuant to BIR Ruling
with their obligation under the temporary restraining order, petitioners ask this Court to issue a
No. 378-2011, value date, October 18,
resolution directing respondents, particularly the Bureau of Treasury, "to comply with its order
2011 per BTr letter authority and BSP
by immediately releasing to the petitioners during the pendency of the case the 20% final
Bank Statements.
withholding tax" so that the monies may be placed in escrow pending resolution of the case. 167
We recall that in its previous pleadings, respondents remain firm in its stance that the October
18, 2011 temporary restraining order could no longer be implemented because the acts sought
to be enjoined were already fait accompli. 168 They allege that the amount withheld was
already remitted by the Bureau of Treasury to the Bureau of Internal Revenue. Hence, it
became part of the General Fund, which required legislative appropriation before it could
validly be disbursed. 169 Moreover, they argue that since the amount in question pertains to
taxes alleged to be erroneously withheld and collected by government, the proper recourse was
for the taxpayers to file an application for tax refund before the Commissioner of Internal
Revenue under Section 204 of the National Internal Revenue Code. 170
In our January 13, 2015 Decision, we rejected respondents' defense of fait accompli. We held
that the amount withheld were yet to be remitted to the Bureau of Internal Revenue, and the
evidence Gournal entry voucher) submitted by respondents was insufficient to prove the fact
of remittance. Thus:
The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that
constitutes both the withholding and remittance of the 20% final withholding tax to the Bureau
of Internal Revenue. Even though the Bureau of Treasury had already withheld the 20% final
withholding tax when they received the temporary restraining order, it had yet to remit the
monies it withheld to the Bureau of Internal Revenue, a remittance which"was due only on
November 10, 2011. The act enjoined by the temporary restraining order had not yet been
fully satisfied and was still continuing.
Under DOF-DBM Joint Circular No. 1-2000A dated July 31, 2001 which prescribes to
national government agencies such as the Bureau of Treasury the procedure for the remittance
of all taxes they withheld to the Bureau of Internal Revenue, a national agency shall file before
the Bureau of Internal Revenue a Tax Remittance Advice (TRA) supported by withholding tax
returns on or before the 1 oth day of the following month after the said taxes had been
withheld. The Bureau of Internal Revenue shall transmit an original copy of the TRA to the
Bureau of Treasury, which shall be the basis in recording the remittance of the tax collection.
The Bureau of Internal Revenue will then record the amount of taxes reflected in the TRA as
tax collection in the Journal of Tax Remittance by government agencies based on its copies of
the TRA. Respondents did not submit any withholding tax return or TRA to prove that the
20% final withholding tax was indeed remitted by the Bureau of Treasury to the Bureau
oflnternal Revenue on October 18, 2011.
Respondent Bureau of Treasury's Journal Entry Voucher No. 11-10- 10395 dated October 18,
2011 submitted to this court shows:
Account Code Debit Amount Credit Amount
Bonds Payable-UT, Dom-Zero 442-360 35,000,000,000.00
Coupon I/Bonds (Peace Bonds)- 10 yr
Sinking Fund-Cash (BSF) 198-001 30,033,792,203.59
Due to BIR 412-002 4,966,207,796.41
151
The foregoing journal entry, however, does not prove that the amount of P4,966,207, 796.41,
representing the 20% final withholding tax on the PEACe Bonds, was disbursed by it and
remitted to the Bureau of Internal Revenue on October 18, 2011. The entries merely show that
the monies corresponding to 20% final withholding tax was set aside for remittance to the
Bureau of Internal Revenue. 171
Respondents did not submit any withholding tax return or tax remittance advice to prove that
the 20% final withholding tax was, indeed, remitted by the Bureau of Treasury to the Bureau
of Internal Revenue on October 18, 2011, and consequently became part of the general fund of
the government. The corresponding journal entry in the books of both the Bureau of Treasury
and Bureau of Internal Revenue showing the transfer of the withheld funds to the Bureau of
Internal Revenue was likewise not submitted to this Court. The burden of proof lies on them to
show their claim of remittance. Until now, respondents have failed to submit sufficient
supporting evidence to prove their claim.
In Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing
Corporation, 172 this Court upheld the right of a withholding agent to file a claim for refund of
the withheld taxes of its foreign parent company. This Court, citing Philippine Guaranty
Company, Inc. v. Commissioner of Internal Revenue, 173 ruled that inasmuch as it is an agent
of government for the withholding of the proper amount of tax, it is also an agent of its foreign
parent company with respect to the filing of the necessary income tax return and with respect
to actual payment of the tax to the government. Thus:
The term "taxpayer" is defined in our NIRC as referring to "any person subject to tax imposed
by the Title [on Tax on Income]." It thus becomes important to note that under Section 53(c)
of the NIRC, the withholding agent who is "required to deduct and withhold any tax" is made
"personally liable for such tax" and indeed is indemnified against any claims and demands
which the stockholder might wish to make in
questioning the amount of payments effected by the withholding agent in accordance with the
provisions of the NIRC. The withholding agent, P&G-Phil., is directly and independently
liable for the correct amount of the tax that should be withheld from the dividend remittances.
The withholding agent is, moreover, subject to and liable for deficiency assessments,
surcharges and penalties should the amount of the tax withheld be finally found to be less than
the amount that should have been withheld under law.
A "person liable for tax" has been held to be a "person subject to tax" and properly considered
a "taxpayer." The terms "liable for tax" and "subject to tax" both connote legal obligation or
duty to pay a tax. It is very difficult, indeed conceptually impossible, to consider a person who
is statutorily made "liable for tax" as not "subject to tax." By any reasonable standard, such a
person should be regarded as a party in interest, or as a person having sufficient legal interest,
to bring a suit for refund of taxes he believes were illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, this Court
pointed out that a withholding agent is in fact the agent both of the government and of the
taxpayer, and that the withholding agent is not an ordinary government agent:
The law sets no condition for the personal liability of the withholding agent to attach. The
reason is to compel the withholding agent to withhold the tax under all circumstances. In
effect, the responsibility for the collection of the tax as well as the payment thereof is
concentrated upon the person over whom the Government has jurisdiction. Thus, the
withholding agent is constituted the agent of both the Government and the taxpayer. With
respect to the collection and/or withholding of the tax, he is the Government's agent. In regard
to the filing of the necessary income tax return and the payment of the tax to the Government,
he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary government
agent especially because under Section 53 (c) he is held personally liable for the tax he is duty
bound to withhold; whereas the Commissioner and his deputies are not made liable by law.
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the
beneficial owner of the dividends with respect to the filing of the necessary income tax return
and with respect to actual payment of the tax to the government, such authority may
reasonably be held to include the authority to file a claim for refund and to bring an action for
recovery of such claim. This implied authority is especially warranted where, as in the instant
case, the withholding agent is the wholly owned subsidiary of the parent-stockholder and
therefore, at all times, under the effective control of such parent-stockholder. In the
circumstances of this case, it seems particularly unreal to deny the implied authority of P&G-
Phil. to claim a refund and to commence an action for such refund.
....
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly
regarded as a "taxpayer" within the meaning of Section 309, NIRC, and as impliedly
authorized to file the claim for refund and the suit to recover such claim. 174 (Emphasis
supplied, citations omitted)
In Commissioner of Internal Revenue v. Smart Communication, Inc.;175
[W]hile the withholding agent has the right to recover the taxes erroneously or illegally
collected, he nevertheless has the obligation to remit the same to the principal taxpayer. As an
agent of the taxpayer, it is his duty to return what he has recovered; otherwise, he would be
unjustly enriching himself at the expense of the principal taxpayer from whom the taxes were
withheld, and from whom he derives his legal right to file a claim for refund. 176
Since respondents have not sufficiently shown the actual remittance of the 20% final
withholding taxes withheld from the proceeds of the PEACe bonds to the Bureau of Internal
Revenue, there was no legal impediment for the Bureau of Treasury (as agent of petitioners) to
release the monies to petitioners to be placed in escrow, pending resolution of the motions for
reconsideration filed in this case by respondents and petitioners-intervenors RCBC and RCBC
Capital.
Moreover, Sections 204 and 229 of the National Internal Revenue Code are not applicable
since the Bureau of Treasury's act of withholding the 20% final withholding tax was done after
the Petition was filed.
Petitioners also urge177 us to hold respondents liable for 6% legal interest reckoned from
October 19, 2011 until they fully pay the amount corresponding to the 20% final withholding
tax. This Court has previously granted interest in cases where patent arbitrariness on the part
of the revenue authorities has been shown, or where the collection of tax was illegal. 178
In Philex Mining Corp. v. Commissioner of Internal Revenue: 179
[T]he rule is that no interest on refund of tax can be awarded unless authorized by law or the
collection of the tax was attended by arbitrariness. An action is not arbitrary when exercised
honestly and upon due consideration where there is room for two opinions, however much it
may be believed that an erroneous conclusion was reached. Arbitrariness presupposes
inexcusable or obstinate disregard of legal provisions.180 (Emphasis supplied, citations
omitted)
Here, the Bureau of Treasury made no effort to release the amount of ₱4,966,207,796.41,
corresponding to the 20% final withholding tax, when it could have done so.
In the Court's temporary restraining order dated October 18, 2011, 181 which respondent
received on October 19, 2011, we "enjoin[ed] the implementation of BIR Ruling No. 370-
2011 against the [PEACe Bonds,] ... subject to the condition that the 20% final withholding
tax on interest income there.from shall be withheld by the petitioner banks and placed in
escrow pending resolution of [the} petition." 182
Subsequently, in our November 15, 2011 Resolution, we directed respondents to "show cause
why they failed to comply with the [temporary restraining order]; and [to] comply with the
[temporary restraining order] in order that petitioners may place the corresponding funds in
escrow pending resolution of the petition."183
Respondent did not heed our orders.
In our Decision dated January 13, 2015, we reprimanded the Bureau of Treasury for its
continued retention of the amount corresponding to the 20% final withholding tax, in wanton
disregard of the orders of this Court.
We further ordered the Bureau of Treasury to immediately release and pay the bondholders the
amount corresponding to the 20% final withholding tax that it withheld on October 18, 2011.
However, respondent remained obstinate in its refusal to release the monies and exhibited.utter
disregard and defiance of this Court.
As early as October 19, 2011, petitioners could have deposited the amount of ₱4,966,207,
796.41 in escrow and earned interest, had respondent Bureau of Treasury complied with the
temporary restraining order and
released the funds. It was inequitable for the Bureau of Treasury to have withheld the potential
earnings of the funds in escrow from petitioners.
Due to the Bureau of Treasury's unjustified refusal to release the funds to be deposited in
escrow, in utter disregard of the orders of the Court, it is held liable to pay legal interest of
6% per annum 184 on the amount of ₱4,966,207, 796.41 representing the 20% final
withholding tax on the PEACe Bonds.
WHEREFORE, respondents' Motion for Reconsideration and Clarification is DENIED, and
petitioners-intervenors RCBC and RCBC Capital Corporation's Motion for Clarification
and/or Partial Reconsideration is PARTLY GRANTED.
Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay the
bondholders the amount of P4,966,207, 796.41, representing the 20% final withholding tax on
the PEACe Bonds, with legal interest of 6% per annum from October 19, 2011 until full
payment.
SO ORDERED.

152
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 207843 July 15, 2015
COMMISSION OF INTERNAL REVENUE, Petitioner,
vs.
COURT OF TAX APPEALS (SECOND DIVISION) and PETRON
CORPORATION,* Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for certiorari1 are the Resolutions dated February 13, 20132 and May
8, 20133 of the Court of Tax Appeals, Second Division (CTA) in CTA Case No. 8544
reversing and setting aside the earlier dismissal of the petition for review filed by private
respondent Petron Corporation (Petron) in the said case on the bases of prematurity and lack
of jurisdiction.
The Facts
Petron, which is engaged in the manufacture and marketing of petroleum products, imports
alkylate as a raw material or blending component for the manufacture of ethanol-blended
motor gasoline.4 For the period January 2009 to August 2011, as well as for the month of
April 2012, Petron transacted an aggregate of 22 separate importations for which petitioner the
Commissioner of Internal Revenue (CIR) issued Authorities to Release Imported Goods
(ATRIGs), categorically stating that Petron's importation of alkylate is exempt from the
payment of the excise tax because it was not among those articles enumerated as subject to
excise tax under Title VI of Republic Act No. (RA) 8424,5 as amended, or the 1997 National
Internal Revenue Code (NIRC). With respect, however, to Petron's alkylate importations
covering the period September 2011 to June 2012 (excluding April 2012), the CIR inserted,
without prior notice, a reservation for all ATRIGs issued,6 stating that:
This is without prejudice to the collection of the corresponding excise taxes, penalties and
interest depending on the final resolution of the Office of the Commissioner on the issue of
whether this item is subject to the excise taxes under the National Internal Revenue Code of
1997, as amended.7
In June 2012, Petron imported 12,802,660 liters of alkylate and paid value-added tax (VAT) in
the total amount of ?41,657,533.00 as evidenced by Import Entry and Internal Revenue
Declaration (IEIRD) No. SN 122406532. Based on the Final Computation, said importation
was subjected by the Collector of Customs of Port Limay, Bataan, upon instructions of the
Commissioner of Customs (COC), to excise taxes of ₱4.35 per liter, or in the aggregate
amount of ₱55,691,571.00, and consequently, to an additional VAT of 12% on the imposed
excise tax in the amount of ₱6,682,989.00.8 The imposition of the excise tax was supposedly
premised on Customs Memorandum Circular (CMC) No. 164-2012 dated July 18, 2012,
implementing the Letter dated June 29, 2012 issued by the CIR, which states that:
[A]lkylate which is a product of distillation similar to that of naphta, is subject to excise tax
under Section 148( e) of the National Internal Revenue Code (NIRC) of 1997. 9
In view of the CIR's assessment, Petron filed before the CTA a petition for review, 10 docketed
as CTA Case No. 8544, raising the issue of whether its importation of alkylate as a blending
component is subject to excise tax as contemplated under Section 148 (e) of the NIRC.
On October 5, 2012, the CIR filed a motion to dismiss on the grounds of lack of jurisdiction
and prematurity.11
Initially, in a Resolution12 dated November 15, 2012, the CTA granted the CIR's motion and
dismissed the case. However, on Petron's motion for reconsideration, 13 it reversed its earlier
disposition in a Resolution14 dated February 13, 2013, and eventually denied the CIR's motion
for reconsideration15 therefrom in a Resolution16 dated May 8, 2013. In effect, the CTA gave
153
due course to Petron's petition, finding that: (a) the controversy was not essentially for the
determination of the constitutionality, legality or validity of a law, rule or regulation but a
question on the propriety or soundness of the CIR's interpretation of Section 148 (e) of the
NIRC which falls within the exclusive jurisdiction of the CTA under Section 4 thereof,
particularly under the phrase "other matters arising under [the NIRC]";17 and (b) there are
attending circumstances that exempt the case from the rule on non-exhaustion of
administrative remedies, such as the great irreparable damage that may be suffered by Petron
from the CIR's final assessment of excise tax on its importation. 18
Aggrieved, the CIR sought immediate recourse to the Court, through the instant petition,
alleging that the CTA committed grave abuse of discretion when it assumed authority to take
cognizance of the case despite its lack of jurisdiction to do so. 19
The Issue Before the Court
The core issue to be resolved is whether or not the CTA properly assumed jurisdiction over the
petition assailing the imposition of excise tax on Petron's importation of alkylate based on
Section 148 (e) of the NIRC.
The Court's Ruling
The petition is meritorious.
The CIR asserts that the interpretation of the subject tax provision, i.e., Section 148 (e) of the
NIRC, embodied in CMC No. 164-2012, is an exercise of her quasi-legislative function which
is reviewable by the Secretary of Finance, whose decision, in turn, is appealable to the Office
of
the President and, ultimately, to the regular courts, and that only her quasi-judicial functions or
the authority to decide disputed assessments, refunds, penalties and the like are subject to the
exclusive appellate jurisdiction of the CTA.20 She likewise contends that the petition suffers
from prematurity due to Petron 's failure to exhaust all available remedies within the
administrative level in accordance with the Tariff and Customs Code (TCC). 21
The CIR's position is well-grounded.
Section 4 of the NIRC confers upon the CIR both: (a) the power to interpret tax laws in the
exercise of her quasi-legislative function; and (b) the power to decide tax cases in the exercise
of her quasi-judicial function. It also delineates the jurisdictional authority to review the
validity of the CIR's exercise of the said powers, thus:
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The
power to interpret the provisions of this Code and other tax laws shall be under the exclusive
and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under this Code or other
laws or portions thereof administered by the Bureau of Internal Revenue is vested in the
Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.
(Emphases and underscoring supplied)
The CTA is a court of special jurisdiction, with power to review by appeal decisions involving
tax disputes rendered by either the CIR or the COC.1âwphi1 Conversely, it has no jurisdiction
to determine the validity of a ruling issued by the CIR or the COC in the exercise of their
quasi-legislative powers to interpret tax laws. These observations may be deduced from a
reading of Section 7 of RA 1125,22 as amended by RA 9282,23 entitled "An Act Creating the
Court of Tax Appeals," enumerating the cases over which the CT A may exercise its
jurisdiction:
Sec. 7. Jurisdiction. -The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
 National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;
2. Inaction by the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relations thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau
of Internal Revenue, where the National Internal Revenue Code provides a
specific period of action, in which case the inaction shall be deemed a
denial;
3. Decisions, orders or resolutions of the Regional Trial Comis in local tax
cases originally decided or resolved by them in the exercise of their
original or appellate jurisdiction;
4. Decisions of the Commissioner of Customs in cases involving liability
for customs duties, fees or other money charges, seizure, detention or
release of property affected, fines, forfeitures or other penalties in relation
thereto, or other matters arising under the Customs Law or other laws
administered by the Bureau of Customs;
5. Decisions of the Central Board of Assessment Appeals in the exercise
of its appellate jurisdiction over cases involving the assessment and
taxation of real property originally decided by the provincial or city board
of assessment appeals;
6. Decisions of the Secretary of Finance on customs cases elevated to him
automatically for review from decisions of the Commissioner of Customs
which are adverse to the Government under Section 2315 of the Tariff and
Customs Code;
7. Decisions of the Secretary of Trade and Industry, in the case of
nonagricultural product, commodity or article, and the Secretary of
Agriculture in the case of agricultural product, commodity or article,
involving dumping and countervailing duties under Section 301 and 302,
respectively, of the Tariff and Customs Code, and safeguard measures
under Republic Act No. 8800, where either party may appeal the decision
to impose or not to impose said duties.
b. Jurisdiction over cases involving criminal offenses as herein provided:
1. Exclusive original jurisdiction over all criminal offenses arising from
violations of the National Internal Revenue Code or Tariff and Customs
Code and other laws administered by the Bureau of Internal Revenue or
the Bureau of Customs: Provided, however, That offenses or felonies
mentioned in this paragraph where the principal amount of taxes and fees,
exclusive of charges and penalties, claimed is less than One million pesos
(₱1,000,000.00) or where there is no specified amount claimed shall be
tried by the regular Courts and the jurisdiction of the CTA shall be
appellate. Any provision of law or the Rules of Court to the contrary
notwithstanding, the criminal action and the corresponding civil action for
the recovery of civil liability for taxes and penalties shall at all times be
simultaneously instituted with, and jointly determined in the same
proceeding by the CT A, the filing of the criminal action being deemed to
necessarily carry with it the filing of the civil action, and no right to
reserve the filling of such civil action separately from the criminal action
will be recognized.
2. Exclusive appellate jurisdiction in criminal offenses:
154
a. Over appeals from the judgments, resolutions or orders of the
Regional Trial Courts in tax cases originally decided by them, in
their respective territorial jurisdiction.
b. Over petitions for review of the judgments, resolutions or
orders of the Regional Trial Courts in the exercise of their
appellate jurisdiction over tax cases originally decided by the
Metropolitan Trial Courts, Municipal Trial Courts and
Municipal Circuit Trial Courts in their respective jurisdiction.
c. Jurisdiction over tax collection cases as herein provided:
1. Exclusive original jurisdiction in tax collection cases involving final and
executory assessments for taxes, fees, charges and penalties: Provided, however,
That collection cases where the principal amount of taxes and fees, exclusive of
charges and penalties, claimed is less than One million pesos (₱1,000,000.00) shall
be tried by the proper Municipal Trial Court, Metropolitan Trial Court and Regional
Trial Court.
2. Exclusive appellate jurisdiction in tax collection cases:
a. Over appeals from the judgments, resolutions or orders of the Regional
Trial Courts in tax collection cases originally decided by them, in their
respective territorial jurisdiction.
b. Over petitions for review of the judgments, resolutions or orders of the
Regional Trial Courts in the exercise of their appellate jurisdiction over
tax collection cases originally decided by the Metropolitan Trial Courts,
Municipal Trial Courts and Municipal Circuit Trial Courts, in their
respective jurisdiction. (Emphasis supplied)
In this case, Petron's tax liability was premised on the COC's issuance of CMC No. 164-2012,
which gave effect to the CIR's June 29, 2012 Letter interpreting Section 148 (e) of the NIRC
as to include alkyl ate among the articles subject to customs duties, hence, Petron's petition
before the CTA ultimately challenging the legality and constitutionality of the CIR's aforesaid
interpretation of a tax provision. In line with the foregoing discussion, however, the CIR
correctly argues that the CT A had no jurisdiction to take cognizance of the petition as its
resolution would necessarily involve a declaration of the validity or constitutionality of the
CIR's interpretation of Section 148 (e) of the NIRC, which is subject to the exclusive review
by the Secretary of Finance and ultimately by the regular courts. In British American Tobacco
v. Camacho,24 the Court ruled that the CTA's jurisdiction to resolve tax disputes excludes the
power to rule on the constitutionality or validity of a law, rule or regulation, to wit:
While the above statute confers on the CTA jurisdiction to resolve tax disputes in general, this
does not include cases where the constitutionality of a law or rule is challenged. Where what is
assailed is the validity or constitutionality of a law, or a rule or regulation issued by the
administrative agency in the performance of its quasi-legislative function, the regular courts
have jurisdiction to pass upon the same. x x x.25
In asserting its jurisdiction over the present case, the CTA explained that Petron's petition filed
before it "simply puts in question" the propriety or soundness of the CIR's interpretation and
application of Section 148 (e) of the NIRC (as embodied in CMC No. 164-2012) "in relation
to" the imposition of excise tax on Petron's importation of alkylate; thus, the CTA posits that
the case should be regarded as "other matters arising under [the NIRC]" under the second
paragraph of Section 4 of the NIRC, therefore falling within the CTA's jurisdiction: 26
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The
power to interpret the provisions of this Code and other tax laws shall be under the exclusive
and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under this Code or other
laws or portions thereof administered by the Bureau of Internal Revenue is vested in the
commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.
(Emphases and underscoring supplied)
The Court disagrees.
As the CIR aptly pointed out, the phrase "other matters arising under this Code," as stated in
the second paragraph of Section 4 of the NIRC, should be understood as pertaining to those
matters directly related to the preceding phrase "disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in relation thereto" and must therefore
not be taken in isolation to invoke the jurisdiction of the CTA.27 In other words, the subject
phrase should be used only in reference to cases that are, to begin with, subject to the
exclusive appellate jurisdiction of the CTA, i.e., those controversies over which the CIR had
exercised her quasi-judicial functions or her power to decide disputed assessments, refunds or
internal revenue taxes, fees or other charges, penalties imposed in relation thereto, not to those
that involved the CIR's exercise of quasi-legislative powers.
In Enrile v. Court of Appeals,28 the Court, applying the statutory construction principle of
ejusdem generis,29explained the import of using the general clause "other matters arising under
the Customs Law or other law or part of law administered by the Bureau of Customs" in the
enumeration of cases subject to the exclusive appellate jurisdiction of the CTA, saying that:
[T]he 'other matters' that may come under the general clause should be of the same nature as
those that have preceded them applying the rule of construction known as ejusdem
generis.30(Emphasis and underscoring supplied)
Hence, as the CIR's interpretation of a tax provision involves an exercise of her quasi-
legislative functions, the proper recourse against the subject tax ruling expressed in CMC No.
164-2012 is a review by the Secretary of Finance and ultimately the regular courts. In
Commissioner of Customs v. Hypermix Feeds Corporation, 31 the Court has held that:
The determination of whether a specific rule or set of rules issued by an administrative agency
contravenes the law or the constitution is within the jurisdiction of the regular courts. Indeed,
the Constitution vests the power of judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree, order, instruction, ordinance, or
regulation in the courts, including the regional trial courts. This is within the scope of judicial
power, which includes the authority of the courts to determine in an appropriate action the
validity of the acts of the political departments. x x x.32
Besides, Petron prematurely invoked the jurisdiction of the CT A. Under Section 7 of RA
1125, as amended by RA 9282, what is appealable to the CT A is the decision of the COC
over a customs collector's adverse ruling on a taxpayer's protest:
SEC. 7. Jurisdiction. -The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation
thereto, or other matters arising under the National Internal Revenue or other laws
administered by the Bureau of Internal Revenue;
xxxx
4. Decisions of the Commissioner of Customs in cases involving liability for customs duties,
fees or other money charges, seizure, detention or release of property affected, fines,
forfeitures or other penalties in relation thereto, or other matters arising under the Customs
Law or other laws administered by the Bureau of Customs;
xxxx
Section 11 of the same law is no less categorical in stating that what may be the subject of an
appeal to the CT A is a decision, ruling or inaction of the CIR or the COC, among others:
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. – Any party adversely
affected by a decision, ruling or inaction of the Commissioner of Internal Revenue, the
Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry or
the Secretary of Agriculture or the Central Board of Assessment Appeals or the Regional Trial
155
Courts may file an appeal with the CTA within thirty (30) days after the receipt of such
decision or ruling or after the expiration of the period fixed by law for action as referred to in
Section 7(a)(2) herein.
xxxx
In this case, there was even no tax assessment to speak of. While customs collector Federico
Bulanhagui himself admitted during the CTA's November 8, 2012 hearing that the
computation he had written at the back page of the IEIRD served as the final assessment
imposing excise tax on Petron's importation of alkylate,33 the Court concurs with the CIR's
stance that the subject IEIRD was not yet the customs collector's final assessment that could
be the proper subject of review. And even if it were, the same should have been brought first
for review before the COC and not directly to the CTA. It should be stressed that the CTA has
no jurisdiction to review by appeal, decisions of the customs collector. 34 The TCC prescribes
that a party adversely affected by a ruling or decision of the customs collector may protest
such ruling or decision upon payment of the amount due35 and, if aggrieved by the action of
the customs collector on the matter under protest, may have the same reviewed by the
COC.36 It is only after the COC shall have made an adverse ruling on the matter may the
aggrieved party file an
appeal to the CT A.37
Notably, Petron admitted to not having filed a protest of the assessment before the customs
collector and elevating a possible adverse ruling therein to the COC, reasoning that such a
procedure would be costly and impractical, and would unjustly delay the resolution of the
issues which, being purely legal in nature anyway, were also beyond the authority of the
customs collector to resolve with finality.38 This admission is at once decisive of the issue of
the CTA's jurisdiction over the petition. There being no protest ruling by the customs collector
that was appealed to the COC, the filing of the petition before the CTA was premature as there
was nothing yet to review.39
Verily, the fact that there is no decision by the COC to appeal from highlights Petron's failure
to exhaust administrative remedies prescribed by law. Before a party is allowed to seek the
intervention of the courts, it is a pre-condition that he avail of all administrative processes
afforded him, such that if a remedy within the administrative machinery can be resorted to by
giving the administrative officer every opportunity to decide on a matter that comes within his
jurisdiction, then such remedy must be exhausted first before the court's power of judicial
review can be sought, otherwise, the premature resort to the court is fatal to one's cause of
action.40 While there are exceptions to the principle of exhaustion of administrative remedies,
it has not been sufficiently shown that the present case falls under any of the exceptions.
WHEREFORE, the petition is GRANTED. The Resolutions dated February 13, 2013 and May
8, 2013 of the Court of Tax Appeals (CTA), Second Division in CTA Case No. 8544 are
hereby REVERSED and SET ASIDE. The petition for review filed by private respondent
Petron Corporation before the CTA is DISMISSED for lack of jurisdiction and prematurity.
SO ORDERED.