1
EN BANC return the same having a market value of P100,200.00; and (3)
G.R. No. L-18384 September 20, 1965
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs. HEIRS OF CESAR JALANDONI, ET AL., defendants-appellants.
BAUTISTA ANGELO, J.:
Isabel Ledesma died intestate on June 23, 1948 leaving real
properties situated in the provinces of Negros Occidental and
Rizal and in the cities of Manila and Baguio, and personal
properties consisting of shares of stock in various domestic
corporations. She left as heirs her husband Bernardino Jalandoni
and three children, namely, Cesar, Angeles and Delfin, all
surnamed Jalandoni.
On November 19, 1948, Cesar Jalandoni, one of the heirs, filed
an estate and inheritance tax return reporting the following: (1)
that the real and personal properties owned by the deceased
and her surviving husband had a total market value of
P1,324,555.80; (2) that after deducting therefrom the conjugal
share of her husband and some expenses the net estate subject
to estate tax was P28,148.04; and (3) that the amount subject to
inheritance tax was P542,225.83. This return also shows that no
testamentary or intestate proceedings were instituted.
On the basis of this return the Bureau of Internal Revenue made
an assessment on November 20, 1948 calling for the payment of
the amounts of P31,435.95 and P58,863.52 as estate and
inheritance taxes, respectively, stating therein that the
assessment was "to be considered partial pending investigation
of the return." These sums were paid by Cesar Jalandoni.
After a preliminary investigation was made of the properties
reported in the abovementioned return, a second assessment
was made on January 27, 1953 by the Bureau of Internal
Revenue showing that there was due from the estate the
amounts of P5,539.67 and P9,899.37 as deficiency estate and
inheritance taxes, respectively, for which reason a demand was
made on Bernardino Jalandoni stating therein that the same was
still "to be considered partial pending further investigation of
the return," which amounts were paid by Bernardino Jalandoni
on February 28, 1953.
True to the foregoing reservation, the Bureau of Internal
Revenue conducted another investigation and this time it found
(1) that the market value of the lands reported in the return
filed by Cesar Jalandoni was underdeclared in the amount of
P365,149.50; (2) that seven lots which were registered in the
Talisay-Silay cadastre of Negros Occidental as belonging to the
deceased, including their improvements, were omitted from the
included in the return filed by Cesar Jalandoni were in fact
the shares of stock owned by the deceased in the Victorias
Milling Company, Hawaiian-Philippine Company and Central
Azucarera de la Carlota, though included in the return, were
however underdeclared in the amount of P16,355.36, and on
the basis of these findings a third assessment was made against
the estate on May 9, 1956 wherein the heirs were required to
pay the amounts of P29,995.30 and P49,842.05 as deficiency
estate and inheritance taxes, respectively, including accrued
interests, with the warning that failure on their part to pay the
same would subject them to the payment of surcharge, interest,
and penalty for late payment of the tax.
In answer to this third assessment after notice was served on
the administrator of the estate, Bernardino Jalandoni, Lorenzo J.
Teves, in his capacity as counsel of the heirs of the deceased,
wrote a letter to the Collector of Internal Revenue setting up the
defense of prescription in the sense that the deficiency in the
estate and inheritance taxes payment of which was required
therein can no longer be collected since more than five years
had already elapsed from the filing of the return invoking in his
favor Section 331 of the National Internal Revenue Code. To this
defense, the Collector retorted claiming that the stand of
counsel cannot be entertained for the reason that, it appearing
that the estate and inheritance tax return which was filed by the
administrator or by the heirs contained omissions which amount
to fraud indicative of an intention to evade payment of the
proper tax due the government, the taxes then being collected
could still be demanded within ten years from the discovery of
the falsity or omission pursuant to Section 332(a) of said Code,
which period had not yet expired, and as a consequence, the
assessment notice was reiterated with the request that the
deficiency estate and inheritance taxes therein demanded be
settled as soon as possible. And noting that the 30-day period
within which the heirs could appeal the Collector's assessment
to the Court of Tax Appeals had already elapsed, while on the
other hand they indicated their unwillingness to settle the claim,
the Collector of Internal Revenue filed the present case before
the Court of First Instance of Manila pressing the collection of
the deficiency estate and inheritance taxes assessed against the
heirs of the deceased Isabel Ledesma Jalandoni.
While this case was pending hearing on the merits, the lower
court set a date for pre-trial in an effort to have the parties
agree on a stipulation of facts, and this having failed, upon
request of defendants, the lower court ordered the Collector of
Internal Revenue to verify the allegation that the seven lots in
Negros Occidental which were claimed not to have been
included therein, and to this effect the Collector designated
Examiner Genaro Butas to conduct the examination. In his
report Examiner Butas stated that of the seven lots that were
previously reported not included in the return, two were
actually declared therein, though he reaffirmed his previous
finding as regards the other five lots and the market value of the
sugar lands and rice lands left by the deceased and the value of
the shares of stock owned by her in several domestic
corporations.
There being no additional evidence, oral or documentary,
submitted by the parties, and passing solely on the allegations
appearing in the pleadings which appear to be undisputed, the
trial court rendered its decision on February 16, 1960 ordering
defendants, jointly and severally, to pay plaintiff the sum of
P79,837.35 as estate and inheritance taxes, plus the interest
that had accrued thereon as a result of their delinquency.
Defendants interposed the present appeal.
It is claimed that the lower court erred in finding that the return
submitted by Cesar Jalandoni in behalf of the heirs concerning
the estate of the deceased for the purpose of the payment of
the required estate and inheritance taxes is false and fraudulent
there being no evidence on record showing that said return was
filed in bad faith for which reason fraud cannot be imputed to
appellants. As against this claim appellee advances the theory
that since fraudulent intent is a state of mind which cannot be
proven by direct evidence, the same may be inferred from facts
and circumstances that appear to be undisputed as was done by
the court a quo as follows:
The difference between the amounts appearing in the
returns filed and the undeclared properties of the
estate of the deceased is a substantial
understatement of the true value of the estate in
question. The court is of the opinion, and so holds that
the tax returns filed were false. A substantial
understatement of stocks and the omission of seven
(7) parcels of land belonging to the estate of the
deceased, makes it impossible for the court to believe
that the omission or understatements were due to
inadvertence, negligence, or honest statement of
error. Circumstances such as this are competent to
base a finding of willful intent.
And to bolster up this finding appellee submits the following
facts which, it contends, appear in the record: (1) among the
 2

real properties belonging to the deceased five lots in Negros while another lot was not also included because it belonged to deceased in Victorias Milling Company, Hawaiian-Philippine
Occidental, including improvements thereon, with a market Delfin Jalandoni, or Lot 228 which, including improvements, has Company and Central Azucarera de la Carlota, simply because
value of P58,570.00 were not included in the return filed by a a market value of P16,900.00. Hence, from the foregoing we Cesar Jalandoni placed in his return an aggregate market value
representative of appellants; (2) the value of the sugar and rice find that the aggregate value of the aforesaid four lots is of P95,480.00, instead of mentioning the book value declared by
lands that were reported in the return were underdeclared in P86,610.00 which, if deducted from the total value of the seven said corporations in the returns filed by them with the Bureau of
the amount of P365,149.50; and (3) the market value of the lots amounting to P90,110.00, gives a balance of P3,500.00 as Internal Revenue. The fact that the value given in the returns did
shares of stock owned by the deceased in the Victorias Milling the value of the three remaining lots. These three lots being not tally with the book value appearing in the corporate books is
Company, Hawaiian-Philippine Company and the Central conjugal property, one-half thereof belonging to the deceased's not in itself indicative of fraud especially when we take into
Azucarera de la Carlota was underdeclared in the amount of spouse should still be deducted, thus leaving a small balance of consideration the circumstance that said book value only
P16,355.36. In other words, it is claimed that a total amount of P1,750.00. If to this we add that, as the record shows, these became known several months after the death of the deceased.
P440,074.86 which constitutes real asset of the estate has been three lots were already declared in the return submitted by Moreover, it is a known fact that stock securities frequently
deliberately omitted from the return thereby evincing an Bernardino Jalandoni as part of his property and his wife for fluctuate in value and a mere difference of opinion in relation
intention to evade the payment of the correct amount of tax purposes of income tax, there is reason to believe that their thereto cannot serve as proper basis for assessing an intention
due to the government. omission from the return submitted by Cesar Jalandoni was to defraud the government.
merely due to an honest mistake or inadvertence as properly
We are of the opinion that this finding is neither fair nor explained by appellants. We can hardly dispute this conclusion Having reached the conclusion that the heirs of the deceased
reasonable. To begin with, it should be here noted that when as it would be stretching too much the imagination if we would have not committed any act indicative of an intention to evade
this case was pending hearing on the merits before the lower find that, because of such inadvertence, which appears to be the payment of the inheritance or estate taxes due the
court, the latter, upon request of appellants, ordered the inconsequential, the heirs of the deceased deliberately omitted government, as evidenced by their willingness in the past to pay
Collector of Internal Revenue to verify the allegation that there from the return the three lots with the only purpose of all the taxes properly assessed against them, it is evident that
were seven lots in Negros Occidental which were claimed not to defrauding the government after declaring therein as asset of the instant claim of appellee has already prescribed under
have been included in the return filed by Cesar Jalandoni, and to the estate property worth P1,324,555.80. Section 331 of the National Internal Revenue Code. And with
this effect the Collector designated Examiner Genaro Butas to this conclusion, a discussion of the other errors assigned by
conduct the examination. Examiner Butas, after conducting the The same thing may be said with regard to the alleged appellants would seem to be unnecessary.
examination, submitted his report the pertinent of which reads: undervaluation of certain sugar and rice lands reported by Cesar
Lot No. Classification Assessed Value Jalandoni
Fair Market Valuewhich appellee fixes at P365,149.50, for the same can WHEREFORE, the decision appealed from is reversed and the
at most be considered as the result of an honest difference of complaint of appellee is dismissed. No pronouncement as to
493 Sugarland P15,140.00 P21,630.00
opinion and not necessarily an intention to commit fraud. It costs.
710 390.00 should be 550.00
stated that in the estate and inheritance tax returns
521 21,000.00 submitted by Cesar Jalandoni on November 19, 1948 he
30,000.00
EN BANC
954 820.00 reported
1,230.00lands as belonging to the deceased with a
said
statement of what in his opinion represent their reasonable
939 1,210.00 1,720.00 G.R. No. L-13203 January 28, 1961
actual value but which happened not to tally with the valuation
Lot 6,080.00 made 6,080.00
by the Collector of Internal Revenue. Certainly if there is
229
House 12,000.00 any mistake
12,000.00in the valuation made by Jalandoni the same can YUTIVO SONS HARDWARE COMPANY, petitioner,
Commercial 6,400.00 only be considered
6,400.00 as honest mistake, or one based on vs.
excusable inadvertence, he being not an expert in appraising COURT OF TAX APPEALS and COLLECTOR OF INTERNAL
228 Concrete House 10,000.00 10,000.00
real estate. The deficiency assessment, moreover, was made by REVENUE, respondents.
Camarin 500.00 500.00of Internal Revenue more than five years from the
the Collector
filing of the return, and experience shows that such an Sycip, Quisumbing, Salazar & Associates for petitioner.
TOTAL intervening period is sufficiently long to, warrant an increase in
P73,650.00 P90,110.00 Office of the Solicitor General for respondents.
value of real estate which is precisely what was found by the
Collector of Internal Revenue with regard to the lands in
In other words, from the report of Examiner Butas the following question. It is certainly an error to impute fraud based on an GUTIERREZ DAVID, J.:
may be gleaned: that of the seven lots alleged to have been honest difference of opinion.
excluded from the return, three were actually included, with the This is a petition for review of a decision of the Court of Tax
particularity that they were the most valuable, to wit: Lot 493 Appeals ordering petitioner to pay to respondent Collector of
with a market value of P21,630.00; Lot 521 with a market value Finally, we find unreasonable to impute with regard to the
appraisal made by appellants of the shares of stock of the Internal Revenue the sum of P1,266,176.73 as sales tax
of P30,000.00; and Lot 229 with a market value of P12,000.00,

deficiency for the third quarter of 1947 to the fourth quarter of
1950; inclusive, plus 75% surcharge thereon, equivalent to
P349,632.54, or a sum total of P2,215,809.27, plus costs of the
suit.
From the stipulation of facts and the evidence adduced by both
parties, it appears that petitioner Yutivo Sons Hardware Co.
(hereafter referred to as Yutivo) is a domestic corporation,
organized under the laws of the Philippines, with principal office
at 404 Dasmariñas St., Manila. Incorporated in 1916, it was
engaged, prior to the last world war, in the importation and sale
of hardware supplies and equipment. After the liberation, it
resumed its business and until June of 1946 bought a number of
cars and trucks from General Motors Overseas Corporation
(hereafter referred to as GM for short), an American
corporation licensed to do business in the Philippines. As
importer, GM paid sales tax prescribed by sections 184, 185 and
186 of the Tax Code on the basis of its selling price to Yutivo.
Said tax being collected only once on original sales, Yutivo paid
no further sales tax on its sales to the public.
On June 13, 1946, the Southern Motors, Inc. (hereafter referred
to as SM) was organized to engage in the business of selling
cars, trucks and spare parts. Its original authorized capital stock
was P1,000,000 divided into 10,000 shares with a par value of
P100 each.
At the time of its incorporation 2,500 shares worth P250,000
appear to have been subscribed into equal proportions by Yu
Khe Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng Poh, and Washington
Sycip. The first three named subscribers are brothers, being sons
of Yu Tiong Yee, one of Yutivo's founders. The latter two are
respectively sons of Yu Tiong Sin and Albino Sycip, who are
among the founders of Yutivo.
After the incorporation of SM and until the withdrawal of GM
from the Philippines in the middle of 1947, the cars and tracks
purchased by Yutivo from GM were sold by Yutivo to SM which,
in turn, sold them to the public in the Visayas and Mindanao.
When GM decided to withdraw from the Philippines in the
middle of 1947, the U.S. manufacturer of GM cars and trucks
appointed Yutivo as importer for the Visayas and Mindanao, and
Yutivo continued its previous arrangement of selling exclusively
to SM. In the same way that GM used to pay sales taxes based
on its sales to Yutivo, the latter, as importer, paid sales tax
prescribed on the basis of its selling price to SM, and since such
3
sales tax, as already stated, is collected only once on original This second assessment was contested by the petitioner Yutivo
sales, SM paid no sales tax on its sales to the public. before the Court of Tax Appeals, alleging that there is no valid
ground to disregard the corporate personality of SM and to hold
On November 7, 1950, after several months of investigation by that it is an adjunct of petitioner Yutivo; (2) that assuming the
revenue officers started in July, 1948, the Collector of Internal separate personality of SM may be disregarded, the sales tax
Revenue made an assessment upon Yutivo and demanded from already paid by Yutivo should first be deducted from the selling
the latter P1,804,769.85 as deficiency sales tax plus surcharge price of SM in computing the sales tax due on each vehicle; and
covering the period from the third quarter of 1947 to the fourth (3) that the surcharge has been erroneously imposed by
quarter of 1949; or from July 1, 1947 to December 31, 1949, respondent. Finding against Yutivo and sustaining the
claiming that the taxable sales were the retail sales by SM to the respondent Collector's theory that there was no legitimate
public and not the sales at wholesale made by, Yutivo to the or bona fide purpose in the organization of SM — the apparent
latter inasmuch as SM and Yutivo were one and the same objective of its organization being to evade the payment of
corporation, the former being the subsidiary of the latter. taxes — and that it was owned (or the majority of the stocks
thereof are owned) and controlled by Yutivo and is a mere
subsidiary, branch, adjunct, conduit, instrumentality or alter ego
The assessment was disputed by the petitioner, and a
of the latter, the Court of Tax Appeals — with Judge Roman
reinvestigation of the case having been made by the agents of
Umali not taking part — disregarded its separate corporate
the Bureau of Internal Revenue, the respondent Collector in his
existence and on April 27, 1957, rendered the decision now
letter dated November 15, 1952 countermanded his demand for
complained of. Of the two Judges who signed the decision, one
sales tax deficiency on the ground that "after several
voted for the modification of the computation of the sales tax as
investigations conducted into the matter no sufficient evidence
determined by the respondent Collector in his decision so as to
could be gathered to sustain the assessment of this Office based
give allowance for the reduction of the tax already paid
on the theory that Southern Motors is a mere instrumentality or
(resulting in the reduction of the assessment to P820,509.91
subsidiary of Yutivo." The withdrawal was subject, however, to
exclusive of surcharges), while the other voted for affirmance.
the general power of review by the now defunct Board of Tax
The dispositive part of the decision, however, affirmed the
Appeals. The Secretary of Finance to whom the papers relative
assessment made by the Collector. Reconsideration of this
to the case were endorsed, apparently not agreeing with the
decision having been denied, Yutivo brought the case to this
withdrawal of the assessment, returned them to the respondent
Court thru the present petition for review.
Collector for reinvestigation.
It is an elementary and fundamental principle of corporation law
After another investigation, the respondent Collector, in a letter
that a corporation is an entity separate and distinct from its
to petitioner dated December 16, 1954, redetermined that the
stockholders and from other corporation petitions to which it
aforementioned tax assessment was lawfully due the
may be connected. However, "when the notion of legal entity is
government and in addition assessed deficiency sales tax due
used to defeat public convenience, justify wrong, protect fraud,
from petitioner for the four quarters of 1950; the respondents'
or defend crime," the law will regard the corporation as an
last demand was in the total sum of P2,215,809.27 detailed as
association of persons, or in the case of two corporations merge
follows:
them into one. (Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 496, citing I
Deficiency
Fletcher Cyclopedia of Corporation,Total
PermAmount
Ed., pp. 135 136;
Sales Tax 75% Surcharge
United States vs. Milwaukee Refrigeration DueTransit Co., 142 Fed.,
Assessment (First) of November 7, 1950 for deficiency 247, 255 per Sanborn, J.) Another rule is that, when the
sales Tax for the period from 3rd Qrtr 1947 to 4th Qrtr corporation is the "mere alter ego or business conduit of a
1949 inclusive P1,031,296.60
person, P773,473.45(Koppel
it may be disregarded." P1,804,769.05
[Phil.], Inc. vs.
Additional Assessment for period from 1st to 4th Qrtr Yatco, supra.)
1950, inclusive 234,880.13 176,160.09 411,040.22
After going over the voluminous record of the present case, we
Total amount demanded per letter of December 16, 1954 P1,266,176.73 P949,632.54 P2,215,809.27
are inclined to rule that the Court of Tax Appeals was not
justified in finding that SM was organized for no other purpose
than to defraud the Government of its lawful revenues. In the

first place, this corporation was organized in June, 1946 when it
could not have caused Yutivo any tax savings. From that date up
to June 30, 1947, or a period of more than one year, GM was
the importer of the cars and trucks sold to Yutivo, which, in turn
resold them to SM. During that period, it is not disputed that
GM as importer, was the one solely liable for sales taxes. Neither
Yutivo or SM was subject to the sales taxes on their sales of cars
and trucks. The sales tax liability of Yutivo did not arise until July
1, 1947 when it became the importer and simply continued its
practice of selling to SM. The decision, therefore, of the Tax
Court that SM was organized purposely as a tax evasion device
runs counter to the fact that there was no tax to evade.
Making the observation from a newspaper clipping (Exh. "T")
that "as early as 1945 it was known that GM was preparing to
leave the Philippines and terminate its business of importing
vehicles," the court below speculated that Yutivo anticipated the
withdrawal of GM from business in the Philippines in June, 1947.
This observation, which was made only in the resolution on the
motion for reconsideration, however, finds no basis in the
record. On the other hand, GM had been an importer of cars in
the Philippines even before the war and had but recently
resumed its operation in the Philippines in 1946 under an
ambitious plan to expand its operation by establishing an
assembly plant here, so that it could not have been expected to
make so drastic a turnabout of not merely abandoning the
assembly plant project but also totally ceasing to do business as
an importer. Moreover, the newspaper clipping, Exh. "T", was
published on March 24, 1947, and clipping, merely reported a
rumored plan that GM would abandon the assembly plant
project in the Philippines. There was no mention of the
cessation of business by GM which must not be confused with
the abandonment of the assembly plant project. Even as respect
the assembly plant, the newspaper clipping was quite explicit in
saying that the Acting Manager refused to confirm that rumor as
late as March 24, 1947, almost a year after SM was organized.
At this juncture, it should be stated that the intention to
minimize taxes, when used in the context of fraud, must be
proved to exist by clear and convincing evidence amounting to
more than mere preponderance, and cannot be justified by a
mere speculation. This is because fraud is never lightly to be
presumed. (Vitelli & Sons vs. U.S 250 U.S. 355; Duffin vs. Lucas,
55 F (2d) 786; Budd vs. Commr., 43 F (2d) 509; Maryland
Casualty Co. vs. Palmette Coal Co., 40 F (2d) 374; Schoonfield
Bros., Inc. vs. Commr., 38 BTA 943; Charles Heiss vs. Commr 36
BTA 833; Kerbaugh vs. Commr 74 F (2d) 749; Maddas vs.
Commr., 114 F. (2d) 548; Moore vs. Commr., 37 BTA 378;
4
National City Bank of New York vs. Commr., 98 (2d) 93; Richard
vs. Commr., 15 BTA 316; Rea Gane vs. Commr., 19 BTA 518).
(See also Balter, Fraud Under Federal Law, pp. 301-302, citing
numerous authorities: Arroyo vs. Granada, et al., 18 Phil. 484.)
Fraud is never imputed and the courts never sustain findings of
fraud upon circumstances which, at the most, create only
suspicion. (Haygood Lumber & Mining Co. vs. Commr., 178 F
(2d) 769; Dalone vs. Commr., 100 F (2d) 507).
In the second place, SM was organized and it operated, under
circumstance that belied any intention to evade sales taxes. "Tax
evasion" is a term that connotes fraud thru the use of pretenses
and forbidden devices to lessen or defeat taxes. The
transactions between Yutivo and SM, however, have always
been in the open, embodied in private and public documents,
constantly subject to inspection by the tax authorities. As a
matter of fact, after Yutivo became the importer of GM cars and
trucks for Visayas and Mindanao, it merely continued the
method of distribution that it had initiated long before GM
withdrew from the Philippines.
On the other hand, if tax saving was the only justification for the
organization of SM, such justification certainly ceased with the
passage of Republic Act No. 594 on February 16, 1951,
governing payment of advance sales tax by the importer based
on the landed cost of the imported article, increased by mark-
ups of 25%, 50%, and 100%, depending on whether the
imported article is taxed under sections 186, 185 and 184,
respectively, of the Tax Code. Under Republic Act No. 594, the
amount at which the article is sold is immaterial to the amount
of the sales tax. And yet after the passage of that Act, SM
continued to exist up to the present and operates as it did many
years past in the promotion and pursuit of the business
purposes for which it was organized.
In the third place, sections 184 to 186 of the said Code provides
that the sales tax shall be collected "once only on every original
sale, barter, exchange . . , to be paid by the manufacturer,
producer or importer." The use of the word "original" and the
express provision that the tax was collectible "once only"
evidently has made the provisions susceptible of different
interpretations. In this connection, it should be stated that a
taxpayer has the legal right to decrease the amount of what
otherwise would be his taxes or altogether avoid them by means
which the law permits. (U.S. vs. Isham 17 Wall. 496, 506;
Gregory vs. Helvering 293 U.S. 465, 469; Commr. vs. Tower, 327
U.S. 280; Lawton vs. Commr 194 F (2d) 380). Any legal means by
the taxpayer to reduce taxes are all right Benry vs. Commr. 25 T.
Cl. 78). A man may, therefore, perform an act that he honestly
believes to be sufficient to exempt him from taxes. He does not
incur fraud thereby even if the act is thereafter found to be
insufficient. Thus in the case of Court Holding Co. vs. Commr. 2
T. Cl. 531, it was held that though an incorrect position in law
had been taken by the corporation there was no suppression of
the facts, and a fraud penalty was not justified.
The evidence for the Collector, in our opinion, falls short of the
standard of clear and convincing proof of fraud. As a matter of
fact, the respondent Collector himself showed a great deal of
doubt or hesitancy as to the existence of fraud. He even
doubted the validity of his first assessment dated November 7,
1959. It must be remembered that the fraud which respondent
Collector imputed to Yutivo must be related to its filing of sales
tax returns of less taxes than were legally due. The allegation of
fraud, however, cannot be sustained without the showing that
Yutivo, in filing said returns, did so fully knowing that the taxes
called for therein called for therein were less than what were
legally due. Considering that respondent Collector himself with
the aid of his legal staff, and after some two years of
investigation and duty of investigation and study concluded in
1952 that Yutivo's sales tax returns were correct — only to
reverse himself after another two years — it would seem harsh
and unfair for him to say in 1954 that Yutivo fully knew in
October 1947 that its sales tax returns were inaccurate.
On this point, one other consideration would show that the
intent to save taxes could not have existed in the minds of the
organizers of SM. The sales tax imposed, in theory and in
practice, is passed on to the vendee, and is usually billed
separately as such in the sales invoice. As pointed out by
petitioner Yutivo, had not SM handled the retail, the additional
tax that would have been payable by it, could have been easily
passed off to the consumer, especially since the period covered
by the assessment was a "seller's market" due to the post-war
scarcity up to late 1948, and the imposition of controls in the
late 1949.
It is true that the arrastre charges constitute expenses of Yutivo
and its non-inclusion in the selling price by Yutivo cost the
Government P4.00 per vehicle, but said non-inclusion was
explained to have been due to an inadvertent accounting
omission, and could hardly be considered as proof of willful
channelling and fraudulent evasion of sales tax. Mere
understatement of tax in itself does not prove fraud. (James
Nicholson, 32 BTA 377, affirmed 90 F. (2) 978, cited in Merten's
Sec. 55.11 p. 21) The amount involved, moreover, is extremely
 5

small inducement for Yutivo to go thru all the trouble of
organizing SM. Besides, the non-inclusion of these small arrastre
charges in the sales tax returns of Yutivo is clearly shown in the
records of Yutivo, which is uncharacteristic of fraud (See Insular
Lumber Co. vs. Collector, G.R. No. L-719, April 28, 1956.)
We are, however, inclined to agree with the court below that
SM was actually owned and controlled by petitioner as to make
it a mere subsidiary or branch of the latter created for the
purpose of selling the vehicles at retail and maintaining stores
for spare parts as well as service repair shops. It is not disputed
that the petitioner, which is engaged principally in hardware
supplies and equipment, is completely controlled by the Yutivo,
Young or Yu family. The founders of the corporation are closely
related to each other either by blood or affinity, and most of its
stockholders are members of the Yu (Yutivo or Young) family. It
is, likewise, admitted that SM was organized by the leading
stockholders of Yutivo headed by Yu Khe Thai. At the time of its
incorporation 2,500 shares worth P250,000.00 appear to have
been subscribed in five equal proportions by Yu Khe Thai, Yu Khe
Siong, Yu Khe Jin, Yu Eng Poh and Washington Sycip. The first
three named subscribers are brothers, being the sons of Yu Tien
Yee, one of Yutivo's founders. Yu Eng Poh and Washington Sycip
are respectively sons of Yu Tiong Sing and Alberto Sycip who are
co-founders of Yutivo. According to the Articles of Incorporation
of the said subscriptions, the amount of P62,500 was paid by the
aforenamed subscribers, but actually the said sum was
advanced by Yutivo. The additional subscriptions to the capital
stock of SM and subsequent transfers thereof were paid by
Yutivo itself. The payments were made, however, without any
transfer of funds from Yutivo to SM. Yutivo simply charged the
accounts of the subscribers for the amount allegedly advanced
by Yutivo in payment of the shares. Whether a charge was to be
made against the accounts of the subscribers or said subscribers
were to subscribe shares appears to constitute a unilateral act
on the part of Yutivo, there being no showing that the former
initiated the subscription.
The transactions were made solely by and between SM and
Yutivo. In effect, it was Yutivo who undertook the subscription of
shares, employing the persons named or "charged" with
corresponding account as nominal stockholders. Of course, Yu
Khe Thai, Yu Khe Jin, Yu Khe Siong and Yu Eng Poh were
manifestly aware of these subscriptions, but considering that
they were the principal officers and constituted the majority of
the Board of Directors of both Yutivo and SM, their subscriptions
could readily or easily be that of Yutivo's Moreover, these
persons were related to death other as brothers or first cousins.
There was every reason for them to agree in order to protect
their common interest in Yutivo and SM.
The issued capital stock of SM was increased by additional
subscriptions made by various person's but except Ng Sam Bak
and David Sycip, "payments" thereof were effected by merely
debiting 'or charging the accounts of said stockholders and
crediting the corresponding amounts in favor of SM, without
actually transferring cash from Yutivo. Again, in this instance,
the "payments" were Yutivo, by effected by the mere unilateral
act of Yutivo a accounts of the virtue of its control over the
individual persons charged, would necessarily exercise
preferential rights and control directly or indirectly, over the
shares, it being the party which really undertook to pay or
underwrite payment thereof.
The shareholders in SM are mere nominal stockholders holding
the shares for and in behalf of Yutivo, so even conceding that
the original subscribers were stockholders bona fide Yutivo was
at all times in control of the majority of the stock of SM and that
the latter was a mere subsidiary of the former.
True, petitioner and other recorded stockholders transferred
their shareholdings, but the transfers were made to their
immediate relatives, either to their respective spouses and
children or sometimes brothers or sisters. Yutivo's shares in SM
were transferred to immediate relatives of persons who
constituted its controlling stockholders, directors and officers.
Despite these purported changes in stock ownership in both
corporations, the Board of Directors and officers of both
corporations remained unchanged and Messrs. Yu Khe Thai, Yu
Khe Siong Hu Khe Jin and Yu Eng Poll (all of the Yu or Young
family) continued to constitute the majority in both boards. All
these, as observed by the Court of Tax Appeals, merely serve to
corroborate the fact that there was a common ownership and
interest in the two corporations.
SM is under the management and control of Yutivo by virtue of
a management contract entered into between the two parties.
In fact, the controlling majority of the Board of Directors of
Yutivo is also the controlling majority of the Board of Directors
of SM. At the same time the principal officers of both
corporations are identical. In addition both corporations have a
common comptroller in the person of Simeon Sy, who is a
brother-in-law of Yutivo's president, Yu Khe Thai. There is
therefore no doubt that by virtue of such control, the business,
financial and management policies of both corporations could
be directed towards common ends.
Another aspect relative to Yutivo's control over SM operations
relates to its cash transactions. All cash assets of SM were
handled by Yutivo and all cash transactions of SM were actually
maintained thru Yutivo. Any and all receipts of cash by SM
including its branches were transmitted or transferred
immediately and directly to Yutivo in Manila upon receipt
thereof. Likewise, all expenses, purchases or other obligations
incurred by SM are referred to Yutivo which in turn prepares the
corresponding disbursement vouchers and payments in relation
there, the payment being made out of the cash deposits of SM
with Yutivo, if any, or in the absence thereof which occurs
generally, a corresponding charge is made against the account
of SM in Yutivo's books. The payments for and charges against
SM are made by Yutivo as a matter of course and without need
of any further request, the latter would advance all such cash
requirements for the benefit of SM. Any and all payments and
cash vouchers are made on Yutivo stationery and made under
authority of Yutivo's corporate officers, without any copy
thereof being furnished to SM. All detailed records such as cash
disbursements, such as expenses, purchases, etc. for the
account of SM, are kept by Yutivo and SM merely keeps a
summary record thereof on the basis of information received
from Yutivo.
All the above plainly show that cash or funds of SM, including
those of its branches which are directly remitted to Yutivo, are
placed in the custody and control of Yutivo, resources and
subject to withdrawal only by Yutivo. SM's being under Yutivo's
control, the former's operations and existence became
dependent upon the latter.
Consideration of various other circumstances, especially when
taken together, indicates that Yutivo treated SM merely as its
department or adjunct. For one thing, the accounting system
maintained by Yutivo shows that it maintained a high degree of
control over SM accounts. All transactions between Yutivo and
SM are recorded and effected by mere debit or credit entries
against the reciprocal account maintained in their respective
books of accounts and indicate the dependency of SM as branch
upon Yutivo.
Apart from the accounting system, other facts corroborate or
independently show that SM is a branch or department of
Yutivo. Even the branches of SM in Bacolod, Iloilo, Cebu, and
Davao treat Yutivo — Manila as their "Head Office" or "Home
Office" as shown by their letters of remittances or other
correspondences. These correspondences were actually
received by Yutivo and the reference to Yutivo as the head or

home office is obvious from the fact that all cash collections of
the SM's branches are remitted directly to Yutivo. Added to this
fact, is that SM may freely use forms or stationery of Yutivo
The fact that SM is a mere department or adjunct of Yutivo is
made more patent by the fact that arrastre conveying, and
charges paid for the "operation of receiving, loading or
unloading" of imported cars and trucks on piers and wharves,
were charged against SM. Overtime charges for the unloading of
cars and trucks as requested by Yutivo and incurred as part of its
acquisition cost thereof, were likewise charged against and
treated as expenses of SM. If Yutivo were the importer, these
arrastre and overtime charges were Yutivo's expenses in
importing goods and not SM's. But since those charges were
made against SM, it plainly appears that Yutivo had sole
authority to allocate its expenses even as against SM in the
sense that the latter is a mere adjunct, branch or department of
the former.
Proceeding to another aspect of the relation of the parties, the
management fees due from SM to Yutivo were taken up as
expenses of SM and credited to the account of Yutivo. If it were
to be assumed that the two organizations are separate juridical
entities, the corresponding receipts or receivables should have
been treated as income on the part of Yutivo. But such
management fees were recorded as "Reserve for Bonus" and
were therefore a liability reserve and not an income account.
This reserve for bonus were subsequently distributed directly to
and credited in favor of the employees and directors of Yutivo,
thereby clearly showing that the management fees were paid
directly to Yutivo officers and employees.
Briefly stated, Yutivo financed principally, if not wholly, the
business of SM and actually extended all the credit to the latter
not only in the form of starting capital but also in the form of
credits extended for the cars and vehicles allegedly sold by
Yutivo to SM as well as advances or loans for the expenses of
the latter when the capital had been exhausted. Thus, the
increases in the capital stock were made in advances or
"Guarantee" payments by Yutivo and credited in favor of SM.
The funds of SM were all merged in the cash fund of Yutivo. At
all times Yutivo thru officers and directors common to it and SM,
exercised full control over the cash funds, policies, expenditures
and obligations of the latter.
Southern Motors being but a mere instrumentality, or adjunct of
Yutivo, the Court of Tax Appeals correctly disregarded the
6
technical defense of separate corporate entity in order to arrive
at the true tax liability of Yutivo.
Petitioner contends that the respondent Collector had lost his
right or authority to issue the disputed assessment by reason of
prescription. The contention, in our opinion, cannot be
sustained. It will be noted that the first assessment was made on
November 7, 1950 for deficiency sales tax from 1947 to 1949.
The corresponding returns filed by petitioner covering the said
period was made at the earliest on October 1, as regards the
third quarter of 1947, so that it cannot be claimed that the
assessment was not made within the five-year period prescribed
in section 331 of the Tax Code invoked by petitioner. The
assessment, it is admitted, was withdrawn by the Collector on
insufficiency of evidence, but November 15, 1952 due to
insufficiency of evidence, but the withdrawal was made subject
to the approval of the Secretary of Finance and the Board of Tax
Appeals, pursuant to the provisions of section 9 of Executive
Order No. 401-A, series of 1951. The decision of the previous
assessment of November 7, Collector countermanding the as
1950 was forwarded to the Board of Tax Appeals through the
Secretary of Finance but that official, apparently disagreeing
with the decision, sent it back for re-investigation.
Consequently, the assessment of November 7, 1950 cannot be
considered to have been finally withdrawn. That the assessment
was subsequently reiterated in the decision of respondent
Collector on December 16, 1954 did not alter the fact that it was
made seasonably. In this connection, it would appear that a
warrant of distraint and levy had been issued on March 28, 1951
in relation with this case and by virtue thereof the properties of
Yutivo were placed under constructive distraint. Said warrant
and constructive distraint have not been lifted up to the
present, which shows that the assessment of November 7, 1950
has always been valid and subsisting.
Anent the deficiency sale tax for 1950, considering that the
assessment thereof was made on December 16, 1954, the same
was assessed well within the prescribed five-year period.
Petitioner argues that the original assessment of November 7,
1950 did not extend the prescriptive period on assessment. The
argument is untenable, for, as already seen, the assessment was
never finally withdrawn, since it was not approved by the
Secretary of Finance or of the Board of Tax Appeals. The
authority of the Secretary to act upon the assessment cannot be
questioned, for he is expressly granted such authority under
section 9 of Executive Order No. 401-And under section 79 (c) of
the Revised Administrative Code, he has "direct control,
direction and supervision over all bureaus and offices under his
jurisdiction and may, any provision of existing law to the
contrary not withstanding, repeal or modify the decision of the
chief of said Bureaus or offices when advisable in public
interest."
It should here also be stated that the assessment in question
was consistently protested by petitioner, making several
requests for reinvestigation thereof. Under the circumstances,
petitioner may be considered to have waived the defense of
prescription.
"Estoppel has been employed to prevent the
application of the statute of limitations against the
government in certain instances in which the taxpayer
has taken some affirmative action to prevent the
collection of the tax within the statutory period. It is
generally held that a taxpayer is estopped to repudiate
waivers of the statute of limitations upon which the
government relied. The cases frequently involve
dissolved corporations. If no waiver has been given,
the cases usually show come conduct directed to a
postponement of collection, such, for example, as
some variety of request to apply an overassessment.
The taxpayer has 'benefited' and 'is not in a position to
contest' his tax liability. A definite representation of
implied authority may be involved, and in many cases
the taxpayer has received the 'benefit' of being saved
from the inconvenience, if not hardship of immediate
collection. "
Conceivably even in these cases a fully informed
Commissioner may err to the sorrow of the revenues,
but generally speaking, the cases present a strong
combination of equities against the taxpayer, and few
will seriously quarrel with their application of the
doctrine of estoppel." (Mertens Law of Federal
Income Taxation, Vol. 10-A, pp. 159-160.)
It is also claimed that section 9 of Executive Order No. 401-A,
series of 1951 — es involving an original assessment of more
than P5,000 — refers only to compromises and refunds of taxes,
but not to total withdrawal of the assessment. The contention is
without merit. A careful examination of the provisions of both
sections 8 and 9 of Executive Order No. 401-A, series of 1951,
reveals the procedure prescribed therein is intended as a check
or control upon the powers of the Collector of Internal Revenue
in respect to assessment and refunds of taxes. If it be conceded

that a decision of the Collector of Internal Revenue on partial
remission of taxes is subject to review by the Secretary of
Finance and the Board of Tax Appeals, then with more reason
should the power of the Collector to withdraw totally an
assessment be subject to such review.
We find merit, however, in petitioner's contention that the
Court of Tax Appeals erred in the imposition of the 5% fraud
surcharge. As already shown in the early part of this decision, no
element of fraud is present.
Pursuant to Section 183 of the National Internal Revenue Code
the 50% surcharge should be added to the deficiency sales tax
"in case a false or fraudulent return is willfully made." Although
the sales made by SM are in substance by Yutivo this does not
necessarily establish fraud nor the willful filing of a false or
fraudulent return.
The case of Court Holding Co. v. Commissioner of Internal
Revenue (August 9, 1943, 2 TC 531, 541-549) is in point. The
petitioner Court Holding Co. was a corporation consisting of only
two stockholders, to wit: Minnie Miller and her husband Louis
Miller. The only assets of third husband and wife corporation
consisted of an apartment building which had been acquired for
a very low price at a judicial sale. Louis Miller, the husband, who
directed the company's business, verbally agreed to sell this
property to Abe C. Fine and Margaret Fine, husband and wife,
for the sum of $54,000.00, payable in various installments. He
received $1,000.00 as down payment. The sale of this property
for the price mentioned would have netted the corporation a
handsome profit on which a large corporate income tax would
have to be paid. On the afternoon of February 23, 1940, when
the Millers and the Fines got together for the execution of the
document of sale, the Millers announced that their attorney had
called their attention to the large corporate tax which would
have to be paid if the sale was made by the corporation itself. So
instead of proceeding with the sale as planned, the Millers
approved a resolution to declare a dividend to themselves
"payable in the assets of the corporation, in complete
liquidation and surrender of all the outstanding corporate
stock." The building, which as above stated was the only
property of the corporation, was then transferred to Mr. and
Mrs. Miller who in turn sold it to Mr. and Mrs. Fine for exactly
the same price and under the same terms as had been
previously agreed upon between the corporation and the Fines.
The return filed by the Court Holding Co. with the respondent
Commissioner of Internal Revenue reported no taxable gain as
7
having been received from the sale of its assets. The Millers, of
course, reported a long term capital gain on the exchange of
their corporate stock with the corporate property. The
Commissioner of Internal Revenue contended that the
liquidating dividend to stockholders had no purpose other than
that of tax avoidance and that, therefore, the sale by the Millers
to the Fines of the corporation's property was in substance a
sale by the corporation itself, for which the corporation is
subject to the taxable profit thereon. In requiring the
corporation to pay the taxable profit on account of the sale, the
Commissioner of Internal Revenue, imposed a surcharge of 25%
for delinquency, plus an additional surcharge as fraud penalties.
The U. S. Court of Tax Appeals held that the sale by the Millers
was for no other purpose than to avoid the tax and was, in
substance, a sale by the Court Holding Co., and that, therefore,
the said corporation should be liable for the assessed taxable
profit thereon. The Court of Tax Appeals also sustained the
Commissioner of Internal Revenue on the delinquency penalty
of 25%. However, the Court of Tax Appeals disapproved the
fraud penalties, holding that an attempt to avoid a tax does not
necessarily establish fraud; that it is a settled principle that a
taxpayer may diminish his tax liability by means which the law
permits; that if the petitioner, the Court Holding Co., was of the
opinion that the method by which it attempted to effect the sale
in question was legally sufficient to avoid the imposition of a tax
upon it, its adoption of that methods not subject to censure;
and that in taking a position with respect to a question of law,
the substance of which was disclosed by the statement indorsed
on it return, it may not be said that that position was taken
fraudulently. We quote in full the pertinent portion of the
decision of the Court of Tax Appeals: .
". . . The respondent's answer alleges that the
petitioner's failure to report as income the taxable
profit on the real estate sale was fraudulent and with
intent to evade the tax. The petitioner filed a reply
denying fraud and averring that the loss reported on
its return was correct to the best of its knowledge and
belief. We think the respondent has not sustained the
burden of proving a fraudulent intent. We have
concluded that the sale of the petitioner's property
was in substance a sale by the petitioner, and that the
liquidating dividend to stockholders had no purpose
other than that of tax avoidance. But the attempt to
avoid tax does not necessarily establish fraud. It is a
settled principle that a taxpayer may diminish his
liability by any means which the law permits. United
States v. Isham, 17 Wall. 496; Gregory v. Helvering,
supra; Chrisholm v. Commissioner, 79 Fed. (2d) 14. If
the petitioner here was of the opinion that the
method by which it attempted to effect the sale in
question was legally sufficient to avoid the imposition
of tax upon it, its adoption of that method is not
subject to censure. Petitioner took a position with
respect to a question of law, the substance of which
was disclosed by the statement endorsed on its
return. We can not say, under the record before us,
that that position was taken fraudulently. The
determination of the fraud penalties is reversed."
When GM was the importer and Yutivo, the wholesaler, of the
cars and trucks, the sales tax was paid only once and on the
original sales by the former and neither the latter nor SM paid
taxes on their subsequent sales. Yutivo might have, therefore,
honestly believed that the payment by it, as importer, of the
sales tax was enough as in the case of GM Consequently, in filing
its return on the basis of its sales to SM and not on those by the
latter to the public, it cannot be said that Yutivo deliberately
made a false return for the purpose of defrauding the
government of its revenues which will justify the imposition of
the surcharge penalty.
We likewise find meritorious the contention that the Tax Court
erred in computing the alleged deficiency sales tax on the selling
price of SM without previously deducting therefrom the sales
tax due thereon. The sales tax provisions (sees. 184.186, Tax
Code) impose a tax on original sales measured by "gross selling
price" or "gross value in money". These terms, as interpreted by
the respondent Collector, do not include the amount of the
sales tax, if invoiced separately. Thus, General Circular No. 431
of the Bureau of Internal Revenue dated July 29, 1939, which
implements sections 184.186 of the Tax Code provides: "
. . .'Gross selling price' or gross value in money' of the
articles sold, bartered, exchanged, transferred as the
term is used in the aforecited sections (sections 184,
185 and 186) of the National Internal Revenue Code, is
the total amount of money or its equivalent which the
purchaser pays to the vendor to receive or get the
goods. However, if a manufacturer, producer, or
importer, in fixing the gross selling price of an article
sold by him has included an amount intended to cover
the sales tax in the gross selling price of the articles,
the sales tax shall be based on the gross selling price
 8

less the amount intended to cover the tax, if the same
is billed to the purchaser as a separate item.
General Circular No. 440 of the same Bureau reads:
Amount intended to cover the tax must be billed as a
separate em so as not to pay a tax on the tax. — On
sales made after he third quarter of 1939, the amount
intended to cover the sales tax must be billed to the
purchaser as separate items in the, invoices in order
that the reduction thereof from the gross ailing price
may be allowed in the computation of the merchants'
percentage tax on the sales. Unless billed to the
purchaser as a separate item in the invoice, the
amounts intended to cover the sales tax shall be
considered as part of the gross selling price of the
articles sold, and deductions thereof will not be
allowed, (Cited in Dalupan, Nat. Int. Rev. Code,
Annotated, Vol. II, pp. 52-53.)
Yutivo complied with the above circulars on its sales to SM, and
as separately billed, the sales taxes did not form part of the
"gross selling price" as the measure of the tax. Since Yutivo had
previously billed the sales tax separately in its sales invoices to
SM General Circulars Nos. 431 and 440 should be deemed to
have been complied. Respondent Collector's method of
computation, as opined by Judge Nable in the decision
complained of —
. . . is unfair, because . . .(it is) practically imposing tax
on a tax already paid. Besides, the adoption of the
procedure would in certain cases elevate the bracket
under which the tax is based. The late payment is
already penalized, thru the imposition of surcharges,
by adopting the theory of the Collector, we will be
creating an additional penalty not contemplated by
law."
If the taxes based on the sales of SM are computed in
accordance with Gen. Circulars Nos. 431 and 440 the total
deficiency sales taxes, exclusive of the 25% and 50% surcharges
for late payment and for fraud, would amount only to
P820,549.91 as shown in the following computation:
Sales Taxes Due and
Rates of Gross Sales of Vehicles
Computed under Gen.
Sales Tax Exclusive of Sales Tax
Cir Nos. 431 & 400appeal from said ruling, order or decision, notwithstanding the
5% P11,912,219.57
7% 909,559.50
10% 2,618,695.28
261,869.53
15% 3,602,397.65 540,359.65
20% 267,150.50
30% 837,146.97 251,114.09
50% 74,244.30
75% 8,000.00
TOTAL P20,220,413.77 P1,809,205.67
Less Taxes Paid by Yutivo 988,655.76
Deficiency Tax still due P820,549.91
This is the exact amount which, according to Presiding Judge
Nable of the Court of Tax Appeals, Yutivo would pay, exclusive of
the surcharges.
Petitioner finally contends that the Court of Tax Appeals erred
or acted in excess of its jurisdiction in promulgating judgment
for the affirmance of the decision of respondent Collector by
less than the statutory requirement of at least two votes of its
judges. Anent this contention, section 2 of Republic Act No.
1125, creating the Court of Tax Appeals, provides that "Any two
judges of the Court of Tax Appeals shall constitute a quorum,
and the concurrence of two judges shall be necessary to
promulgate decision thereof. . . . " It is on record that the
present case was heard by two judges of the lower court. And
while Judge Nable expressed his opinion on the issue of whether
or not the amount of the sales tax should be excluded from the
gross selling price in computing the deficiency sales tax due
from the petitioner, the opinion, apparently, is merely an
expression of his general or "private sentiment" on the
particular issue, for he concurred the dispositive part of the
decision. At any rate, assuming that there is no valid decision for
lack of concurrence of two judges, the case was submitted for
decision of the court below on March 28, 1957 and under
section 13 of Republic Act 1125, cases brought before said court
hall be decided within 30 days after submission thereof. "If no
decision is rendered by the Court within thirty days from the
date a case is submitted for decision, the party adversely
affected by said ruling, order or decision, may file with said
Court a notice of his intention to appeal to the Supreme Court,
and if no decision has as yet been rendered by the Court, the
Total Gross Selling Price with the Supreme Court an
aggrieved
party may file directly
Charged to the Public
foregoing provisions of this section." The case having been
P595,610.98 P12,507,83055
brought before us on
63,669.16 appeal, the question raised by petitioner
973,228.66
as become
purely academic.
2,880,564.81
4,142,757.30
IN VIEW OF THE FOREGOING, the decision of the Court of Tax
53,430.10 320,580.60
Appeals under review is hereby modified in that petitioner shall
be ordered to pay1,088,291.06
to respondent the sum of P820,549.91, plus
25% surcharge thereon
37,122.16 for late payment.
111,366.46
6,000.00 14,000.00
So ordered without costs.
P22,038,619.44
EN BANC
G.R. No. L-17618 August 31, 1964
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
NORTON and HARRISON COMPANY, respondent.
Office of the Solicitor General for petitioner.
Pio Joven for respondent.
PAREDES, J.:
This is an appeal interposed by the Commissioner of Internal
Revenue against the following judgment of the Court of Tax
Appeals:
IN VIEW OF THE FOREGOING, we find no legal basis to
support the assessment in question against petitioner.
If at all, the assessment should have been directed
against JACKBILT, the manufacturer. Accordingly, the
decision appealed from is reversed, and the surety
bond filed to guarantee payment of said assessment is
ordered cancelled. No pronouncement as to costs.
Norton and Harrison is a corporation organized in 1911, (1) to
buy and sell at wholesale and retail, all kinds of goods, wares,
and merchandise; (2) to act as agents of manufacturers in the
United States and foreign countries; and (3) to carry on and
conduct a general wholesale and retail mercantile establishment
in the Philippines. Jackbilt is, likewise, a corporation organized
on February 16, 1948 primarily for the purpose of making,
producing and manufacturing concrete blocks. Under date of
July 27, 1948. Norton and Jackbilt entered into an agreement
whereby Norton was made the sole and exclusive distributor of
concrete blocks manufactured by Jackbilt. Pursuant to this

agreement, whenever an order for concrete blocks was received
by the Norton & Harrison Co. from a customer, the order was
transmitted to Jackbilt which delivered the merchandise direct
to the customer. Payment for the goods is, however, made to
Norton, which in turn pays Jackbilt the amount charged the
customer less a certain amount, as its compensation or profit.
To exemplify the sales procedures adopted by the Norton and
Jackbilt, the following may be cited. In the case of the sale of
420 pieces of concrete blocks to the American Builders on April
1, 1952, the purchaser paid to Norton the sum of P189.00 the
purchase price. Out of this amount Norton paid Jackbilt P168.00,
the difference obviously being its compensation. As per records
of Jackbilt, the transaction was considered a sale to Norton. It
was under this procedure that the sale of concrete blocks
manufactured by Jackbilt was conducted until May 1, 1953,
when the agency agreement was terminated and a
management agreement between the parties was entered into.
The management agreement provided that Norton would sell
concrete blocks for Jackbilt, for a fixed monthly fee of P2,000.00,
which was later increased to P5,000.00.
During the existence of the distribution or agency agreement, or
on June 10, 1949, Norton & Harrison acquired by purchase all
the outstanding shares of stock of Jackbilt. Apparently, due to
this transaction, the Commissioner of Internal Revenue, after
conducting an investigation, assessed the respondent Norton &
Harrison for deficiency sales tax and surcharges in the amount
of P32,662.90, making as basis thereof the sales of Norton to
the Public. In other words, the Commissioner considered the
sale of Norton to the public as the original sale and not the
transaction from Jackbilt. The period covered by the assessment
was from July 1, 1949 to May 31, 1953. As Norton and Harrison
did not conform with the assessment, the matter was brought
to the Court of Tax Appeals.
The Commissioner of Internal Revenue contends that since
Jackbilt was owned and controlled by Norton & Harrison, the
corporate personality of the former (Jackbilt) should be
disregarded for sales tax purposes, and the sale of Jackbilt
blocks by petitioner to the public must be considered as
the original sales from which the sales tax should be computed.
The Norton & Harrison Company contended otherwise — that
is, the transaction subject to tax is the sale from Jackbilt to
Norton.
Wherefore, the parties respectfully pray that the foregoing
stipulation of facts be admitted and approved by this Honorable
Court, without prejudice to the parties adducing other evidence
9
to prove their case not covered by this stipulation of
facts. 1äwphï1.ñët
The majority of the Tax Court, in relieving Norton & Harrison of
liability under the assessment, made the following observations:
The law applicable to the case is Section 186 of the
National Internal Revenue Code which imposes a
percentage tax of 7% on every original sale of goods,
wares or merchandise, such tax to be based on the
gross selling price of such goods, wares or
merchandise. The term "original sale" has been
defined as the first sale by every manufacturer,
producer or importer. (Sec. 5, Com. Act No. 503.)
Subsequent sales by persons other than the
manufacturer, producer or importer are not subject to
the sales tax.
If JACKBILT actually sold concrete blocks
manufactured by it to petitioner under the
distributorship or agency agreement of July 27, 1948,
such sales constituted the original sales which are
taxable under Section 186 of the Revenue Code, while
the sales made to the public by petitioner are
subsequent sales which are not taxable. But it appears
to us that there was no such sale by JACKBILT to
petitioner. Petitioner merely acted as agent for
JACKBILT in the marketing of its products. This is
shown by the fact that petitioner merely accepted
orders from the public for the purchase of JACKBILT
blocks. The purchase orders were transmitted to
JACKBILT which delivered the blocks to the purchaser
directly. There was no instance in which the blocks
ordered by the purchasers were delivered to the
petitioner. Petitioner never purchased concrete blocks
from JACKBILT so that it never acquired ownership of
such concrete blocks. This being so, petitioner could
not have sold JACKBILT blocks for its own account. It
did so merely as agent of JACKBILT. The distributorship
agreement of July 27, 1948, is denominated by the
parties themselves as an "agency for marketing"
JACKBILT products. ... .
xxx xxx xxx
Therefore, the taxable selling price of JACKBILT blocks
under the aforesaid agreement is the price charged to
the public and not the amount billed by JACKBILT to
petitioner. The deficiency sales tax should have been
assessed against JACKBILT and not against petitioner
which merely acted as the former's agent.
xxx xxx xxx
Presiding Judge Nable of the same Court expressed a partial
dissent, stating:
Upon the aforestated circumstances, which disclose
Norton's control over and direction of Jackbilt's affairs,
the corporate personality of Jackbilt should be
disregarded, and the transactions between these two
corporations relative to the concrete blocks should be
ignored in determining the percentage tax for which
Norton is liable. Consequently, the percentage tax
should be computed on the basis of the sales of
Jackbilt blocks to the public.
The majority opinion is now before Us on appeal by the
Commissioner of Internal Revenue, on four (4) assigned errors,
all of which pose the following propositions: (1) whether the
acquisition of all the stocks of the Jackbilt by the Norton &
Harrison Co., merged the two corporations into a single
corporation; (2) whether the basis of the computation of the
deficiency sales tax should be the sale of the blocks to the public
and not to Norton.
It has been settled that the ownership of all the stocks of a
corporation by another corporation does not necessarily breed
an identity of corporate interest between the two companies
and be considered as a sufficient ground for disregarding the
distinct personalities (Liddell & Co., Inc. v. Coll. of Int. Rev. L-
9687, June 30, 1961). However, in the case at bar, we find
sufficient grounds to support the theory that the separate
identities of the two companies should be disregarded. Among
these circumstances, which we find not successfully refuted by
appellee Norton are: (a) Norton and Harrison owned all the
outstanding stocks of Jackbilt; of the 15,000 authorized shares
of Jackbilt on March 31, 1958, 14,993 shares belonged to
Norton and Harrison and one each to seven others; (b) Norton
constituted Jackbilt's board of directors in such a way as to
enable it to actually direct and manage the other's affairs by
making the same officers of the board for both companies. For
instance, James E. Norton is the President, Treasurer, Director
and Stockholder of Norton. He also occupies the same positions

in Jackbilt corporation, the only change being, in the Jackbilt, he
is merely a nominal stockholder. The same is true with Mr.
Jordan, F. M. Domingo, Mr. Mantaring, Gilbert Golden and
Gerardo Garcia, while they are merely employees of the North
they are Directors and nominal stockholders of the Jackbilt (c)
Norton financed the operations of the Jackbilt, and this is shown
by the fact that the loans obtained from the RFC and Bank of
America were used in the expansion program of Jackbilt, to pay
advances for the purchase of equipment, materials rations and
salaries of employees of Jackbilt and other sundry expenses.
There was no limit to the advances given to Jackbilt so much so
that as of May 31, 1956, the unpaid advances amounted to
P757,652.45, which were not paid in cash by Jackbilt, but was
offset by shares of stock issued to Norton, the absolute and sole
owner of Jackbilt; (d) Norton treats Jackbilt employees as its
own. Evidence shows that Norton paid the salaries of Jackbilt
employees and gave the same privileges as Norton employees,
an indication that Jackbilt employees were also Norton's
employees. Furthermore service rendered in any one of the two
companies were taken into account for purposes of promotion;
(e) Compensation given to board members of Jackbilt, indicate
that Jackbilt is merely a department of Norton. The income tax
return of Norton for 1954 shows that as President and Treasurer
of Norton and Jackbilt, he received from Norton P56,929.95, but
received from Jackbilt the measly amount of P150.00, a
circumstance which points out that remuneration of purported
officials of Jackbilt are deemed included in the salaries they
received from Norton. The same is true in the case of Eduardo
Garcia, an employee of Norton but a member of the Board of
Jackbilt. His Income tax return for 1956 reveals that he received
from Norton in salaries and bonuses P4,220.00, but received
from Jackbilt, by way of entertainment, representation,
travelling and transportation allowances P3,000.00. However, in
the withholding statement (Exh. 28-A), it was shown that the
total of P4,200.00 and P3,000.00 (P7,220.00) was received by
Garcia from Norton, thus portraying the oneness of the two
companies. The Income Tax Returns of Albert Golden and
Dioscoro Ramos both employees of Norton but board members
of Jackbilt, also disclose the game method of payment of
compensation and allowances. The offices of Norton and Jackbilt
are located in the same compound. Payments were effected by
Norton of accounts for Jackbilt and vice versa. Payments were
also made to Norton of accounts due or payable to Jackbilt and
vice versa.
Norton and Harrison, while not denying the presence of the set
up stated above, tried to explain that the control over the affairs
of Jackbilt was not made in order to evade payment of taxes;
10
that the loans obtained by it which were given to Jackbilt, were As opined in the case of Gregory v. Helvering "the legal
necessary for the expansion of its business in the manufacture right of a tax payer to decrease the amount of what
of concrete blocks, which would ultimately benefit both otherwise would be his taxes, or altogether avoid
corporations; that the transactions and practices just them, by means which the law permits, cannot be
mentioned, are not unusual and extraordinary, but pursued in doubted". But as held in another case, "where a
the regular course of business and trade; that there could be no corporation is a dummy, is unreal or a sham and
confusion in the present set up of the two corporations, serves no business purpose and is intended only as a
because they have separate Boards, their cash assets are blind, the corporate form may be ignored for the law
entirely and strictly separate; cashiers and official receipts and cannot countenance a form that is bald and a
bank accounts are distinct and different; they have separate mischievous fictions".
income tax returns, separate balance sheets and profit and loss
statements. These explanations notwithstanding an over-all ... a taxpayer may gain advantage of doing business
appraisal of the circumstances presented by the facts of the thru a corporation if he pleases, but the revenue
case, yields to the conclusion that the Jackbilt is merely an officers in proper cases, may disregard the separate
adjunct, business conduit or alter ego, of Norton and Harrison corporate entity where it serves but as a shield for tax
and that the fiction of corporate entities, separate and distinct evasion and treat the person who actually may take
from each, should be disregarded. This is a case where the benefits of the transactions as the person accordingly
doctrine of piercing the veil of corporate fiction, should be made taxable.
to apply. In the case of Liddell & Co. Inc. v. Coll. of Int.
Rev., supra, it was held:
... to allow a taxpayer to deny tax liability on the
ground that the sales were made through another and
There are quite a series of conspicuous circumstances distinct corporation when it is proved that the latter is
that militates against the separate and distinct virtually owned by the former or that they are
personality of Liddell Motors Inc., from Liddell & Co. practically one and the same is to sanction a
We notice that the bulk of the business of Liddell & circumvention of our tax laws. (and cases cited
Co. was channel Red through Liddell Motors, Inc. On therein.)
the other hand, Liddell Motors Inc. pursued no
activities except to secure cars, trucks, and spare parts
In the case of Yutivo Sons Hardware Co. v. Court of Tax Appeals,
from Liddell & Co., Inc. and then sell them to the
L-13203, Jan. 28, 1961, this Court made a similar ruling where
general public. These sales of vehicles by Liddell & Co,
the circumstances of unity of corporate identities have been
to Liddell Motors. Inc. for the most part were shown
shown and which are identical to those obtaining in the case
to have taken place on the same day that Liddell
under consideration. Therein, this Court said:
Motors, Inc. sold such vehicles to the public. We may
even say that the cars and trucks merely touched the
hands of Liddell Motors, Inc. as a matter of formality. We are, however, inclined to agree with the court
below that SM was actually owned and controlled by
petitioner as to make it a mere subsidiary or branch of
xxx xxx xxx
the latter created for the purpose of selling the
vehicles at retail (here concrete blocks) ... .
Accordingly, the mere fact that Liddell & Co. and
Liddell Motors, Inc. are corporations owned and
It may not be amiss to state in this connection, the advantages
controlled by Frank Liddell directly or indirectly is not
to Norton in maintaining a semblance of separate entities. If the
by itself sufficient to justify the disregard of the
income of Norton should be considered separate from the
separate corporate identity of one from the other.
income of Jackbilt, then each would declare such earning
There is however, in this instant case, a peculiar
separately for income tax purposes and thus pay lesser income
sequence of the organization and activities of Liddell
tax. The combined taxable Norton-Jackbilt income would subject
Motors, Inc.
Norton to a higher tax. Based upon the 1954-1955 income tax
return of Norton and Jackbilt (Exhs. 7 & 8), and assuming that

both of them are operating on the same fiscal basis and their
returns are accurate, we would have the following result:
Jackbilt declared a taxable net income of P161,202.31 in which
the income tax due was computed at P37,137.00 (Exh. 8);
whereas Norton declared as taxable, a net income of
P120,101.59, on which the income tax due was computed at
P25,628.00. The total of these liabilities is P50,764.84. On the
other hand, if the net taxable earnings of both corporations are
combined, during the same taxable year, the tax due on their
total which is P281,303.90 would be P70,764.00. So that, even
on the question of income tax alone, it would be to the
advantages of Norton that the corporations should be regarded
as separate entities.
WHEREFORE, the decision appealed from should be as it is
hereby reversed and another entered making the appellee
Norton & Harrison liable for the deficiency sales taxes assessed
against it by the appellant Commissioner of Internal Revenue,
plus 25% surcharge thereon. Costs against appellee Norton &
Harrison.
EN BANC
G.R. No. L-19707 August 17, 1967
PHILIPPINE ACETYLENE CO., INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
Ponce Enrile, Siguion Reyna, Montecillo and Belo, for petitioner.
Office of the Solicitor General for respondents.
CASTRO, J.:
The petitioner is a corporation engaged in the manufacture and
sale of oxygen and acetylene gases. During the period from June
2, 1953 to June 30, 1958, it made various sales of its products to
the National Power Corporation, an agency of the Philippine
Government, and to the Voice of America an agency of the
United States Government. The sales to the NPC amounted to
P145,866.70, while those to the VOA amounted to P1,683, on
account of which the respondent Commission of Internal
Revenue assessed against, and demanded from, the petitioner
the payment of P12,910.60 as deficiency sales tax and
surcharge, pursuant to the following-provisions of the National
Internal Revenue Code:
11
Sec. 186. Percentage tax on sales of other articles.—
There shall be levied, assessed and collected once only
on every original sale, barter, exchange, and similar
transaction either for nominal or valuable
considerations, intended to transfer ownership of, or
title to, the articles not enumerated in sections one
hundred and eighty-four and one hundred and eighty-
five a tax equivalent to seven per centum of the gross
selling price or gross value in money of the articles so
sold, bartered exchanged, or transferred, such tax to
be paid by the manufacturer or producer: . . . .
Sec. 183. Payment of percentage taxes.—(a) In
general.—It shall be the duty of every person
conducting business on which a percentage tax is
imposed under this Title, to make a true and complete
return of the amount of his, her, or its gross monthly
sales, receipts or earnings, or gross value of output
actually removed from the factory or mill warehouse
and within twenty days after the end of each month,
pay the tax due thereon: Provided, That any person
retiring from a business subject to the percentage tax
shall notify the nearest internal revenue officer
thereof, file his return or declaration and pay the tax
due thereon within twenty days after closing his
business.
If the percentage tax on any business is not paid
within the time specified above, the amount of the tax
shall be increased by twenty-five per centum, the
increment to be a part of the tax.
The petitioner denied liability for the payment of the tax on the
ground that both the NPC and the VOA are exempt from
taxation. It asked for a reconsideration of the assessment and,
failing to secure one, appealed to the Court of Tax Appeals.
The court ruled that the tax on the sale of articles or goods in
section 186 of the Code is a tax on the manufacturer and not on
the buyer with the result that the "petitioner Philippine
Acetylene Company, the manufacturer or producer of oxygen
and acetylene gases sold to the National Power Corporation,
cannot claim exemption from the payment of sales tax simply
because its buyer — the National Power Corporation — is
exempt from the payment of all taxes." With respect to the sales
made to the VOA, the court held that goods purchased by the
American Government or its agencies from manufacturers or
producers are exempt from the payment of the sales tax under
the agreement between the Government of the Philippines and
that of the United States, provided the purchases are supported
by certificates of exemption, and since purchases amounting to
only P558, out of a total of P1,683, were not covered by
certificates of exemption, only the sales in the sum of P558 were
subject to the payment of tax. Accordingly, the assessment was
revised and the petitioner's liability was reduced from
P12,910.60, as assessed by the respondent commission, to
P12,812.16.1
The petitioner appealed to this Court. Its position is that it is not
liable for the payment of tax on the sales it made to the NPC and
the VOA because both entities are exempt from taxation.
I
The NPC enjoys tax exemption by virtue of an act2 of Congress
which provides as follows:
Sec. 2. To facilitate the payment of its indebtedness,
the National Power Corporation shall be exempt from
all taxes, except real property tax, and from all duties,
fees, imposts, charges, and restrictions of the Republic
of the Philippines, its provinces, cities and
municipalities.
It is contended that the immunity thus given to the NPC would
be impaired by the imposition of a tax on sales made to it
because while the tax is paid by the manufacturer or producer,
the tax is ultimately shifted by the latter to the former. The
petitioner invokes in support of its position a 1954 opinion of
the Secretary of Justice which ruled that the NPC is exempt from
the payment of all taxes "whether direct or indirect."
We begin with an analysis of the nature of the percentage
(sales) tax imposed by section 186 of the Code. Is it a tax on the
producer or on the purchaser? Statutes of the type under
consideration, which impose a tax on sales, have been described
as "act[s] with schizophrenic symptoms,"3 as they apparently
have two faces — one that of a vendor tax, the other, a vendee
tax. Fortunately for us the provisions of the Code throw some
light on the problem. The Code states that the sales tax "shall be
paid by the manufacturer or producer,"4 who must "make a true
and complete return of the amount of his, her or its gross
monthly sales, receipts or earnings or gross value of output
actually removed from the factory or mill warehouse and within

twenty days after the end of each month, pay the tax due
thereon."5
But it is argued that a sales tax is ultimately passed on to the
purchaser, and that, so far as the purchaser is an entity like the
NPC which is exempt from the payment of "all taxes, except real
property tax," the tax cannot be collected from sales.
Many years ago, Mr. Justice Oliver Wendell Holmes expressed
dissatisfaction with the use of the phrase "pass the tax on."
Writing the opinion of the U.S. Supreme Court in Lash's Products
v. United States,6 he said: "The phrase 'passed the tax on' is
inaccurate, as obviously the tax is laid and remains on the
manufacturer and on him alone. The purchaser does not really
pay the tax. He pays or may pay the seller more for the goods
because of the seller's obligation, but that is all. . . . The price is
the sum total paid for the goods. The amount added because of
the tax is paid to get the goods and for nothing else. Therefore it
is part of the price . . .".
It may indeed be that the incidence of the tax ultimately settles
on the purchaser, but it is not for that reason alone that one
may validly argue that it is a tax on the purchaser. The
exemption granted to the NPC may be likened to the immunity
of the Federal Government from state taxation and vice versa in
the federal system of government of the United States. In the
early case of Panhandle Oil Co. v. Mississippi7 the doctrine of
intergovernment mental tax immunity was held as prohibiting
the imposition of a tax on sales of gasoline made to the Federal
Government. Said the Supreme court of the United States:
A charge at the prescribed. rate is made on account of
every gallon acquired by the United States. It is
immaterial that the seller and not the purchaser is
required to report and make payment to the state.
Sale and purchase constitute a transaction by which
the tax is measured and on which the burden rests. . .
. The necessary operation of these enactments when
so construed is directly to retard, impede and burden
the exertion by the United States, of its constitutional
powers to operate the fleet and hospital. . . . To use
the number of gallons sold the United States as a
measure of the privilege tax is in substance and legal
effect to tax the sale. . . . And that is to tax the United
States — to exact tribute on its transactions and apply
the same to the support of the state.1äwphï1.ñët
12
Justice Holmes did not agree. In a powerful dissent joined by
Justices Brandeis and Stone, he said:
If the plaintiff in error had paid the tax and added it to
the price the government would have nothing to say.
It could take the gasoline or leave it but it could not
require the seller to abate his charge even if it had
been arbitrarily increased in the hope of getting more
from the government than could be got from the
public at large. . . . It does not appear that the
government would have refused to pay a price that
included the tax if demanded, but if the government
had refused it would not have exonerated the seller. . .
. 1943 when the U.S. Supreme Court held that immunity from
. . . I am not aware that the President, the Members of
the Congress, the Judiciary or to come nearer to the
case at hand, the Coast Guard or the officials of the
Veterans' Hospital [to which the sales were made],
because they are instrumentalities of government and
cannot function naked and unfed, hitherto have been
held entitled to have their bills for food and clothing
cut down so far as their butchers and tailors have
been taxed on their sales; and I had not supposed that
the butchers and tailors could omit from their tax
returns all receipts from the large class of customers
to which I have referred. The question of interference
with Government, I repeat, is one of reasonableness
and degree and it seems to me that the interference
in this case is too remote.
But time was not long in coming to confirm the soundness of
Holmes' position. Soon it became obvious that to test the
constitutionality of a statute by determining the party on which
the legal incidence of the tax fell was an unsatisfactory way of
doing things. The fall of the bastion was signalled by Chief
Justice Hughes' statement in James v. Dravo Constructing
Co.8 that "These cases [referring to Panhandle and Indian
Motorcycle Co. v. United States, 283 U.S. 570 (1931)] have been
distinguished and must be deemed to be limited to their
particular facts."
In 1941, Alabama v. King & Boozer9 held that the constitutional
immunity of the United States from state taxation was not
infringed by the imposition of a state sales tax with which the
seller was chargeable but which he was required to collect from
the buyer, in respect of materials purchased by a contractor
with the United States on a cost-plus basis for use in carrying
out its contract, despite the fact that the economic burden of
the tax was borne by the United States.
The asserted right of the one to be free of taxation by
the other does not spell immunity from paying the
added costs, attributable to the taxation of those who
furnish supplies to the Government and who have
been granted no tax immunity. So far as a different
view has prevailed, see Panhandle Oil Co. v.
Mississippi and Graves v. Texas Co., supra, we think it
no longer tenable.
Further inroads into the doctrine of Panhandle were made in
state regulation in the performance of governmental functions
by Federal officers and agencies did not extend to those who
merely contracted to furnish supplies or render services to the
government even though as a result of an increase in the price
of such supplies or services attributable to the state regulation,
its ultimate effect may be to impose an additional economic
burden on the Government.10
But if a complete turnabout from the rule announced
in Panhandle was yet to be made, it was so made in 1952 in Esso
Standard Oil v. Evans11 which held that a contractor is not
exempt from the payment of a state privilege tax on the
business of storing gasoline simply because the Federal
Government with which it has a contract for the storage of
gasoline is immune from state taxation.
This tax was imposed because Esso stored gasoline. It
is not . . . based on the worth of the government
property. Instead, the amount collected is graduated
in accordance with the exercise of Esso's privilege to
engage in such operations; so it is not "on" the federal
property. . . . Federal ownership of the fuel will not
immunize such a private contractor from the tax on
storage. It may generally, as it did here, burden the
United States financially. But since James vs. Dravo
Contracting Co., 302 U.S. 134, 151, 82 L. ed. 155, 167,
58 S. Ct. 208, 114 ALR 318, this has been no fatal flaw.
. . . 12
We have determined the current status of the doctrine of
intergovernmental tax immunity in the United States, by
showing the drift of the decisions following announcement of
the original rule, to point up the that fact that even in those

cases where exemption from tax was sought on the ground of
state immunity, the attempt has not met with success.
As Thomas Reed Powell noted in 1945 in reviewing the
development of the doctrine:
Since the Dravo case settled that it does not matter
that the economic burden of the gross receipts tax
may be shifted to the Government, it could hardly
matter that the shift comes about by explicit
agreement covering taxes rather than by being
absorbed in a higher contract price by bidders for a
contract. The situation differed from that in
the Panhandle and similar cases in that they involved
but two parties whereas here the transaction was
tripartite. These cases are condemned in so far as they
rested on the economic ground of the ultimate
incidence of the burden being on the Government,
but this condemnation still leaves open the question
whether either the state or the United States when
acting in governmental matters may be made legally
liable to the other for a tax imposed on it as vendee.
The carefully chosen language of the Chief Justice
keeps these cases from foreclosing the issue. . . . Yet
at the time it would have been a rash man who would
find in this a dictum that a sales tax clearly on the
Government as purchaser is invalid or a dictum that
Congress may immunize its contractors.13
If a claim of exemption from sales tax based on state immunity
cannot command assent, much less can a claim resting on
statutory grant.
It may indeed be that the economic burden of the tax finally falls
on the purchaser; when it does the tax becomes a part of the
price which the purchaser must pay. It does not matter that an
additional amount is billed as tax to the purchaser. The method
of listing the price and the tax separately and defining taxable
gross receipts as the amount received less the amount of the tax
added, merely avoids payment by the seller of a tax on the
amount of the tax. The effect is still the same, namely, that the
purchaser does not pay the tax. He pays or may pay the seller
more for the goods because of the seller's obligation, but that is
all and the amount added because of the tax is paid to get the
goods and for nothing else.14
13
But the tax burden may not even be shifted to the purchaser at
all. A decision to absorb the burden of the tax is largely a matter
of economics.15 Then it can no longer be contended that a sales
tax is a tax on the purchaser.
We therefore hold that the tax imposed by section 186 of the
National Internal Revenue Code is a tax on the manufacturer or
producer and not a tax on the purchaser except probably in a
very remote and inconsequential sense. Accordingly its levy on
the sales made to tax-exempt entities like the NPC is
permissible.
II
This conclusion should dispose of the same issue with respect to
sales made to the VOA, except that a claim is here made that
the exemption of such sales from taxation rests on stronger
grounds. Even the Court of Tax Appeals appears to share this
view as is evident from the following portion of its decision:
With regard to petitioner's sales to the Voice of
America, it appears that the petitioner and the
respondent are in agreement that the Voice of
America is an agency of the United States Government
and as such, all goods purchased locally by it directly
from manufacturers or producers are exempt from
the payment of the sales tax under the provisions of
the agreement between the Government of the
Philippines and the Government of the United States,
(See Commonwealth Act No. 733) provided such
purchases are supported by serially numbered
Certificates of Tax Exemption issued by the vendee-
agency, as required by General Circular No. V-41,
dated October 16, 1947. . . .
The circular referred to reads:
Goods purchased locally by U.S. civilian agencies
directly from manufacturers, producers or importers
shall be exempt from the sales tax.
It was issued purportedly to implement the Agreement between
the Republic of the Philippines and the United States of America
Concerning Military Bases,16 but we find nothing in the language
of the Agreement to warrant the general exemption granted by
that circular.
The pertinent provisions of the Agreement read:
ARTICLE V. — Exemption from Customs and Other
Duties
No import, excise, consumption or other tax, duty or
impost shall be charged on material, equipment,
supplies or goods, including food stores and clothing,
for exclusive use in the construction, maintenance,
operation or defense of the bases, consigned to, or
destined for, the United States authorities and
certified by them to be for such purposes.
ARTICLE XVIII.—Sales and Services Within the Bases
1. It is mutually agreed that the United States Shall
have the right to establish on bases, free of all
licenses; fees; sales, excise or other taxes, or imposts;
Government agencies, including concessions, such as
sales commissaries and post exchanges, messes and
social clubs, for the exclusive use of the United States
military forces and authorized civilian personnel and
their families. The merchandise or services sold or
dispensed by such agencies shall be free of all taxes,
duties and inspection by the Philippine authorities. . . .
Thus only sales made "for exclusive use in the construction,
maintenance, operation or defense of the bases," in a word,
only sales to the quartermaster, are exempt under article V from
taxation. Sales of goods to any other party even if it be an
agency of the United States, such as the VOA, or even to the
quartermaster but for a different purpose, are not free from the
payment of the tax.
On the other hand, article XVIII exempts from the payment of
the tax sales made within the base by (not sales to)
commissaries and the like in recognition of the principle that a
sales tax is a tax on the seller and not on the purchaser.
It is a familiar learning in the American law of taxation that tax
exemption must be strictly construed and that the exemption
will not be held to be conferred unless the terms under which it
is granted clearly and distinctly show that such was the intention
of the parties.17 Hence, in so far as the circular of the Bureau of
Internal Revenue would give the tax exemptions in the
Agreement an expansive construction it is void.
 14
We hold, therefore, that sales to the VOA are subject to the exemption in its favor under Section 135(a) of the National
payment of percentage taxes under section 186 of the Code. Internal Revenue Code of 1997 (NIRC).
The petitioner is thus liable for P12,910.60, computed as
follows: WHEREFORE, the petition for review on certiorari is GRANTED.
Sales to NPC P145,866.70 The Decision dated March 25, 2009 and Resolution dated June
24, 2009 of the Court of Tax Appeals En Banc in CTA EB No. 415
Sales to VOA P 1,683.00 are hereby REVERSED and SET ASIDE. The claims for tax refund
or credit filed by respondent Pilipinas Shell Petroleum
Total sales subject to tax P147,549.70 Corporation are DENIED for lack of basis.
No pronouncement as to costs.
7% sales tax due thereon P 10,328.48
Add: 25% surcharge P 2,582.12 SO ORDERED.1
Respondent argues that a plain reading of Section 135 of the
NIRC reveals that it is the petroleum products sold to
Total amount due and collectible P 12,910.60
international carriers which are exempt from excise tax for
which reason no excise taxes are deemed to have been due in
the first place. It points out that excise tax being an indirect tax,
Section 135 in relation to Section 148 should be interpreted as
Accordingly, the decision a quo is modified by ordering the
petitioner to pay to the respondent Commission the amount of referring to a tax exemption from the point of production and
removal from the place of production considering that it is only
P12,910.60 as sales tax and surcharge, with costs against the
at that point that an excise tax is imposed. The situation is unlike
petitioner.
the value-added tax (VAT) which is imposed at every point of
turnover – from production to wholesale, to retail and to end-
FIRST DIVISION
consumer. Respondent thus concludes that exemption could
only refer to the imposition of the tax on the statutory seller, in
G.R. No. 188497 February 19, 2014 this case the respondent. This is because when a tax paid by the
statutory seller is passed on to the buyer it is no longer in the
COMMISSIONER OF INTERNAL REVENUE, Petitioner, nature of a tax but an added cost to the purchase price of the
vs. product sold.
PILIPINAS SHELL PETROLEUM CORPORATION, Respondent.
Respondent also contends that our ruling that Section 135 only
RESOLUTION prohibits local petroleum manufacturers like respondent from
shifting the burden of excise tax to international carriers has
adverse economic impact as it severely curtails the domestic oil
VILLARAMA, JR., J.:
industry. Requiring local petroleum manufacturers to absorb the
tax burden in the sale of its products to international carriers is
For resolution are the Motion for Reconsideration dated May
contrary to the State’s policy of "protecting gasoline dealers and
22, 2012 and Supplemental Motion for Reconsideration dated
distributors from unfair and onerous trade conditions," and
December 12, 2012 filed by Pilipinas Shell Petroleum
places them at a competitive disadvantage since foreign oil
Corporation (respondent). As directed, the Solicitor General on
producers, particularly those whose governments with which we
behalf of petitioner Commissioner of Internal Revenue filed their
have entered into bilateral service agreements, are not subject
Comment, to which respondent filed its Reply.
to excise tax for the same transaction. Respondent fears this
could lead to cessation of supply of petroleum products to
In our Decision promulgated on April 25, 2012, we ruled that the international carriers, retrenchment of employees of domestic
Court of Tax Appeals (CTA) erred in granting respondent's claim manufacturers/producers to prevent further losses, or worse,
for tax refund because the latter failed to establish a tax shutting down of their production of jet A-1 fuel and aviation
gas due to unprofitability of sustaining operations. Under this
scenario, participation of Filipino capital, management and labor
in the domestic oil industry is effectively diminished.
Lastly, respondent asserts that the imposition by the Philippine
Government of excise tax on petroleum products sold to
international carriers is in violation of the Chicago Convention
on International Aviation ("Chicago Convention") to which it is a
signatory, as well as other international agreements (the
Republic of the Philippines’ air transport agreements with the
United States of America, Netherlands, Belgium and Japan).
In his Comment, the Solicitor General underscores the statutory
basis of this Court’s ruling that the exemption under Section 135
does not attach to the products. Citing Exxonmobil Petroleum &
Chemical Holdings, Inc.-Philippine Branch v. Commissioner of
Internal Revenue,2 which held that the excise tax, when passed
on to the purchaser, becomes part of the purchase price, the
Solicitor General claims this refutes respondent’s theory that the
exemption attaches to the petroleum product itself and not to
the purchaser for it would have been erroneous for the seller to
pay the excise tax and inequitable to pass it on to the purchaser
if the excise tax exemption attaches to the product.
As to respondent’s reliance in the cases of Silkair (Singapore)
Pte. Ltd. v. Commissioner of Internal Revenue3 and Exxonmobil
Petroleum & Chemical Holdings, Inc.-Philippine Branch v.
Commissioner of Internal Revenue,4 the Solicitor General points
out that there was no pronouncement in these cases that
petroleum manufacturers selling petroleum products to
international carriers are exempt from paying excise taxes. In
fact, Exxonmobil even cited the case of Philippine Acetylene Co,
Inc. v. Commissioner of Internal Revenue.5 Further, the ruling in
Maceda v. Macaraig, Jr.6 which confirms that Section 135 does
not intend to exempt manufacturers or producers of petroleum
products from the payment of excise tax.
The Court will now address the principal arguments proffered by
respondent: (1) Section 135 intended the tax exemption to
apply to petroleum products at the point of production; (2)
Philippine Acetylene Co., Inc. v. Commissioner of Internal
Revenue and Maceda v. Macaraig, Jr. are inapplicable in the
light of previous rulings of the Bureau of Internal Revenue (BIR)
and the CTA that the excise tax on petroleum products sold to
international carriers for use or consumption outside the
Philippines attaches to the article when sold to said
international carriers, as it is the article which is exempt from
the tax, not the international carrier; and (3) the Decision of this
Court will not only have adverse impact on the domestic oil

industry but is also in violation of international agreements on
aviation.
Under Section 129 of the NIRC, excise taxes are those applied to
goods manufactured or produced in the Philippines for domestic
sale or consumption or for any other disposition and to things
imported. Excise taxes as used in our Tax Code fall under two
types – (1) specific tax which is based on weight or volume
capacity and other physical unit of measurement, and (2) ad
valorem tax which is based on selling price or other specified
value of the goods. Aviation fuel is subject to specific tax under
Section 148 (g) which attaches to said product "as soon as they
are in existence as such."
On this point, the clarification made by our esteemed colleague,
Associate Justice Lucas P. Bersamin regarding the traditional
meaning of excise tax adopted in our Decision, is well-taken.
The transformation undergone by the term "excise tax" from its
traditional concept up to its current definition in our Tax Code
was explained in the case of Petron Corporation v. Tiangco,7 as
follows:
Admittedly, the proffered definition of an excise tax as "a tax
upon the performance, carrying on, or exercise of some right,
privilege, activity, calling or occupation" derives from the
compendium American Jurisprudence, popularly referred to as
Am Jur and has been cited in previous decisions of this Court,
including those cited by Petron itself. Such a definition would
not have been inconsistent with previous incarnations of our Tax
Code, such as the NIRC of 1939, as amended, or the NIRC of
1977 because in those laws the term "excise tax" was not used
at all. In contrast, the nomenclature used in those prior laws in
referring to taxes imposed on specific articles was "specific tax."
Yet beginning with the National Internal Revenue Code of 1986,
as amended, the term "excise taxes" was used and defined as
applicable "to goods manufactured or produced in the
Philippines… and to things imported." This definition was carried
over into the present NIRC of 1997. Further, these two latest
codes categorize two different kinds of excise taxes: "specific
tax" which is imposed and based on weight or volume capacity
or any other physical unit of measurement; and "ad valorem
tax" which is imposed and based on the selling price or other
specified value of the goods. In other words, the meaning of
"excise tax" has undergone a transformation, morphing from the
Am Jur definition to its current signification which is a tax on
certain specified goods or articles.
15
The change in perspective brought forth by the use of the term
"excise tax" in a different connotation was not lost on the
departed author Jose Nolledo as he accorded divergent
treatments in his 1973 and 1994 commentaries on our tax laws.
Writing in 1973, and essentially alluding to the Am Jur definition
of "excise tax," Nolledo observed:
Are specific taxes, taxes on property or excise taxes –
In the case of Meralco v. Trinidad ([G.R.] 16738, 1925) it was
held that specific taxes are property taxes, a ruling which seems
to be erroneous. Specific taxes are truly excise taxes for the fact
that the value of the property taxed is taken into account will
not change the nature of the tax. It is correct to say that specific
taxes are taxes on the privilege to import, manufacture and
remove from storage certain articles specified by law.
In contrast, after the tax code was amended to classify specific
taxes as a subset of excise taxes, Nolledo, in his 1994
commentaries, wrote:
1. Excise taxes, as used in the Tax Code, refers to taxes
applicable to certain specified goods or articles
manufactured or produced in the Philippines for
domestic sale or consumption or for any other
disposition and to things imported into the
Philippines. They are either specific or ad valorem.
2. Nature of excise taxes. – They are imposed directly
on certain specified goods. (infra) They are, therefore,
taxes on property. (see Medina vs. City of Baguio, 91
Phil. 854.)
A tax is not excise where it does not subject directly the produce
or goods to tax but indirectly as an incident to, or in connection
with, the business to be taxed.
In their 2004 commentaries, De Leon and De Leon restate the
Am Jur definition of excise tax, and observe that the term is
"synonymous with ‘privilege tax’ and [both terms] are often
used interchangeably." At the same time, they offer a caveat
that "[e]xcise tax, as [defined by Am Jur], is not to be confused
with excise tax imposed [by the NIRC] on certain specified
articles manufactured or produced in, or imported into, the
Philippines, ‘for domestic sale or consumption or for any other
disposition.’"
It is evident that Am Jur aside, the current definition of an excise
tax is that of a tax levied on a specific article, rather than one
"upon the performance, carrying on, or the exercise of an
activity."
This current definition was already in place when the Code was
enacted in 1991, and we can only presume that it was what the
Congress had intended as it specified that local government
units could not impose "excise taxes on articles enumerated
under the [NIRC]." This prohibition must pertain to the same
kind of excise taxes as imposed by the NIRC, and not those
previously defined "excise taxes" which were not integrated or
denominated as such in our present tax law.8 (Emphasis
supplied.)
That excise tax as presently understood is a tax on property has
no bearing at all on the issue of respondent’s entitlement to
refund. Nor does the nature of excise tax as an indirect tax
supports respondent’s postulation that the tax exemption
provided in Sec. 135 attaches to the petroleum products
themselves and consequently the domestic petroleum
manufacturer is not liable for the payment of excise tax at the
point of production. As already discussed in our Decision, to
which Justice Bersamin concurs, "the accrual and payment of
the excise tax on the goods enumerated under Title VI of the
NIRC prior to their removal at the place of production are
absolute and admit of no exception." This also underscores the
fact that the exemption from payment of excise tax is conferred
on international carriers who purchased the petroleum products
of respondent.
On the basis of Philippine Acetylene, we held that a tax
exemption being enjoyed by the buyer cannot be the basis of a
claim for tax exemption by the manufacturer or seller of the
goods for any tax due to it as the manufacturer or seller. The
excise tax imposed on petroleum products under Section 148 is
the direct liability of the manufacturer who cannot thus invoke
the excise tax exemption granted to its buyers who are
international carriers. And following our pronouncement in
Maceda v. Macarig, Jr. we further ruled that Section 135(a)
should be construed as prohibiting the shifting of the burden of
the excise tax to the international carriers who buy petroleum
products from the local manufacturers. Said international
carriers are thus allowed to purchase the petroleum products
without the excise tax component which otherwise would have
been added to the cost or price fixed by the local manufacturers
or distributors/sellers.

Excise tax on aviation fuel used for international flights is
practically nil as most countries are signatories to the 1944
Chicago Convention on International Aviation (Chicago
Convention). Article 249 of the Convention has been interpreted
to prohibit taxation of aircraft fuel consumed for international
transport. Taxation of international air travel is presently at such
low level that there has been an intensified debate on whether
these should be increased to "finance development rather than
simply to augment national tax revenue" considering the "cross-
border environmental damage" caused by aircraft emissions
that contribute to global warming, not to mention noise
pollution and congestion at airports).10 Mutual exemptions given
under bilateral air service agreements are seen as main legal
obstacles to the imposition of indirect taxes on aviation fuel. In
response to present realities, the International Civil Aviation
Organization (ICAO) has adopted policies on charges and
emission-related taxes and charges.11
Section 135(a) of the NIRC and earlier amendments to the Tax
Code represent our Governments’ compliance with the Chicago
Convention, its subsequent resolutions/annexes, and the air
transport agreements entered into by the Philippine
Government with various countries. The rationale for exemption
of fuel from national and local taxes was expressed by ICAO as
follows:
...The Council in 1951 adopted a Resolution and
Recommendation on the taxation of fuel, a Resolution on the
taxation of income and of aircraft, and a Resolution on taxes
related to the sale or use of international air transport (cf. Doc
7145) which were further amended and amplified by the policy
statements in Doc 8632 published in 1966. The Resolutions and
Recommendation concerned were designed to recognize the
uniqueness of civil aviation and the need to accord tax exempt
status to certain aspects of the operations of international air
transport and were adopted because multiple taxation on the
aircraft, fuel, technical supplies and the income of international
air transport, as well as taxes on its sale and use, were
considered as major obstacles to the further development of
international air transport. Non-observance of the principle of
reciprocal exemption envisaged in these policies was also seen
as risking retaliatory action with adverse repercussions on
international air transport which plays a major role in the
development and expansion of international trade and travel.12
In the 6th Meeting of the Worldwide Air Transport Conference
(ATCONF) held on March 18-22, 2013 at Montreal, among
matters agreed upon was that "the proliferation of various taxes
16
and duties on air transport could have negative impact on the
sustainable development of air transport and on consumers."
Confirming that ICAO’s policies on taxation remain valid, the
Conference recommended that "ICAO promote more vigorously
its policies and with industry stakeholders to develop analysis
and guidance to States on the impact of taxes and other levies
on air transport."13 Even as said conference was being held, on
March 7, 2013, President Benigno Aquino III has signed into law
Republic Act (R.A.) No. 1037814 granting tax incentives to foreign
carriers which include exemption from the 12% value-added tax
(VAT) and 2.5% gross Philippine billings tax (GPBT). GPBT is a
form of income tax applied to international airlines or shipping
companies. The law, based on reciprocal grant of similar tax
exemptions to Philippine carriers, is expected to increase foreign
tourist arrivals in the country.
Indeed, the avowed purpose of a tax exemption is always "some
public benefit or interest, which the law-making body considers
sufficient to offset the monetary loss entailed in the grant of the
exemption."15 The exemption from excise tax of aviation fuel
purchased by international carriers for consumption outside the
Philippines fulfills a treaty obligation pursuant to which our
Government supports the promotion and expansion of
international travel through avoidance of multiple taxation and
ensuring the viability and safety of international air travel. In
recent years, developing economies such as ours focused more
serious attention to significant gains for business and tourism
sectors as well. Even without such recent incidental benefit,
States had long accepted the need for international cooperation
in maintaining a capital intensive, labor intensive and fuel
intensive airline industry, and recognized the major role of
international air transport in the development of international
trade and travel.
Under the basic international law principle of pacta sunt
servanda, we have the duty to fulfill our treaty obligations in
good faith. This entails harmonization of national legislation with
treaty provisions. In this case, Sec. 135(a) of the NIRC embodies
our compliance with our undertakings under the Chicago
Convention and various bilateral air service agreements not to
impose excise tax on aviation fuel purchased by international
carriers from domestic manufacturers or suppliers. In our
Decision in this case, we interpreted Section 135 (a) as
prohibiting domestic manufacturer or producer to pass on to
international carriers the excise tax it had paid on petroleum
products upon their removal from the place of production,
pursuant to Article 148 and pertinent BIR regulations. Ruling on
respondent’s claim for tax refund of such paid excise taxes on
petroleum products sold to tax-exempt international carriers,
we found no basis in the Tax Code and jurisprudence to grant
the refund of an "erroneously or illegally paid" tax.
Justice Bersamin argues that "(T)he shifting of the tax burden by
manufacturers-sellers is a business prerogative resulting from
the collective impact of market forces," and that it is "erroneous
to construe Section 135(a) only as a prohibition against the
shifting by the manufacturers-sellers of petroleum products of
the tax burden to international carriers, for such construction
will deprive the manufacturers-sellers of their business
prerogative to determine the prices at which they can sell their
products."
We maintain that Section 135 (a), in fulfillment of international
agreement and practice to exempt aviation fuel from excise tax
and other impositions, prohibits the passing of the excise tax to
international carriers who buys petroleum products from local
manufacturers/sellers such as respondent. However, we agree
that there is a need to reexamine the effect of denying the
domestic manufacturers/sellers’ claim for refund of the excise
taxes they already paid on petroleum products sold to
international carriers, and its serious implications on our
Government’s commitment to the goals and objectives of the
Chicago Convention.
The Chicago Convention, which established the legal framework
for international civil aviation, did not deal comprehensively
with tax matters. Article 24 (a) of the Convention simply
provides that fuel and lubricating oils on board an aircraft of a
Contracting State, on arrival in the territory of another
Contracting State and retained on board on leaving the territory
of that State, shall be exempt from customs duty, inspection
fees or similar national or local duties and charges.
Subsequently, the exemption of airlines from national taxes and
customs duties on spare parts and fuel has become a standard
element of bilateral air service agreements (ASAs) between
individual countries.
The importance of exemption from aviation fuel tax was
underscored in the following observation made by a British
author16 in a paper assessing the debate on using tax to control
aviation emissions and the obstacles to introducing excise duty
on aviation fuel, thus:
Without any international agreement on taxing fuel, it is highly
likely that moves to impose duty on international flights, either

at a domestic or European level, would encourage 'tankering':
carriers filling their aircraft as full as possible whenever they
landed outside the EU to avoid paying tax.1âwphi1 Clearly this
would be entirely counterproductive. Aircraft would be
travelling further than necessary to fill up in low-tax
jurisdictions; in addition they would be burning up more fuel
when carrying the extra weight of a full fuel tank.
With the prospect of declining sales of aviation jet fuel sales to
international carriers on account of major domestic oil
companies' unwillingness to shoulder the burden of excise tax,
or of petroleum products being sold to said carriers by local
manufacturers or sellers at still high prices , the practice of
"tankering" would not be discouraged. This scenario does not
augur well for the Philippines' growing economy and the
booming tourism industry. Worse, our Government would be
risking retaliatory action under several bilateral agreements with
various countries. Evidently, construction of the tax exemption
provision in question should give primary consideration to its
broad implications on our commitment under international
agreements.
In view of the foregoing reasons, we find merit in respondent's
motion for reconsideration. We therefore hold that respondent,
as the statutory taxpayer who is directly liable to pay the excise
tax on its petroleum products, is entitled to a refund or credit of
the excise taxes it paid for petroleum products sold to
international carriers, the latter having been granted exemption
from the payment of said excise tax under Sec. 135 (a) of the
NIRC.
WHEREFORE, the Court hereby resolves to:
(1) GRANT the original and supplemental motions for
reconsideration filed by respondent Pilipinas Shell
Petroleum Corporation; and
(2) AFFIRM the Decision dated March 25, 2009 and
Resolution dated June 24, 2009 of the Court of Tax
Appeals En Banc in CT A EB No. 415; and DIRECT
petitioner Commissioner of Internal Revenue to
refund or to issue a tax credit certificate to Pilipinas
Shell Petroleum Corporation in the amount of
J195,014,283.00 representing the excise taxes it paid
on petroleum products sold to international carriers
from October 2001 to June 2002.
17
SO ORDERED.
EN BANC
G.R. No. L-19667 November 29, 1966
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
AMERICAN RUBBER COMPANY and COURT OF TAX
APPEALS, respondents.
G.R. No. L-19801-03 November 29, 1966
AMERICAN RUBBER COMPANY, petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, ET
AL., respondents.
Nos. L-19667:
Office of the Solicitor General for petitioner.
Ozaeta, Gibbs and Ozaeta for respondents.
Nos. L-19801-03:
Ozaeta, Gibbs and Ozaeta for petitioner.
Office of the Solicitor General for respondents.
REYES, J.B.L., J.:
These cases are brought on appeal from the Court of Tax
Appeals by the State (G.R. No. L-19667) as well as by the
American Rubber Company (G.R. Nos. L-19801, 19802, 19803).
The factual background is the same in all four cases, and is not in
controversy, having been stipulated between the parties.
Petitioner, American Rubber Company, a domestic corporation,
from January 1, 1955 to December 1, 1958, was engaged in
producing rubber from its approximately 900 hectare rubber
tree plantation, which it owned and operated in Latuan, Isabela,
City of Basilan. Its products, known in the market as Preserved
Latex, Pale Crepe No. 1, Pale Crepe No. 2, Ribbed Smoked
Sheets Nos. 1 and 2, Flat Bark Rubber, 2X Brown Crepe and 3X
Brown Crepe, are turned out in the following manner:
The initial step common to the production of all the foregoing
rubber products is tapping, i.e., the collection of latex (rubber
juice) from rubber trees. This is done by the daily cutting, early
in the morning, of a spiral incision in the bark of rubber trees
and placing a cup below the lower end of the incision to receive
the flow of latex. The collecting cup is filled after two hours. The
tapper then collects the latex into buckets and carries them to
the collecting shed. The tapper subsequently pours the latex
collected into big milk cans. The filled milk cans are then taken in
motor vehicles to a coagulating shed, also within the premises of
petitioner's plantation, where the latex is strained into
coagulating tanks to remove foreign matter such as leaves and
dirt. After these initial steps, the processes vary in the
production of the various rubber products mentioned above.
Said processes are described hereunder.
Preserved Rubber Latex
Fresh latex is diluted with 5 to 5-1/4 ounces of ammonia per
gallon of latex. The mixture is thoroughly stirred and then
poured into metal drums. The addition of ammonia preserves
the latex in liquid form and prevents its deterioration or its
acquisition of a repulsive smell, and at the same time preserves
its uniform color. Latex which has been thus artificially
preserved in its liquid form generally lasts for about a month
without spoiling. On the other hand, fresh latex in its original
state lasts for only about two hours, after which it becomes
spoiled.
Petitioner sells preserved latex only upon previous orders of
customers who supply empty metal drum containers.
Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2
To produce Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets
Nos. 1 and 2, the petitioner adds to the latex in the coagulating
tank about 15 or 16 ounces of glacial acetic acid per gallon of
latex. The mixture is stirred thoroughly. Thereafter aluminum
partitions are placed crosswise inside the tank so that the latex
will coagulate into uniform slabs. Acetic acid is added to the
latex to hasten coagulation which otherwise takes place
naturally, and to preserve its fresh state and color. The similarity
in the production of Pale Crepe Nos. 1 and 2 and Ribbed Smoked
Sheets Nos. 1 and 2 ends at the point of removing the coagulum
(coagulated rubber sheets) from the coagulating tanks.
To produce Pale Crepe No. 1, the coagulum is passed through a
series of rollers until the desired thickness is attained,
whereupon it is removed to the air-drying house situated inside
petitioner's plantation and hung for a period of about twelve or

thirteen days to dry. There are no mechanical driers used; the
air-drying is done naturally. As soon as the Pale Crepe is dried,
the sheets are sorted; those which are of uniform pale color are
classified as Pale Crepe No. 2, whereupon they are baled and
stored, ready for market.
Ribbed & Smoked Sheets Nos. 1 and 2 are produced practically
in the same manner as Pale Crepe, except that the coagulum is
passed only once through a roller provided with ribs after which
the flattened and ribbed coagulum is removed to petitioner's
smoke-house where it is hung and cured by exposure to heat
and smoke from wood fires for about six or seven days. The
resulting smoked sheets are sorted and classified dependent
upon color and opaqueness into ribbed smoked sheets (RSS) No.
1 and No. 2, baled, and stored ready for the market. No
mechanical equipment is used in generating the smoke in the
smoke-house.
The petitioner's rollers are powered by engines although they
could be turned by hand as it is done in small rubber
plantations. If Pale Crepe Nos. 1 and 2 and Ribbed Smoked
Sheets Nos. 1 and 2 are not air-dried and smoked they
deteriorate, get spoiled, and the color varies.
Flat Bark Rubber
Each morning after a tapper makes a fresh incision in the bark of
a rubber tree, he gathers the latex dripping from the ground
around the tree, called "ground rubber", as well as the dried
latex from the incisions made the previous day, called "bark
rubber". Ground and bark rubber are not intentionally
produced. No chemicals are added to the latex transformed into
ground and bark rubber. This kind of dried latex is spoiled and
has a bad odor.
Ground and bark rubber when gathered in sufficient quantities
are passed numerous times through the rollers or mills until
they form a uniform mass or sheet which, finally is called Flat
Bark Rubber. No chemical is used to coagulate the dried ground
and bark rubber because they are already coagulated. They are
formed into sheets by means only of pressure of the mills or
rollers through which they are passed. Flat Bark Rubber
commands the lowest prices in the rubber market.
3X Brown Crepe
18
Every morning, before a fresh incision is made in the bark of the
rubber trees, the tapper collects not only ground and bark
rubber but removes and collects the latex in the cups, known as
"cup rubber". The cup rubber coagulates and dries through
natural processes and, when gathered in sufficient quantities, is
milled and rolled through a series of rollers until by force of
pressure it is formed into a mass of the desired thickness called
"3X Brown Crepe." Like ground and bark rubber, no chemicals
are added to cup rubber to produce 3X Brown Crepe. Cup
rubber in its original form, like ground and bark rubber, is
spoiled and has a bad odor.
2X Brown Crepe
2X Brown Crepe is obtained by milling or rolling the excess
pieces of coagulated rubber latex which had been cut or
trimmed from the from the ribbed smoked sheets No. 2 into a
uniform mass. 2X Brown Crepe is produced in the same manner
as the other sheets of crepe rubber, i.e., without the addition of
any chemicals.
Petitioner during the said period sold its foregoing rubber
products locally and as prescribed by the respondent's
regulations declared same for tax purposes which respondent
accordingly assessed. Petitioner paid, under protest, the
corresponding sales taxes thereon claiming exemption
therefrom under Section 188 (b) of the National Internal
Revenue Code.
The following sales taxes on the aforementioned rubber
products were paid under protest —
From Jan. 1, 1955 to Dec. 31, 1956 P83,193.48
The issues posed on these appeals are:
From Jan. 1, 1957 to June 30, 1957 P20,504.99
From July 1, 1957 to Dec. 31, 1958 P52,378.90
It is further stipulated that the sales tax collected from
petitioner American Rubber Company on the local sales of its
rubber products, following Internal Revenue General Circulars
Nos. 431 and 440, had been separately itemized and billed by
petitioner Company in the invoices issued to the customers, that
paid both the value of the rubber articles and the separately
itemized sales tax, from January 1, 1955 to August 2, 1957.
After paying under protest, the petitioner claimed refund of the
sales taxes paid by it on the ground that under section 188,
paragraph b, of the Internal Revenue Code, as amended,1 its
rubber products were agricultural products exempt from sales
tax, and upon refusal of the Commissioner of Internal Revenue,
brought the case on appeal to the Court of Tax Appeals (C.T.A.
Nos. 356, 440,, 632). The respondent Commissioner interposed
defenses, denying that petitioner's products were agricultural
ones within the exemption; claiming that there had been no
exhaustion of administrative remedies; and argued that the
sales tax having been passed to the buyers during the period
that elapsed from January 1, 1955 to August 2, 1957, the
petitioner did not have personality to demand, sue for and
recover the aforesaid sales taxes, plus interest.
In its decision, now under appeal, the Tax Court held Preserved
Latex, Flat Bark Rubber, and 3X Brown Crepe to be agricultural
products, "because the labor employed in the processing
thereof is agricultural labor", and hence, the sales of such
products were exempt from sales tax, but declared Pale Crepe
No. 1, Ribbed Smoked Sheets Nos. 1 and 3, as well as 2X Brown
Crepe (which is obtained from rolling excess pieces of Smoked
Sheets) to be manufactured products, sales of which were
subject to the tax. It overruled the defense of non-exhaustion of
administrative remedies and upheld the Revenue
Commissioner's stand that petitioner Company was not entitled
to recover the sales tax that had been separately billed to its
customers, and paid by the latter. Hence, it dismissed the appeal
in C.T.A. Nos. 356 and 440 and ordered respondent
Commissioner to refund only P3,916.49 without interest, or
costs.
Both parties then duly appealed to this.
(1) Whether the plaintiff's rubber products above
described should be considered agricultural or
manufactured for purposes of their subjection to the
sales tax;
(2) Whether plaintiff is or is not entitled to recover the
sales tax paid by it, but passed on to and paid by the
buyers of its products; and
(3) Whether plaintiff is or is not entitled to interest on
the sales tax paid by it under protest, in case recovery
thereof is allowed.

The first issue, in our opinion, is governed by the principles laid
down by this Court in Philippine Packing Corporation vs.
Collector of Internal Revenue, 100 Phil. 545 et seq. We there
ruled that the exemption from sales tax established in section
188 (b) of the Internal Revenue Tax Code in favor of sales of
agricultural products, whether in their original form or not,
made by the producer or owner of the land where produced is
not taken away merely because the produce undergoes
processing at the hand of said producer or owner for the
purpose of working his product into a more convenient and
valuable form suited to meet the demand of an expanded
market; that the exemption was not designed in favor of the
small agricultural producer, already exempted by the
subsequent paragraphs of the same section 188, but that said
exemption is not incompatible with large scale agricultural
production that incidentally required resort to preservative
processes designed to increase or prolong marketability of the
product.
In the case before us, the parties have stipulated that fresh latex
directly obtained from the rubber tree, which is clearly an
agricultural product, becomes spoiled after only two hours. It
has, therefore, a severely limited marketability. The addition of
ammonia prevents its deterioration for about a month, and we
see no reason why this preservative process should wrest away
from the preserved latex the protective mantle of the tax
exemption.
Taking also into account the great distance that separates the
plaintiff's plantation from the main rubber processing centers in
Japan, the United States and Europe, and the difficulty in
handling products in liquid form, it can be discerned without
difficulty that preserved, latex, with its 30-day spoilage limit, is
still severely handicapped for export and dollar earning
purposes.
To overcome these shortcomings, and extend its useful life
almost indefinitely, it becomes necessary to separate and
solidify the rubber granules diffused in the latex, and hence,
according to the stipulation of facts and the evidence, acetic
acid is added to hasten coagulation. There is nothing on record
to show that the acetic acid in way produces anything that was
not originally in the source, the liquid latex. The coagulum is
then rolled and compacted and afterwards air dried to make
Pale Crepe(1 and 2), or else cured and smoked to produce
rubber sheets. Once again we see nothing in this processing to
alter the agricultural nature of the result; what takes place is
merely an accelerated coagulation and dessication that would
19
naturally occur anyway, only within a longer period of time,
coupled with greater spoilage of the product.
Thus the operations carried out by plaintiff appear to be purely
preservative in nature, made necessary, by its production of
fresh rubber latex in a large scale. they are purely incidental to
the latter, just as the canning of skinned and cored pineapples in
syrup was held to be incidental to the large-scale cultivation of
the fruit in the Philippine Packing Corporation case (ante). Being
necessary to suit the product to the demands of the market, the
operations in both cases should lead to the same result, non-
taxability of the sales of the respective agricultural products. In
not so holding, the Tax Court was in error.
Even less justifiable is the position taken by the Revenue
Commissioner in his appeal against the finding of the Tax Court
that Flat Bark 3X Brown Crepe rubber are agricultural products.
According to the record, these sheets result from the drippings
and waste rubber that have dried naturally, that are rolled and
compacted into the desired thickness, without any other
processing.
As to 2X Brown Crepe which is compacted out of the trimmings
and waste left over from the production of ribbed smoked
sheets, no reason is seen why it should be treated differently
from the ribbed smoked sheets themselves.
In his appeal, the Revenue Commissioner contends that all of
plaintiff's products should be deemed manufactured articles, on
the strength of section 194 (n) of the Revenue Code defining a
"manufacturer" as
every person who by physical or chemical process
alters the exterior texture or form or inner substances
of any raw material or manufactured or partially
manufactured product in such manner as to prepare it
for a special use or uses to which it could not have
been put to in its original condition, or who . . . alters
the quality of any such raw material . . . as to reduce it
to marketable shape . . . .
But, as pointed out in the Philippine Packing Corporation case,
this definition is not applicable to the exemption of agricultural
products, "whether in their original form or not". The use of this
last phrase in the statute clearly indicates that the agricultural
product may be altered in texture or form without being
divested of the exemption (cas cit. 100 Phil., p. 548). The
exception would be sales of agricultural products while Republic
Act No. 1612 was in effect because under this Act the freedom
from sales tax became restricted to agricultural products "in
their original form" only. So that plaintiff's sales from August 24,
1956 (approval of Republic Act 1612) to June 22, 1957 (when
Republic Act 1856 became effective and restored the exemption
to agricultural products "whether in their original form or not")
became properly taxable. Under paragraphs (A)2 and B(4) of the
additional stipulation of facts (CTA Rec. pp. 261-262, G.R. L-
19801), the sales tax properly collected during this period of
plaintiff's transactions amounted to P18,187.19 from August 24
to December 31, 1956; and P18,888.28 from January 1 to June
21, 1957, or a total of P37,075.47. This last amount is, therefore
non-recoverable.2
The second issue in this appeal concerns the holding of the
Court of Tax Appeals that the plaintiff Company is not entitled to
recover the sales tax paid by it from January, 1955 to August 2,
1957, because during that period the plaintiff had separately
invoiced and billed the corresponding sales tax to the buyers of
its products. In so holding, the Tax Court relied on our decisions
in Medina vs. City of Baguio, 91 Phil. 854; Mendoza, Santos &
Co. vs. Municipality of Meycawayan, L-6069-6070, April 30, 1954
(94 Phil. 1047); and Zosimo Rojas & Bros. vs. City of Cavite, L-
10730, May 27, 1958.
The basic ruling is that of Medina vs. City of Baguio, supra,
where this Court affirmed the ruling of the court of First
Instance to the effect that —
"The amount collected from the theatergoers as
additional price of admission tickets is not the
property of plaintiffs or any of them. It is paid by the
public. If anybody has the right to claim it, it is those
who paid it. Only owners of property has the right to
claim said property. The cine owner acted as mere
agents of the city in collecting additional price charged
in the sale of admission tickets." (Medina vs. City of
Baguio, 91 Phil. 854) (Emphasis supplied)
We agree with the plaintiff-appellant that the Medina ruling is
not applicable to the present case, since the municipal taxes
therein imposed were taxes on the admission tickets sold, so
that, in effect, they were levies upon the theatergoers who
bought them; so much so that (as the decision expressly ruled)
the tax was collected by the theater owners as agents of the
respective municipal treasurers. This does not obtain in the case
at bar. The Medina ruling was merely followed in Rojas & Bros.

vs. Cavite, supra; and in Mendoza, Santos & Co. vs. Municipality
of Meycawayan, 94 Phil. 1047.
By contrast with the municipal taxes involved in the preceding
cases, the sales tax is by law imposed directly, not on the thing
sold, but on the act (sale) of the manufacturer, producer or
importer (Op. of the Secretary of Justice, June 15, 1946; 47
C.J.S., p. 1141), who is exclusively made liable for its timely
payment. There is no proof that the tax paid by plaintiff is the
very money paid by its customers. Where the tax money paid by
the plaintiff came from is really no concern of the Government,
but solely a matter between the plaintiff and its customers.
Anyway, once recovered, the plaintiff must hold the refund
taxes in trust for the individual purchasers who advanced
payment thereof, and whose names must appear in plaintiff's
records.
Moreover, the separate billing of the sales tax in appellant's
invoices was a direct result of the respondent Commissioner's
General Circular No. 440, providing that —
if a manufacturer, producer, or importer, in fixing the
gross selling price of an article sold by him, has
included an amount intended to cover the sales tax in
the gross selling price of the article, the sales tax shall
be based on the gross selling price less the amount
intended to cover the tax, if the same is billed to the
purchaser as a separate item in the invoice. . . .
(Emphasis supplied)
In other words, the separate itemization of the sales tax in the
invoices was permitted to avoid the taxpayer being compelled to
pay a sales tax on the tax itself. It does not seem either just or
proper that a step suggested by the Internal Revenue authorities
themselves to protect the taxpayer from paying a double tax
should now be used to block his action to recover taxes
collected without legal sanction.
Finally, a more important reason that militates against extensive
and indiscriminate application of the Medina vs. City of Baguio
ruling is that it would tend to perpetuate illegal taxation; for the
individual customers to whom the tax is ultimately shifted will
ordinarily not care to sue for its recovery, in view of the small
amount paid by each and the high cost of litigation for the
reclaiming of an illegal tax. In so far, therefore, as it favors the
imposition, collection and retention of illegal taxes, and
20
encourages a multiplicity of suits, the Tax Court's ruling under
appeal violates morals and public policy.
The plaintiff Company also urges that the refund of the taxes
should include interest thereon. While this Court has allowed
recovery of interest in some cases, it has done so only in cases
of patent arbitrariness on the part of the Revenue authorities;
and in this instance we agree with the Tax Court that no such
patent arbitrariness has been shown.
IN VIEW OF THE FOREGOING, the decision of the Court of Tax
Appeals is affirmed in Case G.R. No. L-19667 and modified in
cases G.R. Nos. L-19801, L-19802 and L-19803, by declaring the
sales taxes therein involved to have been improperly denied
levied and collected and ordering respondent Commissioner of
Internal Revenue to refund the same, except the taxes
corresponding to the period from August 24, 1956 to June 22,
1957, during which Republic Act No. 1612 was in force. The
amount of P37,075.47 paid by the taxpayer for this period is
hereby declared properly collected and not refundable. Without
special pronouncement as to costs.
FIRST DIVISION
G.R. No. L-31092 February 27, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
JOHN GOTAMCO & SONS, INC. and THE COURT OF TAX
APPEALS, respondents.
YAP, J.:
The question involved in this petition is whether respondent
John Gotamco & Sons, Inc. should pay the 3% contractor's tax
under Section 191 of the National Internal Revenue Code on the
gross receipts it realized from the construction of the World
Health Organization office building in Manila.
The World Health Organization (WHO for short) is an
international organization which has a regional office in Manila.
As an international organization, it enjoys privileges and
immunities which are defined more specifically in the Host
Agreement entered into between the Republic of the Philippines
and the said Organization on July 22, 1951. Section 11 of that
Agreement provides, inter alia, that "the Organization, its assets,
income and other properties shall be: (a) exempt from all direct
and indirect taxes. It is understood, however, that the
Organization will not claim exemption from taxes which are, in
fact, no more than charges for public utility services; . . .
When the WHO decided to construct a building to house its own
offices, as well as the other United Nations offices stationed in
Manila, it entered into a further agreement with the
Govermment of the Republic of the Philippines on November
26, 1957. This agreement contained the following provision
(Article III, paragraph 2):
The Organization may import into the
country materials and fixtures required for
the construction free from all duties and
taxes and agrees not to utilize any portion of
the international reserves of the
Government.
Article VIII of the above-mentioned agreement referred to the
Host Agreement concluded on July 22, 1951 which granted the
Organization exemption from all direct and indirect taxes.
In inviting bids for the construction of the building, the WHO
informed the bidders that the building to be constructed
belonged to an international organization with diplomatic status
and thus exempt from the payment of all fees, licenses, and
taxes, and that therefore their bids "must take this into account
and should not include items for such taxes, licenses and other
payments to Government agencies."
The construction contract was awarded to respondent John
Gotamco & Sons, Inc. (Gotamco for short) on February 10, 1958
for the stipulated price of P370,000.00, but when the building
was completed the price reached a total of P452,544.00.
Sometime in May 1958, the WHO received an opinion from the
Commissioner of the Bureau of Internal Revenue stating that "as
the 3% contractor's tax is an indirect tax on the assets and
income of the Organization, the gross receipts derived by
contractors from their contracts with the WHO for the
construction of its new building, are exempt from tax in
accordance with . . . the Host Agreement." Subsequently,
however, on June 3, 1958, the Commissioner of Internal
Revenue reversed his opinion and stated that "as the 3%
contractor's tax is not a direct nor an indirect tax on the WHO,

but a tax that is primarily due from the contractor, the same is
not covered by . . . the Host Agreement."
On January 2, 1960, the WHO issued a certification state 91 inter
alia,:
When the request for bids for the
construction of the World Health
Organization office building was called for,
contractors were informed that there would
be no taxes or fees levied upon them for
their work in connection with the
construction of the building as this will be
considered an indirect tax to the
Organization caused by the increase of the
contractor's bid in order to cover these
taxes. This was upheld by the Bureau of
Internal Revenue and it can be stated that
the contractors submitted their bids in good
faith with the exemption in mind.
The undersigned, therefore, certifies that
the bid of John Gotamco & Sons, made
under the condition stated above, should be
exempted from any taxes in connection with
the construction of the World Health
Organization office building.
On January 17, 1961, the Commissioner of Internal Revenue
sent a letter of demand to Gotamco demanding payment of P
16,970.40, representing the 3% contractor's tax plus surcharges
on the gross receipts it received from the WHO in the
construction of the latter's building.
Respondent Gotamco appealed the Commissioner's decision to
the Court of Tax Appeals, which after trial rendered a decision,
in favor of Gotamco and reversed the Commissioner's decision.
The Court of Tax Appeal's decision is now before us for review
on certiorari.
In his first assignment of error, petitioner questions the
entitlement of the WHO to tax exemption, contending that the
Host Agreement is null and void, not having been ratified by the
Philippine Senate as required by the Constitution. We find no
merit in this contention. While treaties are required to be
ratified by the Senate under the Constitution, less formal types
of international agreements may be entered into by the Chief
21
Executive and become binding without the concurrence of the
legislative body. 1 The Host Agreement comes within the latter
category; it is a valid and binding international agreement even
without the concurrence of the Philippine Senate.
The privileges and immunities granted to the WHO under the
Host Agreement have been recognized by this Court as legally
binding on Philippine authorities. 2
Petitioner maintains that even assuming that the Host
Agreement granting tax exemption to the WHO is valid and
enforceable, the 3% contractor's tax assessed on Gotamco is not
an "indirect tax" within its purview. Petitioner's position is that
the contractor's tax "is in the nature of an excise tax which is a
charge imposed upon the performance of an act, the enjoyment
of a privilege or the engaging in an occupation. . . It is a tax due
primarily and directly on the contractor, not on the owner of the
building. Since this tax has no bearing upon the WHO, it cannot
be deemed an indirect taxation upon it."
We agree with the Court of Tax Appeals in rejecting this
contention of the petitioner. Said the respondent court:
In context, direct taxes are those that are
demanded from the very person who, it is
intended or desired, should pay them; while
indirect taxes are those that are demanded
in the first instance from one person in the
expectation and intention that he can shift
the burden to someone else. (Pollock vs.
Farmers, L & T Co., 1957 US 429, 15 S. Ct.
673, 39 Law. Ed. 759.) The contractor's tax is
of course payable by the contractor but in
the last analysis it is the owner of the
building that shoulders the burden of the tax
because the same is shifted by the
contractor to the owner as a matter of self-
preservation. Thus, it is an indirect tax. And
it is an indirect tax on the WHO because,
although it is payable by the petitioner, the
latter can shift its burden on the WHO. In
the last analysis it is the WHO that will pay
the tax indirectly through the contractor and
it certainly cannot be said that 'this tax has
no bearing upon the World Health
Organization.
Petitioner claims that under the authority of the Philippine
Acetylene Company versus Commissioner of Internal Revenue,
et al., 3 the 3% contractor's tax fans directly on Gotamco and
cannot be shifted to the WHO. The Court of Tax Appeals,
however, held that the said case is not controlling in this case,
since the Host Agreement specifically exempts the WHO from
"indirect taxes." We agree. The Philippine Acetylene case
involved a tax on sales of goods which under the law had to be
paid by the manufacturer or producer; the fact that the
manufacturer or producer might have added the amount of the
tax to the price of the goods did not make the sales tax "a tax on
the purchaser." The Court held that the sales tax must be paid
by the manufacturer or producer even if the sale is made to tax-
exempt entities like the National Power Corporation, an agency
of the Philippine Government, and to the Voice of America, an
agency of the United States Government.
The Host Agreement, in specifically exempting the WHO from
"indirect taxes," contemplates taxes which, although not
imposed upon or paid by the Organization directly, form part of
the price paid or to be paid by it. This is made clear in Section 12
of the Host Agreement which provides:
While the Organization will not, as a general
rule, in the case of minor purchases, claim
exemption from excise duties, and from
taxes on the sale of movable and immovable
property which form part of the price to be
paid, nevertheless, when the Organization is
making important purchases for official use
of property on which such duties and taxes
have been charged or are chargeable the
Government of the Republic of the
Philippines shall make appropriate
administrative arrangements for
the remission or return of the amount of
duty or tax. (Emphasis supplied).
The above-quoted provision, although referring only to
purchases made by the WHO, elucidates the clear intention of
the Agreement to exempt the WHO from "indirect" taxation.
The certification issued by the WHO, dated January 20, 1960,
sought exemption of the contractor, Gotamco, from any taxes in
connection with the construction of the WHO office building.
The 3% contractor's tax would be within this category and
should be viewed as a form of an "indirect tax" On the
Organization, as the payment thereof or its inclusion in the bid

price would have meant an increase in the construction cost of
the building.
Accordingly, finding no reversible error committed by the
respondent Court of Tax Appeals, the appealed decision is
hereby affirmed.
SO ORDERED.
EN BANC
[G.R. No. 88291. May 31, 1991.]
ERNESTO M. MACEDA, Petitioner, v. HON. CATALINO MACARAIG,
JR., in his capacity as Executive Secretary, Office of the President;
HON. VICENTE R. JAYME, in his capacity as Secretary of the
Department of Finance; HON. SALVADOR MISON, in his capacity
as Commissioner, Bureau of Customs; HON. JOSE U. ONG, in his
capacity as Commissioner of Internal Revenue; NATIONAL POWER
CORPORATION; the FISCAL INCENTIVES REVIEW BOARD; Caltex
(Phils.) Inc.; Pilipinas Shell Petroleum Corporation; Philippine
National Oil Corporation; and Petrophil
Corporation, Respondents.
Villamor & Villamor Law Offices for Petitioner.
Angara, Abello, Concepcion, Regala & Cruz for Pilipinas Shell
Petroleum Corporation.
Siguion Reyna, Montecillo & Ongsiako for Caltex (Phils.), Inc.
SYLLABUS
1. REMEDIAL LAW; SPECIAL CIVIL ACTION; MANDAMUS; CASE
OF MERALCO SECURITIES CORPORATION VS. SAVELLANO, 117
SCRA 804 (1982), APPLIED. — In Meralco, this Court recognizes
the situation when mandamus can control the discretion of the
Commissioners of Internal Revenue and Customs when the
exercise of discretion is tainted with arbitrariness and grave
abuse as to go beyond statutory authority.
2. ID.; ID.; WRIT OF PROHIBITION; ISSUANCE THEREOF PROPER
IN CASE AT BAR. — Public respondents assess that a writ of
prohibition is not proper as its function is to prevent an unlawful
exercise of jurisdiction or to prevent the oppressive exercise of
legal authority. Precisely, petitioner questions the lawfulness of
the acts of public respondents in this case.
22
3. TAXATION; TAXPAYERS SUIT; TO PROSPER DIRECT INJURY TO
THE PETITIONER NOT NECESSARY; WHERE ISSUE INVOLVES
ILLEGAL EXPENDITURE OF PUBLIC MONEY. — In the petition it is
alleged that petitioner is "instituting this suit in his capacity as a
taxpayer and a duly-elected Senator of the Philippines." Public
respondent argues that petitioner must show he has sustained
direct injury as a result of the action and that it is not sufficient
for him to have a mere general interest common to all members
of the public. The Court however agrees with the petitioner that
as a taxpayer he may file the instant petition following the ruling
in Lozada when it involves illegal expenditure of public money.
The petition questions the legality of the tax refund to NPC by
way of tax credit certificates and the use of said assigned tax
credits by respondent oil companies to pay for their tax and
duty liabilities to the BIR and Bureau of Customs.
4. ID.; APPEAL; COURT OF TAX APPEALS; SECTION 7 OF REPUBLIC
ACT NO. 125; NOT APPLICABLE IN CASE AT BAR. — Assuming
petitioner has the personality to file the petition, public
respondents also allege that the proper remedy for petitioner is
an appeal to the Court of Tax Appeals under Section 7 of R.A.
No. 125 instead of this petition. However Section 11 of said law
provides — "Sec. 11. Who may appeal; effect of appeal — Any
person, association or corporation adversely affected by a
decision or ruling of the Commissioner of Internal Revenue, the
Collector of Customs (Commissioner of Customs) or any
provincial or City Board of Assessment Appeals may file am
appeal in the Court of Tax Appeals within thirty days after
receipt of such decision or ruling." From the foregoing, it is only
the taxpayer adversely affected by a decision or ruling of the
Commissioner of Internal Revenue, the Commissioner of
Customs or any provincial or city Board of Assessment Appeal
who may appeal to the Court of Tax Appeals. Petitioner does not
fall under this category.
5. ID.; DISTINCTION BETWEEN DIRECT AND INDIRECT TAXES. —
A direct tax is a tax for which a taxpayer is directly liable on the
transaction or business it engages in. Examples are the custom
duties and ad valorem taxes paid by the oil companies to the
Bureau of Customs for their importation of crude oil, and the
specific and ad valorem taxes they pay to the Bureau of Internal
Revenue after converting the crude oil into petroleum products.
On the other hand, "indirect taxes are taxes primarily paid by
persons who can shift the burden upon someone else." For
example, the excise and ad valorem taxes that oil companies pay
to the Bureau of Internal Revenue upon removal of petroleum
products from its refinery can be shifted to its buyer, like the
NPC, by adding them to the "cash" and/or "selling price."
6. ID.; CASE OF NATIONAL POWER CORPORATION VS. PROVINCE
OF ALBAY (G.R. NO. 87479, JUNE 4, 1990) MODIFIED OR
SUPERSEDED IN CASE AT BAR. — In the case of National Power
Corporation v. Province of Albay, the Court observed that under
P.D. No. 776 the power of the FIRB was only recommendatory
and requires the approval of the President to be valid. Thus, in
said case the Court held that FIRB Resolutions Nos. 10-85 and 1-
86 not having been approved by the President were not valid
and effective while the validity of FIRB 17-87 was upheld as it
was duly approved by the Office of the President on October 5,
1987. However, under Section 2 of P.D. No. 1931 of June 11,
1984, hereinabove reproduced, which amended P.D. No. 776, it
is clearly provided for that such FIRB resolution, may be
approved by the "President of the Philippines and/or the
Minister of Finance." To repeat, as FIRB Resolutions Nos. 10-85
and 1-86 were duly approved by the Minister of Finance, hence
they are valid and effective. To this extent, this decision modifies
or supersedes the Court’s earlier decision National Power
Corporation v. Province of Albay.
7. ID.; NATIONAL POWER CORPORATION; EXEMPT FROM BOTH
DIRECT AND INDIRECT TAXES. — Under R.A. No. 358 the
exemption was worded in general terms, as to cover "all taxes,
duties, fees, imposts, charges, etc. . . ." However, the
amendment under Republic Act No. 6395 enumerated the
details covered by the exemption. Subsequently, P.D. No. 380,
made even more specific the details of the exemption of NPC to
cover, among others, both direct and indirect taxes on all
petroleum products used in its operation. Presidential Decree
No. 938 amended the tax exemption by simplifying the same
law in general terms. It succinctly exempts NPC from "all forms
of taxes, duties, fees, imposts, as well as costs and service fees
including filing fees, appeal bonds, supersedeas bonds, in any
court or administrative proceedings." The use of the phrase "all
forms" of taxes demonstrate the intention of the law to give
NPC all the tax exemptions it has been enjoying before.
8. ID.; ID.; ID.; RATIONALE. — The rationale for this exemption is
that being non-profit the NPC "shall devote all its returns from
its capital investment as well as excess revenues from its
operation, for expansion. To enable the Corporation to pay the
indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section one of this
Act, . . . ." The preamble of P.D. No. 938 states — "WHEREAS, in
the application of the tax exemption provision of the Revised
Charter, the non-profit character of the NPC has not been fully
utilized because of restrictive interpretations of the taxing
agencies of the government on said provisions . . ."

9. ID.; ID.; GRANT OF TAX EXEMPTION; INTERPRETED LIBERALLY
IN FAVOR OF A GOVERNMENT INSTRUMENTALITY. — The
lawmaker did not intend that the said provisions of P.D. No. 938
shall be construed strictly against NPC. On the contrary, the law
mandates that it should be interpreted liberally so as to enhance
the tax-exempt status of NPC. Hence, petitioner cannot invoke
the rule on strictissimi juris with respect to the interpretation of
statutes granting tax exemptions to NPC. Moreover, it is a
recognized principle that the rule on strict interpretation does
not apply in the case of exemptions in favor of a government
political subdivision or instrumentality.
10. ID.; ID.; ID.; FROM INDIRECT TAXES; NOT REPEALED BY
PRESIDENTIAL DECREE NO. 938; REPEAL BY IMPLICATION NOT
FAVORED. — The contention of petitioner that the exemption of
NPC from indirect taxes under Section 13 of R.A. No. 6395 and
P.D. No. 380, is deemed repealed by P.D. No. 938 when the
reference to it was deleted is not well-taken. Repeal by
implication is not favored unless it is manifest that the
legislature so intended. As laws are presumed to be passed with
deliberation and with knowledge of all existing ones on the
subject, it is logical to conclude that in passing a statute it is not
intended to interfere with or abrogate a former law relating to
the same subject matter, unless the repugnancy between the
two is not only irreconcilable but also clear and convincing as a
result of the language used, or unless the latter Act fully
embraces the subject matter of the earlier. The first effort of a
court must always be to reconcile or adjust the provisions of one
statute with those of another so as to give sensible effect to
both provisions. The legislative intent must be ascertained from
a consideration of the statute as a whole, and not of an isolated
part or a particular provision alone. When construing a statute,
the reason for its enactment should be kept in mind and the
statute should be construed with reference to its intended
scope and purpose and the evil sought to be remedied. The NPC
is a government instrumentality with the enormous task of
undertaking development of hydroelectric generation of power
and production of electricity from other sources, as well as the
transmission of electric power on a nationwide basis, to improve
the quality of life of the people pursuant to the State policy
embodied in Section E, Article II of the 1987 Constitution. It is
evident from the provisions of P.D. No. 938 that its purpose is to
maintain the tax exemption of NPC from all forms of taxes
including indirect taxes as provided for under R.A. No. 6395 and
P.D. No. 380 if it is to attain its goals.
11. ID.; PRESIDENTIAL DECREE NO. 938; CONSTRUCTION AND
INTERPRETATION BY OFFICE CHARGED WITH THE
23
IMPLEMENTATION THEREOF GIVEN WEIGHT. — The
construction of P.D. No. 938 by the Office charged with its
implementation should be given controlling weight. Since the
May 8, 1985 ruling of Commissioner Ancheta, to the letter of
the Secretary of Finance of June 26, 1985 confirming said ruling,
the letters of the BIR of August 18, 1986, and December 22,
1986, the letter of the Secretary of Finance of February 19,
1987, the Memorandum of the Executive Secretary of October
9, 1987, by authority of the President, confirming and approving
FIRB Resolution No. 17-87, the letter of the Secretary of Finance
of May 20, 1988 to the Executive Secretary rendering his
opinion as requested by the latter, and the latter’s reply of June
15, 1988, it was uniformly held that the grant of tax exemption
to NPC under C.A. No. 120, as amended, included exemption
from payment of all taxes relative to NPC’s petroleum purchases
including indirect taxes. The Court finds and so holds that the
foregoing reasons adduced in the aforestated letter of the
Secretary of Finance as confirmed by the then Executive
Secretary are well-taken. When the NPC was exempted from all
forms of taxes, duties, fees, imposts and other charges, under
P.D. No. 938, it means exactly what it says, i.e., all forms of taxes
including those that were imposed directly or indirectly on
petroleum products used in its operation.
12. ID.; CASE OF PHILIPPINE ACETYLENE CO. INC. VS.
COMMISSIONER OF INTERNAL REVENUE, 20 SCRA 1056 (1967);
NOT APPLICABLE IN CASE AT BAR. — The doctrine in Philippine
Acetylene decided in 1967 by this Court cannot apply to the
present case. It involved the sales tax of products the plaintiff
sold to NPC from June 2, 1953 to June 30, 1958 when NPC was
enjoying tax exemption from all taxes under Commonwealth Act
No. 120, as amended by Republic Act No. 358 issued on June 4,
1949 hereinabove reproduced. In said case, this Court held, that
the sales tax is due from the manufacturer and not the buyer, so
plaintiff cannot claim exemptions simply because the NPC, the
buyer, was exempt. However, on September 10, 1971, Republic
Act No. 6395 was passed as the revised charter of NPC whereby
Section 13 thereof was amended by emphasizing its non-profit
character and expanding the extent of its tax exemption. As
petitioner concedes, Section 13(d) aforestated of this
amendment under Republic Act No. 6345 spells out clearly the
exemption of the NPC from indirect taxes. And as hereinabove
stated, in P.D. No. 380, the exemption of NPC from indirect
taxes was emphasized when it was specified to include those
imposed "directly and indirectly." Thereafter, under P.D. No. 938
the tax exemption of NPC was integrated under Section 13
defining the same in general terms to cover "all forms of taxes,
duties, fees, imposts, etc." which, as hereinabove discussed,
logically includes exemption from indirect taxes on petroleum
products used in its operation. This is the status of the tax
exemptions the NPC was enjoying when P.D. No. 1931 was
passed, on the authority of which FIRB Resolution Nos. 10-85
and 1-86 were issued, and when Executive Order No. 93 was
promulgated, by which FIRB Resolution 17-87 was issued. Thus,
the ruling in Philippine Acetylene cannot apply to this case due
to the different environmental circumstances. As a matter of
fact, the amendments of Section 13, under R.A. No. 6395, P.D.
No. 380 and P.D. No. 838 appear to have been brought about by
the earlier inconsistent rulings of the tax agencies due to the
doctrine in Philippine Acetylene, so as to leave no doubt as to
the exemption of the NPC from indirect taxes on petroleum
products it uses in its operation. Effectively, said amendments
superseded if not abrogated the ruling in Philippine Acetylene
that the tax exemption of NPC should be limited to direct taxes
only.
13. ADMINISTRATIVE LAW; DEPARTMENT SECRETARY; MAYBE
OVERRULED BY EXECUTIVE SECRETARY; CASE AT BAR. — Section
2 of E.O. No. 93 provides: "SECTION 2. The Fiscal Incentives
Review Board created under Presidential Decree No. 776, as
amended, is hereby authorized to: a) restore tax and or duty
exemptions withdrawn hereunder in whole or in part; b) revise
the scope and coverage of tax and of duty exemption that may
be restored. c) impose conditions for the restoration of tax and
or duty exemption; d) prescribe the date or period of effectivity
of the restoration of tax and or duty exemption; e) formulate
and submit to the President for approval, a complete system for
the grant of subsidies to deserving beneficiaries, in lieu of or in
combination with the restoration of tax and duty exemptions or
preferential treatment in taxation, indicating the source of
funding therefor, eligible beneficiaries and the terms and
conditions for the grant thereof taxing into consideration the
international commitments of the Philippines and the necessary
precautions such that the grant of subsidies does not become
the basis for countervailing action. The then Secretary of Justice
in Opinion No. 77 dated August 6, 1977 was of the view that the
powers conferred upon the FIRB by Sections 2(a), (b), (c), and (d)
of Executive Order No. 93 constitute undue delegation of
legislative power and is therefore unconstitutional. However, he
was overruled by the respondent Executive Secretary in a letter
to the Secretary of Finance dated March 30, 1989. The Executive
Secretary, by authority of the President, has the power to
modify, alter or reverse the construction of a statute given by a
department secretary.
14. CONSTITUTIONAL LAW; NON-DELEGATION OF LEGISLATIVE
POWER; STANDARD TEST; IMPLIED UNDER SECTION 3 OF
EXECUTIVE ORDER 93. — A reading of Section 3 of E.O. No. 93

which provides: "SECTION 3. In the discharge of its authority
hereunder, the Fiscal Incentives Review Board shall take into
account any or all of the following considerations: a) the effect
on relative price levels; b) relative contribution of the
beneficiary to the revenue generation effort; c) nature of the
activity the beneficiary is engaged; d) in general, the greater
national interest to be served." Shows that it set the policy to be
the greater national interest. The standards of the delegated
power are also clearly provided for. The required "standard"
need not be expressed. In Edu v. Ericta and in De la Llana v. Alba,
this Court held: "The standard may be either express or implied.
If the former, the non-delegated objection is easily met. The
standard though does not have to be spelled out specifically. It
could be implied from the policy and purpose of the act
considered as a whole." In People v. Rosenthal the broad
standard of "public interest" was deemed sufficient. In Calalang
v. Williams, it was "public welfare" and in Cervantes v. Auditor
General, it was the purpose of promotion of "simplicity,
economy and efficiency." And, implied from the purpose of the
law as a whole, "national security" was considered sufficient
standard and so was "protection of fish-fry or fish eggs."
15. ID.; ID.; CASE OF TABLARIN VS. GUTIERREZ, 152 SCRA 730
(1981); ENUNCIATED THE RATIONALE IN FAVOR OF DELEGATION
OF LEGISLATIVE FUNCTIONS. — In the case of Tablarin v.
Gutierrez, this Court enunciated the rationale in favor of
delegation of legislative functions — "One thing however, is
apparent in the development of the principle of separation of
powers and that is that the maxim of delegatus non potest
delegare or delegati potestas non potest delegare, adopted this
practice (Delegibus et Consuetudiniis, Anglia edited by G.E.
Woodline, Yale University Press, 1922, Vol. 2, p. 167) but which
is also recognized in principle in the Roman Law (d. 17.18.3) has
been made to adapt itself to the complexities of modern
government, giving rise to the adoption, within certain limits, of
the principle of subordinate legislation, not only in the United
States and England but in practically all modern governments.
(People v. Rosenthal and Osmeña, 68 Phil. 318, 1939).
Accordingly, with the growing complexities of modern life, the
multiplication of the subjects of governmental regulation, and
the increased difficulty of administering the laws, there is a
constantly growing tendency toward the delegation of greater
power by the legislative, and toward the approval of the practice
by the Courts."
16. ID.; ID.; EXECUTIVE ORDER NO. 93; CONSTITUTIONALITY
THEREOF UPHELD. — The legislative authority could not or is not
expected to state all the detailed situations wherein the tax
exemption privileges of persons or entities would be restored.
24
The task may be assigned to an administrative body like the
FIRB. Moreover, all presumptions are indulged in favor of the
constitutionality and validity of the statute. Such presumption
can be overturned if its invalidity is proved beyond reasonable
doubt. Otherwise, a liberal interpretation in favor of
constitutionality of legislation should be adopted. E.O. No. 93 is
complete in itself and constitutes a valid delegation of legislative
power to the FIRB. And as above discussed, the tax exemption
privilege that was restored to NPC by FIRB Resolution No. 17-87
of June 1987 includes exemption from indirect taxes and duties
on petroleum products used in its operation.
17. ID.; ID.; PRESIDENTIAL DECREE NO. 776 AND 1931;
CONSTITUTIONALITY UPHELD IN THE CASE OF NATIONAL
POWER CORPORATION VS. PROVINCE OF ALBAY (G.R. NO.
87479, JUNE 4, 1990). — In Albay, as above stated, this Court
upheld the validity of P.D. Nos. 776 and 1931. The latter decree
withdrew tax exemptions of government-owned or controlled
corporations including their subsidiaries but authorized the FIRB
to restore the same. Nevertheless, in Albay, as above-discussed,
this Court ruled that the tax exemptions under FIRB Resolution
Nos. 10-85 and 1-86 cannot be enforced as said resolutions
were only recommendatory and were not duly approved by the
President of the Philippines as required by P.D. No. 776. The
Court also sustained in Albay the validity of Executive Order No.
93, and of the tax exemptions restored under FIRB Resolution
No. 17-87 which was issued pursuant thereto, as it was duly
approved by the President as required by said executive order.
Moreover, under Section 3, Article XVIII of the Transitory
Provisions of the 1987 Constitution, it is provided that: "All
existing laws, decrees, executive orders, proclamation, letters of
instructions, and other executive issuances not inconsistent with
this constitution shell remain operative until amended, repealed
or revoked." Thus, P.D. Nos. 776 and 1931 are valid and
operative unless it is shown that they are inconsistent with the
Constitution.
18. ID.; LATEST LAW APPLICABLE ON TAX EXEMPTION OF
NATIONAL POWER CORPORATION. — Even assuming arguendo
that P.D. Nos. 776, 1931 and Executive Order No. 93 are not
valid and are unconstitutional, the result would be the same, as
then the latest applicable law would be P.D. No. 938 which
amended the NPC charter by granting exemption to NPC from
all forms of taxes. As above discussed, this exemption of NPC
covers direct and indirect taxes on petroleum products used in
its operation. This is as it should be, if We are to hold as invalid
and inoperative the withdrawal of such tax exemptions under
P.D. No. 1931 as well as under Executive Order No. 93 and the
delegation of the power to restore these exemptions to the
FIRB.
19. ID.; GRANT OF TAX EXEMPTION TO NATIONAL POWER
CORPORATION NOT A CASE OF TAX EVASION. — This tax
exemption is intended not only to insure that the NPC shall
continue to generate electricity for the country but more
importantly, to assure cheaper rates to be paid by the
consumers. The allegation that this is in effect allowing tax
evasion by oil companies is not quite correct. There are various
arrangements in the payment of crude oil purchased by NPC
from oil companies. Generally, the custom duties paid by the oil
companies are added to the selling price paid by NPC. As to the
specific and ad valorem taxes, they are added as part of the
seller’s price, but NPC pays the price net of tax, on condition
that NPC would seek a tax refund to the oil companies. No tax
component on fuel had been charged or recovered by NPC from
the consumers through its power rates. Thus, this is not a case
of tax evasion of the oil companies but of tax relief for the NPC.
DECISION
GANCAYCO, J.:
This petition seeks to nullify certain decisions, orders, rulings,
and resolutions of respondents Executive Secretary, Secretary of
Finance, Commissioner of Internal Revenue, Commissioner of
Customs and the Fiscal Incentives Review Board (FIRB) for
exempting the National Power Corporation (NPC) from indirect
tax and duties.chanrobles virtual lawlibrary
The relevant facts are not in dispute.
On November 3, 1986, Commonwealth Act No. 120 created the
NPC as a public corporation to undertake the development of
hydraulic power and the production of power from other
sources. 1
On June 4, 1949, Republic Act No. 358 granted NPC tax and duty
exemption privileges under —
"Sec. 2. To facilitate payment of its indebtedness, the National
Power Corporation shall be exempt from all taxes, duties, fees,
imposts, charges and restrictions of the Republic of the
Philippines, its provinces, cities and municipalities."
On September 10, 1971, Republic Act No. 6395 revised the

charter of the NPC wherein Congress declared as a national
policy the total electrification of the Philippines through the
development of power from all sources to meet the needs of
industrial development and rural electrification which should be
pursued coordinately and supported by all instrumentalities and
agencies of the government, including its financial institutions. 2
The corporate existence of NPC was extended to carry out this
policy, specifically to undertake the development of hydro
electric generation of power and the production of electricity
from nuclear, geothermal and other sources, as well as the
transmission of electric power on a nationwide basis. 3 Being a
non-profit corporation, Section 13 of the law provided in detail
the exemption of the NPC from all taxes, duties, fees, imposts
and other charges by the government and its
instrumentalities.chanrobles.com : virtual law library
On January 22, 1974, Presidential Decree No. 380 amended
section 13, paragraphs (a) and (d) of Republic Act No. 6395 by
specifying, among others, the exemption of NPC from such
taxes, duties, fees, imposts and other charges imposed "directly
or indirectly," on all petroleum products used by NPC in its
operation. Presidential Decree No. 938 dated May 27, 1976
further amended the aforesaid provision by integrating the tax
exemption in general terms under one paragraph.
On June 11, 1984, Presidential Decree No. 1931 withdrew all tax
exemption privileges granted in favor of government-owned or
controlled corporations including their subsidiaries. 4 However,
said law empowered the President and/or the then Minister of
Finance, upon recommendation of the FIRB, to restore, partially
or totally, the exemption withdrawn, or otherwise revise the
scope and coverage of any applicable tax and duty.
Pursuant to said law, on February 7, 1985, the FIRB issued
Resolution No. 10-85 restoring the tax and duty exemption
privileges of NPC from June 11, 1984 to June 30, 1985. On
January 7, 1986, the FIRB issued resolution No. 1-86 indefinitely
restoring the NPC tax and duty exemption privileges effective
July 1, 1985.
However, effective March 10, 1987, Executive Order No. 93
once again withdrew all tax and duty incentives granted to
government and private entities which had been restored under
Presidential Decree Nos. 1931 and 1955 but it gave the
authority to FIRB to restore, revise the scope and prescribe the
date of effectivity of such tax and or duty exemptions.
On June 24, 1987 the FIRB issued Resolution No. 17-87 restoring
NPC’s tax and duty exemption privileges effective March 10,
25
1987. On October 5, 1987, the President, through respondent
Executive Secretary Macaraig, Jr., confirmed and approved FIRB
Resolution No. 17-87.
As alleged in the petition, the following are the background
facts:
The following are the facts relevant to NPC’s questioned claim
for refunds of taxes and duties originally paid by respondents
Caltex, Petrophil and Shell for specific and ad valorem taxes to
the BIR; and for Customs duties and ad valorem taxes paid by
PNOC, Shell and Caltex to the Bureau of Customs on its crude oil
importation.
Many of the factual statements are reproduced from the Senate
Committee on Accountability of Public Officers and
Investigations (Blue Ribbon) Report No. 474 dated January 12,
1989 and approved by the Senate on April 21, 1989 (copy
attached here to as Annex "A") and are identified in quotation
marks:
1. "Since May 27, 1976 when P.D. No. 938 was issued until June
11, 1984 when P.D. No. 1931 was promulgated abolishing the
tax exemptions of all government-owned or-controlled
corporations, the oil firms never paid excise or specific and ad
valorem taxes for petroleum products sold and delivered to the
NPC. This non-payment of taxes therefore spanned a period of
eight (8) years." (par. 23, p. 7, Annex "A").
During this period, the Bureau of Internal Revenue was not
collecting specific taxes on the purchases of NPC of petroleum
products from the oil companies on the erroneous belief that
the National Power Corporation (NPC) was exempt from indirect
taxes as reflected in the letter of Deputy Commissioner of
Internal Revenue (DCIR) Romulo Villa to the NPC dated October
29, 1980 granting blanket authority to the NPC to purchase
petroleum products from the oil companies without payment of
specific tax (copy of this letter is attached hereto as petitioner’s
Annex "B").
2. The oil companies started to pay specific and ad valorem
taxes on their sales of oil products to NPC only after the
promulgation of P.D. No. 1931 on June 11, 1984, withdrawing all
exemptions granted in favor of government-owned or-
controlled corporations and empowering the FIRB to
recommend to the President or to the Minister of Finance the
restoration of the exemptions which were withdrawn.
"Specifically, Caltex paid the total amount of P58,020,110.79 in
specific and ad valorem taxes for deliveries of petroleum
products to NPC covering the period from October 31, 1984 to
April 27, 1985." (par. 23, p. 7, Annex "A")
3. "Caltex billings to NPC until June 10, 1984 always included
customs duty without the tax portion. Beginning June 11, 1984,
when P.D. 1931 was promulgated abolishing NPC’s tax
exemptions, Caltex’s billings to NPC always included both duties
and taxes. (Caturla, tsn, Oct. 10, 1988, pp. 1-5)" (par. 24, p. 7,
Annex "A")
4. "For the sales of petroleum products delivered to NPC during
the period from October, 1984 to April, 1985, NPC was billed a
total of P522,016,77.34 (sic) including both duties and taxes, the
specific tax component being valued at P58,020,110.79." (par.
25, p. 8, Annex "A").
5. "Fiscal Incentives Review Board (FIRB) Resolution 10-85,
dated February 7, 1985, certified true copy of which is hereto
attached as Annex "C", restored the tax exemption privileges of
NPC effective retroactively to June 11, 1984 up to June 30, 1985.
The first paragraph of said resolution reads as follows:
"1. Effective June 11, 1984, the tax and duty exemption
privileges enjoyed by the National Power Corporation under C.A.
No. 120, as amended, are restored up to June 30, 1985."
Because of this restoration (Annex "G") the NPC applied on
September 11, 1985 with the BIR for a "refund of Specific Taxes
paid on petroleum products . . . in the total amount of
P58,020,110.79." (par. 26, pp. 8-9, Annex "A").
6. In a letter to the president of the NPC dated May 8, 1985
(copy attached as petitioner’s Annex "D"), Acting BIR
Commissioner Ruben Ancheta declared:
"FIRB Resolution No. 10-85 serves as sufficient basis to allow
NPC to purchase petroleum products from the oil companies
free of specific and ad valorem taxes, during the period in
question.
The "period in question" is June 11, 1984 to June 30, 1985.
7. "On June 6, 1985 — The president of the NPC, Mr. Gabriel
Itchon, wrote Mr. Cesar Virata, Chairman of the FIRB (Annex
"E"), requesting "the FIRB to resolve conflicting rulings on the
tax exemption privileges of the National Power Corporation
(NPC)." These rulings involve FIRB Resolutions No. 1-84 and 10-
85. (par. 40, p. 12, Annex "A")

8. In a letter to the President of NPC (Annex "F"), dated June 26,
1985, Minister Cesar Virata confirmed the ruling of May 8, 1985
of Acting BIR Commissioner Ruben Ancheta, (par. 41, p. 12,
Annex "A")
9. On October 22, 1985, however, under BIR Ruling No. 186-85,
addressed to Hanil Development Co., Ltd., a Korean contractor
of NPC for its infrastructure projects, certified true copy of
which is attached hereto as petitioner’s Annex "E", BIR Acting
Commissioner Ruben Ancheta ruled:
"In Reply please be informed that after a re-study of Section 13,
R.A. 6395, as amended by P.D. 938, this Office is of the opinion,
and so holds, that the scope of the tax exemption privilege
enjoyed by NPC under said section covers only taxes for which it
is directly liable and not on taxes which are only shifted to it.
(Phil. Acetylene v. C.I.R. Et. Al., G.R. L-19707, Aug. 17, 1967)
Since contractor’s tax is directly payable by the contractor, not
by NPC, your request for exemption, based on the stipulation in
the aforesaid contract that NPC shall assume payment of your
contractor’s tax liability, cannot be granted for lack of legal
basis." (Annex "H") (Emphasis supplied).
Said BIR ruling clearly states that NPC’s exemption privileges
covers (sic) only taxes for which it is directly liable and does not
cover taxes which are only shifted to it or for indirect taxes. The
BIR, through Ancheta, reversed its previous position of May 8,
1985 adopted by Ancheta himself favoring NPC’s indirect tax
exemption privilege.
10. Furthermore, "in a BIR Ruling, unnumbered," dated June 30,
1986, "addressed to Caltex (Annex "F"), the BIR Commissioner
declared that PAL’s tax exemption is limited to taxes for which
PAL is directly liable, and that the payment of specific and ad
valorem taxes on petroleum products is a direct liability of the
manufacturer or producer thereof." (par. 51, p. 15, Annex "A")
11. "On January 7, 1986, FIRB Resolution No. 1-86 was issued
restoring NPC’s tax exemptions retroactively from July 1, 1985
to a indefinite period," certified true copy of which is hereto
attached as petitioner’s Annex "H."
12. NPC’s total refund claim was P468.58 million but only a
portion thereof i.e. the P58,020,110.79 (corresponding to
Caltex) was approved and released by way of a Tax Credit Memo
(Annex "Q") dated July 7, 1986, certified true copy of which [is]
attached hereto as petitioner’s Annex "F," which was assigned
by NPC to Caltex. BIR Commissioner Tan approved the Deed of
Assignment on July 30, 1987, certified true copy of which is
26
hereto attached as petitioner’s Annex "G"). (pars. 26, 52, 53, pp.
9 and 15, Annex "A").
The Deed of Assignment stipulated among others that NPC is
assigning the tax credit to Caltex in partial settlement of its
outstanding obligations to the latter while Caltex, in turn, would
apply the assigned tax credit against its specific tax payments for
two (2) months. (per memorandum dated July 28, 1986 of DCIR
Villa, copy attached as petitioner Annex "G").
13. As a result of the favorable action taken by the BIR in the
refund of the P58.0 million tax credit assigned to Caltex, the NPC
reiterated its request for the release of the balance of its
pending refunds of taxes paid by respondents Petrophil, Shell
and Caltex covering the period from June 11, 1984 to early part
of 1986 amounting to P410.58 million. (The claim of the first
two (2) oil companies covers the period from June 11, 1984 to
early part of 1986; while that of Caltex starts from July 1, 1985
to early 1986). This request was denied on August 18, 1986,
under BIR Ruling 152-86 (certified true copy of which is attached
hereto as petitioner’s Annex "I"). The BIR ruled that NPC’s tax
free privilege to buy petroleum products covered only the
period from June 11, 1984 up to June 30, 1985. It further
declared that, despite FIRB No. 1-86, NPC had already lost its tax
and duty exemptions because it only enjoys special privilege for
taxes for which it is directly liable. This ruling, in effect, denied
the P410-Million tax refund application of NPC." (par. 28, p. 9,
Annex "A")
14. "NPC filed a motion for reconsideration on September 18,
1986. Until now the BIR has not resolved the motion. (Benigna,
II-3, Oct. 17, 1988, p. 2; Memorandum for the Complainant, Oct.
26, 1988, p. 15)." (par. 29, p. 9, Annex "A")
15. On December 22, 1986, in a 2nd Indorsement to the Hon.
Fulgencio S. Factoran, Jr., BIR Commissioner Tan, Jr. (certified
true copy of which is hereto attached and made a part hereof as
petitioner’s Annex "J"), reversed his previous position and states
this time that all deliveries of petroleum products to NPC are tax
exempt, regardless of the period of delivery.
16. On December 17, 1986, President Corazon C. Aquino
enacted Executive Order No. 93, entitled "Withdrawing All Tax
and Duty Incentives, Subject to Certain Exceptions, Expanding
the Powers of the Fiscal Incentives Review Board and Other
Purposes."
17. On June 24, 1987, the FIRB issued Resolution No. 17-87,
which restored NPC’s tax exemption privilege and included in
the exemption "those pertaining to its domestic purchases of
petroleum and petroleum products, and the restorations were
made to retroact effective March 10, 1987, a certified true copy
of which is hereto attached and made a part hereof as Annex
"K."
18. On August 6, 1987, the Hon. Sedfrey A. Ordoñez, Secretary
of Justice, issued Opinion No. 77, series of 1987, opining that
"the power conferred upon Fiscal Incentives Review Board by
Section 2-(a), (b), (c) and (d) of Executive order No. 98 constitute
undue delegation of legislative power and, therefore, [are]
unconstitutional," a copy of which is hereto attached and made
a part hereof as Petitioner’s Annex "L."
19. On October 5, 1987, respondent Executive Secretary
Macaraig, Jr. in a Memorandum to the Chairman of the FIRB, a
certified true copy of which is hereto attached and made a part
hereof as petitioner’s Annex "M," confirmed and approved FIRB
Res. No. 17-87 dated June 24, 1987, allegedly pursuant to
Sections 1 (f) and 2 (e) of Executive Order No. 93.
20. "Secretary Vicente Jayme in a reply dated May 20, 1988 to
Secretary Catalino Macaraig, who by letter dated May 2, 1988
asked him to rule "on whether or not, as the law now stands,
the National Power Corporation is still exempt from taxes, duties
. . . on its local purchases of . . . petroleum products . . ."
declared that "NPC under the provisions of its Revised Charter
retains its exemption from duties and taxes imposed on the
petroleum products purchased locally and used for the
generation of electricity," a certified true copy of which is
attached hereto as petitioner’s Annex "N." (par. 30, pp. 9-10,
Annex "A")
21. Respondent Executive Secretary came up likewise with a
confirmatory letter dated June 15, 1988 but without the usual
official form of "By the Authority of the President," a certified
true copy of which is hereto attached and made a part hereof as
Petitioner’s Annex "O."
22. The actions of respondents Finance Secretary and the
Executive Secretary are based on the RESOLUTION No. 17-87 of
FIRB, restoring the tax and duty exemption of the respondent
NPC pertaining to its domestic purchases of petroleum products
(petitioner’s Annex "K", supra).
23. "Subsequently, the newspapers particularly, the Daily Globe,
in its issue of July 11, 1988 reported that the Office of the
President and the Department of Finance had ordered the BIR
to refund the tax payments of the NPC amounting to P1.58

Billion which includes the P410 Million Tax refund already
rejected by BIR Commissioner Tan, Jr., in his BIR Ruling No. 152-
86. And in a letter dated July 28, 1988 of Undersecretary
Marcelo B. Fernando to BIR Commissioner Tan, Jr. the P1.58
Billion tax refund was ordered released to NPC." (par. 31, p. 10,
Annex "A")
24. On August 8, 1988, petitioner "wrote both Undersecretary
Fernando and Commissioner Tan requesting them to hold in
abeyance the release of the P1.58 billion and await the outcome
of the investigation in regard to Senate Resolution No. 227,"
copies attached as Petitioner’s Annexes "P" and "P-1" (par. 32,
p. 10, Annex "A").
Reacting to this letter of the petitioner, Undersecretary
Fernando wrote Commissioner Tan of the BIR dated August,
1988 requesting him to hold in abeyance the release of the tax
refunds to NPC until after the termination of the Blue Ribbon
investigation.
25. In the Bureau of Customs, oil companies import crude oil
and before removal thereof from customs custody, the
corresponding customs duties and ad valorem taxes are paid.
Bunker fuel oil is one of the petroleum products processed from
the crude oil; and same is sold to NPC. After the sale, NPC
applies for tax credit covering the duties and ad valorem
exemption under its Charter. Such applications are processed by
the Bureau of Customs and the corresponding tax credit
certificates are issued in favor of NPC which, in turn assigns it to
the oil firm that imported the crude oil. These certificates are
eventually used by the assignee-oil firms in payment of their
other duty and tax liabilities with the Bureau of Customs." (par.
70, p. 19, Annex "A").
A lesser amount totalling P740 million, covering the period from
1985 to the present, is being sought by respondent NPC for
refund from the Bureau of Customs for duties paid by the oil
companies on the importation of crude oil from which the
processed products sold locally by them to NPC was derived.
However, based on figures submitted to the Blue Ribbon
Committee of the Philippine Senate which conducted an
investigation on this matter as mandated by Senate Resolution
No. 227 of which the herein petitioner was the sponsor, a much
bigger figure was actually refunded to NPC representing duties
and ad valorem taxes paid to the Bureau of Customs by the oil
companies on the importation of crude oil from 1979 to 1985.
26. Meantime, Petitioner, as member of the Philippine Senate
introduced P.S. Res. No. 227, entitled:
27
"Resolution Directing the Senate Blue Ribbon Committee, In Aid
of Legislation, To conduct a Formal and Extensive Inquiry into
the Reported Massive Tax Manipulations and Evasions by Oil
Companies, particularly Caltex (Phils.) Inc., Pilipinas Shell and
Petrophil, Which Were Made Possible By Their Availing of the
Non-Existing Exemption of National Power Corporation (NPC)
from Indirect Taxes, Resulting Recently in Their Obtaining A Tax
Refund Totalling P1.55 Billion From the Department of Finance,
Their Refusal to Pay Since 1976 Customs Duties Amounting to
Billions of Pesos on Imported Crude Oil Purportedly for the Use
of the National Power Corporation, the Non-Payment of Surtax
on Windfall Profits from Increases in the Price of Oil Products in
August 1987 amounting Maybe to as Much as P1.2 Billion Surtax
Paid by Them in 1984 and For Other Purposes."
27. Acting on the above Resolution, the Blue Ribbon Committee
of the Senate did conduct a lengthy formal inquiry on the
matter, calling all parties interested to the witness stand
including representatives from the different oil companies, and
in due time submitted its Committee Report No. 474 . . . — The
Blue Ribbon Committee recommended the following courses of
action.
"1. Cancel its approval of the tax refund of P58,020,110.70 to
the National Power Corporation (NPC) and its approval of Tax
Credit memo covering said amount (Annex "P" hereto), dated
July 7, 1986, and cancel its approval of the Deed of Assignment
(Annex "Q" hereto) by NPC to Caltex, dated July 28, 1986, and
collect from Caltex its tax liabilities which were erroneously
treated as paid or settled with the use of the tax credit
certificate that NPC assigned to said firm:
"1.1 NPC did not have any indirect tax exemption since May 27,
1976 when PD 938 was issued. Therefore, the grant of a tax
refund to NPC in the amount of P58 million was illegal, and
therefore, null and void. Such refund was a nullity right from the
beginning. Hence, it never transferred any right in favor of NPC.
"2. Stop the processing and/or release of P1.58 billion tax refund
to NPC and or oil companies on the same ground that the NPC,
since May 27, 1976 up to June 17, 1987 was never granted any
indirect tax exemption. So, the P1.58 billion represent taxes
legally and properly paid by the oil firms.
"3. Start collection actions of specific or excise and ad valorem
taxes due on petroleum products sold to NPC from May 27,
1976 (promulgation of PD 938) to June 17, 1987 (issuance of EO
195).
"B. For the Bureau of Customs (BOC) to do the following:
"1. Start recovery actions on the illegal duty refunds or duty
credit certificates for purchases of petroleum products by NPC
and allegedly granted under the NPC charter covering the years
1978-1988 . . ."
28. On March 30, 1989, acting on the request of respondent
Finance Secretary for clearance to direct the Bureau of Internal
Revenue and of Customs to proceed with the processing of
claims for tax credits/refunds of the NPC, respondent Executive
Secretary rendered his ruling, the dispositive portion of which
reads:
"IN VIEW OF THE FOREGOING, the clearance is hereby GRANTED
and, accordingly, unless restrained by proper authorities, that
department and/or its line-tax bureaus may now proceed with
the processing of the claims of the National Power Corporation
for duty and tax free exemption and or tax credits/refunds, if
there be any, in accordance with the ruling of that Department
dated May 20, 1988, as confirmed by this Office on June 15,
1988.." . . 5
Hence, this petition for certiorari, prohibition and mandamus
with prayer for a writ of preliminary injunction and/or
restraining order, praying among others that:
"1. Upon filing of this petition, a temporary restraining order
forthwith be issued against respondent FIRB, Executive
Secretary Macaraig, and Secretary of Finance Jayme restraining
them and other persons acting for, under, and in their behalf
from enforcing their resolution, orders and ruling, to wit:
A. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner’s
Annex "K");
B. Memorandum-Order of the Office of the President dated
October 5, 1987 (petitioner’s Annex "M");
C. Order of the Executive Secretary dated June 15, 1988
(petitioner’s Annex "O");
D. Order of the Executive Secretary dated March 30, 1989
(petitioner’s Annex "Q"); and
E. Ruling of the Finance Secretary dated May 20, 1988
(petitioner’s Annex "N").

2. Said temporary restraining order should also include
respondents Commissioners of Customs Mison and Internal
Revenue Ong restraining them from processing and releasing
any pending claim or application by respondent NPC for tax and
duty refunds.
3. Thereafter, and during the pendency of this petition, to issue
a writ or preliminary injunction against above-named
respondents and all persons acting for and in their behalf
4. A decision be rendered in favor of the petitioner and against
the respondents:
A. Declaring that respondent NPC did not enjoy indirect tax
exemption privilege since May 27, 1976 up to the present;
B. Nullifying the setting aside the following:
1. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner’s
Annex "K");
2. Memorandum-Order of the Office of the President dated
October 5, 1987 (petitioner’s Annex "M");
3. Order of the Executive Secretary dated June 15, 1988
(petitioner’s Annex "O");
4. Order of the Executive Secretary dated March 30, 1989
(petitioner’s Annex "Q");
5. Ruling of the Finance Secretary dated May 20, 1988
(petitioner’s Annex "N");
6. Tax Credit memo dated July 7, 1986 issued to respondent NPC
representing tax refund for P58,020,110.79 (petitioner’s Annex
"F");
7. Deed of Assignment of said tax credit memo to respondent
Caltex dated July 30, 1987 (petitioner’s Annex "G");
8. Application of the assigned tax credit of Caltex in payment of
its tax liabilities with the Bureau of Internal Revenue; and
9. Illegal duty and tax refunds issued by the Bureau of Customs
to respondent NPC by way of tax credit certificates from 1979
up to the present.
C. Declaring as illegal and null and void the pending claims for
tax and duty refunds by respondent NPC with the Bureau of
28
Customs and the Bureau of Internal Revenue;
D. Prohibiting respondents Commissioner of Customs and
Commissioner of Internal Revenue from enforcing the
abovequestioned resolution, orders and ruling of respondents
Executive Secretary, Secretary of Finance, and FIRB by
processing and releasing respondent NPC’s tax and duty
refunds;
E. Ordering the respondent Commissioner of Customs to deny
as being null and void the pending claims for refund of
respondent NPC with the Bureau of Customs covering the
period from 1985 to the present; to cancel and invalidate the
illegal payment made by respondents Caltex, Shell and PNOC by
using the tax credit certificates assigned to them by NPC; and to
recover from respondents Caltex, Shell and PNOC all the
amounts appearing in said tax credit certificates which were
used to settle their duty and tax liabilities with the Bureau of
Customs.
F. Ordering respondent Commissioner of Internal Revenue to
deny as being null and void the pending claims for refund of
respondent NPC with the Bureau of Internal Revenue covering
the period from June 11, 1984 to June 17, 1987.
PETITIONER prays for such other relief and remedy as may be
just and equitable in the premises." 6
The issues raised in the petition are the following:
"To determine whether respondent NPC is legally entitled to the
questioned tax and duty refunds, this Honorable Court must
resolve the following issues:
Main issue —
Whether or not the respondent NPC has ceased to enjoy
indirect tax and duty exemption with the enactment of P.D. No.
938 on May 27, 1976 which amended P.D. No. 380, issued on
January 11, 1974.
Corollary issues —
1. Whether or not FIRB Resolution No. 10-85 dated February 7,
1985 which restored NPC’s tax exemption privilege effective
June 11, 1984 to June 30, 1985 and FIRB Resolution No. 1-86
dated January 7, 1986 restoring NPC’s tax exemption privilege
effective July 1, 1985 included the restoration of indirect tax
exemption to NPC; and
2. Whether or not FIRB could validly and legally issue Resolution
No. 17-87 dated June 24, 1987 which restored NPC’s tax
exemption privilege effective March 10, 1987; and if said
Resolution was validly issued, the nature and extent of the tax
exemption privilege restored to NPC." 7
In a resolution dated June 6, 1989, the Court, without giving due
course to the petition, required respondents to comment
thereon, within ten (10) days from notice. The respondents
having submitted their comment, on October 10, 1989 the
Court required petitioner to file a consolidated reply to the
same. After said reply was filed by petitioner on November 15,
1989 the Court gave due course to the petition, considering the
comments of respondents as their answer to the petition, and
requiring the parties to file simultaneously their respective
memoranda within twenty (20) days from notice. The parties
having submitted their respective memoranda, the petition was
deemed submitted for resolution.
First the preliminary issues.
Public respondents allege that petitioner does not have the
standing to challenge the questioned orders and resolution.
In the petition it is alleged that petitioner is "instituting this suit
in his capacity as a taxpayer and a duly-elected Senator of the
Philippines." Public respondent argues that petitioner must
show he has sustained direct injury as a result of the action and
that it is not sufficient for him to have a mere general interest
common to all members of the public. 8
The Court however agrees with the petitioner that as a taxpayer
he may file the instant petition following the ruling in Lozada
when it involves illegal expenditure of public money. The
petition questions the legality of the tax refund to NPC by way of
tax credit certificates and the use of said assigned tax credits by
respondent oil companies to pay for their tax and duty liabilities
to the BIR and Bureau of Customs.
Assuming petitioner has the personality to file the petition,
public respondents also allege that the proper remedy for
petitioner is an appeal to the Court of Tax Appeals under Section
7 of R.A. No. 125 instead of this petition. However Section 11 of
said law provides —
"Sec. 11. Who may appeal; effect of appeal — Any person,
association or corporation adversely affected by a decision or
ruling of the Commissioner of Internal Revenue, the Collector of

Customs (Commissioner of Customs) or any provincial or City
Board of Assessment Appeals may file am appeal in the Court of
Tax Appeals within thirty days after receipt of such decision or
ruling."
From the foregoing, it is only the taxpayer adversely affected by
a decision or ruling of the Commissioner of Internal Revenue,
the Commissioner of Customs or any provincial or city Board of
Assessment Appeal who may appeal to the Court of Tax Appeals.
Petitioner does not fall under this category.chanrobles virtual
lawlibrary
Public respondents also contend that mandamus does not lie to
compel the Commissioner of Internal Revenue to impose a tax
assessment not found by him to be proper. It would be
tantamount to a usurpation of executive functions. 9
Even in Meralco, this Court recognizes the situation when
mandamus can control the discretion of the Commissioners of
Internal Revenue and Customs when the exercise of discretion is
tainted with arbitrariness and grave abuse as to go beyond
statutory authority. 10
Public respondents then assert that a writ of prohibition is not
proper as its function is to prevent an unlawful exercise of
jurisdiction 11 or to prevent the oppressive exercise of legal
authority. 12 Precisely, petitioner questions the lawfulness of
the acts of public respondents in this case.
Now to the main issue.
It may be useful to make a distinction, for the purpose of this
disposition, between a direct tax and an indirect tax. A direct tax
is a tax for which a taxpayer is directly liable on the transaction
or business it engages in. Examples are the custom duties and
ad valorem taxes paid by the oil companies to the Bureau of
Customs for their importation of crude oil, and the specific and
ad valorem taxes they pay to the Bureau of Internal Revenue
after converting the crude oil into petroleum products.
On the other hand, "indirect taxes are taxes primarily paid by
persons who can shift the burden upon someone else." 13 For
example, the excise and ad valorem taxes that oil companies pay
to the Bureau of Internal Revenue upon removal of petroleum
products from its refinery can be shifted to its buyer, like the
NPC, by adding them to the "cash" and/or "selling price."
The main thrust of the petition is that under the latest
amendment to the NPC charter by Presidential Decree No. 938,
29
the exemption of NPC from indirect taxation was revoked and
repealed. While petitioner concedes that NPC enjoyed broad
exemption privileges from both direct and indirect taxes on the
petroleum products it used, under Section 13 of Republic Act
No. 6395 and more so under Presidential Decree No. 380,
however, by the deletion of the phrases "directly or indirectly"
and "on all petroleum products used by the Corporation in the
generation, transmission, utilization and sale of electric power"
he contends that the exemption from indirect taxes was
withdrawn by P.D. No. 938.chanrobles virtualawlibrary
chanrobles.com:
Petitioner further states that the exemption of NPC provided in
Section 13 of Presidential Decree No. 938 regarding the
payments of "all forms of taxes, etc." cannot be interpreted to
include indirect tax exemption. He cites Philippine Acetylene Co.
Inc. v. Commissioner of Internal Revenue. 14 Petitioner
emphasizes the principle in taxation that the exception
contained in the tax statutes must be strictly construed against
the one claiming the exemption, and that the rule that a tax
statute granting exemption must be strictly construed against
the one claiming the exemption is similar to the rule that a
statute granting taxing power is to be construed strictly, with
doubts resolved against its existence. 15 Petitioner cites rulings
of the BIR that the phrase exemption from "all taxes, etc." from
"all forms of taxes" and "in lieu of all taxes" covers only taxes for
which the taxpayer is directly liable. 16
On the corollary issues. First, FIRB Resolution Nos. 10-85 and 1-
86 issued under Presidential Decree No. 1931, the relevant
provision of which are to wit:
"P.D. No. 1931 provides as follows:
"SECTION 1. The provisions of special or general law to the
contrary notwithstanding, all exemptions from the payment of
duties, taxes . . . heretofore granted in favor of government-
owned or controlled corporations . . . are hereby withdrawn.
(Emphasis supplied.)
"SECTION 2. The President of the Philippines and/or the Minister
of Finance, upon the recommendation of the Fiscal Incentives
Review Board . . . is hereby empowered to restore, partially or
totally, the exemptions withdrawn by Section 1 above . . ."
(Emphasis supplied.)
The relevant provisions of FIRB resolution Nos. 10-85 and 1-86
are the following:
Resolution No. 10-85
"BE IT RESOLVED AS IT IS HEREBY RESOLVED, That:
"1. Effective June 11, 1984, the tax and duty exemption
privileges enjoyed by the National Power Corporation under C.A.
No. 120 as amended are restored up to June 30, 1985.
"2. Provided, That this restoration does not apply to the
following:
a. importations of fuel oil (crude equivalent) and coal as per FIRB
Resolution No. 1-84;
b. commercially-funded importations; and
c. interest income derived from any investment source.
"3. Provided further, That in case of importations funded by
international financing agreements, the NPC is hereby required
to furnish the FIRB on a periodic basis the particulars of items
received or to be received through such arrangements, for
purposes of tax and duty exemptions privileges." 17
Resolution No. 1-86
"BE IT RESOLVED AS IT IS HEREBY RESOLVED: That:
"1. Effective July 1, 1985, the tax and duty exemption privileges
enjoyed by the National Power Corporation (NPC) under
Commonwealth Act No. 120, as amended, are restored:
Provided, That importations of fuel oil (crude oil equivalent), and
coal of the herein grantee shall be subject to the basic and
additional import duties; Provided, further, that the following
shall remain fully taxable:
a. Commercially-funded importations; and
b. Interest income derived by said grantee from bank deposits
and yield or any other monetary benefits from deposit
substitutes, trust funds and other similar arrangements.
"2. The NPC as a government corporation is exempt from the
real property tax on land and improvements owned by it
provided that the beneficial use of the property is not
transferred to another pursuant to the provisions of Sec. 10(a)
of the Real Property Tax Code, as amended." 18
Petitioner does not question the validity and enforceability of

FIRB Resolution Nos. 10-85 and 1-86. Indeed, they were issued
in compliance with the requirement of Section 2, P.D. No. 1931,
whereby the FIRB should make the recommendation subject to
the approval of "the President of the Philippines and or the
Minister of Finance." While said Resolutions do not appear to
have been approved by the President, they were nevertheless
approved by the Minister of Finance who is also duly authorized
to approve the same. In fact it was the Minister of Finance who
signed and promulgated said resolutions. 19
The observation of Mr. Justice Sarmiento in the dissenting
opinion that FIRB Resolution Nos. 10-85 and 1-86 which were
promulgated by then Acting Minister of Finance Alfredo de
Roda, Jr. and Minister of Finance Cesar E.A. Virata, as Chairman
of FIRB, respectively, should be separately approved by said
Minister of Finance as required by P.D. 1931 is, a superfluity. An
examination of the said resolutions which are reproduced in full
in the dissenting opinion show that the said officials signed said
resolutions in the dual capacity of Chairman of FIRB and Minister
of Finance.chanrobles law library
Mr. Justice Sarmiento also makes reference to the case National
Power Corporation v. Province of Albay, 20 wherein the Court
observed that under P.D. No. 776 the power of the FIRB was
only recommendatory and requires the approval of the
President to be valid. Thus, in said case the Court held that FIRB
Resolutions Nos. 10-85 and 1-86 not having been approved by
the President were not valid and effective while the validity of
FIRB 17-87 was upheld as it was duly approved by the Office of
the President on October 5, 1987.chanrobles virtual lawlibrary
However, under Section 2 of P.D. No. 1931 of June 11, 1984,
hereinabove reproduced, which amended P.D. No. 776, it is
clearly provided for that such FIRB resolution, may be approved
by the "President of the Philippines and/or the Minister of
Finance." To repeat, as FIRB Resolutions Nos. 10-85 and 1-86
were duly approved by the Minister of Finance, hence they are
valid and effective. To this extent, this decision modifies or
supersedes the Court’s earlier decision in Albay afore-referred
to.
Petitioner, however, argues that under both FIRB resolutions,
only the tax and duty exemption privileges enjoyed by the NPC
under its charter, C.A. No. 120, as amended, are restored, that
is, only its direct tax exemption privilege; and that it cannot be
interpreted to cover indirect taxes under the principle that tax
exemptions are construed stricissimi juris against the taxpayer
and liberally in favor of the taxing authority.
30
Petitioner argues that the release by the BIR of the P58.0 million
refund to respondent NPC by way of a tax credit certificate 21
which was assigned to respondent Caltex through a deed of
assignment approved by the BIR 22 is patently illegal. He also
contends that the pending claim of respondent NPC in the
amount of P410.58 million with respondent BIR for the sale and
delivery to it of bunker fuel by respondents Petrophil, Shell and
Caltex from July 1, 1985 up to 1986, being illegal, should not be
released.chanrobles virtual lawlibrary
Now to the second corollary issue involving the validity of FIRB
Resolution No. 17-87 issued on June 24, 1987. It was issued
under authority of Executive Order No. 93 dated December 17,
1986 which grants to the FIRB, among others, the power to
recommend the restoration of the tax and duty
exemptions/incentives withdrawn thereunder.chanrobles
lawlibrary : rednad
Petitioner stresses that on August 6, 1987 the Secretary of
Justice rendered Opinion No. 77 to the effect that the powers
conferred upon the FIRB by Section 2(a), (b), and (c) and (4) of
Executive Order No. 93 "constitute undue delegation of
legislative power and is, therefore, unconstitutional." Petitioner
observes that the FIRB did not merely recommend but
categorically restored the tax and duty exemption of the NPC so
that the memorandum of the respondent Executive Secretary
dated October 5, 1987 approving the same is a surplusage.
Further assuming that FIRB Resolution No. 17-87 to have been
legally issued, following the doctrine in Philippine Acetylene,
petitioner avers that the restoration cannot cover indirect taxes
and it cannot create new indirect tax exemption not otherwise
granted in the NPC charter as amended by Presidential Decree
No. 938.
The petition is devoid of merit.
The NPC is a non-profit public corporation created for the
general good and welfare 23 wholly owned by the government
of the Republic of the Philippines. 24 From the very beginning of
its corporate existence, the NPC enjoyed preferential tax
treatment, 25 "to enable the Corporation to pay the
indebtedness and obligation and in furtherance and effective
implementation of the policy enunciated in Section one of
"Republic Act No. 6395" 26 which provides:
"Section 1. Declaration of Policy — Congress hereby declares
that (1) the comprehensive development, utilization and
conservation of Philippine water resources for all beneficial
uses, including power generation, and (2) the total
electrification of the Philippines through the development of
power from all sources to meet the need of rural electrification
are primary objectives of the nation which shall be pursued
coordinately and supported by all instrumentalities and agencies
of the government including its financial institutions."
From the changes made in the NPC charter, the intention to
strengthen its preferential tax treatment is obvious. Under
Republic Act No. 358, its exemption is provided as follows:
"Sec. 2. To facilitate payment of its indebtedness, the National
Power Corporation shall be exempt from all taxes, duties, fees,
imposts, charges, and restrictions of the Republic of the
Philippines, its provinces, cities and municipalities."
Under Republic Act No. 6395:
"Sec. 13. Non-profit Character of the Corporation; Exemption
from all Taxes, Duties, Fees, Imposts and other Charges by
Government and Governmental Instrumentalities. — The
Corporation shall be nonprofit and shall devote all its returns
from its capital investment, as well as excess revenues from its
operation, for expansion. To enable the Corporation to pay its
indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section one of this
Act, the Corporation is hereby declared exempt:
"(a) From the payment of all taxes, duties, fees, imposts,
charges, costs and service fees in any court or administrative
proceedings in which it may be a party, restrictions and duties to
the Republic of the Philippines, its provinces, cities,
municipalities and other government agencies and
instrumentalities;
"(b) From all income taxes, franchise taxes and realty taxes to be
paid to the National Government, its provinces, cities,
municipalities and other government agencies and
instrumentalities;
"(c) From all import duties, compensating taxes and advanced
sales tax, and wharfage fees on import of foreign goods required
for its operations and projects; and
"(d) From all taxes, duties, fees, imposts, and all other charges
imposed by the Republic of the Philippines, its provinces, cities,
municipalities and other government agencies and
instrumentalities, on all petroleum products used by the
Corporation in the generation, transmission, utilization, and sale

of electric power." (Emphasis supplied.)
Under Presidential Decree No. 380:
"Sec. 13. Non-profit Character of the Corporation: Exemption
from all Taxes, Duties, Fees, Imposts and other Charges by the
Government and Government Instrumentalities. — The
Corporation shall be non-profit and shall devote all its returns
from its capital investment as well as excess revenues from its
operation, for expansion. To enable the Corporation to pay its
indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section one of this
Act, the Corporation, including its subsidiaries, is hereby
declared, exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges,
costs and services fees in any court or administrative
proceedings in which it may be a party, restrictions and duties to
the Republic of the Philippines, its provinces, cities,
municipalities and other government agencies and
instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be
paid to the National Government, its provinces, cities,
municipalities and other governmental agencies and
instrumentalities;
(c) From all import duties, compensating taxes and advanced
sales tax, and wharfage fees on import of foreign goods required
for its operation and projects; and
(d) From all taxes, duties, fees, imposts, and all other charges
imposed directly or indirectly by the Republic of the Philippines,
its provinces, cities, municipalities and other government
agencies and instrumentalities, on all petroleum produced used
by the Corporation in the generation, transmission, utilization,
and sale of electric power." (Emphasis supplied.)
Under Presidential Decree No. 938:
"Sec. 13. Non-profit Character of the Corporation: Exemption
from All Taxes, Duties, Fees, Imposts and Other Charges by the
Government and Government Instrumentalities. — The
Corporation shall be non-profit and shall devote all its returns
from its capital investment as well as excess revenues from its
operation, for expansion. To enable the Corporation to pay the
indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section One of this
Act, the Corporation, including its subsidiaries hereby declared
31
exempt from the payment of all forms of taxes, duties, fees,
imposts as well as costs and service fees including filing fees,
appeal bonds, supersedeas bonds, in any court or administrative
proceedings." (Emphasis supplied.)
It is noted that in the earlier law, R.A. No. 358 the exemption
was worded in general terms, as to cover "all taxes, duties, fees,
imposts, charges, etc. . . ." However, the amendment under
Republic Act No. 6395 enumerated the details covered by the
exemption. Subsequently, P.D. No. 380, made even more
specific the details of the exemption of NPC to cover, among
others, both direct and indirect taxes on all petroleum products
used in its operation. Presidential Decree No. 938 amended the
tax exemption by simplifying the same law in general terms. It
succinctly exempts NPC from "all forms of taxes, duties, fees,
imposts, as well as costs and service fees including filing fees,
appeal bonds, supersedeas bonds, in any court or administrative
proceedings."
The use of the phrase "all forms" of taxes demonstrate the
intention of the law to give NPC all the tax exemptions it has
been enjoying before. The rationale for this exemption is that
being non-profit the NPC "shall devote all its returns from its
capital investment as well as excess revenues from its operation,
for expansion. To enable the Corporation to pay the
indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section one of this
Act, . . ." 27
The preamble of P.D. No. 938 states —
"WHEREAS, in the application of the tax exemption provision of
the Revised Charter, the non-profit character of the NPC has not
been fully utilized because of restrictive interpretations of the
taxing agencies of the government on said provisions . . ."
(Emphasis supplied.)
It is evident from the foregoing that the lawmaker did not intend
that the said provisions of P.D. No. 938 shall be construed
strictly against NPC. On the contrary, the law mandates that it
should be interpreted liberally so as to enhance the tax-exempt
status of NPC.
Hence, petitioner cannot invoke the rule on strictissimi juris with
respect to the interpretation of statutes granting tax exemptions
to NPC.
Moreover, it is a recognized principle that the rule on strict
interpretation does not apply in the case of exemptions in favor
of a government political subdivision or instrumentality. 28
"The basis for applying the rule of strict construction to
statutory provisions granting tax exemptions or deductions,
even more obvious than with reference to the affirmative or
levying provisions of tax statutes, is to minimize differential
treatment and foster impartiality, fairness, and equality of
treatment among tax payers.
The reason for the rule does not apply in the case of exemptions
running to the benefit of the government itself or its agencies. In
such case the practical effect of an exemption is merely to
reduce the amount of money that has to be handled by
government in the course of its operations. For these reasons,
provisions granting exemptions to government agencies may be
construed liberally, in favor of non tax-liability of such agencies."
29
In the case of property owned by the state or a city or other
public corporations, the express exemption should not be
construed with the same degree of strictness that applies to
exemptions contrary to the policy of the state, since as to such
property "exemption is the rule and taxation the exception." 30
The contention of petitioner that the exemption of NPC from
indirect taxes under Section 13 of R.A. No. 6395 and P.D. No.
380, is deemed repealed by P.D. No. 938 when the reference to
it was deleted is not well-taken.
Repeal by implication is not favored unless it is manifest that the
legislature so intended. As laws are presumed to be passed with
deliberation and with knowledge of all existing ones on the
subject, it is logical to conclude that in passing a statute it is not
intended to interfere with or abrogate a former law relating to
the same subject matter, unless the repugnancy between the
two is not only irreconcilable but also clear and convincing as a
result of the language used, or unless the latter Act fully
embraces the subject matter of the earlier. 31 The first effort of
a court must always be to reconcile or adjust the provisions of
one statute with those of another so as to give sensible effect to
both provisions. 32
The legislative intent must be ascertained from a consideration
of the statute as a whole, and not of an isolated part or a
particular provision alone. 33 When construing a statute, the
reason for its enactment should be kept in mind and the statute
should be construed with reference to its intended scope and
purpose 34 and the evil sought to be remedied. 35

The NPC is a government instrumentality with the enormous
task of undertaking development of hydroelectric generation of
power and production of electricity from other sources, as well
as the transmission of electric power on a nationwide basis, to
improve the quality of life of the people pursuant to the State
policy embodied in Section E, Article II of the 1987 Constitution.
It is evident from the provisions of P.D. No. 938 that its purpose
is to maintain the tax exemption of NPC from all forms of taxes
including indirect taxes as provided for under R.A. No. 6395 and
P.D. No. 380 if it is to attain its goals.
Further, the construction of P.D. No. 938 by the Office charged
with its implementation should be given controlling weight. 36
Since the May 8, 1985 ruling of Commissioner Ancheta, to the
letter of the Secretary of Finance of June 26, 1985 confirming
said ruling, the letters of the BIR of August 18, 1986, and
December 22, 1986, the letter of the Secretary of Finance of
February 19, 1987, the Memorandum of the Executive Secretary
of October 9, 1987, by authority of the President, confirming
and approving FIRB Resolution No. 17-87, the letter of the
Secretary of Finance of May 20, 1988 to the Executive Secretary
rendering his opinion as requested by the latter, and the latter’s
reply of June 15, 1988, it was uniformly held that the grant of
tax exemption to NPC under C.A. No. 120, as amended, included
exemption from payment of all taxes relative to NPC’s
petroleum purchases including indirect taxes. 37 Thus, then
Secretary of Finance Vicente Jayme in his letter of May 20, 1988
to the Executive Secretary Macaraig aptly stated the justification
for this tax exemption of NPC —
"The issue turns on the effect to the exemption of NPC from
taxes of the deletion of the phrase ‘taxes imposed indirectly’ on
oil products and its exemption from ‘all forms of taxes.’ It is
suggested that the change in language evidenced an intention
to exempt NPC only from taxes directly imposed on or payable
by it; since taxes on fuel-oil purchased by it; since taxes on fuel-
oil purchased by NPC locally are levied on and paid by its oil
suppliers, NPC thereby lost its exemption from those taxes. The
principal authority relied on is the 1967 case of Philippine
Acetylene Co., Inc. v. Commissioner of Internal Revenue, 20
SCRA 1056.
First of all, tracing the changes made through the years in the
Revised Charter, the strengthening of NPC’s preferential tax
treatment was clearly the intention. To the extent that the
explanatory ‘whereas clauses’ may disclose the intent of the
law-maker, the charges effected by P.D. 938 can only be read as
32
being expansive rather than restrictive, including its version of
Section 13.
Our Tax Code does not recognize that there are taxes directly
imposed and those imposed indirectly. The textbook distinction
between a direct and an indirect tax may be based on the
possibility of shifting the incidence of the tax. A direct tax is one
which is demanded from the very person intended to be the
payor, although it may ultimately be shifted to another. An
example of a direct tax is the personal income tax. On the other
hand, indirect taxes are those which are demanded from one
person in the expectation and intention that he shall indemnify
himself at the expense of another. An example of this type of tax
is the sales tax levied on sales of a commodity.
The distinction between a direct tax and one indirectly imposed
(or an indirect tax) is really of no moment. What is more
relevant is that when an ‘indirect tax’ is paid by those upon
whom the tax ultimately falls, it is paid not as a tax but as an
additional part of the cost or of the market price of the
commodity.
This distinction was made clear by Chief Justice Castro in the
Philippine Acetylene case, when he analyzed the nature of the
percentage (sales) tax to determine whether it is a tax on the
producer or on the purchaser of the commodity. Under out Tax
Code, the sales tax falls upon the manufacturer or producer. The
phrase ‘pass on’ the tax was criticized as being inaccurate.
Justice Castro says that the tax remains on the manufacturer
alone. The purchaser does not pay the tax; he pays an amount
added to the price because of the tax. Therefore, the tax is not
‘passed on’ and does not for that reason become an ‘indirect
tax’ on the purchaser. It is eminently possible that the law
maker in enacting P.D. 938 in 1976 may have used lessons from
the analysis of Chief Justice Castro in 1967 Philippine Acetylene
case.
When P.D. 938 which exempted NPC from ‘all forms of taxes’
was issued in May 1976, the so-called oil crunch had already
drastically pushed up crude oil prices from about $1.00 per bbl.
in 1971 to about $10 and a peak (as it turned out) of about $34
per bbl. in 1981. In 1974-78, NPC was operating the Meralco
thermal plants under a lease agreement. The power generated
by the leased plants was sold to Meralco for distribution to its
customers. This lease and sale arrangement was entered into for
the benefit of the consuming public, by reducing the tax burden
on the swiftly rising world crude oil prices. This objective was
achieved by the use of NPC’s ‘tax umbrella’ under its Revised
Charter — the exemption from specific taxes on locally
purchased fuel oil. In this context, I can not interpret P.D. 938 to
have withdrawn the exemption from tax on fuel oil to which
NPC was already entitled and which exemption Government in
fact was utilizing to soften the burden of high crude prices.
There is one other consideration which I consider pivotal. The
taxes paid by oil companies on oil products sold to NPC, whether
paid to them by NPC or not, never entered into the rates
charged by NPC to its customers — not even during those
periods of uncertainty engendered by the issuance of P.D. 1931
and E.O. 93 on NP/C’s tax status. No tax component on the fuel
have been charged or recovered by NPC through its rates.
There is an import duty on the crude oil imported by the local
refineries. After the refining process, specific and ad valorem
taxes are levied on the finished products including fuel oil or
residue upon their withdrawal from the refinery. These taxes are
paid by the oil companies as the manufacturer thereof.
In selling the fuel oil to NPC, the oil companies include in their
billings the duty and tax component. NPC pays the oil
companies’ invoices including the duty component but net of
the tax component. NPC then applies for drawback of customs
duties paid and for a credit in amount equivalent to the tax paid
by the oil companies) on the products purchased. The tax credit
is assigned to the oil companies — as payment, in effect, of the
tax component shown in the sales invoices. (NOTE: These
procedures varied over time — There were instances when NPC
paid the tax component that was shifted to it and then applied
for tax credit. There were also side issues raised because of P.D.
1931 and E.O. 93 which withdrew all exemptions of government
corporations. In these latter instances, the resolutions of the
Fiscal Incentives Review Board (FIRB) come into play. These
incidents will not be touched upon for purposes of this
discussion).
NPC rates of electricity are structured such that changes in its
cost of fuel are automatically (without need of fresh approvals)
reflected in the subsequent months’ billing rates.
This Fuel Cost Adjustment clause protects NPC’s rate of return. If
NPC should ever accept liability to the tax and duty component
on the oil products, such amount will go into its fuel cost and be
passed on to its customers through corresponding increases in
rates. Since 1974, when NPC operated the oil-fired generating
stations leased from Meralco (which plants it bought in 1979),
until the present time, no tax on fuel oil ever went into NPC’s
electric rates.

That the exemption of NPC from the tax on fuel was not
withdrawn by P.D. 938 is impressed upon me by yet another
circumstance. It is conceded that NPC, at the very least, is
exempt from taxes to which it is directly liable. NPC therefore
could very well have imported its fuel oil or crude residue for
burning at its thermal plants. There would have been no
question in such a case as to its exemption from all duties and
taxes, even under the strictest interpretation that can be put
forward. However, at the time P.D. 938 was issued in 1976,
there were already operating in the Philippines three oil
refineries. The establishment of these refineries in the
Philippines involved heavy investments, were economically
desirable and enabled the country to import crude oil and
process/refine the same into the various petroleum products at
a savings to the industry and the public. The refining process
produced as its largest output, in volume, fuel oil or residue,
whose conventional economic use was for burning in electric or
steam generating plants. Had there been no use locally for the
residue, the oil refineries would have become largely unviable.
Again, in this circumstances, I cannot accept that P.D. 938 would
have in effect forced NPC to by-pass the local oil refineries and
import its fossil fuel requirements directly in order to avail itself
of its exemption from ‘direct taxes.’ The oil refineries had to
keep operating both for economic development and national
security reasons. In fact, the restoration by the FIRB of NPC’s
exemption after P.D. 1931 and E.O. 93 expressly excluded direct
fuel oil importations, so as not to prejudice the continued
operations of the local oil refineries.
To answer your query therefore, it is the opinion of this
Department that NPC under the provisions of its Revised Charter
retains its exemption from duties and taxes imposed on the
petroleum products purchased locally and used for the
generation of electricity.
The Department in issuing this ruling does so pursuant to its
power and function to supervise and control the collection of
government revenues by the application and implementation of
revenue laws. It is prepared to take the measures supplemental
to this ruling necessary to carry the same into full effect.
As presented rather extensively above, the NPC electric power
rates did not carry the taxes and duties paid on the fuel oil it
used. The point is that while these levies were in fact paid to the
government, no part thereof was recovered from the sale of
electricity produced. As a consequence, as of our most recent
information, some P1.56 B in claims represent amounts for
which the oil suppliers and NPC are ‘out-of-pocket. There would
33
have to be specific order to the Bureaus concerned for the
resumption of the processing of these claims." 38
In the latter of June 15, 1988 of then Executive Secretary
Macaraig to the then Secretary of Finance, the said opinion-
ruling of the latter was confirmed and its implementation was
directed. 39
The Court finds and so holds that the foregoing reasons adduced
in the aforestated letter of the Secretary of Finance as
confirmed by the then Executive Secretary are well-taken. When
the NPC was exempted from all forms of taxes, duties, fees,
imposts and other charges, under P.D. No. 938, it means exactly
what it says, i.e., all forms of taxes including those that were
imposed directly or indirectly on petroleum products used in its
operation.
Reference is made in the dissenting opinion to contrary rulings
of the BIR that the exemption of the NPC extends only to taxes
for which it is directly liable and not to taxes merely shifted to it.
However, these rulings are predicated on Philippine Acetylene.
The doctrine in Philippine Acetylene decided in 1967 by this
Court cannot apply to the present case. It involved the sales tax
of products the plaintiff sold to NPC from June 2, 1953 to June
30, 1958 when NPC was enjoying tax exemption from all taxes
under Commonwealth Act No. 120, as amended by Republic Act
No. 358 issued on June 4, 1949 hereinabove reproduced.
In said case, this Court held, that the sales tax is due from the
manufacturer and not the buyer, so plaintiff cannot claim
exemptions simply because the NPC, the buyer, was exempt.
However, on September 10, 1971, Republic Act No. 6395 was
passed as the revised charter of NPC whereby Section 13
thereof was amended by emphasizing its non-profit character
and expanding the extent of its tax exemption.
As petitioner concedes, Section 13(d) aforestated of this
amendment under Republic Act No. 6345 spells out clearly the
exemption of the NPC from indirect taxes. And as hereinabove
stated, in P.D. No. 380, the exemption of NPC from indirect
taxes was emphasized when it was specified to include those
imposed "directly and indirectly."
Thereafter, under P.D. No. 938 the tax exemption of NPC was
integrated under Section 13 defining the same in general terms
to cover "all forms of taxes, duties, fees, imposts, etc." which, as
hereinabove discussed, logically includes exemption from
indirect taxes on petroleum products used in its operation.
This is the status of the tax exemptions the NPC was enjoying
when P.D. No. 1931 was passed, on the authority of which FIRB
Resolution Nos. 10-85 and 1-86 were issued, and when
Executive Order No. 93 was promulgated, by which FIRB
Resolution 17-87 was issued.
Thus, the ruling in Philippine Acetylene cannot apply to this case
due to the different environmental circumstances. As a matter
of fact, the amendments of Section 13, under R.A. No. 6395,
P.D. No. 380 and P.D. No. 838 appear to have been brought
about by the earlier inconsistent rulings of the tax agencies due
to the doctrine in Philippine Acetylene, so as to leave no doubt
as to the exemption of the NPC from indirect taxes on
petroleum products it uses in its operation. Effectively, said
amendments superseded if not abrogated the ruling in
Philippine Acetylene that the tax exemption of NPC should be
limited to direct taxes only.chanrobles virtual lawlibrary
In the light of the foregoing discussion the first corollary issue
must consequently be resolved in the affirmative, that is, FIRB
Resolution No. 10-85 dated February 7, 1985 and FIRB
Resolution No. 1-86 dated January 7, 1986 which restored NPC’s
tax exemption privileges included the restoration of the indirect
tax exemption of the NPC on petroleum products it used.
On the second corollary issue as to the validity of FIRB resolution
No. 17-87 dated June 24, 1987 which restored NPC’s tax
exemption privilege effective March 10, 1987, the Court finds
that the same is valid and effective.
It provides as follows:
"BE IT RESOLVED, AS IT IS HEREBY RESOLVED, That the tax and
duty exemption privileges of the National Power Corporation,
including those pertaining to its domestic purchases of
petroleum and petroleum products, granted under the terms
and conditions of Commonwealth Act No. 120 (Creating the
National Power Corporation, defining its powers, objectives and
functions, and for other purposes), as amended, are restored
effective March 10, 1987, subject to the following conditions:
"1. The restoration of the tax and duty exemption privileges
does not apply to the following:
1.1 Importation of fuel oil (crude equivalent) and coal;
1.2 Commercially-funded importations (i.e., importations which

include but are not limited to those financed by the NPC’s own
internal funds, domestic borrowings from any source
whatsoever, borrowing from foreign-based private financial
institutions, etc.); and
1.3 Interest income derived from any source.
"2. The NPC shall submit to the FIRB a report of its expansion
program, including details of disposition of relieved tax and duty
payments for such expansion on an annual basis or as often as
the FIRB may require it to do so. This report shall be in addition
to the usual FIRB reporting requirements on incentive
availment." 40
Executive Order No. 93 provides as follows —
"SECTION 1. The provisions of any general or special law to the
contrary notwithstanding, all tax and duty incentives granted to
government and private entities are hereby withdrawn, except:
a) those covered by the non-impairment clause of the
Constitution;
b) those conferred by effective international agreements to
which the Government of the Republic of the Philippines is a
signatory;
c) those enjoyed by enterprises registered with:
(i) the Board of Investments pursuant to Presidential Decree No.
1789, as amended;
(ii) the Export Processing Zone Authority, pursuant to
Presidential Decree No. 66, as amended;
(iii) the Philippine Veterans Investment Development
Corporation Industrial Authority pursuant to Presidential Decree
No. 538, as amended;
d) those enjoyed by the copper mining industry pursuant to the
provisions of Letter of Instruction No. 1416;
e) those conferred under the four basic codes namely:
(i) the Tariff and Customs Code, as amended;
(ii) the National Internal Revenue Code, as amended;
(iii) the Local Tax Code, as amended;
34
(iv) the Real Property Tax Code, as amended;.
f) those approved by the President upon the recommendation
of the Fiscal Incentives Review Board.
"SECTION 2. The Fiscal Incentives Review Board created under
Presidential Decree No. 776, as amended, is hereby authorized
to:
a) restore tax and or duty exemptions withdrawn hereunder in
whole or in part;
b) revise the scope and coverage of tax and of duty exemption
that may be restored.
c) impose conditions for the restoration of tax and or duty
exemption;
d) prescribe the date or period of effectivity of the restoration of
tax and or duty exemption;
e) formulate and submit to the President for approval, a
complete system for the grant of subsidies to deserving
beneficiaries, in lieu of or in combination with the restoration of
tax and duty exemptions or preferential treatment in taxation,
indicating the source of funding therefor, eligible beneficiaries
and the terms and conditions for the grant thereof taxing into
consideration the international commitments of the Philippines
and the necessary precautions such that the grant of subsidies
does not become the basis for countervailing action.
"SECTION 3. In the discharge of its authority hereunder, the
Fiscal Incentives Review Board shall take into account any or all
of the following considerations:
a) the effect on relative price levels;
b) relative contribution of the beneficiary to the revenue
generation effort;
c) nature of the activity the beneficiary is engaged;
d) in general, the greater national interest to be served."
True it is that the then Secretary of Justice in Opinion No. 77
dated August 6, 1977 was of the view that the powers conferred
upon the FIRB by Sections 2(a), (b), (c), and (d) of Executive
Order No. 93 constitute undue delegation of legislative power
and is therefore unconstitutional. However, he was overruled by
the respondent Executive Secretary in a letter to the Secretary
of Finance dated March 30, 1989. The Executive Secretary, by
authority of the President, has the power to modify, alter or
reverse the construction of a statute given by a department
secretary. 41
A reading of Section 3 of said law shows that it set the policy to
be the greater national interest. The standards of the delegated
power are also clearly provided for.
The required "standard" need not be expressed. In Edu v. Ericta
42 and in De la Llana v. Alba, 43 this Court held: "The standard
may be either express or implied. If the former, the non-
delegated objection is easily met. The standard though does not
have to be spelled out specifically. It could be implied from the
policy and purpose of the act considered as a whole."
In People v. Rosenthal 44 the broad standard of "public interest"
was deemed sufficient. In Calalang v. Williams, 45 it was "public
welfare" and in Cervantes v. Auditor General, 46 it was the
purpose of promotion of "simplicity, economy and efficiency."
And, implied from the purpose of the law as a whole, "national
security" was considered sufficient standard 47 and so was
"protection of fish-fry or fish eggs." 48
The observation of petitioner that the approval of the President
was not even required in said Executive Order of the tax
exemption privilege approved by the FIRB, unlike in previous
similar issuances, is not well-taken. On the contrary, under
Section 1 (f) of Executive Order No. 93, aforestated, such tax
and duty exemptions extended by the FIRB must be approved by
the President. In this case, FIRB Resolution No. 17-87 was
approved by the respondent Executive Secretary, by authority of
the President, on October 15, 1987. 49
Mr. Justice Isagani A. Cruz commenting on the delegation of
legislative power stated —
"The latest in our jurisprudence indicates that delegation of
legislative power has become the rule and its non-delegation
the exception. The reason is the increasing complexity of
modern life and many technical fields of governmental functions
as in matters pertaining to tax exemptions. This is coupled by
the growing inability of the legislature to cope directly with the
many problems demanding its attention. The growth of society
has ramified its activities and created peculiar and sophisticated
problems that the legislature cannot be expected reasonably to
comprehend. Specialization even in legislation has become

necessary. To many of the problems attendant upon present
day undertakings, the legislature may not have the competence,
let alone the interest and the time, to provide the required
direct and efficacious, not to say specific solutions." 50
Thus, in the case of Tablarin v. Gutierrez, 51 this Court
enunciated the rationale in favor of delegation of legislative
functions —
"One thing however, is apparent in the development of the
principle of separation of powers and that is that the maxim of
delegatus non potest delegare or delegati potestas non potest
delegare, adopted this practice (Delegibus et Consuetudiniis,
Anglia edited by G.E. Woodline, Yale University Press, 1922, Vol.
2, p. 167) but which is also recognized in principle in the Roman
Law (d. 17.18.3) has been made to adapt itself to the
complexities of modern government, giving rise to the adoption,
within certain limits, of the principle of subordinate legislation,
not only in the United States and England but in practically all
modern governments. (People v. Rosenthal and Osmeña, 68
Phil. 318, 1939). Accordingly, with the growing complexities of
modern life, the multiplication of the subjects of governmental
regulation, and the increased difficulty of administering the
laws, there is a constantly growing tendency toward the
delegation of greater power by the legislative, and toward the
approval of the practice by the Courts." (Emphasis supplied.)
The legislative authority could not or is not expected to state all
the detailed situations wherein the tax exemption privileges of
persons or entities would be restored. The task may be assigned
to an administrative body like the FIRB.
Moreover, all presumptions are indulged in favor of the
constitutionality and validity of the statute. Such presumption
can be overturned if its invalidity is proved beyond reasonable
doubt. Otherwise, a liberal interpretation in favor of
constitutionality of legislation should be adopted. 52
E.O. No. 93 is complete in itself and constitutes a valid
delegation of legislative power to the FIRB. And as above
discussed, the tax exemption privilege that was restored to NPC
by FIRB Resolution No. 17-87 of June 1987 includes exemption
from indirect taxes and duties on petroleum products used in its
operation.
Indeed, the validity of Executive Order No. 93 as well as of FIRB
Resolution No. 17-87 has been upheld in Albay. 53
In the dissenting opinion of Mr. Justice Cruz, it is stated that P.D.
35
Nos. 1931 and 1955 issued by President Marcos in 1984 are
invalid as they were presumably promulgated under the
infamous Amendment No. 6 and that as they cover tax
exemption, under Section 17(4), Article VIII of the 1973
Constitution, the same cannot be passed "without the
concurrence of the majority of all the members of the Batasan
Pambansa." And, even conceding that the reservation of
legislative power in the President was valid, it is opined that it
was not validly exercised as there is no showing that such
presidential encroachment was justified under the conditions
then existing. Consequently, it is concluded that Executive Order
No. 93, which was intended to implement said decrees, is also
illegal. The authority of the President to sub-delegate to the
FIRB powers delegated to him is also questioned.
In Albay, 54 as above stated, this Court upheld the validity of
P.D. Nos. 776 and 1931. The latter decree withdrew tax
exemptions of government-owned or controlled corporations
including their subsidiaries but authorized the FIRB to restore
the same. Nevertheless, in Albay, as above-discussed, this Court
ruled that the tax exemptions under FIRB Resolution Nos. 10-85
and 1-86 cannot be enforced as said resolutions were only
recommendatory and were not duly approved by the President
of the Philippines as required by P.D. No. 776. 55 The Court also
sustained in Albay the validity of Executive Order No. 93, and of
the tax exemptions restored under FIRB Resolution No. 17-87
which was issued pursuant thereto, as it was duly approved by
the President as required by said executive order.
Moreover, under Section 3, Article XVIII of the Transitory
Provisions of the 1987 Constitution, it is provided that:
"All existing laws, decrees, executive orders, proclamation,
letters of instructions, and other executive issuances not
inconsistent with this constitution shell remain operative until
amended, repealed or revoked."
Thus, P.D. Nos. 776 and 1931 are valid and operative unless it is
shown that they are inconsistent with the Constitution.
Even assuming arguendo that P.D. Nos. 776, 1931 and Executive
Order No. 93 are not valid and are unconstitutional, the result
would be the same, as then the latest applicable law would be
P.D. No. 938 which amended the NPC charter by granting
exemption to NPC from all forms of taxes. As above discussed,
this exemption of NPC covers direct and indirect taxes on
petroleum products used in its operation. This is as it should be,
if We are to hold as invalid and inoperative the withdrawal of
such tax exemptions under P.D. No. 1931 as well as under
Executive Order No. 93 and the delegation of the power to
restore these exemptions to the FIRB.chanrobles virtual
lawlibrary
The Court realizes the magnitude of the consequences of this
decision. To reiterate, in Albay this Court ruled that the NPC is
liable for real estate taxes as of June 11, 1984 (the date of
promulgation of P.D. No. 1931) when NPC had ceased to enjoy
tax exemption privileges since FIRB Resolution Nos. 1085 and 1-
86 were not validly issued. The real estate tax liability of NPC
from June 11, 1984 to December 1, 1990 is estimated to
amount to P7.49 billion plus another P4.76 billion in fuel import
duties the firm had earlier paid to the government which the
NPC now proposed to pass on to the consumers by another 33-
centavo increase per kilowatt hour in power rates on top of the
17-centavo increase per kilowatt hour that took effect just over
a week ago. 56 Hence, another case has been filed in this Court
to stop this proposed increase without a hearing.
As above-discussed, at the time FIRB Resolutions Nos. 10-85 and
1-86 were issued, P.D. No. 776 dated August 24, 1975 was
already amended by P.D. No. 1931, 57 wherein it is provided
that such FIRB resolutions may be approved not only by the
President of the Philippines but also by the Minister of Finance.
Such resolutions were promulgated by the Minister of Finance in
his own right and also in his capacity as FIRB Chairman. Thus, a
separate approval thereof by the Minister of Finance or by the
President is unnecessary.chanrobles virtual lawlibrary
As earlier stated a reexamination of the ruling in Albay on this
aspect is therefore called for and consequently, Albay must be
considered superseded to this extent by this decision. This is
because P.D. No. 938 which is the latest amendment to the NPC
charter granting the NPC exemption from all forms of taxes
certainly covers real estate taxes which are direct taxes.
This tax exemption is intended not only to insure that the NPC
shall continue to generate electricity for the country but more
importantly, to assure cheaper rates to be paid by the
consumers.
The allegation that this is in effect allowing tax evasion by oil
companies is not quite correct. There are various arrangements
in the payment of crude oil purchased by NPC from oil
companies. Generally, the custom duties paid by the oil
companies are added to the selling price paid by NPC. As to the
specific and ad valorem taxes, they are added as part of the
seller’s price, but NPC pays the price net of tax, on condition
that NPC would seek a tax refund to the oil companies. No tax

component on fuel had been charged or recovered by NPC from
the consumers through its power rates. 58 Thus, this is not a
case of tax evasion of the oil companies but of tax relief for the
NPC. The billions of pesos involved in these exemptions will
certainly inure to the ultimate good and benefit of the
consumers who are thereby spared the additional burden of
increased power rates to cover these taxes paid or to be paid by
the NPC if it is held liable for the same.chanrobles law library :
red
The fear of the serious implication of this decision in that NPC’s
suppliers, importers and contractors may claim the same
privilege should be dispelled by the fact that (a) this decision
particularly treats of only the exemption of the NPC from all
taxes, duties, fees, imposts and all other charges imposed by the
government on the petroleum products it used or uses for its
operation; and (b) Section 13(d) of R.A. No. 6395 and Section 1
3(d) of P.D. No. 380, both specifically exempt the NPC from all
taxes, duties, fees, imposts and all other charges imposed by the
Government on all petroleum products used in its operation
only, which is the very exemption which this Court deems to be
carried over by the passage of P.D. No. 938. As a matter of fact
in Section 13(d) of P.D. No. 380 it is specified that the aforesaid
exemption from taxes, etc. covers those "directly or indirectly"
imposed by the "Republic of the Philippines, its provinces, cities,
municipalities and other government agencies and
instrumentalities" on said petroleum products. The exemption
therefore from direct and indirect tax on petroleum products
used by NPC cannot benefit the suppliers, importers and
contractors of NPC of other products or services.chanrobles
virtual lawlibrary
The Court realizes the laudable objective of petitioner to
improve the revenue of the government. The amount of
revenue received or expected to be received by this tax
exemption is, however, not going to any of the oil companies.
There would be no loss to the government. The said amount
shall accrue to the benefit of the NPC, a government
corporation, so as to enable it to sustain its tremendous task of
providing electricity for the country and at the least cost to the
consumers. Denying this tax exemption would mean hampering
if not paralyzing the operations of the NPC. The resulting
increased revenue in the government will also mean increased
power rates to be shouldered by the consumers if the NPC is to
survive and continue to provide our power requirements. 59
The greater interest of the people must be paramount.
WHEREFORE, the petition is DISMISSED for lack of merit. No
pronouncement as to costs.
36
SO ORDERED.
EN BANC
[G.R. No. 88291. June 8, 1993.]
ERNESTO M. MACEDA, Petitioner, v. HON. CATALINO MACARAIG,
JR., in his capacity as Executive Secretary, Office of the President,
HON. VICENTE JAYME, ETC., ET AL., Respondents.
Angara, Abello, Concepcion & Cruz for respondent Pilipinas Shell
Petroleum Corporation.
Siguion Reyna, Montecillo & Ongsiako for Caltex.
SYLLABUS
1. TAXATION; NATIONAL POWER CORPORATION (NPC); EXEMPT
FROM ALL FORMS OF DIRECT AND INDIRECT TAXES. — A
chronological review of the NPC laws will show that it has been
the lawmaker’s intention the NPC was to be completely tax
exempt from all forms of taxes — direct and indirect. NPC’s tax
exemption at first applied to the bonds it was authorized to float
to finance its operations upon its creation by virtue of C.A. No.
120. When the NPC was authorized to contract with the IBRD for
foreign financing, any loans obtained were to be completely tax
exempt. After the NPC was authorized to borrow from other
sources of funds — aside from issuance of bonds — it was again
specifically exempted from all types of taxes "to facilitate
payment of its indebtedness." Even when the ceilings for
domestic and foreign borrowings were periodically increased,
the tax exemption privileges of the NPC were maintained. NPC’s
tax exemption from real estate taxes was, however, specifically
withdrawn by Rep. Act No. 987, as above stated. The exemption
was, however, restored by R.A. No. 6395. Section 13, R.A. No.
6395, was very comprehensive in its enumeration of the tax
exemptions allowed NPC. Its Section 13(d) is the starting point
of this bone of contention among the parties. For easy
reference, it is reproduced as follows:" [T]he Corporation is
hereby declared exempt: . . ." (d) From all taxes, duties, fees,
imposts and all other charges imposed by the Republic of the
Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities, on all petroleum
products used by the Corporation in the generation,
transmission, utilization, and sale of electric power." P.D. No.
380 added the phrase "directly or indirectly" to said Section
13(d). Then came P.D. No. 938 which amended Sec. 13(a), (b),
(c) and (d) into one very simple paragraph. It should be noted
that Section 13, R.A. No. 6395, provided for tax exemptions for
the following items: 13(a) : court of administrative proceedings;
13(b) : income, franchise, realty taxes; 13(c) : import of foreign
goods required for its operations and projects; 13(d) : petroleum
products used in generation of electric power. P.D. No. 938
lumped up 13(c) and 13(d) into the phrase "ALL FORMS OF
TAXES, ETC.,", included 13(a) under the "was well as" clause and
added PNOC subsidiaries as qualified for tax exemptions. This is
the only conclusion one can arrive at if he has read all the NPC
laws in the order of enactment or issuance as narrated above in
part I hereof. President Marcos must have considered all the
NPC statues from C.A. No. 120 up to its latest amendments, P.D.
No. 380, P.D. No. 395 and P.D. No. 759, AND came up with a
very simple Section 13, R.A. No. 6395, as amended BY P.D. No.
938. P.D. No. 938 did not amend the same and so the tax
exemption provision in Section 8 (b), R.A. No. 6395, as amended
by P.D. NO. 380, still stands. Since the subject matter of this
particular Section 8 (B) had to do only with loans and machinery
imported, paid for from the proceeds of these foreign loans,
THERE WAS NO OTHER SUBJECT MATTER TO LUMP IT UP WITH,
and so, the tax exemption stood as is — with the express
mention of "direct and indirect" tax exemptions. And this "direct
and indirect" tax exemption privilege extended to "taxes, fees,
imposts, other charges . . . to be imposed" in the further —
surely, an indication that the lawmakers wanted the NPC to be
exempt from ALL FORMS of taxes — direct and indirect.
2. REMEDIAL LAW; DOCTRINE LAID DOWN IN PULIDO v. PABLO
(117 SCRA 16 [1980]) APPLIED BY ANALOGY IN CASE AT BAR. —
This Court notes that petitioner brought to the attention of this
Court, the matter of the abolition of NPC’s tax exemption
privileges by P.D. No. 1177 only in his Common Reply/Comment
to Private Respondents’ "Opposition" and "Comment" to Motion
for Reconsideration, four (4) months AFTER the Motion for
Reconsideration had been filed. During oral arguments heard on
July 9, 1992, he proceeded to discuss this tax exemption
withdrawal as explained by then Secretary of Justice Vicente
Abad Santos in Opinion No. 133 (S’77). A careful perusal of
petitioner’s Senate Blue Ribbon Committee Report No. 474, the
basis of the petition at bar, fails to yield any mention of said P.D.
No. 1177’s effect on NPC’s tax exemption privileges. Applying by
analogy Pulido v. Pablo, the Court declares that the matter of
P.D. No. 1177 abolishing NPC’s tax exemption privileges was not
seasonably invoked by the petitioner.
3. TAXATION; NPC; WITHDRAWAL OF TAX EXEMPTION AND
REPEAL OF SUBSIDY SCHEME FOR FORMER TAX EXCEPT GOCCs
UNDER SECTION 23, PRESIDENTIAL DECREE NO. 1177; EFFECT

THEREOF. — The express repeal of tax privileges of any
government-owned or controlled corporation (GOCC), NPC
included, was reiterated in the fourth whereas clause of P.D. No.
1931’s preamble. The subsidy provided for in Section 23, P.D.
No. 1177, being inconsistent with Section 2, P.D. No. 1931, was
deemed repealed as the Fiscal Incentives Revenue Board was
tasked with recommending the partial or total restoration of tax
exemptions withdrawn by Section 1, P.D. No. 1931. The Court
rules that when P.D. No. 1931 basically reenacted in its Section 1
the first half of Section 23, P.D. No. 1177, on withdrawal of tax
exemption privileges of all GOCCs, said Section 1, P.D. No. 1931
was deemed to be a continuation of the first half of Section 23,
P.D. No. 1177, although the second half of Section 23, P.D. No.
1177, on the subsidy scheme for former tax exempt GOCCs, had
been expressly repealed by Section 2 with its institution of the
FIRB recommendation of partial/total restoration of tax
exemption privileges. The NPC tax exemption privileges
withdrawn by Section 1, P.D. No. 1931, were, therefore, the
same NPC tax exemption privileges withdrawn by Section 23,
P.D. No. 1177. NPC could no longer obtain a subsidy for the
taxes it had to pay. It could, however, under P.D. No. 1931, ask
for a total restoration of its tax exemption privileges, which it
did, and the same were granted under FIRB Resolutions Nos. 10-
85 and 1-86 as approved by the Minister of Finance.
4. CONSTITUTIONAL LAW; NATIONAL ASSEMBLY; LAW
GRANTING TAX EXEMPTION; CONCURRENCE OF MAJORITY OF
ALL MEMBERS, REQUIRED; PROVISION DOES NOT APPLY TO
LAWS ENACTED BY THE PRESIDENT. — The rule that under the
1973 Constitution "no law granting a tax exemption shall be
passed without the concurrence of a majority of all the
members of the Batasang Pambansa" does not apply as said P.D.
No. 1931 was not passed by the Interim Batasang Pambansa but
by then President Marcos under His Amendment No. 6 power.
P.D. No. 1931 was validly issued by then President Marcos under
his Amendment No. 6 authority.
5. TAXATION; PROCEDURAL DUE PROCESS; NOT VIOLATED BY
THE RECOMMENDATION AND APPROVAL OF NPC’S TAX
EXEMPTION PRIVILEGES DONE BY THE SAME PERSON ACTING IN
HIS DUAL CAPACITIES. — The question arises as to whether one
can talk about "due process" being violated when FIRB
Resolutions nos. 10-85 and 1-86 were approved by the Minister
of Finance when the same were recommended by him in his
capacity as Chairman of the Fiscal Incentives Review Board. In
the case of the tax exemption restoration of NPC, there is no
other comparable entity — not even a single public or private
corporation -- whose rights would be violated if NPC’s tax
exemption privileges were to be restored. It should be noted
37
that NPC was not asking to be granted tax exemption privileges
for the first time. It was just asking that its tax exemption
privileges be restored. It is for these reasons that, at least in
NPC’s case, the recommendation and approval of NPC’s tax
exemption privileges under FIRB Resolution Nos. 10-85 and 1-
86, done by the same person acting in his dual capacities as
Chairman of the Fiscal Incentives Review Board and Minister of
Finance, respectively , do not violate procedural due process.
6. ID.; SPECIFIC TAX ON PETROLEUM BOUGHT BY THE NPC; TAX
PAYABLE BY OIL COMPANIES SUPPLYING THE SAME. — The
Court rules and declares that the oil companies which supply
bunker fuel oil to NPC have to pay the taxes impose upon said
bunker fuel oil sold to NPC. By the very nature of indirect
taxation, the economic burden of such taxation is expected to
be passed on through the channels of commerce to the user or
consumer of the goods sold. Because, however, the NPC has
been exempted from both direct and indirect taxation, the NPC
must be held exempted from absorbing the economic burden of
indirect taxation. This means, on the one hand, that the oil
companies which wish to sell to NPC must absorb all or part of
the economic burden of the taxes previously paid to BIR, which
they could shift to NPC if NPC did not enjoy exemption from
indirect taxes. This means also, on the other hand, that the NPC
may refuse to pay that part of the "normal" purchase price of
bunker fuel oil which represents all or part of the taxes
previously paid by the oil companies to BIR. If NPC nonetheless
purchases such oil from the oil companies — because to do so
may be more convenient and ultimately less costly for NPC than
NPC itself importing and hauling and storing the oil from
overseas — NPC is entitled to be reimbursed by the BIR for that
part of the buying price of NPC which verifiably represents the
tax already paid by the oil company-vendor to the BIR.
7. ID.; AD VALOREM TAXES; ISSUE ON ENTITY OBLIGED TO PAY
RENDERED MOOT BY ISSUANCE OF EXECUTIVE ORDER NO. 195.
— It should be noted at this point in time that the whole issue of
who WILL pay these indirect taxes HAS BEEN RENDERED moot
and academic by E.O. No. 195 issued on June 16, 1987 by virtue
of which the ad valorem tax rate on bunker fuel oil was reduced
to ZERO (0%) PER CENTUM.
8. ID.; NATIONAL INTERNAL REVENUE CODE; RECOVERY OF TAX
ERRONEOUSLY OR ILLEGALLY COLLECTED; CLAIM FOR REFUND
OR CREDIT, INDISPENSABLE; SUIT MUST BE FILED AFTER
EXPIRATION OF TWO YEARS FROM DATE OF PAYMENT; CASE AT
BAR. — The law governing recovery of erroneously or illegally
collected taxes is Section 230 of the National Internal Revenue
Code of 1977, as amended. A careful examination of petitioner’s
pleadings and annexes attached thereto does not reveal when
the alleged claim for a P410,580,000.00. Actually, as the Court
sees it, this is a clear case of a "Mexican standoff." We cannot
restrain the BIR from refunding said amount because of Our
ruling that NPC has both direct and indirect tax exemption
privileges. Neither can We order the BIR to refund said amount
to NPC as there is no pending petition for review on certiorari of
a suit for its collection before Us. At any rate, at this point in
time, NPC can no longer file any suit to collect said amount
EVEN IF it has previously filed a claim with the BIR because it is
time-barred under Section 230 of the Internal Revenue Code of
1977, as amended. The date of the Deed of Assignment is June
6, 1986. Even if We were to assume that payment by NPC for
the amount of P410,580,000.00 had been made on said date, it
is clear that more than two (2) years had already elapsed from
said date. At the same time, We should note that there is no
legal obstacle to the BIR granting, even without a suit by NPC,
the tax credit or refund claimed by NPC, assuming that NPC’s
claim had been made seasonably, and assuming the amounts
covered had actually been paid previously by the oil companies
to the BIR.
RESOLUTION
NOCON, J.:
Just like lightning which does strike the same place twice in
some instances, this matter of indirect tax exemption of the
private respondent National Power Corporation (NPC) is brought
to this Court a second time. Unfazed by the Decision We
promulgated on May 31, 1991 1 petitioner Ernesto Maceda asks
this Court to reconsider said Decision. Lest We be criticized for
denying due process to the petitioner, We have decided to take
a second look at the issues. In the process, a hearing was held
on July 9, 1992 where all parties presented their respective
arguments. Etched in this Count’s mind are the paradoxical
claims by both petitioner and private respondents that their
respective positions are for the benefit of the Filipino people.
I
A chronological review of the relevant NPC laws, specially with
respect to its tax exemption provisions, at the risk of being
repetitious is, therefore, in order.
On November 3, 1936, Commonwealth Act No. 120 was enacted

creating the National Power Corporation, a public corporation,
mainly to develop hydraulic power from all water sources in the
Philippines. 2 The sum of P250,000.00 was appropriated out of
the funds in the Philippine treasury for the purpose of
organizing the NPC and conducting its preliminary work. 3 The
main source of funds for the NPC was the flotation of bonds in
the capital markets 4 and these bonds
. . . issued under the authority of this Act shall be exempt from
the payment of all taxes by the Commonwealth of the
Philippines, or by any authority, branch, division or political
subdivision thereof and subject to the provisions of the Act of
Congress, approved March 24, 1934, otherwise known as the
Tydings McDuffie Law, which facts shall be stated upon the face
of said bonds. . . ." 5
On June 24, 1938, C.A. No. 344 was enacted increasing to
P550,000.00 the funds needed for the initial operations of the
NPC and reiterating the provision on the flotation of bonds as
soon as the first construction of any hydraulic power project was
to be decided by the NPC Board. 6 The provision on tax
exemption in relation to the issuance of the NPC bonds was
neither amended nor deleted.
On September 30, 1939, C.A. No. 495 was enacted removing the
provision on the payment of the bond’s principal and interest in
"gold coins" but adding that payment could be made in United
States dollars. 7 The provision on tax exemption in relation to
the issuance of the NPC bonds was neither amended nor
deleted.
On June 4, 1949, Republic Act No. 357 was enacted authorizing
the President of the Philippines to guarantee, absolutely and
unconditionally, as primary obligor, the payment of any and all
NPC loans. 8 He was also authorized to contract on behalf of the
NPC with the International Bank for Reconstruction and
Development (IBRD) for NPC loans for the accomplishment of
NPC’s corporate objectives 9 and for the reconstruction and
development of the economy of the country. 10 It was expressly
stated that:
"Any such loan or loans shall be exempt from taxes, duties, fees,
imposts, charges, contributions and restrictions of the Republic
of the Philippines, its provinces, cities and municipalities." 11
On the same date, R.A. No. 358 was enacted expressly
authorizing the NPC, for the first time, to incur other types of
indebtedness, aside from indebtedness incurred by flotation of
bonds. 12 As to the pertinent tax exemption provision, the law
38
stated as follows:
"To facilitate payment of its indebtedness, the National Power
Corporation shall be exempt from all taxes, duties, fees,
imposts, charges, and restrictions of the Republic of the
Philippines, its provinces, cities and municipalities." 13
On July 10, 1952, R.A. No. 813 was enacted amending R.A. No.
357 in that, aside from the IBRD, the President of the Philippines
was authorized to negotiate, contract and guarantee loans with
the Export-Import Bank of Washington, D.C., U.S.A., or any other
international financial institution. 14 The tax provision for
repayment of these loans, as stated in R.A. No. 357, was not
amended.
On June 2, 1954, R.A. No. 987 was enacted specifically to
withdraw NPC’s tax exemption for real estate taxes. As enacted,
the law states as follows:
"To facilitate payment of its indebtedness, the National Power
Corporation shall be exempt from all taxes, except real property
tax, and from all duties, fees, imposts, charges, and restrictions
of the Republic of the Philippines, its provinces, cities and
municipalities." 15
On September 8, 1955, R.A. No. 1397 was enacted directing that
the NPC projects to be funded by the increased indebtedness 16
should bear the National Economic Council’s stamp of approval.
The tax exemption provision related to the payment of this total
indebtedness was not amended nor deleted.
On June 13, 1955, R.A. No. 2055 was enacted increasing the
total amount of foreign loans NPC was authorized to incur to
US$100,000,000.00 from the US$50,000,000.00 ceiling in R.A.
No. 357. 17 The tax provision related to the repayment of these
loans was not amended nor deleted.
On June 13, 1958, R.A. No. 2058 was enacted fixing the
corporate life of NPC to December 31, 2000. 18 All laws or
provisions of laws and executive orders contrary to said R.A. No.
2058 were expressly repealed. 19
On June 18, 1960, R.A. No. 2641 was enacted converting the
NPC from a public corporation into a stock corporation with an
authorized capital stock of P100,000,000.00 divided into
1,000,000 shares having a par value of P100.00 each, with said
capital stock wholly subscribed to by the Government. 20 No tax
exemption provision was incorporated in said Act.
On June 17, 1961, R.A. No. 3043 was enacted increasing the
above-mentioned authorized capital stock to P250,000,000.00
with the increase to be wholly subscribed by the Government.
21 No tax provision was incorporated in said Act.
On June 17, 1967, R.A No. 4897 was enacted. NPC’s capital stock
was increased again to P300,000,000.00, the increase to be
wholly subscribed by the Government. No tax provision was
incorporated in said Act. 22
On September 10, 1971, R.A No. 6395 was enacted revising the
charter of the NPC, C.A. No. 120, as amended. Declared as
primary objectives of the nation were:
"Declaration of Policy. — Congress hereby declares that (1) the
comprehensive development, utilization and conservation of
Philippine water resources for all beneficial uses, including
power generation, and (2) the total electrification of the
Philippines through the development of power from all sources
to meet the needs of industrial development and dispersal and
the needs of rural electrification are primary objectives of the
nation which shall be pursued coordinately and supported by all
instrumentalities and agencies of the government, including the
financial institutions." 23
Section 4 of C.A. No. 120, was renumbered as Section 8, and
divided into Sections 8(a) (Authority to incur Domestic
Indebtedness) and Section 8 (b) (Authority to Incur Foreign
Loans).
As to the issuance of bonds by the NPC, Paragraph No. 3 of
Section 8(a), states as follows:
"The bonds issued under the authority of this subsection shall be
exempt from the payment of all taxes by the Republic of the
Philippines, or by any authority, branch, division or political
subdivision thereof which facts shall be stated upon the face of
said bonds. . . ." 24
As to the foreign loans the NPC was authorized to contract,
Paragraph No. 5, Section 8(b), states as follows:
"The loans, credits and indebtedness contracted under this
subsection and the payment of the principal, interest and other
charges thereon, as well as the importation of machinery,
equipment, materials and supplies by the Corporation, paid
from the proceeds of any loan, credit or indebtedness incurred
under this Act, shall also be exempt from all taxes, fees, imposts,
other charges and restrictions, including import restrictions, by

the Republic of the Philippines, or any of its agencies and
political subdivisions."25
A new section was added to the charter, now known as Section
13, R.A. No. 6395, which declares the non-profit character and
tax exemptions of NPC as follows:
"The Corporation shall be nonprofit and shall devote all its
returns from its capital investment, as well as excess revenues
from its operation, for expansion. To enable the Corporation to
pay its indebtedness and obligations and in furtherance and
effective implementation of the policy enunciated in Section
one of this Act, the Corporation is hereby declared exempt:
"(a) From the payment of all taxes, duties, fees, imposts,
charges, costs and service fees in any court or administrative
proceedings in which it may be a party, restrictions and duties to
the Republic of the Philippines, its provinces, cities,
municipalities and other government agencies and
instrumentalities;
"(b) From all income taxes, franchise taxes and realty taxes to be
paid to the National Government, its provinces, cities,
municipalities and other government agencies and
instrumentalities;
"(c) From all import duties, compensating taxes and advanced
sales tax, and wharfage fees on import of foreign goods required
for its operations and projects; and
"(d) From all taxes, duties, fees, imposts and all other charges
imposed by the Republic of the Philippines, its provinces, cities,
municipalities and other government agencies and
instrumentalities, on all petroleum products used by the
Corporation in the generation, transmission, utilization, and sale
of electric power." 26
On November 7, 1972, Presidential Decree No. 40 was issued
declaring that the electrification of the entire country was one
of the primary concerns of the country. And in connection with
this, it was specifically stated that:
"The setting up of transmission line grids and the construction of
associated generation facilities in Luzon, Mindanao and major
islands of the country, including the Visayas, shall be the
responsibility of the National Power Corporation (NPC) as the
authorized implementing agency of the State." 27
"x x x
39
It is the ultimate objective of the State for the NPC to own and
operate as a single integrated system all generating facilities
supplying electric power to the entire area embraced by any grid
set up by the NPC." 28
On January 22, 1974, P.D. No. 380 was issued giving extra
powers to the NPC to enable it to fulfill its role under aforesaid
P.D. No. 40. Its authorized capital stock was raised to
P2,000,000,000.00, 29 its total domestic indebtedness was
pegged at a maximum of P3,000,000,000.00 at any one time, 30
and the NPC was authorized to borrow a total of
US$1,000,000,000.00 31 in foreign loans.
The relevant tax exemption provision for these foreign loans
states as follows:
"The loans, credits and indebtedness contracted under this
subsection and the payment of the principal, interest and other
charges thereon, as well as the importation of machinery,
equipment, materials, supplies and services, by the Corporation,
paid from the proceeds of any loan, credit or indebtedness
incurred under this Act, shall also he exempt from all direct and
indirect taxes, fees, imposts, other charges and restrictions,
including import restrictions previously and presently imposed,
and to be imposed by the Republic of the Philippines, or any of
its agencies and political subdivisions. "32 (Emphasis supplied)
Sections 13(a) and 13(d) of R.A. No. 6395 were amended to read
as follows:
"(a) From the payment of all taxes, duties, fees, imposts, charges
and restrictions to the Republic of the Philippines, its provinces,
cities, municipalities and other government agencies and
instrumentalities including the taxes, duties, fees, imposts and
other charges provided for under the Tariff and Customs Code
of the Philippines, Republic Act Numbered Nineteen Hundred
Thirty-Seven, as amended, and as further amended by
Presidential Decree No. 34, dated October 27, 1972, and
Presidential Decree No. 69, dated November 24, 1972, and costs
and service fees in any court or administrative proceedings in
which it may be a party;
"x x x
(d) From all taxes, duties, fees, imposts, and all other charges
imposed directly or indirectly by the Republic of the Philippines,
its provinces, cities, municipalities and other government
agencies and instrumentalities, on all petroleum products used
by the Corporation in the generation, transmission, utilization
and sale of electric power." 33 (Emphasis supplied)
On February 26, 1970, P.D. No. 395 was issued removing certain
restrictions in the NPC’s sale of electricity to its different
customers. 34 No tax exemption provision was amended,
deleted or added.
On July 31, 1975, P.D. No. 758 was issued directing that
P200,000,000.00 would be appropriated annually to cover the
unpaid subscription of the Government in the NPC authorized
capital stock, which amount would be taken from taxes accruing
to the General Fund of the Government, proceeds from loans,
issuance of bonds, treasury bills or notes to be issued by the
Secretary of Finance for this particular purpose. 35
On May 27, 1970, P.D. No. 938 was issued
"(I)n view of the accelerated expansion programs for generation
and transmission facilities which includes nuclear power
generation, the present capitalization of National Power
Corporation (NPC) and the ceilings for domestic and foreign
borrowings are deemed insufficient; 36
"x x x
"(I)n the application of the tax exemption provisions of the
Revised Charter, the non-profit character of NPC has not been
fully utilized because of restrictive interpretation of the taxing
agencies of the government on said provisions; 37
"x x x
"(I)n order to effect the accelerated expansion program and
attain the declared objective of total electrification of the
country, further amendments of certain sections of Republic Act
No. 6395, as amended by Presidential Decrees Nos. 380, 395
and 758, have become imperative;" 38
Thus NPC’s capital stock was raised to P8,000,000,000.00, 39
the total domestic indebtedness ceiling was increased to
P12,000,000,000.00, 40 the total foreign loan ceiling was raised
to US$4,000,000,000.00 41 and Section 13 of R.A. No. 6395, was
amended to read as follows:
"The Corporation shall be non-profit and shall devote all its
returns from its capital investment as well as excess revenues
from its operation, for expansion. To enable the Corporation to
pay its indebtedness and obligations and in furtherance and

effective implementation of the policy enunciated in Section
one of this Act, the Corporation, including its subsidiaries, is
hereby declared exempt from the payment of all forms of taxes,
duties, fees, imposts as well as costs and service fees including
filing fees, appeal bonds, supersedeas bonds, in any court or
administrative proceedings." 42
II
On the other hand, the pertinent tax laws involved in this
controversy are P.D. Nos. 882, 1177,1931 and Executive Order
No. 93 (S’86).
On January 30, 1976, P.D. No. 882 was issued withdrawing the
tax exemption of NPC with regard to its imports as follows:
"WHEREAS, importations by certain government agencies,
including government-owned or controlled corporation, are
exempt from the payment of customs duties and compensating
tax; and
"WHEREAS, in order to reduce foreign exchange spending and to
protect domestic industries, it is necessary to restrict and
regulate such tax-free importations.
"NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the
Philippines, by virtue of the powers vested in me by the
Constitution, do hereby decree and order the following:
"SECTION 1. All importations of any government agency,
including government-owned or controlled corporations which
are exempt from the payment of customs duties and internal
revenue taxes, shall be subject to the prior approval of an Inter-
Agency Committee which shall insure compliance with the
following conditions:
‘(a) That no such article of local manufacture are available in
sufficient quantity and comparable quality at reasonable prices;
(b) That the articles to be imported are directly and actually
needed and will be used exclusively by the grantee of the
exemption for its operations and projects or in the conduct of its
functions; and
(c) The shipping documents covering the importation are in the
name of the grantee to whom the goods shall be delivered
directly by customs authorities.
"x x x
40
"SEC. 3. The Committee shall have the power to regulate and
control the tax-free importation of government agencies in
accordance with the conditions set forth in Section 1 hereof and
the regulations to be promulgated to implement the provisions
of this Decree. Provided, however, That any government agency
or government-owned or controlled corporation, or any local
manufacturer or business firm adversely affected by any
decision or ruling of the Inter-Agency Committee may file an
appeal with the Office of the President within ten days from the
date of notice thereof. . . .
"x x x
"SEC. 6. . . . . Section 13 of Republic Act No. 6395; xxx. and all
similar provisions of all general and special laws and decrees are
hereby amended accordingly.
"x x x."
On July 30, 1977, P.D. No. 1177 was issued as it was
". . . declared the policy of the State to formulate and implement
a National Budget that is an instrument of national
development, reflective of national objectives, strategies and
plans. The budget shall be supportive of and consistent with the
socio-economic development plan and shall be oriented
towards the achievement of explicit objectives and expected
results, to ensure that funds are utilized and operations are
conducted effectively, economically and efficiently. The national
budget shall be formulated within the context of a regionalized
government structure and of the totality of revenues and other
receipts, expenditures and borrowings of all levels of
government-owned or controlled corporations. The budget shall
likewise be prepared within the context of the national long-
term plan and of a long-term budget program." 43
In line with such policy, the law decreed that
"All units of government, including government-owned or
controlled corporations, shall pay income taxes, customs duties
and other taxes and fees as are imposed under revenue laws:
provided, that organizations otherwise exempted by law from
the payment of such taxes/duties may ask for a subsidy from the
General Fund in the exact amount of taxes/duties due: provided,
further, that a procedure shall be established by the Secretary of
Finance and the Commissioner of the Budget, whereby such
subsidies shall automatically be considered as both revenue and
expenditure of the General Fund." 44
The law also declared that —
" [A]ll laws, decrees, executive orders, rules and regulations or
parts thereof which are inconsistent with the provisions of the
Decree are hereby repealed and/or modified accordingly." 45
On June 11, 1984, most likely due to the economic morass the
Government found itself in after the Aquino assassination, P.D.
No. 1931 was issued to reiterate that:
"WHEREAS, Presidential Decree No. 1177 has already expressly
repealed the grant of tax privileges to any government-owned
or controlled corporation and all other units of government;" 46
and since there was a
". . . need for government-owned or controlled corporations and
all other units of government enjoying tax privileges to share in
the requirements of development, fiscal or otherwise, by paying
the duties, taxes and other charges due from them." 47
it was decreed that:
"SECTION 1. The provisions of special or general law to the
contrary notwithstanding, all exemptions from the payment of
duties, taxes, fees, imposts and other charges heretofore
granted in favor of government-owned or controlled
corporations including their subsidiaries, are hereby withdrawn.
"SEC. 2. The President of the Philippines and/or the Minister of
Finance, upon the recommendation of the Fiscal Incentives
Review Board created under Presidential Decree No. 776, is
hereby empowered to restore, partially or totally, the
exemptions withdrawn by Section 1 above, or otherwise revise
the scope and coverage of any applicable tax and duty, taking
into account, among others, any or all of the following:
1) The effect on the relative price levels;
2) The relative contribution of the corporation to the revenue
generation effort;
3) The nature of the activity in which the corporation is engaged
in; or
4) In general the greater national interest to be served.
x x x

SEC. 5. The provisions of Presidential Decree No. 1177 as well as
all other laws, decrees, executive orders, administrative orders,
rules, regulations or parts thereof which are inconsistent with
this Decree are hereby repealed, amended or modified
accordingly.chanrobles.com : virtual law library
On December 17, 1986, E.O. No. 93 (S’86) was issued with a
view to correct presidential restoration or grant of tax
exemption to other government and private entities without
benefit of review by the Fiscal Incentives Review Board, to wit:
"WHEREAS, Presidential Decree Nos. 1931 and 1955 issued on
June 11, 1984 and October 14, 1984, respectively, withdrew the
tax and duty exemption privileges, including the preferential tax
treatment of government and private entities with certain
exceptions, in order that the requirements of national economic
development, in terms of fiscal and other resources, may be met
more adequately;
"x x x
"WHEREAS, in addition to those whose tax and duty exemption
privileges were restored by the Fiscal Incentives Review Board
(FIRB), a number of affected entities, government and private,
had their tax and duty exemption privileges restored or granted
by Presidential action without benefit of review by the Fiscal
Incentives Review Board (FIRB);
"x x x.
Since it was decided that:
" [A]ssistance to government and private entities may be better
provided where necessary by explicit subsidy and budgetary
support rather than tax and duty exemption privileges if only to
improve the fiscal monitoring aspects of government
operations."
it was thus ordered that:
"SECTION 1. The provisions of any general or special law to the
contrary notwithstanding, all tax and duty incentives granted to
government and private entities are hereby withdrawn, except:
a) those covered by the non-impairment clause of the
Constitution;
b) those conferred by effective international agreement to
which the Government of the Republic of the Philippines is a
41
signatory;
c) those enjoyed by enterprises registered with:
(i) the Board of Investment pursuant to Presidential Decree No.
1789, as amended;
(ii) the Export Processing Zone Authority, pursuant to
Presidential Decree No. 66, as amended;
(iii) the Philippine Veterans Investment Development
Corporation Industrial Authority pursuant to Presidential Decree
No. 538, as amended.
d) those enjoyed by the copper mining industry pursuant to the
provisions of letter of Instructions No. 1416;
e) those conferred under the four basic codes namely:
(i) the Tariff and Customs Code, as amended;
(ii) the National Internal Revenue Code, as amended;
(iii) the Local Tax Code, as amended;
(iv) the Real Property Tax Code, as amended;
f) those approved by the President upon the recommendation
of the Fiscal Incentives Review Board.
"SECTION 2. The Fiscal Incentives Review Board created under
Presidential Decree No. 776, as amended, is hereby authorized
to:
a) restore tax and/or duty exemptions withdrawn hereunder in
whole or in part;
b) revise the scope and coverage of tax and/or duty exemption
that may be restored;
c) impose conditions for the restoration of tax and/or duty
exemption;
d) prescribe the date or period of effectivity of the restoration of
tax and/or duty exemption;
e) formulate and submit to the President for approval, a
complete system for the grant of subsidies to deserving
beneficiaries, in lieu of or in combination with the restoration of
tax and duty exemptions or preferential treatment in taxation,
indicating the source of funding therefor, eligible beneficiaries
and the terms and conditions for the grant thereof taking into
consideration the international commitment of the Philippines
and the necessary precautions such that the grant of subsidies
does not become the basis for countervailing action.
"SECTION 3. In the discharge of its authority hereunder, the
Fiscal Incentives Review Board shall take into account any or all
of the following considerations:
a) the effect on relative price levels;
b) relative contribution of the beneficiary to the revenue
generation effort;
c) nature of the activity the beneficiary is engaged; and
d) in general, the greater national interest to be served.
"x x x
"SECTION 5. All laws, orders, issuances, rules and regulations or
parts thereof inconsistent with this Executive Order are hereby
repealed or modified accordingly."
E.O. No. 93 (S’98) was decreed to be effective 48 upon the
promulgation of the rules and regulations, to be issued by the
Ministry of Finance. 49 Said rules and regulations were
promulgated and published in the Official Gazette on February
23, 1987. These became effective on the 15th day after
publication 50 in the Official Gazette, 51 which 15th day was
March 10, 1987.
III
Now, to some definitions. We refer to the very simplistic
approach that all would be lawyers, learn in their TAXATION I
course, which for convenient reference, is as follows:
Classifications or Kinds of Taxes:
According to Persons who pay or who bear the burden:
a. Direct Tax — that where the person supposed to pay the tax
really pays it, WITHOUT transferring the burden to someone
else.
Examples: Individual income tax, corporate income tax, transfer

taxes (estate tax, donor’s tax), residence tax, immigration tax
b. Indirect Tax — that where the tax is imposed upon goods
BEFORE reaching the consumer who ultimately pays for it, not
as a tax, but as a part of the purchase price.
Examples: The internal revenue indirect taxes (specific tax,
percentage taxes, VAT) and the tariff and customs indirect taxes
(import duties, special import tax and other dues) 52
IV
To simplify matters, the issues raised by petitioner in his motion
for reconsideration can be reduced to the following:
(1) What kind of tax exemption privileges did NPC have?
(2) For what periods in time were these privileges being
enjoyed?
(3) If there are taxes to be paid, who shall pay for these taxes?.
V
Petitioner contends that P.D. No. 938 repealed the indirect tax
exemption of NPC as the phrase "all forms of taxes, etc.," in its
Section 10, amending Section 13, R.A. No. 6395, as amended by
P.D. No. 380, does not expressly include "indirect taxes."
His point is not well-taken.
A chronological review of the NPC laws will show that it has
been the lawmaker’s intention that the NPC was to be
completely tax exempt from all forms of taxes direct and
indirect.
NPC’s tax exemption at first applied to the bonds it was
authorized to float to finance its operations upon its creation by
virtue of C.A. No. 120.
When the NPC was authorized to contract with the IBRD for
foreign financing, any loans obtained were to be completely tax
exempt.
After the NPC was authorized to borrow from other sources of
funds — aside from issuance of bonds — it was again specifically
exempted from all types of taxes "to facilitate payment of its
indebtedness." Even when the ceilings for domestic and foreign
borrowings were periodically increased, the tax exemption
42
privileges of the NPC were maintained.
NPC’s tax exemption from real estate taxes was, however,
specifically withdrawn by Rep. Act No. 987, as above stated. The
exemption was, however, restored by R.A. No. 6395.
Section 13, R.A.. No. 6395, was very comprehensive in its
enumeration of the tax exemptions allowed NPC. Its Section
13(d) is the starting point of this bone of contention among the
parties. For easy reference, it is reproduced as follows:
" [T]he Corporation is hereby declared exempt:
"x x x
"(d) From all taxes, duties, fees, imposts and all other charges
imposed by the Republic of the Philippines, its provinces, cities,
municipalities and other government agencies and
instrumentalities, on all petroleum products used by the
Corporation in the generation, transmission, utilization, and sale
of electric power."
P.D. No. 380 added the phrase "directly or indirectly" to said
Section 13(d), which now reads as follows:
"x x x
"(d) From all taxes, duties, fees, imposts, and all other charges
imposed directly or indirectly by the Republic of the Philippines,
its provinces, cities, municipalities and other government
agencies and instrumentalities, on all petroleum products used
by the Corporation in the generation, transmission, utilization
and sale of electric power." (Emphasis supplied)
Then came P.D. No. 938 which amended Sec. 13 (a), (o), (c) and
(d) into one very simple paragraph as follows:
"The Corporation shall be non-profit and shall devote all its
returns from its capital investment as well as excess revenues
from its operation, for expansion. To enable the Corporation to
pay its indebtedness and obligations and in furtherance and
effective implementation of the policy enunciated in Section
one of this Act, the Corporation, including its subsidiaries, is
hereby declared exempt from the payment of ALL FORMS OF
taxes, duties, fees, imposts as well as costs and service fees
including filing fees, appeal bonds, supersedeas bonds, in any
court or administrative proceedings." (Emphasis supplied)
Petitioner reminds Us that:
"It must be borne in mind that Presidential Decree Nos. 380 and
938 were issued by one man, acting as both the Executive and
legislative. 53
"x x x
" [S]ince both presidential decrees were made by the same
person, it would have been very easy for him to retain the same
or similar language used in P.D. No. 380 in P.D. No. 938 if his
intention were to preserve the indirect tax exemption of NPC.
54
Actually, P.D. No. 938 attests to the ingenuousness of then
President Marcos no matter what his faults were. It should be
noted that Section 13, R.A. No. 6395, provided for tax
exemptions for the following terms:
13(a): court or administrative proceedings;
13(b): income, franchise, realty taxes;
13(c): import of foreign goods required for its operations and
projects;
13(d): petroleum products used in generation of electric power.
P.D. No. 938 lumped up 13(b), 13(c) and 13(d) into the phrase
"ALL FORMS OF TAXES, ETC.,", included 13(a) under the "as well
as" clause and added PNOC subsidiaries as qualified for tax
exemptions.
This is the only conclusion one can arrive at if he has read all the
NPC laws in the order of enactment or issuance as narrated
above in part I hereof. President Marcos must have considered
all the NPC statutes from C.A. No. 120 up to its latest
amendments, P.D. No. 380, P.D. No. 395 and P.D. No. 759, AND
came up 55 with a very simple Section 13, R.A. No. 6395, as
amended by P.D. No. 938.
One common theme in all these laws is that the NPC must be
enabled to pay its indebtedness 56 which, as of P.D. No. 938,
was P12 Billion in total domestic indebtedness, at any one time,
and US$4 Billion in total foreign loans at any one time. The NPC
must be and has to be exempt from all forms of taxes if this goal
is to be achieved.
By virtue of P.D. No. 938, NPC’s capital stock was raised to P 8
Billion. It must be remembered that to pay for the government

share in its capital stock P.D. No. 758 was issued mandating that
P200 Million would be appropriated annually to cover the said
unpaid subscription of the Government in NPC’s authorized
capital stock. And significantly one of the sources of this annual
appropriation of P200 million is TAX MONEY accruing to the
General Fund of the Government. It does not stand to reason
then that former President Marcos would order P200 Million to
be taken partially or totally from tax money to be used to pay
the Government subscription in the NPC, on one hand, and then
order the NPC to pay all its indirect taxes, on the other.
The above conclusion that then President Marcos lumped up
Sections 13 (b), 13 (c) and 13 (d) into the phrase "ALL FORMS
OF" is supported by the fact that he did not do the same for the
tax exemption provision for the foreign loans to be incurred.
The tax exemption on foreign loans found in Section 8(b), R.A.
No. 6395, reads as follows:
"The loans, credits and indebtedness contracted under this
subsection and the payment of the principal, interest and other
charges thereon, as well as the importation of machinery,
equipment, materials and supplies by the Corporation, paid
from the proceeds of any loan, credit or indebtedness incurred
under this Act, shall also be exempt from all taxes, fees, imposts,
other charges and restrictions, including import restrictions, by
the Republic of the Philippines, or any of its agencies and
political subdivisions." 57
The same was amended by P.D. No. 380 as follows:
"The loans, credits and indebtedness contracted under this
subsection and the payment of the principal, interest and other
charges thereon, as well as the importation of machinery,
equipment, materials, supplies and services, by the Corporation,
paid from the proceeds of any loan, credit or indebtedness
incurred under this Act, shall also be exempt from all direct and
indirect taxes, fees, imposts, other charges and restrictions,
including import restrictions previously and presently imposed,
and to be imposed by the Republic of the Philippines, or any of
its agencies and political subdivisions. "58 (Emphasis supplied)
P.D. No. 938 did not amend the same 59 and so the tax
exemption provision in Section 8 (b), R.A. No. 6395, as amended
by P.D. No. 380, still stands. Since the subject matter of this
particular Section 8 (b) had to do only with loans and machinery
imported, paid for from the proceeds of these foreign loans,
THERE WAS NO OTHER SUBJECT MATTER TO LUMP IT UP WITH,
and so, the tax exemption stood as is with the express mention
43
of "direct and indirect" tax exemptions. And this "direct and
indirect" tax exemption privilege extended to "taxes, fees,
imposts, other charges xxx to be imposed" in the future —
surely, an indication that the lawmakers wanted the NPC to be
exempt from ALL FORMS of taxes — direct and indirect.
It is crystal clear, therefore, that NPC had been granted tax
exemption privileges for both direct and indirect taxes under
P.D. No. 938.
VI
Five (5) years on into the now discredited New Society, the
Government decided to rationalize government receipts and
expenditures by formulating and implementing a National
Budget. 60 The NPC, being a government owned and controlled
corporation had to shed off its tax exemption status privileges
under P.D. No. 1177. It was, however, allowed to ask for a
subsidy from the General Fund in the exact amount of
taxes/duties due.
Actually, much earlier, P.D. No. 882 had already repealed NPC’s
tax-free importation privileges. It allowed, however, NPC to
appeal said repeal with the Office of the President and to avail
of tax-free importation privileges under its Section 1, subject to
the prior approval of an Inter-Agency Committee created by
virtue of said P.D. No. 882. It is presumed that the NPC, being
the special creation of the State, was allowed to continue its tax-
free importations.
This Court notes that petitioner brought to the attention of this
Court, the matter of the abolition of NPC’s tax exemption
privileges by P.D. No. 1177 61 only in his Common
Reply/Comment to Private Respondents’ "Opposition" and
"Comment" to Motion for Reconsideration, four (4) months
AFTER the Motion for Reconsideration had been filed. During
oral arguments heard on July 9, 1992, he proceeded to discuss
this tax exemption withdrawal as explained by then Secretary of
Justice Vicente Abad Santos in Opinion No. 133 (S’77). 62 A
careful perusal of petitioner’s Senate Blue Ribbon Committee
Report No. 474, the basis of the petition at bar, fails to yield any
mention of said P.D. No. 1177’s effect on NPC’s tax exemption
privileges. 63 Applying by analogy Pulido v. Pablo, 64 the Court
declares that the matter of P.D. No. 1177 abolishing NPC’s tax
exemption privileges was not seasonably invoked 65 by the
petitioner.
Be that as it may, the Court still has to discuss the effect of P.D.
No. 1177 on the NPC tax exemption privileges as this statute has
been reiterated twice in P.D. No. 1931. The express repeal of tax
privileges of any government-owned or controlled corporation
(GOCC), NPC included, was reiterated in the fourth whereas
clause of P.D. No. 1931’s preamble. The subsidy provided for in
Section 23, P.D. No. 1177, being inconsistent with Section 2, P.D.
No. 1931, was deemed repealed as the Fiscal Incentives
Revenue Board was tasked with recommending the partial or
total restoration of tax exemptions withdrawn by Section 1, P.D.
No. 1931.
The records before Us do not indicate whether or not NPC asked
for the subsidy contemplated in Section 23, P.D. No. 1177.
Considering, however, that under Section 16 of P.D. No. 1177,
NPC had to submit to the Office of the President its request for
the P200 million mandated by P.D. No. 758 to be appropriated
annually by the Government to cover its unpaid subscription to
the NPC authorized capital stock and that under Section 22, of
the same P.D. No. NPC had to likewise submit to the Office of
the President its internal operating budget for review due to
capital inputs of the government (P.D. No. 758) and to the
national government’s guarantee of the domestic and foreign
indebtedness of the NPC, it is clear that NPC was covered by
P.D. No. 1177.
There is reason to believe that NPC availed of the subsidy
granted tax exempt GOCCs that suddenly found themselves
having to pay taxes. It will be noted that Section 23, P.D. No.
1177, mandated that the Secretary of Finance and the
Commissioner of the Budget had to establish the necessary
procedures to accomplish the tax payment/tax subsidy scheme
of the Government. In effect, NPC did not put out any cash to
pay any tax as it get from the General Fund the amounts
necessary to pay the different revenue collectors for the taxes it
had to pay.
In his Memorandum filed July 16,1992, petitioner submits:
" [T]hat with the enactment of P.D. No. 1177 on July 30, 1977,
the NPC lost all its duty and tax exemptions, whether direct or
indirect. And so there was nothing to be withdrawn or to be
restored under P.D. No. 1931, issued on June 11, 1984. This is
evident from sections 1 and 2 of said P.D. No 1931 which reads:
‘Section 1. The provisions of special or general law to the
contrary notwithstanding, all exemptions from the payment of
duties, taxes, fees, imports and other charges heretofore
granted in favor of government-owned or controlled
corporations including their subsidiaries are hereby withdrawn.

‘Section 2. The President of the Philippines and/or the Minister
of Finance, upon the recommendation of the Fiscal Incentives
Review Board created under P.D. No. 776, is hereby empowered
to restore partially or totally, the exemptions withdrawn by
section 1 above. . . .’
"Hence, P.D. No. 1931 did not have any effect nor did it change
NPC’s status. Since it had already lost all its tax exemptions
privilege with the issuance of P.D. No. 1177 seven (7) years
earlier or on July 30, 1977, there were no tax exemptions to be
withdrawn by section 1 which could later be restored by the
Minister of Finance upon the recommendation of the FIRB
under section 2 of P.D. No. 1931. Consequently, FIRB resolutions
No. 10-85, and 1-86, were all illegally and invalidly issued since
FIRB acted beyond their statutory authority by creating and not
merely restoring the tax exempt status of NPC. The same is true
for FIRB Res. No. 1787 which restored NPC’s tax exemption
under E.O. No. 93 which likewise abolished all duties and tax
exemptions but allowed the President upon recommendation of
the FIRB to restore those abolished."
The Court disagrees.
Applying by analogy the weight of authority that:
"When a revised and consolidated act reenacts in the same or
substantially the same terms the provisions of the act or acts so
revised and consolidated, the revision and consolidation shall be
taken to be a continuation of the former act or acts, although
the former act or acts may be expressly repealed by the revised
and consolidated act; and all rights and liabilities under the
former act or acts are preserved and may be enforced." 66
the Court rules that when P.D. No. 1931 basically reenacted in
its Section 1 the first half of Section 23, P.D. No. 1177, on
withdrawal of tax exemption privileges of all GOCCs, said Section
1, P.D. No. 1931 was deemed to be a continuation of the first
half of Section 23, P.D. No. 1177, although the second half of
Section 23, P.D. No. 1177, on the subsidy scheme for former tax
exempt GOCCs, had been expressly repealed by Section 2 with
its institution of the FIRB recommendation of partial/total
restoration of tax exemption privileges.
The NPC tax exemption privileges withdrawn by Section 1, P.D.
No. 1931, were, therefore, the same NPC tax exemption
privileges withdrawn by Section 23, P.D. No. 1177. NPC could no
longer obtain a subsidy for the taxes it had to pay. It could,
however, under P.D. No. 1931, ask for a total restoration of its
tax exemption privileges, which it did, and the same were
44
granted under FIRB Resolutions Nos. 10-85 67 and 1-86 68 as
approved by the Minister of Finance.
Consequently, contrary to petitioner’s submission, FIRB
Resolutions Nos. 10-85 and 1-86 were both legally and validly
issued by the FIRB pursuant to P.D. No. 1931. FIRB did not
create NPC’s tax exemption status but merely restored it. 69
Some quarters have expressed the view that P.D. No 1931 was
legally issued under the now rather infamous Amendment No. 6
70 as there was no showing that President Marcos’
encroachment on legislative prerogatives was justified under the
then prevailing condition that he could legislate "only if the
Batasang Pambansa ‘failed or was unable to act inadequately on
any matter that in his judgment required immediate action’ to
meet the ‘exigency’." 71
Actually under said Amendment No. 6, then President Marcos
could issue decrees not only when the Interim Batasang
Pambansa failed or was unable to act adequately on any matter
for any reason that in his (Marcos’) judgment required
immediate action, but also when there existed a grave
emergency or a threat or thereof. It must be remembered that
said Presidential Decree was issued only around nine (9) months
after the Philippines unilaterally declared a moratorium on its
foreign debt payments 72 as a result of the economic crisis
triggered by a loss of confidence in the government brought
about by the Aquino assassination. The Philippines was then
trying to reschedule its debt payments. 73 One of the big
borrowers was the NPC 74 which had a US$2.1 billion white
elephant of a Bataan Nuclear Power Plant on its back. 75 From
all indications, it must have been this grave emergency of a debt
rescheduling which compelled Marcos to issue P.D. No. 1931,
under his Amendment 6 power. 76
The rule, therefore, that under the 1973 Constitution "no law
granting a tax exemption shall be passed without the
concurrence of a majority of the Batasang Pambansa" 77 does
not apply as said P.D. No. 1931 was not passed by the Interim
Batasang Pambansa but by then President Marcos under his
Amendment No. 6 power.
P.D. No. 1931 was, therefore, validly issued by then President
Marcos under his Amendment No. 6 authority.
Under E.O. No. 93 (S’86) NPC’s tax exemption privileges were
again clipped by, this time, President Aquino. Its Section 2
allowed the NPC to apply for the restoration of its tax exemption
privileges. The same was granted under FIRB Resolution NO. 17-
87 78 dated June 24, 1987 which restored NPC’s tax exemption
privileges effective, starting March 10, 1987, the date of
effectivity of E.O. No. 93 (S’86).
FIRB Resolution No. 17-87 was approved by the President on
October 5, 1987. 79 There is no indication, however, from the
records of the case whether or not similar approvals were given
by then President Marcos for FIRB Resolutions Nos. 10-85 and 1-
86. This has led some quarters to believe that a "travesty of
justice" might have occurred when the Ministry of Finance
approved his own recommendation as Chairman of the Fiscal
Incentives Review Board as what happened in Zambales
Chromite v. Court of Appeals 80 when the Secretary of
Agriculture and Natural Resources approved a decision earlier
rendered by him when he was the Director of Mines, 81 and in
Anzaldo v. Clave 82 where Presidential Executive Assistant Clave
affirmed, on appeal to Malacañang, his own decision as
Chairman of the Civil Service Commission. 83
Upon deeper analysis, the question arises as to whether one can
talk about "due process" being violated when FIRB Resolutions
Nos. 10-85 and 1-86 were approved by the Minister of Finance
when the same were recommended by him in his capacity as
Chairman of the Fiscal Incentives Review Board. 84
In Zambales Chromite and Anzaldo, two (2) different parties
were involved: mining groups and scientist-doctors,
respectively. Thus, there was a need for procedural due process
to be followed.
In the case of the tax exemption restoration of NPC, there is no
other comparable entity — not even a single public or private
corporation — whose rights would be violated if NPC’s tax
exemption privileges were to be restored. while there might
have been a MERALCO before Martial Law, it is of public
knowledge that the MERALCO generating plants were sold to
the NPC in line with the State policy that NPC was to be the
State implementing arm for the electrification of the entire
country. Besides, MERALCO was limited to Manila and its
environs. And as of 1984, there was no more MERALCO — as a
producer of electricity — which could have objected to the
restoration of NPC’s tax exemption privileges.
It should be noted that NPC was not asking to be granted tax
exemption privileges for the first time. It was just asking that its
tax exemption privileges be restored. It is for these reasons that,
at least in NPC’s case, the recommendation and approval of
NPC’s tax exemption privileges under FIRB Resolution Nos. 10-
85 and 1-86, done by the same person acting in his dual

capacities as Chairman of the Fiscal Incentives Review Board and
Minister of Finance, respectively, do not violate procedural due
process.
While as above-mentioned, FIRB Resolution No. 17-87 was
approved by President Aquino on October 5, 1987, the view has
been expressed that President Aquino, at least with regard to
E.O. 93 (S’86), had no authority to sub-delegate to the FIRB,
which was allegedly not a delegate of the legislature, the power
delegated to her thereunder.
A misconception must be cleared up.
When E.O. No. 93 (S’86) was issued, President Aquino was
exercising both Executive and Legislative powers. Thus, there
was no power delegated to her, rather it was she who was
delegating her power. She delegated it to the FIRB, which, for
purposes of E.O. No. 93 (S’56), is a delegate of the legislature.
Clearly, she was not a sub-delegating her power.
And E.O. No. 93 (S’56), as a delegating law, was complete in
itself — it set forth the policy to be carried out 85 and it fixed
the standard to which the delegate had to conform in the
performance of his functions, 86 both qualities having been
enunciated by this Court in Pelaez v. Auditor General. 87
Thus, after all has been said, it is clear that the NPC had its tax
exemption privileges restored from June 11, 1984 up to the
present..
VII
The next question that projects itself is — who pays the tax? The
answer to the question could be gleaned from the manner by
which the Commissaries of the Armed Forces of the Philippines
sell their goods.chanrobles lawlibrary : rednad
By virtue of P.D. No. 83, 88 veterans, members of the Armed
Forces of the Philippines, and their depend ents buy groceries
and other goods free of all taxes and duties if bought from any
AFP Commissaries.
In practice, the AFP Commissary suppliers probably treat the
unchargeable specific, ad valorem and other taxes on the goods
earmarked for AFP Commissaries as an added cost of operation
and distribute it over the total units of goods sold as it would
any other cost. Thus, even the ordinary supermarket buyer
probably pays for the specific, ad valorem and other taxes which
these suppliers do not charge the AFP Commissaries. 89
45
IN MUCH THE SAME MANNER, it is clear that private
respondents-oil companies have to absorb the taxes they add to
the bunker fuel oil they sell to NPC. It should be stated at this
juncture that, as early as May 14,1954, the Secretary of Justice
rendered an opinion, 90 wherein he stated and We quote:
"x x x
"Republic Act No. 358 exempts the National Power Corporation
from ‘all taxes, duties, fees, imposts, charges, and restrictions of
the Republic of the Philippines and its provinces. cities, and
municipalities.’ This exemption is broad enough to include all
taxes, whether direct or indirect, which the National Power
Corporation may be required to pay, such as the specific tax on
petroleum products. That it is indirect is of no amount [should
be of no moment], for it is the corporation that ultimately pays
it. The view which refuses to accord the exemption because the
tax is first paid by the seller disregards realities and gives more
importance to form than to substance. Equity and law always
exalt substance over form.
"x x x
"Tax exemptions are undoubtedly to be construed strictly but
not so grudgingly as to defeat their purpose. It is common
knowledge that many impositions taxpayers have to pay are in
the nature of indirect taxes. To limit the exemption granted the
National Power Corporation to direct taxes notwithstanding the
general and broad language of the statute will be to thwart the
legislative intention in giving exemption from all forms of taxes
and impositions without distinguishing between those that are
direct and those that are not.(Emphasis supplied).
In view of all the foregoing, the Court rules and declares that the
oil companies which supply bunker fuel oil to NPC have to pay
the taxes imposed upon said bunker fuel oil sold to NPC. By the
very nature of indirect taxation, the economic burden of such
taxation is expected to be passed on through the channels of
commerce to the user or consumer of the goods sold. Because,
however, the NPC has been exempted from both direct and
indirect taxation, the NPC must be held exempted from
absorbing the economic burden of indirect taxation. This means,
on the one hand, that the oil companies which wish to sell to
NPC absorb all or part of the economic burden of the taxes
previously paid to BIR, which they could shift to NPC if NPC did
not enjoy exemption from indirect taxes. This means also, on
the other hand, that the NPC may refuse to pay that part of the
"normal" purchase price of bunker fuel oil which represents all
or part of the taxes previously paid by the oil companies to BIR.
If NPC nonetheless purchases such oil from the oil companies
because to do so may be more convenient and ultimately less
costly for NPC than NPC itself importing and hauling and storing
the oil from overseas — NPC is entitled to be reimbursed by the
BIR for that part of the buying price of NPC which verifiably
represents the tax already paid by the oil company-vendor to
the BIR. It should be noted at this point in time that the whole
issue of who WILL pay these indirect taxes HAS BEEN RENDERED
moot and academic by E.O. No. 195 issued on June 16, 1987 by
virtue of which the ad valorem tax rate on bunker fuel oil was
reduced to ZERO (0%) PER CENTUM. Said E.O. No. 195 reads as
follows:
"EXECUTIVE ORDER NO. 195.
"AMENDING PARAGRAPH (b) OF SECTION 128 OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, BY
REVISING THE EXCISE TAX RATES OF CERTAIN PETROLEUM
PRODUCTS.
"x x x
"SECTION 1. Paragraph (b) of Section 128 of the National
Internal Revenue Code, as amended, is hereby amended to read
as follows:
‘Par. (b) — For products subject to ad valorem tax only:
PRODUCT AD VALOREM
TAX RATE
‘1. . . .
‘2. . . .
‘3. . . .
‘4. Fuel oil, commercially known as bunker oil and on similar fuel
oils having more or less the same generating power
......................................0%
x x x
"SEC. 3. This Executive Order shall take effect immediately.
"Done in the City of Manila, this 17th day of June, in the year of
Our Lord, nineteen hundred and eighty-seven." (Emphasis

supplied).
The oil companies can now deliver bunker fuel oil to NPC
without having to worry about who is going to bear the
economic burden of the ad valorem taxes. What this Court will
now dispose of are petitioner’s complaints that some indirect
tax money has been illegally refunded by the Bureau of Internal
Revenue to the NPC and that more claims for refunds by the
NPC are being processed for payment by the BIR. A case in point
is the Tax Credit Memo issued by the Bureau of Internal
Revenue in favor of the NPC last July 7, 1986 for P58,020,110.79
which were for "erroneously paid specific and ad valorem taxes
during the period from October 31, 1984 to April 27, 1985." 91
Petitioner asks Us to declare this Tax Credit Memo illegal as the
PNC did not have indirect tax exemptions with the enactment of
P.D. No. 938. As We have already ruled otherwise, the only
questions left are whether NPC is entitled to a tax refund for the
tax component of the price of the bunker fuel oil purchased
from Caltex (Phils.) Inc. and whether the Bureau of Internal
Revenue properly refunded the amount to NPC.
After P.D. No. 1931 was issued on June 11, 1984 withdrawing
the tax exemptions of all GOCCs — NPC included, it was only on
May 5, 1985 when the BIR issued its letter authority to the NPC
authorizing it to withdraw tax-free bunker fuel oil from the oil
companies pursuant to FIRB Resolution No. 1O-85.92 Since the
tax exemption restoration was retroactive to June 11,1984 there
was a need, therefore, to recover said amount as Caltex
(Phils.)Inc. had already paid the BIR the specific and ad valorem
taxes on the bunker oil it sold NPC during the period above
indicated and had billed NPC correspondingly. 93 It should be
noted that the NPC, in its letter-claim dated September 11,1985
to the Commissioner of the Bureau of Internal Revenue DID NOT
CATEGORICALLY AND UNEQUIVOCALLY STATE that it itself paid
the P55,020,110.79 as part of the bunker fuel oil price it
purchased from Caltex (Phils.) Inc. 94
The law governing recovery of erroneously or illegally collected
taxes is Section 230 of the National Internal Revenue Code of
1977, as amended, which reads as follows:
"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
46
may he 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."
x x x actually been paid previously by the oil companies to the BIR.
Inasmuch as NPC filed its claim for P58,020,110.79 on
September 11, 1985, 95 the Commissioner correctly issued the
Tax Credit Memo in view of NPC’s indirect tax exemption.
Petitioner, however, asks Us to restrain the Commissioner from
acting favorably on NPC’s claim for P410,580,000.00 which
represents specific and ad valorem taxes paid by the oil
companies to the BIR from June 11, 1984 to the early part of
1986. 96
A careful examination of petitioner’s pleadings and annexes
attached thereto does not reveal when the alleged claim for a
P410,580,000.00 tax refund was filed. It is only stated in
paragraph No. 2 of the Deed of Assignment 97 executed by and
between NPC and Caltex (Phils.) Inc., as follows:
"That the ASSIGNOR (NPC) has a pending tax credit claim with
the Bureau of Internal Revenue amounting to P442,887,716.16,
P58,020,110.79 of which is due to Assignor’s oil purchases from
the Assignee (Caltex [Phils.] Inc.)"
Actually, as the Court sees it, this is a clear case of a "Mexican
standoff." We cannot restrain the BIR from refunding said
amount because of Our ruling that NPC has both direct and
indirect tax exemption privileges. Neither can We order the BIR
to refund said amount to NPC as there is no pending petition for
review on certiorari of a suit for its collection before Us. At any
rate, at this point in time, NPC can no longer file any suit to
collect said amount EVEN IF it has previously filed a claim with
the BIR because it is time-barred under Section 230 of the
National Internal Revenue Code of 1977, as amended, which
states:
"In any case, no such suit or proceeding shall be begun after the
expiration of two years from the date of payment of the tax or
penalty REGARDLESS of any supervening cause that may arise
after payment. . . ." (Emphasis and Italics supplied).
The date of the Deed of Assignment is June 6, 1986. Even if We
were to assume that payment by NPC for the amount of
P410,580,000.00 had been made on said date, it is clear that
more than two (2) years had already elapsed from said date. At
the same time, We should note that there is no legal obstacle to
the BIR granting, even without a suit by NPC, the tax credit or
refund claimed by NPC, assuming that NPC’s claim had been
made seasonably, and assuming the amounts covered had
WHEREFORE, in view of all the foregoing, the Motion for
Reconsideration of petitioner is hereby DENIED for lack of merit
and the decision of this Court promulgated on May 31, 1991 is
hereby AFFIRMED.
SO ORDERED.
THIRD DIVISION
G.R. No. 140230 December 15, 2005
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, Respondent.
DECISION
GARCIA, J.:
In this petition for review on certiorari, the Commissioner of
Internal Revenue (Commissioner) seeks the review and reversal
of the September 17, 1999 Decision1 of the Court of Appeals
(CA) in CA-G.R. No. SP 47895, affirming, in effect, the February
18, 1998 decision2 of the Court of Tax Appeals (CTA) in C.T.A.
Case No. 5178, a claim for tax refund/credit instituted by
respondent Philippine Long Distance Company (PLDT) against
petitioner for taxes it paid to the Bureau of Internal Revenue
(BIR) in connection with its importation in 1992 to 1994 of
equipment, machineries and spare parts.
The facts:

PLDT is a grantee of a franchise under Republic Act (R.A.) No.
7082 to install, operate and maintain a telecommunications
system throughout the Philippines.
For equipment, machineries and spare parts it imported for its
business on different dates from October 1, 1992 to May 31,
1994, PLDT paid the BIR the amount of ₱164,510,953.00, broken
down as follows: (a) compensating tax of ₱126,713,037.00;
advance sales tax of ₱12,460,219.00 and other internal revenue
taxes of ₱25,337,697.00. For similar importations made
between March 1994 to May 31, 1994, PLDT paid
₱116,041,333.00 value-added tax (VAT).
On March 15, 1994, PLDT addressed a letter to the BIR seeking a
confirmatory ruling on its tax exemption privilege under Section
12 of R.A. 7082, which reads:
Sec. 12. The grantee … shall be liable to pay the same taxes on
their real estate, buildings, and personal property, exclusive of
this franchise, as other persons or corporations are now or
hereafter may be required by law to pay. In addition thereto,
the grantee, … shall pay a franchise tax equivalent to three
percent (3%) of all gross receipts of the telephone or other
telecommunications businesses transacted under this franchise
by the grantee, its successors or assigns, and the said percentage
shall be in lieu of all taxes on this franchise or earnings thereof:
Provided, That the grantee … shall continue to be liable for
income taxes payable under Title II of the National Internal
Revenue Code pursuant to Sec. 2 of Executive Order No. 72
unless the latter enactment is amended or repealed, in which
case the amendment or repeal shall be applicable thereto.
(Emphasis supplied).
Responding, the BIR issued on April 19, 1994 Ruling No. UN-140-
94,3 pertinently reading, as follows:
PLDT shall be subject only to the following taxes, to wit:
xxx xxx xxx
7. The 3% franchise tax on gross receipts which shall be in lieu of
all taxes on its franchise or earnings thereof.
xxx xxx xxx
47
The "in lieu of all taxes" provision under Section 12 of RA 7082 Less:
clearly exempts PLDT from all taxes including the 10% value-
added tax (VAT) prescribed by Section 101 (a) of the same Code a) Amount already prescribed: xxx
on its importations of equipment, machineries and spare parts
necessary in the conduct of its business covered by the
Total P 38,015,132.00
franchise, except the aforementioned enumerated taxes for
which PLDT is expressly made liable.
b) Waived by petitioner
xxx xxx xxx
(Exh. B-216) ₱ 1,440,874.00 ₱39,456,006.00
In view thereof, this Office … hereby holds that PLDT, is exempt
from VAT on its importation of equipment, machineries and Amount refundable ₱87,257,031.00
spare parts … needed in its franchise operations.
ADVANCE SALES TAX
Armed with the foregoing BIR ruling, PLDT filed on December 2,
1994 a claim4 for tax credit/refund of the VAT, compensating Total amount claimed ₱12,460.219.00
taxes, advance sales taxes and other taxes it had been paying "in
connection with its importation of various equipment, Less amount already prescribed: ₱5,043,828.00
machineries and spare parts needed for its operations". With its
claim not having been acted upon by the BIR, and obviously to
forestall the running of the prescriptive period therefor, PLDT Amount refundable ₱7,416,391.00
filed with the CTA a petition for review,5 therein seeking a
refund of, or the issuance of a tax credit certificate in, the OTHER BIR TAXES
amount of ₱280,552,286.00, representing compensating taxes,
advance sales taxes, VAT and other internal revenue taxes Total amount claimed ₱25,337,697.00
alleged to have been erroneously paid on its importations from
October 1992 to May 1994. The petition was docketed in said
Less amount already prescribed: 11,187,740.00
court as CTA Case No. 5178.
Amount refundable ₱14,149,957.00
On February 18, 1998, the CTA rendered a decision6 granting
PLDT’s petition, pertinently saying:
VALUE ADDED TAX
This Court has noted that petitioner has included in its claim
receipts covering the period prior to December 16, 1992, thus, Total amount claimed ₱116.041,333.00
prescribed and barred from recovery. In conclusion, We find
that the petitioner is entitled to the reduced amount of Less amount waived by petitioner
₱223,265,276.00 after excluding from the final computation
those taxes that were paid prior to December 16, 1992 as they (unaccounted receipts) 1,599,436.00
fall outside the two-year prescriptive period for claiming for a
refund as provided by law. The computation of the refundable
Amount refundable ₱114,441,897.00
amount is summarized as follows:
TOTAL AMOUNT REFUNDABLE ₱223,265,276.00,
COMPENSATING TAX
============
Total amount claimed ₱126,713.037.00
(Breakdown omitted)

and accordingly disposed, as follows:
WHEREFORE, in view of all the foregoing, this Court finds the
instant petition meritorious and in accordance with law.
Accordingly, respondent is hereby ordered to REFUND or to
ISSUE in favor of petitioner a Tax Credit Certificate in the
reduced amount of ₱223,265,276.00 representing erroneously
paid value-added taxes, compensating taxes, advance sales
taxes and other BIR taxes on its importation of equipments (sic),
machineries and spare parts for the period covering the taxable
years 1992 to 1994.
Noticeably, the CTA decision, penned by then Associate Justice
Ramon O. de Veyra, with then CTA Presiding Judge Ernesto D.
Acosta, concurring, is punctuated by a dissenting opinion7 of
Associate Judge Amancio Q. Saga who maintained that the
phrase "in lieu of all taxes" found in Section 12 of R.A. No.
7082, supra, refers to exemption from "direct taxes only" and
does not cover "indirect taxes", such as VAT, compensating tax
and advance sales tax.
In time, the BIR Commissioner moved for a reconsideration but
the CTA, in its Resolution8 of May 7, 1998, denied the motion,
with Judge Amancio Q. Saga reiterating his dissent.9
Unable to accept the CTA decision, the BIR Commissioner
elevated the matter to the Court of Appeals (CA) by way of
petition for review, thereat docketed as CA-G.R. No. 47895.
As stated at the outset hereof, the appellate court, in the herein
challenged Decision10 dated September 17, 1999, dismissed the
BIR’s petition, thereby effectively affirming the CTA’s judgment.
Relying on its ruling in an earlier case between the same parties
and involving the same issue – CA-G.R. SP No. 40811, decided 16
February 1998 – the appellate court partly wrote in its assailed
decision:
This Court has already spoken on the issue of what taxes are
referred to in the phrase "in lieu of all taxes" found in Section 12
of R.A. 7082. There are no reasons to deviate from the ruling
and the same must be followed pursuant to the doctrine
of stare decisis. xxx. "Stare decisis et non quieta movere. Stand
by the decision and disturb not what is settled."
48
Hence, this recourse by the BIR Commissioner on the lone
assigned error that:
THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT
IS EXEMPT FROM THE PAYMENT OF VALUE-ADDED TAXES,
COMPENSATING TAXES, ADVANCE SALES TAXES AND OTHER BIR
TAXES ON ITS IMPORTATIONS, BY VIRTUE OF THE PROVISION IN
ITS FRANCHISE THAT THE 3% FRANCHISE TAX ON ITS GROSS
RECEIPTS SHALL BE IN LIEU OF ALL TAXES ON ITS FRANCHISE OR
EARNINGS THEREOF.
There is no doubt that, insofar as the Court of Appeals is
concerned, the issue petitioner presently raises had been
resolved by that court in CA-G.R. SP No. 40811,
entitled Commissioner of Internal Revenue vs. Philippine Long
Distance Company. There, the Sixteenth Division of the
appellate court declared that under the express provision of
Section 12 of R.A. 7082, supra, "the payment [by PLDT] of the 3%
franchise tax of [its] gross receipts shall be in lieu of all
taxes" exempts PLDT from payment of compensating tax,
advance sales tax, VAT and other internal revenue taxes on its
importation of various equipment, machinery and spare parts
for the use of its telecommunications system.
Dissatisfied with the CA decision in that case, the BIR
Commissioner initially filed with this Court a motion for time to
file a petition for review, docketed in this Court as G.R. No.
134386. However, on the last day for the filing of the intended
petition, the then BIR Commissioner had a change of heart and
instead manifested11 that he will no longer pursue G.R. No.
134386, there being no compelling grounds to disagree with the
Court of Appeals’ decision in CA-G.R. 40811. Consequently, on
September 28, 1998, the Court issued a Resolution12 in G.R. No.
134386 notifying the parties that "no petition" was filed in said
case and that the CA judgment sought to be reviewed therein
"has now become final and executory". Pursuant to said
Resolution, an Entry of Judgment13 was issued by the Court of
Appeals in CA-G.R. SP No. 40811. Hence, the CA’s dismissal of
CA-G.R. No. 47895 on the additional ground of stare decisis.
Under the doctrine of stare decisis et non quieta movere, a point
of law already established will, generally, be followed by the
same determining court and by all courts of lower rank in
subsequent cases where the same legal issue is raised.14 For
reasons needing no belaboring, however, the Court is not at all
concluded by the ruling of the Court of Appeals in its earlier CA-
G.R. SP No. 47895.
The Court has time and again stated that the rule on stare
decisis promotes stability in the law and should, therefore, be
accorded respect. However, blind adherence to precedents,
simply as precedent, no longer rules. More important than
anything else is that the court is right,15 thus its duty to abandon
any doctrine found to be in violation of the law in force.16
As it were, the former BIR Commissioner’s decision not to
pursue his petition in G.R. No. 134386 denied the BIR, at least as
early as in that case, the opportunity to obtain from the Court
an authoritative interpretation of Section 12 of R.A. 7082. All is,
however, not lost. For, the government is not estopped by acts
or errors of its agents, particularly on matters involving taxes.
Corollarily, the erroneous application of tax laws by public
officers does not preclude the subsequent correct application
thereof.17 Withal, the errors of certain administrative officers, if
that be the case, should never be allowed to jeopardize the
government’s financial position.18
Hence, the need to address the main issue tendered herein.
According to the Court of Appeals, the "in lieu of all taxes"
clause found in Section 12 of PLDT’s franchise (R.A. 7082) covers
all taxes, whether direct or indirect; and that said section states,
in no uncertain terms, that PLDT’s payment of the 3% franchise
tax on all its gross receipts from businesses transacted by it
under its franchise is in lieu of all taxes on the franchise or
earnings thereof. In fine, the appellate court, agreeing with
PLDT, posits the view that the word "all" encompasses any and
all taxes collectible under the National Internal Revenue Code
(NIRC), save those specifically mentioned in PLDT’s franchise,
such as income and real property taxes.
The BIR Commissioner excepts. He submits that the exempting
"in lieu of all taxes" clause covers direct taxes only, adding that
for indirect taxes to be included in the exemption, the intention
to include must be specific and unmistakable. He thus faults the
Court of Appeals for erroneously declaring PLDT exempt from
payment of VAT and other indirect taxes on its importations. To
the Commissioner, PLDT’s claimed entitlement to tax
refund/credit is without basis inasmuch as the 3% franchise tax
being imposed on PLDT is not a substitute for or in lieu of
indirect taxes.
The sole issue at hand is whether or not PLDT, given the tax
component of its franchise, is exempt from paying VAT,

compensating taxes, advance sales taxes and internal revenue
taxes on its importations.
Based on the possibility of shifting the incidence of taxation, or
as to who shall bear the burden of taxation, taxes may be
classified into either direct tax or indirect tax.
In context, direct taxes are those that are exacted from the very
person who, it is intended or desired, should pay them;19 they
are impositions for which a taxpayer is directly liable on the
transaction or business he is engaged in.20
On the other hand, indirect taxes are those that are demanded,
in the first instance, from, or are paid by, one person in the
expectation and intention that he can shift the burden to
someone else.21 Stated elsewise, indirect taxes are taxes
wherein the liability for the payment of the tax falls on one
person but the burden thereof can be shifted or passed on to
another person, such as when the tax is imposed upon goods
before reaching the consumer who ultimately pays for it. When
the seller passes on the tax to his buyer, he, in effect, shifts the
tax burden, not the liability to pay it, to the purchaser as part of
the price of goods sold or services rendered.
To put the situation in graphic terms, by tacking the VAT due to
the selling price, the seller remains the person primarily and
legally liable for the payment of the tax. What is shifted only to
the intermediate buyer and ultimately to the final purchaser is
the burden of the tax.22 Stated differently, a seller who is directly
and legally liable for payment of an indirect tax, such as the VAT
on goods or services, is not necessarily the person who
ultimately bears the burden of the same tax. It is the final
purchaser or end-user of such goods or services who, although
not directly and legally liable for the payment thereof, ultimately
bears the burden of the tax.23
There can be no serious argument that PLDT, vis-à-vis its
payment of internal revenue taxes on its importations in
question, is effectively claiming exemption from taxes not falling
under the category of direct taxes. The claim covers VAT,
advance sales tax and compensating tax.
The NIRC classifies VAT as "an indirect tax … the amount of
[which] may be shifted or passed on to the buyer, transferee or
lessee of the goods".24 As aptly pointed out by Judge Amancio Q.
Saga in his dissent in C.T.A. Case No. 5178, the 10% VAT on
importation of goods partakes of an excise tax levied on the
49
privilege of importing articles. It is not a tax on the franchise of a
business enterprise or on its earnings. It is imposed on all
taxpayers who import goods (unless such importation falls
under the category of an exempt transaction under Sec. 109 of
the Revenue Code) whether or not the goods will eventually be
sold, bartered, exchanged or utilized for personal consumption.
The VAT on importation replaces the advance sales tax payable
by regular importers who import articles for sale or as raw
materials in the manufacture of finished articles for sale.25
Advance sales tax has the attributes of an indirect tax because
the tax-paying importer of goods for sale or of raw materials to
be processed into merchandise can shift the tax or, to borrow
from Philippine Acetylene Co, Inc. vs. Commissioner of Internal
Revenue,26 lay the "economic burden of the tax", on the
purchaser, by subsequently adding the tax to the selling price of
the imported article or finished product.
Compensating tax also partakes of the nature of an excise tax
payable by all persons who import articles, whether in the
course of business or not.27 The rationale for compensating tax
is to place, for tax purposes, persons purchasing from merchants
in the Philippines on a more or less equal basis with those who
buy directly from foreign countries.28
It bears to stress that the liability for the payment of the indirect
taxes lies only with the seller of the goods or services, not in the
buyer thereof. Thus, one cannot invoke one’s exemption
privilege to avoid the passing on or the shifting of the VAT to
him by the manufacturers/suppliers of the goods he
purchased.29 Hence, it is important to determine if the tax
exemption granted to a taxpayer specifically includes the
indirect tax which is shifted to him as part of the purchase price,
otherwise it is presumed that the tax exemption embraces only
those taxes for which the buyer is directly liable.30
Time and again, the Court has stated that taxation is the rule,
exemption is the exception. Accordingly, statutes granting tax
exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority.31 To him,
therefore, who claims a refund or exemption from tax payments
rests the burden of justifying the exemption by words too plain
to be mistaken and too categorical to be misinterpreted.32
As may be noted, the clause "in lieu of all taxes" in Section 12 of
RA 7082 is immediately followed by the limiting or qualifying
clause "on this franchise or earnings thereof", suggesting that
the exemption is limited to taxes imposed directly on PLDT since
taxes pertaining to PLDT’s franchise or earnings are its direct
liability. Accordingly, indirect taxes, not being taxes on PLDT’s
franchise or earnings, are outside the purview of the "in lieu"
provision.
If we were to adhere to the appellate court’s interpretation of
the law that the "in lieu of all taxes" clauseencompasses the
totality of all taxes collectible under the Revenue Code, then,
the immediately following limiting clause "on this franchise and
its earnings" would be nothing more than a pure jargon bereft
of effect and meaning whatsoever. Needless to stress, this kind
of interpretation cannot be accorded a governing sway following
the familiar legal maxim redendo singula singulis meaning, take
the words distributively and apply the reference. Under this
principle, each word or phrase must be given its proper
connection in order to give it proper force and effect, rendering
none of them useless or superfluous. 33
Significantly, in Manila Electric Company [Meralco] vs.
Vera,34 the Court declared the relatively broader exempting
clause "shall be in lieu of all taxes and assessments of
whatsoever nature … upon the privileges earnings, income
franchise ... of the grantee" written in par. # 9 of Meralco’s
franchise as not so all encompassing as to embrace indirect tax,
like compensating tax. There, the Court said:
It is a well-settled rule or principle in taxation that a
compensating tax … is an excise tax … one that is imposed on
the performance of an act, the engaging in an occupation, or the
enjoyment of a privilege. A tax levied upon property because of
its ownership is a direct tax, whereas one levied upon property
because of its use is an excise duty. ….
The compensating tax being imposed upon … MERALCO, is an
impost on its use of imported articles and is not in the nature of
a direct tax on the articles themselves, the latter tax falling
within the exemption. Thus, in International Business Machine
Corporation vs. Collector of Internal Revenue, … which involved
the collection of a compensating tax from the plaintiff-petitioner
on business machines imported by it, this Court stated in
unequivocal terms that "it is not the act of importation that is
taxed under section 190 but the uses of imported goods not
subjected to a sales tax" because the "compensating tax was
expressly designated as a substitute to make up or compensate
for the revenue lost to the government through the avoidance
of sales taxes by means of direct purchases abroad.

xxx xxx xxx
xxx If it had been the legislative intent to exempt MERALCO from
paying a tax on the use of imported equipments, the legislative
body could have easily done so by expanding the provision of
paragraph 9 and adding to the exemption such words as
"compensating tax" or "purchases from abroad for use in its
business," and the like.
It may be so that in Maceda vs. Macaraig, Jr.35 the
Court held
that an exemption from "all taxes" granted to the National
Power Corporation (NPC) under its charter36 includes both direct
and indirect taxes. But far from providing PLDT
comfort, Maceda in fact supports the case of herein petitioner,
the correct lesson of Maceda being that an exemption from "all
taxes" excludes indirect taxes, unless the exempting statute, like
NPC’s charter, is so couched as to include indirect tax from the
exemption. Wrote the Court:
xxx However, the amendment under Republic Act No. 6395
enumerated the details covered by the exemption.
Subsequently, P.D. 380, made even more specific the details of
the exemption of NPC to cover, among others, both direct and
indirect taxes on all petroleum products used in its operation.
Presidential Decree No. 938 [NPC’s amended charter) amended
the tax exemption by simplifying the same law in general terms.
It succinctly exempts NPC from "all forms of taxes, duties fees
…."
The use of the phrase "all forms" of taxes demonstrate the
intention of the law to give NPC all the tax exemptions it has
been enjoying before. ….
xxx xxx xxx
It is evident from the provisions of P.D. No. 938 that its purpose
is to maintain the tax exemption of NPC from all forms of taxes
including indirect taxes as provided under R.A. No. 6395 and
P.D. 380 if it is to attain its goals. (Italics in the original; words in
bracket added)
Of similar import is what we said in Borja vs. Collector of Internal
Revenue.37 There, the Court upheld the decision of the CTA
denying a claim for refund of the compensating taxes paid on
the importation of materials and equipment by a grantee of a
heat and power legislative franchise containing an "in lieu"
provision, rationalizing as follows:
50
xxx Moreover, the petitioner’s alleged exemption from the
payment of compensating tax in the present case is not clear or
expressed; unlike the exemption from the payment of income
tax which was clear and expressed in the Carcar case. Unless it
appears clearly and manifestly that an exemption is intended,
the provision is to be construed strictly against the party
claiming exemption. xxx.
Jurisprudence thus teaches that imparting the "in lieu of all
taxes" clause a literal meaning, as did the Court of Appeals and
the CTA before it, is fallacious. It is basic that in construing a
statute, it is the duty of courts to seek the real intent of the
legislature, even if, by so doing, they may limit the literal
meaning of the broad language.38
It cannot be over-emphasized that tax exemption represents a
loss of revenue to the government and must, therefore, not rest
on vague inference. When claimed, it must be strictly construed
against the taxpayer who must prove that he falls under the
exception. And, if an exemption is found to exist, it must not be
enlarged by construction, since the reasonable presumption is
that the state has granted in express terms all it intended to
grant at all, and that, unless the privilege is limited to the very
terms of the statute the favor would be extended beyond
dispute in ordinary cases.39
All told, we fail to see how Section 12 of RA 7082 operates as
granting PLDT blanket exemption from payment of indirect
taxes, which, in the ultimate analysis, are not taxes on its
franchise or earnings. PLDT has not shown its eligibility for the
desired exemption. None should be granted.
As a final consideration, the Court takes particular stock, as the
CTA earlier did, of PLDT’s allegation that the Bureau of Customs
assessed the company for advance sales tax and compensating
tax for importations entered between October 1, 1992 and May
31, 1994 when the value-added tax system already replaced, if
not totally eliminated, advance sales and compensating
taxes.40 Indeed, pursuant to Executive Order No. 27341 which
took effect on January 1, 1988, a multi-stage value-added tax
was put into place to replace the tax on original and subsequent
sales tax.42 It stands to reason then, as urged by PLDT, that
compensating tax and advance sales tax were no longer
collectible internal revenue taxes under the NILRC when the
Bureau of Customs made the assessments in question and
collected the corresponding tax. Stated a bit differently, PLDT
was no longer under legal obligation to pay compensating tax
and advance sales tax on its importation from 1992 to 1994.
Parenthetically, petitioner has not made an issue about PLDT’s
allegations concerning the abolition of the provisions of the Tax
Code imposing the payment of compensating and advance sales
tax on importations and the non-existence of these taxes during
the period under review. On the contrary, petitioner admits that
the VAT on importation of goods has "replace[d] the
compensating tax and advance sales tax under the old Tax
Code".43
Given the above perspective, the amount PLDT paid in the
concept of advance sales tax and compensating tax on the 1992
to 1994 importations were, in context, erroneous tax payments
and would theoretically be refundable. It should be emphasized,
however, that, such importations were, when made, already
subject to VAT.
Factoring in the fact that a portion of the claim was barred by
prescription, the CTA had determined that PLDT is entitled to a
total refundable amount of ₱94,673,422.00 (₱87,257,031.00 of
compensating tax + ₱7,416,391.00 = ₱94,673,422.00).
Accordingly, it behooves the BIR to grant a refund of the
advance sales tax and compensating tax in the total amount of
₱94,673,422.00, subject to the condition that PLDT present
proof of payment of the corresponding VAT on said
transactions.
WHEREFORE, the petition is partially GRANTED. The Decision of
the Court of Appeals in CA-G.R. No. 47895 dated September 17,
1999 is MODIFIED. The Commissioner of Internal Revenue
is ORDERED to issue a Tax Credit Certificate or to refund to PLDT
only the of ₱94,673,422.00 advance sales tax and compensating
tax erroneously collected by the Bureau of Customs from
October 1, 1992 to May 31, 1994, less the VAT which may have
been due on the importations in question, but have otherwise
remained uncollected.
SO ORDERED.
SECOND DIVISION
G.R. No. 173594 February 6, 2008
SILKAIR (SINGAPORE) PTE, LTD., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION
CARPIO MORALES, J.:
Petitioner, Silkair (Singapore) Pte. Ltd. (Silkair), a corporation
organized under the laws of Singapore which has a Philippine
representative office, is an online international air carrier
operating the Singapore-Cebu-Davao-Singapore, Singapore-
Davao-Cebu-Singapore, and Singapore-Cebu-Singapore routes.
On December 19, 2001, Silkair filed with the Bureau of Internal
Revenue (BIR) a written application for the refund
of P4,567,450.79 excise taxes it claimed to have paid on its
purchases of jet fuel from Petron Corporation from January to
June 2000.1
As the BIR had not yet acted on the application as of December
26, 2001, Silkair filed a Petition for Review2 before the CTA
following Commissioner of Internal Revenue v. Victorias Milling
Co., Inc., et al.3
Opposing the petition, respondent Commissioner on Internal
Revenue (CIR) alleged in his Answer that, among other things,
Petitioner failed to prove that the sale of the
petroleum products was directly made from a
domestic oil company to the international carrier. The
excise tax on petroleum products is the direct liability
of the manufacturer/producer, and when added to the
cost of the goods sold to the buyer, it is no longer a
tax but part of the price which the buyer has to pay to
obtain the article.4 (Emphasis and underscoring
supplied)
By Decision of May 27, 2005, the Second Division of the CTA
denied Silkair’s petition on the ground that as the excise tax was
imposed on Petron Corporation as the manufacturer of
petroleum products, any claim for refund should be filed by the
latter; and where the burden of tax is shifted to the purchaser,
the amount passed on to it is no longer a tax but becomes an
added cost of the goods purchased. Thus the CTA discoursed:
The liability for excise tax on petroleum products that
are being removed from its refinery is imposed on the
manufacturer/producer (Section 130 of the NIRC of
1997). x x x
51
xxxx
While it is true that in the case of excise tax imposed
on petroleum products, the seller thereof may shift
the tax burden to the buyer, the latter is the proper
party to claim for the refund in the case of exemption
from excise tax. Since the excise tax was imposed upon
Petron Corporation as the manufacturer of petroleum
products, pursuant to Section 130(A)(2), and that the
corresponding excise taxes were indeed, paid by it, . .
. any claim for refund of the subject excise taxes should
be filed by Petron Corporation as the taxpayer
contemplated under the law. Petitioner cannot be
considered as the taxpayer because it merely
shouldered the burden of the excise tax and not the
excise tax itself.
Therefore, the right to claim for the refund of excise
taxes paid on petroleum products lies with Petron
Corporation who paid and remitted the excise tax to
the BIR. Respondent, on the other hand, may only
claim from Petron Corporation the reimbursement of
the tax burden shifted to the former by the latter. The
excise tax partaking the nature of an indirect tax, is
clearly the liability of the manufacturer or seller who
has the option whether or not to shift the burden of
the tax to the purchaser. Where the burden of the tax
is shifted to the [purchaser], the amount passed on to it
is no longer a tax but becomes an added cost on the
goods purchased which constitutes a part of the
purchase price. The incidence of taxation or the
person statutorily liable to pay the tax falls on Petron
Corporation though the impact of taxation or the
burden of taxation falls on another person, which in
this case is petitioner Silkair.5 (Italics in the original;
emphasis and underscoring supplied)
Silkair filed a Motion for Reconsideration6 during the pendency
of which or on September 12, 2005 the Bengzon Law Firm
entered its appearance as counsel,7 without Silkair’s then-
counsel of record (Jimenez Gonzales Liwanag Bello Valdez
Caluya & Fernandez or "JGLaw") having withdrawn as such.
By Resolution8 of September 22, 2005, the CTA Second Division
denied Silkair’s motion for reconsideration. A copy of the
Resolution was furnished Silkair’s counsel JGLaw which received
it on October 3, 2005.9
On October 13, 2005, JGLaw, with the conformity of Silkair, filed
its Notice of Withdrawal of Appearance.10 On even date, Silkair,
through the Bengzon Law Firm, filed a
Manifestation/Motion11 stating:
Petitioner was formerly represented xxx by JIMENEZ
GONZALES LIWANAG BELLO VALDEZ CALUYA &
FERNANDEZ (JGLaw).
1. On 24 August 2005, petitioner served
notice to JGLaw of its decision to cease all
legal representation handled by the latter
on behalf of the petitioner. Petitioner also
requested JGLaw to make arrangements for
the transfer of all files relating to its legal
representation on behalf of petitioner to the
undersigned counsel. x x x
2. The undersigned counsel was engaged to
act as counsel for the petitioner in the
above-entitled case; and thus, filed its entry
of appearance on 12 September 2005. x x x
3. The undersigned counsel, through
petitioner, has received information that the
Honorable Court promulgated a Resolution
on petitioner’s Motion for Reconsideration.
To date, the undersigned counsel has yet to
receive an official copy of the above-
mentioned Resolution. In light of the
foregoing, undersigned counsel hereby
respectfully requests for an official copy of
the Honorable Court’s Resolution on
petitioner’s Motion for Reconsideration x x
x.12 (Underscoring supplied)
On October 14, 2005, the Bengzon Law Firm received its
requested copy of the September 22, 200513 CTA Second
Division Resolution. Thirty-seven days later or on October 28,
2005, Silkair, through said counsel, filed a Motion for Extension
of Time to File Petition for Review14 before the CTA En Banc
which gave it until November 14, 2005 to file a petition for
review.
On November 11, 2005, Silkair filed another Motion for
Extension of Time.15 On even date, the Bengzon Law Firm
informed the CTA of its withdrawal of appearance as counsel for
 52

Silkair with the information, that Silkair would continue to be Arrieta, et. al., 7 SCRA 224)." Considering that binding on the petitioner, as in the case of Damasco v. Arrieta,
represented by Atty. Teodoro A. Pastrana, who used to be with petitioner, through its counsel of record, had received etc., et al.25 x x x heavily relied upon by the respondent";26 and
the firm but who had become a partner of the Pastrana and the September 22, 2005 Resolution as early as that "the case of Dolores De Mesa Abad v. Court of Appeals27 has
Fallar Law Offices.16 October 3, 2005, it had only until October 18, 2005 more appropriate application to the present case."28
within which to file its Petition for Review. Petitioner
The CTA En Banc granted Silkair’s second Motion for Extension only managed to file the Petition for Review with the In Dolores De Mesa Abad, the trial court issued an order of
of Time, giving Silkair until November 24, 2005 to file its petition Court En Banc on November 17, 2005 or [after] thirty November 19, 1974 granting the therein private respondents’
for review. On November 17, 2005, Silkair filed its Petition for (30) days had lapsed from the final date of October Motion for Annulment of documents and titles. The order was
Review17 before the CTA En Banc. 18, 2005 to appeal. received by the therein petitioner’s counsel of record, Atty.
Escolastico R. Viola, on November 22, 1974 prior to which or on
By Resolution of May 19,2006, the CTA En Banc The argument that it requested Motions for Extension July 17, 1974, Atty. Vicente Millora of the Millora, Tobias and
dismissed18 Silkair’s petition for review for having been filed out of Time on October 28, 2005 or ten (10) days from the Calimlim Law Office had filed an "Appearance and
of time in this wise: appeal period and the second Motion for Extension of Manifestation." Atty. Millora received a copy of the trial court’s
Time to file its Petition for Review on November 11, order on December 9, 1974. On January 4, 1975, the therein
2005 and its allowance by the CTA En petitioners, through Atty. Ernesto D. Tobias also of the Millora,
A petitioner is given a period of fifteen (15) days from
Banc notwithstanding, the questioned Decision is no Tobias and Calimlim Law Office, filed their Notice of Appeal and
notice of award, judgment, final order or resolution,
longer appealable for failure to timely file the Cash Appeal Bond as well as a Motion for Extension of the
or denial of motion for new trial or reconsideration to
necessary Petition for Review.19 (Emphasis in the period to file a Record on Appeal. They filed the Record on
appeal to the proper forum, in this case, the CTA En
original) Appeal on January 24, 1975. The trial court dismissed the appeal
Banc. This is clear from both Section 11 and Section 9
for having been filed out of time, which was upheld by the Court
of Republic Act No. 9282 x x x.
In a Separate Concurring Opinion,20 CTA Associate Justice of Appeals on the ground that the period within which to appeal
Juanito C. Castañeda, Jr. posited that Silkair is not the proper should be counted from November 22, 1974, the date Atty.
xxxx Viola received a copy of the November 19, 1974 order. The
party to claim the tax refund.
appellate court held that Atty. Viola was still the counsel of
The petitioner, through its counsel of record Jimenez, record, he not having yet withdrawn his appearance as counsel
Silkair filed a Motion for Reconsideration21 which the CTA En
Gonzalez, L[iwanag], Bello, Valdez, Caluya & for the therein petitioners. On petition for certiorari,29 this Court
Banc denied.22 Hence, the present Petition for Review23 which
Fernandez Law Offices, received the Resolution dated held
raises the following issues:
September 22, 2005 on October 3, 2005. At that time,
the petitioner had two counsels of record, namely, x x x [R]espondent Court reckoned the period of
Jimenez, Gonzales, L[iwanag], Bello, Valdez, Caluya & I. WHETHER OR NOT THE PETITION FOR REVIEW FILED
appeal from the time petitioners’ original counsel,
Fernandez Law Offices and The Bengzon Law Firm WITH THE HONORABLE COURT OF TAX APPEALS EN
Atty. Escolastico R. Viola, received the Order granting
which filed its Entry of Appearance on September 12, BANC WAS TIMELY FILED.
the Motion for Annulment of documents and titles on
2005. However, as of said date, Atty. Mary Jane B. November 22, 1974. But as petitioners stress, Atty.
Austria-Delgado of Jimenez, Gonzales, L[iwanag], II. APPEAL BEING AN ESSENTIAL PART OF OUR Vicente Millora of the Millora, Tobias and Calimlim
Bello, Valdez, Caluya & Fernandez Law Offices was still JUDICIAL SYSTEM, WHETHER OR NOT PETITIONER Law Office had filed an "Appearance and
the counsel of record considering that the Notice of SHOULD BE DEPRIVED OF ITS RIGHT TO APPEAL ON Manifestation" on July 16, 1974. Where there may
Withdrawal of Appearance signed by Atty. Mary Jane THE BASIS OF TECHNICALITY. have been no specific withdrawal by Atty. Escolastico
B. Austria-Delgado was filed only on October 13, 2005 R. Viola, for which he should be admonished, by the
or ten (10) days after receipt of the September 22, III. ASSUMING THE HONORABLE SUPREME COURT appearance of a new counsel, it can be said that Atty.
2005 Resolution of the Court’s Second Division. This WOULD HOLD THAT THE FILING OF THE PETITITON Viola had ceased as counsel for petitioners. In fact,
notwithstanding, Section 2 of Rule 13 of the Rules of FOR REVIEW WITH THE HONORABLE COURT OF TAX Orders subsequent to the aforesaid date were already
Court provides that if any party has appeared by APPEALS EN BANC WAS TIMELY, WHETHER OR NOT sent by the trial Court to the Millora, Tobias and
counsel, service upon him shall be made upon his THE PETITIONER IS THE PROPER PARTY TO CLAIM FOR Calimlim Law Office and not to Atty. Viola.
counsel or one of them, unless service upon the party REFUND OR TAX CREDIT.24 (Underscoring supplied)
himself is ordered by the Court. Where a party is
Under the circumstances, December 9, 1974 is the
represented by more than one counsel of record,
Silkair posits that "the instant case does not involve a situation controlling date of receipt by petitioners’ counsel and
"notice to any one of the several counsel on record is
where the petitioner was represented by two (2) counsels on from which the period of appeal from the Order of
equivalent to notice to all the counsel (Damasco vs.
record, such that notice to the former counsel would be held November 19, 1974 should be reckoned. That being

the case, petitioner’s x x x appeal filed on January 4,
1975 was timely filed.30 (Underscoring supplied)
The facts of Dolores De Mesa Abad are not on all fours with
those of the present case. In any event, more recent
jurisprudence holds that in case of failure to comply with the
procedure established by Section 26, Rule 13831 of the Rules of
Court re the withdrawal of a lawyer as a counsel in a case, the
attorney of record is regarded as the counsel who should be
served with copies of the judgments, orders and
pleadings.32 Thus, where no notice of withdrawal or substitution
of counsel has been shown, notice to counsel of record is, for all
purposes, notice to the client.33 The court cannot be expected
to itself ascertain whether the counsel of record has been
changed.34
In the case at bar, JGLaw filed its Notice of Withdrawal of
Appearance on October 13, 200535 after the Bengzon Law Firm
had entered its appearance. While Silkair claims it dismissed
JGLaw as its counsel as early as August 24, 2005, the same was
communicated to the CTA only on October 13, 2005.36 Thus,
JGLaw was still Silkair’s counsel of record as of October 3, 2005
when a copy of the September 22, 2005 resolution of the CTA
Second Division was served on it. The service upon JGLaw on
October 3, 2005 of the September 22, 2005 resolution of CTA
Second Division was, therefore, for all legal intents and
purposes, service to Silkair, and the CTA correctly reckoned the
period of appeal from such date.
TECHNICALITY ASIDE, on the merits, the petition just the same
fails.
Silkair bases its claim for refund or tax credit on Section 135 (b)
of the NIRC of 1997 which reads
Sec. 135. Petroleum Products sold to International
Carriers and Exempt Entities of Agencies. – Petroleum
products sold to the following are exempt from excise
tax:
xxxx
(b) Exempt entities or agencies covered by tax
treaties, conventions, and other international
agreements for their use and consumption: Provided,
however, That the country of said foreign international
carrier or exempt entities or agencies exempts from
53
similar taxes petroleum products sold to Philippine
carriers, entities or agencies; x x x
x x x x,
and Article 4(2) of the Air Transport Agreement between the
Government of the Republic of the Philippines and the
Government of the Republic of Singapore (Air Transport
Agreement between RP and Singapore) which reads
Fuel, lubricants, spare parts, regular equipment and
aircraft stores introduced into, or taken on board
aircraft in the territory of one Contracting party by, or
on behalf of, a designated airline of the other
Contracting Party and intended solely for use in the
operation of the agreed services shall, with the
exception of charges corresponding to the service
performed, be exempt from the same customs duties,
inspection fees and other duties or taxes imposed in
the territories of the first Contracting Party , even
when these supplies are to be used on the parts of the
journey performed over the territory of the
Contracting Party in which they are introduced into or
taken on board. The materials referred to above may
be required to be kept under customs supervision and
control.
The proper party to question, or seek a refund of, an indirect tax
is the statutory taxpayer, the person on whom the tax is
imposed by law and who paid the same even if he shifts the
burden thereof to another.37 Section 130 (A) (2) of the NIRC
provides that "[u]nless otherwise specifically allowed, the return
shall be filed and the excise tax paid by the manufacturer or
producer before removal of domestic products from place of
production." Thus, Petron Corporation, not Silkair, is the
statutory taxpayer which is entitled to claim a refund based on
Section 135 of the NIRC of 1997 and Article 4(2) of the Air
Transport Agreement between RP and Singapore.
Even if Petron Corporation passed on to Silkair the burden of the
tax, the additional amount billed to Silkair for jet fuel is not a tax
but part of the price which Silkair had to pay as a purchaser.38
Silkair nevertheless argues that it is exempt from indirect taxes
because the Air Transport Agreement between RP and
Singapore grants exemption "from the same customs duties,
inspection fees and other duties or taxes imposed in the
territory of the first Contracting Party."39 It invokes Maceda v.
Macaraig, Jr.40 which upheld the claim for tax credit or refund
by the National Power Corporation (NPC) on the ground that the
NPC is exempt even from the payment of indirect taxes.
Silkairs’s argument does not persuade. In Commissioner of
Internal Revenue v. Philippine Long Distance Telephone
Company,41 this Court clarified the ruling in Maceda v.
Macaraig, Jr., viz:
It may be so that in Maceda vs. Macaraig, Jr., the
Court held that an exemption from "all taxes" granted
to the National Power Corporation (NPC) under its
charter includes both direct and indirect taxes. But far
from providing PLDT comfort, Maceda in fact supports
the case of herein petitioner, the correct lesson
of Macedabeing that an exemption from "all taxes"
excludes indirect taxes, unless the exempting statute,
like NPC’s charter, is so couched as to include indirect
tax from the exemption. Wrote the Court:
x x x However, the amendment under
Republic Act No. 6395 enumerated the
details covered by the exemption.
Subsequently, P.D. 380, made even more
specific the details of the exemption of NPC
to cover, among others, both direct and
indirect taxes on all petroleum products
used in its operation. Presidential Decree
No. 938 [NPC’s amended charter] amended
the tax exemption by simplifying the same
law in general terms. It succinctly exempts
NPC from "all forms of taxes, duties[,]
fees…"
The use of the phrase "all forms" of taxes
demonstrates the intention of the law to
give NPC all the tax exemptions it has been
enjoying before…
xxxx
It is evident from the provisions of P.D. No.
938 that its purpose is to maintain the tax
exemption of NPC from all forms of taxes
including indirect taxes as provided under
R.A. No. 6395 and P.D. 380 if it is to attain its

goals. (Italics in the original; emphasis
supplied)42
The exemption granted under Section 135 (b) of the NIRC of
1997 and Article 4(2) of the Air Transport Agreement between
RP and Singapore cannot, without a clear showing of legislative
intent, be construed as including indirect taxes. Statutes
granting tax exemptions must be construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing
authority, 43 and if an exemption is found to exist, it must not be
enlarged by construction.44
WHEREFORE, the petition is DENIED.
Costs against petitioner.
SO ORDERED.
SECOND DIVISION
G.R. No. 151135 July 2, 2004
CONTEX CORPORATION, petitioner,
vs.
HON. COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
QUISUMBING, J.:
For review is the Decision1 dated September 3, 2001, of the
Court of Appeals, in CA-G.R. SP No. 62823, which reversed and
set aside the decision2 dated October 13, 2000, of the Court of
Tax Appeals (CTA). The CTA had ordered the Commissioner of
Internal Revenue (CIR) to refund the sum of P683,061.90 to
petitioner as erroneously paid input value-added tax (VAT) or in
the alternative, to issue a tax credit certificate for said amount.
Petitioner also assails the appellate court’s Resolution,3 dated
December 19, 2001, denying the motion for reconsideration.
Petitioner is a domestic corporation engaged in the business of
manufacturing hospital textiles and garments and other hospital
54
supplies for export. Petitioner’s place of business is at the Subic Sections 20410 and 22911 of the Tax Code, its claim should be
Bay Freeport Zone (SBFZ). It is duly registered with the Subic Bay denied, according to the BIR.
Metropolitan Authority (SBMA) as a Subic Bay Freeport
Enterprise, pursuant to the provisions of Republic Act No. On October 13, 2000, the CTA decided CTA Case No. 5895 as
7227.4 As an SBMA-registered firm, petitioner is exempt from all follows:
local and national internal revenue taxes except for the
preferential tax provided for in Section 12 (c)5 of Rep. Act No.
WHEREFORE, in view of the foregoing, the Petition for
7227. Petitioner also registered with the Bureau of Internal
Review is hereby PARTIALLY GRANTED. Respondent is
Revenue (BIR) as a non-VAT taxpayer under Certificate of
hereby ORDERED to REFUND or in the alternative to
Registration RDO Control No. 95-180-000133.
ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner
the sum of P683,061.90, representing erroneously
From January 1, 1997 to December 31, 1998, petitioner paid input VAT.
purchased various supplies and materials necessary in the
conduct of its manufacturing business. The suppliers of these
SO ORDERED.12
goods shifted unto petitioner the 10% VAT on the purchased
items, which led the petitioner to pay input taxes in the
amounts of P539,411.88 and P504,057.49 for 1997 and 1998, In granting a partial refund, the CTA ruled that petitioner
respectively.6 misread Sections 106(A)(2)(a) and 112(A) of the Tax Code. The
tax court stressed that these provisions apply only to those
entities registered as VAT taxpayers whose sales are zero-rated.
Acting on the belief that it was exempt from all national and
Petitioner does not fall under this category, since it is a non-VAT
local taxes, including VAT, pursuant to Rep. Act No. 7227,
taxpayer as evidenced by the Certificate of Registration RDO
petitioner filed two applications for tax refund or tax credit of
Control No. 95-180-000133 issued by RDO Rosemarie Ragasa of
the VAT it paid. Mr. Edilberto Carlos, revenue district officer of
BIR RDO No. 18 of the Subic Bay Freeport Zone and thus it is
BIR RDO No. 19, denied the first application letter, dated
exempt from VAT, pursuant to Rep. Act No. 7227, said the CTA.
December 29, 1998.
Nonetheless, the CTA held that the petitioner is exempt from
Unfazed by the denial, petitioner on May 4, 1999, filed another
the imposition of input VAT on its purchases of supplies and
application for tax refund/credit, this time directly with Atty.
materials. It pointed out that under Section 12(c) of Rep. Act No.
Alberto Pagabao, the regional director of BIR Revenue Region
7227 and the Implementing Rules and Regulations of the Bases
No. 4. The second letter sought a refund or issuance of a tax
Conversion and Development Act of 1992, all that petitioner is
credit certificate in the amount of P1,108,307.72, representing
required to pay as a SBFZ-registered enterprise is a 5%
erroneously paid input VAT for the period January 1, 1997 to
preferential tax.
November 30, 1998.
The CTA also disallowed all refunds of input VAT paid by the
When no response was forthcoming from the BIR Regional
petitioner prior to June 29, 1997 for being barred by the two-
Director, petitioner then elevated the matter to the Court of Tax
year prescriptive period under Section 229 of the Tax Code. The
Appeals, in a petition for review docketed as CTA Case No. 5895.
tax court also limited the refund only to the input VAT paid by
Petitioner stressed that Section 112(A)7 if read in relation to
the petitioner on the supplies and materials directly used by the
Section 106(A)(2)(a)8 of the National Internal Revenue Code, as
petitioner in the manufacture of its goods. It struck down all
amended and Section 12(b)9 and (c) of Rep. Act No. 7227 would
claims for input VAT paid on maintenance, office supplies,
show that it was not liable in any way for any value-added tax.
freight charges, and all materials and supplies shipped or
delivered to the petitioner’s Makati and Pasay City offices.
In opposing the claim for tax refund or tax credit, the BIR asked
the CTA to apply the rule that claims for refund are strictly
Respondent CIR then filed a petition, docketed as CA-G.R. SP No.
construed against the taxpayer. Since petitioner failed to
62823, for review of the CTA decision by the Court of Appeals.
establish both its right to a tax refund or tax credit and its
Respondent maintained that the exemption of Contex Corp.
compliance with the rules on tax refund as provided for in
under Rep. Act No. 7227 was limited only to direct taxes and not

to indirect taxes such as the input component of the VAT. The
Commissioner pointed out that from its very nature, the value-
added tax is a burden passed on by a VAT registered person to
the end users; hence, the direct liability for the tax lies with the
suppliers and not Contex.
Finding merit in the CIR’s arguments, the appellate court
decided CA-G.R. SP No. 62823 in his favor, thus:
WHEREFORE, premises considered, the appealed
decision is hereby REVERSED AND SET ASIDE. Contex’s
claim for refund of erroneously paid taxes is DENIED
accordingly.
SO ORDERED.13
In reversing the CTA, the Court of Appeals held that the
exemption from duties and taxes on the importation of raw
materials, capital, and equipment of SBFZ-registered enterprises
under Rep. Act No. 7227 and its implementing rules covers only
"the VAT imposable under Section 107 of the [Tax Code], which
is a direct liability of the importer, and in no way includes the
value-added tax of the seller-exporter the burden of which was
passed on to the importer as an additional costs of the
goods."14 This was because the exemption granted by Rep. Act
No. 7227 relates to the act of importation and Section 10715 of
the Tax Code specifically imposes the VAT on importations. The
appellate court applied the principle that tax exemptions are
strictly construed against the taxpayer. The Court of Appeals
pointed out that under the implementing rules of Rep. Act No.
7227, the exemption of SBFZ-registered enterprises from
internal revenue taxes is qualified as pertaining only to those for
which they may be directly liable. It then stated that apparently,
the legislative intent behind Rep. Act No. 7227 was to grant
exemptions only to direct taxes, which SBFZ-registered
enterprise may be liable for and only in connection with their
importation of raw materials, capital, and equipment as well as
the sale of their goods and services.
Petitioner timely moved for reconsideration of the Court of
Appeals decision, but the motion was denied.
Hence, the instant petition raising as issues for our resolution
the following:
A. WHETHER OR NOT THE EXEMPTION FROM ALL
LOCAL AND NATIONAL INTERNAL REVENUE TAXES
55
PROVIDED IN REPUBLIC ACT NO. 7227 COVERS THE
VALUE ADDED TAX PAID BY PETITIONER, A SUBIC BAY
FREEPORT ENTERPRISE ON ITS PURCHASES OF
SUPPLIES AND MATERIALS.
B. WHETHER OR NOT THE COURT OF TAX APPEALS
CORRECTLY HELD THAT PETITIONER IS ENTITLED TO A
TAX CREDIT OR REFUND OF THE VAT PAID ON ITS
PURCHASES OF SUPPLIES AND RAW MATERIALS FOR
THE YEARS 1997 AND 1998.16
Simply stated, we shall resolve now the issues concerning: (1)
the correctness of the finding of the Court of Appeals that the
VAT exemption embodied in Rep. Act No. 7227 does not apply
to petitioner as a purchaser; and (2) the entitlement of the
petitioner to a tax refund on its purchases of supplies and raw
materials for 1997 and 1998.
On the first issue, petitioner argues that the appellate court’s
restrictive interpretation of petitioner’s VAT exemption as
limited to those covered by Section 107 of the Tax Code is
erroneous and devoid of legal basis. It contends that the
provisions of Rep. Act No. 7227 clearly and unambiguously
mandate that no local and national taxes shall be imposed upon
SBFZ-registered firms and hence, said law should govern the
case. Petitioner calls our attention to regulations issued by both
the SBMA and BIR clearly and categorically providing that the tax
exemption provided for by Rep. Act No. 7227 includes
exemption from the imposition of VAT on purchases of supplies
and materials.
The respondent takes the diametrically opposite view that while
Rep. Act No. 7227 does grant tax exemptions, such grant is not
all-encompassing but is limited only to those taxes for which a
SBFZ-registered business may be directly liable. Hence, SBFZ
locators are not relieved from the indirect taxes that may be
shifted to them by a VAT-registered seller.
At this juncture, it must be stressed that the VAT is an indirect
tax. As such, the amount of tax paid on the goods, properties or
services bought, transferred, or leased may be shifted or passed
on by the seller, transferor, or lessor to the buyer, transferee or
lessee.17 Unlike a direct tax, such as the income tax, which
primarily taxes an individual’s ability to pay based on his income
or net wealth, an indirect tax, such as the VAT, is a tax on
consumption of goods, services, or certain transactions involving
the same. The VAT, thus, forms a substantial portion of
consumer expenditures.
Further, in indirect taxation, there is a need to distinguish
between the liability for the tax and the burden of the tax. As
earlier pointed out, the amount of tax paid may be shifted or
passed on by the seller to the buyer. What is transferred in such
instances is not the liability for the tax, but the tax burden. In
adding or including the VAT due to the selling price, the seller
remains the person primarily and legally liable for the payment
of the tax. What is shifted only to the intermediate buyer and
ultimately to the final purchaser is the burden of the
tax.18 Stated differently, a seller who is directly and legally liable
for payment of an indirect tax, such as the VAT on goods or
services is not necessarily the person who ultimately bears the
burden of the same tax. It is the final purchaser or consumer of
such goods or services who, although not directly and legally
liable for the payment thereof, ultimately bears the burden of
the tax.19
Exemptions from VAT are granted by express provision of the
Tax Code or special laws. Under VAT, the transaction can have
preferential treatment in the following ways:
(a) VAT Exemption. An exemption means that the sale
of goods or properties and/or services and the use or
lease of properties is not subject to VAT (output tax)
and the seller is not allowed any tax credit on VAT
(input tax) previously paid.20 This is a case wherein the
VAT is removed at the exempt stage (i.e., at the point
of the sale, barter or exchange of the goods or
properties).
The person making the exempt sale of goods,
properties or services shall not bill any output tax to
his customers because the said transaction is not
subject to VAT. On the other hand, a VAT-registered
purchaser of VAT-exempt goods/properties or services
which are exempt from VAT is not entitled to any
input tax on such purchase despite the issuance of a
VAT invoice or receipt.21
(b) Zero-rated Sales. These are sales by VAT-registered
persons which are subject to 0% rate, meaning the tax
burden is not passed on to the purchaser. A zero-rated
sale by a VAT-registered person, which is a taxable
transaction for VAT purposes, shall not result in any

output tax. However, the input tax on his purchases of
goods, properties or services related to such zero-
rated sale shall be available as tax credit or refund in
accordance with these regulations.22
Under Zero-rating, all VAT is removed from the zero-rated
goods, activity or firm. In contrast, exemption only removes the
VAT at the exempt stage, and it will actually increase, rather
than reduce the total taxes paid by the exempt firm’s business
or non-retail customers. It is for this reason that a sharp
distinction must be made between zero-rating and exemption in
designating a value-added tax.23
Apropos, the petitioner’s claim to VAT exemption in the instant
case for its purchases of supplies and raw materials is founded
mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which
basically exempts them from all national and local internal
revenue taxes, including VAT and Section 4 (A)(a) of BIR Revenue
Regulations No. 1-95.24
On this point, petitioner rightly claims that it is indeed VAT-
Exempt and this fact is not controverted by the respondent. In
fact, petitioner is registered as a NON-VAT taxpayer per
Certificate of Registration25 issued by the BIR. As such, it is
exempt from VAT on all its sales and importations of goods and
services.
Petitioner’s claim, however, for exemption from VAT for its
purchases of supplies and raw materials is incongruous with its
claim that it is VAT-Exempt, for only VAT-Registered entities can
claim Input VAT Credit/Refund.
The point of contention here is whether or not the petitioner
may claim a refund on the Input VAT erroneously passed on to it
by its suppliers.
While it is true that the petitioner should not have been liable
for the VAT inadvertently passed on to it by its supplier since
such is a zero-rated sale on the part of the supplier, the
petitioner is not the proper party to claim such VAT refund.
Section 4.100-2 of BIR’s Revenue Regulations 7-95, as amended,
or the "Consolidated Value-Added Tax Regulations" provide:
Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a
VAT-registered person, which is a taxable transaction
56
for VAT purposes, shall not result in any output tax.
However, the input tax on his purchases of goods,
properties or services related to such zero-rated sale
shall be available as tax credit or refund in accordance
with these regulations.
The following sales by VAT-registered persons shall be
subject to 0%:
(a) Export Sales
"Export Sales" shall mean
...
(5) Those considered export sales under
Articles 23 and 77 of Executive Order No.
226, otherwise known as the Omnibus
Investments Code of 1987, and other special
laws, e.g. Republic Act No. 7227, otherwise
known as the Bases Conversion and
Development Act of 1992.
...
(c) Sales to persons or entities whose exemption
under special laws, e.g. R.A. No. 7227 duly registered
and accredited enterprises with Subic Bay
Metropolitan Authority (SBMA) and Clark
Development Authority (CDA), R. A. No. 7916,
Philippine Economic Zone Authority (PEZA), or
international agreements, e.g. Asian Development
Bank (ADB), International Rice Research Institute
(IRRI), etc. to which the Philippines is a signatory
effectively subject such sales to zero-rate."
Since the transaction is deemed a zero-rated sale, petitioner’s
supplier may claim an Input VAT credit with no corresponding
Output VAT liability. Congruently, no Output VAT may be passed
on to the petitioner.
On the second issue, it may not be amiss to re-emphasize that
the petitioner is registered as a NON-VAT taxpayer and thus, is
exempt from VAT. As an exempt VAT taxpayer, it is not allowed
any tax credit on VAT (input tax) previously paid. In fine, even if
we are to assume that exemption from the burden of VAT on
petitioner’s purchases did exist, petitioner is still not entitled to
any tax credit or refund on the input tax previously paid as
petitioner is an exempt VAT taxpayer.
Rather, it is the petitioner’s suppliers who are the proper parties
to claim the tax credit and accordingly refund the petitioner of
the VAT erroneously passed on to the latter.
Accordingly, we find that the Court of Appeals did not commit
any reversible error of law in holding that petitioner’s VAT
exemption under Rep. Act No. 7227 is limited to the VAT on
which it is directly liable as a seller and hence, it cannot claim
any refund or exemption for any input VAT it paid, if any, on its
purchases of raw materials and supplies.
WHEREFORE, the petition is DENIED for lack of merit. The
Decision dated September 3, 2001, of the Court of Appeals in
CA-G.R. SP No. 62823, as well as its Resolution of December 19,
2001 are AFFIRMED. No pronouncement as to costs.
SO ORDERED.
THIRD DIVISION
G.R. No. 186223, October 01, 2014
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. PHILIPPINE
ASSOCIATED SMELTING AND REFINING
CORPORATION, Respondent.
RESOLUTION
REYES, J.:
The instant petition filed under Rule 45 of the Revised Rules of
Court seeks to reverse and set aside the Court of Tax Appeals
(CTA) En Bane Decision1 dated November 12, 2008 in CTA E.B.
Case No. 351 (CTA Case No. 7565) entitled "Philippine
Associated Smelting and Refining Corporation v. The Honorable
Commissioner of Internal Revenue" which ruled that respondent
is a PEZA-registered enterprise and enjoys tax exemption
privilege; hence, it is exempt from paying the excise tax on
petroleum products in issue and entitled to seek a refund
thereof. The Resolution2 dated January 30, 2009 denied the
motion for reconsideration filed by the Commissioner of Internal
Revenue (petitioner).

The respondent Philippine Associated Smelting and Refining
Corporation (PASAR) is a domestic corporation engaged in the
business of processing, smelting, refining and exporting refined
copper cathodes and other copper products, and a registered
Zone Export Enterprise with the Export Processing Zone
Authority (EPZA).3 PASAR uses petroleum products for its
manufacturing and other processes, and purchases it from local
distributors, which import the same and pay the corresponding
excise taxes. The excise taxes paid are then passed on by the
local distributors to its purchasers. In this particular case, Petron
passed on to PASAR the excise taxes it paid on the petroleum
products bought by the latter during the period of January 2005
to October 2005, totalling eleven million six hundred eighty-
seven thousand four hundred sixty-seven 62/100
(P11,687,467.62).
In December 2006, PASAR filed a claim for refund and/or tax
credit with the Office of the Regional Director of Region XIV,
which denied the same in a letter dated January 3, 2007.4
PASAR then filed a petition for review with the Court of Tax
Appeals (CTA) Second Division, which was contested by the
petitioner. The petitioner also filed a motion to preliminarily
resolve whether PASAR is the proper party to ask for a refund.
Thereafter, the parties agreed to the following stipulation of
issues:
1. Whether or not petroleum products purchased from Petron
and delivered to PASAR to be used in its operation in LIDE are
exempt from excise taxes under Section 17 of P.D. No. 66 and
thus entitled to a refund or issuance of a tax credit certificate.
2. Whether or not PASAR is the proper party to claim for refund
or issuance of tax credit certificate for excise taxes paid.
3. Whether or not the claim for tax credit/refund is properly
substantiated by receipts and invoices.
4. Whether or not the claim for tax credit/refund is timely filed.5
On September 19, 2007, the CTA Second Division issued a
Resolution6 granting the petitioner's motion to preliminarily
resolve whether PASAR is the proper party to ask for a refund,
and dismissed its petition for review. When its motion for
reconsideration was denied in the Resolution7 dated December
3, 2007, PASAR filed a petition for review with the CTA En Banc.
In the assailed Resolution8 dated November 12, 2008, the
CTA En Banc set aside CTA Resolutions dated September 19,
2007 and December 3, 2007, and ordered the remand of the
57
petition for review to the CTA Second Division for reception of
evidence and determination of the amount to be refunded to
the petitioner. The petitioner filed a motion for reconsideration,
which was denied by the CTA En Banc in the assailed
Resolution9 dated January 30, 2009.
In granting PASAR's petition for review, the CTA En Banc ruled
that it is the proper party to claim the refund/credit,
citing Commissioner of Customs v. Philippine Phosphate Fertilizer
Corp.10 and Philippine Phosphate Fertilizer Corporation v.
Commissioner of Internal Revenue.11 According to the CTA, since
PASAR is a PEZA-registered entity enjoying tax exemption
privilege under Presidential Decree (P.D.) No. 66 and
subsequently, Republic Act (R.A.) No. 7916, it is exempt from
payment of excise taxes on petroleum products. And following
the Court's ruling in the Philippine Phosphate Fertilizer
Corporation, PASAR, therefore, may seek refund.12
The grounds relied upon in this petition are as follows:
I.
THE CTA SHOULD HAVE DISMISSED RESPONDENT'S PETITION
FOR REVIEW FOR LACK OF JURISDICTION OVER THE SUBJECT
MATTER OF THE CASE.
II.
THE CTA EN BANC'S RELIANCE ON COMMISSIONER OF CUSTOMS
V. PHILIPPINE PHOSPHATE FERTILIZER CORPORATION AND
PHILIPPINE PHOSPHATE FERTILIZER CORPORATION V.
COMMISSIONER OF INTERNAL REVENUE IS MISPLACED.
III.
RESPONDENT IS NOT THE PROPER PARTY TO CLAIM A TAX
CREDIT AND/OR REFUND.
IV.
THE SPECIFIC TAXES HEREIN SOUGHT TO BE
REFUNDED/CREDITED DO NOT FORM PART OF THE EXPORT
PRODUCTS MANUFACTURED BY RESPONDENT AND,
THEREFORE, NOT REFUNDABLE.13
The petitioner contends that the CTA has no jurisdiction over
the BIR Regional Director's denial of PASAR's claim, arguing that
the CTA's exclusive appellate jurisdiction pertains only to
decisions of the Commissioner of Internal Revenue, as provided
in Section 7 of R.A. No. 1125, as amended by Section 7 of R.A.
No. 9282. The petitioner also objects to the CTA En
Banc's application of the Commissioner of
Customs and Philphos cases in the present case and argues
that Commissioner of Customs involved the tax refund/credit of
customs duties and not excise taxes; Philphos, on the other
hand, did not squarely resolve the issue of whether an EPZA-
registered enterprise is exempt from paying the excise taxes on
petroleum products indirectly used. The petitioner also
contends that the proper party to seek a tax refund/credit is the
statutory taxpayer or the person on whom the tax was imposed
and paid the same, which in this case was Petron, even though
the latter subsequently shifted the burden to PASAR. Finally, the
petitioner believes that Section 17 of P.D. No. 66 does not
clearly provide that petroleum products delivered to EPZA-
registered enterprises are exempt from taxes, and that the
petroleum products purchased by PASAR from Petron do not
form part of the export products it manufactures.14
Respondent, meanwhile, claims that the petitioner is estopped
from questioning the jurisdiction of the CTA. Respondent also
contends, in sum, that Commissioner of
Customs and Philphos are applicable in this case, that it is the
proper party to apply for a tax refund and that it is exempted
from paying excise taxes.15
At the outset, it must be stated that the Court will limit the issue
to be resolved in this case to whether PASAR is the proper party
to claim the tax credit/refund on the excise taxes paid on the
petroleum products purchased from Petron. The other grounds
raised by the petitioner, i.e., jurisdiction and the factual basis of
PASAR's claim for tax refund/credit, are not proper at the
moment inasmuch as the CTA En Banc's review only dealt with
the petitioner's "motion to preliminary resolve the issue of
whether or not [respondent] is the proper party that may ask for
a refund."16 And on this issue, the Court finds that the CTA En
Banc did not commit any reversible error when it ruled that
PASAR is the proper party to file a claim for the refund/credit of
excise taxes. Hence, the petition must be denied.
PASAR is a business enterprise registered with the EPZA
pursuant to P.D. No. 66.17 There is no dispute as regards its use
of fuel and petroleum products for the processing, smelting and
refining of its export copper products, and that Petron, from
which PASAR purchased its fuel and petroleum, products,
passed on the excise taxes paid to the latter. In ruling that
PASAR is the proper party to file the claim for the refund/credit,
the CTA En Bane chiefly relied on the Court's rulings
in Commissioner of Customs v. Philippine Phosphate Fertilizer
Corp.18 and Philippine Phosphate Fertilizer Corporation v.
Commissioner of Internal Revenue.19
Commissioner of Customs involved a claim for refund by

Philippine Phosphate Fertilizer Corporation (Philphos) of the
customs duties it indirectly paid on fuel and petroleum products
purchased from Petron Corporation for the period of October
1991 until June 1992. This was opposed by the Commissioner of
Customs. One of the issues raised in the case was the legal basis
for Philphos' exemption from duties and taxes, it being an EPZA-
registered company. While it may be true that Commissioner of
Customs involved the refund of customs duties paid on
petroleum products, it was nevertheless correctly applied by the
CTA En Banc.
Notably, in Commissioner of Customs, the Court squarely
interpreted the exemption granted under Section 17 of P.D. No.
66 as applicable to both customs duties and internal revenue
taxes, viz:
The incentives offered to enterprises duly registered with the
PEZA consist, among others, of tax exemptions, x x x
Section 17 of the EPZA Law particularizes the tax benefits
accorded to duly registered enterprises. It states:
SEC. 17. Tax Treatment of Merchandize in the Zone. - (1) Except
as otherwise provided in this Decree, foreign and domestic
merchandise, raw materials, supplies, articles, equipment,
machineries, spare parts and wares of every description, except
those prohibited by law, brought into the Zone to be sold,
stored, broken up, repacked, assembled, installed, sorted,
cleaned, graded, or otherwise processed, manipulated,
manufactured, mixed with foreign or domestic merchandise
or used whether directly or indirectly in such activity, shall not be
subject to customs and internal revenue laws and regulations
nor to local tax ordinances, the following provisions of law to the
contrary notwithstanding.
The cited provision certainly covers petroleum supplies used,
directly or indirectly, by Philphos to facilitate its production of
fertilizers, subject to the minimal requirement that these
supplies are brought into the zone. The supplies are not subject
to customs and internal revenue laws and regulations, nor to
local tax ordinances. It is clear that Section 17(1) considers such
supplies exempt even if they are used indirectly, as they had been
in this case.20 (Emphasis and underscoring ours)
Thus, the Court affirmed the refund of customs duties granted
by the CTA and in closing, stated that "[t]he grant of exemption
under Section 17(1) is clear and unambiguous, x x x."21
Philphos, meanwhile, involved Philphos' claim for refund of
excise taxes passed on by Petron. One of the issues identified by
the Court in the case was whether the CTA should have granted
the claim for refund. In resolving said issue, the Court ruled that
58
the CTA erred when it disallowed the petitioner's claim due to
its failure to present invoices as there is nothing in CTA Circular
No. 1-95 that requires its presentation. The issue of whether the
petitioner was entitled to exemption from payment of excise
taxes was not lengthily discussed by the Court because it was
already undisputed. Thus, the Court stated:
In this case, there is no dispute that petitioner is entitled to
exemption from the payment of excise taxes by virtue of its being
an EPZA registered enterprise. As stated by the CTA, the only
thing left to be determined is whether or not petitioner is
entitled to the amount claimed for refund.
xxxx
Since it is not disputed that petitioner is entitled to tax
exemption, it should not be precluded from presenting evidence
to substantiate the amount of refund it is claiming on mere
technicality especially in this case, where the failure to present
invoices at the first instance was adequately explained by
petitioner.22 (Emphasis ours)
Applying the foregoing rulings in this case, it is therefore
undeniable that PASAR is exempted from payment of excise
taxes.
The next pivotal question then that must be resolved is whether
PASAR has the legal personality to file the claim for the refund of
the excise taxes passed on by Petron. The petitioner insists that
PASAR is not the proper party to seek a refund of an indirect tax,
such as an excise tax or Value Added Tax, because it is not the
statutory taxpayer. The petitioner's argument, however, has no
merit.
The rule that it is the statutory taxpayer which has the legal
personality to file a claim for refund23 finds no applicability in
this case. In Philippine Airlines, Inc. v. Commissioner of Internal
Revenue,24 the Court distinguished between the kinds of
exemption enjoyed by a claimant in order to determine the
propriety of a tax refund claim. "If the law confers an exemption
from both direct or indirect taxes, a claimant is entitled to a tax
refund even if it only bears the economic burden of the
applicable tax. On the other hand, if the exemption conferred
only applies to direct taxes, then the statutory taxpayer is
regarded as the proper party to file the refund claim."25 In
PASAR's case, Section 17 of P.D. No. 66, as affirmed
in Commissioner of Customs, specifically declared that supplies,
including petroleum products, whether used directly or
indirectly, shall not be subject to internal revenue laws and
regulations. Such exemption includes the payment of excise
taxes, which was passed on to PASAR by Petron. PASAR,
therefore, is the proper party to file a claim for refund.
WHEREFORE, the petition is DENIED for lack of merit.
Accordingly, the Decision dated November 12, 2008 and its
Resolution dated January 30, 2009 of the Court of Tax
Appeals En Banc in CTA E.B. Case No. 351 are
hereby AFFIRMED in toto.
SO ORDERED.
EN BANC
G.R. No. 210836, September 01, 2015
CHEVRON PHILIPPINES INC., Petitioner, v. COMMISSIONER OF
INTERNAL REVENUE, Respondent.
RESOLUTION
BERSAMIN, J.:
Excise tax on petroleum products is essentially a tax on
property, the direct liability for which pertains to the statutory
taxpayer (i.e., manufacturer, producer or importer). Any excise
tax paid by the statutory taxpayer on petroleum products sold
to any of the entities or agencies named in Section 135 of
the National Internal Revenue Code (NIRC) exempt from excise
tax is deemed illegal or erroneous, and should be credited or
refunded to the payor pursuant to Section 204 of the NIRC. This
is because the exemption granted under Section 135 of the NIRC
must be construed in favor of the property itself, that is, the
petroleum products.
The Case
Before the Court is the Motion for Reconsideration filed by
petitioner Chevron Philippines, Inc. (Chevron)1vis-a-vis the
resolution promulgated on March 19, 2014,2 whereby the
Court's Second Division denied its petition for review
on certiorari for failure to show any reversible error on the part
of the Court of Tax Appeals (CTA) En Banc. The CTA En Banc had
denied Chevron's claim for tax refund or tax credit for the excise
taxes paid on its importation of petroleum products that it had
sold to the Clark Development Corporation (CDC), an entity
exempt from direct and indirect taxes.
The Motion for Reconsideration was later on referred to the

Court En Banc after the Second Division noted that the CTA En
Banc had denied Chevron's claim for the tax refund or tax credit
based on the ruling promulgated in Commissioner of Internal
Revenue v. Pilipinas Shell Petroleum Corporation (Pilipinas
Shell) on April 25, 2012,3 but which ruling was meanwhile
reversed upon reconsideration by the First Division through the
resolution promulgated on February 19, 2014.4 The Court En
Bancaccepted the referral last June 16, 2015.
Antecedents
Chevron sold and delivered petroleum products to CDC in the
period from August 2007 to December 2007.5Chevron did not
pass on to CDC the excise taxes paid on the importation of the
petroleum products sold to CDC in taxable year 2007;6 hence, on
June 26, 2009, it filed an administrative claim for tax refund or
issuance of tax credit certificate in the amount of
P6,542,400.00.7Considering that respondent Commissioner of
Internal Revenue (CIR) did not act on the administrative claim
for tax refund or tax credit, Chevron elevated its claim to the
CTA by petition for review on June 29, 2009.8 The case,
docketed as CTA Case No. 7939, was raffled to the CTA's First
Division.
The CTA First Division denied Chevron's judicial claim for tax
refund or tax credit through its decision dated July 31,
2012,9 and later on also denied Chevron's Motion for
Reconsideration on November 20, 2012.10
In due course, Chevron appealed to the CTA En Banc (CTA EB
No. 964), which, in the decision dated September 30,
2013,11 affirmed the ruling of the CTA First Division, stating that
there was nothing in Section 135(c) of the NIRC that explicitly
exempted Chevron as the seller of the imported petroleum
products from the payment of the excise taxes; and holding that
because it did not fall under any of the categories exempted
from paying excise tax, Chevron was not entitled to the tax
refund or tax credit.
The CTA En Banc noted that:
Considering that an excise tax is in the nature of an indirect tax
where the tax burden can be shifted, Section 135(c) of the NIRC
of 1997, as amended, should be construed as prohibiting the
shifting of the burden of the excise tax to tax-exempt entities
who buys petroleum products from the manufacturer/seller by
incorporating the excise tax component as an added cost in the
price fixed by the manufacturer/seller.
xxxx
59
The above discussion is in line with the pronouncement made by
the Supreme Court in the case of Commissioner of Internal
Revenue v. Pilipinas Shell Petroleum Corporation (Shellcase),
involving Shell's claim for excise tax refund for petroleum
products sold to international carriers. The Supreme Court held
that the exemption from excise tax payment on petroleum
products under Section 135(a) of the NIRC of 1997, as amended,
is conferred on international carriers who purchased the same
for their use or consumption outside the Philippines. The oil
companies which sold such petroleum products to international
carriers are not entitled to a refund of excise taxes previously
paid on the petroleum products sold, x x x
xxxx
Accordingly, petitioner is not entitled to any refund or issuance
of tax credit certificate on excise taxes paid on its importation of
petroleum products sold to CDC pursuant to the doctrine laid
down by the Supreme Court in the Shell case.12
Chevron sought reconsideration, but the CTA En Banc denied its
motion for that purpose in the resolution dated January 7,
2014.13nad
Chevron appealed to the Court,14 but the Court (Second
Division) denied the petition for review on certiorari through the
resolution promulgated on March 19, 2014 for failure to show
any reversible error on the part of the CTA En Banc.
Hence, Chevron has filed the Motion for
Reconsideration, submitting that it was entitled to the tax refund
or tax credit because ruling promulgated on April 25, 2012
in Pilipinas Shell,15 on which the CTA En Banchad based its denial
of the claim of Chevron, was meanwhile reconsidered by the
Court's First Division on February 19, 2014.16nad
Issue
The lone issue for resolution is whether Chevron was entitled to
the tax refund or the tax credit for the excise taxes paid on the
importation of petroleum products that it had sold to CDC in
2007.
Ruling of the Court
Chevron's Motion for Reconsideration is meritorious.
Pilipinas Shell concerns the manufacturer's entitlement to
refund or credit of the excise taxes paid on the petroleum
products sold to international carriers exempt from excise taxes
under Section 135(a) of the NIRC. However, the issue raised
here is whether the importer (i.e., Chevron) was entitled to the
refund or credit of the excise taxes it paid on petroleum
products sold to CDC, a tax-exempt entity under Section 135(c)
of the NIRC. Notwithstanding that the claims for refund or credit
of excise taxes were premised on different subsections of
Section 135 of the NIRC, the basic tax principle applicable was
the same in both cases - that excise tax is a tax on property;
hence, the exemption from the excise tax expressly granted
under Section 135 of the NIRC must be construed in favor of the
petroleum products on which the excise tax was initially
imposed.
Accordingly, the excise taxes that Chevron paid on its
importation of petroleum products subsequently sold to CDC
were illegal and erroneous, and should be credited or refunded
to Chevron in accordance with Section 204 of the NIRC.
We explain.
Under Section 12917 of the NIRC, as amended, excise taxes are
imposed on two kinds of goods, namely: (a) goods
manufactured or produced in the Philippines for domestic sales
or consumption or for any other disposition; and (b) things
imported. Undoubtedly, the excise tax imposed under Section
129 of the NIRC is a tax on property.18nad
With respect to imported things, Section 131 of the NIRC
declares that excise taxes on imported things shall be paid by
the owner or importer to the Customs officers, conformably
with the regulations of the Department of Finance and before
the release of such articles from the customs house, unless the
imported things are exempt from excise taxes and the person
found to be in possession of the same is other than those legally
entitled to such tax exemption. For this purpose, the statutory
taxpayer is the importer of the things subject to excise tax.
Chevron, being the statutory taxpayer, paid the excise taxes on
its importation of the petroleum products.19nad
Section 135 of the NIRC states:
SEC. 135. Petroleum Products Sold to International Carriers and
Exempt Entities or Agencies. - Petroleum products sold to the
following are exempt from excise tax:
(a) International carriers of Philippine or foreign registry on their
use or consumption outside the Philippines: Provided, That the
petroleum products sold to these international carriers shall be
stored in a bonded storage tank and may be disposed of only in
accordance with the rules and regulations to be prescribed by

the Secretary of Finance, upon recommendation of the
Commissioner;
(b) Exempt entities or agencies covered by tax treaties,
conventions and other international agreement for their use or
consumption: Provided, however, That the country of said
foreign international carrier or exempt entities or agencies
exempts from similar taxes petroleum products sold to
Philippine carriers, entities or agencies; and
(c) Entities which are by law exempt from direct and indirect
taxes. (Emphasis supplied.)
Pursuant to Section 135(c), supra, petroleum products sold to
entities that are by law exempt from direct and indirect taxes
are exempt from excise tax. The phrase which are by law exempt
from direct and indirect taxes describes the entities to whom the
petroleum products must be sold in order to render the
exemption operative. Section 135(c) should thus be construed
as an exemption in favor of the petroleum products on which
the excise tax was levied in the first place. The exemption
cannot be granted to the buyers - that is, the entities that are by
law exempt from direct and indirect taxes - because they are not
under any legal duty to pay the excise tax.
CDC was created to be the implementing and operating arm of
the Bases Conversion and Development Authority to manage
the Clark Special Economic Zone (CSEZ).20 As a duly-registered
enterprise in the CSEZ, CDC has been exempt from paying direct
and indirect taxes pursuant to Section 2421 of Republic Act No.
7916 (The Special Economic Zone Act of 1995), in relation to
Section 15 of Republic Act No. 9400 (Amending Republic Act No.
7227, otherwise known as the Bases Conversion Development
Act of 1992).22nad
Inasmuch as its liability for the payment of the excise taxes
accrued immediately upon importation and prior to the removal
of the petroleum products from the customshouse, Chevron
was bound to pay, and actually paid such taxes. But the status of
the petroleum products as exempt from the excise taxes would
be confirmed only upon their sale to CDC in 2007 (or, for that
matter, to any of the other entities or agencies listed in Section
135 of the NIRC). Before then, Chevron did not have any legal
basis to claim the tax refund or the tax credit as to the
petroleum products.
Consequently, the payment of the excise taxes by Chevron upon
its importation of petroleum products was deemed illegal and
erroneous upon the sale of the petroleum products to CDC.
60
Section 204 of the NIRC explicitly allowed Chevron as the
statutory taxpayer to claim the refund or the credit of the excise
taxes thereby paid, viz.:
SEC 204. Authority of the Commissioner to Compromise, Abate
and Refund or Credit Taxes. - The Commissioner may -
xxxx
(C) Credit or refund taxes erroneously or illegally received or
penalties imposed without authority, refund the value of internal
revenue stamps when they are returned in good condition by the
purchaser, and, in his discretion, redeem or change unused
stamps that have been rendered unfit for use and refund their
value upon proof of destruction. No credit or refund of taxes or
penalties shall be allowed unless the taxpayer files in writing with
the Commissioner a claim for credit or refund within two (2)
years after payment of the tax or penalty: Provided, however,
That a return filed showing an overpayment shall be considered
as a written claim for credit or refund.
It is noteworthy that excise taxes are considered as a kind of
indirect tax, the liability for the payment of which may fall on a
person other than whoever actually bears the burden of the
tax.23 Simply put, the statutory taxpayer may shift the economic
burden of the excise tax payment to another - usually the buyer.
In cases involving excise tax exemptions on petroleum products
under Section 135 of the NIRC, the Court has consistently held
that it is the statutory taxpayer, not the party who only bears
the economic burden, who is entitled to claim the tax refund or
tax credit.24 But the Court has also made clear that this rule does
not apply where the law grants the party to whom the economic
burden of the tax is shifted by virtue of an exemption from both
direct and indirect taxes. In which case, such party must be
allowed to claim the tax refund or tax credit even if it is not
considered as the statutory taxpayer under the law.25nad
The general rule applies here because Chevron did not pass on
to CDC the excise taxes paid on the importation of the
petroleum products, the latter being exempt from indirect taxes
by virtue of Section 24 of Republic Act No. 7916, in relation to
Section 15 of Republic Act No. 9400, not because Section 135(c)
of the NIRC exempted CDC from the payment of excise tax.
Accordingly, conformably with Section 204(C) of the
NIRC, supra, and pertinent jurisprudence, Chevron was entitled
to the refund or credit of the excise taxes erroneously paid on
the importation of the petroleum products sold to CDC.
WHEREFORE, the Court GRANTS petitioner Chevron Philippines,
Inc.'s Motion for Reconsideration; DIRECTS respondent
Commissioner of Internal Revenue to refund the excise taxes in
the amount of P6,542,400.00 paid on the petroleum products
sold to Clark Development Corporation in the period from
August 2007 to December 2007, or to issue a tax credit
certificate of that amount to Chevron Philippines, Inc.
No pronouncement on costs of suit.
THIRD DIVISION
G.R. No. 153866 February 11, 2005
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
SEAGATE TECHNOLOGY (PHILIPPINES), respondent.
DECISION
PANGANIBAN, J.:
Business companies registered in and operating from the Special
Economic Zone in Naga, Cebu -- like herein respondent --
are entities exempt from all internal revenue taxes and the
implementing rules relevant thereto, including the value-added
taxes or VAT. Although export sales are not deemed
exempt transactions, they are nonetheless zero-rated. Hence, in
the present case, the distinction between exempt entities and
exempt transactions has little significance, because the net
result is that the taxpayer is not liable for the VAT. Respondent,
a VAT-registered enterprise, has complied with all requisites for
claiming a tax refund of or credit for the input VAT it paid on
capital goods it purchased. Thus, the Court of Tax Appeals and
the Court of Appeals did not err in ruling that it is entitled to
such refund or credit.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of
Court, seeking to set aside the May 27, 2002 Decision2 of the
Court of Appeals (CA) in CA-GR SP No. 66093. The decretal
portion of the Decision reads as follows:
"WHEREFORE, foregoing premises considered, the petition for
review is DENIED for lack of merit."3

The Facts
The CA quoted the facts narrated by the Court of Tax Appeals
(CTA), as follows:
"As jointly stipulated by the parties, the pertinent facts x x x
involved in this case are as follows:
1. [Respondent] is a resident foreign corporation duly registered
with the Securities and Exchange Commission to do business in
the Philippines, with principal office address at the new Cebu
Township One, Special Economic Zone, Barangay Cantao-an,
Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly
appointed and empowered to perform the duties of his office,
including, among others, the duty to act and approve claims for
refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone
Authority (PEZA) and has been issued PEZA Certificate No. 97-
044 pursuant to Presidential Decree No. 66, as amended, to
engage in the manufacture of recording components primarily
used in computers for export. Such registration was made on 6
June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as
evidenced by VAT Registration Certification No. 97-083-000600-
V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have
been filed by [respondent];
6. An administrative claim for refund of VAT input taxes in the
amount of P28,369,226.38 with supporting documents
(inclusive of the P12,267,981.04 VAT input taxes subject of this
Petition for Review), was filed on 4 October 1999 with Revenue
District Office No. 83, Talisay Cebu;
7. No final action has been received by [respondent] from
[petitioner] on [respondent’s] claim for VAT refund.
"The administrative claim for refund by the [respondent] on
October 4, 1999 was not acted upon by the [petitioner]
prompting the [respondent] to elevate the case to [the CTA] on
61
July 21, 2000 by way of Petition for Review in order to toll the
running of the two-year prescriptive period.
"For his part, [petitioner] x x x raised the following Special and
Affirmative Defenses, to wit:
1. [Respondent’s] alleged claim for tax refund/credit is subject to
administrative routinary investigation/examination by
[petitioner’s] Bureau;
2. Since ‘taxes are presumed to have been collected in
accordance with laws and regulations,’ the [respondent] has the
burden of proof that the taxes sought to be refunded were
erroneously or illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997),
the Supreme Court ruled that:
"A claimant has the burden of proof to establish the factual basis not of those under both Presidential Decree No. (PD) 66, as
of his or her claim for tax credit/refund."
4. Claims for tax refund/tax credit are construed in ‘strictissimi
juris’ against the taxpayer. This is due to the fact that claims for
refund/credit [partake of] the nature of an exemption from tax.
Thus, it is incumbent upon the [respondent] to prove that it is
indeed entitled to the refund/credit sought. Failure on the part
of the [respondent] to prove the same is fatal to its claim for tax Moreover, the CA held that neither Section 109 of the Tax Code
credit. He who claims exemption must be able to justify his
claim by the clearest grant of organic or statutory law. An
exemption from the common burden cannot be permitted to
exist upon vague implications;
5. Granting, without admitting, that [respondent] is a Philippine
Economic Zone Authority (PEZA) registered Ecozone Enterprise,
then its business is not subject to VAT pursuant to Section 24 of
Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax Hence this Petition.
Code, as amended. As [respondent’s] business is not subject to
VAT, the capital goods and services it alleged to have purchased
are considered not used in VAT taxable business. As such,
[respondent] is not entitled to refund of input taxes on such
capital goods pursuant to Section 4.106.1 of Revenue
Regulations No. ([RR])7-95, and of input taxes on services
pursuant to Section 4.103 of said regulations.
6. [Respondent] must show compliance with the provisions of
Section 204 (C) and 229 of the 1997 Tax Code on filing of a
written claim for refund within two (2) years from the date of
payment of tax.’
"On July 19, 2001, the Tax Court rendered a decision granting
the claim for refund."4
Ruling of the Court of Appeals
The CA affirmed the Decision of the CTA granting the claim for
refund or issuance of a tax credit certificate (TCC) in favor of
respondent in the reduced amount of P12,122,922.66. This sum
represented the unutilized but substantiated input VAT paid on
capital goods purchased for the period covering April 1, 1998 to
June 30, 1999.
The appellate court reasoned that respondent had availed itself
only of the fiscal incentives under Executive Order No. (EO) 226
(otherwise known as the Omnibus Investment Code of 1987),
amended, and Section 24 of RA 7916. Respondent was,
therefore, considered exempt only from the payment of income
tax when it opted for the income tax holiday in lieu of the 5
percent preferential tax on gross income earned. As a VAT-
registered entity, though, it was still subject to the payment of
other national internal revenue taxes, like the VAT.
nor Sections 4.106-1 and 4.103-1 of RR 7-95 were applicable.
Having paid the input VAT on the capital goods it purchased,
respondent correctly filed the administrative and judicial claims
for its refund within the two-year prescriptive period. Such
payments were -- to the extent of the refundable value -- duly
supported by VAT invoices or official receipts, and were not yet
offset against any output VAT liability.
5
Sole Issue
Petitioner submits this sole issue for our consideration:
"Whether or not respondent is entitled to the refund or
issuance of Tax Credit Certificate in the amount
of P12,122,922.66 representing alleged unutilized input VAT
paid on capital goods purchased for the period April 1, 1998 to
June 30, 1999."6

The Court’s Ruling
The Petition is unmeritorious.
Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to a Refund of
or Credit for Input VAT
No doubt, as a PEZA-registered enterprise within a special
economic zone,7 respondent is entitled to the fiscal incentives
and benefits8 provided for in either PD 669 or EO 226.10 It shall,
moreover, enjoy all privileges, benefits, advantages or
exemptions under both Republic Act Nos. (RA) 722711 and
7844.12
Preferential Tax Treatment Under Special Laws
If it avails itself of PD 66, notwithstanding the provisions of other
laws to the contrary, respondent shall not be subject to internal
revenue laws and regulations for raw materials, supplies,
articles, equipment, machineries, spare parts and wares, except
those prohibited by law, brought into the zone to be stored,
broken up, repacked, assembled, installed, sorted, cleaned,
graded or otherwise processed, manipulated, manufactured,
mixed or used directly or indirectly in such activities.13 Even so,
respondent would enjoy a net-operating loss carry over;
accelerated depreciation; foreign exchange and financial
assistance; and exemption from export taxes, local taxes and
licenses.14
Comparatively, the same exemption from internal revenue laws
and regulations applies if EO 22615 is chosen. Under this law,
respondent shall further be entitled to an income tax holiday;
additional deduction for labor expense; simplification of
customs procedure; unrestricted use of consigned equipment;
access to a bonded manufacturing warehouse system; privileges
for foreign nationals employed; tax credits on domestic capital
equipment, as well as for taxes and duties on raw materials; and
exemption from contractors’ taxes, wharfage dues, taxes and
duties on imported capital equipment and spare parts, export
taxes, duties, imposts and fees,16 local taxes and licenses, and
real property taxes.17
A privilege available to respondent under the provision in RA
7227 on tax and duty-free importation of raw materials, capital
62
and equipment18 -- is, ipso facto, also accorded to the
zone19 under RA 7916. Furthermore, the latter law --
notwithstanding other existing laws, rules and regulations to the
contrary -- extends20 to that zone the provision stating that no
local or national taxes shall be imposed therein.21 No exchange
control policy shall be applied; and free markets for foreign
exchange, gold, securities and future shall be allowed and
maintained.22 Banking and finance shall also be liberalized under
minimum Bangko Sentral regulation with the establishment of
foreign currency depository units of local commercial banks and
offshore banking units of foreign banks.23
In the same vein, respondent benefits under RA 7844 from
negotiable tax credits24 for locally-produced materials used as
inputs. Aside from the other incentives possibly already granted
to it by the Board of Investments, it also enjoys preferential
credit facilities25 and exemption from PD 1853.26
From the above-cited laws, it is immediately clear that petitioner
enjoys preferential tax treatment.27 It is not subject to internal
revenue laws and regulations and is even entitled to tax credits.
The VAT on capital goods is an internal revenue tax from which
petitioner as an entity is exempt. Although
the transactions involving such tax are not exempt, petitioner as
a VAT-registered person,28 however, is entitled to their credits.
Nature of the VAT and the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at present,
from 0 percent to 10 percent levied on every importation of
goods, whether or not in the course of trade or business, or
imposed on each sale, barter, exchange or lease of goods or
properties or on each rendition of services in the course of trade
or business29 as they pass along the production and distribution
chain, the tax being limited only to the value added30 to such
goods, properties or services by the seller, transferor or
lessor.31 It is an indirect tax that may be shifted or passed on to
the buyer, transferee or lessee of the goods, properties or
services.32 As such, it should be understood not in the context of
the person or entity that is primarily, directly and legally liable
for its payment, but in terms of its nature as a tax on
consumption.33 In either case, though, the same conclusion is
arrived at.
The law34 that originally imposed the VAT in the country, as well
as the subsequent amendments of that law, has been drawn
from the tax credit method.35 Such method adopted the
mechanics and self-enforcement features of the VAT as first
implemented and practiced in Europe and subsequently
adopted in New Zealand and Canada.36 Under the present
method that relies on invoices, an entity can credit against or
subtract from the VAT charged on its sales or outputs the VAT
paid on its purchases, inputs and imports.37
If at the end of a taxable quarter the output taxes38 charged by a
seller39 are equal to the input taxes40 passed on by the suppliers,
no payment is required. It is when the output taxes exceed the
input taxes that the excess has to be paid.41 If, however, the
input taxes exceed the output taxes, the excess shall be carried
over to the succeeding quarter or quarters.42 Should the input
taxes result from zero-rated or effectively zero-rated
transactions or from the acquisition of capital goods,43 any
excess over the output taxes shall instead be refunded44 to the
taxpayer or credited45 against other internal revenue taxes.46
Zero-Rated and Effectively Zero-Rated Transactions
Although both are taxable and similar in effect, zero-rated
transactions differ from effectively zero-rated transactions as to
their source.
Zero-rated transactions generally refer to the export sale of
goods and supply of services.47 The tax rate is set at
zero.48 When applied to the tax base, such rate obviously results
in no tax chargeable against the purchaser. The seller of such
transactions charges no output tax,49 but can claim a refund of
or a tax credit certificate for the VAT previously charged by
suppliers.
Effectively zero-rated transactions, however, refer to the sale of
goods50 or supply of services51 to persons or entities whose
exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects such
transactions to a zero rate.52 Again, as applied to the tax base,
such rate does not yield any tax chargeable against the
purchaser. The seller who charges zero output tax on such
transactions can also claim a refund of or a tax credit certificate
for the VAT previously charged by suppliers.
Zero Rating and Exemption
In terms of the VAT computation, zero rating and exemption are
the same, but the extent of relief that results from either one of
them is not.

Applying the destination principle53 to the exportation of goods,
automatic zero rating54 is primarily intended to be enjoyed by
the seller who is directly and legally liable for the VAT, making
such seller internationally competitive by allowing the refund or
credit of input taxes that are attributable to export
sales.55 Effective zero rating, on the contrary, is intended to
benefit the purchaser who, not being directly and legally liable
for the payment of the VAT, will ultimately bear the burden of
the tax shifted by the suppliers.
In both instances of zero rating, there is total relief for the
purchaser from the burden of the tax.56 But in an exemption
there is only partial relief,57 because the purchaser is not
allowed any tax refund of or credit for input taxes paid.58
Exempt Transaction >and Exempt Party
The object of exemption from the VAT may either be the
transaction itself or any of the parties to the transaction.59
An exempt transaction, on the one hand, involves goods or
services which, by their nature, are specifically listed in and
expressly exempted from the VAT under the Tax Code, without
regard to the tax status -- VAT-exempt or not -- of the party to
the transaction.60 Indeed, such transaction is not subject to the
VAT, but the seller is not allowed any tax refund of or credit for
any input taxes paid.
An exempt party, on the other hand, is a person or entity
granted VAT exemption under the Tax Code, a special law or an
international agreement to which the Philippines is a signatory,
and by virtue of which its taxable transactions become exempt
from the VAT.61 Such party is also not subject to the VAT, but
may be allowed a tax refund of or credit for input taxes paid,
depending on its registration as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the
amount of which may be shifted or passed on by the seller to
the purchaser of the goods, properties or services.62 While
the liability is imposed on one person, the burden may be
passed on to another. Therefore, if a special law merely exempts
a party as a seller from its direct liability for payment of the VAT,
but does not relieve the same party as a purchaser from its
indirect burden of the VAT shifted to it by its VAT-registered
suppliers, the purchase transaction is not exempt. Applying this
principle to the case at bar, the purchase transactions entered
into by respondent are not VAT-exempt.
63
Special laws may certainly exempt transactions from the sales,79 such purchase transactions by respondent would indeed
VAT.63 However, the Tax Code provides that those falling under be subject to a zero rate.80
PD 66 are not. PD 66 is the precursor of RA 7916 -- the special
law under which respondent was registered. The Tax Exemptions Broad and Express
purchase transactions it entered into are, therefore, not VAT-
exempt. These are subject to the VAT; respondent is required to
Applying the special laws we have earlier discussed, respondent
register.
as an entity is exempt from internal revenue laws and
regulations.
Its sales transactions, however, will either be zero-rated or taxed
at the standard rate of 10 percent,64 depending again on the
This exemption covers both direct and indirect taxes, stemming
application of the destination principle.65
from the very nature of the VAT as a tax on consumption, for
which the direct liability is imposed on one person but the
If respondent enters into such sales transactions with a indirect burden is passed on to another. Respondent, as an
purchaser -- usually in a foreign country -- for use or exempt entity, can neither be directly charged for the VAT on its
consumption outside the Philippines, these shall be subject to 0 sales nor indirectly made to bear, as added cost to such sales,
percent.66 If entered into with a purchaser for use or the equivalent VAT on its purchases. Ubi lex non distinguit, nec
consumption in the Philippines, then these shall be subject to 10 nos distinguere debemus. Where the law does not distinguish,
percent,67 unless the purchaser is exempt from the indirect we ought not to distinguish.
burden of the VAT, in which case it shall also be zero-rated.
Moreover, the exemption is both express and pervasive for the
Since the purchases of respondent are not exempt from the following reasons:
VAT, the rate to be applied is zero. Its exemption under both PD
66 and RA 7916 effectively subjects such transactions to a zero
First, RA 7916 states that "no taxes, local and national, shall be
rate,68 because the ecozone within which it is registered is
imposed on business establishments operating within the
managed and operated by the PEZA as a separate customs
ecozone."81 Since this law does not exclude the VAT from the
territory.69 This means that in such zone is created the legal
prohibition, it is deemed included. Exceptio firmat regulam in
fiction of foreign territory.70 Under the cross-border principle71 of
casibus non exceptis. An exception confirms the rule in cases not
the VAT system being enforced by the Bureau of Internal
excepted; that is, a thing not being excepted must be regarded
Revenue (BIR),72 no VAT shall be imposed to form part of the
as coming within the purview of the general rule.
cost of goods destined for consumption outside of the territorial
border of the taxing authority. If exports of goods and services
Moreover, even though the VAT is not imposed on the entity
from the Philippines to a foreign country are free of the
but on the transaction, it may still be passed on and, therefore,
VAT,73 then the same rule holds for such exports from the
indirectly imposed on the same entity -- a patent circumvention
national territory -- except specifically declared areas -- to an
of the law. That no VAT shall be imposed directly upon business
ecozone.
establishments operating within the ecozone under RA 7916
also means that no VAT may be passed on and imposed
Sales made by a VAT-registered person in the customs territory
indirectly. Quando aliquid prohibetur ex directo prohibetur et per
to a PEZA-registered entity are considered exports to a foreign
obliquum. When anything is prohibited directly, it is also
country; conversely, sales by a PEZA-registered entity to a VAT-
prohibited indirectly.
registered person in the customs territory are deemed imports
from a foreign country.74 An ecozone -- indubitably a
Second, when RA 8748 was enacted to amend RA 7916, the
geographical territory of the Philippines -- is, however, regarded
same prohibition applied, except for real property taxes that
in law as foreign soil.75 This legal fiction is necessary to give
presently are imposed on land owned by developers.82 This
meaningful effect to the policies of the special law creating the
similar and repeated prohibition is an unambiguous ratification
zone.76 If respondent is located in an export processing
of the law’s intent in not imposing local or national taxes on
zone77 within that ecozone, sales to the export processing zone,
business enterprises within the ecozone.
even without being actually exported, shall in fact be viewed
as constructively exported under EO 226.78 Considered as export

Third, foreign and domestic merchandise, raw materials,
equipment and the like "shall not be subject to x x x internal
revenue laws and regulations" under PD 6683 -- the original
charter of PEZA (then EPZA) that was later amended by RA
7916.84 No provisions in the latter law modify such exemption.
Although this exemption puts the government at an initial
disadvantage, the reduced tax collection ultimately redounds to
the benefit of the national economy by enticing more business
investments and creating more employment opportunities.85
Fourth, even the rules implementing the PEZA law clearly
reiterate that merchandise -- except those prohibited by law --
"shall not be subject to x x x internal revenue laws and
regulations x x x"86 if brought to the ecozone’s restricted
area87 for manufacturing by registered export enterprises,88 of
which respondent is one. These rules also apply to all
enterprises registered with the EPZA prior to the effectivity of
such rules.89
Fifth, export processing zone enterprises registered90 with the
Board of Investments (BOI) under EO 226 patently enjoy
exemption from national internal revenue taxes on imported
capital equipment reasonably needed and exclusively used for
the manufacture of their products;91 on required supplies and
spare part for consigned equipment;92 and on foreign and
domestic merchandise, raw materials, equipment and the like --
except those prohibited by law -- brought into the zone for
manufacturing.93 In addition, they are given credits for the value
of the national internal revenue taxes imposed on domestic
capital equipment also reasonably needed and exclusively used
for the manufacture of their products,94 as well as for the value
of such taxes imposed on domestic raw materials and supplies
that are used in the manufacture of their export products and
that form part thereof.95
Sixth, the exemption from local and national taxes granted
under RA 722796 are ipso facto accorded to ecozones.97In case of
doubt, conflicts with respect to such tax exemption privilege
shall be resolved in favor of the ecozone.98
And seventh, the tax credits under RA 7844 -- given for imported
raw materials primarily used in the production of export
goods,99 and for locally produced raw materials, capital
equipment and spare parts used by exporters of non-traditional
products100 -- shall also be continuously enjoyed by similar
64
exporters within the ecozone.101 Indeed, the latter exporters are
likewise entitled to such tax exemptions and credits.
Tax Refund as Tax Exemption
To be sure, statutes that grant tax exemptions are
construed strictissimi juris102 against the taxpayer103 and liberally
in favor of the taxing authority.104
Tax refunds are in the nature of such
exemptions.105 Accordingly, the claimants of those refunds bear
the burden of proving the factual basis of their claims;106 and of
showing, by words too plain to be mistaken, that the legislature
intended to exempt them.107 In the present case, all the cited
legal provisions are teeming with life with respect to the grant of
tax exemptions too vivid to pass unnoticed. In addition,
respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its
transactions which are not exempt. The end result, however, is
that it is not subject to the VAT. The non-taxability of
transactions that are otherwise taxable is merely a necessary
incident to the tax exemption conferred by law upon it as an
entity, not upon the transactions themselves.108 Nonetheless, its
exemption as an entity and the non-exemption of its
transactions lead to the same result for the following
considerations:
First, the contemporaneous construction of our tax laws by BIR
authorities who are called upon to execute or administer such
laws109 will have to be adopted. Their prior tax issuances have
held inconsistent positions brought about by their probable
failure to comprehend and fully appreciate the nature of the
VAT as a tax on consumption and the application of
the destination principle.110 Revenue Memorandum Circular No.
(RMC) 74-99, however, now clearly and correctly provides that
any VAT-registered supplier’s sale of goods, property or services
from the customs territory to any registered enterprise
operating in the ecozone -- regardless of the class or type of the
latter’s PEZA registration -- is legally entitled to a zero rate.111
Second, the policies of the law should prevail. Ratio legis est
anima. The reason for the law is its very soul.
In PD 66, the urgent creation of the EPZA which preceded the
PEZA, as well as the establishment of export processing zones,
seeks "to encourage and promote foreign commerce as a means
of x x x strengthening our export trade and foreign exchange
position, of hastening industrialization, of reducing domestic
unemployment, and of accelerating the development of the
country."112
RA 7916, as amended by RA 8748, declared that by creating the
PEZA and integrating the special economic zones, "the
government shall actively encourage, promote, induce and
accelerate a sound and balanced industrial, economic and social
development of the country x x x through the establishment,
among others, of special economic zones x x x that shall
effectively attract legitimate and productive foreign
investments."113
Under EO 226, the "State shall encourage x x x foreign
investments in industry x x x which shall x x x meet the tests of
international competitiveness[,] accelerate development of less
developed regions of the country[,] and result in increased
volume and value of exports for the economy."114 Fiscal
incentives that are cost-efficient and simple to administer shall
be devised and extended to significant projects "to compensate
for market imperfections, to reward performance contributing
to economic development,"115 and "to stimulate the
establishment and assist initial operations of the enterprise."116
Wisely accorded to ecozones created under RA 7916117 was the
government’s policy -- spelled out earlier in RA 7227 -- of
converting into alternative productive uses118 the former
military reservations and their extensions,119 as well as of
providing them incentives120 to enhance the benefits that would
be derived from them121 in promoting economic and social
development.122
Finally, under RA 7844, the State declares the need "to evolve
export development into a national effort"123 in order to win
international markets. By providing many export and tax
incentives,124 the State is able to drive home the point that
exporting is indeed "the key to national survival and the means
through which the economic goals of increased employment
and enhanced incomes can most expeditiously be achieved."125
The Tax Code itself seeks to "promote sustainable economic
growth x x x; x x x increase economic activity; and x x x create a
robust environment for business to enable firms to compete
better in the regional as well as the global market."126 After all,
international competitiveness requires economic and tax
incentives to lower the cost of goods produced for export. State

actions that affect global competition need to be specific and
selective in the pricing of particular goods or services.127
All these statutory policies are congruent to the constitutional
mandates of providing incentives to needed investments,128 as
well as of promoting the preferential use of domestic materials
and locally produced goods and adopting measures to help
make these competitive.129 Tax credits for domestic inputs
strengthen backward linkages. Rightly so, "the rule of law and
the existence of credible and efficient public institutions are
essential prerequisites for sustainable economic
development."130
VAT Registration, Not Application for Effective Zero Rating,
Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT
law.131 Petitioner alleges that respondent did register for VAT
purposes with the appropriate Revenue District Office. However,
it is now too late in the day for petitioner to challenge the VAT-
registered status of respondent, given the latter’s prior
representation before the lower courts and the mode of appeal
taken by petitioner before this Court.
The PEZA law, which carried over the provisions of the EPZA law,
is clear in exempting from internal revenue laws and regulations
the equipment -- including capital goods -- that registered
enterprises will use, directly or indirectly, in
manufacturing.132 EO 226 even reiterates this privilege among
the incentives it gives to such enterprises.133Petitioner merely
asserts that by virtue of the PEZA registration alone of
respondent, the latter is not subject to the VAT. Consequently,
the capital goods and services respondent has purchased are
not considered used in the VAT business, and no VAT refund or
credit is due.134 This is a non sequitur. By the VAT’s very nature
as a tax on consumption, the capital goods and services
respondent has purchased are subject to the VAT, although at
zero rate. Registration does not determine taxability under the
VAT law.
Moreover, the facts have already been determined by the lower
courts. Having failed to present evidence to support its
contentions against the income tax holiday privilege of
respondent,135 petitioner is deemed to have conceded. It is a
cardinal rule that "issues and arguments not adequately and
seriously brought below cannot be raised for the first time on
appeal."136 This is a "matter of procedure"137 and a "question of
65
fairness."138 Failure to assert "within a reasonable time warrants
a presumption that the party entitled to assert it either has
abandoned or declined to assert it."139
The BIR regulations additionally requiring an approved prior
application for effective zero rating140 cannot prevail over the
clear VAT nature of respondent’s transactions. The scope of
such regulations is not "within the statutory authority x x x
granted by the legislature.141
First, a mere administrative issuance, like a BIR regulation,
cannot amend the law; the former cannot purport to do any
more than interpret the latter.142 The courts will not
countenance one that overrides the statute it seeks to apply and
implement.143
Other than the general registration of a taxpayer the VAT status
of which is aptly determined, no provision under our VAT law
requires an additional application to be made for such
taxpayer’s transactions to be considered effectively zero-rated.
An effectively zero-rated transaction does not and cannot
become exempt simply because an application therefor was not
made or, if made, was denied. To allow the additional
requirement is to give unfettered discretion to those officials or
agents who, without fluid consideration, are bent on denying a
valid application. Moreover, the State can never be estopped by
the omissions, mistakes or errors of its officials or agents.144
Second, grantia argumenti that such an application is required
by law, there is still the presumption of regularity in the
performance of official duty.145 Respondent’s registration carries
with it the presumption that, in the absence of contradictory
evidence, an application for effective zero rating was also filed
and approval thereof given. Besides, it is also presumed that the
law has been obeyed146 by both the administrative officials and
the applicant.
Third, even though such an application was not made, all the
special laws we have tackled exempt respondent not only from
internal revenue laws but also from the regulations issued
pursuant thereto. Leniency in the implementation of the VAT in
ecozones is an imperative, precisely to spur economic growth in
the country and attain global competitiveness as envisioned in
those laws.
A VAT-registered status, as well as compliance with the invoicing
requirements,147 is sufficient for the effective zero rating of the
transactions of a taxpayer. The nature of its business and
transactions can easily be perused from, as already clearly
indicated in, its VAT registration papers and photocopied
documents attached thereto. Hence, its transactions cannot be
exempted by its mere failure to apply for their effective zero
rating. Otherwise, their VAT exemption would be determined,
not by their nature, but by the taxpayer’s negligence -- a result
not at all contemplated. Administrative convenience cannot
thwart legislative mandate.
Tax Refund or Credit in Order
Having determined that respondent’s purchase transactions are
subject to a zero VAT rate, the tax refund or credit is in order.
As correctly held by both the CA and the Tax Court, respondent
had chosen the fiscal incentives in EO 226 over those in RA 7916
and PD 66. It opted for the income tax holiday regime instead of
the 5 percent preferential tax regime.
The latter scheme is not a perfunctory aftermath of a simple
registration under the PEZA law,148 for EO 226149 also has
provisions to contend with. These two regimes are in fact
incompatible and cannot be availed of simultaneously by the
same entity. While EO 226 merely exempts it from income
taxes, the PEZA law exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the
VAT, but only from the payment of income tax for a certain
number of years, depending on its registration as a pioneer or a
non-pioneer enterprise. Besides, the remittance of the aforesaid
5 percent of gross income earned in lieu of local and national
taxes imposable upon business establishments within the
ecozone cannot outrightly determine a VAT exemption. Being
subject to VAT, payments erroneously collected thereon may
then be refunded or credited.
Even if it is argued that respondent is subject to the 5
percent preferential tax regime in RA 7916, Section 24 thereof
does not preclude the VAT. One can, therefore, counterargue
that such provision merely exempts respondent from taxes
imposed on business. To repeat, the VAT is a tax imposed on
consumption, not on business. Although respondent as an entity
is exempt, the transactions it enters into are not necessarily so.
The VAT payments made in excess of the zero rate that is
imposable may certainly be refunded or credited.

Compliance with All Requisites for VAT Refund or Credit
As further enunciated by the Tax Court, respondent complied
with all the requisites for claiming a VAT refund or credit.150
First, respondent is a VAT-registered entity. This fact alone
distinguishes the present case from Contex, in which this Court
held that the petitioner therein was registered as a non-VAT
taxpayer.151 Hence, for being merely VAT-exempt, the petitioner
in that case cannot claim any VAT refund or credit.
Second, the input taxes paid on the capital goods of respondent
are duly supported by VAT invoices and have not been offset
against any output taxes. Although enterprises registered with
the BOI after December 31, 1994 would no longer enjoy the tax
credit incentives on domestic capital equipment -- as provided
for under Article 39(d), Title III, Book I of EO 226152 -- starting
January 1, 1996, respondent would still have the same benefit
under a general and express exemption contained in both
Article 77(1), Book VI of EO 226; and Section 12, paragraph 2 (c)
of RA 7227, extended to the ecozones by RA 7916.
There was a very clear intent on the part of our legislators, not
only to exempt investors in ecozones from national and local
taxes, but also to grant them tax credits. This fact was revealed
by the sponsorship speeches in Congress during the second
reading of House Bill No. 14295, which later became RA 7916, as
shown below:
"MR. RECTO. x x x Some of the incentives that this bill provides
are exemption from national and local taxes; x x x tax credit for
locally-sourced inputs x x x."
xxxxxxxxx
"MR. DEL MAR. x x x To advance its cause in encouraging
investments and creating an environment conducive for
investors, the bill offers incentives such as the exemption from
local and national taxes, x x x tax credits for locally sourced
inputs x x x."153
And third, no question as to either the filing of such claims
within the prescriptive period or the validity of the VAT returns
has been raised. Even if such a question were raised, the tax
exemption under all the special laws cited above is broad
66
enough to cover even the enforcement of internal revenue laws,
including prescription.154
Summary
To summarize, special laws expressly grant preferential tax
treatment to business establishments registered and operating
within an ecozone, which by law is considered as a separate
customs territory. As such, respondent is exempt from all
internal revenue taxes, including the VAT, and regulations
pertaining thereto. It has opted for the income tax holiday
regime, instead of the 5 percent preferential tax regime. As a
matter of law and procedure, its registration status entitling it to
such tax holiday can no longer be questioned. Its sales
transactions intended for export may not be exempt, but like its
purchase transactions, they are zero-rated. No prior application
for the effective zero rating of its transactions is necessary.
Being VAT-registered and having satisfactorily complied with all
the requisites for claiming a tax refund of or credit for the input
VAT paid on capital goods purchased, respondent is entitled to
such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the Decision AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
FIRST DIVISION
G.R. No. 147188 September 14, 2004
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special
Co-administrators Lorna Kapunan and Mario Luza
Bautista, respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether the
tax planning scheme adopted by a corporation constitutes tax
evasion that would justify an assessment of deficiency income
tax.
The petitioner seeks the reversal of the Decision1 of the Court of
Appeals of 31 January 2001 in CA-G.R. SP No. 57799 affirming
the 3 January 2000 Decision2 of the Court of Tax Appeals (CTA)
in C.T.A. Case No. 5328,3 which held that the respondent Estate
of Benigno P. Toda, Jr. is not liable for the deficiency income tax
of Cibeles Insurance Corporation (CIC) in the amount of
₱79,099,999.22 for the year 1989, and ordered the cancellation
and setting aside of the assessment issued by Commissioner of
Internal Revenue Liwayway Vinzons-Chato on 9 January 1995.
The case at bar stemmed from a Notice of Assessment sent to
CIC by the Commissioner of Internal Revenue for deficiency
income tax arising from an alleged simulated sale of a 16-storey
commercial building known as Cibeles Building, situated on two
parcels of land on Ayala Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President
and owner of 99.991% of its issued and outstanding capital
stock, to sell the Cibeles Building and the two parcels of land on
which the building stands for an amount of not less than ₱90
million.4
On 30 August 1989, Toda purportedly sold the property for
₱100 million to Rafael A. Altonaga, who, in turn, sold the same
property on the same day to Royal Match Inc. (RMI) for ₱200
million. These two transactions were evidenced by Deeds of
Absolute Sale notarized on the same day by the same notary
public.5
For the sale of the property to RMI, Altonaga paid capital gains
tax in the amount of ₱10 million.6
On 16 April 1990, CIC filed its corporate annual income tax
return7 for the year 1989, declaring, among other things, its gain
from the sale of real property in the amount of ₱75,728.021.
After crediting withholding taxes of ₱254,497.00, it paid
₱26,341,2078 for its net taxable income of ₱75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to
Le Hun T. Choa for ₱12.5 million, as evidenced by a Deed of Sale
of Shares of Stocks.9 Three and a half years later, or on 16
January 1994, Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an
assessment notice10 and demand letter to the CIC for deficiency
income tax for the year 1989 in the amount of ₱79,099,999.22.

The new CIC asked for a reconsideration, asserting that the
assessment should be directed against the old CIC, and not
against the new CIC, which is owned by an entirely different set
of stockholders; moreover, Toda had undertaken to hold the
buyer of his stockholdings and the CIC free from all tax liabilities
for the fiscal years 1987-1989.11
On 27 January 1995, the Estate of Benigno P. Toda, Jr.,
represented by special co-administrators Lorna Kapunan and
Mario Luza Bautista, received a Notice of Assessment12 dated 9
January 1995 from the Commissioner of Internal Revenue for
deficiency income tax for the year 1989 in the amount of
₱79,099,999.22, computed as follows:
Income Tax – 1989
Net Income per return
Add: Additional gain on sale of real property taxable
corporate income but were substituted with individual
– 100M)
Total Net Taxable Income per investigation
Tax Due thereof at 35%
Less: Payment already made
1. Per return
2. Thru Capital Gains Tax made
by R.A. Altonaga
Add: 50% Surcharge
25% Surcharge
Total
Add: Interest 20% from
4/16/90-4/30/94 (.808)dead, his estate shall answer for his liability.
TOTAL AMT. DUE & COLLECTIBLE
The Estate thereafter filed a letter of protest.13
In the letter dated 19 October 1995,14 the Commissioner
dismissed the protest, stating that a fraudulent scheme was
deliberately perpetuated by the CIC wholly owned and
67
controlled by Toda by covering up the additional gain of ₱100 government’s right to assess CIC prescribed on 15 April 1993.
million, which resulted in the change in the income structure of The assessment issued on 9 January 1995 was, therefore, no
the proceeds of the sale of the two parcels of land and the longer valid. The CTA also ruled that the mere ownership by
building thereon to an individual capital gains, thus evading the Toda of 99.991% of the capital stock of CIC was not in itself
higher corporate income tax rate of 35%. sufficient ground for piercing the separate corporate personality
of CIC. Hence, the CTA declared that the Estate is not liable for
On 15 February 1996, the Estate filed a petition for deficiency income tax of ₱79,099,999.22 and, accordingly,
review15 with the CTA alleging that the Commissioner erred in cancelled and set aside the assessment issued by the
holding the Estate liable for income tax deficiency; that the Commissioner on 9 January 1995.
inference of fraud of the sale of the properties is unreasonable
and unsupported; and that the right of the Commissioner to In its motion for reconsideration,19 the Commissioner insisted
assess CIC had already prescribed. that the sale of the property owned by CIC was the result of the
connivance between Toda and Altonaga. She further alleged
In his Answer16 and Amended Answer,17 the Commissioner that the latter was a representative, dummy, and a close
argued that the two transactions actually constituted a single business associate of the former, having held his office in a
₱75,987,725.00 property owned by CIC and derived his salary from a foreign
sale of the property by CIC to RMI, and that Altonaga was
neitherunder ordinary
the buyer of the property from CIC nor the seller of the corporation (Aerobin, Inc.) duly owned by Toda for
capital to
same property gains(₱200M
RMI. The additional100,000,000.00
gain of ₱100 million (the representation services rendered. The CTA denied20 the motion
difference between the second simulated sale for ₱200 million for reconsideration, prompting the Commissioner to file a
and the first simulated sale for ₱100₱175,987,725.00
million) realized by CIC was petition for review21 with the Court of Appeals.
taxed at the rate of only 5% purportedly as capital gains tax of
Altonaga, instead of at the rate of 35% ₱ 61,595,703.75
as corporate income tax In its challenged Decision of 31 January 2001, the Court of
of CIC. The income tax return filed by CIC for 1989 with intent to Appeals affirmed the decision of the CTA, reasoning that the
evade payment of the tax was thus false or fraudulent. Since CTA, being more advantageously situated and having the
such falsity or ₱26,595,704.00
fraud was discovered by the BIR only on 8 March necessary expertise in matters of taxation, is "better situated to
1991, the assessment issued on 9 January 1995 was well within determine the correctness, propriety, and legality of the income
the prescriptive10,000,000.00
period prescribed by Section 223 (a) ofBalance
36,595,704.00 the of taxtax
dueassessments assailed by the Toda Estate."22
National Internal Revenue Code of 1986, which provides that tax
may be assessed within ten years from the discovery of the Unsatisfied with the decision of the Court of Appeals, the
₱ 24,999,999.75
falsity or fraud. With the sale being tainted with fraud, the Commissioner filed the present petition invoking the following
separate corporate personality of CIC should be disregarded.
12,499,999.88 grounds:
Toda, being the registered owner of the 99.991% shares of stock
6,249,999.94
of CIC and the beneficial owner of the remaining 0.009% shares
I. THE COURT OF APPEALS ERRED IN HOLDING THAT
registered in the name of the individual directors of CIC, should
₱ 43,749,999.57 RESPONDENT COMMITTED NO FRAUD WITH INTENT
be held liable for the deficiency income tax, especially because
TO EVADE THE TAX ON THE SALE OF THE PROPERTIES
the gains realized from the sale were withdrawn by him as cash
OF CIBELES INSURANCE CORPORATION.
advances or paid to him as cash dividends. Since he is already
35,349,999.65
II. THE COURT OF APPEALS ERRED IN NOT
18 DISREGARDING THE SEPARATE CORPORATE
In its decision of 3 January 2000, the CTA held that the
₱ 79,099,999.22
PERSONALITY OF CIBELES INSURANCE CORPORATION.
Commissioner failed to prove that CIC committed fraud to
==============
deprive the government of the taxes due it. It ruled that even
assuming that a pre-conceived scheme was adopted by CIC, the III. THE COURT OF APPEALS ERRED IN HOLDING THAT
same constituted mere tax avoidance, and not tax evasion. THE RIGHT OF PETITIONER TO ASSESS RESPONDENT
There being no proof of fraudulent transaction, the applicable FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989
period for the BIR to assess CIC is that prescribed in Section 203 HAD PRESCRIBED.
of the NIRC of 1986, which is three years after the last day
prescribed by law for the filing of the return. Thus, the

The Commissioner reiterates her arguments in her previous
pleadings and insists that the sale by CIC of the Cibeles property
was in connivance with its dummy Rafael Altonaga, who was
financially incapable of purchasing it. She further points out that
the documents themselves prove the fact of fraud in that (1) the
two sales were done simultaneously on the same date, 30
August 1989; (2) the Deed of Absolute Sale between Altonaga
and RMI was notarized ahead of the alleged sale between CIC
and Altonaga, with the former registered in the Notarial Register
of Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series
of 1989; and the latter, as Doc. No. 92, Page 20, Book I, Series of
1989, of the same Notary Public; (3) as early as 4 May 1989, CIC
received ₱40 million from RMI, and not from Altonaga. The said
amount was debited by RMI in its trial balance as of 30 June
1989 as investment in Cibeles Building. The substantial portion
of ₱40 million was withdrawn by Toda through the declaration
of cash dividends to all its stockholders.
For its part, respondent Estate asserts that the Commissioner
failed to present the income tax return of Altonaga to prove that
the latter is financially incapable of purchasing the Cibeles
property.
To resolve the grounds raised by the Commissioner, the
following questions are pertinent:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income
tax for the year 1989 prescribed? and
3. Can respondent Estate be held liable for the
deficiency income tax of CIC for the year 1989, if any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion or tax avoidance?
Tax avoidance and tax evasion are the two most common ways
used by taxpayers in escaping from taxation. Tax avoidance is
the tax saving device within the means sanctioned by law. This
method should be used by the taxpayer in good faith and at
arms length. Tax evasion, on the other hand, is a scheme used
outside of those lawful means and when availed of, it usually
subjects the taxpayer to further or additional civil or criminal
liabilities.23
68
Tax evasion connotes the integration of three factors: (1) the
end to be achieved, i.e., the payment of less than that known by
the taxpayer to be legally due, or the non-payment of tax when
it is shown that a tax is due; (2) an accompanying state of mind
which is described as being "evil," in "bad faith," "willfull," or
"deliberate and not accidental"; and (3) a course of action or
failure of action which is unlawful.24
All these factors are present in the instant case. It is significant
to note that as early as 4 May 1989, prior to the purported sale
of the Cibeles property by CIC to Altonaga on 30 August 1989,
CIC received ₱40 million from RMI,25and not from Altonaga.
That ₱40 million was debited by RMI and reflected in its trial
balance26 as "other inv. – Cibeles Bldg." Also, as of 31 July 1989,
another ₱40 million was debited and reflected in RMI’s trial
balance as "other inv. – Cibeles Bldg." This would show that the
real buyer of the properties was RMI, and not the intermediary
Altonaga.
The investigation conducted by the BIR disclosed that Altonaga
was a close business associate and one of the many trusted
corporate executives of Toda. This information was revealed by
Mr. Boy Prieto, the assistant accountant of CIC and an old timer
in the company.27 But Mr. Prieto did not testify on this matter,
hence, that information remains to be hearsay and is thus
inadmissible in evidence. It was not verified either, since the
letter-request for investigation of Altonaga was
unserved,28 Altonaga having left for the United States of
America in January 1990. Nevertheless, that Altonaga was a
mere conduit finds support in the admission of respondent
Estate that the sale to him was part of the tax planning scheme
of CIC. That admission is borne by the records. In its
Memorandum, respondent Estate declared:
Petitioner, however, claims there was a "change of
structure" of the proceeds of sale. Admitted one
hundred percent. But isn’t this precisely the definition
of tax planning? Change the structure of the funds and
pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code
exists, allowing tax free transfers of property for stock,
changing the structure of the property and the tax to
be paid. As long as it is done legally, changing the
structure of a transaction to achieve a lower tax is not
against the law. It is absolutely allowed.
Tax planning is by definition to reduce, if not eliminate
altogether, a tax. Surely petitioner [sic] cannot be
faulted for wanting to reduce the tax from 35% to
5%.29 [Underscoring supplied].
The scheme resorted to by CIC in making it appear that there
were two sales of the subject properties, i.e., from CIC to
Altonaga, and then from Altonaga to RMI cannot be considered
a legitimate tax planning. Such scheme is tainted with fraud.
Fraud in its general sense, "is deemed to comprise anything
calculated to deceive, including all acts, omissions, and
concealment involving a breach of legal or equitable duty, trust
or confidence justly reposed, resulting in the damage to
another, or by which an undue and unconscionable advantage is
taken of another."30
Here, it is obvious that the objective of the sale to Altonaga was
to reduce the amount of tax to be paid especially that the
transfer from him to RMI would then subject the income to only
5% individual capital gains tax, and not the 35% corporate
income tax. Altonaga’s sole purpose of acquiring and
transferring title of the subject properties on the same day was
to create a tax shelter. Altonaga never controlled the property
and did not enjoy the normal benefits and burdens of
ownership. The sale to him was merely a tax ploy, a sham, and
without business purpose and economic substance. Doubtless,
the execution of the two sales was calculated to mislead the BIR
with the end in view of reducing the consequent income tax
liability.
In a nutshell, the intermediary transaction, i.e., the sale of
Altonaga, which was prompted more on the mitigation of tax
liabilities than for legitimate business purposes constitutes one
of tax evasion.31
Generally, a sale or exchange of assets will have an income tax
incidence only when it is consummated.32 The incidence of
taxation depends upon the substance of a transaction. The tax
consequences arising from gains from a sale of property are not
finally to be determined solely by the means employed to
transfer legal title. Rather, the transaction must be viewed as a
whole, and each step from the commencement of negotiations
to the consummation of the sale is relevant. A sale by one
person cannot be transformed for tax purposes into a sale by
another by using the latter as a conduit through which to pass
title. To permit the true nature of the transaction to be
disguised by mere formalisms, which exist solely to alter tax

liabilities, would seriously impair the effective administration of
the tax policies of Congress.33
To allow a taxpayer to deny tax liability on the ground that the
sale was made through another and distinct entity when it is
proved that the latter was merely a conduit is to sanction a
circumvention of our tax laws. Hence, the sale to Altonaga
should be disregarded for income tax purposes.34 The two sale
transactions should be treated as a single direct sale by CIC to
RMI.
Accordingly, the tax liability of CIC is governed by then Section
24 of the NIRC of 1986, as amended (now 27 (A) of the Tax
Reform Act of 1997), which stated as follows:
Sec. 24. Rates of tax on corporations. – (a) Tax on
domestic corporations.- A tax is hereby imposed upon
the taxable net income received during each taxable
year from all sources by every corporation organized
in, or existing under the laws of the Philippines, and
partnerships, no matter how created or organized but
not including general professional partnerships, in
accordance with the following:
Twenty-five percent upon the amount by
which the taxable net income does not
exceed one hundred thousand pesos; and
Thirty-five percent upon the amount by
which the taxable net income exceeds one
hundred thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable
net income in 1989. The 5% individual capital gains tax provided
for in Section 34 (h) of the NIRC of 198635 (now 6% under
Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable.
Hence, the assessment for the deficiency income tax issued by
the BIR must be upheld.
Has the period of assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax
Reform Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of
assessment and collection of taxes.-(a) In the case of a
69
false or fraudulent return with intent to evade tax or
of failure to file a return, the tax may be assessed, or a
proceeding in court after the collection of such tax
may be begun without assessment, at any time within
ten years after the discovery of the falsity, fraud or
omission: Provided, That in a fraud assessment which
has become final and executory, the fact of fraud shall
be judicially taken cognizance of in the civil or criminal
action for collection thereof… .
Put differently, in cases of (1) fraudulent returns; (2) false
returns with intent to evade tax; and (3) failure to file a return,
the period within which to assess tax is ten years from discovery
of the fraud, falsification or omission, as the case may be.
It is true that in a query dated 24 August 1989, Altonaga,
through his counsel, asked the Opinion of the BIR on the tax
consequence of the two sale transactions.36 Thus, the BIR was
amply informed of the transactions even prior to the execution
of the necessary documents to effect the transfer.
Subsequently, the two sales were openly made with the
execution of public documents and the declaration of taxes for
1989. However, these circumstances do not negate the
existence of fraud. As earlier discussed those two transactions
were tainted with fraud. And even assuming arguendo that
there was no fraud, we find that the income tax return filed by
CIC for the year 1989 was false. It did not reflect the true or
actual amount gained from the sale of the Cibeles property.
Obviously, such was done with intent to evade or reduce tax
liability.
As stated above, the prescriptive period to assess the correct
taxes in case of false returns is ten years from the discovery of
the falsity. The false return was filed on 15 April 1990, and the
falsity thereof was claimed to have been discovered only on 8
March 1991.37 The assessment for the 1989 deficiency income
tax of CIC was issued on 9 January 1995. Clearly, the issuance of
the correct assessment for deficiency income tax was well
within the prescriptive period.
Is respondent Estate liable for the 1989 deficiency income tax of
Cibeles Insurance Corporation?
A corporation has a juridical personality distinct and separate
from the persons owning or composing it. Thus, the owners or
stockholders of a corporation may not generally be made to
answer for the liabilities of a corporation and vice versa. There
are, however, certain instances in which personal liability may
arise. It has been held in a number of cases that personal liability
of a corporate director, trustee, or officer along, albeit not
necessarily, with the corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the
corporation, (b) bad faith or gross negligence in
directing its affairs, or (c) conflict of interest, resulting
in damages to the corporation, its stockholders, or
other persons;
2. He consents to the issuance of watered down
stocks or, having knowledge thereof, does not
forthwith file with the corporate secretary his written
objection thereto;
3. He agrees to hold himself personally and solidarily
liable with the corporation; or
4. He is made, by specific provision of law, to
personally answer for his corporate action.38
It is worth noting that when the late Toda sold his shares of
stock to Le Hun T. Choa, he knowingly and voluntarily held
himself personally liable for all the tax liabilities of CIC and the
buyer for the years 1987, 1988, and 1989. Paragraph g of the
Deed of Sale of Shares of Stocks specifically provides:
g. Except for transactions occurring in the ordinary
course of business, Cibeles has no liabilities or
obligations, contingent or otherwise, for taxes, sums
of money or insurance claims other than those
reported in its audited financial statement as of
December 31, 1989, attached hereto as "Annex B" and
made a part hereof. The business of Cibeles has at all
times been conducted in full compliance with all
applicable laws, rules and regulations. SELLER
undertakes and agrees to hold the BUYER and Cibeles
free from any and all income tax liabilities of Cibeles for
the fiscal years 1987, 1988 and 1989.39 [Underscoring
Supplied].
When the late Toda undertook and agreed "to hold the BUYER
and Cibeles free from any all income tax liabilities of Cibeles for
the fiscal years 1987, 1988, and 1989," he thereby voluntarily
held himself personally liable therefor. Respondent estate
cannot, therefore, deny liability for CIC’s deficiency income tax

for the year 1989 by invoking the separate corporate personality
of CIC, since its obligation arose from Toda’s contractual
undertaking, as contained in the Deed of Sale of Shares of Stock.
WHEREFORE, in view of all the foregoing, the petition is
hereby GRANTED. The decision of the Court of Appeals of 31
January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET
ASIDE, and another one is hereby rendered ordering respondent
Estate of Benigno P. Toda Jr. to pay ₱79,099,999.22 as
deficiency income tax of Cibeles Insurance Corporation for the
year 1989, plus legal interest from 1 May 1994 until the amount
is fully paid.
Costs against respondent.
SO ORDERED.
EN BANC
[G.R. No. 119775. October 24, 2003.]
JOHN HAY PEOPLES ALTERNATIVE COALITION, MATEO CARIÑO
FOUNDATION INC., CENTER FOR ALTERNATIVE SYSTEMS
FOUNDATION INC., REGINA VICTORIA A. BENAFIN REPRESENTED
AND JOINED BY HER MOTHER MRS. ELISA BENAFIN, IZABEL M.
LUYK REPRESENTED AND JOINED BY HER MOTHER MRS. REBECCA
MOLINA LUYK, KATHERINE PE REPRESENTED AND JOINED BY HER
MOTHER ROSEMARIE G. PE, SOLEDAD S. CAMILO, ALICIA C.
PACALSO ALIAS "KEVAB," BETTY I. STRASSER, RUBY C. GIRON,
URSULA C. PEREZ ALIAS "BA-YAY," EDILBERTO T. CLARAVALL,
CARMEN CAROMINA, LILIA G. YARANON, DIANE
MONDOC, Petitioners, v. VICTOR LIM, PRESIDENT, BASES
CONVERSION DEVELOPMENT AUTHORITY; JOHN HAY PORO
POINT DEVELOPMENT CORPORATION, CITY OF BAGUIO, TUNTEX
(B.V.I.) CO. LTD., ASIAWORLD INTERNATIONALE GROUP, INC.,
DEPARTMENT OF ENVIRONMENT AND NATURAL
RESOURCES, Respondents.
DECISION
CARPIO MORALES, J.: On August 16, 1993, BCDA entered into a Memorandum of
By the present petition for prohibition, mandamus and
declaratory relief with prayer for a temporary restraining order
(TRO) and/or writ of preliminary injunction, petitioners assail, in formation of a joint venture for the development of Poro Point
the main, the constitutionality of Presidential Proclamation No.
70
420, Series of 1994, "CREATING AND DESIGNATING A PORTION
OF THE AREA COVERED BY THE FORMER CAMP JOHN [HAY] AS
THE JOHN HAY SPECIAL ECONOMIC ZONE PURSUANT TO
REPUBLIC ACT NO. 7227." chanrob1es virtua1 1aw 1ibrary
Republic Act No. 7227, AN ACT ACCELERATING THE
CONVERSION OF MILITARY RESERVATIONS INTO OTHER
PRODUCTIVE USES, CREATING THE BASES CONVERSION AND
DEVELOPMENT AUTHORITY FOR THIS PURPOSE, PROVIDING
FUNDS THEREFOR AND FOR OTHER PURPOSES, otherwise
known as the "Bases Conversion and Development Act of 1992,"
which was enacted on March 13, 1992, set out the policy of the
government to accelerate the sound and balanced conversion
into alternative productive uses of the former military bases
under the 1947 Philippines-United States of America Military
Bases Agreement, namely, the Clark and Subic military
reservations as well as their extensions including the John Hay
Station (Camp John Hay or the camp) in the City of Baguio. 1
As noted in its title, R.A. No. 7227 created public respondent
Bases Conversion and Development Authority 2 (BCDA), vesting
it with powers pertaining to the multifarious aspects of carrying
out the ultimate objective of utilizing the base areas in
accordance with the declared government policy.
R.A. No. 7227 likewise created the Subic Special Economic [and
Free Port] Zone (Subic SEZ) the metes and bounds of which were
to be delineated in a proclamation to be issued by the President
of the Philippines. 3
R.A. No. 7227 granted the Subic SEZ incentives ranging from tax
and duty-free importations, exemption of businesses therein
from local and national taxes, to other hallmarks of a liberalized
financial and business climate. 4
And R.A. No. 7227 expressly gave authority to the President to
create through executive proclamation, subject to the
concurrence of the local government units directly affected,
other Special Economic Zones (SEZ) in the areas covered
respectively by the Clark military reservation, the Wallace Air
Station in San Fernando, La Union, and Camp John Hay. 5
Agreement and Escrow Agreement with private respondents
Tuntex (B.V.I.) Co., Ltd. (TUNTEX) and Asiaworld Internationale
Group, Inc. (ASIAWORLD), private corporations registered under
the laws of the British Virgin Islands, preparatory to the
in La Union and Camp John Hay as premier tourist destinations
and recreation centers. Four months later or on December 16,
1993, BCDA, TUNTEX and ASIAWORLD executed a Joint Venture
Agreement 6 whereby they bound themselves to put up a joint
venture company known as the Baguio International
Development and Management Corporation which would lease
areas within Camp John Hay and Poro Point for the purpose of
turning such places into principal tourist and recreation spots, as
originally envisioned by the parties under their Memorandum of
Agreement.chanrob1es virtua1 1aw 1ibrary
The Baguio City government meanwhile passed a number of
resolutions in response to the actions taken by BCDA as owner
and administrator of Camp John Hay.
By Resolution 7 of September 29, 1993, the Sangguniang
Panlungsod of Baguio City (the sanggunian) officially asked BCDA
to exclude all the barangays partly or totally located within
Camp John Hay from the reach or coverage of any plan or
program for its development.
By a subsequent Resolution 8 dated January 19, 1994, the
sanggunian sought from BCDA an abdication, waiver or
quitclaim of its ownership over the home lots being occupied by
residents of nine (9) barangays surrounding the military
reservation.
Still by another resolution passed on February 21, 1994, the
sanggunian adopted and submitted to BCDA a 15-point concept
for the development of Camp John Hay. 9 The sanggunian’s
vision expressed, among other things, a kind of development
that affords protection to the environment, the making of a
family-oriented type of tourist destination, priority in
employment opportunities for Baguio residents and free access
to the base area, guaranteed participation of the city
government in the management and operation of the camp,
exclusion of the previously named nine barangays from the area
for development, and liability for local taxes of businesses to be
established within the camp. 10
BCDA, TUNTEX and ASIAWORLD agreed to some, but rejected or
modified the other proposals of the sanggunian. 11 They
stressed the need to declare Camp John Hay a SEZ as a condition
precedent to its full development in accordance with the
mandate of R.A. No. 7227. 12
On May 11, 1994, the sanggunian passed a resolution
requesting the Mayor to order the determination of realty taxes
which may otherwise be collected from real properties of Camp
John Hay. 13 The resolution was intended to intelligently guide

the sanggunian in determining its position on whether Camp
John Hay be declared a SEZ, it (the sanggunian) being of the
view that such declaration would exempt the camp’s property
and the economic activity therein from local or national
taxation.chanrob1es virtua1 1aw 1ibrary
More than a month later, however, the sanggunian passed
Resolution No. 255, (Series of 1994), 14 seeking and supporting,
subject to its concurrence, the issuance by then President
Ramos of a presidential proclamation declaring an area of 288.1
hectares of the camp as a SEZ in accordance with the provisions
of R.A. No. 7227. Together with this resolution was submitted a
draft of the proposed proclamation for consideration by the
President. 15
On July 5, 1994 then President Ramos issued Proclamation No.
420, 16 the title of which was earlier indicated, which
established a SEZ on a portion of Camp John Hay and which
reads as follows:
x x x Conversion and Development Authority is hereby established as
Pursuant to the powers vested in me by the law and the
resolution of concurrence by the City Council of Baguio, I, FIDEL
V. RAMOS, President of the Philippines, do hereby create and
designate a portion of the area covered by the former John Hay
reservation as embraced, covered, and defined by the 1947
Military Bases Agreement between the Philippines and the
United States of America, as amended, as the John Hay Special
Economic Zone, and accordingly order:chanrob1es virtua1 1aw
1ibrary
SECTION 1. Coverage of John Hay Special Economic Zone. — The
John Hay Special Economic Zone shall cover the area consisting
of Two Hundred Eighty Eight and one/tenth (288.1) hectares,
more or less, of the total of Six Hundred Seventy-Seven (677)
hectares of the John Hay Reservation, more or less, which have
been surveyed and verified by the Department of Environment
and Natural Resources (DENR) as defined by the following
technical description:
A parcel of land, situated in the City of Baguio, Province of
Benguet, Island of Luzon, and particularly described in survey
plans Psd-131102-002639 and Ccs-131102-000030 as approved
on 16 August 1993 and 26 August 1993, respectively, by the
Department of Environment and Natural Resources, in detail
containing:
Lot 1, Lot 2, Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 13, Lot 14, Lot
71
15, and Lot 20 of Ccs-131102-000030
-and
Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 8, Lot 9, Lot 10, Lot 11, Lot
14, Lot 15, Lot 16, Lot 17, and Lot 18 of Psd-131102-002639
being portions of TCT No. T-3812, LRC Rec. No. 87.chanrob1es
virtua1 law library
With a combined area of TWO HUNDRED EIGHTY EIGHT AND
ONE/TENTH HECTARES (288.1 hectares); Provided that the area
consisting of approximately Six and two/tenth (6.2) hectares,
more or less, presently occupied by the VOA and the residence
of the Ambassador of the United States, shall be considered as
part of the SEZ only upon turnover of the properties to the
government of the Republic of the Philippines.
Sec. 2. Governing Body of the John Hay Special Economic Zone.
— Pursuant to Section 15 of Republic Act No. 7227, the Bases
the governing body of the John Hay Special Economic Zone and,
as such, authorized to determine the utilization and disposition
of the lands comprising it, subject to private rights, if any, and in
consultation and coordination with the City Government of
Baguio after consultation with its inhabitants, and to promulgate
the necessary policies, rules, and regulations to govern and
regulate the zone thru the John Hay Poro Point Development
Corporation, which is its implementing arm for its economic
development and optimum utilization.
Sec. 3. Investment Climate in John Hay Special Economic Zone.
— Pursuant to Section 5(m) and Section 15 of Republic Act No.
7227, the John Hay Poro Point Development Corporation shall
implement all necessary policies, rules, and regulations
governing the zone, including investment incentives, in
consultation with pertinent government departments. Among
others, the zone shall have all the applicable incentives of the
Special Economic Zone under Section 12 of Republic Act No.
7227 and those applicable incentives granted in the Export
Processing Zones, the Omnibus Investment Code of 1987, the
Foreign Investment Act of 1991, and new investment laws that
may hereinafter be enacted.
Sec. 4. Role of Departments, Bureaus, Offices, Agencies and
Instrumentalities. — All Heads of departments, bureaus, offices,
agencies, and instrumentalities of the government are hereby
directed to give full support to Bases Conversion and
Development Authority and/or its implementing subsidiary or
joint venture to facilitate the necessary approvals to expedite
the implementation of various projects of the conversion
program.chanrob1es virtua1 1aw 1ibrary
Sec. 5. Local Authority. — Except as herein provided, the
affected local government units shall retain their basic
autonomy and identity.
Sec. 6. Repealing Clause. — All orders, rules, and regulations, or
parts thereof, which are inconsistent with the provisions of this
Proclamation, are hereby repealed, amended, or modified
accordingly.
Sec. 7. Effectivity. — This proclamation shall take effect
immediately.
Done in the City of Manila, this 5th day of July, in the year of Our
Lord, nineteen hundred and ninety-four.
The issuance of Proclamation No. 420 spawned the present
petition 17 for prohibition, mandamus and declaratory relief
which was filed on April 25, 1995 challenging, in the main, its
constitutionality or validity as well as the legality of the
Memorandum of Agreement and Joint Venture Agreement
between public respondent BCDA and private respondents
TUNTEX and ASIAWORLD.
Petitioners allege as grounds for the allowance of the petition
the following:
I. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1990 (sic)
IN SO FAR AS IT GRANTS TAX EXEMPTIONS IS INVALID AND
ILLEGAL AS IT IS AN UNCONSTITUTIONAL EXERCISE BY THE
PRESIDENT OF A POWER GRANTED ONLY TO THE LEGISLATURE.
II. PRESIDENTIAL PROCLAMATION NO. 420, IN SO FAR AS IT
LIMITS THE POWERS AND INTERFERES WITH THE AUTONOMY
OF THE CITY OF BAGUIO IS INVALID, ILLEGAL AND
UNCONSTITUTIONAL.
III. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1994 IS
UNCONSTITUTIONAL IN THAT IT VIOLATES THE RULE THAT ALL
TAXES SHOULD BE UNIFORM AND EQUITABLE.
IV. THE MEMORANDUM OF AGREEMENT ENTERED INTO BY AND
BETWEEN PRIVATE AND PUBLIC RESPONDENTS BASES
CONVERSION DEVELOPMENT AUTHORITY HAVING BEEN
ENTERED INTO ONLY BY DIRECT NEGOTIATION IS
ILLEGAL.chanrob1es virtua1 1aw 1ibrary

V. THE TERMS AND CONDITIONS OF THE MEMORANDUM OF
AGREEMENT ENTERED INTO BY AND BETWEEN PRIVATE AND
PUBLIC RESPONDENT BASES CONVERSION DEVELOPMENT
AUTHORITY IS sic ILLEGAL.
VI. THE CONCEPTUAL DEVELOPMENT PLAN OF RESPONDENTS
NOT HAVING UNDERGONE ENVIRONMENTAL IMPACT
ASSESSMENT IS BEING ILLEGALLY CONSIDERED WITHOUT A
VALID ENVIRONMENTAL IMPACT ASSESSMENT .
A temporary restraining order and/or writ of preliminary
injunction was prayed for to enjoin BCDA, John Hay Poro Point
Development Corporation and the city government from
implementing Proclamation No. 420, and TUNTEX and
ASIAWORLD from proceeding with their plan respecting Camp
John Hay’s development pursuant to their Joint Venture
Agreement with BCDA. 18
Public respondents, by their separate Comments, allege as moot
and academic the issues raised by the petition, the questioned
Memorandum of Agreement and Joint Venture Agreement
having already been deemed abandoned by the inaction of the
parties thereto prior to the filing of the petition as in fact, by
letter of November 21, 1995, BCDA formally notified TUNTEX
and ASIAWORLD of the revocation of their said agreements. 19
In maintaining the validity of Proclamation No. 420, respondents
contend that by extending to the John Hay SEZ economic
incentives similar to those enjoyed by the Subic SEZ which was
established under R.A. No. 7227, the proclamation is merely
implementing the legislative intent of said law to turn the US
military bases into hubs of business activity or investment. They
underscore the point that the government’s policy of bases
conversion can not be achieved without extending the same tax
exemptions granted by R.A. No. 7227 to Subic SEZ to other SEZs.
Denying that Proclamation No. 420 is in derogation of the local
autonomy of Baguio City or that it is violative of the
constitutional guarantee of equal protection, respondents assail
petitioners’ lack of standing to bring the present suit even as
taxpayers and in the absence of any actual case or controversy
to warrant this Court’s exercise of its power of judicial review
over the proclamation.chanrob1es virtua1 1aw 1ibrary
Finally, respondents seek the outright dismissal of the petition
for having been filed in disregard of the hierarchy of courts and
of the doctrine of exhaustion of administrative remedies.
Replying, 20 petitioners aver that the doctrine of exhaustion of
72
administrative remedies finds no application herein since they
are invoking the exclusive authority of this Court under Section
21 of R.A. No. 7227 to enjoin or restrain implementation of
projects for conversion of the base areas; that the established
exceptions to the aforesaid doctrine obtain in the present
petition; and that they possess the standing to bring the petition
which is a taxpayer’s suit.
Public respondents have filed their Rejoinder 21 and the parties
have filed their respective memoranda.
Before dwelling on the core issues, this Court shall first address
the preliminary procedural questions confronting the petition.
The judicial policy is and has always been that this Court will not
entertain direct resort to it except when the redress sought
cannot be obtained in the proper courts, or when exceptional
and compelling circumstances warrant availment of a remedy
within and calling for the exercise of this Court’s primary
jurisdiction. 22 Neither will it entertain an action for declaratory
relief, which is partly the nature of this petition, over which it
has no original jurisdiction.
Nonetheless, as it is only this Court which has the power under
Section 21 23 of R.A. No. 7227 to enjoin implementation of
projects for the development of the former US military
reservations, the issuance of which injunction petitioners pray
for, petitioners’ direct filing of the present petition with it is
allowed. Over and above this procedural objection to the
present suit, this Court retains full discretionary power to take
cognizance of a petition filed directly to it if compelling reasons,
or the nature and importance of the issues raised, warrant. 24
Besides, remanding the case to the lower courts now would just
unduly prolong adjudication of the issues.
The transformation of a portion of the area covered by Camp
John Hay into a SEZ is not simply a re-classification of an area, a
mere ascription of a status to a place. It involves turning the
former US military reservation into a focal point for investments
by both local and foreign entities. It is to be made a site of
vigorous business activity, ultimately serving as a spur to the
country’s long awaited economic growth. For, as R.A. No. 7227
unequivocally declares, it is the government’s policy to enhance
the benefits to be derived from the base areas in order to
promote the economic and social development of Central Luzon
in particular and the country in general. 25 Like the Subic SEZ,
the John Hay SEZ should also be turned into a "self-sustaining,
industrial, commercial, financial and investment center." 26
More than the economic interests at stake, the development of
Camp John Hay as well as of the other base areas
unquestionably has critical links to a host of environmental and
social concerns. Whatever use to which these lands will be
devoted will set a chain of events that can affect one way or
another the social and economic way of life of the communities
where the bases are located, and ultimately the nation in
general.chanrob1es virtua1 1aw 1ibrary
Underscoring the fragility of Baguio City’s ecology with its
problem on the scarcity of its water supply, petitioners point out
that the local and national government are faced with the
challenge of how to provide for an ecologically sustainable,
environmentally sound, equitable transition for the city in the
wake of Camp John Hay’s reversion to the mass of government
property. 27 But that is why R.A. No. 7227 emphasizes the
"sound and balanced conversion of the Clark and Subic military
reservations and their extensions consistent with ecological and
environmental standards." 28 It cannot thus be gainsaid that the
matter of conversion of the US bases into SEZs, in this case
Camp John Hay, assumes importance of a national magnitude.
Convinced then that the present petition embodies crucial
issues, this Court assumes jurisdiction over the petition.
As far as the questioned agreements between BCDA and
TUNTEX and ASIAWORLD are concerned, the legal questions
being raised thereon by petitioners have indeed been rendered
moot and academic by the revocation of such agreements.
There are, however, other issues posed by the petition, those
which center on the constitutionality of Proclamation No. 420,
which have not been mooted by the said supervening event
upon application of the rules for the judicial scrutiny of
constitutional cases. The issues boil down to:
(1) Whether the present petition complies with the
requirements for this Court’s exercise of jurisdiction over
constitutional issues;
(2) Whether Proclamation No. 420 is constitutional by providing
for national and local tax exemption within and granting other
economic incentives to the John Hay Special Economic Zone;
and
(3) Whether Proclamation No. 420 is constitutional for limiting
or interfering with the local autonomy of Baguio City;
It is settled that when questions of constitutional significance
are raised, the court can exercise its power of judicial review

only if the following requisites are present: (1) the existence of
an actual and appropriate case; (2) a personal and substantial
interest of the party raising the constitutional question; (3) the
exercise of judicial review is pleaded at the earliest opportunity;
and (4) the constitutional question is the lis mota of the case.
29
An actual case or controversy refers to an existing case or
controversy that is appropriate or ripe for determination, not
conjectural or anticipatory. 30 The controversy needs to be
definite and concrete, bearing upon the legal relations of parties
who are pitted against each other due to their adverse legal
interests. 31 There is in the present case a real clash of interests
and rights between petitioners and respondents arising from the
issuance of a presidential proclamation that converts a portion
of the area covered by Camp John Hay into a SEZ, the former
insisting that such proclamation contains unconstitutional
provisions, the latter claiming otherwise.chanrob1es virtua1
1aw 1ibrary
R.A. No. 7227 expressly requires the concurrence of the affected
local government units to the creation of SEZs out of all the base
areas in the country. 32 The grant by the law on local
government units of the right of concurrence on the bases’
conversion is equivalent to vesting a legal standing on them, for
it is in effect a recognition of the real interests that communities
nearby or surrounding a particular base area have in its
utilization. Thus, the interest of petitioners, being inhabitants of
Baguio, in assailing the legality of Proclamation No. 420, is
personal and substantial such that they have sustained or will
sustain direct injury as a result of the government act being
challenged. 33 Theirs is a material interest, an interest in issue
affected by the proclamation and not merely an interest in the
question involved or an incidental interest, 34 for what is at
stake in the enforcement of Proclamation No. 420 is the very
economic and social existence of the people of Baguio City.
Petitioners’ locus standi parallels that of the petitioner and
other residents of Bataan, specially of the town of Limay, in
Garcia v. Board of Investments 35 where this Court
characterized their interest in the establishment of a
petrochemical plant in their place as actual, real, vital and legal,
for it would affect not only their economic life but even the air
they breathe.
Moreover, petitioners Edilberto T. Claravall and Lilia G. Yaranon
were duly elected councilors of Baguio at the time, engaged in
the local governance of Baguio City and whose duties included
deciding for and on behalf of their constituents the question of
73
whether to concur with the declaration of a portion of the area
covered by Camp John Hay as a SEZ. Certainly then, petitioners
Claravall and Yaranon, as city officials who voted against 36 the
sanggunian Resolution No. 255 (Series of 1994) supporting the
issuance of the now challenged Proclamation No. 420, have
legal standing to bring the present petition.
That there is herein a dispute on legal rights and interests is thus
beyond doubt. The mootness of the issues concerning the
questioned agreements between public and private
respondents is of no moment.
"By the mere enactment of the questioned law or the approval
of the challenged act, the dispute is deemed 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." 37
As to the third and fourth requisites of a judicial inquiry, there is
likewise no question that they have been complied with in the
case at bar. This is an action filed purposely to bring forth
constitutional issues, ruling on which this Court must take up.
Besides, respondents never raised issues with respect to these
requisites, hence, they are deemed waived.
Having cleared the way for judicial review, the constitutionality
of Proclamation No. 420, as framed in the second and third
issues above, must now be addressed squarely.chanrob1es
virtua1 1aw 1ibrary
The second issue refers to petitioners’ objection against the
creation by Proclamation No. 420 of a regime of tax exemption
within the John Hay SEZ. Petitioners argue that nowhere in R.A.
No. 7227 is there a grant of tax exemption to SEZs yet to be
established in base areas, unlike the grant under Section 12
thereof of tax exemption and investment incentives to the
therein established Subic SEZ. The grant of tax exemption to the
John Hay SEZ, petitioners conclude, thus contravenes Article VI,
Section 28(4) of the Constitution which provides that "No law
granting any tax exemption shall be passed without the
concurrence of a majority of all the members of Congress."
Section 3 of Proclamation No. 420, the challenged provision,
reads:
Sec. 3. Investment Climate in John Hay Special Economic Zone.
— Pursuant to Section 5(m) and Section 15 of Republic Act No.
7227, the John Hay Poro Point Development Corporation shall
implement all necessary policies, rules, and regulations
governing the zone, including investment incentives, in
consultation with pertinent government departments. Among
others, the zone shall have all the applicable incentives of the
Special Economic Zone under Section 12 of Republic Act No.
7227 and those applicable incentives granted in the Export
Processing Zones, the Omnibus Investment Code of 1987, the
Foreign Investment Act of 1991, and new investment laws that
may hereinafter be enacted. (Emphasis and Italics supplied)
Upon the other hand, Section 12 of R.A. No. 7227 provides:
x x x
(a) Within the framework and subject to the mandate and
limitations of the Constitution and the pertinent provisions of
the Local Government Code, the Subic Special Economic Zone
shall be developed into a self-sustaining, industrial, commercial,
financial and investment center to generate employment
opportunities in and around the zone and to attract and
promote productive foreign investments;
(b) The Subic Special Economic Zone shall be operated and
managed as a separate customs territory ensuring free flow or
movement of goods and capital within, into and exported out of
the Subic Special Economic Zone, as well as provide incentives
such as tax and duty free importations of raw materials, capital
and equipment. However, exportation or removal of goods from
the territory of the Subic Special Economic Zone to the other
parts of the Philippine territory shall be subject to customs
duties and taxes under the Customs and Tariff Code and other
relevant tax laws of the Philippines;chanrob1es virtua1 1aw
1ibrary
(c) The provisions of existing laws, rules and regulations to the
contrary notwithstanding, no taxes, local and national, shall be
imposed within the Subic Special Economic Zone. In lieu of
paying taxes, three percent (3%) of the gross income earned by
all businesses and enterprises within the Subic Special Economic
Zone shall be remitted to the National Government, one percent
(1%) each to the local government units affected by the
declaration of the zone in proportion to their population area,
and other factors. In addition, there is hereby established a
development fund of one percent (1%) of the gross income
earned by all businesses and enterprises within the Subic Special
Economic Zone to be utilized for the Municipality of Subic, and
other municipalities contiguous to be base areas. In case of
conflict between national and local laws with respect to tax
exemption privileges in the Subic Special Economic Zone, the
same shall be resolved in favor of the latter;

(d) No exchange control policy shall be applied and free markets
for foreign exchange, gold, securities and futures shall be
allowed and maintained in the Subic Special Economic Zone;
(e) The Central Bank, through the Monetary Board, shall
supervise and regulate the operations of banks and other
financial institutions within the Subic Special Economic Zone;
(f) Banking and Finance shall be liberalized with the
establishment of foreign currency depository units of local
commercial banks and offshore banking units of foreign banks
with minimum Central Bank regulation;
(g) Any investor within the Subic Special Economic Zone whose
continuing investment shall not be less than Two hundred fifty
thousand dollars ($250,000), his/her spouse and dependent
children under twenty-one (21) years of age, shall be granted
permanent resident status within the Subic Special Economic
Zone. They shall have freedom of ingress and egress to and from
the Subic Special Economic Zone without any need of special
authorization from the Bureau of Immigration and Deportation.
The Subic Bay Metropolitan Authority referred to in Section 13
of this Act may also issue working visas renewable every two (2)
years to foreign executives and other aliens possessing highly-
technical skills which no Filipino within the Subic Special
Economic Zone possesses, as certified by the Department of
Labor and Employment. The names of aliens granted permanent
residence status and working visas by the Subic Bay
Metropolitan Authority shall be reported to the Bureau of
Immigration and Deportation within thirty (30) days after
issuance thereof;chanrob1es virtua1 1aw library
x x x (Emphasis supplied)
It is clear that under Section 12 of R.A. No. 7227 it is only the
Subic SEZ which was granted by Congress with tax exemption,
investment incentives and the like. There is no express
extension of the aforesaid benefits to other SEZs still to be
created at the time via presidential proclamation.
The deliberations of the Senate confirm the exclusivity to Subic
SEZ of the tax and investment privileges accorded it under the
law, as the following exchanges between our lawmakers show
during the second reading of the precursor bill of R.A. No. 7227
with respect to the investment policies that would govern Subic
SEZ which are now embodied in the aforesaid Section 12
thereof:
x x x baselands.
74
Senator Maceda:
This is what I was talking about. We get into problems here
because all of these following policies are centered around the
concept of free port. And in the main paragraph above, we have
declared both Clark and Subic as special economic zones,
subject to these policies which are, in effect, a free-port
arrangement.
Senator Angara:
The Gentleman is absolutely correct, Mr. President. So we must
confine these policies only to Subic.
May I withdraw then my amendment, and instead provide that
"THE SPECIAL ECONOMIC ZONE OF SUBIC SHALL BE
ESTABLISHED IN ACCORDANCE WITH THE FOLLOWING
POLICIES." Subject to style, Mr. President.
Thus, it is very clear that these principles and policies are
applicable only to Subic as a free port.
Senator Paterno:
Mr. President.
The President:
Senator Paterno is recognized.
Senator Paterno:
I take it that the amendment suggested by Senator Angara
would then prevent the establishment of other special economic
zones observing these policies.
Senator Angara:
No, Mr. President, because during our short caucus, Senator
Laurel raised the point that if we give this delegation to the
President to establish other economic zones, that may be an
unwarranted delegation.chanrob1es virtua1 1aw 1ibrary
So we agreed that we will simply limit the definition of powers
and description of the zone to Subic, but that does not exclude
the possibility of creating other economic zones within the
Senator Paterno:
But if that amendment is followed, no other special economic
zone may be created under authority of this particular bill. Is
that correct, Mr. President?
Senator Angara:
Under this specific provision, yes, Mr. President. This provision
now will be confined only to Subic. 38
x x x (Emphasis supplied.)
As gathered from the earlier-quoted Section 12 of R.A. No.
7227, the privileges given to Subic SEZ consist principally of
exemption from tariff or customs duties, national and local taxes
of business entities therein (paragraphs (b) and (c)), free market
and trade of specified goods or properties (paragraph d),
liberalized banking and finance (paragraph f), and relaxed
immigration rules for foreign investors (paragraph g). Yet, apart
from these, Proclamation No. 420 also makes available to the
John Hay SEZ benefits existing in other laws such as the privilege
of export processing zone-based businesses of importing capital
equipment and raw materials free from taxes, duties and other
restrictions; 39 tax and duty exemptions, tax holiday, tax credit,
and other incentives under the Omnibus Investments Code of
1987; 40 and the applicability to the subject zone of rules
governing foreign investments in the Philippines. 41
While the grant of economic incentives may be essential to the
creation and success of SEZs, free trade zones and the like, the
grant thereof to the John Hay SEZ cannot be sustained. The
incentives under R.A. No. 7227 are exclusive only to the Subic
SEZ, hence, the extension of the same to the John Hay SEZ finds
no support therein. Neither does the same grant of privileges to
the John Hay SEZ find support in the other laws specified under
Section 3 of Proclamation No. 420, which laws were already
extant before the issuance of the proclamation or the
enactment of R.A. No. 7227.
More importantly, the nature of most of the assailed privileges
is one of tax exemption. It is the legislature, unless limited by a
provision of the state constitution, that has full power to exempt
any person or corporation or class of property from taxation, its
power to exempt being as broad as its power to tax. 42 Other
than Congress, the Constitution may itself provide for specific
tax exemptions, 43 or local governments may pass ordinances
on exemption only from local taxes. 44

The challenged grant of tax exemption would circumvent the
Constitution’s imposition that a law granting any tax exemption
must have the concurrence of a majority of all the members of
Congress. 45 In the same vein, the other kinds of privileges
extended to the John Hay SEZ are by tradition and usage for
Congress to legislate upon.chanrob1es virtua1 law library
Contrary to public respondents’ suggestions, the claimed
statutory exemption of the John Hay SEZ from taxation should
be manifest and unmistakable from the language of the law on
which it is based; it must be expressly granted in a statute stated
in a language too clear to be mistaken. 46 Tax exemption cannot
be implied as it must be categorically and unmistakably
expressed. 47
If it were the intent of the legislature to grant to the John Hay
SEZ the same tax exemption and incentives given to the Subic
SEZ, it would have so expressly provided in the R.A. No. 7227.
This Court no doubt can void an act or policy of the political
departments of the government on either of two grounds-
infringement of the Constitution or grave abuse of discretion.
48
This Court then declares that the grant by Proclamation No. 420
of tax exemption and other privileges to the John Hay SEZ is void
for being violative of the Constitution. This renders it
unnecessary to still dwell on petitioners’ claim that the same
grant violates the equal protection guarantee.
With respect to the final issue raised by petitioners — that
Proclamation No. 420 is unconstitutional for being in derogation
of Baguio City’s local autonomy, objection is specifically
mounted against Section 2 thereof in which BCDA is set up as
the governing body of the John Hay SEZ. 49
Petitioners argue that there is no authority of the President to
subject the John Hay SEZ to the governance of BCDA which has
just oversight functions over SEZ; and that to do so is to diminish
the city government’s power over an area within its jurisdiction,
hence, Proclamation No. 420 unlawfully gives the President
power of control over the local government instead of just mere
supervision.
Petitioners’ arguments are bereft of merit. Under R.A. No. 7227,
the BCDA is entrusted with, among other things, the following
purpose: 50
x x x that the private respondent is indeed selling its services for a fee
75
(a) To own, hold and/or administer the military reservations of
John Hay Air Station, Wallace Air Station, O’Donnell Transmitter
Station, San Miguel Naval Communications Station, Mt. Sta. Rita
Station (Hermosa, Bataan) and those portions of Metro Manila
Camps which may be transferred to it by the
President;chanrob1es virtua1 1aw 1ibrary
x x x (Emphasis supplied)
With such broad rights of ownership and administration vested
in BCDA over Camp John Hay, BCDA virtually has control over it,
subject to certain limitations provided for by law. By designating
BCDA as the governing agency of the John Hay SEZ, the law
merely emphasizes or reiterates the statutory role or functions
it has been granted.
The unconstitutionality of the grant of tax immunity and
financial incentives as contained in the second sentence of
Section 3 of Proclamation No. 420 notwithstanding, the entire
assailed proclamation cannot be declared unconstitutional, the
other parts thereof not being repugnant to law or the
Constitution. The delineation and declaration of a portion of the
area covered by Camp John Hay as a SEZ was well within the
powers of the President to do so by means of a proclamation. 51
The requisite prior concurrence by the Baguio City government
to such proclamation appears to have been given in the form of
a duly enacted resolution by the sanggunian. The other
provisions of the proclamation had been proven to be
consistent with R.A. No. 7227.
Where part of a statute is void as contrary to the Constitution,
while another part is valid, the valid portion, if separable from
the invalid, may stand and be enforced. 52 This Court finds that
the other provisions in Proclamation No. 420 converting a
delineated portion of Camp John Hay into the John Hay SEZ are
separable from the invalid second sentence of Section 3 thereof,
hence they stand.
WHEREFORE, the second sentence of Section 3 of Proclamation
No. 420 is hereby declared NULL AND VOID and is accordingly
declared of no legal force and effect. Public respondents are
hereby enjoined from implementing the aforesaid void
provision.
Proclamation No. 420, without the invalidated portion, remains
valid and effective.chanrob1es virtua1 1aw 1ibrary
SO ORDERED
THIRD DIVISION
[G.R. No. 115349. April 18, 1997.]
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. THE
COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE
MANILA UNIVERSITY, Respondents.
The Solicitor General for Petitioner.
Bengzon Zarraga Narciso Cudala Pecson and Bengson for Private
Respondent.
SYLLABUS
1. TAXATION; TAX IMPOSITION; AS A RULE, A STATUTE WILL NOT
BE CONSTRUED AS IMPOSING A TAX UNLESS IT DOES SO
CLEARLY, EXPRESSLY, AND UNAMBIGUOUSLY. — The Court takes
this occasion to reiterate the hornbook doctrine in the
interpretation of tax laws that" (a) statute will not be construed
as imposing a tax unless it does so clearly, expressly, and
unambiguously. . . (A) tax cannot be imposed without clear and
express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies
with peculiar strictness to tax laws and the provisions of a taxing
act are not to be extended by implication." Parenthetically, in
answering the question of who is subject to tax statutes, it is
basics that "in case of doubt, such statutes are to be construed
most strongly against the government and in favor of the
subjects or citizens because burdens are not to be imposed nor
presumed to be imposed beyond what statutes expressly and
clearly import.
2. ID.; ID.; SEC. 20 OF THE NATIONAL INTERNAL REVENUE CODE;
APPLICATION; EXEMPTION; NOT PRESENT IN CASE AT BAR. —
The Commissioner should have determined first if private
respondent was covered by Section 205, applying the rule of
strict interpretation of laws imposing taxes and other burdens
on the populace, before asking Ateneo to prove its exemption
therefrom. To fall under its coverage, Section 205 of the
National Internal Revenue Code requires that the independent
contractor be engaged in the business of selling its services.
Hence, to impose the three percent contractor’s tax on Ateneo’s
Institute of Philippine Culture, it should be sufficiently proven

in pursuit of an independent business. And it is only after private
respondent has been found clearly to be subject to the
provisions of Sec. 205 that the question of exemption therefrom
would arise. Only after such coverage is shown does the rule of
construction — that tax exemptions are to be strictly construed
against the taxpayer — come into play. After reviewing the
records of this case, we find no evidence that Ateneo’s Institute
of Philippine Culture ever sold its services for a free to anyone or
was ever engaged in a business apart from and independently of
the academic purposes of the university. The petitioner has
presented no evidence to prove its bare contention that,
indeed, contracts for sale of services were ever entered into by
the private Respondent.
3. ID.; ID.; ID.; EXEMPTION OF GIFTS OR DONATIONS TO AN
EDUCATIONAL INSTITUTION; APPLICATION IN CASE AT BAR. —
The Court of Tax Appeals accurately and correctly declared that
the "funds received by Ateneo de Manila University are
technically not a fee. They may however fall as gifts or donations
which are tax-exempt" as shown by private respondent’s
compliance with the requirement of Section 123 of the National
Internal Revenue Code providing for the exemption of such gifts
to an educational institution. It is, clear that the funds received
by Ateneo’s Institute of Philippine Culture are not given in the
concept of a fee or price in exchange for the performance of a
service or delivery of an object. Rather, the amounts are in the
nature of an endowment or donation given by IPC’s benefactors
solely for the purpose of sponsoring or funding the research
with no strings attached. As found by the two courts below,
such sponsorships are subject to IPC’s terms and conditions. No
proprietary or commercial research is done, and IPC retains the
ownership of the results of the research, including the absolute
right to publish the same. The copyrights over the results of the
research are owned by Ateneo and, consequently, no portion
thereof may be reproduced without its permission. The
amount., given to IPC, therefore. may not be deemed, it bears
stressing. as fees or gross receipts that can be subjected to the
three percent contractor’s tax.
4. CIVIL LAW; CONTRACTS; CONTRACT OF SALE AND FOR A
PIECE OF WORK REQUIRE TRANSFER OF OWNERSHIP; NOT
PRESENT IN CASE AT BAR. — The questioned transactions of
Ateneo’s Institute of Philippine Culture cannot be deemed either
as a contract of sale or a contract for a piece of work. "By the
contract of sale, one of the contracting parties obligates himself
to transfer the ownership of and to deliver a determinate thing,
and the other to pay therefor a price certain in money or its
equivalents." By its very nature, a contract of sale requires a
transfer of ownership. Thus, Article 1458 of the Civil Code
76
"expressly makes the obligation to transfer ownership as an
essential element of the contract of sale, following modern
codes, such as the German and the Swiss. Even in the absence
of this express requirement, however, most writers, including
Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and Capitant,
have considered such transfer of ownership as the primary
purpose of sale. Perez and Alguer follow the same view, stating
that the delivery of the thing does not mean a mere physical
transfer, but is a means of transmitting ownership. Transfer of
title or an agreement to transfer it for a price paid or promised
to be paid is the essence of sale." In the case of a contract for a
piece of work, "the contractor binds himself to execute a piece
of work for the employer, in consideration of a certain price or
compensation. . . If the contractor agrees to produce the work
from materials furnished by him, he shall deliver the thing
produced to the employer and transfer dominion over the thing.
. ." (Articles 1713 and 1714 of the Civil Code of the Philippines).
Ineludably, whether the contract be one of sale or one for a
piece of work, a transfer of ownership is involved and a party
necessarily walks away with an object. In the case at bench, it is
clear from the evidence on record that there was no sale either
of objects or services because. as adverted to earlier, there was
no transfer of ownership over the research data obtained or the
results of research projects undertaken by the Institute of
Philippine Culture. Furthermore, it is clear that the research
activity of the Institute of Philippine Culture is done in
pursuance of maintaining Ateneo’s university status and not in
the course of an independent business of selling such research
with profit in mind.
5. REMEDIAL LAW; EVIDENCE; FACTUAL FINDINGS AND
CONCLUSIONS OF THE COURT OF TAX APPEALS; GENERALLY
CONCLUSIVE; CASE AT BAR. — We reiterate that 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"
Ateneo de Manila University may be deemed a subject of the
three percent contractor’s tax "through the evidence presented
before it." Consequently, "as a matter of principle, this Court will
not set aside the conclusion reached by . . . the Court of Tax
Appeals which is, by the very nature of its function, dedicated
exclusively to the study and consideration of tax problems and
has necessarily developed an expertise on the subject unless
there has been an abuse or improvident exercise of authority . .
." This point becomes more evident in the case before us where
the findings and conclusions of both the Court of Tax Appeals
and the Court of Appeals appear untainted by any abuse of
authority, much less grave abuse of discretion. Thus, we find the
decision of the latter affirming that of the former free from any
palpable error.
DECISION
PANGANIBAN, J.:
In conducting researches and studies of social organizations and
cultural values thru its Institute of Philippine Culture, is the
Ateneo de Manila University performing the work of an
independent contractor and thus taxable within the purview of
then Section 205 of the National Internal Revenue Code levying
a three percent contractor’s tax? This question is answered by
the Court in the negative as it resolves this petition assailing the
Decision 1 of the Respondent Court of Appeals 2 in CA-G.R. SP
No. 31790 promulgated on April 27, 1994 affirming that of the
Court of Tax Appeals. 3
The Antecedent Facts
The antecedents as found by the Court of Appeals are
reproduced hereinbelow, the same being largely undisputed by
the parties. cdtech
"Private respondent is a non-stock, non-profit educational
institution with auxiliary units and branches all over the
Philippines. One such auxiliary unit is the Institute of Philippine
Culture (IPC), which has no legal personality separate and
distinct from that of private Respondent. The IPC is a Philippine
unit engaged in social science studies of Philippine society and
culture. Occasionally, it accepts sponsorships for its research
activities from international organizations, private foundations
and government agencies.
On July 8, 1983, private respondent received from petitioner
Commissioner of Internal Revenue a demand letter dated June
3, 1983, assessing private respondent the sum of P174,043.97
for alleged deficiency contractor’s tax, and an assessment dated
June 27, 1983 in the sum of P1,141,837 for alleged deficiency
income tax, both for the fiscal year ended March 31, 1978.
Denying said tax liabilities, private respondent sent petitioner a
letter-protest and subsequently filed with the latter a
memorandum contesting the validity of the assessments.
On March 17, 1988, petitioner rendered a letter-decision
canceling the assessment for deficiency income tax but

modifying the assessment for deficiency contractor’s tax by
increasing the amount due to P193,475.55. Unsatisfied, private
respondent requested for a reconsideration or reinvestigation of
the modified assessment. At the same time, it filed in the
respondent court a petition for review of the said letter-decision
of the petitioner. While the petition was pending before the
respondent court, petitioner issued a final decision dated August
3, 1988 reducing the assessment for deficiency contractor’s tax
from P193,475.55 to P46,516.41, exclusive of surcharge and
interest.
On July 12, 1993, the respondent court rendered the questioned
decision which dispositively reads:
‘WHEREFORE, in view of the foregoing, respondent’s decision is
SET ASIDE. The deficiency contractor’s tax assessment in the
amount of P46,516.41 exclusive of surcharge and interest for
the fiscal year ended March 31, 1978 is hereby CANCELED. No
pronouncement as to cost.
SO ORDERED.’
Not in accord with said decision, petitioner has come to this
Court via the present petition for review raising the following
issues:
‘1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE
PURVIEW OF INDEPENDENT CONTRACTOR PURSUANT TO
SECTION 205 OF THE TAX CODE; and
2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3%
CONTRACTOR’S TAX UNDER SECTION 205 OF THE TAX CODE’.
The pertinent portions of Section 205 of the National Internal
Revenue Code, as amended, provide:
‘Sec. 205. Contractor, proprietors or operators of dockyards,
and others. — A contractor’s tax of three per centum of the
gross receipts is hereby imposed on the following:
x x x Code." 4
(16) Business agents and other independent contractors except
persons, associations and corporations under contract for
embroidery and apparel for export, as well as their agents and
contractors and except gross receipts of or from a pioneer
industry registered with the Board of Investments under
Republic Act No. 5186:
x x x Petitioner submits before us the following issues:
77
The term ‘independent contractors’ include persons (juridical or
natural) not enumerated above (but not including individuals
subject to the occupation tax under Section 12 of the Local Tax
Code) whose activity consists essentially of the sale of all kinds
of services for a fee regardless of whether or not the
performance of the service calls for the exercise or use of the
physical or mental faculties of such contractors or their
employees.
x x x Institute of Philippine Culture — performing the work of an
Petitioner contends that the respondent court erred in holding
that private respondent is not an "independent contractor"
within the purview of Section 205 of the Tax Code. To petitioner,
the term "independent contractor", as defined by the Code,
encompasses all kinds of services rendered for a fee and that
the only exceptions are the following:
‘a. Persons, association and corporations under contract for
embroidery and apparel for export and gross receipts of or from
pioneer industry registered with the Board of Investment under
R.A. No. 5186;chanroblesvirtual|awlibrary
b. Individuals occupation tax under Section 12 of the Local Tax
Code (under the old Section 182 [b] of the Tax Code); and
c. Regional or area headquarters established in the Philippines
by multinational corporations, including their alien executives,
and which headquarters do not earn or derive income from the
Philippines and which act as supervisory, communication and
coordinating centers for their affiliates, subsidiaries or branches
in the Asia Pacific Region (Section 205 of the Tax Code).’
Petitioner thus submits that since private respondent falls under
the definition of an "independent contractor" and is not among
the aforementioned exceptions, private respondent is therefore
subject to the 3% contractor’s tax imposed under the same
The Court of Appeals disagreed with the Petitioner
Commissioner of Internal Revenue and affirmed the assailed
decision of the Court of Tax Appeals. Unfazed, petitioner now
asks us to reverse the CA through this petition for review.
The Issues
"1. Whether or not private respondent falls under the purview
of independent contractor pursuant to Section 205 of the Tax
Code
2. Whether or not private respondent is subject to 3%
contractor’s tax under Section 205 of the Tax Code." 5
In fine, these may be reduced to a single issue: Is Ateneo de
Manila University, through its auxiliary unit or branch — the
independent contractor and, thus, subject to the three percent
contractor’s tax levied by then Section 205 of the National
Internal Revenue Code?
The Court’s Ruling
The petition is unmeritorious.
Interpretation of Tax Laws
The parts of then Section 205 of the National Internal Revenue
Code germane to the case before us read:
"SEC. 205. Contractors, proprietors or operators of dockyards,
and others. — A contractor’s tax of three per centum of the
gross receipts is hereby imposed on the following:
x x x
(16) Business agents and other independent contractors, except
persons, associations and corporations under contract for
embroidery and apparel for export, as well as their agents and
contractors, and except gross receipts of or from a pioneer
industry registered with the Board of Investments under the
provisions of Republic Act No. 5186;
x x x
The term ‘independent contractors’ include persons (juridical or
natural) not enumerated above (but not including individuals
subject to the occupation tax under Section 12 of the Local Tax
Code) whose activity consists essentially of the sale of all kinds
of services for a fee regardless of whether or not the
performance of the service calls for the exercise or use of the
physical or mental faculties of such contractors or their
employees.
The term ‘independent contractor’ shall not include regional or

area headquarters established in the Philippines by
multinational corporations, including their alien executives, and
which headquarters do not earn or derive income from the
Philippines and which act as supervisory, communications and
coordinating centers for their affiliates, subsidiaries or branches
in the Asia-Pacific Region.
The term ‘gross receipts’ means all amounts received by the
prime or principal contractor as the total contract price,
undiminished by amount paid to the subcontractor, shall be
excluded from the taxable gross receipts of the subcontractor."
Petitioner Commissioner of Internal Revenue contends that
Private Respondent Ateneo de Manila University "falls within the
definition" of an independent contractor and "is not one of
those mentioned as excepted" ; hence, it is properly a subject of
the three percent contractor’s tax levied by the foregoing
provision of law. 6 Petitioner states that the "term ‘independent
contractor’ is not specifically defined so as to delimit the scope
thereof, so much so that any person who . . . renders physical
and mental service for a fee, is now indubitably considered an
independent contractor liable to 3% contractor’s tax." 7
According to petitioner, Ateneo has the burden of proof to show
its exemption from the coverage of the law.chanrobles virtual
lawlibrary
We disagree. Petitioner Commissioner of Internal Revenue erred
in applying the principles of tax exemption without first applying
the well-settled doctrine of strict interpretation in the
imposition of taxes. It is obviously both illogical and impractical
to determine who are exempted without first determining who
are covered by the aforesaid provision. The Commissioner
should have determined first if private respondent was covered
by Section 205, applying the rule of strict interpretation of laws
imposing taxes and other burdens on the populace, before
asking Ateneo to prove its exemption therefrom. The Court
takes this occasion to reiterate the hornbook doctrine in the
interpretation of tax laws that" (a) statute will not be construed
as imposing a tax unless it does so clearly, expressly, and
unambiguously. . . . (A) tax cannot be imposed without clear and
express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies
with peculiar strictness to tax laws and the provisions of a taxing
act are not to be extended by implication." 8 Parenthetically, in
answering the question of who is subject to tax statutes, it is
basic that "in case of doubt, such statutes are to be construed
most strongly against the government and in favor of the
subjects or citizens because burdens are not to be imposed nor
presumed to be imposed beyond what statutes expressly and
78
clearly import." 9
To fall under its coverage, Section 205 of the National Internal
Revenue Code requires that the independent contractor be
engaged in the business of selling its services. Hence, to impose
the three percent contractor’s tax on Ateneo’s Institute of
Philippine Culture, it should be sufficiently proven that the
private respondent is indeed selling its services for a fee in
pursuit of an independent business. And it is only after private
respondent has been found clearly to be subject to the
provisions of Sec. 205 that the question of exemption therefrom
would arise. Only after such coverage is shown does the rule of
construction — that tax exemptions are to be strictly construed
against the taxpayer — come into play, contrary to petitioner’s
position. This is the main line of reasoning of the Court of Tax
Appeals in its decision, 10 which was affirmed by the CA.
The Ateneo de Manila University Did Not Contract
for the Sale of the Services of its Institute of Philippine Culture
After reviewing the records of this case, we find no evidence
that Ateneo’s Institute of Philippine Culture ever sold its services
for a fee to anyone or was ever engaged in a business apart
from and independently of the academic purposes of the
university.
Stressing that "it is not the Ateneo de Manila University per se
which is being taxed," Petitioner Commissioner of Internal
Revenue contends that "the tax is due on its activity of
conducting researches for a fee. The tax is due on the gross
receipts made in favor of IPC pursuant to the contracts the latter
entered to conduct researches for the benefit primarily of its
clients. The tax is imposed on the exercise of a taxable activity. .
. . [T]he sale of services of private respondent is made under a
contract and the various contracts entered into between private
respondent and its clients are almost of the same terms,
showing, among others, the compensation and terms of
payment." 11 (Emphasis supplied.)
In theory, the Commissioner of Internal Revenue may be
correct. However, the records do not show that Ateneo’s IPC in
fact contracted to sell its research services for a fee. Clearly
then, as found by the Court of Appeals and the Court of Tax
Appeals, petitioner’s theory is inapplicable to the established
factual milieu obtaining in the instant case.
In the first place, the petitioner has presented no evidence to
prove its bare contention that, indeed contracts for sale of
services were ever entered into by the private Respondent. As
appropriately pointed out by the latter:
"An examination of the Commissioner’s Written Formal Offer of
Evidence in the Court of Tax Appeals shows that only the
following documentary evidence was presented:
Exhibit 1 BIR letter of authority no. 331844
2 Examiner’s Field Audit Report
3 Adjustments to Sales/Receipts
4 Letter-decision of BIR Commissioner
Bienvenido A. Tan Jr.
None of the foregoing evidence even comes close to purport to
be contracts between private respondent and third parties." 12
Moreover, the Court of Tax Appeals accurately and correctly
declared that the" funds received by the Ateneo de Manila
University are technically not a fee. They may however fall as
gifts or donations which are tax-exempt" as shown by private
respondent’s compliance with the requirement of Section 123
of the National Internal Revenue Code providing for the
exemption of such gifts to an educational institution. 13
Respondent Court of Appeals elucidated on the ruling of the
Court of Tax Appeals:
"To our mind, private respondent hardly fits into the definition
of an ‘independent contractor’.chanrobles.com : virtual law
library
For one, the established facts show that IPC, as a unit of the
private respondent, is not engaged in business. Undisputedly,
private respondent is mandated by law to undertake research
activities to maintain its university status. In fact, the research
activities being carried out by the IPC is focused not on business
or profit but on social sciences studies of Philippine society and
culture. Since it can only finance a limited number of IPC’s
research projects, private respondent occasionally accepts
sponsorship for unfunded IPC research projects from
international organizations, private foundations and
governmental agencies. However, such sponsorships are subject
to private respondent’s terms and conditions, among which are,
that the research is confined to topics consistent with the
private respondent’s academic agenda; that no proprietary or

commercial purpose research is done; and that private
respondent retains not only the absolute right to publish but
also the ownership of the results of the research conducted by
the IPC. Quite clearly, the aforementioned terms and conditions
belie the allegation that private respondent is a contractor or is
engaged in business.
For another, it bears stressing that private respondent is a non-
stock, non-profit educational corporation. The fact that it
accepted sponsorship for IPC’s unfunded projects is merely
incidental. For, the main function of the IPC is to undertake
research projects under the academic agenda of the
private Respondent. Moreover, the records do not show that in
accepting sponsorship of research work, IPC realized profits
from such work. On the contrary, the evidence shows that for
about 30 years, IPC had continuously operated at a loss, which
means that sponsored funds are less than actual expenses for its
research projects. That IPC has been operating at a loss loudly
bespeaks of the fact that education and not profit is the motive
for undertaking the research projects.
Then, too, granting arguendo that IPC made profits from the
sponsored research projects, the fact still remains that there is
no proof that part of such earnings or profits was ever
distributed as dividends to any stockholder, as in fact none was
so distributed because they accrued to the benefit of the private
respondent which is a non-profit educational institution. "14
Therefore, it is clear that the funds received by Ateneo’s
Institute of Philippine Culture are not given in the concept of a
fee or price in exchange for the performance of a service or
delivery of an object. Rather, the amounts are in the nature of
an endowment or donation given by IPC’s benefactors solely for
the purpose of sponsoring or funding the research with no
strings attached. As found by the two courts below, such
sponsorships are subject to IPC’s terms and conditions. No
proprietary or commercial research is done, and IPC retains the
ownership of the results of the research, including the absolute
right to publish the same. The copyrights over the results of the
research are owned by Ateneo and, consequently, no portion
thereof may be reproduced without its permission.15 The
amounts given to IPC, therefore, may not be deemed, it bears
stressing, as fees or gross receipts that can be subjected to the
three percent contractor’s tax.
It is also well to stress that the questioned transactions of
Ateneo’s Institute of Philippine Culture cannot be deemed either
as a contract of sale or a contract for a piece of work. "By the
contract of sale, one of the contracting parties obligates himself
79
to transfer the ownership of and to deliver a determinate thing,
and the other to pay therefor a price certain in money or its
equivalent." 16 By its very nature, a contract of sale requires a
transfer of ownership. Thus, Article 1458 of the Civil Code
"expressly makes the obligation to transfer ownership as an
essential element of the contract of sale, following modern
codes, such as the German and the Swiss. Even in the absence
of this express requirement, however, most writers, including
Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and Capitant,
have considered such transfer of ownership as the primary
purpose of sale. Perez and Alguer follow the same view, stating
that the delivery of the thing does not mean a mere physical
transfer, but is a means of transmitting ownership. Transfer of
title or an agreement to transfer it for a price paid or promised
to be paid is the essence of sale." 17 In the case of a contract for
a piece of work, "the contractor binds himself to execute a piece
of work for the employer, in consideration of a certain price or
compensation. . . . If the contractor agrees to produce the work
from materials furnished by him, he shall deliver the thing
produced to the employer and transfer dominion over the thing.
. . ." 18 Ineludably, whether the contract be one of sale or one
for a piece of work, a transfer of ownership is involved and a
party necessarily walks away with an object. 19 In the case at
bench, it is clear from the evidence on record that there was no
sale either of objects or services because, as adverted to earlier,
there was no transfer of ownership over the research data
obtained or the results of research projects undertaken by the
Institute of Philippine Culture.
Furthermore, it is clear that the research activity of the Institute
of Philippine Culture is done in pursuance of maintaining
Ateneo’s university status and not in the course of an
independent business of selling such research with profit in
mind. This is clear from a reading of the regulations governing
universities:
‘31. In addition to the legal requisites an institution must meet,
among others, the following requirements before an application
for university status shall be considered::red
x x x palpable error.
(e) The institution must undertake research and operate with a
competent qualified staff at least three graduate departments in
accordance with the rules and standards for graduate
education. One of the departments shall be science and
technology. The competence of the staff shall be judged by their
effective teaching, scholarly publications and research activities
published in its school journal as well as their leadership
activities in the profession.
(f) The institution must show evidence of adequate and stable
financial resources and support, a reasonable portion of which
should be devoted to institutional development and research.
(Emphasis supplied)
x x x’
‘32. University status may be withdrawn, after due notice and
hearing, for failure to maintain satisfactorily the standards and
requirements therefor." 20
Petitioner’s contention that it is the Institute of Philippine
Culture that is being taxed and not the Ateneo is patently
erroneous because the former is not an independent juridical
entity that is separate and distinct from the latter.
Factual Findings and Conclusions of the Court of Tax Appeals
Affirmed by the Court of Appeals Generally Conclusive
In addition, we reiterate that 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" 21 Ateneo de
Manila University may be deemed a subject of the three percent
contractor’s tax "through the evidence presented before it."
Consequently, "as a matter of principle, this Court will not set
aside the conclusion reached by . . . the Court of Tax Appeals
which is, by the very nature of its function, dedicated exclusively
to the study and consideration of tax problems and has
necessarily developed an expertise on the subject unless there
has been an abuse or improvident exercise of authority . . ." 22
This point becomes more evident in the case before us where
the findings and conclusions of both the Court of Tax Appeals
and the Court of Appeals appear untainted by any abuse of
authority, much less grave abuse of discretion. Thus, we find the
decision of the latter affirming that of the former free from any
Public Service, Not Profit, is the Motive
The records show that the Institute of Philippine Culture
conducted its research activities at a huge deficit of
P1,624,014.00 as shown in its statements of fund and
disbursements for the period 1972 to 1985. 23 In fact, it was
Ateneo de Manila University itself that had funded the research
projects of the institute, and it was only when Ateneo could no
 80

longer produce the needed funds that the institute sought

funding from outside. The testimony of Ateneo’s Director for
Accounting Services, Ms. Leonor Wijangco, provides significant
insight on the academic and nonprofit nature of the institute’s
research activities done in furtherance of the university’s
purposes, as follows:

"Q Now it was testified to earlier by Miss Thelma Padero (Office

Manager of the Institute of Philippine Culture) that as far as
grants from sponsored research it is possible that the grant
sometimes is less than the actual cost. Will you please tell us in
this case when the actual cost is a lot less than the grant who
shoulders the additional cost?

A The University.

Q Now, why is this done by the University?

A Because of our faculty development program as a university,

because a university has to have its own research institute." 24

So, why is it that Ateneo continues to operate and conduct

researches through its Institute of Philippine Culture when it
undisputedly loses not an insignificant amount in the process?
The plain and simple answer is that private respondent is not a
contractor selling its services for a fee but an academic
institution conducting these researches pursuant to its
commitments to education and, ultimately, to public service. For
the institute to have tenaciously continued operating for so long
despite its accumulation of significant losses, we can only agree
with both the Court of Tax Appeals and the Court of Appeals
that "education and not profit is [IPC’s] motive for undertaking
the research projects."25

WHEREFORE, premises considered, the petition is DENIED and

the assailed Decision of the Court of Appeals is hereby
AFFIRMED in full.

SO ORDERED.