G.R. No.

160756 March 9, 2010

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner,

vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING SECRETARY OF FINANCE JUANITA
D. AMATONG, and THE HON. COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO,
JR., Respondents.

DECISION

CORONA, J.:

In this original petition for certiorari and mandamus,1 petitioner Chamber of Real Estate and Builders’ Associations, Inc. is
questioning the constitutionality of Section 27 (E) of Republic Act (RA) 8424 2 and the revenue regulations (RRs) issued by
the Bureau of Internal Revenue (BIR) to implement said provision and those involving creditable withholding taxes. 3

Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former Executive
Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then Commissioner of Internal
Revenue Guillermo Parayno, Jr. as respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and creditable
withholding tax (CWT) on sales of real properties classified as ordinary assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98. Petitioner argues
that the MCIT violates the due process clause because it levies income tax even if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii)
and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of CWT on the sale of real
properties categorized as ordinary assets. Petitioner contends that these revenue regulations are contrary to law for two
reasons: first, they ignore the different treatment by RA 8424 of ordinary assets and capital assets and second,
respondent Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross selling price
or fair market value of the real properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due process clause
because, like the MCIT, the government collects income tax even when the net income has not yet been determined.
They contravene the equal protection clause as well because the CWT is being levied upon real estate enterprises but not
on other business enterprises, more particularly those in the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;

(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and

(3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary assets
under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

Overview of the Assailed Provisions

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of 2% of its gross
income when such MCIT is greater than the normal corporate income tax imposed under Section 27(A). 4 If the regular
income tax is higher than the MCIT, the corporation does not pay the MCIT. Any excess of the MCIT over the normal tax
shall be carried forward and credited against the normal income tax for the three immediately succeeding taxable years.
Section 27(E) of RA 8424 provides:

Section 27 (E). [MCIT] on Domestic Corporations. -

 (1) Imposition of Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year, as
defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year
immediately following the year in which such corporation commenced its business operations, when the minimum
income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. – Any excess of the [MCIT] over the normal income tax as computed
under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the
three (3) immediately succeeding taxable years.

(3) Relief from the [MCIT] under certain conditions. – The Secretary of Finance is hereby authorized to suspend
the imposition of the [MCIT] on any corporation which suffers losses on account of prolonged labor dispute, or
because of force majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the
necessary rules and regulations that shall define the terms and conditions under which he may suspend the
imposition of the [MCIT] in a meritorious case.

(4) Gross Income Defined. – For purposes of applying the [MCIT] provided under Subsection (E) hereof, the term
‘gross income’ shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost
of goods sold" shall include all business expenses directly incurred to produce the merchandise to bring them to
their present location and use.

For trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods
are in transit.

For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production of finished
goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other
costs incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less sales returns,
allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and expenses necessarily
incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of
personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing
the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, that in the case of
banks, "cost of services" shall include interest expense.

On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the Commissioner of
Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E).5 The pertinent portions thereof read:

Sec. 2.27(E) [MCIT] on Domestic Corporations. –

(1) Imposition of the Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year (whether
calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon any domestic corporation
beginning the fourth (4th) taxable year immediately following the taxable year in which such corporation commenced its
business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or
whenever the amount of minimum corporate income tax is greater than the normal income tax due from such corporation.

For purposes of these Regulations, the term, "normal income tax" means the income tax rates prescribed under Sec.
27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1, 2000 and thereafter.

xxx xxx xxx

(2) Carry forward of excess [MCIT]. – Any excess of the [MCIT] over the normal income tax as computed under Sec.
27(A) of the Code shall be carried forward on an annual basis and credited against the normal income tax for the three (3)
immediately succeeding taxable years.

xxx xxx xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR, promulgated RR 2-98
implementing certain provisions of RA 8424 involving the withholding of taxes. 6 Under Section 2.57.2(J) of RR No. 2-98,
income payments from the sale, exchange or transfer of real property, other than capital assets, by persons residing in the
Philippines and habitually engaged in the real estate business were subjected to CWT:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or
transfer of. – Real property, other than capital assets, sold by an individual, corporation, estate, trust, trust fund or pension
fund and the seller/transferor is habitually engaged in the real estate business in accordance with the following schedule –

Those which are exempt from a Exempt

withholding tax at source as
prescribed in Sec. 2.57.5 of these
regulations.

With a selling price of five hundred 1.5%

thousand pesos (₱500,000.00) or less.

With a selling price of more than five 3.0%

hundred thousand pesos
(₱500,000.00) but not more than two
million pesos (₱2,000,000.00).

With selling price of more than two 5.0%

million pesos (₱2,000,000.00)

xxx xxx xxx

Gross selling price shall mean the consideration stated in the sales document or the fair market value determined in
accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange, the fair market value of the
property received in exchange, as determined in the Income Tax Regulations shall be used.

Where the consideration or part thereof is payable on installment, no withholding tax is required to be made on the
periodic installment payments where the buyer is an individual not engaged in trade or business. In such a case, the
applicable rate of tax based on the entire consideration shall be withheld on the last installment or installments to be paid
to the seller.

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall be deducted and
withheld by the buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or
transfer of real property classified as ordinary asset. - A [CWT] based on the gross selling price/total amount of
consideration or the fair market value determined in accordance with Section 6(E) of the Code, whichever is higher, paid
to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be imposed upon the
withholding agent,/buyer, in accordance with the following schedule:

Where the seller/transferor is exempt from [CWT] in Exempt

accordance with Sec. 2.57.5 of these regulations.
 Upon the following values of real property, where the
seller/transferor is habitually engaged in the real estate
business.
With a selling price of Five Hundred Thousand Pesos 1.5%
(₱500,000.00) or less.
With a selling price of more than Five Hundred Thousand 3.0%
Pesos (₱500,000.00) but not more than Two Million Pesos
(₱2,000,000.00).
With a selling price of more than two Million Pesos 5.0%
(₱2,000,000.00).

xxx xxx xxx

Gross selling price shall remain the consideration stated in the sales document or the fair market value determined in
accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange, the fair market value of the
property received in exchange shall be considered as the consideration.

xxx xxx xxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall apply:

(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not exceed 25% of the
selling price), the tax shall be deducted and withheld by the buyer on every installment.

(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the installment plan" (that is,
payments in the year of sale exceed 25% of the selling price), the buyer shall withhold the tax based on the gross selling
price or fair market value of the property, whichever is higher, on the first installment.

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the [CWT] due on the sale,
transfer or exchange of real property other than capital asset has been fully paid. (Underlined amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or exchange subject to
the CWT will not be recorded by the Registry of Deeds until the CIR has certified that such transfers and conveyances
have been reported and the taxes thereof have been duly paid:7

Sec. 2.58.2. Registration with the Register of Deeds. – Deeds of conveyances of land or land and building/improvement
thereon arising from sales, barters, or exchanges subject to the creditable expanded withholding tax shall not be recorded
by the Register of Deeds unless the [CIR] or his duly authorized representative has certified that such transfers and
conveyances have been reported and the expanded withholding tax, inclusive of the documentary stamp tax, due thereon
have been fully paid xxxx.

On February 11, 2003, RR No. 7-20038 was promulgated, providing for the guidelines in determining whether a particular
real property is a capital or an ordinary asset for purposes of imposing the MCIT, among others. The pertinent portions
thereof state:

Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived from sale,
exchange, or other disposition of real properties shall, unless otherwise exempt, be subject to applicable taxes imposed
under the Code, depending on whether the subject properties are classified as capital assets or ordinary assets;

a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident aliens engaged in trade
or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT]
(expanded) under Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross selling price or current fair market value
as determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary
income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.
 xxx xxx xxx

c. In the case of domestic corporations. –

xxx xxx xxx

(ii) The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building
treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall be subject
to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary income tax
under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may become subject to
the [MCIT] under Sec. 27(E) of the Code, whichever is applicable.

xxx xxx xxx

We shall now tackle the issues raised.

Existence of a Justiciable Controversy

Courts will not assume jurisdiction over a constitutional question unless the following requisites are satisfied: (1) there
must be an actual case calling for the exercise of judicial review; (2) the question before the court must be ripe for
adjudication; (3) the person challenging the validity of the act must have standing to do so; (4) the question of
constitutionality must have been raised at the earliest opportunity and (5) the issue of constitutionality must be the very lis
mota of the case.9

Respondents aver that the first three requisites are absent in this case. According to them, there is no actual case calling
for the exercise of judicial power and it is not yet ripe for adjudication because

[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed by the BIR for the
payment of [MCIT] or [CWT] on sales of real property. Neither did petitioner allege that its members have shut down their
businesses as a result of the payment of the MCIT or CWT. Petitioner has raised concerns in mere abstract and
hypothetical form without any actual, specific and concrete instances cited that the assailed law and revenue regulations
have actually and adversely affected it. Lacking empirical data on which to base any conclusion, any discussion on the
constitutionality of the MCIT or CWT on sales of real property is essentially an academic exercise.

Perceived or alleged hardship to taxpayers alone is not 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.10

An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims which is
susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or dispute. 11 On the other
hand, a question is considered ripe for adjudication when the act being challenged has a direct adverse effect on the
individual challenging it.12

Contrary to respondents’ assertion, we do not have to wait until petitioner’s members have shut down their operations as
a result of the MCIT or CWT. The assailed provisions are already being implemented. As we stated in Didipio Earth-
Savers’ Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:13

By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said to have ripened
into a judicial controversy even without any other overt act. Indeed, even a singular violation of the Constitution and/or the
law is enough to awaken judicial duty.14

If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such question once
and for all.

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the Philippines. Petitioners did not allege
that [it] itself is in the real estate business. It did not allege any material interest or any wrong that it may suffer from the
enforcement of [the assailed provisions].15
Legal standing or locus standi is a party’s personal and substantial interest in a case such that it has sustained or will
sustain direct injury as a result of the governmental act being challenged. 16 In Holy Spirit Homeowners Association, Inc. v.
Defensor,17 we held that the association had legal standing because its members stood to be injured by the enforcement
of the assailed provisions:

Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute that the individual
members of petitioner association are residents of the NGC. As such they are covered and stand to be either benefited or
injured by the enforcement of the IRR, particularly as regards the selection process of beneficiaries and lot allocation to
qualified beneficiaries. Thus, petitioner association may assail those provisions in the IRR which it believes to be
unfavorable to the rights of its members. xxx Certainly, petitioner and its members have sustained direct injury arising
from the enforcement of the IRR in that they have been disqualified and eliminated from the selection process. 18

In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the requirements of an
actual case, ripeness or legal standing when paramount public interest is involved. 19 The questioned MCIT and CWT
affect not only petitioners but practically all domestic corporate taxpayers in our country. The transcendental importance of
the issues raised and their overreaching significance to society make it proper for us to take cognizance of this petition. 20

Concept and Rationale of the MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation system. It came
about as a result of the perceived inadequacy of the self-assessment system in capturing the true income of
corporations.21 It was devised as a relatively simple and effective revenue-raising instrument compared to the normal
income tax which is more difficult to control and enforce. It is a means to ensure that everyone will make some minimum
contribution to the support of the public sector. The congressional deliberations on this are illuminating:

Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting constantly a loss in
their operations to avoid the payment of taxes, and thus avoid sharing in the cost of government. In this regard, the Tax
Reform Act introduces for the first time a new concept called the [MCIT] so as to minimize tax evasion, tax avoidance, tax
manipulation in the country and for administrative convenience. … This will go a long way in ensuring that corporations
will pay their just share in supporting our public life and our economic advancement. 22

Domestic corporations owe their corporate existence and their privilege to do business to the government. They also
benefit from the efforts of the government to improve the financial market and to ensure a favorable business climate. It is
therefore fair for the government to require them to make a reasonable contribution to the public expenses.

Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report minimal or
negative net income resulting in minimal or zero income taxes year in and year out, through under-declaration of income
or over-deduction of expenses otherwise called tax shelters.23

Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy, that is why they have proposed the [MCIT].
Because from experience too, you have corporations which have been losing year in and year out and paid no tax. So, if
the corporation has been losing for the past five years to ten years, then that corporation has no business to be in
business. It is dead. Why continue if you are losing year in and year out? So, we have this provision to avoid this type of
tax shelters, Your Honor.24

The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after operations of a
corporation or consistent reports of minimal net income render its financial statements and its tax payments suspect. For
sure, certain tax avoidance schemes resorted to by corporations are allowed in our jurisdiction. The MCIT serves to put a
cap on such tax shelters. As a tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes
achieved through sophisticated and artful manipulations of deductions and other stratagems. Since the tax base was
broader, the tax rate was lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the law:

First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures, the
imposition of the MCIT commences only on the fourth taxable year immediately following the year in which the corporation
commenced its operations.25 This grace period allows a new business to stabilize first and make its ventures viable before
it is subjected to the MCIT.26
Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax which shall be
credited against the normal income tax for the three immediately succeeding years.27

Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance to
suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force majeure and
legitimate business reverses.28

Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries already had
their own system of minimum corporate income taxation. Our lawmakers noted that most developing countries,
particularly Latin American and Asian countries, have the same form of safeguards as we do. As pointed out during the
committee hearings:

[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for underdeclaration of
gross receipts have this same form of safeguards.

In the case of Thailand, half a percent (0.5%), there’s a minimum of income tax of half a percent (0.5%) of gross
assessable income. In Korea a 25% of taxable income before deductions and exemptions. Of course the different
countries have different basis for that minimum income tax.

The other thing you’ll notice is the preponderance of Latin American countries that employed this method. Okay, those are
additional Latin American countries.29

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their own versions of
the MCIT.30

MCIT Is Not Violative of Due Process

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly oppressive,
arbitrary and confiscatory which amounts to deprivation of property without due process of law. It explains that gross
income as defined under said provision only considers the cost of goods sold and other direct expenses; other major
expenditures, such as administrative and interest expenses which are equally necessary to produce gross income, were
not taken into account.31 Thus, pegging the tax base of the MCIT to a corporation’s gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is not "realized gain."32

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The exercise of
taxing power derives its source from the very existence of the State whose social contract with its citizens obliges it to
promote public interest and the common good.33

Taxation is an inherent attribute of sovereignty.34 It is a power that is purely legislative.35 Essentially, this means that in the
legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects)
and situs (place) of taxation.36 It has the authority to prescribe a certain tax at a specific rate for a particular public purpose
on persons or things within its jurisdiction. In other words, the legislature wields the power to define what tax shall be
imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and
where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that
the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the tax) to
its constituency who are to pay it.37 Nevertheless, it is circumscribed by constitutional limitations. At the same time, like
any other statute, tax legislation carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty or property
without due process of law." In Sison, Jr. v. Ancheta, et al.,38 we held that the due process clause may properly be
invoked to invalidate, in appropriate cases, a revenue measure 39 when it amounts to a confiscation of property. 40 But in
the same case, we also explained that we will not strike down a revenue measure as unconstitutional (for being violative
of the due process clause) on the mere allegation of arbitrariness by the taxpayer. 41 There must be a factual foundation to
such an unconstitutional taint.42 This merely adheres to the authoritative doctrine that, where the due process clause is
invoked, considering that it is not a fixed rule but rather a broad standard, there is a need for proof of such persuasive
character.43

Petitioner is correct in saying that income is distinct from capital. 44 Income means all the wealth which flows into the
taxpayer other than a mere return on capital. Capital is a fund or property existing at one distinct point in time while
income denotes a flow of wealth during a definite period of time.45 Income is gain derived and severed from capital. 46 For
income to be taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation.47

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is
income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its
goods, i.e., the cost of goods48 and other direct expenses from gross sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if
the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a
corporation, pegging the rate at a very much reduced 2% and uses as the base the corporation’s gross income.

Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the
same time reducing the applicable tax rate.49

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in many jurisdictions.
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. 50

The United States has a similar alternative minimum tax (AMT) system which is generally characterized by a lower tax
rate but a broader tax base.51 Since our income tax laws are of American origin, interpretations by American courts of our
parallel tax laws have persuasive effect on the interpretation of these laws. 52 Although our MCIT is not exactly the same
as the AMT, the policy behind them and the procedure of their implementation are comparable. On the question of the
AMT’s constitutionality, the United States Court of Appeals for the Ninth Circuit stated in Okin v. Commissioner:53

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system growing from large
numbers of taxpayers with large incomes who were yet paying no taxes.

xxx xxx xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a rational means of
obtaining a broad-based tax, and therefore is constitutional.54

The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would contribute a minimum
amount of taxes was a legitimate governmental end to which the AMT bore a reasonable relation.55

American courts have also emphasized that Congress has the power to condition, limit or deny deductions from gross
income in order to arrive at the net that it chooses to tax.56 This is because deductions are a matter of legislative grace.57

Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base of the MCIT,
taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable.

Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members nor does it
present empirical data to show that the implementation of the MCIT resulted in the confiscation of their property.
In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and confiscatory.
The Court cannot strike down a law as unconstitutional simply because of its yokes. 58 Taxation is necessarily burdensome
because, by its nature, it adversely affects property rights. 59 The party alleging the law’s unconstitutionality has the burden
to demonstrate the supposed violations in understandable terms. 60

RR 9-98 Merely Clarifies Section 27(E) of RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT is being imposed
and collected even when there is actually a loss, or a zero or negative taxable income:

Sec. 2.27(E) [MCIT] on Domestic Corporations. —

(1) Imposition of the Tax. — xxx The MCIT shall be imposed whenever such corporation has zero or negative taxable
income or whenever the amount of [MCIT] is greater than the normal income tax due from such corporation. (Emphasis
supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable income,
merely defines the coverage of Section 27(E). This means that even if a corporation incurs a net loss in its business
operations or reports zero income after deducting its expenses, it is still subject to an MCIT of 2% of its gross income.
This is consistent with the law which imposes the MCIT on gross income notwithstanding the amount of the net income.
But the law also states that the MCIT is to be paid only if it is greater than the normal net income. Obviously, it may well
be the case that the MCIT would be less than the net income of the corporation which posts a zero or negative taxable
income.

We now proceed to the issues involving the CWT.

The withholding tax system is a procedure through which taxes (including income taxes) are collected. 61 Under Section 57
of RA 8424, the types of income subject to withholding tax are divided into three categories: (a) withholding of final tax on
certain incomes; (b) withholding of creditable tax at source and (c) tax-free covenant bonds. Petitioner is concerned with
the second category (CWT) and maintains that the revenue regulations on the collection of CWT on sale of real estate
categorized as ordinary assets are unconstitutional.

Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424, contends that Sections
2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated "with grave abuse of
discretion amounting to lack of jurisdiction" and "patently in contravention of law" 62 because they ignore such distinctions.
Petitioner’s conclusion is based on the following premises: (a) the revenue regulations use gross selling price (GSP) or
fair market value (FMV) of the real estate as basis for determining the income tax for the sale of real estate classified as
ordinary assets and (b) they mandate the collection of income tax on a per transaction basis, i.e., upon consummation of
the sale via the CWT, contrary to RA 8424 which calls for the payment of the net income at the end of the taxable
period.63

Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents cannot disregard
the distinctions set by the legislators as regards the tax base, modes of collection and payment of taxes on income from
the sale of capital and ordinary assets.

Petitioner’s arguments have no merit.

Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real Property Considered as
Ordinary Assets

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the necessary rules and
regulations for the effective enforcement of the provisions of the law. Such authority is subject to the limitation that the
rules and regulations must not override, but must remain consistent and in harmony with, the law they seek to apply and
implement.64 It is well-settled that an administrative agency cannot amend an act of Congress. 65

We have long recognized that the method of withholding tax at source is a procedure of collecting income tax which is
sanctioned by our tax laws.66 The withholding tax system 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.67 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. 68

Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any person,
national or juridical, residing in the Philippines. Such authority is derived from Section 57(B) of RA 8424 which provides:

SEC. 57. Withholding of Tax at Source. –

xxx xxx xxx

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the [CIR], require the
withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two
percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to the
Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is imposed on the
income payable and the tax is creditable against the income tax liability of the taxpayer for the taxable year.

Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in the Real Estate
Business

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business’ income tax from
net income to GSP or FMV of the property sold.

Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its possible tax
obligation. 69 They are installments on the annual tax which may be due at the end of the taxable year. 70

Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets remains to be
the entity’s net income imposed under Section 24 (resident individuals) or Section 27 (domestic corporations) in relation to
Section 31 of RA 8424, i.e. gross income less allowable deductions. The CWT is to be deducted from the net income tax
payable by the taxpayer at the end of the taxable year. 71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that
the tax base for the sale of real property classified as ordinary assets remains to be the net taxable income:

Section 4. – Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived from sale,
exchange, or other disposition of real properties shall unless otherwise exempt, be subject to applicable taxes imposed
under the Code, depending on whether the subject properties are classified as capital assets or ordinary assets;

xxx xxx xxx

a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident aliens engaged in trade
or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT]
(expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current [FMV] as determined in
accordance with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary income tax imposed
under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building
treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall
be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to theordinary
income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may
become subject to the [MCIT] under Sec. 27(E) of the same Code, whichever is applicable. (Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes withheld (by the
withholding agent/buyer) against its tax due. If the tax due is greater than the tax withheld, then the taxpayer shall pay the
difference. If, on the other hand, the tax due is less than the tax withheld, the taxpayer will be entitled to a refund or tax
credit. Undoubtedly, the taxpayer is taxed on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of practicality and
convenience. Obviously, the withholding agent/buyer who is obligated to withhold the tax does not know, nor is he privy
to, how much the taxpayer/seller will have as its net income at the end of the taxable year. Instead, said withholding
agent’s knowledge and privity are limited only to the particular transaction in which he is a party. In such a case, his basis
can only be the GSP or FMV as these are the only factors reasonably known or knowable by him in connection with the
performance of his duties as a withholding agent.

No Blurring of Distinctions Between Ordinary Assets and Capital Assets

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as ordinary
assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the gain presumed to
be realized from the sale of a capital asset based on its GSP or FMV. This final tax is also withheld at source. 72

The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary assets are not
treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are distinguished as follows:

FWT CWT

a) The amount of income tax withheld by a) Taxes withheld on certain income

the withholding agent is constituted as a full payments are intended to equal or at least
and final payment of the income tax due approximate the tax due of the payee on
from the payee on the said income. said income.

b)The liability for payment of the tax rests
primarily on the payor as a withholding
agent.
b) Payee of income is required to report the
income and/or pay the difference between
the tax withheld and the tax due on the
income. The payee also has the right to ask
for a refund if the tax withheld is more than
the tax due.

c) The payee is not required to file an c) The income recipient is still required to
income tax return for the particular file an income tax return, as prescribed in
income.73 Sec. 51 and Sec. 52 of the NIRC, as
amended.74

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the sale of
ordinary assets. The inherent and substantial differences between FWT and CWT disprove petitioner’s contention that
ordinary assets are being lumped together with, and treated similarly as, capital assets in contravention of the pertinent
provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to the provisions of
RA 8424 on the manner and time of filing of the return, payment and assessment of income tax involving ordinary
assets.75
The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way as capital
gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT. The withholding agent/buyer’s
act of collecting the tax at the time of the transaction by withholding the tax due from the income payable is the essence of
the withholding tax method of tax collection.

No Rule that Only Passive

Incomes Can Be Subject to CWT

Petitioner submits that only passive income can be subjected to withholding tax, whether final or creditable. According to
petitioner, the whole of Section 57 governs the withholding of income tax on passive income. The enumeration in Section
57(A) refers to passive income being subjected to FWT. It follows that Section 57(B) on CWT should also be limited to
passive income:

SEC. 57. Withholding of Tax at Source. —

(A) Withholding of Final Tax on Certain Incomes. — Subject to rules and regulations, the [Secretary] may
promulgate, upon the recommendation of the [CIR], requiring the filing of income tax return by certain income
payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3),
25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b),
28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this
Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same
manner and subject to the same conditions as provided in Section 58 of this Code.

(B) Withholding of Creditable Tax at Source. — The [Secretary] may, upon the recommendation of the [CIR],
require the withholding of a tax on the items of income payable to natural or juridical persons, residing in
the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent
(1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of
the taxpayer for the taxable year. (Emphasis supplied)

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates these as passive
income. The BIR defines passive income by stating what it is not:

…if the income is generated in the active pursuit and performance of the corporation’s primary purposes, the same is not
passive income…76

It is income generated by the taxpayer’s assets. These assets can be in the form of real properties that return rental
income, shares of stock in a corporation that earn dividends or interest income received from savings.

On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income payable to natural or juridical
persons, residing in the Philippines." There is no requirement that this income be passive income. If that were the intent of
Congress, it could have easily said so.

Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to CWT. The former
covers the kinds of passive income enumerated therein and the latter encompasses any income other than those listed in
57(A). Since the law itself makes distinctions, it is wrong to regard 57(A) and 57(B) in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of Section 57(B). RR 2-
98 merely implements the law by specifying what income is subject to CWT. It has been held that, where a statute does
not require any particular procedure to be followed by an administrative agency, the agency may adopt any reasonable
method to carry out its functions.77 Similarly, considering that the law uses the general term "income," the Secretary and
CIR may specify the kinds of income the rules will apply to based on what is feasible. In addition, administrative rules and
regulations ordinarily deserve to be given weight and respect by the courts 78 in view of the rule-making authority given to
those who formulate them and their specific expertise in their respective fields.

No Deprivation of Property Without Due Process

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets deprives its members
of their property without due process of law because, in their line of business, gain is never assured by mere receipt of the
selling price. As a result, the government is collecting tax from net income not yet gained or earned.

Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the end of the taxable
year. The seller will be able to claim a tax refund if its net income is less than the taxes withheld. Nothing is taken that is
not due so there is no confiscation of property repugnant to the constitutional guarantee of due process. More importantly,
the due process requirement applies to the power to tax.79 The CWT does not impose new taxes nor does it increase
taxes.80 It relates entirely to the method and time of payment.

Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers have to wait
years and may even resort to litigation before they are granted a refund.81 This argument is misleading. The practical
problems encountered in claiming a tax refund do not affect the constitutionality and validity of the CWT as a method of
collecting the tax.1avvphi1

Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay labor wages,
materials, cost of money and other expenses which can then save the entity from having to obtain loans entailing
considerable interest expense. Petitioner also lists the expenses and pitfalls of the trade which add to the burden of the
realty industry: huge investments and borrowings; long gestation period; sudden and unpredictable interest rate surges;
continually spiraling development/construction costs; heavy taxes and prohibitive "up-front" regulatory fees from at least
20 government agencies.82

Petitioner’s lamentations will not support its attack on the constitutionality of the CWT. Petitioner’s complaints are
essentially matters of policy best addressed to the executive and legislative branches of the government. Besides, the
CWT is applied only on the amounts actually received or receivable by the real estate entity. Sales on installment are
taxed on a per-installment basis.83 Petitioner’s desire to utilize for its operational and capital expenses money earmarked
for the payment of taxes may be a practical business option but it is not a fundamental right which can be demanded from
the court or from the government.

No Violation of Equal Protection

Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT is being levied
only on real estate enterprises. Specifically, petitioner points out that manufacturing enterprises are not similarly imposed
a CWT on their sales, even if their manner of doing business is not much different from that of a real estate enterprise.
Like a manufacturing concern, a real estate business is involved in a continuous process of production and it incurs costs
and expenditures on a regular basis. The only difference is that "goods" produced by the real estate business are house
and lot units.84

Again, we disagree.

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."85 Stated differently, all persons belonging to the same class shall be taxed alike. It follows that the
guaranty of the equal protection of the laws is not violated by legislation based on a reasonable classification.
Classification, to be valid, must (1) rest on substantial distinctions; (2) be germane to the purpose of the law; (3) not be
limited to existing conditions only and (4) apply equally to all members of the same class.86

The taxing power has the authority to make reasonable classifications for purposes of taxation. 87 Inequalities which result
from a singling out of one particular class for taxation, or exemption, infringe no constitutional limitation. 88 The real estate
industry is, by itself, a class and can be validly treated differently from other business enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize that what
distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the CWT, is
not their production processes but the prices of their goods sold and the number of transactions involved. The income
from the sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome for the
parties to comply with the withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand
customers every month involving both minimal and substantial amounts. To require the customers of manufacturing
enterprises, at present, to withhold the taxes on each of their transactions with their tens or hundreds of suppliers may
result in an inefficient and unmanageable system of taxation and may well defeat the purpose of the withholding tax
system.

Petitioner counters that there are other businesses wherein expensive items are also sold infrequently, e.g. heavy
equipment, jewelry, furniture, appliance and other capital goods yet these are not similarly subjected to the CWT. 89As
already discussed, the Secretary may adopt any reasonable method to carry out its functions. 90 Under Section 57(B), it
may choose what to subject to CWT.

A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner’s argument is not accurate. The sales of
manufacturers who have clients within the top 5,000 corporations, as specified by the BIR, are also subject to CWT for
their transactions with said 5,000 corporations.91

Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not effect the
regisration of any document transferring real property unless a certification is issued by the CIR that the withholding tax
has been paid. Petitioner proffers hardly any reason to strike down this rule except to rely on its contention that the CWT
is unconstitutional. We have ruled that it is not. Furthermore, this provision uses almost exactly the same wording as
Section 58(E) of RA 8424 and is unquestionably in accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source. –

(E) Registration with Register of Deeds. - No registration of any document transferring real property shall be
effected by the Register of Deeds unless the [CIR] or his duly authorized representative has certified that such
transfer has been reported, and the capital gains or [CWT], if any, has been paid: xxxx any violation of this provision
by the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code. (Emphasis supplied)

Conclusion

The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to understand is the
income tax."92 When a party questions the constitutionality of an income tax measure, it has to contend not only with
Einstein’s observation but also with the vast and well-established jurisprudence in support of the plenary powers of
Congress to impose taxes. Petitioner has miserably failed to discharge its burden of convincing the Court that the
imposition of MCIT and CWT is unconstitutional.

WHEREFORE, the petition is hereby DISMISSED.

G.R. No. 180356 February 16, 2010

SOUTH AFRICAN AIRWAYS, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

VELASCO, JR., J.:

The Case

This Petition for Review on Certiorari under Rule 45 seeks the reversal of the July 19, 2007 Decision 1 and October 30,
2007 Resolution2 of the Court of Tax Appeals (CTA) En Banc in CTA E.B. Case No. 210, entitled South African Airways v.
Commissioner of Internal Revenue. The assailed decision affirmed the Decision dated May 10, 2006 3and Resolution
dated August 11, 20064 rendered by the CTA First Division.

The Facts

Petitioner South African Airways is a foreign corporation organized and existing under and by virtue of the laws of the
Republic of South Africa. Its principal office is located at Airways Park, Jones Road, Johannesburg International Airport,
South Africa. In the Philippines, it is an internal air carrier having no landing rights in the country. Petitioner has a general
sales agent in the Philippines, Aerotel Limited Corporation (Aerotel). Aerotel sells passage documents for compensation
or commission for petitioner’s off-line flights for the carriage of passengers and cargo between ports or points outside the
territorial jurisdiction of the Philippines. Petitioner is not registered with the Securities and Exchange Commission as a
corporation, branch office, or partnership. It is not licensed to do business in the Philippines.

For the taxable year 2000, petitioner filed separate quarterly and annual income tax returns for its off-line flights,
summarized as follows:

2.5% Gross
Period Date Filed
Phil. Billings

1st Quarter May 30, 2000 222,531.25

2nd Quarter August 29, 2000 424,046.95
For Passenger PhP
3rd Quarter November 29, 2000 422,466.00
4th Quarter April 16, 2000 453,182.91

Sub-total PhP 1,522,227.11

1st Quarter May 30, 2000 81,531.00

2nd Quarter August 29, 2000 50,169.65
For Cargo PhP
3rd Quarter November 29, 2000 36,383.74
4th Quarter April 16, 2000 37,454.88

Sub-total PhP 205,539.27

TOTAL 1,727,766.38

Thereafter, on February 5, 2003, petitioner filed with the Bureau of Internal Revenue, Revenue District Office No. 47, a
claim for the refund of the amount of PhP 1,727,766.38 as erroneously paid tax on Gross Philippine Billings (GPB) for the
taxable year 2000. Such claim was unheeded. Thus, on April 14, 2003, petitioner filed a Petition for Review with the CTA
for the refund of the abovementioned amount. The case was docketed as CTA Case No. 6656.

On May 10, 2006, the CTA First Division issued a Decision denying the petition for lack of merit. The CTA ruled that
petitioner is a resident foreign corporation engaged in trade or business in the Philippines. It further ruled that petitioner
was not liable to pay tax on its GPB under Section 28(A)(3)(a) of the National Internal Revenue Code (NIRC) of 1997. The
CTA, however, stated that petitioner is liable to pay a tax of 32% on its income derived from the sales of passage
documents in the Philippines. On this ground, the CTA denied petitioner’s claim for a refund.
Petitioner’s Motion for Reconsideration of the above decision was denied by the CTA First Division in a Resolution dated
August 11, 2006.

Thus, petitioner filed a Petition for Review before the CTA En Banc, reiterating its claim for a refund of its tax payment on
its GPB. This was denied by the CTA in its assailed decision. A subsequent Motion for Reconsideration by petitioner was
also denied in the assailed resolution of the CTA En Banc.

Hence, petitioner went to us.

The Issues

Whether or not petitioner, as an off-line international carrier selling passage documents through an independent sales
agent in the Philippines, is engaged in trade or business in the Philippines subject to the 32% income tax imposed by
Section 28 (A)(1) of the 1997 NIRC.

Whether or not the income derived by petitioner from the sale of passage documents covering petitioner’s off-line flights is
Philippine-source income subject to Philippine income tax.

Whether or not petitioner is entitled to a refund or a tax credit of erroneously paid tax on Gross Philippine Billings for the
taxable year 2000 in the amount of P1,727,766.38.5

The Court’s Ruling

This petition must be denied.

Petitioner Is Subject to Income Tax at the Rate of 32% of Its Taxable Income

Preliminarily, we emphasize that petitioner is claiming that it is exempted from being taxed for its sale of passage
documents in the Philippines. Petitioner, however, failed to sufficiently prove such contention.

In Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation, 6 we held, "Since an action for a tax
refund partakes of the nature of an exemption, which cannot be allowed unless granted in the most explicit and
categorical language, it is strictly construed against the claimant who must discharge such burden convincingly."

Petitioner has failed to overcome such burden.

In essence, petitioner calls upon this Court to determine the legal implication of the amendment to Sec. 28(A)(3)(a) of the
1997 NIRC defining GPB. It is petitioner’s contention that, with the new definition of GPB, it is no longer liable under Sec.
28(A)(3)(a). Further, petitioner argues that because the 2 1/2% tax on GPB is inapplicable to it, it is thereby excluded from
the imposition of any income tax.

Sec. 28(b)(2) of the 1939 NIRC provided:

(2) Resident Corporations. – A corporation organized, authorized, or existing under the laws of a 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: Provided, however, that
international carriers shall pay a tax of two and one-half percent on their gross Philippine billings.

This provision was later amended by Sec. 24(B)(2) of the 1977 NIRC, which defined GPB as follows:

"Gross Philippine billings" include gross revenue realized from uplifts anywhere in the world by any international carrier
doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or mail,
provided the cargo or mail originates from the Philippines.

In the 1986 and 1993 NIRCs, the definition of GPB was further changed to read:

"Gross Philippine Billings" means gross revenue realized from uplifts of passengers anywhere in the world and excess
baggage, cargo and mail originating from the Philippines, covered by passage documents sold in the Philippines.
Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere in the world, provided that the
passage documents were sold in the Philippines. Legislature departed from such concept in the 1997 NIRC where GPB is
now defined under Sec. 28(A)(3)(a):

"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.

Now, it is the place of sale that is irrelevant; as long as the uplifts of passengers and cargo occur to or from the
Philippines, income is included in GPB.

As correctly pointed out by petitioner, inasmuch as it does not maintain flights to or from the Philippines, it is not taxable
under Sec. 28(A)(3)(a) of the 1997 NIRC. This much was also found by the CTA. But petitioner further posits the view that
due to the non-applicability of Sec. 28(A)(3)(a) to it, it is precluded from paying any other income tax for its sale of
passage documents in the Philippines.

Such position is untenable.

In Commissioner of Internal Revenue v. British Overseas Airways Corporation (British Overseas Airways), 7 which was
decided under similar factual circumstances, this Court ruled that off-line air carriers having general sales agents in the
Philippines are engaged in or doing business in the Philippines and that their income from sales of passage documents
here is income from within the Philippines. Thus, in that case, we held the off-line air carrier liable for the 32% tax on its
taxable income.

Petitioner argues, however, that because British Overseas Airways was decided under the 1939 NIRC, it does not apply
to the instant case, which must be decided under the 1997 NIRC. Petitioner alleges that the 1939 NIRC taxes resident
foreign corporations, such as itself, on all income from sources within the Philippines. Petitioner’s interpretation of Sec.
28(A)(3)(a) of the 1997 NIRC is that, since it is an international carrier that does not maintain flights to or from the
Philippines, thereby having no GPB as defined, it is exempt from paying any income tax at all. In other words, the
existence of Sec. 28(A)(3)(a) according to petitioner precludes the application of Sec. 28(A)(1) to it.

Its argument has no merit.

First, the difference cited by petitioner between the 1939 and 1997 NIRCs with regard to the taxation of off-line air carriers
is more apparent than real.

We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical term, exempt all international air carriers
from the coverage of Sec. 28(A)(1) of the 1997 NIRC. Certainly, had legislature’s intentions been to completely exclude all
international air carriers from the application of the general rule under Sec. 28(A)(1), it would have used the appropriate
language to do so; but the legislature did not. Thus, the logical interpretation of such provisions is that, if Sec. 28(A)(3)(a)
is applicable to a taxpayer, then the general rule under Sec. 28(A)(1) would not apply. If, however, Sec. 28(A)(3)(a) does
not apply, a resident foreign corporation, whether an international air carrier or not, would be liable for the tax under Sec.
28(A)(1).

Clearly, no difference exists between British Overseas Airways and the instant case, wherein petitioner claims that the
former case does not apply. Thus, British Overseas Airways applies to the instant case. The findings therein that an off-
line air carrier is doing business in the Philippines and that income from the sale of passage documents here is Philippine-
source income must be upheld.

Petitioner further reiterates its argument that the intention of Congress in amending the definition of GPB is to exempt off-
line air carriers from income tax by citing the pronouncements made by Senator Juan Ponce Enrile during the
deliberations on the provisions of the 1997 NIRC. Such pronouncements, however, are not controlling on this Court. We
said in Espino v. Cleofe:8

A cardinal rule in the interpretation of statutes is that the meaning and intention of the law-making body must be sought,
first of all, in the words of the statute itself, read and considered in their natural, ordinary, commonly-accepted and most
obvious significations, according to good and approved usage and without resorting to forced or subtle construction.
Courts, therefore, as a rule, cannot presume that the law-making body does not know the meaning of words and rules of
grammar. Consequently, the grammatical reading of a statute must be presumed to yield its correct sense. x x x It is also
a well-settled doctrine in this jurisdiction that statements made by individual members of Congress in the consideration of
a bill do not necessarily reflect the sense of that body and are, consequently, not controlling in the interpretation of law.
(Emphasis supplied.)

Moreover, an examination of the subject provisions of the law would show that petitioner’s interpretation of those
provisions is erroneous.

Sec. 28(A)(1) and (A)(3)(a) provides:

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%).

xxxx

(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.

Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign corporations are liable for 32% tax on all income
from sources within the Philippines. Sec. 28(A)(3) is an exception to this general rule.

An exception is defined as "that which would otherwise be included in the provision from which it is excepted. It is a clause
which exempts something from the operation of a statue by express words."9 Further, "an exception need not be
introduced by the words ‘except’ or ‘unless.’ An exception will be construed as such if it removes something from the
operation of a provision of law."10

In the instant case, the general rule is that resident foreign corporations shall be liable for a 32% income tax on their
income from within the Philippines, except for resident foreign corporations that are international carriers that derive
income "from carriage of persons, excess baggage, cargo and mail originating from the Philippines" which shall be taxed
at 2 1/2% of their Gross Philippine Billings. Petitioner, being an international carrier with no flights originating from the
Philippines, does not fall under the exception. As such, petitioner must fall under the general rule. This principle is
embodied in the Latin maxim, exception firmat regulam in casibus non exceptis, which means, a thing not being excepted
must be regarded as coming within the purview of the general rule. 11

To reiterate, the correct interpretation of the above provisions is that, if an international air carrier maintains flights to and
from the Philippines, it shall be taxed at the rate of 2 1/2% 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 will be
taxed at the rate of 32% of such income.

As to the denial of petitioner’s claim for refund, the CTA denied the claim on the basis that petitioner is liable for income
tax under Sec. 28(A)(1) of the 1997 NIRC. Thus, petitioner raises the issue of whether the existence of such liability would
preclude their claim for a refund of tax paid on the basis of Sec. 28(A)(3)(a). In answer to petitioner’s motion for
reconsideration, the CTA First Division ruled in its Resolution dated August 11, 2006, thus:
On the fourth argument, petitioner avers that a deficiency tax assessment does not, in any way, disqualify a taxpayer from
claiming a tax refund since a refund claim can proceed independently of a tax assessment and that the assessment
cannot be offset by its claim for refund.

Petitioner’s argument is erroneous. Petitioner premises its argument on the existence of an assessment. In the assailed
Decision, this Court did not, in any way, assess petitioner of any deficiency corporate income tax. The power to make
assessments against taxpayers is lodged with the respondent. For an assessment to be made, respondent must observe
the formalities provided in Revenue Regulations No. 12-99. This Court merely pointed out that petitioner is liable for the
regular corporate income tax by virtue of Section 28(A)(3) of the Tax Code. Thus, there is no assessment to speak of. 12

Precisely, petitioner questions the offsetting of its payment of the tax under Sec. 28(A)(3)(a) with their liability under Sec.
28(A)(1), considering that there has not yet been any assessment of their obligation under the latter provision. Petitioner
argues that such offsetting is in the nature of legal compensation, which cannot be applied under the circumstances
present in this case.

Article 1279 of the Civil Code contains the elements of legal compensation, to wit:

Art. 1279. In order that compensation may be proper, it is necessary:

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

(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.

And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue, 13 thus:

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.
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. We find no cogent reason to deviate from the aforementioned
distinction.

Prescinding from this premise, in Francia v. Intermediate Appellate Court, 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, which
reiterated that:

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

Verily, petitioner’s argument is correct that the offsetting of its tax refund with its alleged tax deficiency is unavailing under
Art. 1279 of the Civil Code.
Commissioner of Internal Revenue v. Court of Tax Appeals,14 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.

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.1avvphi1

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. (Emphasis supplied.)

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)(1), the
correctness of the return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for a refund.

Be that as it may, this Court is unable to affirm the assailed decision and resolution of the CTA En Banc on the outright
denial of petitioner’s claim for a refund. Even though petitioner is not entitled to a refund due to the question on the
propriety of petitioner’s tax return subject of the instant controversy, it would not be proper to deny such claim without
making a determination of petitioner’s liability under Sec. 28(A)(1).

It must be remembered that the tax under Sec. 28(A)(3)(a) is based on GPB, while Sec. 28(A)(1) is based on taxable
income, that is, gross income less deductions and exemptions, if any. It cannot be assumed that petitioner’s liabilities
under the two provisions would be the same. There is a need to make a determination of petitioner’s liability under Sec.
28(A)(1) to establish whether a tax refund is forthcoming or that a tax deficiency exists. The assailed decision fails to
mention having computed for the tax due under Sec. 28(A)(1) and the records are bereft of any evidence sufficient to
establish petitioner’s taxable income. There is a necessity to receive evidence to establish such amount vis-à-vis the claim
for refund. It is only after such amount is established that a tax refund or deficiency may be correctly pronounced.

WHEREFORE, the assailed July 19, 2007 Decision and October 30, 2007 Resolution of the CTA En Banc in CTA E.B.
Case No. 210 are SET ASIDE. The instant case is REMANDED to the CTA En Banc for further proceedings and
appropriate action, more particularly, the reception of evidence for both parties and the corresponding disposition of CTA
E.B. Case No. 210 not otherwise inconsistent with our judgment in this Decision.

SO ORDERED.
G.R. No. 108576 January 20, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO CORP., respondents.

MARTINEZ, J.:

Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the decision of the Court of Appeals (CA) 1 which
affirmed the ruling of the Court of Tax Appeals (CTA) 2 that private respondent A. Soriano Corporation's (hereinafter
ANSCOR) redemption and exchange of the stocks of its foreign stockholders cannot be considered as "essentially
equivalent to a distribution of taxable dividends" under, Section 83(b) of the 1939 Internal Revenue Act. 3

The undisputed facts are as follows:

Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States, formed the corporation "A.
Soriano Y Cia", predecessor of ANSCOR, with a P1,000,000.00 capitalization divided into 10,000 common shares at a par
value of P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres, who are all non-resident
aliens. 4 In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued. 5

On September 12, 1945, ANSCOR's authorized capital stock was increased to P2,500,000.00 divided into 25,000
common shares with the same par value of the additional 15,000 shares, only 10,000 was issued which were all
subscribed by Don Andres, after the other stockholders waived in favor of the former their pre-emptive rights to subscribe
to the new issues. 6 This increased his subscription to 14,963 common shares. 7 A month later, 8 Don Andres transferred
1,250 shares each to his two sons, Jose and Andres, Jr., as their initial investments in ANSCOR. 9 Both sons are
foreigners. 10

By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made between 1949 and December
20, 1963. 11 On December 30, 1964 Don Andres died. As of that date, the records revealed that he has a total
shareholdings of 185,154 shares 12 — 50,495 of which are original issues and the balance of 134.659 shares as stock
dividend declarations. 13 Correspondingly, one-half of that shareholdings or 92,577 14 shares were transferred to his wife,
Doña Carmen Soriano, as her conjugal share. The other half formed part of his estate. 15

A day after Don Andres died, ANSCOR increased its capital stock to P20M 16 and in 1966 further increased it to
P30M. 17 In the same year (December 1966), stock dividends worth 46,290 and 46,287 shares were respectively received
by the Don Andres estate 18 and Doña Carmen from ANSCOR. Hence, increasing their accumulated shareholdings to
138,867 and 138,864 19 common shares each. 20

On December 28, 1967, Doña Carmen requested a ruling from the United States Internal Revenue Service (IRS),
inquiring if an exchange of common with preferred shares may be considered as a tax avoidance scheme 21 under
Section 367 of the 1954 U.S. Revenue Act. 22 By January 2, 1968, ANSCOR reclassified its existing 300,000 common
shares into 150,000 common and 150,000 preferred shares. 23

In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization scheme and not tax
avoidance. 24 Consequently, 25 on March 31, 1968 Doña Carmen exchanged her whole 138,864 common shares for
138,860 of the newly reclassified preferred shares. The estate of Don Andres in turn, exchanged 11,140 of its common
shares, for the remaining 11,140 preferred shares, thus reducing its (the estate) common shares to 127,727. 26

On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from the Don Andres'
estate. By November 1968, the Board further increased ANSCOR's capital stock to P75M divided into 150,000 preferred
shares and 600,000 common shares. 27 About a year later, ANSCOR again redeemed 80,000 common shares from the
Don Andres' estate, 28 further reducing the latter's common shareholdings to 19,727. As stated in the Board Resolutions,
ANSCOR's business purpose for both redemptions of stocks is to partially retire said stocks as treasury shares in order to
reduce the company's foreign exchange remittances in case cash dividends are declared. 29
In 1973, after examining ANSCOR's books of account and records, Revenue examiners issued a report proposing that
ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to Sections 53 and 54 of the 1939 Revenue
Code, 30 for the year 1968 and the second quarter of 1969 based on the transactions of exchange 31 and redemption of
stocks. 31 The Bureau of Internal Revenue (BIR) made the corresponding assessments despite the claim of ANSCOR that
it availed of the tax amnesty under Presidential Decree
(P.D.) 23 32 which were amended by P.D.'s 67 and 157. 33 However, petitioner ruled that the invoked decrees do not cover
Sections 53 and 54 in relation to Article 83(b) of the 1939 Revenue Act under which ANSCOR was
assessed. 34 ANSCOR's subsequent protest on the assessments was denied in 1983 by petitioner. 35

Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on the redemptions and
exchange of stocks. In its decision, the Tax Court reversed petitioner's ruling, after finding sufficient evidence to overcome
the prima facie correctness of the questioned assessments. 36 In a petition for review the CA as mentioned, affirmed the
ruling of the CTA. 37 Hence, this petition.

38
The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue Act which provides:

Sec. 83. Distribution of dividends or assets by corporations. —

(b) Stock dividends — A stock dividend representing the transfer of surplus to capital account shall not be
subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and
in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation
of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or
profits accumulated after March first, nineteen hundred and thirteen. (Emphasis supplied)

Specifically, the issue is whether ANSCOR's redemption of stocks from its stockholder as well as the exchange of
common with preferred shares can be considered as "essentially equivalent to the distribution of taxable dividend"
making the proceeds thereof taxable under the provisions of the above-quoted law.

Petitioner contends that the exchange transaction a tantamount to "cancellation" under Section 83(b) making the
proceeds thereof taxable. It also argues that the Section applies to stock dividends which is the bulk of stocks that
ANSCOR redeemed. Further, petitioner claims that under the "net effect test," the estate of Don Andres gained from the
redemption. Accordingly, it was the duty of ANSCOR to withhold the tax-at-source arising from the two transactions,
pursuant to Section 53 and 54 of the 1939 Revenue Act. 39

ANSCOR, however, avers that it has no duty to withhold any tax either from the Don Andres estate or from Doña Carmen
based on the two transactions, because the same were done for legitimate business purposes which are (a) to reduce its
foreign exchange remittances in the event the company would declare cash dividends, 40 and to (b) subsequently
"filipinized" ownership of ANSCOR, as allegedly, envisioned by Don Andres. 41 It likewise invoked the amnesty provisions
of P.D. 67.

We must emphasize that the application of Sec. 83(b) depends on the special factual circumstances of each case.42 The
findings of facts of a special court (CTA) exercising particular expertise on the subject of tax, generally binds this
Court, 43 considering that it is substantially similar to the findings of the CA which is the final arbiter of questions of
facts. 44 The issue in this case does not only deal with facts but whether the law applies to a particular set of facts.
Moreover, this Court is not necessarily bound by the lower courts' conclusions of law drawn from such facts. 45

AMNESTY:

46
We will deal first with the issue of tax amnesty. Section 1 of P.D. 67 provides:

1. In all cases of voluntary disclosures of previously untaxed income and/or wealth such as earnings,
receipts, gifts, bequests or any other acquisitions from any source whatsoever which are taxable under
the National Internal Revenue Code, as amended, realized here or abroad by any taxpayer, natural or
judicial; the collection of all internal revenue taxes including the increments or penalties or account of
non-payment as well as all civil, criminal or administrative liabilities arising from or incident to such
disclosures under the National Internal Revenue Code, the Revised Penal Code, the Anti-Graft and
Corrupt Practices Act, the Revised Administrative Code, the Civil Service laws and regulations, laws and
regulations on Immigration and Deportation, or any other applicable law or proclamation, are hereby
 condoned and, in lieu thereof, a tax of ten (10%) per centum on such previously untaxed income or
wealth, is hereby imposed, subject to the following conditions: (conditions omitted) [Emphasis supplied].

The decree condones "the collection of all internal revenue taxes including the increments or penalties or account
of non-payment as well as all civil, criminal or administrative liable arising from or incident to" (voluntary)
disclosures under the NIRC of previously untaxed income and/or wealth "realized here or abroad by any taxpayer,
natural or juridical."

May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the amnesty? An income taxpayer
covers all persons who derive taxable income. 47 ANSCOR was assessed by petitioner for deficiency withholding tax
under Section 53 and 54 of the 1939 Code. As such, it is being held liable in its capacity as a withholding agent and not its
personality as a taxpayer.

In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an
agent of the government for the collection of the tax 48 in order to ensure its payments; 49 the payer is the taxpayer — he is
the person subject to tax impose by law; 50 and the payee is the taxing authority. 51 In other words, the withholding agent
is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by
fiction of law. His (agent) liability is direct and independent from the taxpayer, 52 because the income tax is still impose on
and due from the latter. The agent is not liable for the tax as no wealth flowed into him — he earned no income. The Tax
Code only makes the agent personally liable for the tax 53 arising from the breach of its legal duty to withhold as
distinguish from its duty to pay tax since:

the government's cause of action against the withholding is not for the collection of income tax, but for the
enforcement of the withholding provision of Section 53 of the Tax Code, compliance with which is
imposed on the withholding agent and not upon the taxpayer. 54

Not being a taxpayer, a withholding agent, like ANSCOR in this transaction is not protected by the amnesty under
the decree.

Codal provisions on withholding tax are mandatory and must be complied with by the withholding agent. 55 The taxpayer
should not answer for the non-performance by the withholding agent of its legal duty to withhold unless there is collusion
or bad faith. The former could not be deemed to have evaded the tax had the withholding agent performed its duty. This
could be the situation for which the amnesty decree was intended. Thus, to curtail tax evasion and give tax evaders a
chance to reform, 56 it was deemed administratively feasible to grant tax amnesty in certain instances. In addition, a "tax
amnesty, much like a tax exemption, is never favored nor presumed in law and if granted by a statute, the term of the
amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing
authority.57 The rule on strictissimi juris equally applies. 58 So that, any doubt in the application of an amnesty law/decree
should be resolved in favor of the taxing authority.

Furthermore, ANSCOR's claim of amnesty cannot prosper. The implementing rules of P.D. 370 which
expanded amnesty on previously untaxed income under P.D. 23 is very explicit, to wit:

Sec. 4. Cases not covered by amnesty. — The following cases are not covered by the amnesty subject of
these regulations:

xxx xxx xxx

(2) Tax liabilities with or without assessments, on withholding tax at source provided under Section 53
and 54 of the National Internal Revenue Code, as amended; 59

ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax Code. Thus, by specific provision of law, it is
not covered by the amnesty.

TAX ON STOCK DIVIDENDS

General Rule
Sec. 83(b) of the 1939 NIRC was taken from the Section 115(g)(1) of the U.S. Revenue Code of 1928. 60 It laid down the
general rule known as the proportionate test 61 wherein stock dividends once issued form part of the capital and, thus,
subject to income tax.62 Specifically, the general rule states that:

A stock dividend representing the transfer of surplus to capital account shall not be subject to tax.

Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light. Under the US Revenue
Code, this provision originally referred to "stock dividends" only, without any exception. Stock dividends, strictly speaking,
represent capital and do not constitute income to its
recipient. 63 So that the mere issuance thereof is not yet subject to income tax 64 as they are nothing but an "enrichment
through increase in value of capital
investment." 65 As capital, the stock dividends postpone the realization of profits because the "fund represented by the
new stock has been transferred from surplus to capital and no longer available for actual distribution." 66 Income in tax law
is "an amount of money coming to a person within a specified time, whether as payment for services, interest, or profit
from investment." 67 It means cash or its equivalent. 68 It is gain derived and severed from capital, 69 from labor or from
both combined 70 — so that to tax a stock dividend would be to tax a capital increase rather than the income. 71 In a loose
sense, stock dividends issued by the corporation, are considered unrealized gain, and cannot be subjected to income tax
until that gain has been realized. Before the realization, stock dividends are nothing but a representation of an interest in
the corporate properties. 72 As capital, it is not yet subject to income tax. It should be noted that capital and income are
different. Capital is wealth or fund; whereas income is profit or gain or the flow of wealth. 73 The determining factor for the
imposition of income tax is whether any gain or profit was derived from a transaction. 74

The Exception

However, if a corporation cancels or redeems stock issued as a dividend at such time and in such
manner as to make the distribution and cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation
of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or
profits accumulated after March first, nineteen hundred and thirteen. (Emphasis supplied).

In a response to the ruling of the American Supreme Court in the case of Eisner v. Macomber 75 (that pro rata stock
dividends are not taxable income), the exempting clause above quoted was added because provision corporation found a
loophole in the original provision. They resorted to devious means to circumvent the law and evade the tax. Corporate
earnings would be distributed under the guise of its initial capitalization by declaring the stock dividends previously issued
and later redeem said dividends by paying cash to the stockholder. This process of issuance-redemption amounts to a
distribution of taxable cash dividends which was lust delayed so as to escape the tax. It becomes a convenient technical
strategy to avoid the effects of taxation.

Thus, to plug the loophole — the exempting clause was added. It provides that the redemption or cancellation of stock
dividends, depending on the "time" and "manner" it was made, is essentially equivalent to a distribution of taxable
dividends," making the proceeds thereof "taxable income" "to the extent it represents profits". The exception was
designed to prevent the issuance and cancellation or redemption of stock dividends, which is fundamentally not taxable,
from being made use of as a device for the actual distribution of cash dividends, which is taxable. 76Thus,

the provision had the obvious purpose of preventing a corporation from avoiding dividend tax treatment
by distributing earnings to its shareholders in two transactions — a pro rata stock dividend followed by
a pro rata redemption — that would have the same economic consequences as a simple dividend. 77

Although redemption and cancellation are generally considered capital transactions, as such. they are not subject
to tax. However, it does not necessarily mean that a shareholder may not realize a taxable gain from such
transactions. 78 Simply put, depending on the circumstances, the proceeds of redemption of stock dividends are
essentially distribution of cash dividends, which when paid becomes the absolute property of the stockholder.
Thereafter, the latter becomes the exclusive owner thereof and can exercise the freedom of choice. 79 Having
realized gain from that redemption, the income earner cannot escape income tax. 80

As qualified by the phrase "such time and in such manner," the exception was not intended to characterize as taxable
dividend every distribution of earnings arising from the redemption of stock dividend. 81 So that, whether the amount
distributed in the redemption should be treated as the equivalent of a "taxable dividend" is a question of fact, 82 which is
determinable on "the basis of the particular facts of the transaction in question. 83 No decisive test can be used to
determine the application of the exemption under Section 83(b). The use of the words "such manner" and "essentially
equivalent" negative any idea that a weighted formula can resolve a crucial issue — Should the distribution be treated as
taxable dividend. 84 On this aspect, American courts developed certain recognized criteria, which includes the following: 85

1) the presence or absence of real business purpose,

2) the amount of earnings and profits available for the declaration of a regular dividends
and the corporation's past record with respect to the declaration of dividends,

3) the effect of the distribution, as compared with the declaration of regular dividend,

4) the lapse of time between issuance and redemption, 86

5) the presence of a substantial surplus 87 and a generous supply of cash which invites
suspicion as does a meager policy in relation both to current earnings and accumulated
surplus, 88

REDEMPTION AND CANCELLATION

For the exempting clause of Section, 83(b) to apply, it is indispensable that: (a) there is redemption or
cancellation; (b) the transaction involves stock dividends and (c) the "time and manner" of the transaction makes
it "essentially equivalent to a distribution of taxable dividends." Of these, the most important is the third.

Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock 89 in exchange for property,
whether or not the acquired stock is cancelled, retired or held in the treasury. 90Essentially, the corporation gets back
some of its stock, distributes cash or property to the shareholder in payment for the stock, and continues in business as
before. The redemption of stock dividends previously issued is used as a veil for the constructive distribution of cash
dividends. In the instant case, there is no dispute that ANSCOR redeemed shares of stocks from a stockholder (Don
Andres) twice (28,000 and 80,000 common shares). But where did the shares redeemed come from? If its source is the
original capital subscriptions upon establishment of the corporation or from initial capital investment in an existing
enterprise, its redemption to the concurrent value of acquisition may not invite the application of Sec. 83(b) under the
1939 Tax Code, as it is not income but a mere return of capital. On the contrary, if the redeemed shares are from stock
dividend declarations other than as initial capital investment, the proceeds of the redemption is additional wealth, for it is
not merely a return of capital but a gain thereon.

It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends. Here, it is
undisputed that at the time of the last redemption, the original common shares owned by the estate were only
25,247.5 91 This means that from the total of 108,000 shares redeemed from the estate, the balance of 82,752.5 (108,000
less 25,247.5) must have come from stock dividends. Besides, in the absence of evidence to the contrary, the Tax Code
presumes that every distribution of corporate property, in whole or in part, is made out of corporate profits 92such as stock
dividends. The capital cannot be distributed in the form of redemption of stock dividends without violating the trust fund
doctrine — wherein the capital stock, property and other assets of the corporation are regarded as equity in trust for the
payment of the corporate creditors. 93 Once capital, it is always capital. 94 That doctrine was intended for the protection of
corporate creditors. 95

With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years earlier. The time alone
that lapsed from the issuance to the redemption is not a sufficient indicator to determine taxability. It is a must to consider
the factual circumstances as to the manner of both the issuance and the redemption. The "time" element is a factor to
show a device to evade tax and the scheme of cancelling or redeeming the same shares is a method usually adopted to
accomplish the end sought. 96 Was this transaction used as a "continuing plan," "device" or "artifice" to evade payment of
tax? It is necessary to determine the "net effect" of the transaction between the shareholder-income taxpayer and the
acquiring (redeeming) corporation. 97 The "net effect" test is not evidence or testimony to be considered; it is rather an
inference to be drawn or a conclusion to be reached. 98 It is also important to know whether the issuance of stock
dividends was dictated by legitimate business reasons, the presence of which might negate a tax evasion plan. 99

The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not related, for the
redemption to be considered a legitimate tax scheme. 100Redemption cannot be used as a cloak to distribute corporate
earnings. 101 Otherwise, the apparent intention to avoid tax becomes doubtful as the intention to evade becomes manifest.
It has been ruled that:
 [A]n operation with no business or corporate purpose — is a mere devise which put on the form of a
corporate reorganization as a disguise for concealing its real character, and the sole object and
accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or
any part of a business, but to transfer a parcel of corporate shares to a stockholder. 102

Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not be applicable if the redeemed
shares were issued with bona fide business purpose, 103which is judged after each and every step of the transaction have
been considered and the whole transaction does not amount to a tax evasion scheme.

ANSCOR invoked two reasons to justify the redemptions — (1) the alleged "filipinization" program and (2) the reduction of
foreign exchange remittances in case cash dividends are declared. The Court is not concerned with the wisdom of these
purposes but on their relevance to the whole transaction which can be inferred from the outcome thereof. Again, it is the
"net effect rather than the motives and plans of the taxpayer or his corporation" 104 that is the fundamental guide in
administering Sec. 83(b). This tax provision is aimed at the result. 105 It also applies even if at the time of the issuance of
the stock dividend, there was no intention to redeem it as a means of distributing profit or avoiding tax on
dividends.106 The existence of legitimate business purposes in support of the redemption of stock dividends is immaterial
in income taxation. It has no relevance in determining "dividend equivalence". 107 Such purposes may be material only
upon the issuance of the stock dividends. The test of taxability under the exempting clause, when it provides "such time
and manner" as would make the redemption "essentially equivalent to the distribution of a taxable dividend", is whether
the redemption resulted into a flow of wealth. If no wealth is realized from the redemption, there may not be a dividend
equivalence treatment. In the metaphor of Eisner v. Macomber, income is not deemed "realize" until the fruit has fallen or
been plucked from the tree.

The three elements in the imposition of income tax are: (1) there must be gain or and profit, (2) that the gain or profit is
realized or received, actually or constructively, 108 and (3) it is not exempted by law or treaty from income tax. Any
business purpose as to why or how the income was earned by the taxpayer is not a requirement. Income tax is assessed
on income received from any property, activity or service that produces the income because the Tax Code stands as an
indifferent neutral party on the matter of where income comes
from. 109

As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether income was realized
through the redemption of stock dividends. The redemption converts into money the stock dividends which become a
realized profit or gain and consequently, the stockholder's separate property. 110 Profits derived from the capital invested
cannot escape income tax. As realized income, the proceeds of the redeemed stock dividends can be reached by income
taxation regardless of the existence of any business purpose for the redemption. Otherwise, to rule that the said proceeds
are exempt from income tax when the redemption is supported by legitimate business reasons would defeat the very
purpose of imposing tax on income. Such argument would open the door for income earners not to pay tax so long as the
person from whom the income was derived has legitimate business reasons. In other words, the payment of tax under the
exempting clause of Section 83(b) would be made to depend not on the income of the taxpayer, but on the business
purposes of a third party (the corporation herein) from whom the income was earned. This is absurd, illogical and
impractical considering that the Bureau of Internal Revenue (BIR) would be pestered with instances in determining the
legitimacy of business reasons that every income earner may interposed. It is not administratively feasible and cannot
therefore be allowed.

The ruling in the American cases cited and relied upon by ANSCOR that "the redeemed shares are the equivalent of
dividend only if the shares were not issued for genuine business purposes", 111 or the "redeemed shares have
been issued by a corporation bona fide" 112 bears no relevance in determining the non-taxability of the proceeds of
redemption ANSCOR, relying heavily and applying said cases, argued that so long as the redemption is supported by
valid corporate purposes the proceeds are not subject to tax. 113 The adoption by the courts below 114 of such argument is
misleading if not misplaced. A review of the cited American cases shows that the presence or absence of "genuine
business purposes" may be material with respect to the issuance or declaration of stock dividends but not on its
subsequent redemption. The issuance and the redemption of stocks are two different transactions. Although the existence
of legitimate corporate purposes may justify a corporation's acquisition of its own shares under Section 41 of the
Corporation Code, 115 such purposes cannot excuse the stockholder from the effects of taxation arising from the
redemption. If the issuance of stock dividends is part of a tax evasion plan and thus, without legitimate business reasons,
the redemption becomes suspicious which exempting clause. The substance of the whole transaction, not its form, usually
controls the tax consequences. 116

The two purposes invoked by ANSCOR, under the facts of this case are no excuse for its tax liability. First, the alleged
"filipinization" plan cannot be considered legitimate as it was not implemented until the BIR started making assessments
on the proceeds of the redemption. Such corporate plan was not stated in nor supported by any Board Resolution but a
mere afterthought interposed by the counsel of ANSCOR. Being a separate entity, the corporation can act only through its
Board of Directors. 117 The Board Resolutions authorizing the redemptions state only one purpose — reduction of foreign
exchange remittances in case cash dividends are declared. Not even this purpose can be given credence. Records show
that despite the existence of enormous corporate profits no cash dividend was ever declared by ANSCOR from 1945 until
the BIR started making assessments in the early 1970's. Although a corporation under certain exceptions, has the
prerogative when to issue dividends, yet when no cash dividends was issued for about three decades, this circumstance
negates the legitimacy of ANSCOR's alleged purposes. Moreover, to issue stock dividends is to increase the
shareholdings of ANSCOR's foreign stockholders contrary to its "filipinization" plan. This would also increase rather than
reduce their need for foreign exchange remittances in case of cash dividend declaration, considering that ANSCOR is a
family corporation where the majority shares at the time of redemptions were held by Don Andres' foreign heirs.

Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot be a valid excuse for the
imposition of tax. Otherwise, the taxpayer's liability to pay income tax would be made to depend upon a third person who
did not earn the income being taxed. Furthermore, even if the said purposes support the redemption and justify the
issuance of stock dividends, the same has no bearing whatsoever on the imposition of the tax herein assessed because
the proceeds of the redemption are deemed taxable dividends since it was shown that income was generated therefrom.

Thirdly, ANSCOR argued that to treat as "taxable dividend" the proceeds of the redeemed stock dividends would be to
impose on such stock an undisclosed lien and would be extremely unfair to intervening purchase, i.e. those who buys the
stock dividends after their issuance. 118 Such argument, however, bears no relevance in this case as no intervening buyer
is involved. And even if there is an intervening buyer, it is necessary to look into the factual milieu of the case if income
was realized from the transaction. Again, we reiterate that the dividend equivalence test depends on such "time and
manner" of the transaction and its net effect. The undisclosed lien 119 may be unfair to a subsequent stock buyer who has
no capital interest in the company. But the unfairness may not be true to an original subscriber like Don Andres, who
holds stock dividends as gains from his investments. The subsequent buyer who buys stock dividends is investing capital.
It just so happen that what he bought is stock dividends. The effect of its (stock dividends) redemption from that
subsequent buyer is merely to return his capital subscription, which is income if redeemed from the original subscriber.

After considering the manner and the circumstances by which the issuance and redemption of stock dividends were
made, there is no other conclusion but that the proceeds thereof are essentially considered equivalent to a distribution of
taxable dividends. As "taxable dividend" under Section 83(b), it is part of the "entire income" subject to tax under Section
22 in relation to Section 21 120 of the 1939 Code. Moreover, under Section 29(a) of said Code, dividends are included in
"gross income". As income, it is subject to income tax which is required to be withheld at source. The 1997 Tax Code may
have altered the situation but it does not change this disposition.

121
EXCHANGE OF COMMON WITH PREFERRED SHARES

Exchange is an act of taking or giving one thing for another involving 122 reciprocal transfer 123 and is generally considered
as a taxable transaction. The exchange of common stocks with preferred stocks, or preferred for common or a
combination of either for both, may not produce a recognized gain or loss, so long as the provisions of Section 83(b) is not
applicable. This is true in a trade between two (2) persons as well as a trade between a stockholder and a corporation. In
general, this trade must be parts of merger, transfer to controlled corporation, corporate acquisitions or corporate
reorganizations. No taxable gain or loss may be recognized on exchange of property, stock or securities related to
reorganizations. 124

Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into common and preferred, and
that parts of the common shares of the Don Andres estate and all of Doña Carmen's shares were exchanged for the
whole 150.000 preferred shares. Thereafter, both the Don Andres estate and Doña Carmen remained as corporate
subscribers except that their subscriptions now include preferred shares. There was no change in their proportional
interest after the exchange. There was no cash flow. Both stocks had the same par value. Under the facts herein, any
difference in their market value would be immaterial at the time of exchange because no income is yet realized — it was a
mere corporate paper transaction. It would have been different, if the exchange transaction resulted into a flow of wealth,
in which case income tax may be imposed. 125

Reclassification of shares does not always bring any substantial alteration in the subscriber's proportional interest. But the
exchange is different — there would be a shifting of the balance of stock features, like priority in dividend declarations or
absence of voting rights. Yet neither the reclassification nor exchange per se, yields realize income for tax purposes. A
common stock represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily and
usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of
profits. 126Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution. 127
Both shares are part of the corporation's capital stock. Both stockholders are no different from ordinary investors who take
on the same investment risks. Preferred and common shareholders participate in the same venture, willing to share in the
profits and losses of the enterprise. 128 Moreover, under the doctrine of equality of shares — all stocks issued by the
corporation are presumed equal with the same privileges and liabilities, provided that the Articles of Incorporation is silent
on such differences. 129

In this case, the exchange of shares, without more, produces no realized income to the subscriber. There is only a
modification of the subscriber's rights and privileges — which is not a flow of wealth for tax purposes. The issue of taxable
dividend may arise only once a subscriber disposes of his entire interest and not when there is still maintenance of
proprietary interest. 130

WHEREFORE, premises considered, the decision of the Court of Appeals is MODIFIED in that ANSCOR's redemption of
82,752.5 stock dividends is herein considered as essentially equivalent to a distribution of taxable dividends for which it is
LIABLE for the withholding tax-at-source. The decision is AFFIRMED in all other respects.

SO ORDERED.
G.R. No. 195909 September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.

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

G.R. No. 195960

ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION

CARPIO, J.:

The Case

These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules of Court assailing the Decision of 19
November 2010 of the Court of Tax Appeals (CTA) En Banc and its Resolution 2 of 1 March 2011 in CTA Case No. 6746.
This Court resolves this case on a pure question of law, which involves the interpretation of Section 27(B) vis-à-vis
Section 30(E) and (G) of the National Internal Revenue Code of the Philippines (NIRC), on the income tax treatment of
proprietary non-profit hospitals.

The Facts

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit corporation. Under its
articles of incorporation, among its corporate purposes are:

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent, charitable and
scientific hospital which shall give curative, rehabilitative and spiritual care to the sick, diseased and disabled
persons; provided that purely medical and surgical services shall be performed by duly licensed physicians and
surgeons who may be freely and individually contracted by patients;

(b) To provide a career of health science education and provide medical services to the community through
organized clinics in such specialties as the facilities and resources of the corporation make possible;

(c) To carry on educational activities related to the maintenance and promotion of health as well as provide
facilities for scientific and medical researches which, in the opinion of the Board of Trustees, may be justified by
the facilities, personnel, funds, or other requirements that are available;

(d) To cooperate with organized medical societies, agencies of both government and private sector; establish
rules and regulations consistent with the highest professional ethics;

xxxx3

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes amounting to
₱76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax, withholding tax on compensation and
expanded withholding tax. The BIR reduced the amount to ₱63,935,351.57 during trial in the First Division of the CTA. 4

On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax assessments. The
BIR did not act on the protest within the 180-day period under Section 228 of the NIRC. Thus, St. Luke's appealed to the
CTA.

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential tax rate on the income
of proprietary non-profit hospitals, should be applicable to St. Luke's. According to the BIR, Section 27(B), introduced in
1997, "is a new provision intended to amend the exemption on non-profit hospitals that were previously categorized as
non-stock, non-profit corporations under Section 26 of the 1997 Tax Code x x x." 5 It is a specific provision which prevails
over the general exemption on income tax granted under Section 30(E) and (G) for non-stock, non-profit charitable
institutions and civic organizations promoting social welfare. 6

The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its revenues came from
charitable purposes. Moreover, the hospital's board of trustees, officers and employees directly benefit from its profits and
assets. St. Luke's had total revenues of ₱1,730,367,965 or approximately ₱1.73 billion from patient services in 1998. 7

St. Luke's contended that the BIR should not consider its total revenues, because its free services to patients was
₱218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less operating expenses) of
₱334,642,615. 8 St. Luke's also claimed that its income does not inure to the benefit of any individual.

St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare purposes under
Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not destroy its income tax exemption.

The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA that Section 27(B)
applies to St. Luke's. The petition raises the sole issue of whether the enactment of Section 27(B) takes proprietary non-
profit hospitals out of the income tax exemption under Section 30 of the NIRC and instead, imposes a preferential rate of
10% on their taxable income. The BIR prays that St. Luke's be ordered to pay ₱57,659,981.19 as deficiency income and
expanded withholding tax for 1998 with surcharges and interest for late payment.

The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding of a part of its
income, 9 as well as the payment of surcharge and delinquency interest. There is no ground for this Court to undertake
such a factual review. Under the Constitution 10 and the Rules of Court, 11 this Court's review power is generally limited to
"cases in which only an error or question of law is involved." 12 This Court cannot depart from this limitation if a party fails
to invoke a recognized exception.

The Ruling of the Court of Tax Appeals

The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision dated 23 February
2009 which held:

WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED. Accordingly, the 1998
deficiency VAT assessment issued by respondent against petitioner in the amount of ₱110,000.00 is hereby CANCELLED
and WITHDRAWN. However, petitioner is hereby ORDERED to PAY deficiency income tax and deficiency expanded
withholding tax for the taxable year 1998 in the respective amounts of ₱5,496,963.54 and ₱778,406.84 or in the sum of
₱6,275,370.38, x x x.

xxxx

In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the total amount of
₱6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to Section 249(C)(3) of the NIRC of
1997.

SO ORDERED. 13

The deficiency income tax of ₱5,496,963.54, ordered by the CTA En Banc to be paid, arose from the failure of St. Luke's
to prove that part of its income in 1998 (declared as "Other Income-Net") 14 came from charitable activities. The CTA
cancelled the remainder of the ₱63,113,952.79 deficiency assessed by the BIR based on the 10% tax rate under Section
27(B) of the NIRC, which the CTA En Banc held was not applicable to St. Luke's. 15

The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section 30(E) and (G) of the
NIRC. This ruling would exempt all income derived by St. Luke's from services to its patients, whether paying or non-
paying. The CTA reiterated its earlier decision in St. Luke's Medical Center, Inc. v. Commissioner of Internal
Revenue, 16 which examined the primary purposes of St. Luke's under its articles of incorporation and various
documents 17 identifying St. Luke's as a charitable institution.
The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which states that "a charitable institution
does not lose its charitable character and its consequent exemption from taxation merely because recipients of its benefits
who are able to pay are required to do so, where funds derived in this manner are devoted to the charitable purposes of
the institution x x x." 19 The generation of income from paying patients does not per se destroy the charitable nature of St.
Luke's.

Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue, 20 which ruled that the old NIRC
(Commonwealth Act No. 466, as amended) 21 "positively exempts from taxation those corporations or associations which,
otherwise, would be subject thereto, because of the existence of x x x net income." 22 The NIRC of 1997 substantially
reproduces the provision on charitable institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is
lost whenever there is net income, the Court in Jesus Sacred Heart College declared: "[E]very responsible organization
must be run to at least insure its existence, by operating within the limits of its own resources, especially its regular
income. In other words, it should always strive, whenever possible, to have a surplus." 23

The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24 The CTA explained that to apply the
10% preferential rate, Section 27(B) requires a hospital to be "non-profit." On the other hand, Congress specifically used
the word "non-stock" to qualify a charitable "corporation or association" in Section 30(E) of the NIRC. According to the
CTA, this is unique in the present tax code, indicating an intent to exempt this type of charitable organization from income
tax. Section 27(B) does not require that the hospital be "non-stock." The CTA stated, "it is clear that non-stock, non-profit
hospitals operated exclusively for charitable purpose are exempt from income tax on income received by them as such,
applying the provision of Section 30(E) of the NIRC of 1997, as amended." 25

The Issue

The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC, which
imposes a preferential tax rate of 10% on the income of proprietary non-profit hospitals.

The Ruling of the Court

St. Luke's Petition in G.R. No. 195960

As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the petition raises factual
issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall raise only questions of law which must be
distinctly set forth." St. Luke's cites Martinez v. Court of Appeals 26 which permits factual review "when the Court of
Appeals [in this case, the CTA] manifestly overlooked certain relevant facts not disputed by the parties and which, if
properly considered, would justify a different conclusion." 27

This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA "disregarded the
testimony of [its] witness, Romeo B. Mary, being allegedly self-serving, to show the nature of the 'Other Income-Net' x x
x." 28 This is not a case of overlooking or failing to consider relevant evidence. The CTA obviously considered the
evidence and concluded that it is self-serving. The CTA declared that it has "gone through the records of this case and
found no other evidence aside from the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x." 29

The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25% surcharge under Section
248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax within the time prescribed for its payment in the notice
of assessment[.]" 30 St. Luke's is also liable to pay 20% delinquency interest under Section 249(C)(3) of the NIRC. 31 As
explained by the CTA En Banc, the amount of ₱6,275,370.38 in the dispositive portion of the CTA First Division Decision
includes only deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency interest. 32

The Main Issue

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section 27(B) in the NIRC of
1997 vis-à-vis Section 30(E) and (G) on the income tax exemption of charitable and social welfare institutions. The 10%
income tax rate under Section 27(B) specifically pertains to proprietary educational institutions and proprietary non-profit
hospitals. The BIR argues that Congress intended to remove the exemption that non-profit hospitals previously enjoyed
under Section 27(E) of the NIRC of 1977, which is now substantially reproduced in Section 30(E) of the NIRC of
1997. 33 Section 27(B) of the present NIRC provides:

SEC. 27. Rates of Income Tax on Domestic Corporations. -

 xxxx

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals which are non-
profit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof:
Provided, That if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total
gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A)
hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business
or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the
exercise or performance by such educational institution or hospital of its primary purpose or function. A 'proprietary
educational institution' is any private school maintained and administered by private individuals or groups with an issued
permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with
existing laws and regulations. (Emphasis supplied)

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a charitable institution and
an organization promoting social welfare. The arguments of St. Luke's focus on the wording of Section 30(E) exempting
from income tax non-stock, non-profit charitable institutions. 34 St. Luke's asserts that the legislative intent of introducing
Section 27(B) was only to remove the exemption for "proprietary non-profit" hospitals. 35 The relevant provisions of Section
30 state:

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect
to income received by them as such:

xxxx

(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the
benefit of any member, organizer, officer or any specific person;

xxxx

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of
the disposition made of such income, shall be subject to tax imposed under this Code. (Emphasis supplied)

The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B) of the NIRC does not
remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one
hand, and Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax exemption.
The effect of the introduction of Section 27(B) is to subject the taxable income of two specific institutions, namely,
proprietary non-profit educational institutions 36 and proprietary non-profit hospitals, among the institutions covered by
Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate rate under the last
paragraph of Section 30 in relation to Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational
institutions and (2) proprietary non-profit hospitals. The only qualifications for hospitals are that they must be proprietary
and non-profit. "Proprietary" means private, following the definition of a "proprietary educational institution" as "any private
school maintained and administered by private individuals or groups" with a government permit. "Non-profit" means no net
income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the
institution's purposes and all its activities conducted not for profit.

"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino Inc. de Cebu, 37this
Court considered as non-profit a sports club organized for recreation and entertainment of its stockholders and members.
The club was primarily funded by membership fees and dues. If it had profits, they were used for overhead expenses and
improving its golf course. 38 The club was non-profit because of its purpose and there was no evidence that it was
engaged in a profit-making enterprise. 39
The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court defined "charity" in
Lung Center of the Philippines v. Quezon City 40 as "a gift, to be applied consistently with existing laws, for the benefit of
an indefinite number of persons, either by bringing their minds and hearts under the influence of education or religion, by
assisting them to establish themselves in life or [by] otherwise lessening the burden of government." 41A non-profit club for
the benefit of its members fails this test. An organization may be considered as non-profit if it does not distribute any part
of its income to stockholders or members. However, despite its being a tax exempt institution, any income such institution
earns from activities conducted for profit is taxable, as expressly provided in the last paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive test of charity in Lung Center. The
issue in Lung Center concerns exemption from real property tax and not income tax. However, it provides for the test of
charity in our jurisdiction. Charity is essentially a gift to an indefinite number of persons which lessens the burden of
government. In other words, charitable institutions provide for free goods and services to the public which would otherwise
fall on the shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which should have
been spent to address public needs, because certain private entities already assume a part of the burden. This is the
rationale for the tax exemption of charitable institutions. The loss of taxes by the government is compensated by its relief
from doing public works which would have been funded by appropriations from the Treasury. 42

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a tax exemption are
specified by the law granting it. The power of Congress to tax implies the power to exempt from tax. Congress can create
tax exemptions, subject to the constitutional provision that "[n]o law granting any tax exemption shall be passed without
the concurrence of a majority of all the Members of Congress." 43 The requirements for a tax exemption are strictly
construed against the taxpayer 44 because an exemption restricts the collection of taxes necessary for the existence of the
government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution for the purpose of
exemption from real property taxes. This ruling uses the same premise as Hospital de San Juan 45 and Jesus Sacred
Heart College 46 which says that receiving income from paying patients does not destroy the charitable nature of a
hospital.

As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply
because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies
from the government, so long as the money received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. 47

For real property taxes, the incidental generation of income is permissible because the test of exemption is the use of the
property. The Constitution provides that "[c]haritable institutions, churches and personages 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." 48 The test of exemption is not
strictly a requirement on the intrinsic nature or character of the institution. The test requires that the institution use the
property in a certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung Center of the Philippines did not
lose its charitable character when it used a portion of its lot for commercial purposes. The effect of failing to meet the use
requirement is simply to remove from the tax exemption that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress decided to extend
the exemption to income taxes. However, the way Congress crafted Section 30(E) of the NIRC is materially different from
Section 28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines the corporation or association that is
exempt from income tax. On the other hand, Section 28(3), Article VI of the Constitution does not define a charitable
institution, but requires that the institution "actually, directly and exclusively" use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or
any specific person.
Thus, both the organization and operations of the charitable institution must be devoted "exclusively" for charitable
purposes. The organization of the institution refers to its corporate form, as shown by its articles of incorporation, by-laws
and other constitutive documents. Section 30(E) of the NIRC specifically requires that the corporation or association be
non-stock, which is defined by the Corporation Code as "one where no part of its income is distributable as dividends to its
members, trustees, or officers" 49 and that any profit "obtain[ed] as an incident to its operations shall, whenever necessary
or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized." 50 However,
under Lung Center, any profit by a charitable institution must not only be plowed back "whenever necessary or proper,"
but must be "devoted or used altogether to the charitable object which it is intended to achieve." 51

The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the NIRC requires that
these operations be exclusive to charity. There is also a specific requirement that "no part of [the] net income or asset
shall belong to or inure to the benefit of any member, organizer, officer or any specific person." The use of lands, buildings
and improvements of the institution is but a part of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution. However, this does not
automatically exempt St. Luke's from paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's
meets the test of charity, a charitable institution is not ipso facto tax exempt. To be exempt from real property taxes,
Section 28(3), Article VI of the Constitution requires that a charitable institution use the property "actually, directly and
exclusively" for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a
charitable institution must be "organized and operated exclusively" for charitable purposes. Likewise, to be exempt from
income taxes, Section 30(G) of the NIRC requires that the institution be "operated exclusively" for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated exclusively" by
providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of
the disposition made of such income, shall be subject to tax imposed under this Code. (Emphasis supplied)

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts "any" activity for
profit, such activity is not tax exempt even as its not-for-profit activities remain tax exempt. This paragraph qualifies the
requirements in Section 30(E) that the "[n]on-stock corporation or association [must be] organized and operated
exclusively for x x x charitable x x x purposes x x x." It likewise qualifies the requirement in Section 30(G) that the civic
organization must be "operated exclusively" for the promotion of social welfare.

Thus, even if the charitable institution must be "organized and operated exclusively" for charitable purposes, it is
nevertheless allowed to engage in "activities conducted for profit" without losing its tax exempt status for its not-for-profit
activities. The only consequence is that the "income of whatever kind and character" of a charitable institution "from any of
its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax." Prior to the
introduction of Section 27(B), the tax rate on such income from for-profit activities was the ordinary corporate rate under
Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.

In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services to paying patients. It cannot be disputed that a
hospital which receives approximately ₱1.73 billion from paying patients is not an institution "operated exclusively" for
charitable purposes. Clearly, revenues from paying patients are income received from "activities conducted for
profit." 52 Indeed, St. Luke's admits that it derived profits from its paying patients. St. Luke's declared ₱1,730,367,965 as
"Revenues from Services to Patients" in contrast to its "Free Services" expenditure of ₱218,187,498. In its Comment in
G.R. No. 195909, St. Luke's showed the following "calculation" to support its claim that 65.20% of its "income after
expenses was allocated to free or charitable services" in 1998. 53

REVENUES FROM SERVICES TO PATIENTS ₱1,730,367,965.00

OPERATING EXPENSES

Professional care of patients ₱1,016,608,394.00

Administrative 287,319,334.00

Household and Property 91,797,622.00

 ₱1,395,725,350.00

INCOME FROM OPERATIONS ₱334,642,615.00 100%

Free Services -218,187,498.00 -65.20%

INCOME FROM OPERATIONS, Net of FREE SERVICES ₱116,455,117.00 34.80%

OTHER INCOME 17,482,304.00

EXCESS OF REVENUES OVER EXPENSES ₱133,937,421.00

In Lung Center, this Court declared:

"[e]xclusive" 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." x x x The words "dominant use"
or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitution and the
law. Solely is synonymous with exclusively. 54

The Court cannot expand the meaning of the words "operated exclusively" without violating the NIRC. Services to paying
patients are activities conducted for profit. They cannot be considered any other way. There is a "purpose to make profit
over and above the cost" of services. 55 The ₱1.73 billion total revenues from paying patients is not even incidental to St.
Luke's charity expenditure of ₱218,187,498 for non-paying patients.

St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its operating income in 1998. However, if a part
of the remaining 34.80% of the operating income is reinvested in property, equipment or facilities used for services to
paying and non-paying patients, then it cannot be said that the income is "devoted or used altogether to the charitable
object which it is intended to achieve." 56 The income is plowed back to the corporation not entirely for charitable
purposes, but for profit as well. In any case, the last paragraph of Section 30 of the NIRC expressly qualifies that income
from activities for profit is taxable "regardless of the disposition made of such income."

Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase "any activity
conducted for profit." However, it quoted a deposition of Senator Mariano Jesus Cuenco, who was a member of the
Committee of Conference for the Senate, which introduced the phrase "or from any activity conducted for profit."

P. Cuando ha hablado de la Universidad de Santo Tomás que tiene un hospital, no cree Vd. que es una actividad
esencial dicho hospital para el funcionamiento del colegio de medicina de dicha universidad?

xxxx

R. Si el hospital se limita a recibir enformos pobres, mi contestación seria afirmativa; pero considerando que el hospital
tiene cuartos de pago, y a los mismos generalmente van enfermos de buena posición social económica, lo que se paga
por estos enfermos debe estar sujeto a 'income tax', y es una de las razones que hemos tenido para insertar las palabras
o frase 'or from any activity conducted for profit.' 57

The question was whether having a hospital is essential to an educational institution like the College of Medicine of the
University of Santo Tomas. Senator Cuenco answered that if the hospital has paid rooms generally occupied by people of
good economic standing, then it should be subject to income tax. He said that this was one of the reasons Congress
inserted the phrase "or any activity conducted for profit."

The question in Jesus Sacred Heart College involves an educational institution. 58 However, it is applicable to charitable
institutions because Senator Cuenco's response shows an intent to focus on the activities of charitable institutions.
Activities for profit should not escape the reach of taxation. Being a non-stock and non-profit corporation does not, by this
reason alone, completely exempt an institution from tax. An institution cannot use its corporate form to prevent its
profitable activities from being taxed.

The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or social welfare purposes
insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict interpretation of a
provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of
the NIRC requires that an institution be "operated exclusively" for charitable or social welfare purposes to be completely
exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from
its for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to
income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared from sharing
in the expenses of government and yet benefits from them. Tax exemptions for charitable institutions should therefore be
limited to institutions beneficial to the public and those which improve social welfare. A profit-making entity should not be
allowed to exploit this subsidy to the detriment of the government and other taxpayers.1âwphi1

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from all its
income. However, it remains a proprietary non-profit hospital under Section 27(B) of the NIRC as long as it does not
distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St. Luke's,
as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit
activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However, St. Luke's has
good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St. Luke's is "a corporation for purely
charitable and social welfare purposes"59 and thus exempt from income tax. 60 In Michael J. Lhuillier, Inc. v.
Commissioner of Internal Revenue, 61 the Court said that "good faith and honest belief that one is not subject to tax on the
basis of previous interpretation of government agencies tasked to implement the tax law, are sufficient justification to
delete the imposition of surcharges and interest." 62

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY GRANTED. The
Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its Resolution dated 1 March 2011 in CTA
Case No. 6746 are MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998
based on the 10% preferential income tax rate under Section 27(B) of the National Internal Revenue Code. However, it is
not liable for surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National Internal
Revenue Code. All other parts of the Decision and Resolution of the Court of Tax Appeals are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1, Rule 45 of the Rules
of Court.

SO ORDERED.
 G.R. No. 211666, February 25, 2015

REPUBLIC OF THE PHILIPPINES, REPRESENTED BY THE DEPARTMENT OF PUBLIC WORKS AND

HIGHWAYS, Petitioners, v. ARLENE R. SORIANO, Respondent.

DECISION

PERALTA, J.:

Before the Court is a petition for review under Rule 45 of the Rules of Court assailing the Decision 1 dated
November 15, 2013 and Order2 dated March 10, 2014 of the Regional Trial Court (RTC), Valenzuela City,
Branch 270, in Civil Case No. 140-V-10.

The antecedent facts are as follows:

On October 20, 2010, petitioner Republic of the Philippines, represented by the Department of Public
Works and Highways (DPWH), filed a Complaint3 for expropriation against respondent Arlene R. Soriano,
the registered owner of a parcel of land consisting of an area of 200 square meters, situated at Gen. T. De
Leon, Valenzuela City, and covered by Transfer Certificate of Title (TCT) No. V-13790.4 In its Complaint,
petitioner averred that pursuant to Republic Act (RA) No. 8974, otherwise known as “An Act to Facilitate
the Acquisition of Right-Of-Way, Site or Location for National Government Infrastructure Projects and for
other Purposes,” the property sought to be expropriated shall be used in implementing the construction of
the North Luzon Expressway (NLEX)- Harbor Link Project (Segment 9) from NLEX to MacArthur Highway,
Valenzuela City.5cralawred

Petitioner duly deposited to the Acting Branch Clerk of Court the amount of P420,000.00 representing
100% of the zonal value of the subject property. Consequently, in an Order 6 dated May 27, 2011, the RTC
ordered the issuance of a Writ of Possession and a Writ of Expropriation for failure of respondent, or any
of her representatives, to appear despite notice during the hearing called for the purpose.

In another Order7 dated June 21, 2011, the RTC appointed the following members of the Board of
Commissioners for the determination of just compensation: (1) Ms. Eunice O. Josue, Officer-in-Charge,
RTC, Branch 270, Valenzuela City; (2) Atty. Cecilynne R. Andrade, Acting Valenzuela City Assessor, City
Assessor’s Office, Valenzuela City; and (3) Engr. Restituto Bautista, of Brgy. Bisig, Valenzuela City.
However, the trial court subsequently revoked the appointment of the Board for their failure to submit a
report as to the fair market value of the property to assist the court in the determination of just
compensation and directed the parties to submit their respective position papers. 8 Thereafter, the case
was set for hearing giving the parties the opportunity to present and identify all evidence in support of
their arguments therein.

According to the RTC, the records of the case reveal that petitioner adduced evidence to show that the
total amount deposited is just, fair, and equitable. Specifically, in its Position Paper, petitioner alleged that
pursuant to a Certification issued by the Bureau of Internal Revenue (BIR), Revenue Region No. 5, the
zonal value of the subject property in the amount of P2,100.00 per square meter is reasonable, fair, and
just to compensate the defendant for the taking of her property in the total area of 200 square meters. 9In
fact, Tax Declaration No. C-018-07994, dated November 13, 2009 submitted by petitioner, shows that the
value of the subject property is at a lower rate of P400.00 per square meter. Moreover, as testified to by
Associate Solicitor III Julie P. Mercurio, and as affirmed by the photographs submitted, the subject
property is poorly maintained, covered by shrubs and weeds, and not concretely-paved. It is located far
from commercial or industrial developments in an area without a proper drainage system, can only be
accessed through a narrow dirt road, and is surrounded by adjacent dwellings of sub-standard materials.

Accordingly, the RTC considered respondent to have waived her right to adduce evidence and to object to
the evidence submitted by petitioner for her continued absence despite being given several notices to do
so.

On November 15, 2013, the RTC rendered its Decision, the dispositive portion of which
reads:chanRoblesvirtualLawlibrary
WHEREFORE, with the foregoing determination of just compensation, judgment is hereby rendered:
1) Declaring plaintiff to have lawful right to acquire possession of and title to 200 square meters of
defendant Arlene R. Soriano’s parcel of land covered by TCT V-13790 necessary for the construction
of the NLEX – Harbor Link Project (Segment 9) from NLEX to MacArthur Highway Valenzuela City;
2) Condemning portion to the extent of 200 square meters of the above-described parcel of land
including improvements thereon, if there be any, free from all liens and encumbrances;
3) Ordering the plaintiff to pay defendant Arlene R. Soriano Php2,100.00 per square meter or the sum
of Four Hundred Twenty Thousand Pesos (Php420,000.00) for the 200 square meters as fair,
equitable, and just compensation with legal interest at 12% per annum from the taking of the
possession of the property, subject to the payment of all unpaid real property taxes and other
relevant taxes, if there be any;
4) Plaintiff is likewise ordered to pay the defendant consequential damages which shall include the
value of the transfer tax necessary for the transfer of the subject property from the name of the
defendant to that of the plaintiff;
5) The Office of the Register of Deeds of Valenzuela City, Metro Manila is directed to annotate this
Decision in Transfer Certificate of Title No. V-13790 registered under the name of Arlene R. Soriano.
cralawlawlibrary

Let a certified true copy of this decision be recorded in the Registry of Deeds of Valenzuela City.

Records of this case show that the Land Bank Manager’s Check Nos. 0000016913 dated January 21, 2011
in the amount of Php400,000.00 and 0000017263 dated April 28, 2011 in the amount of Php20,000.00
issued by the Department of Public Works and Highways (DPWH) are already stale. Thus, the said Office is
hereby directed to issue another Manager’s Check in the total amount Php420,000.00 under the name of
the Office of the Clerk of Court, Regional Trial Court, Valenzuela City earmarked for the instant
case.10cralawlawlibrary

Petitioner filed a Motion for Reconsideration maintaining that pursuant to Bangko Sentral ng Pilipinas
(BSP) Circular No. 799, Series of 2013, which took effect on July 1, 2013, the interest rate imposed by the
RTC on just compensation should be lowered to 6% for the instant case falls under a loan or forbearance
of money.11 In its Order12 dated March 10, 2014, the RTC reduced the interest rate to 6% per annum not
on the basis of the aforementioned Circular, but on Article 2209 of the Civil Code,
viz.:chanRoblesvirtualLawlibrary

However, the case of National Power Corporation v. Honorable Zain B. Angas is instructive.

In the aforementioned case law, which is similar to the instant case, the Supreme Court had the occasion
to rule that it is well-settled that the aforequoted provision of Bangko Sentral ng Pilipinas Circular applies
only to a loan or forbearance of money, goods or credits. However, the term “judgments” as used in
Section 1 of the Usury Law and the previous Central Bank Circular No. 416, should be interpreted to mean
only judgments involving loan or forbearance of money, goods or credits, following the principle
of ejusdem generis. And applying said rule on statutory construction, the general term “judgments” can
refer only to judgments in cases involving loans or forbearance of any money, goods, or credits. Thus, the
High Court held that, Art. 2209 of the Civil Code, and not the Central Bank Circular, is the law applicable.

Art. 2009 of the Civil Code reads:

“If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per
annum.”cralawlawlibrary

Further in that case, the Supreme Court explained that the transaction involved is clearly not a loan or
forbearance of money, goods or credits but expropriation of certain parcels of land for a public purpose,
the payment of which is without stipulation regarding interest, and the interest adjudged by the trial court
is in the nature of indemnity for damages. The legal interest required to be paid on the amount of just
compensation for the properties expropriated is manifestly in the form of indemnity for damages for the
delay in the payment thereof. It ultimately held that Art. 2209 of the Civil Code shall
apply.13cralawlawlibrary

On May 12, 2014, petitioner filed the instant petition invoking the following
arguments:chanRoblesvirtualLawlibrary

I.

RESPONDENT IS NOT ENTITLED TO THE LEGAL INTEREST OF 6% PER ANNUM ON THE AMOUNT OF JUST
COMPENSATION OF THE SUBJECT PROPERTY AS THERE WAS NO DELAY ON THE PART OF
PETITIONER.chanroblesvirtuallawlibrary

II.

BASED ON THE NATIONAL INTERNAL REVENUE CODE OF 1997 AND THE LOCAL GOVERNMENT CODE, IT
IS RESPONDENT’S OBLIGATION TO PAY THE TRANSFER TAXES.cralawlawlibrary

Petitioner maintains that if property is taken for public use before compensation is deposited with the
court having jurisdiction over the case, the final compensation must include interests on its just value
computed from the time the property is taken up to the time when compensation is actually paid or
deposited with the court.14 Thus, legal interest applies only when the property was taken prior to the
deposit of payment with the court and only to the extent that there is delay in payment. In the instant
case, petitioner posits that since it was able to deposit with the court the amount representing the zonal
value of the property before its taking, it cannot be said to be in delay, and thus, there can be no interest
due on the payment of just compensation.15 Moreover, petitioner alleges that since the entire subject
property was expropriated and not merely a portion thereof, it did not suffer an impairment or decrease in
value, rendering the award of consequential damages nugatory. Furthermore, petitioner claims that
contrary to the RTC’s instruction, transfer taxes, in the nature of Capital Gains Tax and Documentary
Stamp Tax, necessary for the transfer of the subject property from the name of the respondent to that of
the petitioner are liabilities of respondent and not petitioner.

The petition is partly meritorious.

At the outset, it must be noted that the RTC’s reliance on National Power Corporation v. Angas is
misplaced for the same has already been overturned by our more recent ruling in Republic v. Court of
Appeals,16 wherein we held that the payment of just compensation for the expropriated property amounts
to an effective forbearance on the part of the State, to wit:chanRoblesvirtualLawlibrary

Aside from this ruling, Republic notably overturned the Court’s previous ruling in National
Power Corporation v. Angas which held that just compensation due for expropriated properties
is not a loan or forbearance of money but indemnity for damages for the delay in payment;
since the interest involved is in the nature of damages rather than earnings from loans, then
Art. 2209 of the Civil Code, which fixes legal interest at 6%, shall apply.

In Republic, the Court recognized that the just compensation due to the landowners for their
expropriated property amounted to an effective forbearance on the part of the State. Applying
the Eastern Shipping Lines ruling, the Court fixed the applicable interest rate at 12% per annum,
computed from the time the property was taken until the full amount of just compensation was paid, in
order to eliminate the issue of the constant fluctuation and inflation of the value of the currency over time.
In the Court’s own words:
The Bulacan trial court, in its 1979 decision, was correct in imposing interest[s] on the zonal value of the
property to be computed from the time petitioner instituted condemnation proceedings and "took" the
property in September 1969. This allowance of interest on the amount found to be the value of the
property as of the time of the taking computed, being an effective forbearance, at 12% per annum should
help eliminate the issue of the constant fluctuation and inflation of the value of the currency over time.
We subsequently upheld Republic’s 12% per annum interest rate on the unpaid expropriation
compensation in the following cases: Reyes v. National Housing Authority, Land Bank of the Philippines v.
Wycoco, Republic v. Court of Appeals, Land Bank of the Philippines v. Imperial, Philippine Ports Authority
v. Rosales-Bondoc, and Curata v. Philippine Ports Authority.17cralawlawlibrary

Effectively, therefore, the debt incurred by the government on account of the taking of the property
subject of an expropriation constitutes a forbearance18 which runs contrary to the trial court’s opinion that
the same is in the nature of indemnity for damages calling for the application of Article 2209 of the Civil
Code. Nevertheless, in line with the recent circular of the Monetary Board of the Bangko Sentral ng
Pilipinas (BSP-MB) No. 799, Series of 2013, effective July 1, 2013, the prevailing rate of interest for loans
or forbearance of money is six percent (6%) per annum, in the absence of an express contract as to such
rate of interest.

Notwithstanding the foregoing, We find that the imposition of interest in this case is unwarranted in view
of the fact that as evidenced by the acknowledgment receipt 19 signed by the Branch Clerk of Court,
petitioner was able to deposit with the trial court the amount representing the zonal value of the property
before its taking. As often ruled by this Court, the award of interest is imposed in the nature of damages
for delay in payment which, in effect, makes the obligation on the part of the government one of
forbearance to ensure prompt payment of the value of the land and limit the opportunity loss of the
owner.20 However, when there is no delay in the payment of just compensation, We have not hesitated in
deleting the imposition of interest thereon for the same is justified only in cases where delay has been
sufficiently established.21cralawred

The records of this case reveal that petitioner did not delay in its payment of just compensation as it had
deposited the pertinent amount in full due to respondent on January 24, 2011, or four (4) months before
the taking thereof, which was when the RTC ordered the issuance of a Writ of Possession and a Writ of
Expropriation on May 27, 2011. The amount deposited was deemed by the trial court to be just, fair, and
equitable, taking into account the well-established factors in assessing the value of land, such as its size,
condition, location, tax declaration, and zonal valuation as determined by the BIR. Considering, therefore,
the prompt payment by the petitioner of the full amount of just compensation as determined by the RTC,
We find that the imposition of interest thereon is unjustified and should be deleted.

Similarly, the award of consequential damages should likewise be deleted in view of the fact that the
entire area of the subject property is being expropriated, and not merely a portion thereof, wherein such
remaining portion suffers an impairment or decrease in value, as enunciated in Republic of the Philippines
v. Bank of the Philippine Islands,22 thus:chanRoblesvirtualLawlibrary

x x x The general rule is that the just compensation to which the owner of the condemned property is
entitled to is the market value. Market value is that sum of money which a person desirous but not
compelled to buy, and an owner willing but not compelled to sell, would agree on as a price to be paid by
the buyer and received by the seller. The general rule, however, is modified where only a part of a
certain property is expropriated. In such a case, the owner is not restricted to compensation
for the portion actually taken, he is also entitled to recover the consequential damage, if any,
to the remaining part of the property.

xxxx

No actual taking of the building is necessary to grant consequential damages. Consequential damages
are awarded if as a result of the expropriation, the remaining property of the owner suffers
from an impairment or decrease in value.The rules on expropriation clearly provide a legal basis for
the award of consequential damages. Section 6 of Rule 67 of the Rules of Court provides:
x x x The commissioners shall assess the consequential damages to the property not taken and
deduct from such consequential damages the consequential benefits to be derived by the owner from the
public use or public purpose of the property taken, the operation of its franchise by the corporation or the
carrying on of the business of the corporation or person taking the property. But in no case shall the
consequential benefits assessed exceed the consequential damages assessed, or the owner be deprived of
the actual value of his property so taken.
In B.H. Berkenkotter & Co. v. Court of Appeals, we held that:
To determine just compensation, the trial court should first ascertain the market value of the property, to
which should be added the consequential damages after deducting therefrom the consequential benefits
which may arise from the expropriation. If the consequential benefits exceed the consequential damages,
these items should be disregarded altogether as the basic value of the property should be paid in every
case.23cralawred
cralawlawlibrary

Considering that the subject property is being expropriated in its entirety, there is no remaining portion
which may suffer an impairment or decrease in value as a result of the expropriation. Hence, the award of
consequential damages is improper.

Anent petitioner’s contention that it cannot be made to pay the value of the transfer taxes in the nature of
capital gains tax and documentary stamp tax, which are necessary for the transfer of the subject property
from the name of the respondent to that of the petitioner, the same is partly meritorious.

With respect to the capital gains tax, We find merit in petitioner’s posture that pursuant to Sections 24(D)
and 56(A)(3) of the 1997 National Internal Revenue Code (NIRC), capital gains tax due on the sale of real
property is a liability for the account of the seller, to wit:chanRoblesvirtualLawlibrary

Section 24. Income Tax Rates –

xxxx

(D) Capital Gains from Sale of Real Property. –

(1) In General. – The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on
the gross selling price or current fair market value as determined in accordance with Section 6(E) of this
Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the
sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of conditional sales, by individuals, including estates and
trusts: Provided, That the tax liability, if any, on gains from sales or other disposition of real property to
the government or any of its political subdivisions or agencies or to government-owned or controlled
corporations shall be determined either under Section 24(A)or under this Subsection, at the option of the
taxpayer.chanrobleslaw

xxxx
Section 56. Payment and Assessment of Income Tax for Individuals and Corporations. –
(A) Payment of Tax –

xxxx

(3) Payment of Capital Gains Tax. - The total amount of tax imposed and prescribed under Section 24 (c),
24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return prescribed therefor is
filed by the person liable thereto: Provided, That if the seller submits proof of his intention to avail himself
of the benefit of exemption of capital gains under existing special laws, no such payments shall be
required : Provided, further, That in case of failure to qualify for exemption under such special laws and
implementing rules and regulations, the tax due on the gains realized from the original transaction shall
immediately become due and payable, subject to the penalties prescribed under applicable provisions of
this Code: Provided, finally, That if the seller, having paid the tax, submits such proof of intent within six
(6) months from the registration of the document transferring the real property, he shall be entitled to a
refund of such tax upon verification of his compliance with the requirements for such exemption.
cralawlawlibrary

Thus, it has been held that since capital gains is a tax on passive income, it is the seller, not the buyer,
who generally would shoulder the tax.24 Accordingly, the BIR, in its BIR Ruling No. 476-2013, dated
December 18, 2013, constituted the DPWH as a withholding agent to withhold the six percent (6%) final
withholding tax in the expropriation of real property for infrastructure projects. As far as the government
is concerned, therefore, the capital gains tax remains a liability of the seller since it is a tax on the seller's
gain from the sale of the real estate.25cralawred
As to the documentary stamp tax, however, this Court finds inconsistent petitioner’s denial of liability to
the same. Petitioner cites Section 196 of the 1997 NIRC as its basis in saying that the documentary stamp
tax is the liability of the seller, viz.:chanRoblesvirtualLawlibrary

SECTION 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property. - On all conveyances,
deeds, instruments, or writings, other than grants, patents or original certificates of adjudication issued by
the Government, whereby any land, tenement or other realty sold shall be granted, assigned, transferred
or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by
such purchaser or purchasers, there shall be collected a documentary stamp tax, at the rates herein below
prescribed, based on the consideration contracted to be paid for such realty or on its fair market value
determined in accordance with Section 6(E) of this Code, whichever is higher: Provided, That when one of
the contracting parties is the Government, the tax herein imposed shall be based on the actual
consideration:
(a) When the consideration, or value received or contracted to be paid for such realty, after making proper
allowance of any encumbrance, does not exceed One thousand pesos (P1,000), Fifteen pesos (P15.00).

(b) For each additional One thousand pesos (P1,000), or fractional part thereof in excess of One thousand
pesos (P1,000) of such consideration or value, Fifteen pesos (P15.00).
When it appears that the amount of the documentary stamp tax payable hereunder has been reduced by
an incorrect statement of the consideration in any conveyance, deed, instrument or writing subject to such
tax the Commissioner, provincial or city Treasurer, or other revenue officer shall, from the assessment
rolls or other reliable source of information, assess the property of its true market value and collect the
proper tax thereon.cralawlawlibrary

Yet, a perusal of the provision cited above does not explicitly impute the obligation to pay the
documentary stamp tax on the seller. In fact, according to the BIR, all the parties to a transaction are
primarily liable for the documentary stamp tax, as provided by Section 2 of BIR Revenue Regulations No.
9-2000, which reads:26cralawred

SEC. 2. Nature of the Documentary Stamp Tax and Persons Liable for the Tax. –

(a) In General. - The documentary stamp taxes under Title VII of the Code is a tax on certain
transactions. It is imposed against "the person making, signing, issuing, accepting, or
transferring" the document or facility evidencing the aforesaid transactions. Thus, in general, it
may be imposed on the transaction itself or upon the document underlying such act. Any of the
parties thereto shall be liable for the full amount of the tax due: Provided, however, that as
between themselves, the said parties may agree on who shall be liable or how they may share on the cost
of the tax.

(b) Exception. - Whenever one of the parties to the taxable transaction is exempt from the tax imposed
under Title VII of the Code, the other party thereto who is not exempt shall be the one directly liable for
the tax.27cralawlawlibrary

As a general rule, therefore, any of the parties to a transaction shall be liable for the full amount of the
documentary stamp tax due, unless they agree among themselves on who shall be liable for the same.

In this case, there is no agreement as to the party liable for the documentary stamp tax due on the sale of
the land to be expropriated. But while petitioner rejects any liability for the same, this Court must take
note of petitioner’s Citizen’s Charter, 28 which functions as a guide for the procedure to be taken by the
DPWH in acquiring real property through expropriation under RA 8974. The Citizen’s Charter, issued
by petitioner DPWH itself on December 4, 2013, explicitly provides that the documentary stamp
tax, transfer tax, and registration fee due on the transfer of the title of land in the name of the
Republic shall be shouldered by the implementing agency of the DPWH, while the capital gains
tax shall be paid by the affected property owner. 29 Thus, while there is no specific agreement
between petitioner and respondent, petitioner’s issuance of the Citizen’s Charter serves as its notice to the
public as to the procedure it shall generally take in cases of expropriation under RA 8974. Accordingly, it
will be rather unjust for this Court to blindly accede to petitioner’s vague rejection of liability in the face of
its issuance of the Citizen’s Charter, which contains a clear and unequivocal assumption of accountability
for the documentary stamp tax. Had petitioner provided this Court with more convincing basis, apart from
a mere citation of an indefinite provision of the 1997 NIRC, showing that it should be respondent-seller
who shall be liable for the documentary stamp tax due on the sale of the subject property, its rejection of
the payment of the same could have been sustained.

WHEREFORE, premises considered, the instant petition is PARTIALLY GRANTED. The Decision and
Order, dated November 15, 2013 and March 10, 2014, respectively, of the Regional Trial Court,
Valenzuela City, Branch 270, in Civil Case No. 140-V-10 are hereby MODIFIED, in that the imposition of
interest on the payment of just compensation as well as the award of consequential damages are deleted.
In addition, respondent Arlene R. Soriano is ORDERED to pay for the capital gains tax due on the transfer
of the expropriated property, while the documentary stamp tax, transfer tax, and registration fee shall be
for the account of petitioner.

SO ORDERED
G.R. No. 170389 October 20, 2010

COMMISSION OF INTERNAL REVENUE, Petitioner,

vs.
AQUAFRESH SEAFOODS, INC., Respondent.

DECISION

PERALTA, J.:

Before this Court is a petition for review on certiorari,1 under Rule 45 of the Rules of Court, seeking to set aside the
November 9, 2005 Decision2 of the Court of Tax Appeals (CTA) En Banc in CTA-E.B. No. 77. The CTA En Bancaffirmed
the December 22, 2004 Decision of the CTA First Division.

The facts of the case are as follows:

On June 7, 1999, respondent Aquafresh Seafoods Inc. sold to Philips Seafoods, Inc. two parcels of land, including
improvements thereon, located at Barrio Banica, Roxas City, for the consideration of Three Million One Hundred
Thousand Pesos (Php 3,100, 000.00). Said properties were covered under Transfer Certificate of Titles Nos. T-21799 and
T-21804.

Respondent then filed a Capital Gains Tax Return/Application for Certification Authorizing Registration and paid the
amount of Php186,000.00, representing the Capital Gains Tax (CGT) and the amount of Php46,500.00, representing the
Documentary Stamp Tax (DST) due from the said sale. Subsequently, Revenue District Officer Gil G. Tabanda issued
Certificate Authorizing Registration No. 1071477.

The Bureau of Internal Revenue (BIR), however, received a report that the lots sold were undervalued for taxation
purposes. This prompted the Special Investigation Division (SID) of the BIR to conduct an occular inspection over the
properties. After the investigation, the SID concluded that the subject properties were commercial with a zonal value of
Php2,000.00 per square meter.

On September 15, 2000, Regional Director Leonardo Q. Sacamos (Director Sacamos) of the Revenue Region Iloilo City
sent two Assessment Notices apprising respondent of CGT and DST defencies in the sum of Php1,372,171.46 and
Php356,267.62, respectively. Director Sacamos relied on the findings of the SID that the subject properties were
commercial with a zonal valuation of Php2,000.00 per square meter.

On October 1, 2000, respondent sent a letter protesting the assessments made by Director Sacamos. On December 1,
2000, Director Sacamos denied respondent's protest for lack of legal basis. Respondent appealed, but the same was
denied with finality on February 13, 2002.

On March 19, 2002, respondent filed a petition for review3 before the CTA seeking the reversal of the denial of its protest.
The main thrust of respondent's petition was that the subject properties were located in Barrio Banica, Roxas, where the
pre-defined zonal value was Php650.00 per square meter based on the "Revised Zonal Values of Real Properties in the
City of Roxas under Revenue District Office No. 72 – Roxas City" (1995 Revised Zonal Values of Real Properties).
Respondent asserted that the subject properties were classified as "RR" or residential and not commercial. Respondent
argued that since there was already a pre-defined zonal value for properties located in Barrio Banica, the BIR officials had
no business re-classifying the subject properties to commercial.

On December 22, 2004, the CTA promulgated a Decision4 ruling in favor of respondent, the dispositive portion of which
reads:

IN VIEW OF THE FOREGOING, respondent's assessments for deficiency capital against tax and documentary stamp
taxes are hereby CANCELLED and SET ASIDE. x x x

SO ORDERED.5

Ruling in favor of respondent, the CTA opined that that the existing Revised Zonal Values in the City of Roxas should
prevail for purposes of determining respondent's tax liabilities, thus:
While respondent is given the authority to determine the fair market value of the subject properties for the purpose of
computing internal revenue taxes, such authority is not without restriction or limitation. The first sentence of Section
6(E) sets the limitation or condition in the exercise of such power by requiring respondent to consult with
competent appraisers both from private and public sectors. As there was no re-evaluation and no revision of the
zonal values of the subject properties in Roxas City at the time of the sale, respondent cannot unilaterally determine the
zonal values of the subject properties by invoking his powers of obtaining information and making assessments under
Sections 5 and 6 of the NIRC. The existing Revised Zonal Values of Real Properties in the City of Roxas shall
prevail for the purpose of determining the proper tax liabilities of petitioner.6

Petitioner Commissioner of Internal Revenue filed a Motion for Reconsideration, which was, however, denied by the CTA
in a Resolution7 dated April 4, 2005.

Petitioner then appealed to the CTA En Banc.

In a Decision dated November 9, 2005, the CTA En Banc dismissed petitioner's appeal, the dispositive portion of which
reads:

WHEREFORE, premises considered, the Petition for Review is DISMISSED for lack of merit.

SO ORDERED.8

The CTA En Banc ruled that the 1995 Revised Zonal Values of Real Properties should prevail. Said court relied on
Section 6 (E) of the National Internal Revenue Code (NIRC) which requires consultation from appraisers, from both the
public and private sectors, in fixing the zonal valuation of properties. The CTA En Banc held that petitioner failed to prove
any amendment effected on the 1995 Revised Zonal Values of Real Properties at the time of the sale of the subject
properties.

Hence, herein petition, with petitioner raising the following issues for this Court's resolution, to wit:

I.

WHETHER OR NOT THE REQUIREMENT OF CONSULTATION WITH COMPETENT APPRAISERS BOTH FROM THE
PRIVATE AND PUBLIC SECTORS IN DETERMINING THE FAIR MARKET VALUE OF THE SUBJECT LOTS IS
APPLICABLE IN THE CASE AT BAR.

II.

WHETHER OR NOT THE COURT OF TAX APPEALS EN BANC COMMITTED GRAVE ERROR IN APPLYING THE
FAIR MARKET VALUE BASED ON THE ZONAL VALUATION OF A RESIDENTIAL LAND AS TAX BASE IN THE
COMPUTATION OF CAPITAL GAINS TAX AND DOCUMENTARY STAMP TAX DEFICIENCIES OF RESPONDENT. 9

The petition is not meritorious. The issues being interrelated, this Court shall discuss the same in seriatim.

Under Section 27(D)(5) of the NIRC of 1997, a CGT of six (6%) percent is imposed on the gains presumed to have been
realized in the sale, exchange or disposition of lands and/or buildings which are not actively used in the business of a
corporation and which are treated as capital assets based on the gross selling price or fair market value as determined in
accordance with Section 6(E) of the NIRC, whichever is higher.

On the other hand, under Section 196 of the NIRC, DST is based on the consideration contracted to be paid or on its fair
market value determined in accordance with Section 6(E) of the NIRC, whichever is higher.

Thus, in determining the value of CGT and DST arising from the sale of a property, the power of the CIR to assess is
subject to Section 6(E) of the NIRC, which provides:

Section 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax
Administration and Enforcement. -

xxxx
(E) Authority of the Commissioner to Prescribe Real Property Values – The Commissioner is hereby authorized to divide
the Philippines into different zones or area and shall, upon consultation with competent appraisers both from the
private and public sectors, determine the fair market value of real properties located in each zone or area. For purposes
of computing internal revenue tax, the value of the property shall be, whichever is higher of:

(1) the fair market value as determined by the Commissioner; or

(2) the fair market value as shown in the schedule of values of the Provincial and City Assessors.

While the CIR has the authority to prescribe real property values and divide the Philippines into zones, the law is clear that
the same has to be done upon consultation with competent appraisers both from the public and private sectors. It is
undisputed that at the time of the sale of the subject properties found in Barrio Banica, Roxas City, the same were
classified as "RR," or residential, based on the 1995 Revised Zonal Value of Real Properties. Petitioner, thus, cannot
unilaterally change the zonal valuation of such properties to "commercial" without first conducting a re-evaluation of the
zonal values as mandated under Section 6(E) of the NIRC.

Petitioner argues, however, that the requirement of consultation with competent appraisers is mandatory only when it is
prescribing real property values – that is when a formulation or change is made in the schedule of zonal values. Petitioner
also contends that what it did in the instant case was not to prescribe the zonal value, but merely classify the same as
commercial and apply the corresponding zonal value for such classification based on the existing schedule of zonal
values in Roxas City.10

We disagree.

To this Court's mind, petitioner's act of re-classifying the subject properties from residential to commercial cannot be done
without first complying with the procedures prescribed by law. It bears to stress that ALL the properties in Barrio Banica
were classified as residential, under the 1995 Revised Zonal Values of Real Properties. Thus, petitioner's act of
classifying the subject properties involves a re-classification and revision of the prescribed zonal values.

In addition, Revenue Memorandum No. 58-69 provides for the procedures on the establishment of the zonal values of real
properties, viz.:

(1) The submission or review by the Revenue District Offices Sub-Technical Committee of the schedule of
recommended zonal values to the TCRPV;

(2) The evaluation by TCRPV of the submitted schedule of recommended zonal values of real properties;

(3) Except in cases of correction or adjustment, the TCRPV finalizes the schedule and submits the same to the
Executive Committee on Real Property Valuation (ECRPV);

(3) Upon approval of the schedule of zonal values by the ECRPV, the same is embodied in a Department Order
for implementation and signed by the Secretary of Finance. Thereafter, the schedule takes effect (15) days after
its publication in the Official Gazette or in any newspaper of general circulation.

Petitioner failed to prove that it had complied with Revenue Memorandum No. 58-69 and that a revision of the 1995
Revised Zonal Values of Real Properties was made prior to the sale of the subject properties. Thus, notwithstanding
petitioner's disagreement to the classification of the subject properties, the same must be followed for purposes of
computing the CGT and DST. It bears stressing, and as observed by the CTA En Banc, that the 1995 Revised Zonal
Values of Real Properties was drafted by petitioner, BIR personnel, representatives from the Department of Finance,
National Tax Research Center, Institute of Philippine Real Estate Appraisers and Philippine Association of Realtors
Board, which duly satisfied the requirement of consultation with public and private appraisers.11

Petitioner contends, nevertheless, that its act of classifying the subject properties based on actual use was in accordance
with guidelines number 1-b and 2 as set forth in "Certain Guidelines in the Implementation of Zonal Valuation of Real
Properties for RDO 72 Roxas City" (Zonal Valuation Guidelines). 12

Section 1 (b) of the Zonal Valuation Guidelines reads:

1. No zonal value has been prescribed for a particular classification of real property.
Where in the approved schedule of zonal values for a particular barangay -

xxxx

b) No zonal value has been prescribed for a particular classification of real property in one barangay, the zonal value
prescribed for the same classification of real property located in an adjacent barangay of similar conditions shall be used.

Section 1 (b) does not apply to the case at bar for the simple reason that said proviso operates only when "no zonal
valuation has been prescribed." The properties located in Barrio Banica, Roxas City were already subject to a zonal
valuation, a fact which even petitioner has admitted in its petition, thus:

It must be noted that under the schedule of zonal values, Barangay Banica, where the subject lots are situated, has a
single classification only – that of a residential area. Accordingly, it has a prescribed zonal value of Php650.00 per square
meter.13

Petitioner, however, also relies on Section 2 (a) of the Zonal Valuation Guidelines, to justify its action. Said section states:

2. Predominant Use of Property.

a) All real properties, regardless of actual use, located in a street/barangay zone, the use of which are predominantly
commercial shall be classified as "Commercial" for purposes of zonal valuation.

In BIR Ruling No. 041-2001, issued on September 18, 2001, the BIR tackled the application of a provision which is
identical to Section 2 (a) of the Zonal Valuation Guidelines. BIR Ruling No. 041-2001 involved a request by the Iglesia Ni
Cristo that the re-computation of CGT and DST based on the predominant use of the real properties located at Mindanao
Avenue, Quezon City, be set aside. In said case, the Iglesia ni Cristo paid the CGT and DST based on the zonal value of
residential lots in Quezon City. The Revenue District Officer, however, ordered a re-computation of the CGT and DST
based on the ground that the real property is located in a predominantly commercial area and must be classified as
commercial for purposes of zonal valuation. The BIR ruled in favor of Iglesia ni Cristo stating that "Certain Guidelines in
the Implementation of Zonal Valuation of Real Properties for RDO No. 38, applying the predominant use of property as
the basis for the computation of the Capital Gains and Documentary Stamp Taxes, shall apply only when the real
property is located in an area or zone where the properties are not yet classified and their respective zonal
valuation are not yet determined." The pertinent portion of BIR Ruling No. 041-2001 reads:

In reply, please be informed that this Office finds your request meritorious. The number 2 guideline laid down in Certain
Guidelines in the implementation of Zonal valuation of Real Properties for RDO No. 38- North Quezon City xxx does not
apply to this case.

Number 2 of the CERTAIN GUIDELINES IN THE IMPLEMENTATION OF ZONAL VALUATION OF REAL PROPERTIES
FOR RD NO. 38 – NORTH QUEZON CITY" provides:

"2. PREDOMINANT USE OF PROPERTY:

ALL REAL PROPERTIES REGARDLESS OF ACTUAL USE, LOCATED IN A STREET/BARANGAY ZONE, THE USE
OF WHICH ARE PREDOMINANTLY COMMERCIAL SHALL BE CLASSIFIED AS 'COMMERICIAL'FOR PURPOSES
OF ZONAL VALUATION."

It is the considered opinion of this Office that the guideline applies when the real property is located in an area or
zone where the properties are not yet classified and their respective zonal valuation are not yet determined.

In the instant case, however, the classification and valuation of the properties located in Mindanao Avenue,
Bagong Bantay, have already been determined. Under Department of Finance Order No. 6-2000, the properties along
Mindanao Avenue had already been classified as residential and commercial. The zonal valuation thereof had already
been determined. x x x Therefore, the Revenue District Officer of RDO No. 38 has no discretion to determine the
classification or valuation of the properties located in the pertinent area. The computation of the capital gains and
documentary stamp taxes shall be based on the zonal of residential properties located at Mindanao Avenue, Bago
Bantay, Quezon City.141avvphil
Based on the foregoing, this Court need not belabour on the applicability of Section 2 (a), as the BIR itself has already
ruled that the same shall apply only when the real property is located in an area or zone where the properties are not yet
classified and their respective zonal valuation are not yet determined. As mentioned earlier, the subject properties were
already part of the 1995 Revised Zonal Value of Real Properties which classified the same as residential with a zonal
value of Php650.00 per square meter; thus, Section 2 (a) clearly has no application.

This Court agrees with the observation of the CTA that "zonal valuation was established with the objective of having an
‘efficient tax administration by minimizing the use of discretion in the determination of the tax based on the part of the
administrator on one hand and the taxpayer on the other hand.’"15 Zonal value is determined for the purpose of
establishing a more realistic basis for real property valuation. Since internal revenue taxes, such as CGT and DST, are
assessed on the basis of valuation, the zonal valuation existing at the time of the sale should be taken into account.16

If petitioner feels that the properties in Barrio Banica should also be classified as commercial, then petitioner should work
for its revision in accordance with Revenue Memorandum Order No. 58-69. The burden was on petitioner to prove that the
classification and zonal valuation in Barrio Banica have been revised in accordance with the prevailing memorandum. In
the absence of proof to the contrary, the 1995 Revised Zonal Values of Real Properties must be followed.

Lastly, this Court takes note of the wording of Section 2 (b) of the Zonal Valuation Guidelines, to wit:

2. Predominant Use of Property.

b) The predominant use of other classification of properties located in a street/barangay zone, regardless of actual
use shall be considered for purposes of zonal valuation.

Based thereon, this Court rules that even assuming arguendo that the subject properties were used for commercial
purposes, the same remains to be residential for zonal value purposes. It appears that actual use is not considered for
zonal valuation, but the predominant use of other classification of properties located in the zone. Again, it is undisputed
that the entire Barrio Banica has been classified as residential.

WHEREFORE, premises considered, the petition is denied. The November 9, 2005 Decision of the Court of Tax
Appeals En Banc, in CTA-E.B. No. 77, is hereby AFFIRMED.

SO ORDERED.
G.R. No. 138919 May 2, 2006

FAR EAST BANK AND TRUST COMPANY as Trustee of Various Retirement Funds, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and THE COURT OF APPEALS, Respondents.

DECISION

TINGA, J.:

The present petition evokes some degree of natural sympathy for the petitioner, as it seeks the refund of taxes wrongfully
paid on the income earned by several retirement funds of private employees held by petitioner in their behalf. The steps
undertaken by petitioner to seek the refund were woefully error-laden, yet their claims still received due solicitation from
this Court. But in the end, the errors committed are just too multiple as well as consequential, and the claim for refund not
sufficiently proven. Impulses may suggest that we reverse and grant, but logic and the law dictate that the Court affirm the
assailed rulings of the Court of Appeals and the Court of Tax Appeals.

Before us is a Petition for Review on Certiorari filed by petitioner Far East Bank & Trust Company, assailing the
Resolutions of the Court of Appeals Fifth Division dated 12 January 1999 and 3 June 1999. 1 The Resolution of 12 January
1999 dismissed outright, on procedural grounds, a petition for review filed by petitioner questioning a Decision of the
Court of Tax Appeals dated 11 September 1998.2

While the petition before us primarily seeks the review of the procedural grounds on which the petition before the Court of
Appeals was denied, it stems from a claim for refund lodged by petitioner against the Commissioner of Internal Revenue
(CIR) on taxes on interest income withheld and paid to the CIR for the four (4) quarters of 1993, arising from investments
derived from money market placements, bank deposits, deposit substitute instruments and government securities made
by petitioner as the trustee of various retirement funds.

Petitioner is the trustee of various retirement plans established by several companies for its employees. As trustee of the
retirement plans, petitioner was authorized to hold, manage, invest and reinvest the assets of these plans. 3Petitioner
utilized such authority to invest these retirement funds in various money market placements, bank deposits, deposit
substitute instruments and government securities. These investments necessarily earned interest income. Petitioner’s
claim for refund centers on the tax withheld by the various withholding agents, and paid to the CIR for the four (4) quarters
of 1993, on the aforementioned interest income. It is alleged that the total final withholding tax on interest income paid for
that year amounted to P6,049,971.83.1avvphil.net4

On four dates, 12 May 1993, 16 August 1993, 31 January 1994, and 29 April 1994, petitioner filed its written claim for
refund with the Bureau of Internal Revenue (BIR) for the first, second, third and fourth quarters of 1993, respectively.
Petitioner cited this Court’s "precedent setting" decision in Commissioner of Internal Revenue v. Court of
Appeals,5 promulgated on 23 March 1992, said case holding that employees’ trusts are exempted by specific mandate of
law from income taxation. Nonetheless, the claims for refund were denied.

By this time, petitioner already had a pending petition before the Court of Tax Appeals (CTA), docketed as CTA Case No.
4848, and apparently involving the same legal issue but a previous taxable period. Hoping to comply with the two (2)-year
period within which to file an action for refund under Section 230 of the then Tax Code, petitioner filed a Motion to Admit
Supplemental Petition6 in CTA Case No. 4848 on 28 April 1995, seeking to include in that case the tax refund claimed for
the year 1993. However, the CTA denied the admission of the Supplemental Petition in a Resolution dated 25 August
1995.7 The CTA reasoned then that CTA Case No. 4848 had already been pending for more than two and a half (2 ½)
years, and the admission of the supplemental petition, with a substantial enlargement of petitioner’s original claim for
refund, would further delay the proceedings, causing as it would, an effective change in the cause of action. Nonetheless,
the CTA advised that petitioner could instead file a separate petition for review for the refund of the withholding taxes paid
in 1993.8

Petitioner decided to follow the CTA’s advice, and on 9 October 1995, it filed another petition for review with the CTA,
docketed as CTA Case No. 5292, concerning its claim for refund for the year 1993. The CIR posed various defenses,
among them, that the claim for refund had already prescribed.9 Trial ensued.

On 11 September 1998, the CTA promulgated its decision in CTA Case No. 5292, denying the claim for refund for the
year 1993. While the CTA noted that the income from employees’ trust funds were exempt from income taxes, the claims
for refund had already prescribed insofar as they covered the first, second and third quarters of 1993, as well as from the
period of 1 October to 8 October 1993. The CTA so ruled considering that the petition before it was filed only on 9 October
1995, and thus, only those claims that arose after 9 October 1993 could be considered in light of the two (2)-year
prescriptive period for the filing of a judicial claim for refund from the date of payment of the tax, as provided in Section
230 of the Tax Code.10

As to the claim for refund covering the period 9 October 1993 up to 31 December 1993, the CTA likewise ruled that such
could not be granted, the evidence being insufficient to establish the fact "that the money or assets of the funds were
indeed used or placed in money market placements, bank deposits, other deposit substitute instruments and government
securities, more particularly treasury bills." The CTA noted that petitioner merely submitted as its evidence copies of the
following documents: the list of the various funds; the schedule of taxes withheld on a quarterly basis in 1993; the written
claims for refund; the BIR Rulings on the various Retirement Plans; the trust agreements of the various retirement plans;
and certifications of the Accounting Department of petitioner, Citibank, and the Bangko Sentral ng Pilipinas as to the taxes
that they respectively withheld.11

The CTA faulted petitioner for failing to submit such necessary documentary proof of transactions, such as confirmation
receipts and purchase orders that would ordinarily show the fact of purchase of treasury bills or money market placements
by the various funds, together with their individual bank account numbers. These various documents which petitioner
failed to submit were characterized as "the best evidence on the participation of the funds, and without them, there is no
way for this Court to verify the actual involvement of the funds in the alleged investment in treasury bills and money
market placements."12 The CTA also held as insufficient for such purposes the certifications issued by Citibank, BSP, and
petitioner’s own Accounting Department, considering that the aggregate amount of the final withholding taxes to which
they attest totalled more than P40,000,000.00, in comparison to the present claims of only around P6,000,000.00. The
CTA thus concluded that such certifications included non-tax exempt or otherwise taxable transactions, the sums of which
were conglomerated with the amount that may have actually been refundable.

Petitioner filed a Motion for Reconsideration and/or New Trial, which the CTA denied in a Resolution dated 4 December
1998.13 Petitioner then filed a Petition for Review under Rule 43 with the Court of Appeals. However, this petition was
denied outright by the appellate court in its Resolution dated 12 January 1999. The Court of Appeals held that petitioner
had failed to observe the requirement, under Section 2, Rule 42 of the 1997 Rules of Civil Procedure that the petition
should be accompanied by other material portions of the record as would support the allegations of the petition. The Court
of Appeals particularly mentioned the following documents omitted by the petitioner in its petition: the Supplemental
Petition, the CTA Resolution denying the admission of the Supplemental Petition, the new Petition filed with the CTA, and
the Motion for Reconsideration and/or New Trial.14

Petitioner moved for reconsideration of the adverse decision of the Court of Appeals, attaching to its motion the required
certified copies of the cited documents. Nonetheless, the Court of Appeals denied the motion for reconsideration through
a Resolution dated 3 June 1999, holding that the belated compliance did not cure the defect of the petition. Moreover, the
Court of Appeals also noted that it had taken a "closer look at the petition" and on that basis concluded that the CTA
Decision contained no reversible error.15

Hence, the present petition, which we deny.

Petitioner argues that it was error on the part of the Court of Appeals to have dismissed its petition "on a mere
technicality."16 Yet the dismissal engaged in by the Court of Appeals on procedural grounds is wholly sanctioned by the
relevant provisions of the Rules of Court. Section 6 of Rule 43, 1997 Rules of Civil Procedure, then governing the
procedure of appeals from decisions of the CTA to the Court of Appeals, 17 explicitly provides that the petition for review be
accompanied by "certified true copies of such material portions of the record referred to [in the petition] and other
supporting papers". Under Section 7, Rule 43, the failure to attach such documents which should accompany the petition
is sufficient ground for the dismissal of the petition.

It should be remembered that it is only when the petition has been given due course, after a prima facie finding that the
CTA had committed errors of fact or law that would warrant reversal18, that the case record would be transmitted from the
court of origin to the Court of Appeals.19 Clearly, upon the filing of the petition, the appellate court would have no
documentary basis to discern whether the required prima facie standard has been met except the petition itself and the
documents that accompany it. While the submissions in the petition may refer to other documents in the record, or may
even quote at length from those documents, the Court of Appeals would have no way to ascertain the veracity of the
submissions unless the certified true copies of these documents are attached to the petition itself.

Thus, the requirement that certified true copies of such portions of the record referred to in the petition be attached is not
a mere technicality that can be overlooked with ease, but an essential requisite for the determination of prima facie basis
for giving due course to the petition. Thus, it does not constitute error in law when the Court of Appeals dismissed the
petition on such ground. Moreover, while the court a quo is capacitated to give cognizance to the belated compliance
attempted by petitioner, acquiescence to such belated compliance is a matter of sound discretion on the part of the lower
court, and one not ordinarily disturbed by the Court.

Even assuming that the procedural errors may be overlooked, we still agree with the Court of Appeals in holding in the
Resolution of 3 June 1999 that the CTA committed no reversible error in its assailed decision.

We hold, as the CTA did, that the exemption from income tax of income from employees’ trusts still stands. The Court had
first recognized such exemption in the aforementioned CIR v. Court of Appeals20 case, arising as it did from the
enactment of Republic Act No. 4917 which granted exemption from income tax to employees’ trusts. 21 The same
exemption was provided in Republic Act No. 8424, the Tax Reform Act of 1997, and may now be found under Section
60(B) of the present National Internal Revenue Code. Admittedly, such interest income of the petitioner for 1993 was not
subject to income tax.

Still, petitioner did pay the income tax it was not liable for when it withheld such tax on interest income for the year 1993.
Such taxes were erroneously assessed or collected, and thus, Section 230 of the National Internal Revenue Code then in
effect comes into full application. The provision reads:

SEC. 230. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be maintained in any court for
the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected without authority or of any sum alleged to have been
excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid
under protest or duress.

In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment
of the tax or penalty regardless of any supervening cause that may arise after payment: 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. (emphasis supplied)

The CTA noted that since the petition for review was only filed on 9 October 1995, petitioner could no longer claim the
refund of such tax withheld for the period of January to 8 October 1995, the two (2)-year prescriptive period having
elapsed. Petitioner submits that the two (2)-year prescriptive period should be reckoned from the date of its filing of the
Supplemental Petition on 28 April 1995, not from the filing of its new petition for review after the Supplemental Petition
was denied.22 Even granting that this should be the case, such argument would still preclude the refund of taxes
wrongfully paid from January to 27 April 1993, the two (2)-year prescriptive period for those taxes paid then having
already become operative.

Yet could the two (2)-year prescriptive period for the refund of erroneously paid taxes be deemed tolled by the filing of the
Supplemental Petition? Petitioner argues that Section 230 of the then Tax Code does not specify the form in which the
judicial claim should be made. That may be so, but it does not follow that the two (2)-year period may be suspended by
the filing of just any judicial claim with any court. For example, the prescriptive period to claim for the refund of corporate
income tax paid by a Makati-based corporation cannot be suspended by the filing of a complaint with the Municipal Circuit
Trial Court of Sorsogon. At the very least, such judicial claim should be filed with a court which would properly have
jurisdiction over the action for the refund.

In this case, there is no doubt that the CTA has jurisdiction over actions seeking the refund of income taxes erroneously
paid. But it should be borne in mind that petitioner initially sought to bring its claim for refund for the taxes paid in 1993
through a supplemental petition in another case pending before the CTA, and not through an original action. The
admission of supplemental pleadings, including supplemental complaints, does not arise as a matter of right on the
petitioner, but remains in the sound discretion of the court, which is well within its right to deny the admission of the
pleading. Section 6, Rule 10 of the 1997 Rules of Civil Procedure, governing supplemental pleadings, is clear that the
court only "may" admit the supplemental pleading, and is thus not obliged to do so.

It is only upon the admission by the court of the supplemental complaint that it may be deem to augment the original
complaint. Until such time, the court acquires no jurisdiction over such new claims as may be raised in the supplemental
complaint. Assuming that the CTA erred in refusing to admit the Supplemental Petition, such action is now beyond the
review of this Court, the order denying the same having long lapsed into finality, and it appearing that petitioner did not
attempt to elevate such denial for judicial review with the proper appellate court.
We thus cannot treat the Supplemental Petition as having any judicial effect. It cannot even be deemed as having been
filed, the CTA refusing to admit the same. Moreover, the CTA could not have acquired jurisdiction over the causes of
action stated in the Supplemental Petition by virtue of the same pleading owing to that court’s non-admission of that
complaint. The CTA acquired jurisdiction over the claim for refund for taxes paid by petitioner in 1993 only upon the filing
of the new Petition for Review on 9 October 1995.

Yet, let us assume again, this time, that the filing of the Supplemental Petition could have tolled the two (2)-year
prescriptive period insofar as the 1993 taxes paid after 28 April 1993 were concerned. There may even be cause to
entertain this assumption, considering that this two (2)-year prescriptive period is not jurisdictional and may be suspended
under exceptional circumstances.23 Yet a closer look at the case does not indicate the presence of such exceptional
circumstances, but instead affirm that the petition is still bereft of merit.

The CTA evinced palpable discomfort over the sufficiency of the evidence presented by petitioner to establish its claim for
refund. It noted as follows:

As regards the third issue, this Court is convinced that the evidence of the petitioner for the remaining portion of the claim
for the fourth quarter of 1993 is insufficient to establish the fact that the money or assets of the funds were indeed used or
placed in money market placements, bank deposits, other deposit substitute instruments and government securities, more
particularly treasury bills.

To prove its case, petitioner merely submitted copies of the following documents, namely:

Exhibit

1. List of the various funds A

2. Schedule of taxes withheld on B

a quarterly basis in 1993

3. Written claims for refund C-C4

D-D4

E-E4

F-F4

4. BIR Rulings on the various G-Y

Retirement Plans at bar

5. Trust agreements of the Z-RR

various Retirement Plans

6. Certifications of the Accounting SS-UU49,

Department of petitioner, Citibank, inclusive and Bangko Sentral ng Pilipinas on the taxes they respectively
withheld

It is to be noted from the above listed exhibits that documentary proof of transactions, such as confirmation receipts and
purchase orders which would ordinarily show the fact of purchase of treasury bills or money market placements by the
various funds, together with their individual bank account numbers, were not submitted in evidence by the petitioner. They
represent the best evidence on the participation of the funds and without them, there is no way for this Court to verify the
actual involvement of the funds in the alleged investment in the treasury bills and money market placements.24
Clarifications are in order. The cited passage may seem to implicitly assume that only such income earned by the
employees’ trusts from money market placements, bank deposits, other deposit substitute instruments and government
securities are exempted from income taxation. This is contrary to the provisions in Republic Act No. 4917, which then
stood as the governing provision on income tax exemption of employees’ trusts:

SECTION 1. Any provision of law to the contrary notwithstanding, the retirement benefits received by official and
employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan
maintained by the employer shall be exempt from all taxes and shall not be liable to attachment, levy or seizure by or
under any legal or equitable process whatsoever except to pay a debt of the official or employee concerned to the private
benefit plan or that arising from liability imposed in a criminal action; xxx

The tax exemption enjoyed by employees’ trusts was absolute, irrespective of the nature of the tax. There was no need
for the petitioner to particularly show that the tax withheld was derived from interest income from money market
placements, bank deposits, other deposit substitute instruments and government securities, since the source of the
interest income does not have any effect on the exemption enjoyed by employees’ trusts.

What has to be established though, as a matter of evidence, is that the amount sought to be refunded to petitioner
actually corresponds to the tax withheld on the interest income earned from the exempt employees’ trusts. The need to be
determinate on this point especially militates, considering that petitioner, in the ordinary course of its banking business,
earns interest income not only from its investments of employees’ trusts, but on a whole range of accounts which do not
enjoy the same broad exemption as employees’ trusts.

It clearly bothered the CTA that the submitted certifications from Citibank, the BSP, and petitioner’s own Accounting
Department attest only to the total amount of final withholding taxes remitted to the BIR. Evidently, the sum includes not
only such taxes withheld from the interest income of the exempt employees’ trusts, but also from other transactions
between petitioner and the BSP or Citibank which are not similarly exempt from taxation. For these certifications to hold
value, there is particular need for them to segregate such taxes withheld from the interest income of employees’ trusts,
and those withheld from other income sources. Otherwise, these certifications are ineffectual to establish the present
claim for refund.

The weak evidentiary value of these certifications proved especially fatal, as no other documentary evidence was
submitted to establish that the withholding agents actually withheld interest income earned from the employees’ trusts
administered by petitioner. The other evidence submitted by petitioner merely establishes the fact that it administered
various named employees trusts, the particular trust agreements between petitioner and these trusts, its requests for
refund from the BIR and their consequent denials. Petitioner did submit a schedule of taxes withheld on a quarterly basis
for the year 1993, but this document was apparently prepared by petitioner itself, and its self-serving nature precludes
from according it any authoritative value.

We agree with the CIR that petitioner should have instead submitted documentary proof of transactions, such as
confirmation receipts and purchase orders, as the best evidence on the participation of the funds from these employees
trusts. The appreciation of facts made by the CTA, which exercises particular expertise on the subject of tax, generally
binds this Court.25 It may not be so, as the CIR contends, that the proper purpose for presenting such documents is to
establish that the funds were actually invested "in treasury bills and money market placements", since the character of the
investments does not detract from the fact that all income earned by the employees’ trusts is exempt from taxation.
Instead, these documents are vital insofar as they establish the extent of the investments made by petitioner from the
employees’ trusts, as distinguished from those made from other account sources, and correspondingly, the amount of
taxes withheld from the interest income derived from these employees’ trusts alone.

Petitioner argues that the testimony of its witnesses establishes that it would be next to impossible to single out the
particular transactions involving exempt employees’ trusts, in view of the manner of lumping all the data in the reporting
procedures of the withholding agents, particularly concerning treasury bills. While that may be so, a necessary
consequence of the special exemption enjoyed alone by employees’ trusts would be a necessary segregation in the
accounting of such income, interest or otherwise, earned from those trusts from that earned by the other clients of
petitioner. The Court has no desire to impose unnecessarily pernickety documentary requirements in obtaining a valid tax
refund. Yet it cannot be escaped that the taxpayer needs to establish not only that the refund is justified under the law, but
also the correct amount that should be refunded. If the latter requisite cannot be ascertained with particularity, there is
cause to deny the refund, or allow it only to the extent of the sum that is actually proven as due. Tax refunds partake the
nature of tax exemptions and are thus construed strictissimi juris against the person or entity claiming the
exemption.26 The burden in proving the claim for refund necessarily falls on the taxpayer, and petitioner in this case failed
to discharge the necessary burden of proof.
One argument remains. It can be dispensed with briefly. Petitioner argues that the CTA should have granted its motion for
a new trial, which was premised on the claim that certain documents had been misplaced during the relocation of
petitioner’s headquarters, and were located only after the case was submitted for resolution. 27 Section 1, Rule 37 of the
1997 Rules of Civil Procedure does allow for a new trial on the ground that "newly discovered evidence, which [movant]
could not, with reasonable diligence, have discovered and produced at the trial, and which if presented would probably
alter the result". However, as the CTA pointed out in its 4 December 1998 Resolution, the case was submitted for
resolution with the CTA only in May of 1998, or more than two (2) years since the alleged transfer of headquarters by the
petitioner. The CTA also noted that during that time, petitioner "made no visible attempt to retrieve the documents or at
the very least, inform this Court of such problem".28 These observations sufficiently rebut the claim that the alleged newly
discovered evidence could not have been located with reasonable diligence.

It is tragic that the ultimate loss to be borne by the tardy claim for the refund would be not by the petitioner-bank, but the
hundreds of private employees whose retirement funds were reposed in petitioner’s trust. However, the damage was
sustained due to multiple levels of incompetence on the part of the petitioner which this Court cannot simply give sanction
to. Many of the so-called procedural hurdles could have been overlooked, even by this Court, but in the end, the claim for
tax refund was simply not proven with the particularity demanded of an action seeking to siphon off the nation’s
"lifeblood."

WHEREFORE, the petition is DENIED. Costs against petitioner.

SO ORDERED.
G.R. No. 162175 June 28, 2010

MIGUEL J. OSSORIO PENSION FOUNDATION, INCORPORATED, Petitioner,

vs.
COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE, Respondents.

DECISION

CARPIO, J.:

The Case

The Miguel J. Ossorio Pension Foundation, Incorporated (petitioner or MJOPFI) filed this Petition for Certiorari 1 with
Prayer for the Issuance of a Temporary Restraining Order and/or Writ of Preliminary Injunction to reverse the Court of
Appeals’ (CA) Decision2 dated 30 May 2003 in CA-G.R. SP No. 61829 as well as the Resolution3 dated 7 November 2003
denying the Motion for Reconsideration. In the assailed decision, the CA affirmed the Court of Tax Appeals’ (CTA)
Decision4 dated 24 October 2000. The CTA denied petitioner’s claim for refund of withheld creditable tax of ₱3,037,500
arising from the sale of real property of which petitioner claims to be a co-owner as trustee of the employees’ trust or
retirement funds.

The Facts

Petitioner, a non-stock and non-profit corporation, was organized for the purpose of holding title to and administering the
employees’ trust or retirement funds (Employees’ Trust Fund) established for the benefit of the employees of Victorias
Milling Company, Inc. (VMC).5 Petitioner, as trustee, claims that the income earned by the Employees’ Trust Fund is tax
exempt under Section 53(b) of the National Internal Revenue Code (Tax Code).

Petitioner alleges that on 25 March 1992, petitioner decided to invest part of the Employees’ Trust Fund to purchase a
lot6 in the Madrigal Business Park (MBP lot) in Alabang, Muntinlupa. Petitioner bought the MBP lot through
VMC.7Petitioner alleges that its investment in the MBP lot came about upon the invitation of VMC, which also purchased
two lots. Petitioner claims that its share in the MBP lot is 49.59%. Petitioner’s investment manager, the Citytrust Banking
Corporation (Citytrust),8 in submitting its Portfolio Mix Analysis, regularly reported the Employees’ Trust Fund’s share in
the MBP lot.9 The MBP lot is covered by Transfer Certificate of Title No. 183907 (TCT 183907) with VMC as the
registered owner.10

Petitioner claims that since it needed funds to pay the retirement and pension benefits of VMC employees and to
reimburse advances made by VMC, petitioner’s Board of Trustees authorized the sale of its share in the MBP lot.11

On 14 March 1997, VMC negotiated the sale of the MBP lot with Metropolitan Bank and Trust Company, Inc. (Metrobank)
for ₱81,675,000, but the consummation of the sale was withheld.12 On 26 March 1997, VMC eventually sold the MBP lot
to Metrobank. VMC, through its Vice President Rolando Rodriguez and Assistant Vice President Teodorico Escober,
signed the Deed of Absolute Sale as the sole vendor.

Metrobank, as withholding agent, paid the Bureau of Internal Revenue (BIR) ₱6,125,625 as withholding tax on the sale of
real property.

Petitioner alleges that the parties who co-owned the MBP lot executed a notarized Memorandum of Agreement as to the
proceeds of the sale, the pertinent provisions of which state:13

2. The said parcels of land are actually co-owned by the following:

Block 4, Lot 1 Covered by TCT No. 183907

% SQ.M. AMOUNT
MJOPFI 49.59% 450.00 ₱ 5,504,748.25
VMC 32.23% 351.02 3,578,294.70
 VFC 18.18% 197.98 2,018,207.30

3. Since Lot 1 has been sold for ₱81,675,000.00 (gross of 7.5% withholding tax and 3% broker’s commission, MJOPFI’s
share in the proceeds of the sale is ₱40,500,000.00 (gross of 7.5% withholding tax and 3% broker’s commission.
However, MJO Pension Fund is indebted to VMC representing pension benefit advances paid to retirees amounting to
₱21,425,141.54, thereby leaving a balance of ₱14,822,358.46 in favor of MJOPFI. Check for said amount of
₱14,822,358.46 will therefore be issued to MJOPFI as its share in the proceeds of the sale of Lot 1. The check
corresponding to said amount will be deposited with MJOPFI’s account with BPI Asset Management & Trust Group which
will then be invested by it in the usual course of its administration of MJOPFI funds.

Petitioner claims that it is a co-owner of the MBP lot as trustee of the Employees’ Trust Fund, based on the notarized
Memorandum of Agreement presented before the appellate courts. Petitioner asserts that VMC has confirmed that
petitioner, as trustee of the Employees’ Trust Fund, is VMC’s co-owner of the MBP lot. Petitioner maintains that its
ownership of the MBP lot is supported by the excerpts of the minutes and the resolutions of petitioner’s Board Meetings.
Petitioner further contends that there is no dispute that the Employees’ Trust Fund is exempt from income tax. Since
petitioner, as trustee, purchased 49.59% of the MBP lot using funds of the Employees’ Trust Fund, petitioner asserts that
the Employees’ Trust Fund's 49.59% share in the income tax paid (or ₱3,037,697.40 rounded off to ₱3,037,500) should
be refunded.14

Petitioner maintains that the tax exemption of the Employees’ Trust Fund rendered the payment of ₱3,037,500 as illegal
or erroneous. On 5 May 1997, petitioner filed a claim for tax refund. 15

On 14 August 1997, the BIR, through its Revenue District Officer, wrote petitioner stating that under Section 26 of the Tax
Code, petitioner is not exempt from tax on its income from the sale of real property. The BIR asked petitioner to submit
documents to prove its co-ownership of the MBP lot and its exemption from tax.16

On 2 September 1997, petitioner replied that the applicable provision granting its claim for tax exemption is not Section 26
but Section 53(b) of the Tax Code. Petitioner claims that its co-ownership of the MBP lot is evidenced by Board
Resolution Nos. 92-34 and 96-46 and the memoranda of agreement among petitioner, VMC and its subsidiaries. 17

Since the BIR failed to act on petitioner’s claim for refund, petitioner elevated its claim to the Commissioner of Internal
Revenue (CIR) on 26 October 1998. The CIR did not act on petitioner’s claim for refund. Hence, petitioner filed a petition
for tax refund before the CTA. On 24 October 2000, the CTA rendered a decision denying the petition. 18

On 22 November 2000, petitioner filed its Petition for Review before the Court of Appeals. On 20 May 2003, the CA
rendered a decision denying the appeal. The CA also denied petitioner’s Motion for Reconsideration. 19

Aggrieved by the appellate court’s Decision, petitioner elevated the case before this Court.

The Ruling of the Court of Tax Appeals

The CTA held that under Section 53(b)20 [now Section 60(b)] of the Tax Code, it is not petitioner that is entitled to
exemption from income tax but the income or earnings of the Employees’ Trust Fund. The CTA stated that petitioner is
not the pension trust itself but it is a separate and distinct entity whose function is to administer the pension plan for some
VMC employees.21 The CTA, after evaluating the evidence adduced by the parties, ruled that petitioner is not a party in
interest.

To prove its co-ownership over the MBP lot, petitioner presented the following documents:

a. Secretary’s Certificate showing how the purchase and eventual sale of the MBP lot came about.

b. Memoranda of Agreement showing various details:

i. That the MBP lot was co-owned by VMC and petitioner on a 50/50 basis;

ii. That VMC held the property in trust for North Legaspi Land Development Corporation, North Negros
Marketing Co., Inc., Victorias Insurance Factors Corporation, Victorias Science and Technical
Foundation, Inc. and Canetown Development Corporation.
 iii. That the previous agreement (ii) was cancelled and it showed that the MBP lot was co-owned by
petitioner, VMC and Victorias Insurance Factors Corporation (VFC).22

The CTA ruled that these pieces of evidence are self-serving and cannot by themselves prove petitioner’s co-ownership of
the MBP lot when the TCT, the Deed of Absolute Sale, and the Monthly Remittance Return of Income Taxes Withheld
(Remittance Return) disclose otherwise. The CTA further ruled that petitioner failed to present any evidence to prove that
the money used to purchase the MBP lot came from the Employees' Trust Fund. 23

The CTA concluded that petitioner is estopped from claiming a tax exemption. The CTA pointed out that VMC has led the
government to believe that it is the sole owner of the MBP lot through its execution of the Deeds of Absolute Sale both
during the purchase and subsequent sale of the MBP lot and through the registration of the MBP lot in VMC’s name.
Consequently, the tax was also paid in VMC’s name alone. The CTA stated that petitioner may not now claim a refund of
a portion of the tax paid by the mere expediency of presenting Secretary’s Certificates and memoranda of agreement in
order to prove its ownership. These documents are self-serving; hence, these documents merit very little weight.24

The Ruling of the Court of Appeals

The CA declared that the findings of the CTA involved three types of documentary evidence that petitioner presented to
prove its contention that it purchased 49.59% of the MBP lot with funds from the Employees’ Trust Fund: (1) the
memoranda of agreement executed by petitioner and other VMC subsidiaries; (2) Secretary’s Certificates containing
excerpts of the minutes of meetings conducted by the respective boards of directors or trustees of VMC and petitioner; (3)
Certified True Copies of the Portfolio Mix Analysis issued by Citytrust regarding the investment of ₱5,504,748.25 in
Madrigal Business Park I for the years 1994 to 1997.25

The CA agreed with the CTA that these pieces of documentary evidence submitted by petitioner are largely self-serving
and can be contrived easily. The CA ruled that these documents failed to show that the funds used to purchase the MBP
lot came from the Employees’ Trust Fund. The CA explained, thus:

We are constrained to echo the findings of the Court of Tax Appeals in regard to the failure of the petitioner to ensure that
legal documents pertaining to its investments, e.g. title to the subject property, were really in its name, considering its
awareness of the resulting tax benefit that such foresight or providence would produce; hence, genuine efforts towards
that end should have been exerted, this notwithstanding the alleged difficulty of procuring a title under the names of all the
co-owners. Indeed, we are unable to understand why petitioner would allow the title of the property to be placed solely in
the name of petitioner's alleged co-owner, i.e. the VMC, although it allegedly owned a much bigger (nearly half), portion
thereof. Withal, petitioner failed to ensure a "fix" so to speak, on its investment, and we are not impressed by the
documents which the petitioner presented, as the same apparently allowed "mobility" of the subject real estate assets
between or among the petitioner, the VMC and the latter's subsidiaries. Given the fact that the subject parcel of land was
registered and sold under the name solely of VMC, even as payment of taxes was also made only under its name, we
cannot but concur with the finding of the Court of Tax Appeals that petitioner's claim for refund of withheld creditable tax is
bereft of solid juridical basis.26

The Issues

The issues presented are:

1. Whether petitioner or the Employees’ Trust Fund is estopped from claiming that the Employees’ Trust Fund is
the beneficial owner of 49.59% of the MBP lot and that VMC merely held 49.59% of the MBP lot in trust for the
Employees’ Trust Fund.

2. If petitioner or the Employees’ Trust Fund is not estopped, whether they have sufficiently established that the
Employees’ Trust Fund is the beneficial owner of 49.59% of the MBP lot, and thus entitled to tax exemption for its
share in the proceeds from the sale of the MBP lot.

The Ruling of the Court

We grant the petition.

The law expressly allows a co-owner (first co-owner) of a parcel of land to register his proportionate share in the name of
his co-owner (second co-owner) in whose name the entire land is registered. The second co-owner serves as a legal
trustee of the first co-owner insofar as the proportionate share of the first co-owner is concerned. The first co-owner
remains the owner of his proportionate share and not the second co-owner in whose name the entire land is registered.
Article 1452 of the Civil Code provides:

Art. 1452. If two or more persons agree to purchase a property and by common consent the legal title is taken in the name
of one of them for the benefit of all, a trust is created by force of law in favor of the others in proportion to the interest of
each. (Emphasis supplied)

For Article 1452 to apply, all that a co-owner needs to show is that there is "common consent" among the purchasing co-
owners to put the legal title to the purchased property in the name of one co-owner for the benefit of all. Once this
"common consent" is shown, "a trust is created by force of law." The BIR has no option but to recognize such legal trust
as well as the beneficial ownership of the real owners because the trust is created by force of law. The fact that the title is
registered solely in the name of one person is not conclusive that he alone owns the property.

Thus, this case turns on whether petitioner can sufficiently establish that petitioner, as trustee of the Employees’ Trust
Fund, has a common agreement with VMC and VFC that petitioner, VMC and VFC shall jointly purchase the MBP lot and
put the title to the MBP lot in the name of VMC for the benefit petitioner, VMC and VFC.

We rule that petitioner, as trustee of the Employees’ Trust Fund, has more than sufficiently established that it has an
agreement with VMC and VFC to purchase jointly the MBP lot and to register the MBP lot solely in the name of VMC for
the benefit of petitioner, VMC and VFC.

Factual findings of the CTA will be reviewed

when judgment is based on a misapprehension of facts.

Generally, the factual findings of the CTA, a special court exercising expertise on the subject of tax, are regarded as final,
binding and conclusive upon this Court, especially if these are substantially similar to the findings of the CA which is
normally the final arbiter of questions of fact.27 However, there are recognized exceptions to this rule,28such as when the
judgment is based on a misapprehension of facts.

Petitioner contends that the CA erred in evaluating the documents as self-serving instead of considering them as truthful
and genuine because they are public documents duly notarized by a Notary Public and presumed to be regular unless the
contrary appears. Petitioner explains that the CA erred in doubting the authenticity and genuineness of the three
memoranda of agreement presented as evidence. Petitioner submits that there is nothing wrong in the execution of the
three memoranda of agreement by the parties. Petitioner points out that VMC authorized petitioner to administer its
Employees’ Trust Fund which is basically funded by donation from its founder, Miguel J. Ossorio, with his shares of stocks
and share in VMC's profits.29

Petitioner argues that the Citytrust report reflecting petitioner’s investment in the MBP lot is concrete proof that money of
the Employees’ Trust Funds was used to purchase the MBP lot. In fact, the CIR did not dispute the authenticity and
existence of this documentary evidence. Further, it would be unlikely for Citytrust to issue a certified copy of the Portfolio
Mix Analysis stating that petitioner invested in the MBP lot if it were not true. 30

Petitioner claims that substantial evidence is all that is required to prove petitioner’s co-ownership and all the pieces of
evidence have overwhelmingly proved that petitioner is a co-owner of the MBP lot to the extent of 49.59% of the MBP lot.
Petitioner explains:

Thus, how the parties became co-owners was shown by the excerpts of the minutes and the resolutions of the Board of
Trustees of the petitioner and those of VMC. All these documents showed that as far as March 1992, petitioner already
expressed intention to be co-owner of the said property. It then decided to invest the retirement funds to buy the said
property and culminated in it owning 49.59% thereof. When it was sold to Metrobank, petitioner received its share in the
proceeds from the sale thereof. The excerpts and resolutions of the parties' respective Board of Directors were certified
under oath by their respective Corporate Secretaries at the time. The corporate certifications are accorded verity by law
and accepted as prima facie evidence of what took place in the board meetings because the corporate secretary is, for
the time being, the board itself.31

Petitioner, citing Article 1452 of the Civil Code, claims that even if VMC registered the land solely in its name, it does not
make VMC the absolute owner of the whole property or deprive petitioner of its rights as a co-owner.32 Petitioner argues
that under the Torrens system, the issuance of a TCT does not create or vest a title and it has never been recognized as
a mode of acquiring ownership.33
The issues of whether petitioner or the Employees’ Trust Fund is estopped from claiming 49.59% ownership in the MBP
lot, whether the documents presented by petitioner are self-serving, and whether petitioner has proven its exemption from
tax, are all questions of fact which could only be resolved after reviewing, examining and evaluating the probative value of
the evidence presented. The CTA ruled that the documents presented by petitioner cannot prove its co-ownership over
the MBP lot especially that the TCT, Deed of Absolute Sale and the Remittance Return disclosed that VMC is the sole
owner and taxpayer.

However, the appellate courts failed to consider the genuineness and due execution of the notarized Memorandum of
Agreement acknowledging petitioner’s ownership of the MBP lot which provides:

2. The said parcels of land are actually co-owned by the following:

Block 4, Lot 1 Covered by TCT No. 183907

% SQ.M. AMOUNT
MJOPFI 49.59% 450.00 P 5,504,748.25
VMC 32.23% 351.02 3,578,294.70
VFC 18.18% 197.98 2,018,207.30

Thus, there is a "common consent" or agreement among petitioner, VMC and VFC to co-own the MBP lot in the
proportion specified in the notarized Memorandum of Agreement.

In Cuizon v. Remoto,34 we held:

Documents acknowledged before notaries public are public documents and public documents are admissible in evidence
without necessity of preliminary proof as to their authenticity and due execution. They have in their favor the presumption
of regularity, and to contradict the same, there must be evidence that is clear, convincing and more than merely
preponderant.

The BIR failed to present any clear and convincing evidence to prove that the notarized Memorandum of Agreement is
fictitious or has no legal effect. Likewise, VMC, the registered owner, did not repudiate petitioner’s share in the MBP lot.
Further, Citytrust, a reputable banking institution, has prepared a Portfolio Mix Analysis for the years 1994 to 1997
showing that petitioner invested ₱5,504,748.25 in the MBP lot. Absent any proof that the Citytrust bank records have been
tampered or falsified, and the BIR has presented none, the Portfolio Mix Analysis should be given probative value.

The BIR argues that under the Torrens system, a third person dealing with registered property need not go beyond the
TCT and since the registered owner is VMC, petitioner is estopped from claiming ownership of the MBP lot. This
argument is grossly erroneous. The trustor-beneficiary is not estopped from proving its ownership over the property held
in trust by the trustee when the purpose is not to contest the disposition or encumbrance of the property in favor of an
innocent third-party purchaser for value. The BIR, not being a buyer or claimant to any interest in the MBP lot, has not
relied on the face of the title of the MBP lot to acquire any interest in the lot. There is no basis for the BIR to claim that
petitioner is estopped from proving that it co-owns, as trustee of the Employees’ Trust Fund, the MBP lot. Article 1452 of
the Civil Code recognizes the lawful ownership of the trustor-beneficiary over the property registered in the name of the
trustee. Certainly, the Torrens system was not established to foreclose a trustor or beneficiary from proving its ownership
of a property titled in the name of another person when the rights of an innocent purchaser or lien-holder are not involved.
More so, when such other person, as in the present case, admits its being a mere trustee of the trustor or beneficiary.

The registration of a land under the Torrens system does not create or vest title, because registration is not one of the
modes of acquiring ownership. A TCT is merely an evidence of ownership over a particular property and its issuance in
favor of a particular person does not foreclose the possibility that the property may be co-owned by persons not named in
the certificate, or that it may be held in trust for another person by the registered owner.35

No particular words are required for the creation of a trust, it being sufficient that a trust is clearly intended. 36 It is
immaterial whether or not the trustor and the trustee know that the relationship which they intend to create is called a
trust, and whether or not the parties know the precise characteristic of the relationship which is called a trust because
what is important is whether the parties manifested an intention to create the kind of relationship which in law is known as
a trust.37
The fact that the TCT, Deed of Absolute Sale and the Remittance Return were in VMC’s name does not forestall the
possibility that the property is owned by another entity because Article 1452 of the Civil Code expressly authorizes a
person to purchase a property with his own money and to take conveyance in the name of another.

In Tigno v. Court of Appeals, the Court explained, thus:

An implied trust arises where a person purchases land with his own money and takes conveyance thereof in the name of
another. In such a case, the property is held on resulting trust in favor of the one furnishing the consideration for the
transfer, unless a different intention or understanding appears. The trust which results under such circumstances does not
arise from a contract or an agreement of the parties, but from the facts and circumstances; that is to say, the trust results
because of equity and it arises by implication or operation of law. 38

In this case, the notarized Memorandum of Agreement and the certified true copies of the Portfolio Mix Analysis prepared
by Citytrust clearly prove that petitioner invested ₱5,504,748.25, using funds of the Employees' Trust Fund, to purchase
the MBP lot. Since the MBP lot was registered in VMC’s name only, a resulting trust is created by operation of law. A
resulting trust is based on the equitable doctrine that valuable consideration and not legal title determines the equitable
interest and is presumed to have been contemplated by the parties.39 Based on this resulting trust, the Employees’ Trust
Fund is considered the beneficial co-owner of the MBP lot.

Petitioner has sufficiently proven that it had a "common consent" or agreement with VMC and VFC to jointly purchase the
MBP lot. The absence of petitioner’s name in the TCT does not prevent petitioner from claiming before the BIR that the
Employees’ Trust Fund is the beneficial owner of 49.59% of the MBP lot and that VMC merely holds 49.59% of the MBP
lot in trust, through petitioner, for the benefit of the Employees’ Trust Fund.

The BIR has acknowledged that the owner of a land can validly place the title to the land in the name of another person.
In BIR Ruling [DA-(I-012) 190-09] dated 16 April 2009, a certain Amelia Segarra purchased a parcel of land and
registered it in the names of Armin Segarra and Amelito Segarra as trustees on the condition that upon demand by Amelia
Segarra, the trustees would transfer the land in favor of their sister, Arleen May Segarra-Guevara. The BIR ruled that an
implied trust is deemed created by law and the transfer of the land to the beneficiary is not subject to capital gains tax or
creditable withholding tax.

Income from Employees’ Trust Fund is Exempt from Income Tax

Petitioner claims that the Employees’ Trust Fund is exempt from the payment of income tax. Petitioner further claims that
as trustee, it acts for the Employees’ Trust Fund, and can file the claim for refund. As trustee, petitioner considers itself as
the entity that is entitled to file a claim for refund of taxes erroneously paid in the sale of the MBP lot.40

The Office of the Solicitor General argues that the cardinal rule in taxation is that tax exemptions are highly disfavored and
whoever claims a tax exemption must justify his right by the clearest grant of law. Tax exemption cannot arise by
implication and any doubt whether the exemption exists is strictly construed against the taxpayer. 41Further, the findings of
the CTA, which were affirmed by the CA, should be given respect and weight in the absence of abuse or improvident
exercise of authority.421avvphi1

Section 53(b) and now Section 60(b) of the Tax Code provides:

SEC. 60. Imposition of Tax. -

(A) Application of Tax. - x x x

(B) Exception. - The tax imposed by this Title shall not apply to employee’s trust which forms part of a pension,
stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees (1) if contributions
are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees
the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under the
trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees
under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or
diverted to, purposes other than for the exclusive benefit of his employees: Provided, That any amount actually
distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent
that it exceeds the amount contributed by such employee or distributee.
Petitioner’s Articles of Incorporation state the purpose for which the corporation was formed:

Primary Purpose

To hold legal title to, control, invest and administer in the manner provided, pursuant to applicable rules and conditions as
established, and in the interest and for the benefit of its beneficiaries and/or participants, the private pension plan as
established for certain employees of Victorias Milling Company, Inc., and other pension plans of Victorias Milling
Company affiliates and/or subsidiaries, the pension funds and assets, as well as accruals, additions and increments
thereto, and such amounts as may be set aside or accumulated for the benefit of the participants of said pension plans;
and in furtherance of the foregoing and as may be incidental thereto. 43(Emphasis supplied)

Petitioner is a corporation that was formed to administer the Employees' Trust Fund. Petitioner invested ₱5,504,748.25 of
the funds of the Employees' Trust Fund to purchase the MBP lot. When the MBP lot was sold, the gross income of the
Employees’ Trust Fund from the sale of the MBP lot was ₱40,500,000. The 7.5% withholding tax of ₱3,037,500 and
broker’s commission were deducted from the proceeds. In Commissioner of Internal Revenue v. Court of Appeals,44 the
Court explained the rationale for the tax-exemption privilege of income derived from employees’ trusts:

It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise, taxation of those
earnings would result in a diminution of accumulated income and reduce whatever the trust beneficiaries would receive
out of the trust fund. This would run afoul of the very intendment of the law.

In Miguel J. Ossorio Pension Foundation, Inc. v. Commissioner of Internal Revenue,45 the CTA held that petitioner is
entitled to a refund of withholding taxes paid on interest income from direct loans made by the Employees' Trust Fund
since such interest income is exempt from tax. The CTA, in recognizing petitioner’s entitlement for tax exemption,
explained:

In or about 1968, Victorias Milling Co., Inc. established a retirement or pension plan for its employees and those of its
subsidiary companies pursuant to a 22-page plan. Pursuant to said pension plan, Victorias Milling Co., Inc. makes a (sic)
regular financial contributions to the employee trust for the purpose of distributing or paying to said employees, the
earnings and principal of the funds accumulated by the trust in accordance with said plan. Under the plan, it is imposable,
at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or
income to be used for, or diverted to, purposes other than for the exclusive benefit of said employees. Moreover, upon the
termination of the plan, any remaining assets will be applied for the benefit of all employees and their beneficiaries entitled
thereto in proportion to the amount allocated for their respective benefits as provided in said plan.

The petitioner and Victorias Milling Co., Inc., on January 22, 1970, entered into a Memorandum of Understanding,
whereby they agreed that petitioner would administer the pension plan funds and assets, as assigned and transferred to it
in trust, as well as all amounts that may from time to time be set aside by Victorias Milling Co., Inc. "For the benefit of the
Pension Plan, said administration is to be strictly adhered to pursuant to the rules and regulations of the Pension Plan and
of the Articles of Incorporation and By Laws" of petitioner.

The pension plan was thereafter submitted to the Bureau of Internal Revenue for registration and for a ruling as to
whether its income or earnings are exempt from income tax pursuant to Rep. Act 4917, in relation to Sec. 56(b), now Sec.
54(b), of the Tax Code.

In a letter dated January 18, 1974 addressed to Victorias Milling Co., Inc., the Bureau of Internal Revenue ruled that "the
income of the trust fund of your retirement benefit plan is exempt from income tax, pursuant to Rep. Act 4917 in
relation to Section 56(b) of the Tax Code."

In accordance with petitioner’s Articles of Incorporation (Annex A), petitioner would "hold legal title to, control, invest
and administer, in the manner provided, pursuant to applicable rules and conditions as established, and in the
interest and for the benefit of its beneficiaries and/or participants, the private pension plan as established for
certain employees of Victorias Milling Co., Inc. and other pension plans of Victorias Milling Co. affiliates and/or
subsidiaries, the pension funds and assets, as well as the accruals, additions and increments thereto, and such
amounts as may be set aside or accumulated of said pension plans. Moreover, pursuant to the same Articles of
Incorporations, petitioner is empowered to "settle, compromise or submit to arbitration, any claims, debts or
damages due or owing to or from pension funds and assets and other funds and assets of the corporation, to
commence or defend suits or legal proceedings and to represent said funds and assets in all suits or legal
proceedings."
Petitioner, through its investment manager, the City Trust Banking Corporation, has invested the funds of the
employee trust in treasury bills, Central Bank bills, direct lending, etc. so as to generate income or earnings for
the benefit of the employees-beneficiaries of the pension plan. Prior to the effectivity of Presidential Decree No. 1959
on October 15, 1984, respondent did not subject said income or earning of the employee trust to income tax because they
were exempt from income tax pursuant to Sec. 56(b), now Sec. 54(b) of the Tax Code and the BIR Ruling dated January
18, 1984 (Annex D). (Boldfacing supplied; italicization in the original)

xxx

It asserted that the pension plan in question was previously submitted to the Bureau of Internal Revenue for a ruling as to
whether the income or earnings of the retirement funds of said plan are exempt from income tax and in a letter dated
January 18,1984, the Bureau ruled that the earnings of the trust funds of the pension plan are exempt from
income tax under Sec. 56(b) of the Tax Code. (Emphasis supplied)

"A close review of the provisions of the plan and trust instrument disclose that in reality the corpus and income of the trust
fund are not at no time used for, or diverted to, any purpose other than for the exclusive benefit of the plan beneficiaries.
This fact was likewise confirmed after verification of the plan operations by the Revenue District No. 63 of the Revenue
Region No. 14, Bacolod City. Section X also confirms this fact by providing that if any assets remain after satisfaction of
the requirements of all the above clauses, such remaining assets will be applied for the benefits of all persons included in
such classes in proportion to the amounts allocated for their respective benefits pursuant to the foregoing priorities.

"In view of all the foregoing, this Office is of the opinion, as it hereby holds, that the income of the trust fund of your
retirement benefit plan is exempt from income tax pursuant to Republic Act 4917 in relation to Section 56(b) of the Tax
Code. (Annex "D" of Petition)

This CTA decision, which was affirmed by the CA in a decision dated 20 January 1993, became final and executory on 3
August 1993.

The tax-exempt character of petitioner’s Employees' Trust Fund is not at issue in this case. The tax-exempt character of
the Employees' Trust Fund has long been settled. It is also settled that petitioner exists for the purpose of holding title to,
and administering, the tax-exempt Employees’ Trust Fund established for the benefit of VMC’s employees. As such,
petitioner has the personality to claim tax refunds due the Employees' Trust Fund.

In Citytrust Banking Corporation as Trustee and Investment Manager of Various Retirement Funds v. Commissioner of
Internal Revenue,46 the CTA granted Citytrust’s claim for refund on withholding taxes paid on the investments made by
Citytrust in behalf of the trust funds it manages, including petitioner.47 Thus:

In resolving the second issue, we note that the same is not a case of first impression. Indeed, the petitioner is correct in its
adherence to the clear ruling laid by the Supreme Court way back in 1992 in the case of Commissioner of Internal
Revenue vs. The Honorable Court of Appeals, The Court of Tax Appeals and GCL Retirement Plan, 207 SCRA 487 at
page 496, supra, wherein it was succinctly held:

xxx

There can be no denying either that the final withholding tax is collected from income in respect of which employees’
trusts are declared exempt (Sec. 56(b), now 53(b), Tax Code). 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. If an employees’ trust like the GCL enjoys a tax-exempt status from income, we see
no logic in withholding a certain percentage of that income which it is not supposed to pay in the first place.

xxx

Similarly, the income of the trust funds involved herein is exempt from the payment of final withholding taxes.

This CTA decision became final and executory when the CIR failed to file a Petition for Review within the extension
granted by the CA.

Similarly, in BIR Ruling [UN-450-95], Citytrust wrote the BIR to request for a ruling exempting it from the payment of
withholding tax on the sale of the land by various BIR-approved trustees and tax-exempt private employees' retirement
benefit trust funds48 represented by Citytrust. The BIR ruled that the private employees benefit trust funds, which
included petitioner, have met the requirements of the law and the regulations and therefore qualify as reasonable
retirement benefit plans within the contemplation of Republic Act No. 4917 (now Sec. 28(b)(7)(A), Tax Code). The income
from the trust fund investments is therefore exempt from the payment of income tax and consequently from the payment
of the creditable withholding tax on the sale of their real property. 49

Thus, the documents issued and certified by Citytrust showing that money from the Employees’ Trust Fund was invested
in the MBP lot cannot simply be brushed aside by the BIR as self-serving, in the light of previous cases holding that
Citytrust was indeed handling the money of the Employees’ Trust Fund. These documents, together with the notarized
Memorandum of Agreement, clearly establish that petitioner, on behalf of the Employees’ Trust Fund, indeed invested in
the purchase of the MBP lot. Thus, the Employees' Trust Fund owns 49.59% of the MBP lot.1avvphi1

Since petitioner has proven that the income from the sale of the MBP lot came from an investment by the Employees'
Trust Fund, petitioner, as trustee of the Employees’ Trust Fund, is entitled to claim the tax refund of ₱3,037,500 which
was erroneously paid in the sale of the MBP lot.

Wherefore, we GRANT the petition and SET ASIDE the Decision of 30 May 2003 of the Court of Appeals in CA-G.R. SP
No. 61829. Respondent Commissioner of Internal Revenue is directed to refund petitioner Miguel J. Ossorio Pension
Foundation, Incorporated, as trustee of the Employees’ Trust Fund, the amount of ₱3,037,500, representing income tax
erroneously paid.

SO ORDERED.
G.R. No. 192398 September 29, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
PILIPINAS SHELL PETROLEUM CORPORATION, Respondent.

DECISION

VILLARAMA, JR., J.:

Before us is a petition for review on certiorari filed by petitioner Commissioner of Internal Revenue, who seeks to nullify
and set aside the September 10, 2009 Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 77117. The CA had
affirmed the Decision2 of the Court of Tax Appeals ordering petitioner to refund, or in the alternative, issue a tax credit
certificate in favor of Pilipinas Shell Petroleum Corporation (respondent) in the amount of 1!22,101,407.64 representing
the latter's erroneously paid documentary stamp tax for the taxable year 2000. Petitioner likewise assails the CA
Resolution3 denying petitioner's motion for reconsideration. The antecedent facts:

Petitioner is the duly appointed Commissioner of Internal Revenue who holds office at the Bureau of Internal Revenue
(BIR) National Office located at Agham Road, Diliman, Quezon City.

Respondent Pilipinas Shell Petroleum Corporation (PSPC) is a corporation organized and existing under the laws of the
Philippines and was incorporated to construct, operate and maintain petroleum refineries, works, plant machinery,
equipment dock and harbor facilities and auxiliary works and other facilities of all kinds and used in or in connection with
the manufacture of products of all kinds which are wholly or partly derived from crude oil.

On April 27, 1999, respondent entered into a Plan of Merger with its affiliate, Shell Philippine Petroleum Corporation
(SPPC), a corporation organized and existing under the laws ofthe Philippines. In the Plan of Merger, it was provided that
the entire assets and liabilities of SPPC will be transferred to, and absorbed by, respondent as the surviving entity. The
Securities and Exchange Commission approved the merger on July 1, 1999.

On August 10, 1999, respondent paidto the BIR documentary stamp taxes amounting to ₱524,316.00 on the original
issuance of shares of stock of respondent issued in exchange for the surrendered SPPC shares pursuant to Section 175
of the National InternalRevenue Code of1997 (NIRC or Tax Code).

Confirming the tax-free nature of the merger between respondent and SPPC, the BIR, in a ruling 4 dated October 4, 1999,
ruled that pursuant to Section 40 (C)(2) and (6)(b) of the NIRC, no gain or loss shall be recognized, if, in pursuance to a
planof merger or consolidation, a shareholder exchanges stock in a corporation which is a party to the merger or
consolidation solely for the stock ofanother corporation which is also a party to the merger or consolidation. The BIR ruled,
among others, that no gain or loss shall be recognized by the stockholders of SPPC on the exchange of their shares of
stock of SPPC solely for shares of stock of respondent pursuant to the Plan of Merger.

The BIR, however, stated in said Ruling that

3. The issuance by PSPC of its own shares of stock to the shareholders of SPPC in exchange for the surrendered
certificates of stock of SPPC shall be subject to the documentary stamp tax (DST) at the rate of Two Pesos (₱2.00) on
each Two HundredPesos (₱200.00), or fractional part thereof, based on the total par value of the PSPC shares of stock
issued pursuant to Section 175 of the Tax Code of 1997.

xxxx

6. The exchange of land and improvements by SPPC to PSPC for the latter’s shares of stock shall be subject to
documentary stamp tax imposed under Section 196 of the Tax Code of 1997, based on the consideration contracted to be
paid for such realty or its fair market value determined in accordance withSection 6(E) of the said Code, whichever is
higher. x x x5

On May 10, 2000, respondent paid to the BIR the amount of ₱22,101,407.64 representing documentary stamp tax on the
transfer of real property from SPPC to respondent.
Believing that it erroneously paid documentary stamp tax on its absorption of real property owned by SPPC, respondent
filed with petitioner on September 18, 2000, a formal claim for refund or tax credit of the documentary stamp tax in the
amount of ₱22,101,407.64.

There being no action by petitioner, respondent filed on May 8, 2002, a petition 6 for review with the Court of Tax Appeals
(CTA) in order to suspend the running of the two-year prescriptive period.

Petitioner filed an Answer7 on June 11, 2002 praying that the petition for review be dismissed for lack of merit. Petitioner
asserted that in taxdeferred exchanges, documentary stamp tax is imposed. Petitioner cited BIR Ruling No. 2-20018 dated
February 2, 2001 which states:

In view of all the foregoing, it is the opinion of this Office, as we hereby hold, that the tax-deferred exchange of properties
of a corporation, which is a party to a merger or consolidation, solely for shares of stock in a corporation, which is also a
party to the merger or consolidation, is subject to the documentary stamp tax under Section 176 if the properties to be
transferred are shares of stock or even certificates of obligations, and also to the documentary stamp tax under Sec[tion]
196, if the properties to be transferred are real properties. Finally, it may be worth mentioning that the original issuance of
shares of stock ofthe surviving corporation in favor of the stockholders of the absorbed corporation as a result of the
merger, is subject to the documentary stamp tax under Sec[tion] 175 of the Tax Code of 1997. (BIR Ruling No. S-40-220-
2000, December 21, 2000).9

In its Decision10 promulgated on April 30,2003, the CTA granted respondent’s prayer for tax refund or credit.

The CTA held that

Based on the foregoing, it is evident that the transfer of real property from the absorbed corporation to the surviving or
consolidated corporation pursuant to a merger or consolidation occurs by operation of lawinasmuch as the real property is
deemed transferred without further act or deed. In the case at bar, the petitioner’s theory is that DST on the transfer of
real property does not apply to a "statutorymerger" where real property of the absorbed corporation is deemed
automatically vested in the surviving corporation by operation of law, i.e., without any further act of deed.

xxxx

To reiterate, since the transfer of real property of SPPC to petitioner was not effected by or dependent on any voluntary
act or deed of the parties to the merger, DST, therefore, should not attach to the same.

xxxx

A perusal of the above-cited provision would reveal that the DST is imposed only on all conveyances, deeds, instruments,
or writings where realty sold shall be conveyed to purchaser or purchasers. Clearly, in case of merger, as in the case at
bar, only by straining the imagination can the transferee be said to have "bought" or "purchased" real property from the
transferor. The absorption by petitioner of real property of SPPC as an inherent legal consequence of the merger is not a
sale or other conveyance of real property for a consideration in money or money’s worth.

As correctly pointed out by the petitioner, SPPC’s real property was not conveyed to or vested inpetitioner by means of
any deed, instrument or writing, considering that real properties were automatically vested in petitioner without"further act
or deed".There was a complete absence of any formal instrument or writing upon which DST may be imposed. Nor can
the realty be said tohave been "sold" or vested in a "purchaser or purchasers" within the ordinary meanings of those
terms.

xxxx

Moreover, under Revenue Memorandum Circular No. 44-86 dated December 4, 1986, which outlines the procedure in the
determination and collection of stamp tax on instruments of sale or conveyance of real property, it is clear that the DST
applies only if the instrument is a sale or other conveyance of real property for a consideration in money or money’s worth.

Finally, the absorption by petitioner of real property of SPPC by operation of law pursuant to the merger is part and parcel
of a single and continuing transaction. Accordingly, the same should not be subject to DST as if it constituted a separate
and distinct transaction.
As earlier stated, DST is in the nature of an excise tax because it is really imposed on the privilege to enter into a
transaction. Its imposition, therefore, should be only once. And in a statutory merger, there is only one transaction, i.e., the
issuance by the surviving corporation of its own shares of stock to the stockholdersof the absorbed corporation in
exchange for the shares surrendered by the shareholders of the absorbed corporation. All other transactions which are an
integral and inherent part of the merger, such as the absorption of real property, should no longer be subject to another
round of DST. In other words,all the integral parts of the merger (e.g., surrender of shares inexchange for shares, transfer
of assets, assumption of liabilities, etc.) should be treated as a single and continuing transaction subject only to one DST.
The transfer of real property is not a transaction separate and distinct from the merger but an integral part or a mere
continuation of the initial transaction which was previously consummated. Applying the same in petitioner’s case, the
absorption by petitioner of real property of SPPC is not a transaction separate and distinct from the merger, wherein
petitioner issued its own shares to SPPC shareholders in exchange for the latter’s shares in SPPC, the absorbed entity,
but a mere continuation of the initial transaction which was previously consummated, and for which the required DST was
already paid.11

On June 4, 2003, petitioner filed a petition for review with the CA. In the herein assailed Decision dated September 10,
2009, the CA dismissed the petition and affirmed the Decision of the CTA. The appellate court held that the transfer of the
properties of SPPC to respondent was not in exchange for the latter’s shares of stock but is a legal consequence of the
merger. The CA ruled that the actual transfer of SPPC’s real properties to respondent was not effected by or dependent
upon any voluntary deed, conveyance or assignment but occurred by operation of law. The CA held that since the basis of
the BIR in imposing the documentary stamp tax is not applicable to a transfer of realproperty by operation of law, PSPC
erroneously paid the documentary stamp tax and is therefore, entitled to a tax refund or tax credit.

Petitioner filed a motion for reconsideration which was denied by the CA in its Resolution dated April 13, 2010.

Hence, petitioner filed the present petition on the sole ground that

THE COURT OF APPEALS ERRED IN HOLDING THAT THE TRANSFER OF REAL PROPERTIES OF SPPC TO
RESPONDENT IN EXCHANGE FOR THE LATTER’S SHARES OF STOCK IS NOT SUBJECT TO THE DST IMPOSED
UNDER SECTION 196 OF THE TAX CODE.12

Petitioner points out that the mergerbetween SPPC and respondent resulted in the following: (1) the issuanceby
respondent of its own shares of stock to the shareholders of SPPC in exchange for the surrendered certificates of stock of
SPPC and was imposed a documentary stamp tax under Section 175 of the Tax Code in the amount of ₱524,316.00; and
(2) the transfer of SPPC’s real properties to respondent in exchange for the latter’s shares of stock which was imposed a
documentary stamp tax under Section 196 of the Tax Code in the amount of ₱22,101,407.64. Respondent claims that the
documentary stamp tax imposed on the second transaction had been erroneously paid and seeks to claim a refund or tax
credit in the amount of ₱22,101,407.64. Both the CTA and the CA held that respondent is entitled to refund or tax credit.

Petitioner insists that the transfer of SPPC’s real properties to respondent in exchange for the latter’s shares of stock is
subject to documentary stamp tax. Petitioner contends that Section 196 of the Tax Code covers all transfers of real
property for a valuable consideration and does not only refer to sale of realtysince it speaks of real property being
"granted, assigned, transferred or otherwise conveyed."

Petitioner also claims that the subject transfer was not entirely by operation of law since the merger agreement between
respondent and SPPC involves the voluntary act of the parties. Petitioner avers that it is wrong to say that no
documentary stamp tax isimposable allegedly because the transfer to respondent of SPPC’s realproperties was not
effected by means of any deed, instrument or writing. Petitioner contends that Section 196 of the Tax Code does not
require that a particular document be executed for the transfer of real property in order to be subject to documentary
stamp tax. Petitioner adds that it is enough that a conveyance of real property has been effected since documentary
stamp tax is imposed not on the document alone but on the transaction. Petitioner avers that the merger between SPPC
and respondent, while constituting a single transaction, gave riseto several tax incidents which, for tax purposes, should
be treated individually and apart from the merger as a whole.

Lastly, petitioner argues that the enactment of Republic Act No. 924313 (RA 9243) which specifically exempts the transfers
of real property in merger or consolidation from documentary stamp tax only supports further the conclusion that prior to
RA9243, such transfers are subject to documentary stamp tax. Otherwise, there would have been no reason to
specifically exempt such transfers from documentary stamp taxes.

Respondent in its Comment14 primarily submits that the decision sought to be reviewed is already final and executory and
the petition is filed out of time.
Respondent asserts that it is a rule of statutory construction that a statute’s clauses and phrases should not be taken as
detached and isolated expressions, but the whole and every part thereof must be considered in fixing the meaning of any
of its parts. Respondent claims that petitioner’s interpretation that a mere grant, assignment, transferor conveyance of real
property is subject to documentary stamp tax under Section 196 is erroneous since petitioner disregarded the
qualifyingword "sold" which describes the kind of transfer that is contemplated as subject to documentary stamp tax.
Respondent also points out that the fact that Section 196 refers to the words "sold", "purchaser" and
"consideration"undoubtedly leads to the conclusion that only sales of real property are contemplated. That contrary to
petitioner’s claim, documentary stamp tax is not levied on the privilege to convey real properties regardless of the manner
of conveyance. Respondent emphasizes that the transaction between respondent and SPPC was not one whereby SPPC
transferred its real properties to respondent in exchange for the latter’s shares of stock. SPPC and respondent did not
enter into some Deed of Assignment or a Deed of Exchange whereby SPPC assigned or conveyed its real properties to
respondent either for cash or in exchange for some property like shares of stock. Rather, the transaction that SPPC and
respondent entered into was a merger and the transfer of the real properties of SPPC to respondent was merely a legal
consequence of the merger of SPPC with respondent. Respondent, therefore,posits that since the absorption by
respondent of SPPC’s real properties as a consequence of the merger is without consideration in money or money’s
worth, the same is not subject to documentary stamp tax. Furthermore, respondent maintains that in a statutory merger or
consolidation, real property ofthe absorbed corporation is transferred to and automatically vested in the surviving
corporation purely and strictly by operation of law and not by voluntary act of the parties to the merger.

The issues presented for our resolution are as follows: (1) whether the transfer of SPPC’s real properties to respondent is
subject to documentary stamp tax under Section 196 of the Tax Code; and (2) whether respondent is entitled to the
refund/tax credit inthe amount of ₱22,101,407.64 representing documentary stamp tax paid for the taxable year 2000 in
connection with the transfer of real properties from SPPC to respondent.

Prefatorily, we first address respondent’s contention that the petition for review on certiorari was filed late.

Records show that on September 10, 2009, the CA issued the assailed decision. Petitioner filed a motion for
reconsideration but the motion was denied by the CA in a Resolution dated April 13, 2010. Petitioner received notice of
the Resolution on April 29, 2010 and thus had 15 days from that date or until May 14, 2010 to file its petition for review on
certiorari. On June 3, 2010, the Office of the Solicitor General (OSG), representing petitioner, filed a manifestation and
motion (ad cautelam) requesting for an extension of time within which to file a petition for review on certiorari. The OSG
averred that petitioner forwarded the case to the OSG for representation; however, the records ofthe case, due to
inadvertence and without fault of the handling lawyer, were forwarded to him only on May 26, 2010. Hence, it was
impossible for him to file the petition or a motion for extension on May 14, 2010. Thereafter, the OSG filed a motion for
extension dated June 10, 2010 requesting for a second extension of time to file its petition. Petitioner filed the present
petition for review on certiorari on July 9, 2010.

In a Resolution15 dated July 26, 2010, this Court granted pro hac vice petitioner’s first and second motions for extension
totalling 45 days from May 26, 2010. Hence, petitioner had until July 10, 2010 to file its petition for review on certiorari.
Since the present petition was filed on July 9, 2010, it was filed within the 45-day extension period granted to petitioner.

We now proceed to the primordial issue of whether the transfer of SPPC’s real properties to respondent issubject to
documentary stamp tax under Section 196 of the Tax Code. The pertinent provision states, to wit:

SEC. 196. Stamp Tax on Deeds of Sale and Conveyance of Real Property. – On all conveyances, deeds, instruments, or
writings, other than grants, patents, or original certificates of adjudication issued by the Government, whereby any land,
tenement or other realty sold shall be granted, assigned, transferred orotherwise conveyed to the purchaser, or
purchasers, or to any other person or persons designated by such purchaser or purchasers, there shall be collected a
documentary stamp tax,at the rates herein below prescribed based on the consideration contracted to be paid for such
realty or on its fair market value determined in accordance with Section 6(E) of this Code, whichever is higher: Provided,
That when one of the contracting parties is the Government, the tax herein imposed shall be based on the actual
consideration. (Emphasis and underscoring ours.)

As can be gleaned from the aforequoted provision, documentary stamp tax is imposed on all conveyances, deeds,
instruments or writings whereby land or realty sold shall be conveyed to the purchaser or purchasers.

It is a rule in statutory construction that every part of the statute must be interpreted with reference to the context, i.e.,that
every part of the statute must be considered together with the other parts, and kept subservient to the general intent of the
whole enactment.16 The law must not be read in truncated parts, its provisions must beread in relation to the whole
law.17 The particular words, clauses and phrases should not be studied as detached and isolated expression, but the
whole and every part of the statute must be considered in fixing the meaning of any of its parts and in order to produce a
harmonious whole.18

Here, we do not find merit in petitioner’s contention that Section 196 covers all transfers and conveyancesof real property
for a valuable consideration. A perusal of the subject provision would clearly show it pertains only to sale transactions
where real property is conveyed to a purchaser for a consideration. The phrase "granted, assigned, transferred or
otherwise conveyed" is qualified by the word "sold" which means that documentary stamp tax under Section 196 is
imposed on the transfer of realty by way of sale and does not apply to all conveyances of real property. Indeed, as
correctly noted by the respondent, the fact that Section 196 refers to words "sold", "purchaser" and "consideration"
undoubtedly leads to the conclusion that only sales of real property are contemplated therein.

Thus, petitioner obviously erred when it relied on the phrase "granted, assigned, transferred or otherwise conveyed" in
claiming that all conveyances of real property regardless of the manner of transfer are subject to documentary stamp tax
under Section 196. It is not proper to construe the meaning of a statute on the basis of one part. As we have previously
explained,

A statute is passed as a whole and not in parts or sections, and is animated by one general purpose and intent.
Consequently, each part or section should be construed in connection with every other part or section so as to produce a
harmonious whole. It is not proper to confine its intention to the one section construed. It is always an unsafe way of
construing a statute or contract to divide it by a process of etymological dissection, into separate words, and then apply to
each, thus separated from the context, some particular meaning to be attached to any word or phrase usually to be
ascertained from the context.19

We quote with approval the following statements of the appellate court in the assailed decision, Section 196 should be
read as a whole and not phrase by phrase. The phrase granted, assigned, transferred or otherwise conveyedclearly refers
to the phrase whereby any land, tenement or other realty is sold. This clearly shows that the legislature intended Section
196 to refer to a transfer of realty byvirtue of sale. This is further bolstered by the fact that the property is granted,
assigned, transferred or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons
designated by such purchaser or purchasers. In addition, the basis of the stamp tax is the consideration agreed upon by
the parties or the property’s fair market value. Taking all of these into consideration, it is beyond doubt that … Section 196
pertains to a transfer of realty by way of sale.20

It should be emphasized that in the instant case, the transfer of SPPC’s real property to respondent was pursuant to their
approved plan of merger. In a merger of two existing corporations, one of the corporations survives and continues the
business, while the other is dissolved, and all its rights, properties, and liabilities are acquired by the surviving
corporation.21 Although there is a dissolution of the absorbed or merged corporations, there is no winding up of their
affairs or liquidation of their assets because the surviving corporation automatically acquires all their rights,privileges, and
powers, as well as their liabilities.22 Here, SPPC ceasedto have any legal personality and respondent PSPC stepped into
everything that was SPPC’s, pursuant to the law and the terms of their Plan of Merger.

Pertinently, a merger of two corporations produces the following effects, among others:

Sec. 80. Effects of merger or consolidation. – x x x

xxxx

4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges,
immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables
due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of,
or belonging to, or due to each constituent corporations, shall be taken and deemed to be transferred to and vested in
such surviving or consolidated corporation without further act or deed;… 23 (Emphasis supplied.)

In a merger, the real properties are not deemed "sold" to the surviving corporation and the latter could not be considered
as "purchaser" of realty since the real properties subject of the merger were merely absorbed by the surviving corporation
by operation of law and these properties are deemed automatically transferred to and vestedin the surviving corporation
without further act or deed. Therefore, the transfer of real properties to the surviving corporation in pursuance of a merger
is not subject to documentary stamp tax. As stated at the outset, documentary stamp tax is imposed only on all
conveyances, deeds, instruments or writing where realty sold shall be conveyed to a purchaser or purchasers. The
transfer of SPPC’s real property to respondent was neither a sale nor was it a conveyance of real property for a
consideration contracted to be paidas contemplated under Section 196 of the Tax Code. Hence, Section 196 ofthe Tax
Code is inapplicable and respondent is not liable for documentary stamp tax.

In fact, as properly cited in the CTA Decision, Section 185 of Revenue Regulations No. 26, otherwise known as the
documentary stamp tax regulations, provides:

Section 185. Conveyances withoutconsideration. – Conveyances of realty, not in connection with a sale, to trustees or
other persons without consideration are not taxable.

Furthermore, it should be noted that a documentary stamp tax is in the nature of an excise tax because it is imposed upon
the privilege, opportunity or facility offered at exchanges for the transaction of the business.24 Documentary stamp tax is a
tax on documents, instruments, loan agreements, and papers evidencing the acceptance, assignment, or transfer of an
obligation, right or property incident thereto.25 Documentary stamp tax is thus imposed on the exercise of these privileges
through the execution of specific instruments, independently of the legal status of the transactions giving rise
thereto.26 Based on the foregoing, the transfer of real properties from SPPC to respondent is not subject to documentary
stamp tax considering that the same was not conveyed to or vested in respondent by means of any specific deed,
instrumentor writing. There was no deed of assignment and transfer separatelyexecuted by the parties for the conveyance
of the real properties. The conveyance of real properties not being embodied in a separate instrumentbut is incorporated
in the merger plan, thus, respondent is not liable to pay documentarystamp tax.

Notably, RA 9243, entitled "An Act Rationalizing the Provisions of the Documentary Stamp Tax of the National Internal
Revenue Code of 1997" was enacted and took effect on April 27, 2004 which exempts the transfer of real property of a
corporation, which is a party to the merger or consolidation, to another corporation, which is also a party to the merger or
consolidation, from the payment of documentary stamp tax.

Section 9 of the law which amends Section 199 of the NIRC states,

SECTION 9. Section 199 of the National Internal Revenue Code of 1997, as amended, is hereby further amended to read
as follows:

Section 199. Documents and Papers Not Subject to Stamp Tax. – The provisions of Section 173 to the contrary
notwithstanding, the following instruments, documents and papers shall be exempt from the documentary stamp tax:

xxxx

(m) Transfer of property pursuant to Section 40 (C)(2) 27 of the National Internal Revenue Code of 1997, as amended.
(Emphasis supplied.)

The enactment of the said law nowremoves any doubt and had made clear that the transfer of real properties as a
consequence of merger or consolidation is not subject to documentary stamp tax.1âwphi1

Thus, we find no error on the part of the CA in affirming the Decision of the CTA which ruled that respondent is entitled to
a refund or issuance of a tax credit certificate in the amount of ₱22,101,407.64 representing respondent’s erroneously
paid documentary stamp tax on the transfer of real property from SPPC torespondent.

We reiterate the well-established doctrine that as a matter of practice and principle, this Court will not set aside the
conclusion reached by an agency, like the CTA, especially if affirmed by the CA. By the very nature of its function, it has
dedicated itself to the study and consideration of tax problems and has necessarily developed an expertise on the subject,
unless there has been an abuse or improvident exercise of authority on its part which is not present
here.28 WHEREFORE, we DENY the petition for lack of merit. The Decision dated September 10, 2009 and Resolution
dated April 13, 2010 of the Court of Appeals in CA-G.R. SP No. 77117 are hereby AFFIRMED.

No pronouncement as to costs.

SO ORDERED.
G.R. No. 166018 June 4, 2014

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE BRANCHES, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent;

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

G.R. No. 167728

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE BRANCHES, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

These petitions for review on certiorari1 assail the Decision2 and Resolution dated July 8, 2004 and October 25, 2004,
respectively, of the Court of Appeals in CA-G.R. SP No. 77580, as well as the Decision3 and Resolution dated September
2, 2004 and April 4, 2005, respectively, of the Court of Appeals in CA-G.R. SP No. 70814. The respective Decisions in the
said cases similarly reversed and set aside the decisions of the Court of Tax Appeals (CTA) in CTA Case Nos. 5951 4 and
6009,5 respectively, and dismissed the petitions of petitioner Hongkong and Shanghai Banking Corporation Limited-
Philippine Branches (HSBC). The corresponding Resolutions, on the other hand, denied the respective motions for
reconsideration of the said Decisions.

HSBC performs, among others, custodial services on behalf of its investor-clients, corporate and individual, resident or
non-resident of the Philippines, with respect to their passive investments in the Philippines, particularly investments in
shares of stocks in domestic corporations. As a custodian bank, HSBC serves as the collection/payment agent with
respect to dividends and other income derived from its investor-clients’ passive investments.6

HSBC’s investor-clients maintain Philippine peso and/or foreign currency accounts, which are managed by HSBC through
instructions given through electronic messages. The said instructions are standard forms known in the banking industry as
SWIFT, or "Society for Worldwide Interbank Financial Telecommunication." In purchasing shares of stock and other
investment in securities, the investor-clients would send electronic messages from abroad instructing HSBC to debit their
local or foreign currency accounts and to pay the purchase price therefor upon receipt of the securities.7

Pursuant to the electronic messages of its investor-clients, HSBC purchased and paid Documentary Stamp Tax (DST)
from September to December 1997 and also from January to December 1998 amounting to ₱19,572,992.10 and
₱32,904,437.30, respectively, broken down as follows:

A. September to December 1997

September 1997 P 6,981,447.90

October 1997 6,209,316.60
November 1997 3,978,510.30
December 1997 2,403,717.30
Total ₱19,572,992.10

B. January to December 1998

January 1998 P 3,328,305.60

February 1998 4,566,924.90
March 1998 5,371,797.30
 April 1998 4,197,235.50
May 1998 2,519,587.20
June 1998 2,301,333.00
July 1998 1,586,404.50
August 1998 1,787,359.50
September 1998 1,231,828.20
October 1998 1,303,184.40
November 1998 2,026,379.70
December 1998 2,684,097.50
Total ₱32,904,437.30

On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then Commissioner, Beethoven Rualo, issued BIR
Ruling No. 132-99 to the effect that instructions or advises from abroad on the management of funds located in the
Philippines which do not involve transfer of funds from abroad are not subject to DST. BIR Ruling No. 132-99 reads:

Date: August 23, 1999

FERRY TOLEDO VICTORINO GONZAGA

& ASSOCIATES
G/F AFC Building, Alfaro St.
Salcedo Village, Makati
Metro Manila

Attn: Atty. Tomas C. Toledo

Tax Counsel

Gentlemen:

This refers to your letter dated July 26, 1999 requesting on behalf of your clients, the CITIBANK & STANDARD
CHARTERED BANK, for a ruling as to whether or not the electronic instructions involving the following transactions of
residents and non-residents of the Philippines with respect to their local or foreign currency accounts are subject to
documentary stamp tax under Section 181 of the 1997 Tax Code, viz:

A. Investment purchase transactions:

An overseas client sends instruction to its bank in the Philippines to either:

(i) debit its local or foreign currency account and to pay a named recipient in the Philippines; or

(ii) receive funds from another bank in the Philippines for deposit into its account and to pay a named
recipient in the Philippines."

The foregoing transactions are carried out under instruction from abroad and [do] not involve actual fund transfer since the
funds are already in the Philippine accounts. The instructions are in the form of electronic messages (i.e., SWIFT MT100
or MT 202 and/or MT 521). In both cases, the payment is against the delivery of investments purchased. The purchase of
investments and the payment comprise one single transaction. DST has already been paid under Section 176 for the
investment purchase.

B. Other transactions:

An overseas client sends an instruction to its bank in the Philippines to either:

 (i) debit its local or foreign currency account and to pay a named recipient, who may be another bank, a
corporate entity or an individual in the Philippines; or

(ii) receive funds from another bank in the Philippines for deposit to its account and to pay a named
recipient, who may be another bank, a corporate entity or an individual in the Philippines."

The above instruction is in the form of an electronic message (i.e., SWIFT MT 100 or MT 202) or tested cable, and may
not refer to any particular transaction.

The opening and maintenance by a non-resident of local or foreign currency accounts with a bank in the Philippines is
permitted by the Bangko Sentral ng Pilipinas, subject to certain conditions.

In reply, please be informed that pursuant to Section 181 of the 1997 Tax Code, which provides that –

SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others.– Upon any acceptance or payment of any bill of
exchange or order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines,
there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos (₱200), or
fractional part thereof, of the face value of any such bill of exchange, or order, or Philippine equivalent of such value, if
expressed in foreign currency. (Underscoring supplied.)

a documentary stamp tax shall be imposed on any bill of exchange or order for payment purporting to be drawn in a
foreign country but payable in the Philippines.

Under the foregoing provision, the documentary stamp tax shall be levied on the instrument, i.e., a bill of exchange or
order for the payment of money, which purports to draw money from a foreign country but payable in the Philippines. In
the instant case, however, while the payor is residing outside the Philippines, he maintains a local and foreign currency
account in the Philippines from where he will draw the money intended to pay a named recipient. The instruction or order
to pay shall be made through an electronic message, i.e., SWIFT MT 100 or MT 202 and/or MT 521. Consequently, there
is no negotiable instrument to be made, signed or issued by the payee. In the meantime, such electronic instructions by
the non-resident payor cannot be considered as a transaction per se considering that the same do not involve any transfer
of funds from abroad or from the place where the instruction originates. Insofar as the local bank is concerned, such
instruction could be considered only as a memorandum and shall be entered as such in its books of accounts. The actual
debiting of the payor’s account, local or foreign currency account in the Philippines, is the actual transaction that should
be properly entered as such.

Under the Documentary Stamp Tax Law, the mere withdrawal of money from a bank deposit, local or foreign currency
account, is not subject to DST, unless the account so maintained is a current or checking account, in which case, the
issuance of the check or bank drafts is subject to the documentary stamp tax imposed under Section 179 of the 1997 Tax
Code. In the instant case, and subject to the physical impossibility on the part of the payor to be present and prepare and
sign an instrument purporting to pay a certain obligation, the withdrawal and payment shall be made in cash. In this light,
the withdrawal shall not be subject to documentary stamp tax. The case is parallel to an automatic bank transfer of local
funds from a savings account to a checking account maintained by a depositor in one bank.

Likewise, the receipt of funds from another bank in the Philippines for deposit to the payee’s account and thereafter upon
instruction of the non-resident depositor-payor, through an electronic message, the depository bank to debit his account
and pay a named recipient shall not be subject to documentary stamp tax.

It should be noted that the receipt of funds from another local bank in the Philippines by a local depository bank for the
account of its client residing abroad is part of its regular banking transaction which is not subject to documentary stamp
tax. Neither does the receipt of funds makes the recipient subject to the documentary stamp tax. The funds are deemed to
be part of the deposits of the client once credited to his account, and which, thereafter can be disposed in the manner he
wants. The payor-client’s further instruction to debit his account and pay a named recipient in the Philippines does not
involve transfer of funds from abroad. Likewise, as stated earlier, such debit of local or foreign currency account in the
Philippines is not subject to the documentary stamp tax under the aforementioned Section 181 of the Tax Code.

In the light of the foregoing, this Office hereby holds that the instruction made through an electronic message by non-
resident payor-client to debit his local or foreign currency account maintained in the Philippines and to pay a certain
named recipient also residing in the Philippines is not the transaction contemplated under Section 181 of the 1997 Tax
Code. Such being the case, such electronic instruction purporting to draw funds from a local account intended to be paid
to a named recipient in the Philippines is not subject to documentary stamp tax imposed under the foregoing Section.
This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be
disclosed that the facts are different, this ruling shall be considered null and void.

Very truly yours,

(Sgd.) BEETHOVEN L. RUALO

Commissioner of Internal Revenue8

With the above BIR Ruling as its basis, HSBC filed on October 8, 1999 an administrative claim for the refund of the
amount of ₱19,572,992.10 allegedly representing erroneously paid DST to the BIR for the period covering September to
December 1997.

Subsequently, on January 31, 2000, HSBC filed another administrative claim for the refund of the amount of
₱32,904,437.30 allegedly representing erroneously paid DST to the BIR for the period covering January to December
1998.

As its claims for refund were not acted upon by the BIR, HSBC subsequently brought the matter to the CTA as CTA Case
Nos. 5951 and 6009, respectively, in order to suspend the running of the two-year prescriptive period.

The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in CTA Case No. 5951
favored HSBC. Respondent Commissioner of Internal Revenue was ordered to refund or issue a tax credit certificate in
favor of HSBC in the reduced amounts of ₱30,360,570.75 in CTA Case No. 6009 and ₱16,436,395.83 in CTA Case No.
5951, representing erroneously paid DST that have been sufficiently substantiated with documentary evidence. The CTA
ruled that HSBC is entitled to a tax refund or tax credit because Sections 180 and 181 of the 1997 Tax Code do not apply
to electronic message instructions transmitted by HSBC’s non-resident investor-clients:

The instruction made through an electronic message by a nonresident investor-client, which is to debit his local or foreign
currency account in the Philippines and pay a certain named recipient also residing in the Philippines is not the
transaction contemplated in Section 181 of the Code. In this case, the withdrawal and payment shall be made in cash. It is
parallel to an automatic bank transfer of local funds from a savings account to a checking account maintained by a
depositor in one bank. The act of debiting the account is not subject to the documentary stamp tax under Section 181.
Neither is the transaction subject to the documentary stamp tax under Section 180 of the same Code. These electronic
message instructions cannot be considered negotiable instruments as they lack the feature of negotiability, which, is the
ability to be transferred (Words and Phrases).

These instructions are considered as mere memoranda and entered as such in the books of account of the local bank,
and the actual debiting of the payor’s local or foreign currency account in the Philippines is the actual transaction that
should be properly entered as such.9

The respective dispositive portions of the Decisions dated May 2, 2002 in CTA Case No. 6009 and dated December 18,
2002 in CTA Case No. 5951 read:

II. CTA Case No. 6009

WHEREFORE, in the light of all the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Respondent is
hereby ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the amount of
₱30,360,570.75 representing erroneous payment of documentary stamp tax for the taxable year 1998. 10

II. CTA Case No. 5951

WHEREFORE, in the light of the foregoing, the instant petition is hereby partially granted. Accordingly, respondent is
hereby ORDERED to REFUND, or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in the
reduced amount of ₱16,436,395.83 representing erroneously paid documentary stamp tax for the months of September
1997 to December 1997.11

However, the Court of Appeals reversed both decisions of the CTA and ruled that the electronic messages of HSBC’s
investor-clients are subject to DST. The Court of Appeals explained:
At bar, [HSBC] performs custodial services in behalf of its investor-clients as regards their passive investments in the
Philippines mainly involving shares of stocks in domestic corporations. These investor-clients maintain Philippine peso
and/or foreign currency accounts with [HSBC]. Should they desire to purchase shares of stock and other investments
securities in the Philippines, the investor-clients send their instructions and advises via electronic messages from abroad
to [HSBC] in the form of SWIFT MT 100, MT 202, or MT 521 directing the latter to debit their local or foreign currency
account and to pay the purchase price upon receipt of the securities (CTA Decision, pp. 1-2; Rollo, pp. 41-42). Pursuant
to Section 181 of the NIRC, [HSBC] was thus required to pay [DST] based on its acceptance of these electronic
messages – which, as [HSBC] readily admits in its petition filed before the [CTA], were essentially orders to pay the
purchases of securities made by its client-investors (Rollo, p. 60).

Appositely, the BIR correctly and legally assessed and collected the [DST] from [HSBC] considering that the said tax was
levied against the acceptances and payments by [HSBC] of the subject electronic messages/orders for payment. The
issue of whether such electronic messages may be equated as a written document and thus be subject to tax is beside
the point. As We have already stressed, Section 181 of the law cited earlier imposes the [DST] not on the bill of exchange
or order for payment of money but on the acceptance or payment of the said bill or order. The acceptance of a bill or order
is the signification by the drawee of its assent to the order of the drawer to pay a given sum of money while payment
implies not only the assent to the said order of the drawer and a recognition of the drawer’s obligation to pay such
aforesaid sum, but also a compliance with such obligation (Philippine National Bank vs. Court of Appeals, 25 SCRA 693
[1968]; Prudential Bank vs. Intermediate Appellate Court, 216 SCRA 257 [1992]). What is vital to the valid imposition of
the [DST] under Section 181 is the existence of the requirement of acceptance or payment by the drawee (in this case,
[HSBC]) of the order for payment of money from its investor-clients and that the said order was drawn from a foreign
country and payable in the Philippines. These requisites are surely present here.

It would serve the parties well to understand the nature of the tax being imposed in the case at bar. In Philippine Home
Assurance Corporation vs. Court of Appeals (301 SCRA 443 [1999]), the Supreme Court ruled that [DST is] levied on the
exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal
relationships through the execution of specific instruments, independently of the legal status of the transactions giving rise
thereto. In the same case, the High Court also declared – citing Du Pont vs. United States (300 U.S. 150, 153 [1936])

The tax is not upon the business transacted but is an excise upon the privilege, opportunity, or facility offered at
exchanges for the transaction of the business. It is an excise upon the facilities used in the transaction of the business
separate and apart from the business itself. x x x.

To reiterate, the subject [DST] was levied on the acceptance and payment made by [HSBC] pursuant to the order made
by its client-investors as embodied in the cited electronic messages, through which the herein parties’ privilege and
opportunity to transact business respectively as drawee and drawers was exercised, separate and apart from the
circumstances and conditions related to such acceptance and subsequent payment of the sum of money authorized by
the concerned drawers. Stated another way, the [DST] was exacted on [HSBC’s] exercise of its privilege under its
drawee-drawer relationship with its client-investor through the execution of a specific instrument which, in the case at bar,
is the acceptance of the order for payment of money. The acceptance of a bill or order for payment may be done in writing
by the drawee in the bill or order itself, or in a separate instrument (Prudential Bank vs. Intermediate Appellate Court,
supra.)Here, [HSBC]’s acceptance of the orders for the payment of money was veritably ‘done in writing in a separate
instrument’ each time it debited the local or foreign currency accounts of its client-investors pursuant to the latter’s
instructions and advises sent by electronic messages to [HSBC]. The [DST] therefore must be paid upon the execution of
the specified instruments or facilities covered by the tax – in this case, the acceptance by [HSBC] of the order for payment
of money sent by the client-investors through electronic messages. x x x.12

Hence, these petitions.

HSBC asserts that the Court of Appeals committed grave error when it disregarded the factual and legal conclusions of
the CTA. According to HSBC, in the absence of abuse or improvident exercise of authority, the CTA’s ruling should not
have been disturbed as the CTA is a highly specialized court which performs judicial functions, particularly for the review
of tax cases. HSBC further argues that the Commissioner of Internal Revenue had already settled the issue on the
taxability of electronic messages involved in these cases in BIR Ruling No. 132-99 and reiterated in BIR Ruling No. DA-
280-2004.13

The Commissioner of Internal Revenue, on the other hand, claims that Section 181 of the 1997 Tax Code imposes DST
on the acceptance or payment of a bill of exchange or order for the payment of money. The DST under Section 18 of the
1997 Tax Code is levied on HSBC’s exercise of a privilege which is specifically taxed by law. BIR Ruling No. 132-99 is
inconsistent with prevailing law and long standing administrative practice, respondent is not barred from questioning his
own revenue ruling. Tax refunds like tax exemptions are strictly construed against the taxpayer. 14
The Court finds for HSBC.

The Court agrees with the CTA that the DST under Section 181 of the Tax Code is levied on the acceptance or payment
of "a bill of exchange purporting to be drawn in a foreign country but payable in the Philippines" and that "a bill of
exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it,
requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in
money to order or to bearer." A bill of exchange is one of two general forms of negotiable instruments under the
Negotiable Instruments Law.15

The Court further agrees with the CTA that the electronic messages of HSBC’s investor-clients containing instructions to
debit their respective local or foreign currency accounts in the Philippines and pay a certain named recipient also residing
in the Philippines is not the transaction contemplated under Section 181 of the Tax Code as such instructions are "parallel
to an automatic bank transfer of local funds from a savings account to a checking account maintained by a depositor in
one bank." The Court favorably adopts the finding of the CTA that the electronic messages "cannot be considered
negotiable instruments as they lack the feature of negotiability, which, is the ability to be transferred" and that the said
electronic messages are "mere memoranda" of the transaction consisting of the "actual debiting of the [investor-client-
payor’s] local or foreign currency account in the Philippines" and "entered as such in the books of account of the local
bank," HSBC.16

More fundamentally, the instructions given through electronic messages that are subjected to DST in these cases are not
negotiable instruments as they do not comply with the requisites of negotiability under Section 1 of the Negotiable
Instruments Law, which provides:

Sec. 1. Form of negotiable instruments.– An instrument to be negotiable must conform to the following requirements:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.

The electronic messages are not signed by the investor-clients as supposed drawers of a bill of exchange; they do not
contain an unconditional order to pay a sum certain in money as the payment is supposed to come from a specific fund or
account of the investor-clients; and, they are not payable to order or bearer but to a specifically designated third party.
Thus, the electronic messages are not bills of exchange. As there was no bill of exchange or order for the payment drawn
abroad and made payable here in the Philippines, there could have been no acceptance or payment that will trigger the
imposition of the DST under Section 181 of the Tax Code.

Section 181 of the 1997 Tax Code, which governs HSBC’s claim for tax refund for taxable year 1998 subject of G.R. No.
167728, provides:

SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any acceptance or payment of any bill
of exchange or order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines,
there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos (₱200), or
fractional part thereof, of the face value of any such bill of exchange, or order, or the Philippine equivalent of such value, if
expressed in foreign currency. (Emphasis supplied.)

Section 230 of the 1977 Tax Code, as amended, which governs HSBC’s claim for tax refund for DST paid during the
period September to December 1997 and subject of G.R. No. 166018, is worded exactly the same as its counterpart
provision in the 1997 Tax Code quoted above.

The origin of the above provision is Section 117 of the Tax Code of 1904,17 which provided: SECTION 117. The acceptor
or acceptors of any bill of exchange or order for the payment of any sum of money drawn or purporting to be drawn in any
foreign country but payable in the Philippine Islands, shall, before paying or accepting the same, place thereupon a stamp
in payment of the tax upon such document in the same manner as is required in this Act for the stamping of inland bills of
exchange or promissory notes, and no bill of exchange shall be paid nor negotiated until such stamp shall have been
affixed thereto.18 (Emphasis supplied.)

It then became Section 30(h) of the 1914 Tax Code19:

SEC. 30. Stamp tax upon documents and papers. – Upon documents, instruments, and papers, and upon acceptances,
assignments, sales, and transfers of the obligation, right, or property incident thereto documentary taxes for and in respect
of the transaction so had or accomplished shall be paid as hereinafter prescribed, by the persons making, signing,
issuing, accepting, or transferring the same, and at the time such act is done or transaction had:

xxxx

(h) Upon any acceptance or payment upon acceptance of any bill of exchange or order for the payment of money
purporting to be drawn in a foreign country but payable in the Philippine Islands, on each two hundred pesos, or fractional
part thereof, of the face value of any such bill of exchange or order, or the Philippine equivalent of such value, if
expressed in foreign currency, two centavos[.] (Emphasis supplied.)

It was implemented by Section 46 in relation to Section 39 of Revenue Regulations No. 26,20 as amended:

SEC. 39. A Bill of Exchange is one that "denotes checks, drafts, and all other kinds of orders for the payment of money,
payable at sight or on demand, or after a specific period after sight or from a stated date."

SEC. 46. Bill of Exchange, etc. – When any bill of exchange or order for the payment of money drawn in a foreign country
but payable in this country whether at sight or on demand or after a specified period after sight or from a stated date, is
presented for acceptance or payment, there must be affixed upon acceptance or payment of documentary stamp equal to
P0.02 for each ₱200 or fractional part thereof. (Emphasis supplied.)

It took its present form in Section 218 of the Tax Code of 1939,21 which provided:

SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any acceptance or payment of any bill
of exchange or order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines,
there shall be collected a documentary stamp tax of four centavos on each two hundred pesos, or fractional part thereof,
of the face value of any such bill of exchange or order, or the Philippine equivalent of such value, if expressed in foreign
currency. (Emphasis supplied.)

It then became Section 230 of the 1977 Tax Code,22 as amended by Presidential Decree Nos. 1457 and 1959,which, as
stated earlier, was worded exactly as Section 181 of the current Tax Code:

SEC. 230. Stamp tax upon acceptance of bills of exchange and others. – Upon any acceptance or payment of any bill of
exchange or order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines,
there shall be collected a documentary stamp tax of thirty centavos on each two hundred pesos, or fractional part thereof,
of the face value of any such bill of exchange, or order, or the Philippine equivalent of such value, if expressed in foreign
currency. (Emphasis supplied.)

The pertinent provision of the present Tax Code has therefore remained substantially the same for the past one hundred
years.1âwphi1 The identical text and common history of Section 230 of the 1977 Tax Code, as amended, and the 1997
Tax Code, as amended, show that the law imposes DST on either (a) the acceptance or (b) the payment of a foreign bill
of exchange or order for the payment of money that was drawn abroad but payable in the Philippines.

DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or properties incident
thereto.23 Under Section 173 of the 1997 Tax Code, the persons primarily liable for the payment of the DST are those (1)
making, (2) signing, (3) issuing, (4) accepting, or (5) transferring the taxable documents, instruments or papers. 24

In general, DST is levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or
termination of specific legal relationships through the execution of specific instruments. Examples of such privileges, the
exercise of which, as effected through the issuance of particular documents, are subject to the payment of DST are leases
of lands, mortgages, pledges and trusts, and conveyances of real property. 25
As stated above, Section 230 of the 1977 Tax Code, as amended, now Section 181 of the 1997 Tax Code, levies DST on
either (a) the acceptance or (b) the payment of a foreign bill of exchange or order for the payment of money that was
drawn abroad but payable in the Philippines. In other words, it levies DST as an excise tax on the privilege of the drawee
to accept or pay a bill of exchange or order for the payment of money, which has been drawn abroad but payable in the
Philippines, and on the corresponding privilege of the drawer to have acceptance of or payment for the bill of exchange or
order for the payment of money which it has drawn abroad but payable in the Philippines.

Acceptance applies only to bills of exchange.26 Acceptance of a bill of exchange has a very definite meaning in law. 27 In
particular, Section 132 of the Negotiable Instruments Law provides:

Sec. 132. Acceptance; how made, by and so forth. – The acceptance of a bill [of exchange28] is the signification by the
drawee of his assent to the order of the drawer. The acceptance must be in writing and signed by the drawee. It must not
express that the drawee will perform his promise by any other means than the payment of money.

Under the law, therefore, what is accepted is a bill of exchange, and the acceptance of a bill of exchange is both the
manifestation of the drawee’s consent to the drawer’s order to pay money and the expression of the drawee’s promise to
pay. It is "the act by which the drawee manifests his consent to comply with the request contained in the bill of exchange
directed to him and it contemplates an engagement or promise to pay."29 Once the drawee accepts, he becomes an
acceptor.30 As acceptor, he engages to pay the bill of exchange according to the tenor of his acceptance. 31

Acceptance is made upon presentment of the bill of exchange, or within 24 hours after such presentment. 32Presentment
for acceptance is the production or exhibition of the bill of exchange to the drawee for the purpose of obtaining his
acceptance.33

Presentment for acceptance is necessary only in the instances where the law requires it. 34 In the instances where
presentment for acceptance is not necessary, the holder of the bill of exchange can proceed directly to presentment for
payment.

Presentment for payment is the presentation of the instrument to the person primarily liable for the purpose of demanding
and obtaining payment thereof.35

Thus, whether it be presentment for acceptance or presentment for payment, the negotiable instrument has to be
produced and shown to the drawee for acceptance or to the acceptor for payment.

Revenue Regulations No. 26 recognizes that the acceptance or payment (of bills of exchange or orders for the payment of
money that have been drawn abroad but payable in the Philippines) that is subjected to DST under Section 181 of the
1997 Tax Code is done after presentment for acceptance or presentment for payment, respectively. In other words, the
acceptance or payment of the subject bill of exchange or order for the payment of money is done when there is
presentment either for acceptance or for payment of the bill of exchange or order for the payment of money.

Applying the above concepts to the matter subjected to DST in these cases, the electronic messages received by HSBC
from its investor-clients abroad instructing the former to debit the latter's local and foreign currency accounts and to pay
the purchase price of shares of stock or investment in securities do not properly qualify as either presentment for
acceptance or presentment for payment. There being neither presentment for acceptance nor presentment for payment,
then there was no acceptance or payment that could have been subjected to DST to speak of.

Indeed, there had been no acceptance of a bill of exchange or order for the payment of money on the part of HSBC. To
reiterate, there was no bill of exchange or order for the payment drawn abroad and made payable here in the Philippines.
Thus, there was no acceptance as the electronic messages did not constitute the written and signed manifestation of
HSBC to a drawer's order to pay money. As HSBC could not have been an acceptor, then it could not have made any
payment of a bill of exchange or order for the payment of money drawn abroad but payable here in the Philippines. In
other words, HSBC could not have been held liable for DST under Section 230 of the 1977 Tax Code, as amended, and
Section 181 of the 1997 Tax Code as it is not "a person making, signing, issuing, accepting, or, transferring" the taxable
instruments under the said provision. Thus, HSBC erroneously paid DST on the said electronic messages for which it is
entitled to a tax refund.

WHEREFORE, the petitions are hereby GRANTED and the Decisions dated May 2, 2002 in CTA Case No. 6009 and
dated December 18, 2002 in CT A Case No. 5951 of the Court of Tax Appeals are REINSTATED.

SO ORDERED.
G.R. No. 175188 July 15, 2015

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
LA TONDENA DISTILLERS, INC. (LTDI [now GINEBRA SAN MIGUEL], Respondent.

DECISION

DEL CASTILLO, J.:

The transfer of real property to a surviving corporation pursuant to a merger is not subject to Documentary Stamp Tax
(DST).1

This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the September 26, 2006 Decision 3 and
the October 31, 2006 Resolution4 of the Court of Tax Appeals (CTA) in C.T.A. EB No. 178.

Factual Antecedents

On September 17, 2001, respondent La Tondeña Distillers, Inc. entered into a Plan of Merger5 with Sugarland Beverage
Corporation (SBC), SMC Juice, Inc. (SMCJI), and Metro Bottled Water Corporation (MBWC).6 As a result of the merger,
the assets and liabilities of the absorbed corporations were transferred to respondent, the surviving
corporation.7 Respondent later changed its corporate name to Ginebra San Miguel, Inc. (GSMI). 8

On September 26, 2001, respondent requested for a confirmation of the tax-free nature of the said merger from the
Bureau of Internal Revenue (BIR).9

On November 5, 2001, the BIR issued a ruling stating that pursuant to Section 40(C)(2) 10 and (6)(b)11 of the 1997 National
Internal Revenue Code (NIRC), no gain or loss shall be recognized by the absorbed corporations as transferors of all
assets and liabilities.12 However, the transfer of assets, such as real properties, shall be subject to DST imposed under
Section 19613 of the NIRC.14

Consequently, on various dates from October 31, 2001 to November 15, 2001, respondent paid to the BIR the following
DST, to wit:

DST
Property Locations Total Assets
Payments
A. Metro Bottled Water Corp.
General Trias, Cavite 326,508,953.0015 4,897,635.00
Mandaue City, Cebu 14,078,381.00 211,185.00
Pavia, Iloilo 10,644,861.00 159,675.00
B. Sugarland Beverage Corp.
Navotas, Metro Manila 171,790,790.00 2,576,865.00
Imus, Cavite 218,114,261.00 3,272,175.00
Pine Street, Mandaluyong 201,562,148.00 3,023,445.00
Totals 942,729,393.00 14,140,980.00 16

On October 14, 2003, claiming that it is exempt from paying DST, respondent filed with petitioner Commissioner of
Internal Revenue (CIR) an administrative claim for tax refund or tax credit in the amount of 14,140,980.00, representing
the DST it allegedly erroneously paid on the occasion of the merger. 17

On the same day, respondent filed with the CTA a Petition for Review, docketed as C.T.A. Case No. 6796 and raffled to
the Second (2nd) Division of the CTA.18

Ruling of the Court of Tax Appeals Division

On January 6, 2006, the 2nd Division of the CTA rendered a Decision19 finding respondent entitled to its claim for tax
refund or tax credit in the amount of 14,140,980.00, representing its erroneously paid DST for the taxable year
2001.20 The 2nd Division of the CTA ruled that Section 196 of the NIRC does not apply because there is no purchaser or
buyer in the case of a merger.21 Citing Section 8022 of the Corporation Code of the Philippines, the 2nd Division of the
CTA explained that the assets of the absorbed corporations were not bought or purchased by respondent but were
transferred to and vested in respondent as an inherent legal consequence of the merger, without any further act or
deed.23 It also noted that any doubts as to the tax-free nature of the merger had been already removed by the subsequent
enactment of Republic Act No. (RA) 9243,24 which amended Section 19925 of the NIRC by specifically exempting from the
payment of DST the transfer of property pursuant to a merger. 26Aggrieved, petitioner moved for reconsideration but the
2nd Division of the CTA denied the same in a Resolution dated April 4, 2006. 27

Unfazed, petitioner elevated the matter to the CTA En Banc via a Petition for Review, docketed as C.T.A.EB No. 178.

Ruling of the Court of Tax Appeals En Banc

On September 26, 2006, the CTA En Banc rendered the assailed Decision, finding no reversible error on the part of the
2nd Division of the CTA in granting respondent’s claim for tax refund or tax credit. 28 The CTA En Banc opined that Section
196 of the NIRC does not apply to a merger as the properties subject of a merger are not sold, but are merely absorbed
by the surviving corporation.29 In other words, the properties are transferred by operation of law, without any further act or
deed.30

Petitioner sought reconsideration of the assailed Decision.

On October 31, 2006, the CTA En Banc issued the assailed Resolution, denying petitioner’s motion for reconsideration. 31

Issue

Hence, petitioner filed the instant Petition for Review on Certiorari raising the sole issue of whether the CTA En Banc
erred in ruling that respondent is exempt from payment of DST.32 Petitioner’s Arguments

Petitioner posits that DST is levied on the exercise of the privilege to convey real property regardless of the manner of
conveyance.33 Thus, it is imposed on all conveyances of realty, including realty transfer during a corporate merger. 34 As to
the subsequent enactment of RA 9243, petitioner claims that respondent cannot benefit from it as laws apply
prospectively.35 Respondent’s Arguments

Respondent, on the other hand, contends that DST is imposed only on conveyances, deeds, instruments, or writing,
where realty sold shall be conveyed to a purchaser or buyer.36 In this case, there is no purchaser or buyer as a merger is
neither a sale nor a liquidation of corporate property but a consolidation of properties, powers, and facilities of the
constituent companies.37

Our Ruling

The Petition must fail.

In Commissioner of Internal Revenue v. Pilipinas Shell Petroleum Corporation, 38 the Supreme Court already ruled that
Section 196of the NIRC does not include the transfer of real property from one corporation to another pursuant to a
merger. It explained that:

[W]e do not find merit in petitioner’s contention that Section 196 covers all transfers and conveyances of real property for
a valuable consideration. A perusal of the subject provision would clearly show it pertains only to sale transactions where
real property is conveyed to a purchaser for a consideration. The phrase "granted, assigned, transferred or otherwise
conveyed" is qualified by the word "sold" which means that documentary stamp tax under Section 196 is imposed on the
transfer of realty by way of sale and does not apply to all conveyances of real property. Indeed, as correctly noted by the
respondent, the fact that Section 196 refers to words "sold", "purchaser" and "consideration" undoubtedly leads to the
conclusion that only sales of real property are contemplated therein.

Thus, petitioner obviously erred when it relied on the phrase "granted, assigned, transferred or otherwise conveyed" in
claiming that all conveyances of real property regardless of the manner of transfer are subject to documentary stamp tax
under Section 196. It is not proper to construe the meaning of a statute on the basis of one part. x x x
 xxxx

It should be emphasized that in the instant case, the transfer of SPPC’s real property to respondent was pursuant to their
approved plan of merger.1âwphi1 In a merger of two existing corporations, oneof the corporations survives and continues
the business, while the other is dissolved, and all its rights, properties, and liabilities are acquired by the surviving
corporation. Although there is a dissolution of the absorbed or merged corporations, there is no winding up of their affairs
or liquidation of their assets because the surviving corporation automatically acquires all their rights, privileges, and
powers, as well as their liabilities. Here, SPPC ceased to have any legal personality and respondent PSPC stepped into
everything that was SPPC’s, pursuant to the law and the terms of their Plan of Merger.

Pertinently, a merger of two corporations produces the following effects, among others:

Sec. 80. Effects of merger or consolidation. – x x x

xxxx

4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges,
immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables
due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of,
or belonging to, or due to each constituent corporations, shall be taken and deemed to be transferred to and vested in
such surviving or consolidated corporation without further act or deed;

In a merger, the real properties are not deemed "sold" to the surviving corporation and the latter could not be considered
as "purchaser" of realty since the real properties subject of the merger were merely absorbed by the surviving corporation
by operation of law and these properties are deemed automatically transferred to and vested in the surviving corporation
without further act or deed. Therefore, the transfer of real properties to the surviving corporation in pursuance of a merger
is not subject to documentary stamp tax. As stated at the outset, documentary stamp tax is imposed only on all
conveyances, deeds, instruments or writing where realty sold shall be conveyed to a purchaser or purchasers. The
transfer of SPPC’s real property to respondent was neither a sale nor was it a conveyance of real property for a
consideration contracted to be paid as contemplated under Section 196 of the Tax Code. Hence, Section 196 of the Tax
Code is inapplicable and respondent is not liable for documentary stamp tax. 39(Emphasis in the original)

Following the doctrine of stare decisis, which dictates that when a court has reached a conclusion in one case, it should
be applied to those that follow if the facts are substantially the same, even though the parties may be different,40 we find
that respondent is not liable for DST as the transfer of real properties from the absorbed corporations to respondent was
pursuant to a merger. And having complied with the provisions of Sections 204(C) 41and 22942 of the NIRC, we agree with
the CTA that respondent is entitled to a refund of the DST it erroneously paid on various dates between October 31, 2001
to November 15, 2001 in the total amount of 14,140,980.00.

Likewise without merit is petitioner’s contention that respondent cannot claim exemption under RA 9243 as this was
enacted only in 2004 or after respondent’s tax liability accrued. To be clear, respondent did not file its claim for tax refund
or tax credit based on the exemption found in RA 9243. Rather, it filed a claim for tax refund or tax credit on the ground
that Section 196 of the NIRC does not include the transfer of real property pursuant to a merger. In fact, the ratio
decidendi (or reason for the decision) in Pilipinas Shell Petroleum Corporation 43 was based on Section 196 of the NIRC, in
relation to Section 80 of the Corporation Code, not RA 9243. In that case, RA 9243 was mentioned only to emphasize that
"the enactment of the said law now removes any doubt and had made clear that the transfer of real properties as a
consequence of merger or consolidation is not subject to [DST]."44

All told, we find no error on the part of the CTA in granting respondent's claim for tax refund or tax credit in the amount of
₱14,140,980.00, representing its erroneously paid DST for the taxable year 2001.

In closing, we must stress that taxes must not be imposed beyond what the law expressly and clearly declares as tax laws
must be construed strictly against the State and liberally in favor of the taxpayer. 45

WHEREFORE, the Petition is hereby DENIED. The assailed September 26, 2006 Decision and the October 31, 2006
Resolution of the Court of Tax Appeals in C.T.A. EB No. 178 are hereby AFFIRMED.

SO ORDERED.
G.R. No. 167807 December 6, 2011

MANOLITO AGRA, EDMUNDO P. AGUILAR, IMELDA I. AMERICA, EVELYN R. CONCEPCION, DIOSDADO A.

CORSIGA, PERCIVAL G. CRISOSTOMO, CESAR E. FAELDON, MA. REGINA C. FILOTEO, ZARINA O. HIPOLITO,
JANICE F. MABILOG, ROBERTO MARTINEZ, JONATHAN MENDROS, NORMAN MIRASOL, EDRICK V. MOZO,
LORENZO A. PENOLIAR, LOURDES QUINTERO, GLORIA GUDELIA SAMBO, DEMOSTHENES V. ERENO,
RHONEIL LIBUNAO, ILUGEN P. MABANSAG, JOSEPHINE MAGBOO, MADELEINE ANN B. BAUTISTA, ULYSSES
C. BIBON, ANGELINA RAMOS, EDUARDO M. SUMAYOD, DOMINGO TAMAYO, HERACLEA M. AFABLE, ANNA
LISSA CREENCIA, CHONA O. DELA CRUZ, MERCY NANETTE C. IBOY, JEAN A. LUPANGO, MARIE DELA O. NA-
OBRE, PERLA LUZ OCAMPO, ROUCHELLEJANE PAYURAN, ABIGAIL E. PORMENTO, THERESITA A. RIVERA,
MILAGROS ROBLES, JOSEPHINE ROSILLO, ARSENIA M. SACDALAN, PRECILA TUBIO, IRENE H. VIRAY,
WILFREDO O. BUCSIT, BONIFACIO DAVID, ROSARIO P. DIZON, EXEQUIEL EVALE, JR., RONALD M. MANALO,
HENRIETTA A. MARAMOT, FELICISIMO U. PULA, JONAS F. SALVADOR, ERNESTO SILVANO, JR., ENRICO G.
VELGADO, FEDERICO VILLAR, JR., ARNEL C. ABEN, ABDULMALIK BACARAMAN, VIRGINIA BORJA, ANTONIO
CARANDANG, JR., RINA RIEL DOLINA, MANOLITO FAJARDO, ARVIN B. GARDUQUE, CAYETANO JUAREZ, MA.
SHERYL LABONETE, HERCONIDA T. LAZARO, MARITESS MARTINEZ, AURELIO L. MENDOZA, ARNEL M.
NOGOT, GERARDO G. POMOY, DENCIO RAMOS, CORAZON TAGUDIN, ANAFEL B. TIO, AGATONA S. ZALATAR,
MARGIE EULALIA CALMA, RENEE D. MELLA, ARLIQUIN AMERICA, DEANNA B. AYSON, GERALDINE J. CALICA,
CHESTER FERNANDEZ, LUISA I. HERNANDEZ, CYNTHIA E. LISONDRA, ALONA S. LLVATA, CLAIRE P. QUETUA,
ROSEMARIE S. QUINTOS, RUTH S. RAMIREZ, LINO VERMUDO, JR., ROLANDO R. APOLONIO, CELIA I. ACCAD,
MA. ALMA AYOS, PAMELA CASTILLO, ARNOLD DUPA, LAURENCE FELICIANO, LEANDRO P. LIBRANDO,
MARILOU B. LOPEZ, AMELITA P. LUCERO, ESTERBELLE T. SIBALA, JONA ANDAL, ANDRES RATIO, MA.
THERESA Q. MALLANO, DANILO P. LIGUA, JOY ABOGADO, VIRGINIA C. STA. ANA, ALBERNARD BAUTISTA,
JUBANE DE PEDRO, PAUL DINDO C. DELA CRUZ, ALEJO B. INCISO, SHERWIN MAÑADA, JESUS T. OBIDOS,
JOEL B. ARELLANO, ALFREDO CABRERA, MARY LYNN E. GELLOR, JOHN JOSEPH M. MAGTULOY, MICHELLE
MONTEMAYOR, RHINA ANGUE, NORBERTO BAYAGA, JR., JUSTINO CALVEZ, EDWIN CONCEPCION, ALAN
JOSEPH IBE, CESAR JACINTO, JOSERITA MADRID, IRENE MARTIN, GINA T. QUINDO, RENATO SUBIJANO,
NIELMA E. VERZOSA, ALL NATIONAL ELECTRIFICATION ADMINISTRATION EMPLOYEES, REPRESENTED BY
REGINA FILOTEO, Petitioners,
vs.
COMMISSION ON AUDIT, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

This is a special civil action via certiorari under Rule 65 in relation to Rule 64 of the 1997 Revised Rules of Civil Procedure
from the Decision1 of the Commission on Audit (COA) No. 2003-134 dated October 9, 2003, which denied the grant of rice
allowance to employees of the National Electrification Administration (NEA) who were hired after June 30, 1989
(petitioners) and COA’s Resolution2 No. 2005-010 dated February 24, 2005, which likewise denied petitioners’ Motion for
Reconsideration.

On July 1, 1989, Republic Act No. 6758 (the Compensation and Position Classification Act of 1989) took effect, Section
12 of which provides:

Sec. 12. Consolidation of Allowances and Compensation. — All allowances, except for representation and transportation
allowances; clothing and laundry allowances; subsistence allowance of marine officers and crew on board government
vessels and hospital personnel; hazard pay; allowances of foreign service personnel stationed abroad; and such other
additional compensation not otherwise specified herein as may be determined by the DBM, shall be deemed included in
the standardized salary rates herein prescribed. Such other additional compensation, whether in cash or in kind, being
received by incumbents only as of July 1, 1989 not integrated into the standardized salary rates shall continue to be
authorized.

Existing additional compensation of any national government official or employee paid from local funds of a local
government unit shall be absorbed into the basic salary of said official or employee and shall be paid by the National
Government. (Emphasis ours.)

Pursuant to its authority to implement Republic Act No. 6758 under Section 23 thereof, the Department of Budget and
Management (DBM) on October 2, 1989 issued Corporate Compensation Circular No. 10 (DBM-CCC No. 10), otherwise
known as the "Implementing Rules and Regulations of R.A. No. 6758." Paragraph 5.5 of DBM-CCC No. 10 reads:
 5.5 The following allowances/fringe benefits authorized to GOCCs/GFIs pursuant to the aforementioned
issuances are not likewise to be integrated into the basic salary and allowed to be continued only for incumbents
of positions as of June 30, 1989 who are authorized and actually receiving said allowances/benefits as of said
date, at the same terms and conditions prescribed in said issuances[:]

5.5.1 Rice Subsidy;

5.5.2 Sugar Subsidy;

5.5.3 Death Benefits other than those granted by the GSIS;

5.5.4 Medical/dental/optical allowances/benefits;

5.5.5 Children’s Allowance;

5.5.6 Special Duty Pay/Allowance;

5.5.7 Meal Subsidy;

5.5.8 Longevity Pay; and

5.5.9 Teller’s Allowance. (Emphasis added.)

A group of NEA employees who were hired after October 31, 19893 claimed that they did not receive meal, rice, and
children’s allowances. Thus, on July 23, 1999, they filed a special civil action for mandamus against NEA and its Board of
Administrators before the Regional Trial Court (RTC), Branch 88, Quezon City, docketed as SP. Civil Action No. Q-99-
38275, alleging violation of their right to the equal protection clause under the Constitution.

On December 15, 1999, the RTC rendered its Decision4 in their favor, disposing of the case in the following manner:

WHEREFORE, foregoing considered, the petition is hereby GRANTED directing the respondent NEA, its Board of
Administrators to forthwith settle the claims of the petitioners and other employees similarly situated and extend to them
the benefits and allowances to which they are entitled but which until now they have been deprived of as enumerated
under Section 5 of DBM CCC No. 10 and their inclusion in the Provident Funds Membership, retroactive from the date of
their appointments up to the present or until their separation from the service. 5

At the instance of the complainants, the Branch Clerk of Court of RTC Branch 88, Quezon City, Lily D. Labarda, issued a
CERTIFICATION6 dated January 24, 2000, which states:

This is to certify that the Decision dated December 16, 1999 7 of the above-entitled case which reads the dispositive
portion:

xxxx

is now final and executory.

This certification [is] issued upon the request of Ms. Blesilda B. Aguilar for whatever legal purpose/s it may serve. 8

Afterwards, the Presiding Judge of RTC Branch 88, Quezon City issued a Writ of Execution 9 in SP. Civil Action No. Q-99-
38275 on February 22, 2000.10 Thereafter, the RTC issued a Notice of Garnishment against the funds of NEA with
Development Bank of the Philippines (DBP) to the extent of ₱16,581,429.00.11

NEA questioned before the Court of Appeals the Orders of the lower court, and the case was docketed as CA-G.R. SP
No. 62919. On July 4, 2002, the Court of Appeals rendered a Decision12 declaring null and void the December 11, 2000
Resolution as well as the January 8, 2001 Order of the RTC, and ordering the implementation of a writ of execution
against the funds of NEA. Thus, NEA filed a Petition for Review on Certiorari with this Court, docketed as G.R. No.
154200. Meanwhile, the RTC held in abeyance the execution of its December 15, 1999 Decision pending resolution of this
Court of the review on certiorari in National Electrification Administration v. Morales. 13
On July 24, 2007, this Court reversed and set aside the Court of Appeals decision and described the subsequent events
relating to the case in this manner14 :

Meanwhile, in a letter dated June 28, 2000, former DBM Secretary Benjamin E. Diokno informed NEA Administrator
Conrado M. Estrella III of the denial of the NEA request for a supplemental budget on the ground that the claims under
R.A. No. 6758 which the RTC had ordered to be settled cannot be paid because Morales, et al. are not "incumbents of
positions as of July 1, 1989 who are actually receiving and enjoying such benefits."

Moreover, in an Indorsement dated March 23, 2000, the Commission on Audit (COA) advised NEA against making further
payments in settlement of the claims of Morales, et al. Apparently, COA had already passed upon claims similar to
those of Morales, et al. in its earlier "Decision No. 95-074" dated January 25, 1995. Portions of the Indorsement read as
follows:

This Office concurs with the above view. The court may have exceeded its jurisdiction when it entertained the
petition for the entitlement of the after-hired employees which had already been passed upon by this
Commission in COA Decision No. 95-074 dated January 25, 1995. There, it was held that: "the adverse action of this
Commission sustaining the disallowance made by the Auditor, NEA, on the payment of fringe benefits granted to NEA
employees hired from July 1, 1989 to October 31, 1989 is hereby reconsidered. Accordingly, subject disallowance is
lifted."

Thus, employees hired after the extended date of October 31, 1989, pursuant to the above COA decision cannot
defy that decision by filing a petition for mandamus in the lower court. Presidential Decree No. 1445 and the 1987
Constitution prescribe that the only mode for appeal from decisions of this Commission is on certiorari to the
Supreme Court in the manner provided by law and the Rules of Court. Clearly, the lower court had no jurisdiction
when it entertained the subject case of mandamus. And void decisions of the lower court can never attain
finality, much less be executed. Moreover, COA was not made a party thereto, hence, it cannot be compelled to
allow the payment of claims on the basis of the questioned decision.

PREMISES CONSIDERED, the auditor of NEA should post-audit the disbursement vouchers on the bases of this
Commission's decision particularly the above-cited COA Decision No. 94-074 [sic] and existing rules and regulations, as if
there is no decision of the court in the subject special civil action for mandamus. At the same time, management should
be informed of the intention of this Office to question the validity of the court decision before the Supreme Court through
the Office of the Solicitor General.

Parenthetically, the records at hand do not indicate when Morales, et al. were appointed. Even the December [15], 1999
RTC Decision is vague for it merely states that they were appointed after June 30, 1989, which could mean that they were
appointed either before the cut-off date of October 31, 1989 or after. Thus, there is not enough basis for this Court to
determine that the foregoing COA Decision No. 95-074 adversely affects Morales, et al.. Moreover, the records do not
show whether COA actually questioned the December 16, 1999 RTC Decision before this Court.15

The Court ruled that respondents therein could not proceed against the funds of NEA "because the December [15], 1999
RTC Decision sought to be satisfied is not a judgment for a specific sum of money susceptible of execution by
garnishment; it is a special judgment requiring petitioners to settle the claims of respondents in accordance with existing
regulations of the COA."16 The Court further held as follows:

In its plain text, the December [15], 1999 RTC Decision merely directs petitioners to "settle the claims of [respondents]
and other employees similarly situated." It does not require petitioners to pay a certain sum of money to respondents. The
judgment is only for the performance of an act other than the payment of money, implementation of which is governed by
Section 11, Rule 39 of the Rules of Court, which provides:

Section 11. Execution of special judgments. - When a judgment requires the performance of any act other than those
mentioned in the two preceding sections, a certified copy of the judgment shall be attached to the writ of execution and
shall be served by the officer upon the party against whom the same is rendered, or upon any other person required
thereby, or by law, to obey the same, and such party or person may be punished for contempt if he disobeys such
judgment.

xxxx

Garnishment is proper only when the judgment to be enforced is one for payment of a sum of money.
The RTC exceeded the scope of its judgment when, in its February 22, 2000 Writ of Execution, it directed petitioners to
"extend to [respondents] the benefits and allowances to which they are entitled but which until now they have been
deprived of as enumerated under Sec. 5 of DBM CCC No. 10 and x x x to cause their inclusion in the Provident Fund
Membership." Worse, it countenanced the issuance of a notice of garnishment against the funds of petitioners with DBP to
the extent of ₱16,581,429.00 even when no such amount was awarded in its December 16, 1999 Decision.

However, in its subsequent Orders dated May 17, 2000 and January 8, 2001, the RTC attempted to set matters right by
directing the parties to now await the outcome of the legal processes for the settlement of respondents’ claims.

That is only right.

Without question, petitioner NEA is a GOCC -- a juridical personality separate and distinct from the government, with
capacity to sue and be sued. As such GOCC, petitioner NEA cannot evade execution; its funds may be garnished or
levied upon in satisfaction of a judgment rendered against it. However, before execution may proceed against it, a claim
for payment of the judgment award must first be filed with the COA.

Under Commonwealth Act No. 327, as amended by Section 26 of P.D. No. 1445, it is the COA which has primary
jurisdiction to examine, audit and settle "all debts and claims of any sort" due from or owing the Government or any of its
subdivisions, agencies and instrumentalities, including government-owned or controlled corporations and their
subsidiaries. With respect to money claims arising from the implementation of R.A. No. 6758, their allowance or
disallowance is for COA to decide, subject only to the remedy of appeal by petition for certiorari to this Court.

All told, the RTC acted prudently in halting implementation of the writ of execution to allow the parties recourse to the
processes of the COA. It may be that the tenor of the March 23, 2000 Indorsement issued by COA already spells doom
for respondents’ claims; but it is not for this Court to preempt the action of the COA on the post-audit to be conducted by it
per its Indorsement dated March 23, 2000.

In fine, it was grave error for the CA to reverse the RTC and direct immediate implementation of the writ of execution
through garnishment of the funds of petitioners,

WHEREFORE, the petition is GRANTED. The July 4, 2002 Decision of the Court of Appeals is REVERSED andSET
ASIDE. The Resolution dated December 11, 2000 and Order dated January 8, 2001 of the Regional Trial Court, Branch
88, Quezon City in Special Civil Action No. Q-99-38275 are REINSTATED.17

Meantime, the Civil Service Commission issued Resolution No. 001295 dated June 1, 200118 and interpreted Section 12
of Republic Act No. 6758 in this manner:

Material to the resolution of this instant request is Section 12 of SSL x x x.

xxxx

The Commission, x x x is of the view that this provision of law does not imply that such other additional compensation not
integrated into the salary rates shall not be received by employees appointed after July 1, 1989. The word "only" before
the phrase "as of July 1, 1989" does not refer to incumbents but qualifies what additional compensation can be continued
together with the qualifying words "not integrated into the standardized rates shall continue to be authorized." The correct
interpretation therefore is that, additional compensation being received by employees not integrated into the standardized
rates as of July 1, 1989 shall continue to be authorized and received/enjoyed by said employees, whether or not said
employee was appointed prior to or after July 1, 1989.

A different interpretation will result in the creation of two classes of employees, i.e., one class receiving less pay than
another class for substantially equal work. Said interpretation will violate Section 2 of the SSL which provides, thus:

xxxx

Additionally, this interpretation will also violate the constitutional precept that no person shall be denied the equal
protection of law (Section 1, Article III of the 1987 Constitution). Applying this precept the Supreme Court declared that
"equal protection of the law is against unde favor on an individual or class (Tiu vs. Court of Appeals, GR No. 127410,
January 20, 1999).19
The Office of the Government Corporate Counsel (OGCC), in response to the request of then NEA Administrator Manuel
Luis S. Sanchez, issued on August 14, 2001 its Opinion No. 157, s. 2001 20 declaring that the RTC decision, not having
been appealed, had become the law of the case which must now be applied. The pertinent portion of such opinion reads:

HON. MANUEL LUIS S. SANCHEZ

Administrator
National Electrification Administration
NEA Road, Diliman, Quezon City

Re: Request for legal opinion on the propriety and applicability to NEA employees hired after July 1, 1989 of OGCC
Opinion NO. 086, s. 2001

xxxx

Pursuant to law, subject Decision became final and executory fifteen (15) days after its rendition, there being no appeal or
motion for reconsideration filed in the interim, as certified to by Atty. Lily D. Labarda, Branch 88, Quezon City, on January
24, 2000.

The foregoing considered, this Office therefore cannot opine otherwise save to uphold the supremacy and finality of the
aforequoted Decision of the Court on the matter. Its judgment is now res judicata, hence, the controlling legal rule, as far
as Petitioners NEA employees are concerned, is that they must be extended the benefits and allowances "to which they
are entitled but which until now they have been deprived of as enumerated under Section 5 of DBM CCC No. 101 x x x,
retroactive from the date of their appointments up to the present or until their separation from the service." This is the law
of the case which must now be applied. At any rate, we have stated in OGCC Opinion No. 086, S. 2001 that even
employees hired after July 1, 1989 may receive the subject benefits provided there is determination by the DBM that the
same have not been actually integrated into their basic salaries.

Hence, your query is therefore answered in the affirmative.21

Pursuant to the above opinion in its favor, the NEA Board of Administrators issued Resolution No. 29 on August 9,
200122 approving the entitlement to rice, medical, children, meal, and other related allowances to NEA employees hired
after October 31, 1989,23 and the payment of these benefits, chargeable to its Personnel Services Savings. This
resolution was the outcome of the meeting of the NEA Board of Administrators on the same date, and reads:

RESOLUTION NO. 29

xxxx

RESOLVED THEREFORE TO APPROVE, as it hereby approves, the entitlement to rice, medical, children, meal and
other related allowances of NEA employees hired after October 31, 1989 and payment of these benefits;

RESOLVED FURTHER TO CONFIRM, as it hereby confirms, the initial appropriation and payment of One Million Six
Hundred Forty Six Thousand One Hundred Twenty Seven Pesos and Thirty Centavos (P1,646,127.30) for this purpose
chargeable against the Personnel Services Savings.24

Thus, NEA granted the questioned allowances to its employees who were not receiving these benefits/allowances,
including rice allowance amounting to ₱1,865,811.84 covering the period January to August 2001. 25

However, the resident auditor of COA, Carmelita M. Agullana (Agullana), did not allow the payment of rice allowance for
the period January to August 2001 to NEA employees who were not incumbents as of June 30, 1989, under Notice of
Disallowance26 No. 2001-004-101 dated September 6, 2001. Agullana indicated the "Facts and/or Reasons for
Disallowance" as follows:

Payment of Rice Allowance for the period January, 2001 to August, 2001 to employees who were not incumbents as of
June 30, 1989 not allowed pursuant to RA #6758 as implemented by Corporate Compensation Circular No. 10 prescribing
the Rules and Regulations for the Implementation of the Revised Compensation and Position Classification System for
Government-Owned and/or Controlled Corporations (GOCCs) and Financial Institutions (GFIs) specifically Sections 5.4
and 5.5 thereof. x x x.27
NEA, through then Acting Administrator Francisco G. Silva, and assisted by counsel, appealed Agullana’s disallowance to
the COA on September 27, 2001,28 arguing that the disallowance had no basis in law and in fact, and that the subject
disbursement was anchored on a court decision that had become final and executory.

The COA denied the appeal from the disallowance in a Decision29 dated October 9, 2003 (Decision No. 2003-134). The
COA stated that:

The Director of x x x Corporate Audit Office II recommended the affirmance of the subject disallowance contending that
Section 12 of Republic Act (RA) No. 6758 (Salary Standardization Law) x x x remains applicable on the matter since
Department of Budget and Management-Corporate Compensation Circular No. 10, s. 1989 (DBM-CCC No. 10) was
declared ineffective by the Supreme Court in the case of De Jesus, et al. vs. COA, et al. (G.R. No. 109023, August 13,
1998) due to its non-publication in the Official Gazette or in a newspaper of general circulation. She pointed out that the
alleged discriminatory effect and violation of the policy to provide equal pay for substantially equal work in the above-
quoted provision have been sufficiently considered in Philippine Ports Authority vs. COA, 214 SCRA 653 and later
confirmed in Philippine International Trading Corporation vs. COA, G.R. No. 132593, June 25, 1999, wherein the
Supreme Court ruled that:

"x x x we must mention that this Court has confirmed in Philippine Ports Authority vs. Commission on Audit the legislative
intent to protect incumbents who are receiving salaries and allowances over and above those authorized by RA 6758 to
continue to receive the same even after RA 6758 took effect. In reserving the benefit to incumbents, the legislature has
manifested its intent to gradually phase out this privilege without upsetting the policy of non-diminution of pay and
consistent with the rule that laws should only be applied prospectively in the spirit of fair play."

She also conformed to the OGCC Opinion No. 52, s. 1999 dated March 22, 1999, edifying the implication of the De Jesus
Case which enunciated thusly:

"Notwithstanding the ruling in the De Jesus Case, the applicable law is still Section 12 of R.A. No. 6758 which allows
additional compensation being received by incumbents as of July 1, 1989 not integrated into the standard rates to
continue. The recent nullification of DBM-CCC No. 10 applies favorably only to those incumbent employees (hired prior to
July 1, 1989) and does not in any way change the position or situation of those employees hired after the cut-off date.
With the issuance of R.A. 6758, employees hired after July 1, 1989 must follow the revised and unified compensation and
position classification system in the government, for which the DBM was directed to establish and administer and which
shall be applied for all government entities.

xxxx

The new hirees having accepted their employment, aware of such a condition that they are not entitled to additional
benefits and allowances, they would be estopped from complaining."

Moreover, the Director noted that when the rice allowance to the claimants was granted in the year 2001, the DBM had
already published CCC No. 10.

Anent the contention that the subject decision of the RTC has become the law of the case which must be applied, she
stressed that the said doctrine is one of the policies only and will be disregarded when compelling circumstances call for a
redetermination of the point of law. As cited in Black’s Law Dictionary, 6th Edition, 1990, "the doctrine is merely a rule of
procedure and does not go to the power of the court, and will not be adhered to where its application will result in unjust
decision."

xxxx

PREMISES CONSIDERED, the instant appeal is hereby DENIED and the disallowance in the total amount of
₱1,865,811.84 is accordingly affirmed.30

NEA filed a Motion for Reconsideration of the said Decision, but this was denied in COA Decision No. 2005-01031dated
February 24, 2005, the pertinent portions of which read:

After a careful re-evaluation, this Commission finds herein motion devoid of merit, the issues raised therein being a mere
reiteration of the previous arguments of the movant in his appeal and which were already considered and passed upon by
this Commission in the assailed decision.
WHEREFORE, there being no new and material evidence adduced as would warrant a reversal or modification of the
decision herein sought to be reconsidered, the instant motion for reconsideration has to be, as it is hereby, denied with
finality.32

Thus, petitioners came to this Court questioning the COA’s decision and resolution on the disallowance of their rice
subsidy.

Petitioners claim that the COA’s reliance on DBM-CCC No. 10 is totally misplaced, alleging that this interpretation had
been "squarely debunked" by the Supreme Court in a number of cases, including Cruz v. Commission on
Audit.33 Furthermore, petitioners claim that in a similar case involving Opinion No. 086, s. 2001 of the OGCC, it wrote: "[It]
is our considered opinion that employees of COA, whether appointed before or after July 1, 1989, are entitled to the
benefits enumerated under Section 5.5 of DBM-CCC No. 10 x x x."34

We quote portions of Opinion No. 086, s. 2001 of the OGCC below:

Please be informed that our Office had previously rendered legal opinions involving the same issue upon the request of
some of our client corporations similarly situated. In our Opinion No. 55, Series of 2000, we stated:

"At the outset we would like to clarify that the amount of the standardized salary vis-à-vis the pre-SSL salary (plus
allowance) is not conclusively determinant of whether or not a certain allowance is deemed integrated into the former.
Section 12 of R.A. 6758 expressly provides:

xxxx

The law is thus clear. The general rule is that all allowances are deemed included in the standardized rates set forth in
R.A. 6758. This is consistent with the primary intent of the Act to eliminate wage inequities. The law, however, admits of
certain exceptions and as stated in the second sentence of the aforecited provision, such other additional compensation in
cash or in kind not integrated into the standardized rates being received by incumbents as of July 1, 1989 shall continue
to be authorized. It is our view, however, that a government agency, in this case NDC, does not have discretion to
determine what allowances received by incumbent employees prior to SSL are deemed included or integrated in the
standardized rates. It is the DBM which has the mandate and authority under the SSL to determine what additional
compensation shall be integrated and it is precisely why it issued NCC No. 10."

The foregoing opinion is consistent with our Opinion No. 52, Series of 1999, wherein we opined:

"x x x Nonetheless, as Section 12 of RA 6758 expressly provides that such additional compensation, whether in cash or in
kind, being received by incumbent employees as of July 1, 1989 not integrated to the standardized salary rates as may be
determined by the DBM shall continue to be authorized, the question becomes a matter of fact, on whether or not the
aforementioned allowances have been integrated into the salaries of employees."35 (Emphases in the quoted text.)

Petitioners claim that "the Civil Service Commission, the Office of the Government Corporate Counsel and the highest
court of the land, the Supreme Court, chose not to distinguish the entitlement of benefits to those hired before and after
October 31, 1989 (or in this case, July [1], 1989)," while "the COA sweepingly does so by just a wave of the hand." 36 To
support this claim, petitioners erroneously cite Javier v. Philippine Ports Authority, CA-G.R. No. 67937, March 12, 2002,
as a decision by this Court, but said decision was rendered by the Court of Appeals.

Petitioners argue that assuming that they are not entitled to the rice allowance in question, they should not be required to
refund the amounts received, on grounds of fairness and equity. In connection with this, petitioners allege as follows:

Prior to December 31, 2003, NEA consists of 720 employees more or less who received the rice allowance. Upon [the]
restructuring of NEA in December 2003, all NEA employees were legally terminated. Out of 720 employees, only 320
employees are now left with to operate NEA. Most of the (sic) them are rehired while minority of them are newly hired.
Thus, the refund of P1,865,811.84, shall be shouldered by those who remained as NEA employees. Secondly, those who
received the said rice allowance accepted it in good faith believing that they are entitled to it as a matter of law. 37

In its Comment38 dated September 21, 2005, COA’s lone argument is that "[t]he assailed COA decision is not tainted with
grave abuse of discretion. The disallowance of payment for the rice [subsidy] by the COA is in accord with the law and the
rules." COA maintains that the law on the matter, Section 12 of Republic Act No. 6758, is clear, as its last sentence
provides reservation of certain allowances to incumbents. COA argues in this wise:
The Supreme Court in Philippine Ports Authority vs. Commission on Audit confirmed the legislative intent to protect
incumbents who are receiving salaries and/or allowances over and above those authorized by R.A. 6758 to continue to
receive the same even after the law took effect. In reserving the benefit to incumbents, the legislature has manifested its
intent to gradually phase out this privilege without upsetting the policy of non-diminution of pay and consistent with the
rule that laws should only be applied prospectively in the spirit of fairness and justice.

Thus, pursuant to its authority under Section 23 of R.A. No. 6758, the DBM x x x issued on October 2, 1989, DBM-CCC
No. 10. Section 5.5 of DBM-CCC No. 10 enumerated the various allowances/fringe benefits authorized to GOCCs/GFIs
which are not to be integrated into the basic salary and allowed to be continued only for incumbents of positions as of
June 30, 1989 who are authorized and actually receiving said allowances/benefits as of said date. Among these was the
rice subsidy/allowance.

Hence, in light of the effectivity of DBM-CCC No. 10 on March 16, 1999 following its reissuance (in its entirety on February
15, 1999) and publication in the Official Gazette on March 1, 1999, the disallowance by the COA of the rice allowance for
the period beginning January 2001 up to August 2001 is not tainted with grave abuse of discretion but in accord with the
law and the rules.39

Petitioners, in their Reply,40 anchor their petition on their allegation that the RTC Decision had already become final and
executory, could no longer be disturbed, and must be respected by the parties. To support their claim, they cite Arcenas v.
Court of Appeals41 wherein this Court held:

For, it is a fundamental rule that when a final judgment becomes executory, it thereby becomes immutable and
unalterable. The judgment may no longer be modified in any respect, even if the modification is meant to correct what is
perceived to be an erroneous conclusion of fact or law, and regardless of whether the modification is attempted to be
made by the court rendering it or by the highest Court of the land. The only recognized exceptions are the correction of
clerical errors or the making of so-called nunc pro tunc entries which cause no prejudice to any party, and, of course,
where the judgment is void. Any amendment or alteration which substantially affects a final and executory judgment is null
and void for lack of jurisdiction, including the entire proceedings held for that purpose. 42 (Emphasis ours.)

Petitioners likewise cite Panado v. Court of Appeals43 wherein the Court held that "[i]t is axiomatic that final and executory
judgments can no longer be attacked by any of the parties or be modified, directly or indirectly, even by the highest court
of the land."44 From the foregoing jurisprudence, petitioners conclude that the acts of COA in disallowing the claims and
ordering refund of benefits already received clearly constitute grave abuse of discretion amounting to lack of jurisdiction
inasmuch as said acts frustrated the final and executory decision of the trial court.

The pivotal issues as determined by the COA are:

1. Whether or not the immutability of final decision doctrine must prevail over the exclusive jurisdiction of [the
COA] to audit and settle disbursements of funds; and

2. Whether or not the NEA employees hired after June 30, 1989 are entitled to rice allowance.45

The COA resolved these issues in this manner:

As to the first issue, the immutability rule applies only when the decision is promulgated by a court possessed of
jurisdiction to hear and decide the case. Undoubtedly, the petition in the guise of a case for mandamus is a money claim
falling within the original and exclusive jurisdiction of this Commission. Noting the propensity of the lower courts in taking
cognizance of cases filed by claimants in violation of such primary jurisdiction, the Supreme Court issued Administrative
Circular 10-2000 dated October 23, 2000 enjoining judges of lower courts to exercise caution in order to prevent "possible
circumvention of the rules and procedures of the Commission on Audit" and reiterating the basic rule that: "All money
claims against the Government must be filed with the Commission on Audit which shall act upon it within sixty days.
Rejection of the claim will authorize the claimant to elevate the matter to the Supreme Court on certiorari and in effect sue
the State thereby."

Under the doctrine of primary jurisdiction, when an administrative body is clothed with original and exclusive jurisdiction,
courts are utterly without power and authority to exercise concurrently such jurisdiction. Accordingly, all the proceedings of
the court in violation of that doctrine and all orders and decisions reached thereby are null and void. It will be noted in the
cited Supreme Court Circular that money claims are cognizable by the COA and its decision is appealable only to the
Supreme Court. The lower courts have nothing to do with such genus of transactions.
Anent the issue of entitlement to rice allowance by employees hired after June 30, 1989, this Commission is left with no
option but to affirm the disallowance in the face of the explicit provisions of DBM-CCC No. 10. After its publication on
March 9, 1999 in the Official Gazette, rice allowance was allowed only for incumbents as of July 1, 1989. Obviously, there
is no violation of the equal protection clause as cited in the PITC case, supra, because whatever increments the
incumbents are enjoying over those of non-incumbents are transitory, for the same law provides that such difference shall
be deducted from the salary increase the former should receive under Section 17. Thus, the equalization or
standardization of what the two categories of employees will be receiving in terms of benefits is ensured.

PREMISES CONSIDERED, the instant appeal is hereby DENIED and the disallowance in the total amount of
₱1,865,811.84 is accordingly affirmed.46

We agree with the findings of the COA.

In National Electrification Administration v. Morales, the order of garnishment against the NEA funds to implement the
RTC Decision was in issue, and we said that the COA had exclusive jurisdiction to decide on the allowance or
disallowance of money claims arising from the implementation of Republic Act No. 6758. We observed therein that "the
RTC acted prudently in halting implementation of the writ of execution to allow the parties recourse to the processes of the
COA."47 In fact, we even stated there that "it is not for this Court to preempt the action of the COA on the post-audit to be
conducted by it per its Indorsement dated March 23, 2000."48

We find that the COA had ruled in accordance with law and jurisprudence, and we see no reason to reverse its decision.

Section 5.5 of DBM-CCC No. 10 is clear that rice subsidy is one of the benefits that will be granted to employees of
GOCCs49 or GFIs50 only if they are "incumbents" as of July 1, 1989. We reproduce the first paragraph of Section 5.5
below:

5.5 The following allowances/fringe benefits authorized to GOCCs/GFIs pursuant to the aforementioned issuances are not
likewise to be integrated into the basic salary and allowed to be continued only for incumbents of positions as of June 30,
1989 who are authorized and actually receiving said allowances/benefits as of said date, at the same terms and
conditions prescribed in said issuances[:]

5.5.1 Rice Subsidy; x x x.51

We have defined an incumbent as "a person who is in present possession of an office; one who is legally authorized to
discharge the duties of an office."52 There is no question that petitioners were not incumbents as of June 30, 1989. We
have likewise characterized NEA as a GOCC in National Electrification Administration v. Morales. Thus, Section 5.5
quoted above, issued pursuant to the authority given to the DBM under Section 12 of Republic Act No. 6758, was
correctly applied by the COA.

We find our pronouncements in Philippine National Bank v. Palma53 to be applicable and conclusive on this issue now
before us:

During these tough economic times, this Court understands, and in fact sympathizes with, the plight of ordinary
government employees. Whenever legally possible, it has bent over backwards to protect labor and favor it with additional
economic advantages. In the present case, however, the Salary Standardization Law clearly provides that the claimed
benefits shall continue to be granted only to employees who were "incumbents" as of July 1, 1989. Hence, much to its
regret, the Court has no authority to reinvent or modify the law to extend those benefits even to employees hired after that
date.1awphil

xxxx

Stare Decisis

The doctrine "stare decisis et non quieta movere (Stand by the decisions and disturb not what is settled)" is firmly
entrenched in our jurisprudence. Once this Court has laid down a principle of law as applicable to a certain state of facts,
it would adhere to that principle and apply it to all future cases in which the facts are substantially the same as in the
earlier controversy.
The precise interpretation and application of the assailed provisions of RA 6758, namely those in Section 12, have long
been established in Philippine Ports Authority v. COA. The essential pronouncements in that case have further been
fortified by Manila International Airport Authority v. COA, Philippine International Trading Corporation v. COA, and Social
Security System v. COA.

This Court has consistently held in those cases that allowances or fringe benefits, whether or not integrated into the
standardized salaries prescribed by RA 6758, should continue to be enjoyed by employees who (1) were
incumbents and (2) were receiving those benefits as of July 1, 1989.

In Philippine Ports Authority v. COA, the x x x Court said that the intention of the framers of that law was to phase out
certain allowances and privileges gradually, without upsetting the principle of non-diminution of pay. The intention of
Section 12 to protect incumbents who were already receiving those allowances on July 1, 1989, when RA 6758 took effect
was emphasized thus:

"An incumbent is a person who is in present possession of an office.

"The consequential outcome, under sections 12 and 17, is that if the incumbent resigns or is promoted to a higher
position, his successor is no longer entitled to his predecessor’s RATA privilege x x x or to the transition allowance."

Finally, to explain what July 1, 1989 pertained to, we held in the same case as follows:

"x x x. The date July 1, 1989 becomes crucial only to determine that as of said date, the officer was an incumbentand
was receiving the RATA, for purposes of entitling him to its continued grant. x x x."

In Philippine International Trading Corporation v. COA, this Court confirmed the legislative intention in this wise:

"x x x [T]here was no intention on the part of the legislature to revoke existing benefits being enjoyed by incumbentsof
government positions at the time of the passage of RA 6758 by virtue of Sections 12 and 17 thereof. x x x."

The Court stressed that in reserving the benefits to incumbents alone, the legislature’s intention was not only to adhere to
the policy of non-diminution of pay, but also to be consistent with the prospective application of laws and the spirit of
fairness and justice.

xxxx

In consonance with stare decisis, there should be no more misgivings about the proper application of Section 12. In the
present case, the payment of benefits to employees hired after July 1, 1989, was properly withheld, because the law
clearly mandated that those benefits should be reserved only to incumbents who were already enjoying them before its
enactment. Withholding them from the others ensured that the compensation of the incumbents would not be diminished
in the course of the latter’s continued employment with the government agency. 54 (Emphasis ours, citations
omitted.)1avvphi1

As petitioners were hired after June 30, 1989, the COA was correct in disallowing the grant of the benefit to them, as they
were clearly not entitled to it. As quoted above, we have repeatedly held that under Section 12 of Republic Act No. 6758,
the only requirements for the continuous grant of allowances and fringe benefits on top of the standardized salary rates for
employees of GOCCs and GFIs are as follows: (1) the employee must be an incumbent as of July 1, 1989; and (2) the
allowance or benefit was not consolidated in the standardized salary rate as prescribed by Republic Act No. 6758. 55

We hereby reiterate our ruling in Philippine National Bank v. Palma as regards Section 12 of Republic Act No. 6758, as
follows:

In sum, we rule thus:

1. Under Section 12 of RA 6758, additional compensation already being received by the employees of petitioner,
but not integrated into the standardized salary rates -- enumerated in Section 5.5 of DBM-CC[C] No. 10, like "rice
subsidy, sugar subsidy, death benefits other than those granted by the GSIS," and so on -- shall continue to be
given.
 2. However, the continuation of the grant shall be available only to those "incumbents" already receiving it on July
1, 1989.

3. Thus, in PPA v. COA, this Court held that PPA employees already receiving the RATA granted by LOI No. 97
should continue to receive them, provided they were already "incumbents" on or before July 1, 1989.

4. PITC v. COA held that in enacting RA 6758, Congress was adhering to the policy of non-diminution of existing
pay. Hence, if a benefit was not yet existing when the law took effect on July 1, 1989, there was nothing to
continue and no basis for applying the policy.

5. Neither would Cruz v. COA be applicable. In those cases, the COA arbitrarily set a specific date, October 31,
1989; RA 6758 had not made a distinction between those hired before and those after that date. In the present
case, the law itself set July 1, 1989, as the date when employees should be "incumbents," because that was
when RA 6758 took effect. It was not an arbitrarily chosen date; there was sufficient reason for setting it as the
cutoff point.56

Notwithstanding our ruling above, however, we take up as another matter the refund ordered by the COA on the rice
subsidy that petitioners had already received. As regards the refund, we rule in favor of petitioners and will not require
them to return the amounts anymore.

This is because, to begin with, the officials and administrators of NEA themselves had believed that their employees were
entitled to the allowances, and this was covered by Resolution No. 29 of the NEA Board of Administrators. The petitioners
thus received in good faith the rice subsidy together with other allowances provided in said Resolution. For reasons of
equity and fairness, therefore, and considering their long wait for this matter to be resolved with finality, we will no longer
require a refund from these public servants.

Our pronouncements on refund in De Jesus v. Commission on Audit, 57 wherein we cited Blaquera v. Hon. Alcala,58are
applicable:

Considering, however, that all the parties here acted in good faith, we cannot countenance the refund of subject incentive
benefits for the year 1992, which amounts the petitioners have already received. Indeed, no indicia of bad faith can be
detected under the attendant facts and circumstances. The officials and chiefs of offices concerned disbursed such
incentive benefits in the honest belief that the amounts given were due to the recipients and the latter accepted the same
with gratitude, confident that they richly deserve such benefits.

This ruling in Blaquera applies to the instant case. Petitioners here received the additional allowances and bonuses in
good faith under the honest belief that LWUA Board Resolution No. 313 authorized such payment. At the time petitioners
received the additional allowances and bonuses, the Court had not yet decided Baybay Water District. Petitioners had no
knowledge that such payment was without legal basis. Thus, being in good faith, petitioners need not refund the
allowances and bonuses they received but disallowed by the COA. 59 (Emphasis supplied.)

As in the cases above quoted, we cannot countenance the refund of the rice subsidies given to petitioners by NEA for the
period January to August 2001 at this late time, especially since they were given by the government agency to its
employees in good faith.

WHEREFORE, premises considered, the petition is hereby PARTIALLY GRANTED. COA Decision No. 2003-134 dated
October 9, 2003 and COA Resolution No. 2005-010 dated February 24, 2005 are hereby AFFIRMED with the
CLARIFICATION that the petitioners shall no longer be required to refund the rice subsidies for the period January to
August 2001, which they had received from NEA but were later disallowed by the COA.

SO ORDERED.
G.R. No. 118794 May 8, 1996

PHILIPPINE REFINING COMPANY (now known as "UNILEVER PHILIPPINES [PRC], INC."), petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS, and THE COMMISSIONER OF INTERNAL
REVENUE, respondents.

REGALADO, J.:p

This is an appeal by certiorari from the decision of respondent Court of Appeals1 affirming the decision of the Court of Tax Appeals which disallowed petitioner's
claim for deduction as bad debts of several accounts in the total sum of P395,324.27, and imposing a 25% surcharge and 20% annual delinquency interest on the
alleged deficiency income tax liability of petitioner.

Petitioner Philippine Refining Company (PRC) was assessed by respondent Commissioner of Internal Revenue
(Commissioner) to pay a deficiency tax for the year 1985 in the amount of P1,892,584.00, computed as follows:

Deficiency Income Tax

Net Income per investigation P197,502,568.00

Add: Disallowances
Bad Debts P 713,070.93
Interest Expense P 2,666,545.49
—————— ——————
P3,379,616.00

Net Taxable Income 200,882,184.00

Tax Due Thereon 70,298,764.00

Less: Tax Paid 69,115,899.00
Deficiency Income Tax 1,182,865.00
Add: 20% Interest (60% max.) 709,719.00
——————

Total Amount Due and Collectible P1,892,584.002

The assessment was timely protested by petitioner on April 26, 1989, on the ground that it was based on the
erroneous disallowances of "bad debts" and "interest expense" although the same are both allowable and legal
deductions. Respondent Commissioner, however, issued a warrant of garnishment against the deposits of petitioner
at a branch of City Trust Bank, in Makati, Metro Manila, which action the latter considered as a denial of its protest.

Petitioner accordingly filed a petition for review with the Court of Tax Appeals (CTA) on the same assignment of
error, that is, that the "bad debts" and "interest expense" are legal and allowable deductions. In its decision3 of
February 3, 1993 in C.T.A. Case No. 4408, the CTA modified the findings of the Commissioner by reducing the
deficiency income tax assessment to P237,381.26, with surcharge and interest incident to delinquency. In said
decision, the Tax Court reversed and set aside the Commissioner's disallowance of the interest expense of
P2,666,545.19 but maintained the disallowance of the supposed bad debts of thirteen (13) debtors in the total sum
of P395,324.27.

Petitioner then elevated the case to respondent Court of Appeals which, as earlier stated, denied due course to the
petition for review and dismissed the same on August 24, 1994 in CA-G.R. SP No. 31190,4 on the following
ratiocination:

We agree with respondent Court of Tax Appeals:

 Out of the sixteen (16) accounts alleged as bad debts, We find that only three (3)
accounts have met the requirements of the worthlessness of the accounts, hence
were properly written off as: bad debts, namely:

1. Petronila Catap P 29,098.30

(Pet Mini Grocery)

2. Esther Guinto 254,375.54

(Esther Sari-sari Store)

3. Manuel Orea 34,272.82

(Elman Gen. Mdsg.)

—————

TOTAL P 317,746.66

xxx xxx xxx

With regard to the other accounts, namely:

1. Remoblas Store P 11,961.00

2. Tomas Store 16,842.79

3. AFPCES 13,833.62
4. CM Variety Store 10,895.82
5. U' Ren Mart Enterprise 10,487.08
6. Aboitiz Shipping Corp. 89,483.40
7. J. Ruiz Trucking 69,640.34
8. Renato Alejandro 13,550.00
9. Craig, Mostyn Pty. Ltd. 23,738.00
10. C. Itoh 19,272.22
11. Crocklaan B.V. 77,690.00
12. Enriched Food Corp. 24,158.00
13. Lucito Sta. Maria 13,772.00

—————

TOTAL P 395,324.27

We find that said accounts have not satisfied the requirements of the "worthlessness of a debt".
Mere testimony of the Financial Accountant of the Petitioner explaining the worthlessness of said
debts is seen by this Court as nothing more than a self-serving exercise which lacks probative value.
There was no iota of documentary evidence (e.g., collection letters sent, report from investigating
fieldmen, letter of referral to their legal department, police report/affidavit that the owners were
bankrupt due to fire that engulfed their stores or that the owner has been murdered. etc.), to give
support to the testimony of an employee of the Petitioner. Mere allegations cannot prove the
worthlessness of such debts in 1985. Hence, the claim for deduction of these thirteen (13) debts
should be rejected.5

1. This pronouncement of respondent Court of Appeals relied on the ruling of this Court in Collector vs. Goodrich
International Rubber Co.,6 which established the rule in determining the "worthlessness of a debt." In said case, we
held that for debts to be considered as "worthless," and thereby qualify as "bad debts" making them deductible, the
taxpayer should show that (1) there is a valid and subsisting debt. (2) the debt must be actually ascertained to be
worthless and uncollectible during the taxable year; (3) the debt must be charged off during the taxable year; and (4)
the debt must arise from the business or trade of the taxpayer. Additionally, before a debt can be considered
worthless, the taxpayer must also show that it is indeed uncollectible even in the future.
Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted diligent efforts to
collect the debts, viz.: (1) sending of statement of accounts; (2) sending of collection letters; (3) giving the account to
a lawyer for collection; and (4) filing a collection case in court.

On the foregoing considerations, respondent Court of Appeals held that petitioner did not satisfy the requirements of
"worthlessness of a debt" as to the thirteen (13) accounts disallowed as deductions.

It appears that the only evidentiary support given by PRC for its aforesaid claimed deductions was the explanation
or justification posited by its financial adviser or accountant, Guia D. Masagana. Her allegations were not supported
by any documentary evidence, hence both the Court of Appeals and the CTA ruled that said contentions per
secannot prove that the debts were indeed uncollectible and can be considered as bad debts as to make them
deductible. That both lower courts are correct is shown by petitioner's own submission and the discussion thereof
which we have taken time and patience to cull from the antecedent proceedings in this case, albeit bordering on
factual settings.

The accounts of Remoblas Store in the amount of P11,961.00 and CM Variety Store in the amount of P10,895.82
are uncollectible, according to petitioner, since the stores were burned in November, 1984 and in early 1985,
respectively, and there are no assets belonging to the debtors that can be garnished by PRC.7 However, PRC failed
to show any documentary evidence for said allegations. Not a single document was offered to show that the stores
were burned, even just a police report or an affidavit attesting to such loss by fire. In fact, petitioner did not send
even a single demand letter to the owners of said stores.

The account of Tomas Store in the amount of P16,842.79 is uncollectible, claims petitioner PRC, since the owner
thereof was murdered and left no visible assets which could satisfy the debt. Withal, just like the accounts of the two
other stores just mentioned, petitioner again failed to present proof of the efforts exerted to collect the debt, other
than the aforestated asseverations of its financial adviser.

The accounts of Aboitiz Shipping Corporation and J. Ruiz Trucking in the amounts of P89,483.40 and P69,640.34,
respectively, both of which allegedly arose from the hijacking of their cargo and for which they were given 30%
rebates by PRC, are claimed to be uncollectible. Again, petitioner failed to present an iota of proof, not even a copy
of the supposed policy regulation of PRC that it gives rebates to clients in case of loss arising from fortuitous events
or force majeure, which rebates it now passes off as uncollectible debts.

As to the account of P13,550.00 representing the balance collectible from Renato Alejandro, a former employee
who failed to pay the judgment against him, it is petitioner's theory that the same can no longer be collected since
his whereabouts are unknown and he has no known property which can be garnished or levied upon. Once again,
petitioner failed to prove the existence of the said case against that debtor or to submit any documentation to show
that Alejandro was indeed bound to pay any judgment obligation.

The amount of P13,772.00 corresponding to the debt of Lucito Sta. Maria is allegedly due to the loss of his stocks
through robbery and the account is uncollectible due to his insolvency. Petitioner likewise failed to submit
documentary evidence, not even the written reports of the alleged investigation conducted by its agents as testified
to by its aforenamed financial adviser.

Regarding the accounts of C. Itoh in the amount of P19,272.22, Crocklaan B.V. in the sum of P77,690.00, and
Craig, Mostyn Pty. Ltd. with a balance of P23,738.00, petitioner contends that these debtors being foreign
corporations, it can sue them only in their country of incorporation; and since this will entail expenses more than the
amounts of the debts to be collected, petitioner did not file any collection suit but opted to write them off as bad
debts. Petitioner was unable to show proof of its efforts to collect the debts, even by a single demand letter therefor.
While it is not required to file suit, it is at least expected by the law to produce reasonable proof that the debts are
uncollectible although diligent efforts were exerted to collect the same.

The account of Enriched Food Corporation in the amount of P24,158.00 remains unpaid, although petitioner claims
that it sent several letters. This is not sufficient to sustain its position. even if true, but even smacks of insouciance
on its part. On top of that, it was unable to show a single copy of the alleged demand letters sent to the said
corporation or any of its corporate officers.
With regard to the account of AFPCES for unpaid supplies in the amount of P13,833.62, petitioner asserts that since
the debtor is an agency of the government, PRC did not file a collection suit therefor. Yet, the mere fact that
AFPCES is a government agency does not preclude PRC from filing suit since said agency, while discharging
proprietary functions, does not enjoy immunity from suit. Such pretension of petitioner cannot pass judicial muster.

No explanation is offered by petitioner as to why the unpaid account of U' Ren Mart Enterprise in the amount of
P10,487.08 was written off as a bad debt. However, the decision of the CTA includes this debtor in its findings on
the lack of documentary evidence to justify the deductions claimed, since the worthlessness of the debts involved
are sought to be established by the mere self-serving testimony of its financial consultant.

The contentions of PRC that nobody is in a better position to determine when an obligation becomes a bad debt
than the creditor itself, and that its judgment should not be substituted by that of respondent court as it is PRC which
has the facilities in ascertaining the collectibility or uncollectibility of these debts, are presumptuous and uncalled for.
The Court of Tax Appeals is a highly specialized body specifically created for the purpose of reviewing tax cases.
Through its expertise, it is undeniably competent to determine the
issue of whether or not the debt is deductible through the evidence presented before it.8

Because of this recognized expertise, the findings of the CTA will not ordinarily be reviewed absent a showing of
gross error or abuse on its part.9 The findings of fact of the CTA are binding on this Court and in the absence of
strong reasons for this Court to delve into facts, only questions of law are open for determination. 10 Were it not,
therefore, due to the desire of this Court to satisfy petitioner's calls for clarification and to use this case as a vehicle
for exemplification, this appeal could very well have been summarily dismissed.

The Court vehemently rejects the absurd thesis of petitioner that despite the supervening delay in the tax payment,
nothing is lost on the part of the Government because in the event that these debts are collected, the same will be
returned as taxes to it in the year of the recovery. This is an irresponsible statement which deliberately ignores the
fact that while the Government may eventually recover revenues under that hypothesis, the delay caused by the
non-payment of taxes under such a contingency will obviously have a disastrous effect on the revenue collections
necessary for governmental operations during the period concerned.

2. We need not tarry at length on the second issue raised by petitioner. It argues that the imposition of the 25%
surcharge and the 20% delinquency interest due to delay in its payment of the tax assessed is improper and
unwarranted, considering that the assessment of the Commissioner was modified by the CTA and the decision of
said court has not yet become final and executory.

Regarding the 25% surcharge penalty, Section 248 of the Tax Code provides:

Sec. 248. Civil Penalties. — (a) There shall be imposed, in addition to the tax required to be paid, a
penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases:

xxx xxx xxx

(3) Failure to pay the tax within the time prescribed for its payment.

With respect to the penalty of 20% interest, the relevant provision is found in Section 249 of the same Code, as
follows:

Sec. 249. Interest. — (a) In general. — There shall be assessed and collected on any unpaid
amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be
prescribed by regulations, from the date prescribed for payment until the amount is fully paid.

xxx xxx xxx

(c) Delinquency interest. — In case of failure pay:

(1) The amount of the tax due on any return required to be

filed, or
 (2) The amount of the tax due for which no return is required, or

(3) A deficiency tax, or any surcharge or interest thereon, on the due date appearing in the notice
and demand of the Commissioner,

there shall be assessed and collected, on the unpaid amount, interest at the rate prescribed in
paragraph (a) hereof until the amount is fully paid, which interest shall form part of the tax.
(emphasis supplied)

xxx xxx xxx

As correctly pointed out by the Solicitor General, the deficiency tax assessment in this case, which was the subject
of the demand letter of respondent Commissioner dated April 11,1989, should have been paid within thirty (30) days
from receipt thereof. By reason of petitioner's default thereon, the delinquency penalties of 25% surcharge and
interest of 20% accrued from April 11, 1989. The fact that petitioner appealed the assessment to the CTA and that
the same was modified does not relieve petitioner of the penalties incident to delinquency. The reduced amount of
P237,381.25 is but a part of the original assessment of P1,892,584.00.

Our attention has also been called to two of our previous rulings and these we set out here for the benefit of
petitioner and whosoever may be minded to take the same stance it has adopted in this case. Tax laws imposing
penalties for delinquencies, so we have long held, are intended to hasten tax payments by punishing evasions or
neglect of duty in respect thereof. If penalties could be condoned for flimsy reasons, the law imposing penalties for
delinquencies would be rendered nugatory, and the maintenance of the Government and its multifarious activities
will be adversely affected. 11

We have likewise explained that it is mandatory to collect penalty and interest at the stated rate in case of
delinquency. The intention of the law is to discourage delay in the payment of taxes due the Government and, in this
sense, the penalty and interest are not penal but compensatory for the concomitant use of the funds by the taxpayer
beyond the date when he is supposed to have paid them to the Government. 12 Unquestionably, petitioner chose to
turn a deaf ear to these injunctions.

ACCORDINGLY, the petition at bar is DENIED and the judgment of respondent Court of Appeals is hereby
AFFIRMED, with treble costs against petitioner