G.R. No.
L-29059 December 15, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CEBU PORTLAND CEMENT COMPANY and COURT OF TAX APPEALS,
respondents.
CRUZ, J.:
By virtue of a decision of the Court of Tax Appeals rendered on June
21, 1961, as modified on appeal by the Supreme Court on February
27, 1965, the Commissioner of Internal Revenue was ordered to
refund to the Cebu Portland Cement Company the amount of P
359,408.98, representing overpayments of ad valorem taxes on
cement produced and sold by it after October 1957. 1
On March 28, 1968, following denial of motions for reconsideration
filed by both the petitioner and the private respondent, the latter
moved for a writ of execution to enforce the said judgment . 2
The motion was opposed by the petitioner on the ground that the
private respondent had an outstanding sales tax liability to which
the judgment debt had already been credited. In fact, it was
stressed, there was still a balance owing on the sales taxes in the
amount of P 4,789,279.85 plus 28% surcharge. 3
On April 22, 1968, the Court of Tax Appeals * granted the motion,
holding that the alleged sales tax liability of the private respondent
was still being questioned and therefore could not be set-off against
the refund. 4
In his petition to review the said resolution, the Commissioner of
Internal Revenue claims that the refund should be charged against
the tax deficiency of the private respondent on the sales of cement
under Section 186 of the Tax Code. His position is that cement is a
manufactured and not a mineral product and therefore not exempt
from sales taxes. He adds that enforcement of the said tax
deficiency was properly effected through his power of distraint of
personal property under Sections 316 and 318 5 of the said Code
and, moreover, the collection of any national internal revenue tax
may not be enjoined under Section 305, 6 subject only to the
exception prescribed in Rep. Act No. 1125. 7 This is not applicable to
the instant case. The petitioner also denies that the sales tax
assessments have already prescribed because the prescriptive
period should be counted from the filing of the sales tax returns,
which had not yet been done by the private respondent.
1
For its part, the private respondent disclaims liability for the sales
taxes, on the ground that cement is not a manufactured product but
a mineral product. 8 As such, it was exempted from sales taxes
under Section 188 of the Tax Code after the effectivity of Rep. Act
No. 1299 on June 16, 1955, in accordance with Cebu Portland
Cement Co. v. Collector of Internal Revenue, 9 decided in 1968.
Here Justice Eugenio Angeles declared that "before the effectivity of
Rep. Act No. 1299, amending Section 246 of the National Internal
Revenue Code, cement was taxable as a manufactured product
under Section 186, in connection with Section 194(4) of the said
Code," thereby implying that it was not considered a manufactured
product afterwards. Also, the alleged sales tax deficiency could not
as yet be enforced against it because the tax assessment was not
yet final, the same being still under protest and still to be definitely
resolved on the merits. Besides, the assessment had already
prescribed, not having been made within the reglementary five-year
period from the filing of the tax returns. 10
Our ruling is that the sales tax was properly imposed upon the
private respondent for the reason that cement has always been
considered a manufactured product and not a mineral product. This
matter was extensively discussed and categorically resolved in
Commissioner of Internal Revenue v. Republic Cement Corporation,
11 decided on August 10, 1983, where Justice Efren L. Plana, after
an exhaustive review of the pertinent cases, declared for a
unanimous Court:
2
From all the foregoing cases, it is clear that cement qua cement was
never considered as a mineral product within the meaning of
Section 246 of the Tax Code, notwithstanding that at least 80% of its
components are minerals, for the simple reason that cement is the
product of a manufacturing process and is no longer the mineral
product contemplated in the Tax Code (i.e.; minerals subjected to
simple treatments) for the purpose of imposing the ad valorem tax.
What has apparently encouraged the herein respondents to
maintain their present posture is the case of Cebu Portland Cement
Co. v. Collector of Internal Revenue, L-20563, Oct. 29, 1968 (28
SCRA 789) penned by Justice Eugenio Angeles. For some portions of
that decision give the impression that Republic Act No. 1299, which
amended Section 246, reclassified cement as a mineral product that
was not subject to sales tax. ...
xxx xxx xxx
After a careful study of the foregoing, we conclude that reliance on
the decision penned by Justice Angeles is misplaced. The said
decision is no authority for the proposition that after the enactment
of Republic Act No. 1299 in 1955 (defining mineral product as things
with at least 80% mineral content), cement became a 'mineral
product," as distinguished from a "manufactured product," and
therefore ceased to be subject to sales tax. It was not necessary for
the Court to so rule. It was enough for the Court to say in effect that
even assuming Republic Act No. 1299 had reclassified cement was a
mineral product, the reclassification could not be given
retrospective application (so as to justify the refund of sales taxes
paid before Republic Act 1299 was adopted) because laws operate
prospectively only, unless the legislative intent to the contrary is
manifest, which was not so in the case of Republic Act 1266. [The
situation would have been different if the Court instead had ruled in
favor of refund, in which case it would have been absolutely
necessary (1) to make an unconditional ruling that Republic Act
1299 re-classified cement as a mineral product (not subject to sales
tax), and (2) to declare the law retroactive, as a basis for granting
refund of sales tax paid before Republic Act 1299.]
In any event, we overrule the CEPOC decision of October 29, 1968
(G.R. No. L-20563) insofar as its pronouncements or any implication
therefrom conflict with the instant decision.
The above views were reiterated in the resolution 12 denying
reconsideration of the said decision, thus:
The nature of cement as a "manufactured product" (rather than a
"mineral product") is well-settled. The issue has repeatedly
presented itself as a threshold question for determining the basis
for computing the ad valorem mining tax to be paid by cement
Companies. No pronouncement was made in these cases that as a
3
"manufactured product" cement is subject to sales tax because this
was not at issue.
The decision sought to be reconsidered here referred to the
legislative history of Republic Act No. 1299 which introduced a
definition of the terms "mineral" and "mineral products" in Sec. 246
of the Tax Code. Given the legislative intent, the holding in the
CEPOC case (G.R. No. L-20563) that cement was subject to sales tax
prior to the effectivity •f Republic Act No. 1299 cannot be construed
to mean that, after the law took effect, cement ceased to be so
subject to the tax. To erase any and all misconceptions that may
have been spawned by reliance on the case of Cebu Portland
Cement Co. v. Collector of Internal Revenue, L-20563, October 29,
1968 (28 SCRA 789) penned by Justice Eugenio Angeles, the Court
has expressly overruled it insofar as it may conflict with the decision
of August 10, 1983, now subject of these motions for
reconsideration.
On the question of prescription, the private respondent claims that
the five-year reglementary period for the assessment of its tax
liability started from the time it filed its gross sales returns on June
30, 1962. Hence, the assessment for sales taxes made on January
16, 1968 and March 4, 1968, were already out of time. We disagree.
This contention must fail for what CEPOC filed was not the sales
returns required in Section 183(n) but the ad valorem tax returns
required under Section 245 of the Tax Code. As Justice Irene R.
Cortes emphasized in the aforestated resolution:

In order to avail itself of the benefits of the five-year prescription
period under Section 331 of the Tax Code, the taxpayer should have
filed the required return for the tax involved, that is, a sales tax
return. (Butuan Sawmill, Inc. v. CTA, et al., G.R. No. L-21516, April
29, 1966, 16 SCRA 277). Thus CEPOC should have filed sales tax
returns of its gross sales for the subject periods. Both parties admit
that returns were made for the ad valorem mining tax. CEPOC
argues that said returns contain the information necessary for the
assessment of the sales tax. The Commissioner does not consider
such returns as compliance with the requirement for the filing of tax
returns so as to start the running of the five-year prescriptive
period.
We agree with the Commissioner. It has been held in Butuan
Sawmill Inc. v. CTA, supra, that the filing of an income tax return
cannot be considered as substantial compliance with the
requirement of filing sales tax returns, in the same way that an
income tax return cannot be considered as a return for
compensating tax for the purpose of computing the period of
prescription under Sec. 331. (Citing Bisaya Land Transportation Co.,
Inc. v. Collector of Internal Revenue, G.R. Nos. L-12100 and L-11812,
May 29, 1959). There being no sales tax returns filed by CEPOC, the
statute of stations in Sec. 331 did not begin to run against the
government. The assessment made by the Commissioner in 1968 on
CEPOC's cement sales during the period from July 1, 1959 to
December 31, 1960 is not barred by the five-year prescriptive
period. Absent a return or when the return is false or fraudulent,
4
the applicable period is ten (10) days from the discovery of the
fraud, falsity or omission. The question in this case is: When was
CEPOC's omission to file tha return deemed discovered by the
government, so as to start the running of said period? 13
The argument that the assessment cannot as yet be enforced
because it is still being contested loses sight of the urgency of the
need to collect taxes as "the lifeblood of the government." If the
payment of taxes could be postponed by simply questioning their
validity, the machinery of the state would grind to a halt and all
government functions would be paralyzed. That is the reason why,
save for the exception already noted, the Tax Code provides:
Sec. 291. Injunction not available to restrain collection of tax. — No
court shall have authority to grant an injunction to restrain the
collection of any national internal revenue tax, fee or charge
imposed by this Code.
It goes without saying that this injunction is available not only when
the assessment is already being questioned in a court of justice but
more so if, as in the instant case, the challenge to the assessment is
still-and only-on the administrative level. There is all the more
reason to apply the rule here because it appears that even after
crediting of the refund against the tax deficiency, a balance of more
than P 4 million is still due from the private respondent.
To require the petitioner to actually refund to the private
respondent the amount of the judgment debt, which he will later
have the right to distrain for payment of its sales tax liability is in
our view an Idle ritual. We hold that the respondent Court of Tax
Appeals erred in ordering such a charade.

WHEREFORE, the petition is GRANTED. The resolution dated April

22, 1968, in CTA Case No. 786 is SET ASIDE, without any
pronouncement as to costs.

SO ORDERED.

5
U.S. Supreme Court and also are to be included as part of his estate in computing the
federal estate tax. P. 295 U. S. 254.
Bull v. United States, 295 U.S. 247 (1935)

Bull v. United States

2. Where the articles of a personal service partnership having no
invested capital provide that, in the event of a partner's death, the
No. 649 survivors, if his representative does not object, shall be at liberty to
continue the business for a year, the estate in that case to share the
profits or losses as the deceased partner would if living, the profits
coming to the estate from such continuation of the business are not
Argued April 9, 1935
to be regarded as the fruits of a sale of any interest of the deceased
to the survivors, but are income of the estate, taxable as such; they
are no part of the corpus of the estate left by the decedent upon
Decided April 29, 1935 which the federal estate tax is to be computed. P. 295 U. S. 255.

295 U.S. 247 3. Retention by the Government of money wrongfully exacted as

taxes is immoral, and amounts in law to a fraud on the taxpayer's
rights. P. 295 U. S. 261.

CERTIORARI TO THE COURT OF CLAIMS

Syllabus
1. Moneys received by a deceased partner's estate as his share of
profits earned by the firm before he died, are taxable as his income
4. A claim for recovery of money so held may not only be the
subject of a suit in the Court of Claims, but may be used by way of
recoupment and credit in an action by the United States arising out
of the same transaction, and this even though an independent suit
against the Government to enforce the claim would be barred by
the statute of limitations. P. 295 U. S. 261.

6
5. Recoupment is in the nature of a defense arising out of some
feature of the transaction upon which the plaintiff's action is
grounded. Such a defense is never barred by the statute of
limitations so long as the main action itself is timely. P. 295 U. S.
262.
Page 295 U. S. 248
6. The Government wrongfully collected and retained an estate tax
on moneys earned for and paid to an estate in partnership
transactions after the decedent's death, and which were not part of
the corpus of the estate and were properly taxable only as income
of the estate. Before the time allowed for claiming reimbursement
had elapsed, the Government proceeded to assess and collect an
income tax on the identical moneys.
Held:
(1) That the taxpayer was entitled to recoup from the amount of the
income tax the amount of the unlawful estate tax by suit for the
difference in the Court of Claims, although suit to recover the
unlawful tax independently had become barred. Pp. 295 U. S. 261-
262.
7
(2) A complaint by which the taxpayer prayed judgment in the
alternative, either for the amount of the income tax or for what
should have been credited against it on account of the estate tax,
was sufficient to put in suit the right to recoupment. P. 295 U. S.
263.
7. The Court of Claims is not bound by any special rules of pleading;
all that is required is that the petition shall contain a plain and
concise statement of the fact relied on and give the United States
reasonable notice of the matters it is called upon to meet. P. 295 U.
S. 263.
79 Ct.Cls. 133, 6 F. Supp. 141, reversed.
Certiorari, 294 U.S. 704, to review a judgment rejecting a claim for
money unlawfully exacted as taxes.
Page 295 U. S. 251
MR. JUSTICE ROBERTS delivered the opinion of the Court.
Archibald H. Bull died February 13, 1920. He had been a member of
a partnership engaged in the business of ship-brokers. The
agreement of association provided that, in the event a partner died,
the survivors should continue the business for one year subsequent
to his death, and his estate should "receive the same interests, or
participate in the losses to the same extent," as the deceased
partner would, if living,
"based on the usual method of ascertaining what the said profits or
losses would be. . . . Or the estate of the deceased partner shall
have the option of withdrawing his interest from the firm within
thirty days after the probate of will . . . , and all adjustments of
profits or losses shall be made as of the date of such withdrawal."
The estate's representative did not exercise the option to withdraw
in thirty days, and the business was conducted until December 31,
1920, as contemplated by the agreement.
The enterprise required no capital, and none was ever invested by
the partners. Bull's share of profits from January 1, 1920, to the
date of his death, February 13, 1920, was $24,124.20; he had no
other accumulated profits,
Page 295 U. S. 252
8
and no interest in any tangible property belonging to the firm.
Profits accruing to the estate for the period from the decedent's
death to the end of 1920 were $212,718.79, $200,117.90 being paid
during the year and $12,601.70 during the first two months of 1921.
The Court of Claims found:
"When filing an estate tax return, the executor included the
decedent's interest in the partnership at a value of $24,124.20,
which represented the decedent's share of the earnings accrued to
the date of death, whereas the Commissioner, in 1921, valued such
interest at $235,202.99, and subjected such increased value to the
payment of an estate tax, which was paid in June and August, 1921 .
The last-mentioned amount was made up of the amount of
$24,124.20 plus the amount of $212,718.79 hereinbefore
mentioned. The estate tax on this increased amount was
$41,517.45. [Footnote 1]"
"April 14, 1921, plaintiff filed an income tax return for the period
February 13, 1920, to December 31, 1920, for the estate of the
decedent, which return did not include, as income, the amount of
$200,117.09 received as the share of the profits earned by the
partnership during the period for which the return was filed. The
estate employed the cash receipts and disbursement method of
accounting."
"Thereafter, in July, 1925, the Commissioner determined that the
sum of $200,117.09 received in 1920 should have been returned by
the executor as income to the estate for the period February 13 to
December 31, 1920, and notified plaintiff of a deficiency in income
tax due from the estate for that period of $261,212.65, which was
due in part to the inclusion of that amount as taxable income and in
part to adjustments not here in controversy.
Page 295 U. S. 253
No deduction was allowed by the Commissioner from the amount
of $200,117.09 on account of the value of the decedent's interest in
the partnership at his death."
6 F. Supp. 141, 142.
September 5, 1925, the executor appealed to the Board of Tax
Appeals from the deficiency of income tax so determined. The
Board sustained the Commissioner's action in including the item of
$200,117.99 without any reduction on account of the value of the
9
decedent's interest in the partnership at the date of death,
[Footnote 2] and determined a deficiency of $55,166.49, which,
with interest of $7,510.95, was paid April 14, 1928.
July 11, 1928, the executor filed a claim for refund of this amount,
setting forth that the $200,117.99, by reason of which the
additional tax was assessed and paid, was corpus; that it was so
originally determined by the Commissioner and the estate tax
assessed thereon was paid by the executor, and that the
subsequent assessment of an income tax against the estate for the
receipt of the same sum was erroneous. The claim was rejected
May 8, 1929. September 16, 1930, the executor brought suit in the
Court of Claims, and in his petition, after setting forth the facts as he
alleged them to be, prayed judgment in the alternative: (1) for the
principal sum of $62,677.44, the amount paid April 14, 1928, as a
deficiency of income tax unlawfully assessed and collected; or (2)
for the sum of $47,643.44 on the theory that, if the sum of
$200,117.99 was income for the year 1920 and taxable as such, the
United States should have credited against the income tax
attributable to the receipt of this sum the overpayment of estate
tax resulting from including the amount in the taxable estate --
$34,035, [Footnote 3] with interest thereon.
Page 295 U. S. 254
The Court of Claims held that the item was income, and properly so
taxed. With respect to the alternative relief sought, it said:
"We cannot consider whether the Commissioner correctly included
the total amount received from the business in the net estate of the
decedent subject to estate tax, for the reason that the suit was not
timely instituted."
Judgment went for the United States. [Footnote 4] Because of the
novelty and importance of the question presented, we granted
certiorari. [Footnote 5]
1. We concur in the view of the Court of Claims that the amount
received from the partnership as profits earned prior to Bull's death
was income earned by him in his lifetime and taxable to him as
such, and that it was also corpus of his estate and as such to be
included in his gross estate for computation of estate tax. We also
agree that the sums paid his estate as profits earned after his death
were not corpus, but income received by his executor, and to be
reckoned in computing income tax for the years 1920 and 1921.
Where the effect of the contract is that the deceased partner's
estate shall leave his interest in the business and the surviving
partners shall acquire it by payments to the estate, the transaction
is a sale, and payments made to the estate are for the account of
the survivors. It results that the surviving partners are taxable upon
firm profits, and the estate is not. [Footnote 6] Here, however, the
10
survivors have purchased nothing belonging to the decedent, who
had made no investment in the business and owned no tangible
property connected with it. The portion of the profits paid his estate
was therefore income, and not corpus, and this is so whether we
consider the executor a member of the old firm for the remainder
Page 295 U. S. 255
of the year, or hold that the estate became a partner in a new
association formed upon the decedent's demise.
2. A serious and difficult issue is raised by the claim that the same
receipt has been made the basis of both income and estate tax,
although the item cannot in the circumstances be both income and
corpus, and that the alternative prayer of the petition required the
court to render a judgment which would redress the illegality and
injustice resulting from the erroneous inclusion of the sum in the
gross estate for estate tax. The respondent presents two arguments
in opposition, one addressed to the merits and the other to the bar
of the statute of limitations.
On the merits, it is insisted that the government was entitled to
both estate tax and income tax in virtue of the right conferred on
the estate by the partnership agreement and the fruits of it. The
position is that, as the contract gave Bull a valuable right which
passed to his estate at his death, the Commissioner correctly
included it for estate tax. And the propriety of treating the share of
profits paid to the estate as income is said to be equally clear. The
same sum of money in different aspects may be the basis of both
forms of tax. An example is found in this estate. The decedent's
share of profits accrued to the date of his death was $24,124.20.
This was income to him in his lifetime and his executor was bound
to return it as such. But the sum was paid to the executor by the
surviving partners, and thus became an asset of the estate;
accordingly, the petitioner returned that amount as part of the
gross estate for computation of estate tax and the Commissioner
properly treated it as such.
We are told that, since the right to profits is distinct from the profits
actually collected, we cannot now say more than that perhaps the
Commissioner put too high a value on the contract right when he
valued it as equal to the amount
Page 295 U. S. 256
of profits received -- $212,718.99. This error, if error it was, the
government says is now beyond correction.
While, as we have said, the same sum may in different aspects be
used for the computation of both an income and an estate tax, this
11
fact will not here serve to justify the Commissioner's rulings. They
were inconsistent. The identical money -- not a right to receive the
amount, on the one hand, and actual receipt resulting from that
right on the other -- was the basis of two assessments. The double
taxation involved in this inconsistent treatment of that sum of
money is made clear by the lower court's finding we have quoted.
The Commissioner assessed estate tax on the total obtained by
adding $24,124.20, the decedent's share of profits earned prior to
his death, and $212,718.79, the estate's share of profits earned
thereafter. He treated the two items as of like quality, considered
them both as capital or corpus, and viewed neither as the measure
of value of a right passing from the decedent at death. No other
conclusion may be drawn from the finding of the Court of Claims.
In the light of the facts, it would not have been permissible to place
a value of $212,718.99 or any other value on the mere right of
continuance of the partnership relation inuring to Bull's estate. Had
he lived, his share of profits would have been income. By the terms
of the agreement, his estate was to sustain precisely the same
status quoad the firm as he had, in respect of profits and losses.
Since the partners contributed no capital and owned no tangible
property connected with the business, there is no justification for
characterizing the right of a living partner to his share of earnings as
part of his capital, and if the right was not capital to him, it could
not be such to his estate. Let us suppose Bull had, while living,
assigned his interest in the firm, with his partners' consent, to a
third person for a valuable consideration, and, in making return of
income, had valued or capitalized the right to profits which

Page 295 U. S. 257
he had thus sold, had deducted such valuation from the
consideration received, and returned the difference only as gain.
We think the Commissioner would rightly have insisted that the
entire amount received was income.
Since the firm was a personal service concern and no tangible
property was involved in its transactions, if it had not been for the
terms of the agreement, no accounting would have ever been made
upon Bull's death for anything other than his share of profits
accrued to the date of his death -- $24,124.20 -- and this would
have been the only amount to be included in his estate in
connection with his membership in the firm. As respects the status
after death, the form of the stipulation is significant. The
declaration is that the surviving partners "are to be at liberty" to
continue the business for a year, in the same relation with the
deceased partner's estate as if it were in fact the decedent himself
still alive and a member of the firm. His personal representative is
given a veto which will prevent the continuance of the firm's
business. The purpose may well have been to protect the goodwill
of the enterprise in the interest of the survivors, and to afford them
a reasonable time in which to arrange for their future activities. But
no sale of the decedent's interest or share in the goodwill can be
spelled out. Indeed, the government strenuously asserted, in
supporting the treatment of the payments to the estate as income,
12
that the estate sold nothing to the surviving partners, and we agree.
An analogous situation would be presented if Bull had not died, but
the partnership had terminated by limitation on February 13, 1920,
and the agreement had provided that, if Bull's partners so desired,
the relation should continue for another year. It could not
successfully be contended that, in such case, Bull's share of profit
for the additional year was capital.
We think there was no estate tax due in respect of the $212,718.79
paid to the executor as profits for the period subsequent to the
decedent's death.
Page 295 U. S. 258
The government's second point is that, if the use of profits accruing
to the estate in computing estate tax was wrong, the statute of
limitations bars correction of the error in the present action. So the
Court of Claims thought. We hold otherwise.
The petitioner included in his estate tax return, as the value of Bull's
interest in the partnership, only $24,124.20, the profit accrued prior
to his death. The Commissioner added $212,718.79, the sum
received as profits after Bull's death, and determined the total
represented the value of the interest. The petitioner acquiesced and
paid the tax assessed in full in August, 1921. He had no reason to
assume the Commissioner would adjudge the $212,718.79 income
and taxable as such. Nor was this done until July, 1925. The
petitioner thereupon asserted, as we think correctly, that the item
could not be both corpus and income of the estate. The
Commissioner apparently held a contrary view. The petitioner
appealed to the Board of Tax Appeals from the proposed deficiency
of income tax. His appeal was dismissed April 9, 1928. It was then
too late to file a claim for refund of overpayment of estate tax due
to the error of inclusion in the estate of its share of firm profits.
[Footnote 7] Inability to obtain a refund or credit, or to sue the
United States, did not, however, alter the fact that, if the
government should insist on payment of the full deficiency of
income tax, it would be in possession of some $41,000 in excess of
the sum to which it was justly entitled. Payment was demanded.
The petitioner paid April 14, 1928, and, on June 11, 1928, presented
a claim for refund, in which he still insisted the amount in question
was corpus, had been so determined and estate tax paid on that
basis, and should not be classified for taxation as income. The claim
was rejected May 8, 1929, and the present action instituted
September 16, 1930.
Page 295 U. S. 259
The fact that the petitioner relied on the Commissioner's
assessment for estate tax, and believed the inconsistent claim of
deficiency of income tax was of no force, cannot avail to toll the
statute of limitations, which forbade the bringing of any action in
13
1930 for refund of the estate tax payments made in 1921. As the
income tax was properly collected, suit for the recovery of any part
of the amount paid on that account was futile. Upon what theory,
then, may the petitioner obtain redress in the present action for the
unlawful retention of the money of the estate? Before an answer
can be given, the system of enforcing the government's claims for
taxes must be considered in its relation to the problem.
A tax is an exaction by the sovereign, and necessarily the sovereign
has an enforceable claim against everyone within the taxable class
for the amount lawfully due from him. The statute prescribes the
rule of taxation. Some machinery must be provided for applying the
rule to the facts in each taxpayer's case in order to ascertain the
amount due. The chosen instrumentality for the purpose is an
administrative agency whose action is called an assessment. The
assessment may be a valuation of property subject to taxation,
which valuation is to be multiplied by the statutory rate to ascertain
the amount of tax. Or it may include the calculation and fix the
amount of tax payable, and assessments of federal estate and
income taxes are of this type. Once the tax is assessed, the taxpayer
will owe the sovereign the amount when the date fixed by law for
payment arrives. Default in meeting the obligation calls for some
procedure whereby payment can be enforced. The statute might
remit the government to an action at law wherein the taxpayer
could offer such defense as he had. A judgment against him might
be collected by the levy of an execution. But taxes are the lifeblood
of government, and their prompt and certain availability an
imperious need. Time out of mind, therefore, the sovereign has
resorted to more drastic

Page 295 U. S. 260
means of collection. The assessment is given the force of a
judgment, and if the amount assessed is not paid when due,
administrative officials may seize the debtor's property to satisfy
the debt.
In recognition of the fact that erroneous determinations and
assessments will inevitably occur, the statutes, in a spirit of fairness,
invariably afford the taxpayer an opportunity at some stage to have
mistakes rectified. Often an administrative hearing is afforded
before the assessment becomes final; or administrative machinery
is provided whereby an erroneous collection may be refunded; in
some instances, both administrative relief and redress by an action
against the sovereign in one of its courts are permitted methods of
restitution of excessive or illegal exaction. Thus, the usual procedure
for the recovery of debts is reversed in the field of taxation.
Payment precedes defense, and the burden of proof, normally on
the claimant, is shifted to the taxpayer. The assessment supersedes
the pleading, proof, and judgment necessary in an action at law, and
has the force of such a judgment. The ordinary defendant stands in
judgment only after a hearing. The taxpayer often is afforded his
hearing after judgment and after payment, and his only redress for
unjust administrative action is the right to claim restitution. But
these reversals of the normal process of collecting a claim cannot
obscure the fact that, after all, what is being accomplished is the
14
recovery of a just debt owed the sovereign. If that which the
sovereign retains was unjustly taken in violation of its own statute,
the withholding is wrongful. Restitution is owed the taxpayer.
Nevertheless, he may be without a remedy. But we think this is not
true here.
In a proceeding for the collection of estate tax, the United States
through a palpable mistake, took more than it was entitled to.
Retention of the money was against morality and conscience. But
claim for refund or credit
Page 295 U. S. 261
was not presented, or action instituted for restitution, within the
period fixed by the statute of limitations. If nothing further had
occurred, congressional action would have been the sole avenue of
redress.
In July, 1925, the government brought a new proceeding arising out
of the same transaction involved in the earlier proceeding. This
time, however, its claim was for income tax. The taxpayer opposed
payment in full by demanding recoupment of the amount
mistakenly collected as estate tax and wrongfully retained. Had the
government instituted an action at law, the defense would have
been good. The United States, we have held, cannot, as against the
claim of an innocent party, hold his money which has gone into its
treasury by means of the fraud of their agent. United States v. State
Bank, 96 U. S. 30. While here the money was taken through mistake
without any element of fraud, the unjust retention is immoral, and
amounts in law to a fraud on the taxpayer's rights. What was said in
the State Bank case applies with equal force to this situation.
"An action will lie whenever the defendant has received money
which is the property of the plaintiff, and which the defendant is
obliged by natural justice and equity to refund. The form of the
indebtedness or the mode in which it was incurred is immaterial. . . .
In these cases [cited in the opinion] and many others that might be
cited, the rules of law applicable to individuals were applied to the
United States."
Pp. 96 U. S. 35-36. [Footnote 8] A claim for recovery of money so
held may not only be the subject of a suit in the Court of Claims, as
shown by the authority referred to, but may be used by way of
recoupment and credit in an action by the United States arising out
of the same transaction. United States v. Macdaniel, 7 Pet. 1, 32 U.
S. 16-17; United States v. Ringgold, 8 Pet. 150, 33 U. S. 163-164. In
the
Page 295 U. S. 262
15
latter case, this language was used:
"No direct suit can be maintained against the United States; but
when an action is brought by the United States, to recover money in
the hands of a party, who has a legal claim against them, it would be
a very rigid principle, to deny to him the right of setting up such
claim in a court of justice, and turn him round to an application to
congress. If the right of the party is fixed by the existing law, there
can be no necessity for an application to congress, except for the
purpose of remedy. And no such necessity can exist when this right
can properly be set up by way of defence, to a suit by the United
States. [Footnote 9]"
If the claim for income tax deficiency had been the subject of a suit,
any counter-demand for recoupment of the overpayment of estate
tax could have been asserted by way of defense and credit
obtained, notwithstanding the statute of limitations had barred an
independent suit against the government therefor. This is because
recoupment is in the nature of a defense arising out of some feature
of the transaction upon which the plaintiff's action is grounded.
Such a defense is never barred by the statute of limitations so long
as the main action itself is timely. [Footnote 10]
The circumstance that both claims, the one for estate tax and the
other for income tax, were prosecuted to judgment and execution
in summary form does not obscure the fact that, in substance, the
proceedings were actions to collect debts alleged to be due the the facts set out in the petition, may be the basis of the judgment
United States. It is rendered. [Footnote 13]

Page 295 U. S. 263
immaterial that in the second case, owing to the summary nature of
the remedy, the taxpayer was required to pay the tax and
afterwards seek refundment. This procedural requirement does not
obliterate his substantial right to rely on his cross-demand for credit
of the amount which, if the United States had sued him for income
tax, he could have recouped against his liability on that score.
We are of opinion that the petitioner was entitled to have credited
against the deficiency of income tax the amount of his overpayment
of estate tax with interest, and that he should have been given
judgment accordingly. The judgment must be reversed, and the
cause remanded for further proceedings in conformity with this
opinion.
Reversed.

To the objection that the sovereign is not liable to respond to the

petitioner the answer is that it has given him a right of credit or
refund, which, though he could not assert it in an action brought by
him in 1930, had accrued and was available to him, since it was
actionable and not barred in 1925 when the government proceeded
against him for the collection of income tax.

The pleading was sufficient to put in issue the right to recoupment.

The Court of Claims is not bound by any special rules of pleading;
[Footnote 11] all that is required is that the petition shall contain a
plain and concise statement of the facts relied on and give the
United States reasonable notice of the matters it is called upon to
meet. [Footnote 12] And a prayer for alternative relief, based upon

16
G.R. No. 153793 August 29, 2006
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman
(Attorney-in-fact) Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) appeals from the
January 18, 2002 Decision1 of the Court of Appeals in CA-G.R. SP
No. 59794, which granted the tax refund of respondent Juliane
Baier-Nickel and reversed the June 28, 2000 Decision2 of the Court
of Tax Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also assails
the May 8, 2002 Resolution3 of the Court of Appeals denying its
motion for reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-resident
German citizen, is the President of JUBANITEX, Inc., a domestic
corporation engaged in "[m]anufacturing, marketing on wholesale
17
only, buying or otherwise acquiring, holding, importing and
exporting, selling and disposing embroidered textile products."4
Through JUBANITEX’s General Manager, Marina Q. Guzman, the
corporation appointed and engaged the services of respondent as
commission agent. It was agreed that respondent will receive 10%
sales commission on all sales actually concluded and collected
through her efforts.5
In 1995, respondent received the amount of P1,707,772.64,
representing her sales commission income from which JUBANITEX
withheld the corresponding 10% withholding tax amounting to
P170,777.26, and remitted the same to the Bureau of Internal
Revenue (BIR). On October 17, 1997, respondent filed her 1995
income tax return reporting a taxable income of P1,707,772.64 and
a tax due of P170,777.26.6
On April 14, 1998, respondent filed a claim to refund the amount of
P170,777.26 alleged to have been mistakenly withheld and remitted
by JUBANITEX to the BIR. Respondent contended that her sales
commission income is not taxable in the Philippines because the
same was a compensation for her services rendered in Germany
and therefore considered as income from sources outside the
Philippines.
The next day, April 15, 1998, she filed a petition for review with the
CTA contending that no action was taken by the BIR on her claim for
refund.7 On June 28, 2000, the CTA rendered a decision denying her
claim. It held that the commissions received by respondent were
actually her remuneration in the performance of her duties as
President of JUBANITEX and not as a mere sales agent thereof. The
income derived by respondent is therefore an income taxable in the
Philippines because JUBANITEX is a domestic corporation.
On petition with the Court of Appeals, the latter reversed the
Decision of the CTA, holding that respondent received the
commissions as sales agent of JUBANITEX and not as President
thereof. And since the "source" of income means the activity or
service that produce the income, the sales commission received by
respondent is not taxable in the Philippines because it arose from
the marketing activities performed by respondent in Germany. The
dispositive portion of the appellate court’s Decision, reads:
WHEREFORE, premises considered, the assailed decision of the
Court of Tax Appeals dated June 28, 2000 is hereby REVERSED and
SET ASIDE and the respondent court is hereby directed to grant
petitioner a tax refund in the amount of Php 170,777.26.
SO ORDERED.8
Petitioner filed a motion for reconsideration but was denied.9
Hence, the instant recourse.
18
Petitioner maintains that the income earned by respondent is
taxable in the Philippines because the source thereof is JUBANITEX,
a domestic corporation located in the City of Makati. It thus implied
that source of income means the physical source where the income
came from. It further argued that since respondent is the President
of JUBANITEX, any remuneration she received from said corporation
should be construed as payment of her overall managerial services
to the company and should not be interpreted as a compensation
for a distinct and separate service as a sales commission agent.
Respondent, on the other hand, claims that the income she
received was payment for her marketing services. She contended
that income of nonresident aliens like her is subject to tax only if the
source of the income is within the Philippines. Source, according to
respondent is the situs of the activity which produced the income.
And since the source of her income were her marketing activities in
Germany, the income she derived from said activities is not subject
to Philippine income taxation.
The issue here is whether respondent’s sales commission income is
taxable in the Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC),
states:
SEC. 25. Tax on Nonresident Alien Individual. –
(A) Nonresident Alien Engaged in Trade or Business Within the
Philippines. –
(1) In General. – A nonresident alien individual engaged in trade or
business in the Philippines shall be subject to an income tax in the
same manner as an individual citizen and a resident alien individual,
on taxable income received from all sources within the Philippines.
A nonresident alien individual who shall come to the Philippines and
stay therein for an aggregate period of more than one hundred
eighty (180) days during any calendar year shall be deemed a
‘nonresident alien doing business in the Philippines,’ Section 22(G)
of this Code notwithstanding.
xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business
Within the Philippines. – There shall be levied, collected and paid
for each taxable year upon the entire income received from all
sources within the Philippines by every nonresident alien individual
not engaged in trade or business within the Philippines x x x a tax
equal to twenty-five percent (25%) of such income. x x x
19
Pursuant to the foregoing provisions of the NIRC, non-resident
aliens, whether or not engaged in trade or business, are subject to
Philippine income taxation on their income received from all
sources within the Philippines. Thus, the keyword in determining
the taxability of non-resident aliens is the income’s "source." In
construing the meaning of "source" in Section 25 of the NIRC, resort
must be had on the origin of the provision.
The first Philippine income tax law enacted by the Philippine
Legislature was Act No. 2833,10 which took effect on January 1,
1920.11 Under Section 1 thereof, nonresident aliens are likewise
subject to tax on income "from all sources within the Philippine
Islands," thus –
SECTION 1. (a) There shall be levied, assessed, collected, and paid
annually upon the entire net income received in the preceding
calendar year from all sources by every individual, a citizen or
resident of the Philippine Islands, a tax of two per centum upon
such income; and a like tax shall be levied, assessed, collected, and
paid annually upon the entire net income received in the preceding
calendar year from all sources within the Philippine Islands by every
individual, a nonresident alien, including interest on bonds, notes,
or other interest-bearing obligations of residents, corporate or
otherwise.
Act No. 2833 substantially reproduced the United States (U.S.) (3) Services. – Compensation for labor or personal services
Revenue Law of 1916 as amended by U.S. Revenue Law of 1917.12 performed in the Philippines;
Being a law of American origin, the authoritative decisions of the
official charged with enforcing it in the U.S. have peculiar persuasive
force in the Philippines.13 xxxx

The Internal Revenue Code of the U.S. enumerates specific types of (C) Gross Income From Sources Without the Philippines. x x x
income to be treated as from sources within the U.S. and specifies
when similar types of income are to be treated as from sources
outside the U.S.14 Under the said Code, compensation for labor and
xxxx
personal services performed in the U.S., is generally treated as
income from U.S. sources; while compensation for said services
performed outside the U.S., is treated as income from sources
outside the U.S.15 A similar provision is found in Section 42 of our (3) Compensation for labor or personal services performed without
NIRC, thus: the Philippines;

SEC. 42. x x x The following discussions on sourcing of income under the Internal
Revenue Code of the U.S., are instructive:

(A) Gross Income From Sources Within the Philippines. x x x

The Supreme Court has said, in a definition much quoted but often
debated, that income may be derived from three possible sources
only: (1) capital and/or (2) labor; and/or (3) the sale of capital
xxxx
assets. While the three elements of this attempt at definition need
not be accepted as all-inclusive, they serve as useful guides in any
inquiry into whether a particular item is from "sources within the

20
United States" and suggest an investigation into the nature and
location of the activities or property which produce the income.
If the income is from labor the place where the labor is done should
be decisive; if it is done in this country, the income should be from
"sources within the United States." If the income is from capital, the
place where the capital is employed should be decisive; if it is
employed in this country, the income should be from "sources
within the United States." If the income is from the sale of capital
assets, the place where the sale is made should be likewise decisive.
Much confusion will be avoided by regarding the term "source" in
this fundamental light. It is not a place, it is an activity or property.
As such, it has a situs or location, and if that situs or location is
within the United States the resulting income is taxable to
nonresident aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent statutes was
to discard the 1909 and 1913 basis of taxing nonresident aliens and
foreign corporations and to make the test of taxability the "source,"
or situs of the activities or property which produce the income. The
result is that, on the one hand, nonresident aliens and nonresident
foreign corporations are prevented from deriving income from the
United States free from tax, and, on the other hand, there is no
undue imposition of a tax when the activities do not take place in,
and the property producing income is not employed in, this country.
21
Thus, if income is to be taxed, the recipient thereof must be
resident within the jurisdiction, or the property or activities out of
which the income issues or is derived must be situated within the
jurisdiction so that the source of the income may be said to have a
situs in this country.
The underlying theory is that the consideration for taxation is
protection of life and property and that the income rightly to be
levied upon to defray the burdens of the United States Government
is that income which is created by activities and property protected
by this Government or obtained by persons enjoying that
protection. 16
The important factor therefore which determines the source of
income of personal services is not the residence of the payor, or the
place where the contract for service is entered into, or the place of
payment, but the place where the services were actually
rendered.17
In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue,18
the Court addressed the issue on the applicable source rule relating
to reinsurance premiums paid by a local insurance company to a
foreign insurance company in respect of risks located in the
Philippines. It was held therein that the undertaking of the foreign
insurance company to indemnify the local insurance company is the
activity that produced the income. Since the activity took place in
the Philippines, the income derived therefrom is taxable in our
jurisdiction. Citing Mertens, The Law of Federal Income Taxation,
the Court emphasized that the technical meaning of source of
income is the property, activity or service that produced the same.
Thus:
The source of an income is the property, activity or service that
produced the income. The reinsurance premiums remitted to
appellants by virtue of the reinsurance contracts, accordingly, had
for their source the undertaking to indemnify Commonwealth
Insurance Co. against liability. Said undertaking is the activity that
produced the reinsurance premiums, and the same took place in
the Philippines. x x x the reinsured, the liabilities insured and the
risk originally underwritten by Commonwealth Insurance Co., upon
which the reinsurance premiums and indemnity were based, were
all situated in the Philippines. x x x19
In Commissioner of Internal Revenue v. British Overseas Airways
Corporation (BOAC),20 the issue was whether BOAC, a foreign
airline company which does not maintain any flight to and from the
Philippines is liable for Philippine income taxation in respect of sales
of air tickets in the Philippines, through a general sales agent
relating to the carriage of passengers and cargo between two points
both outside the Philippines. Ruling in the affirmative, the Court
applied the case of Alexander Howden & Co., Ltd. v. Collector of
Internal Revenue, and reiterated the rule that the source of income
is that "activity" which produced the income. It was held that the
22
"sale of tickets" in the Philippines is the "activity" that produced the
income and therefore BOAC should pay income tax in the
Philippines because it undertook an income producing activity in the
country.
Both the petitioner and respondent cited the case of Commissioner
of Internal Revenue v. British Overseas Airways Corporation in
support of their arguments, but the correct interpretation of the
said case favors the theory of respondent that it is the situs of the
activity that determines whether such income is taxable in the
Philippines. The conflict between the majority and the dissenting
opinion in the said case has nothing to do with the underlying
principle of the law on sourcing of income. In fact, both applied the
case of Alexander Howden & Co., Ltd. v. Collector of Internal
Revenue. The divergence in opinion centered on whether the sale of
tickets in the Philippines is to be construed as the "activity" that
produced the income, as viewed by the majority, or merely the
physical source of the income, as ratiocinated by Justice Florentino
P. Feliciano in his dissent. The majority, through Justice Ameurfina
Melencio-Herrera, as ponente, interpreted the sale of tickets as a
business activity that gave rise to the income of BOAC. Petitioner
cannot therefore invoke said case to support its view that source of
income is the physical source of the money earned. If such was the
interpretation of the majority, the Court would have simply stated
that source of income is not the business activity of BOAC but the
place where the person or entity disbursing the income is located or
where BOAC physically received the same. But such was not the
import of the ruling of the Court. It even explained in detail the
business activity undertaken by BOAC in the Philippines to pinpoint
the taxable activity and to justify its conclusion that BOAC is subject
to Philippine income taxation. Thus –
BOAC, during the periods covered by the subject assessments,
maintained a general sales agent in the Philippines. That general
sales agent, from 1959 to 1971, "was engaged in (1) selling and
issuing tickets; (2) breaking down the whole trip into series of trips
— each trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and (4)
consequently allocating to the various airline companies on the
basis of their participation in the services rendered through the
mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." Those activities were in
exercise of the functions which are normally incident to, and are in
progressive pursuit of, the purpose and object of its organization as
an international air carrier. In fact, the regular sale of tickets, its
main activity, is the very lifeblood of the airline business, the
generation of sales being the paramount objective. There should be
no doubt then that BOAC was "engaged in" business in the
Philippines through a local agent during the period covered by the
assessments. x x x21
xxxx
The source of an income is the property, activity or service that
produced the income. For the source of income to be considered as
23
coming from the Philippines, it is sufficient that the income is
derived from activity within the Philippines. In BOAC's case, the sale
of tickets in the Philippines is the activity that produces the income.
The tickets exchanged hands here and payments for fares were also
made here in Philippine currency. The situs of the source of
payments is the Philippines. The flow of wealth proceeded from,
and occurred within, Philippine territory, enjoying the protection
accorded by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of
supporting the government.
A transportation ticket is not a mere piece of paper. When issued by
a common carrier, it constitutes the contract between the ticket-
holder and the carrier. It gives rise to the obligation of the
purchaser of the ticket to pay the fare and the corresponding
obligation of the carrier to transport the passenger upon the terms
and conditions set forth thereon. The ordinary ticket issued to
members of the traveling public in general embraces within its
terms all the elements to constitute it a valid contract, binding upon
the parties entering into the relationship.22
The Court reiterates the rule that "source of income" relates to the
property, activity or service that produced the income. With respect
to rendition of labor or personal service, as in the instant case, it is
the place where the labor or service was performed that
determines the source of the income. There is therefore no merit in
petitioner’s interpretation which equates source of income in labor
or personal service with the residence of the payor or the place of
payment of the income.
Having disposed of the doctrine applicable in this case, we will now
determine whether respondent was able to establish the factual
circumstances showing that her income is exempt from Philippine
income taxation.
The decisive factual consideration here is not the capacity in which
respondent received the income, but the sufficiency of evidence to
prove that the services she rendered were performed in Germany.
Though not raised as an issue, the Court is clothed with authority to
address the same because the resolution thereof will settle the vital
question posed in this controversy.23
The settled rule is that tax refunds are in the nature of tax
exemptions and are to be construed strictissimi juris against the
taxpayer.24 To those therefore, who claim a refund rest the burden
of proving that the transaction subjected to tax is actually exempt
from taxation.
In the instant case, the appointment letter of respondent as agent
of JUBANITEX stipulated that the activity or the service which would
entitle her to 10% commission income, are "sales actually concluded
and collected through [her] efforts."25 What she presented as
24
evidence to prove that she performed income producing activities
abroad, were copies of documents she allegedly faxed to JUBANITEX
and bearing instructions as to the sizes of, or designs and fabrics to
be used in the finished products as well as samples of sales orders
purportedly relayed to her by clients. However, these documents do
not show whether the instructions or orders faxed ripened into
concluded or collected sales in Germany. At the very least, these
pieces of evidence show that while respondent was in Germany, she
sent instructions/orders to JUBANITEX. As to whether these
instructions/orders gave rise to consummated sales and whether
these sales were truly concluded in Germany, respondent presented
no such evidence. Neither did she establish reasonable connection
between the orders/instructions faxed and the reported monthly
sales purported to have transpired in Germany.
The paucity of respondent’s evidence was even noted by Atty.
Minerva Pacheco, petitioner’s counsel at the hearing before the
Court of Tax Appeals. She pointed out that respondent presented
no contracts or orders signed by the customers in Germany to prove
the sale transactions therein.26 Likewise, in her Comment to the
Formal Offer of respondent’s evidence, she objected to the
admission of the faxed documents bearing instruction/orders
marked as Exhibits "R,"27 "V," "W", and "X,"28 for being self
serving.29 The concern raised by petitioner’s counsel as to the
absence of substantial evidence that would constitute proof that
the sale transactions for which respondent was paid commission
actually transpired outside the Philippines, is relevant because
respondent stayed in the Philippines for 89 days in 1995. Except for
the months of July and September 1995, respondent was in the
Philippines in the months of March, May, June, and August 1995,30
the same months when she earned commission income for services
allegedly performed abroad. Furthermore, respondent presented
no evidence to prove that JUBANITEX does not sell embroidered
products in the Philippines and that her appointment as commission
agent is exclusively for Germany and other European markets.
In sum, we find that the faxed documents presented by respondent
did not constitute substantial evidence, or that relevant evidence
that a reasonable mind might accept as adequate to support the
conclusion31 that it was in Germany where she performed the
income producing service which gave rise to the reported monthly
sales in the months of March and May to September of 1995. She
thus failed to discharge the burden of proving that her income was
from sources outside the Philippines and exempt from the
application of our income tax law. Hence, the claim for tax refund
should be denied.
The Court notes that in Commissioner of Internal Revenue v. Baier-
Nickel,32 a previous case for refund of income withheld from
respondent’s remunerations for services rendered abroad, the
Court in a Minute Resolution dated February 17, 2003,33 sustained
the ruling of the Court of Appeals that respondent is entitled to
refund the sum withheld from her sales commission income for the
year 1994. This ruling has no bearing in the instant controversy
because the subject matter thereof is the income of respondent for
the year 1994 while, the instant case deals with her income in 1995.
25
Otherwise, stated, res judicata has no application here. Its elements
are: (1) there must be a final judgment or order; (2) the court that
rendered the judgment must have jurisdiction over the subject
matter and the parties; (3) it must be a judgment on the merits; (4)
there must be between the two cases identity of parties, of subject
matter, and of causes of action. 34 The instant case, however, did
not satisfy the fourth requisite because there is no identity as to the
subject matter of the previous and present case of respondent
which deals with income earned and activities performed for
different taxable years.
WHEREFORE, the petition is GRANTED and the January 18, 2002
Decision and May 8, 2002 Resolution of the Court of Appeals in CA-
G.R. SP No. 59794, are REVERSED and SET ASIDE. The June 28, 2000
Decision of the Court of Tax Appeals in C.T.A. Case No. 5633, which
denied respondent’s claim for refund of income tax paid for the
year 1995 is REINSTATED.
SO ORDERED.
G.R. No. 107135 February 23, 1999 Petitioner (private respondent CENVOCO herein) is a manufacturer
of edible and coconut/coprameal cake and such other coconut
related oil subject to the miller's tax of 3%. Petitioner also
COMMISSIONER OF INTERNAL REVENUE, petitioner, manufactures lard, detergent and laundry soap subject to the sales
tax of 10%.
vs.

THE COURT OF APPEALS, CENTRAL VEGETABLE MANUFACTURING

CO., INC., and THE COURT OF TAX APPEALS, respondents. In 1986, petitioner purchased a specified number of containers and
packaging materials for its edible oil from its suppliers and paid the
sales tax due thereon.

After an investigation conducted by respondent's Revenue

Examiner, Assessment Notice No. FAS-B-86-88-001661-001664
PURISIMA, J.:
dated April 22, 1988 was issued against petitioner for deficiency
miller's tax in the total amount of P1,575,514.70 . . . .

Before the Court is a Petition for Review on Certiorari from the

judgment of the Court of Appeals affirming in toto the decision of
On June 29, 1988, petitioner filed with respondent a letter dated
the Court of Tax Appeals which required the Commissioner of
June 27, 1988 requesting for reconsideration of the above
Internal Revenue to credit the sales taxes paid by Central Vegetable
deficiency miller's tax assessments, contending that the final
Oil Manufacturing Co., Inc. (CENVOCO) on containers and packaging
provision of Section 168 of the Tax Code does not a apply to sales
materials of its milled products, against the deficiency miller's tax
tax paid on containers and packaging materials, hence, the amount
due thereon for the year 1986.
paid therefor should have been credited against the miller's tax
assessed against it. Again, thru letter dated September 28, 1988,
petitioner reiterated its request for reconsideration.
As culled in the decision of the Court of Tax Appeals, the undisputed
facts are, as follows:

26
On November 17, 1988, respondent wrote CENVOCO, the full text We have received your letter of September 28,1988, relative to our
of which letter reads: assessment against your company in the amount of P1,575,514.75,
as deficiency miller's tax for the year 1986.

November 17, 1988

Sec. 188 of the Tax Code provides that sales, miller's or excise taxes
paid on raw materials or supplies used in the milling process shall
Central Vegetable Oil not be allowed against the miller's tax due. You contend that since
packaging materials are not used in the milling process then, the
sales taxes paid thereon should be allowed as a credit against the
miller's tax due because they do not fall within the scope of the
Manufacturing Co. Inc.
prohibition.

P.O. Box 2816

It is our position, however, that since the law specifically does not
allow taxes paid on the raw materials or supplies used in the milling
process as a credit against the miller's tax due, with more reasons
Manila should the sales taxes paid on materials not used in the milling
process be allowed as a credit against the miller's tax due. There is
no provision of law which allows such a credit-to-be made.
Attention: Mr. James Chua

In view of the above, we are reiterating the assessment referred to

President above. We request that you make payment immediately so that this
case may be considered closed and terminated.

Gentlemen:
Very truly yours,

27
 Appealed to the Court of Appeals, the said decision was affirmed in
toto. (Rollo, p. 38)
(SGD) EUFRACIO D. SANTOS

The Court of Appeals adopted the reasons cited and ratiocination by

Deputy Commissioner the Court of Tax Appeals for allowing the sales tax paid by CENVOCO
on the containers and packaging materials of its milled products to
be credited against the miller's tax due thereon, viz —
(CA Decision, pp. 31-33 Rollo)

The main issuein this case is whether or not respondent CENVOCO

Dissatisfied with the adverse action taken by the BIR, CENVOCO
filed a petition for review with the Court of Tax Appeals, which
came out with a decision, dated December 3, 1990, in favor of
CENVOCO, disposing, thus:
is liable for deficiency miller's tax for the year 1986 in the amount of
P1,575,514.70. This in turn hinges on whether or not containers and
packaging materials are raw materials used in the milling process
within the contemplation of the final proviso of Section 168 of the
National Internal Revenue Code, which reads:

WHEREFORE, in view of the foregoing, petitioner Central Vegetable

Oil Manufacturing Co., Inc., is not liable for deficiency miller's tax for
the year 1986 in the amount of P1,575,514.70.
No pronouncement as to costs.
Provided, finally, that credit for any sales, miller's or excise taxes
paid on raw materials or supplies used in the milling process shall
not be allowed against the miller's tax due, except in the case of a
proprietor or operator of a refined sugar factory as provided
hereunder.

SO ORDERED. (Rollo, p. 53) xxx xxx xxx

28
. . . We agree with respondent Court that containers and packages
cannot be considered "raw materials" utilized in the milling process.
In arriving at the conclusion, respondent Court quoted with
approval the reasons cited by CENVOCO, as follows:
FIRST; The raw materials used by Cenvoco in manufacturing edible
oil are copra and/or coconut oil. In other words, the term "used" in
the final proviso of Section 168 of the NIRC refers or is strictly
confined to "raw materials" or supplies fed, supplied or put into the
apparatus, equipment, machinery or its adjuncts that cause or
execute the milling process. On the other hand, the containers, such
as tin cans, and/or packages are not used or fed into the milling
machinery nor were ever intended for conversion to form part of
the finished product, i.e., refined coconut/edible oil. Consequently,
it would be absurd to say that said containers and packages are
"used in the milling process", for the process. involves "grinding,
crushing, stamping, cutting, shaping or polishing". (See THE
DICTIONARY, by TIME, COPYRIGHT 1974, p. 444) . . .
SECOND; Petitioner's interpretation of the term raw materials is
contrary to law and jurisprudence. Thus, raw materials as used in
the definition of " manufacture", denotes materials from which final
product is made (Black's Law Dictionary, 4th ed. citing State vs.
Hennessy Co., 71 Mont. 301, 230, p. 64, 65). And consistent with
said definition, Revenue Regulations Nos. 2-86 and 11-86 [effective
January 1, 1986 and August 11 1986, respectively] which govern the
filing of quarterly percentage tax returns and payment thereof
29
under the provisions, inter alia, of Section 168 of the NIRC, define
raw materials or material, to wit:
Any article which when used in the MANUFACTURE of another
article becomes a homogenous part thereof, such that it can no
longer be identified in its original state nor may be removed
therefrom without destroying or rendering useless the finished
article to which it has been merged, mixed or dissolved. . . .
Tested in the light of the foregoing statutory definition, it is evident
that containers and packages used by Cenvoco are not "raw
materials" and do not fall within the purview of the final proviso of
Section 168 of the NIRC. . . . As a coup de grace, it is pertinent to
note the case of Caltex (Phils.) Inc. vs. Manila Port Service (17 SCRA
1075) where the Supreme Court aptly defined containers and/or
packages.
. . . a package or a bundle made up for transportation; a packet; a
bale; a parcel; or that in which anything is packed: box, case, barrel,
crate , etc. in which goods are packed; a container. (Emphasis Ours)
The definition is an emphatic rejection of petitioner's construction
that Cenvoco's containers and packages are raw materials used in
the milling process. . . .

. . . Moreover, Section 168 of the Revenue Code expressly limits the
articles subject to percentage tax (miller's tax) to: "rope, sugar,
coconut oil, palm oil, cassava flour or starch, desiccated coconuts,
manufactured, processed or milled by them, including the by-
product of the raw materials, from which said articles are produced,
processed or manufactured". . . .
(CR Decision, Rollo pp. 34-36)
Hence, the petition under consideration, posing the issue:
WHETHER OR NOT THE SALES TAX PAID BY CENVOCO WHEN IT
PURCHASED CONTAINERS AND PACKAGING MATERIALS FOR ITS
MILLED PRODUCTS CAN BE CREDITED AGAINST THE DEFICIENCY
MILLER'S TAX DUE THEREON.
Resolution of the issue posited by the petitioner hinges on. the
proper application of Section 168 of the then applicable National
Internal Revenue Code, particularly the last proviso of said section,
which reads:
30
Sec. 168. Percentage tax upon proprietors or operators of rope
factories, sugar centrals and mills, coconut oil mills, palm oil mills,
cassava mills and desiccated coconut factories. Proprietors or
operators of rope factories, sugar centrals and mills, coconut oil
mills, palm oil mills, cassava mills, and desiccated coconut factories,
shall pay a tax equivalent to three (3) percent of the gross value of
money of all the rope, sugar, coconut, oil, palm oil, cassava flour or
starch, desiccated coconut, manufactured, processed or milled by
them, including the by-product of the raw materials, from which
said articles are produced, processed or manufactured, such tax to
be based on the actual selling price or market value of these articles
at the time they leave the factory or mill warehouse: Provided,
however, that this tax shall not apply to rope, coconut oil, palm oil
and the by-product of copra from which it is produced or
manufactured, and dessiccated coconuts, if such rope, coconut oil,
palm oil, copra by-products and dessiccated coconuts, shall be
removed for exportation by the proprietor of operator or the
factory or mill himself, and are actually exported without returning
to the Philippines, whether in their original state or as an ingredient
or part of any manufactured article or product: Provided further,
That where the planter or the owner of the raw materials is the
exporter of the aforementioned milled or manufactured products,
he shall be entitled to a tax credit of the miller's taxes withheld by
the proprietor or operator of the factory or mill, corresponding to
the quantity exported, which may be used against any internal
revenue tax directly due from him: and Provided, finally, That credit
for any sales. miller's or excise taxes paid on raw materials or
supplies used in the milling process shall not be allowed against the
miller's tax due, except in the case of a proprietor or operator of a
refined sugar factory as provided hereunder. (emphasis supplied)

Notably, the law relied upon by the BIR Commissioner as the basis
for not allowing Cenvoco's tax credit is just a proviso of Section 168
of the old Tax Code. The restriction in the said proviso, however, is
limited only to sales, miller's or excise taxes paid "on raw materials
used in the milling process".
Under the rules of statutory construction, exceptions, as a general
rule, should be strictly but reasonably construed. They extend only
so far as their language fairly warrants, and all doubts should be
resolved in favor of the general provisions rather than the
exception. Where a general rule is established by statute with
exceptions, the court will not curtail the former nor add to the latter
by implication. . . . (Samson vs. Court of Appeals, 145 SCRA 659
[1986]).
The exception provided for in Section 168 of the old Tax Code
should thus be strictly construed. Conformably, the sales, miller's
and excise taxes paid on all Other materials (except on raw
materials used in the milling process), such as the sales taxes paid
on containers and packaging materials of the milled products under
consideration, may be credited against the miller's tax due therefor.
It is a basic rule of interpretation that words and phrases used in the
statute, in the absence of a clear legislative intent to the contrary,
31
should be given their plain, ordinary and common usage or
meaning. (Mustang Lumber Inc. v. CA, 257 SCRA 430 [1996] citing
Ruben E. Agpalo, Statutory Construction, second ed. [1990], 131).
From the disquisition and rationalization aforequoted, containers
and packaging materials are certainly not raw materials. Cans and
tetrakpaks are not used in the manufacture of Cenvoco's finished
products which are coconut, edible oil or coprameal cake. Such
finished products are packed in cans and tetrapaks.
Petitioner laments the pronouncement by the Court of Appeals that
Deputy Commissioner Eufracio Santos' 1988 ruling may not reverse
Commissioner Ruben Ancheta's favorable ruling on a similar claim
of CENVOCO of October, 1984, which reads in part:
. . . This refers to your letter dated September 5, 1984 requesting
that the 10% sales tax paid on container cans purchased by you, be
credited against the 2% (now 3%) miller's tax due on the refined
coconut edible oil.
It is represented that you process copra and/or coconut oil and sell
the refined edible oil in cans; that said cans are purchased from can
manufacturers who in turn bill to you the price of the cans and the
10% tax paid thereon which are separately shown on the invoice;
and that the cost of the cans, including the 2% miller's tax is
computed.
In reply, I have the honor to inform you that your request is hereby
granted. . . . (Pacific Oxygen & Acetylene Co. vs. Commissioner, GR
No. L-17708, April 30, 1905). (Rollo p. 36)
According to petitioner, to hold, as what the Court of Appeals did,
that a reversal of the aforesaid ruling would be violative of the rule
on non-retroactivity of rulings of tax officials when prejudicial to the
taxpayer (Section 278 of the old Tax Code) would, in effect, create a
perpetual exemption in favor of CENVOCO although there may be
subsequent changes in circumstances warranting a reversal.
This Court is mindful of the well-entrenched principle that the
government is never estopped from collecting taxes because of
mistakes or errors on the part of its agents, but this rule admits of
exceptions in the interest of justice and fairplay. (ABS CBN
Broadcasting Corp. vs. Court of Tax Appeals, 108 SCRA 151 [1951])
More so in the present case, where we discern no error in allowing
the sales taxes paid by CENVOCO on the containers and packages of
its milled products, to be credited against the deficiency miller's tax
due thereon, for a proper application of the law.
32
It bears stressing that tax burdens are not to be imposed, nor
presumed to be imposed beyond what the statute expressly and
clearly imports, tax statutes being construed strictissimi juris against
the government. (The Province of Bulacan, et. al, vs. Hon. CA, et. al.,
GR No. 226232, November 27, 1998; Republic vs. IAC, 196 SCRA
335[1931]; CIR vs. Firemen's Fund Ins. Co., 148 SCRA 315 (1987); CIR
vs. CA, 204 SCRA 182 [1991])
Then, too, it has been the long standing policy and practice of this
Court to respect conclusions arrived at by quasi-judicial agencies,
especially the Court of Tax Appeals which: by the nature of its
functions, is dedicated exclusively to the study and consideration of
tax problems, and which has thus developed an expertise on the
subject, unless an abuse or improvident exercise of its authority is
shown. Finding no such abuse or improvident exercise of authority
or discretion under the premises, the decision of the Court of
Appeals, affirming that of the Court of Tax Appeals, should be
upheld. (Commissioner of Internal Revenue vs. Court of Appeals,
204 SCRA 189 [1991])
WHEREFORE, the petition is hereby DISMISSED and the decision of
the Court of Appeals AFFIRMED. No pronouncement as to costs.
SO ORDERED.
G.R. No. L-30232 July 29, 1988
LUZON STEVEDORING CORPORATION, petitioner-appellant,
vs.
COURT OF TAX APPEALS and the HONORABLE COMMISSIONER OF
INTERNAL REVENUE, respondents-appellees.
H. San Luis & V.L. Simbulan for petitioner-appellant.
PARAS, J.:
This is a petition for review of the October 21, 1968 Decision * of
the Court of Tax Appeals in CTA Case No. 1484, "Luzon Stevedoring
Corporation v. Hon. Ramon Oben, Commissioner, Bureau of Internal
Revenue", denying the various claims for tax refund; and the
February 20, 1969 Resolution of the same court denying the motion
for reconsideration.
Herein petitioner-appellant, in 1961 and 1962, for the repair and
maintenance of its tugboats, imported various engine parts and
other equipment for which it paid, under protest, the assessed
33
compensating tax. Unable to secure a tax refund from the
Commissioner of Internal Revenue, on January 2, 1964, it filed a
Petition for Review (Rollo, pp. 14-18) with the Court of Tax Appeals,
docketed therein as CTA Case No. 1484, praying among others, that
it be granted the refund of the amount of P33,442.13. The Court of
Tax Appeals, however, in a Decision dated October 21, 1969 (Ibid.,
pp. 22-27), denied the various claims for tax refund. The decretal
portion of the said decision reads:
WHEREFORE, finding petitioner's various claims for refund
amounting to P33,442.13 without sufficient legal justification, the
said claims have to be, as they are hereby, denied. With costs
against petitioner.
On January 24, 1969, petitioner-appellant filed a Motion for
Reconsideration (Ibid., pp. 28-34), but the same was denied in a
Resolution dated February 20, 1969 (Ibid., p. 35). Hence, the instant
petition.
This Court, in a Resolution dated March 13, 1969, gave due course
to the petition (Ibid., p. 40). Petitioner-appellant raised three (3)
assignments of error, to wit:
I
 National Internal Revenue Code, as amended by Republic Act No.
3176.
The lower court erred in holding that the petitioner-appellant is
engaged in business as stevedore, the work of unloading and
loading of a vessel in port, contrary to the evidence on record.
Said law provides:

II
Sec. 190. Compensating tax. — ... And Provided further, That the tax
imposed in this section shall not apply to articles to be used by the
importer himself in the manufacture or preparation of articles
The lower court erred in not holding that the business in which subject to specific tax or those for consignment abroad and are to
petitioner-appellant is engaged, is part and parcel of the shipping form part thereof or to articles to be used by the importer himself
industry. as passenger and/or cargo vessel, whether coastwise or oceangoing,
including engines and spare parts of said vessel. ....

III
Petitioner contends that tugboats are embraced and included in the
term cargo vessel under the tax exemption provisions of Section
The lower court erred in not allowing the refund sought by 190 of the Revenue Code, as amended by Republic Act. No. 3176.
petitioner-appellant. He argues that in legal contemplation, the tugboat and a barge
loaded with cargoes with the former towing the latter for loading
and unloading of a vessel in part, constitute a single vessel.
The instant petition is without merit. Accordingly, it concludes that the engines, spare parts and
equipment imported by it and used in the repair and maintenance
of its tugboats are exempt from compensating tax (Rollo, p. 23).

The pivotal issue in this case is whether or not petitioner's tugboats"

can be interpreted to be included in the term "cargo vessels" for
purposes of the tax exemption provided for in Section 190 of the On the other hand, respondents-appellees counter that petitioner-
appellant's "tugboats" are not "Cargo vessel" because they are

34
neither designed nor used for carrying and/or transporting persons
or goods by themselves but are mainly employed for towing and
pulling purposes. As such, it cannot be claimed that the tugboats in
question are used in carrying and transporting passengers or
cargoes as a common carrier by water, either coastwise or
oceangoing and, therefore, not within the purview of Section 190 of
the Tax Code, as amended by Republic Act No. 3176 (Brief for
Respondents-Appellees, pp. 45).
must be used in coastwise or oceangoing navigation (Decision, CTA
Case No. 1484; Rollo, p. 24).
As pointed out by the Court of Tax Appeals, the amendatory
provisions of Republic Act No. 3176 limit tax exemption from the
compensating tax to imported items to be used by the importer
himself as operator of passenger and/or cargo vessel (Ibid., p. 25).

This Court has laid down the rule that "as the power of taxation is a As quoted in the decision of the Court of Tax Appeals, a tugboat is
high prerogative of sovereignty, the relinquishment is never defined as follows:
presumed and any reduction or dimunition thereof with respect to
its mode or its rate, must be strictly construed, and the same must
be coached in clear and unmistakable terms in order that it may be
A tugboat is a strongly built, powerful steam or power vessel, used
applied." (84 C.J.S. pp. 659-800), More specifically stated, the
for towing and, now, also used for attendance on vessel. (Webster
general rule is that any claim for exemption from the tax statute
New International Dictionary, 2nd Ed.)
should be strictly construed against the taxpayer (Acting
Commissioner of Customs v. Manila Electric Co. et al., 69 SCRA 469
[1977] and Commissioner of Internal Revenue v. P.J. Kiener Co. Ltd.,
et al., 65 SCRA 142 [1975]). A tugboat is a diesel or steam power vessel designed primarily for
moving large ships to and from piers for towing barges and lighters
in harbors, rivers and canals. (Encyclopedia International Grolier,
Vol. 18, p. 256).
As correctly analyzed by the Court of Tax Appeals, in order that the
importations in question may be declared exempt from the
compensating tax, it is indispensable that the requirements of the
amendatory law be complied with, namely: (1) the engines and A tug is a steam vessel built for towing, synonymous with tugboat.
spare parts must be used by the importer himself as a passenger (Bouvier's Law Dictionary.) (Rollo, p. 24).
and/or cargo, vessel; and (2) the said passenger and/or cargo vessel

35
Under the foregoing definitions, petitioner's tugboats clearly do not
fall under the categories of passenger and/or cargo vessels. Thus, it
is a cardinal principle of statutory construction that where a
provision of law speaks categorically, the need for interpretation is
obviated, no plausible pretense being entertained to justify non-
compliance. All that has to be done is to apply it in every case that
falls within its terms (Allied Brokerage Corp. v. Commissioner of
Customs, L-27641, 40 SCRA 555 [1971]; Quijano, etc. v. DBP, L-
26419, 35 SCRA 270 [1970]).
And, even if construction and interpretation of the law is insisted
upon, following another fundamental rule that statutes are to be
construed in the light of purposes to be achieved and the evils
sought to be remedied (People v. Purisima etc., et al., L-42050-66,
86 SCRA 544 [1978], it will be noted that the legislature in amending
Section 190 of the Tax Code by Republic Act 3176, as appearing in
the records, intended to provide incentives and inducements to
bolster the shipping industry and not the business of stevedoring, as
manifested in the sponsorship speech of Senator Gil Puyat (Rollo, p.
26).
On analysis of petitioner-appellant's transactions, the Court of Tax
Appeals found that no evidence was adduced by petitioner-
appellant that tugboats are passenger and/or cargo vessels used in
the shipping industry as an independent business. On the contrary,
petitioner-appellant's own evidence supports the view that it is
engaged as a stevedore, that is, the work of unloading and loading
36
of a vessel in port; and towing of barges containing cargoes is a part
of petitioner's undertaking as a stevedore. In fact, even its trade
name is indicative that its sole and principal business is stevedoring
and lighterage, taxed under Section 191 of the National Internal
Revenue Code as a contractor, and not an entity which transports
passengers or freight for hire which is taxed under Section 192 of
the same Code as a common carrier by water (Decision, CTA Case
No. 1484; Rollo, p. 25).
Under the circumstances, there appears to be no plausible reason
to disturb the findings and conclusion of the Court of Tax Appeals.
As a matter of principle, this Court will not set aside the conclusion
reached by an agency such as 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 (Reyes v. Commissioner of
Internal Revenue, 24 SCRA 199 [1981]), which is not present in the
instant case.
PREMISES CONSIDERED, the instant petition is DISMISSED and the
decision of the Court of Tax Appeals is AFFIRMED.
SO ORDERED.
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
37
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,:
38
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 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."
39
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 The above-quoted provision, although referring only to purchases
producer; the fact that the manufacturer or producer might have made by the WHO, elucidates the clear intention of the Agreement
added the amount of the tax to the price of the goods did not make to exempt the WHO from "indirect" taxation.
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, The certification issued by the WHO, dated January 20, 1960, sought
an agency of the Philippine Government, and to the Voice of exemption of the contractor, Gotamco, from any taxes in
America, an agency of the United States Government. 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
The Host Agreement, in specifically exempting the WHO from payment thereof or its inclusion in the bid price would have meant
"indirect taxes," contemplates taxes which, although not imposed an increase in the construction cost of the building.
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: Accordingly, finding no reversible error committed by the
respondent Court of Tax Appeals, the appealed decision is hereby
affirmed.
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 SO ORDERED.
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).

40
G.R. No. 115349 April 18, 1997

The antecedents as found by the Court of Appeals are reproduced

hereinbelow, the same being largely undisputed by the parties.
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
Private respondent is a non-stock, non-profit educational institution
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO with auxiliary units and branches all over the Philippines. One such
DE MANILA UNIVERSITY, respondents. 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
PANGANIBAN, J.:
organizations, private foundations and government agencies.

In conducting researches and studies of social organizations and

On July 8, 1983, private respondent received from petitioner
cultural values thru its Institute of Philippine Culture, is the Ateneo
Commissioner of Internal Revenue a demand letter dated June 3,
de Manila University performing the work of an independent
1983, assessing private respondent the sum of P174,043.97 for
contractor and thus taxable within the purview of then Section 205
alleged deficiency contractor's tax, and an assessment dated June
of the National Internal Revenue Code levying a three percent
27, 1983 in the sum of P1,141,837 for alleged deficiency income tax,
contractor's tax? This question is answer by the Court in the
both for the fiscal year ended March 31, 1978. Denying said tax
negative as it resolves this petition assailing the Decision 1 of the
liabilities, private respondent sent petitioner a letter-protest and
Respondent Court of Appeals 2 in CA-G.R. SP No. 31790
subsequently filed with the latter a memorandum contesting the
promulgated on April 27, 1994 affirming that of the Court of Tax
validity of the assessments.
Appeals. 3

On March 17, 1988, petitioner rendered a letter-decision canceling

The Antecedent Facts
the assessment for deficiency income tax but modifying the

41
assessment for deficiency contractor's tax by increasing the amount 1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE
due to P193,475.55. Unsatisfied, private respondent requested for a PURVIEW OF INDEPENDENT CONTRACTOR PURSUANT TO SECTION
reconsideration or reinvestigation of the modified assessment. At 205 OF THE TAX CODE; and
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 2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3%
decision dated August 3, 1988 reducing the assessment for CONTRACTOR'S TAX UNDER SECTION 205 OF THE TAX CODE.
deficiency contractor's tax from P193,475.55 to P46,516.41,
exclusive of surcharge and interest.

The pertinent portions of Section 205 of the National Internal

Revenue Code, as amended, provide:
On July 12, 1993, the respondent court rendered the questioned
decision which dispositively reads:

Sec. 205. Contractor, proprietors or operators of dockyards, and

others. — A contractor's tax of three per centum of the gross
WHEREFORE, in view of the foregoing, respondent's decision is SET receipts is hereby imposed on the following:
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
xxx xxx xxx
to cost.

(16) Business agents and other independent contractors except

SO ORDERED.
Not in accord with said decision, petitioner has come to this Court
via the present petition for review raising the following issues:
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:

42
xxx xxx xxx
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.
xxx xxx xxx
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;
43
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 Code. 4
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
Petitioner submits before us the following 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 Institute of
Philippine Culture — performing the work of an 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:
44
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:
xxx xxx xxx
(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;
xxx xxx xxx
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.
45
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 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 Service 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
46
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".
47
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
48
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 of 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 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 (f) The institution must show evidence of adequate and stable
financial resources and support, a reasonable portion of which
research projects undertaken by the Institute of Philippine Culture.
should be devoted to institutional development and research.
(emphasis supplied)

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:
xxx xxx xxx
xxx xxx xxx
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 form the latter.

(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.
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

49
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 palpable error.
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 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
50
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.

51
[G.R. No. 80276 : December 21, 1990.]
192 SCRA 604
HYDRO RESOURCES CONTRACTORS CORPORATION, Petitioner, vs.
THE COURT OF TAX APPEALS and THE HON. DEPUTY MINISTER OF
FINANCE, ALFREDO PIO DE RODA, Respondents.
DECISION
PARAS, J.:
This is a special civil action of Certiorari instituted by petitioner
Hydro Resources Contractors Corporation against respondents
52
Court of Tax Appeals and Deputy Minister of Finance which seeks to
set aside the decisions of both public respondents holding
petitioner liable for a 3% ad valorem duty in the amount of
P281,591.00.
It appears that the National Irrigation Administration (referred to
hereinafter as NIA for brevity) a government owned and controlled
corporation, entered into an agreement, sometime in August 1978,
with petitioner Hydro Resources Contractors Corporation (Hydro for
short), for the construction of the Magat River Multipurpose Project
in Isabela.
Under the aforesaid contract, designated as Contract No. MPI-C-1,
petitioner was allowed to procure new construction equipment,
spare parts and tools from abroad, the payment for which was
advanced by NIA under a financing plan embodied in the contract,
as follows:
a) Procurement — Petitioner is required to submit to NIA for
approval a list of new construction equipment, spare parts and tools
which it intends to acquire from abroad. Petitioner shall procure
these items as an agent of NIA as all invoices shall be in the name of
said government agency. NIA undertakes to pay all import taxes,
duties and all fees, imposts and other charges that may be due on
said importations.: nad
b) Ownership and delivery — The equipment and spare parts 3 units Cat Drill Toyo TYPR 120 278,264.25
imported from abroad shall be owned by NIA and delivered to its
construction site in Isabela.
1 unit Tamrock Hyd. Drill

c) Repayment — Petitioner shall repay NIA the costs of the above

procurement and the manner of repayment shall be through 16 units Air Leg Drills Toyo 1,493,834.29
deductions from each monthly or periodic progress payment due to
petitioner.

1 unit Toyo Reinforcing Bar 12,000.92

d) Transfer of Ownership — Ownership shall be transferred to

petitioner only upon complete payment of the costs above
3 units Toyo TYCD 10 CY Cralwer 265,421.35
mentioned.

2 units Scheele K-60 Pump 624,772.80

The equipment imported by NIA in 1978 and 1979 for Hydro's use
are —

2 units New Reed Gun Mdl. IAS 67,349.90

DESCRIPTION OF EQUIPMENT NET BOOK VALUE

1 unit Prota Tunnel Profile 43,340.26

1 Tamrock Hyd. Jumbo Drill

2 units Wild Theodolite Surveying

Ser. #18153 P1,566,116.55

53
Equipment 28,545.93
1 unit Toyo Mud Sub Pump 201,108.01
2 units Aichi Skymaster Truck
mounted Boom 93,622.78
2 units Grindex Sub Type Pump 140,518.35
6 units K/Worth C500 Truck Mixer 1,690,054.60
1 unit Putamesitor 201,863.77
6 units Sullair Air Comp. 588,940.53
2 units Well Air Driven Grout 20,582.40
54
10 units Stancom VHF Radio Tran. 32,537.70
4 units Cummins 1,055,209.20
By the terms of the contract (quoted earlier) NIA undertakes
payment of all the import duties and taxes incident to the
importations deductible from the proceeds of the contract price.
HYDRO shall repay NIA in full the value of the construction
equipment out of the same proceeds before eventual transfer or
taking ownership of subject construction equipment upon
termination of the contract.
NIA reneged and failed in the compliance of its tax obligations. In
the meantime, HYDRO had fully repaid the value of the construction
equipment in the amount of P14,537,783.63 (US$1,991,477.21) so
much so that on December 6, 1982 and March 24, 1983, NIA
executed deeds of sale covering the same and transferring the
ownership thereof in favor of petitioner.
Upon the transfer of the ownership of the said equipment HYDRO
was assessed by the Bureau of Customs the corresponding customs
duty and compensating tax, respectively, as follows:
Customs Duty — P1,214,010.00 "The foregoing scheme entered into between NIA and HYDRO had
generated a contract and it will be unfair to involve new proposal as
in the imposition of 3% additional duty ad valorem which was not
Compensating Tax — 1,089,368.63 obtaining at the time of the agreement nor at the time of arrival
and release of the shipment from the piers. For one thing, the
scheme may be viewed in the same light as sales of commodities to
be delivered at some future date, whose price or prices at the time
——————
of delivery may be way above or below the sale price or prices. For
another thing, HYDRO may not be deprived of rights vested before
the promulgation of Executive Order 860 prescribing 3% additional
P2,303,378.63 duty ad valorem." (p. 22, Rollo)

========= The Acting Commissioner of Customs affirmed the ruling of the

Collector of Customs. In his 2nd Indorsement dated June 25, 1984,
(p. 25, Rollo) Acting Commissioner Ramon Farolan stated —
This amount was paid by HYDRO to the Bureau of Customs.

In addition, HYDRO was assessed additional 3% ad valorem duty in
the amount of P281,591.00 prescribed in Executive Order 860.
HYDRO also paid this amount but this time under protest.:-cralaw
The Collector of Customs acted favorably on petitioner's protest and
ordered the refund of the amount paid for the ad valorem duty in
the form of tax credit, ruling that —
"This Office shares the view of the Collector of Customs to the effect
that the various equipment and parts in question which the
National Irrigation Administration imported in 1978 and 1979 and
subsequently sold to Hydro Resources Construction Corporation by
virtue of a previous agreement, are subject to duties and taxes but
not the additional 3% ad valorem duty under Executive Order No.
860 which took effect only on December 21, 1982. Moreover, the
Deputy Minister of Finance, in his 1st Indorsement to the Central
Bank dated March 26, 1983, which was then reproduced by the

55
Central Bank Governor in a circular letter to all authorized agent
banks, clarified to all authorized agent banks, clarified that —
I

Letters of Credit opened prior to the effectivity of P.D. 1853 and

E.O. 860 are not subject to the provisions thereof even if they are THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OR IN EXCESS
amended after the effectivity thereof. OF ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION IN
REFUSING TO CONSIDER THE FACT THAT THE SALE OF THE NIA-
FINANCED EQUIPMENT TOOK PLACE IN 1978.

(p. 15, Rollo).

II

These findings of the Collector of Customs as well as the Acting

Customs Commissioner were reversed by the Deputy Minister of
THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OR IN EXCESS
Finance.
OF ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION IN
APPLYING EXECUTIVE ORDER NO. 860 RETROACTIVELY.

Petitioner appealed to the Court of Tax Appeals but in its Decision

dated May 22, 1987, the said court (with a dissenting opinion)
affirmed the ruling of the Deputy Minister of Finance denying III
petitioner's claim for refund.

THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OF IN EXCESS

Hence, the present recourse, after petitioner's motion for OF ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION IN
reconsideration was denied. FAILING TO CONSIDER THAT THE IMPOSITION OF THE 3% AD
VALOREM TAX ON IMPORTATIONS MADE PRIOR TO ITS ISSUANCE IS
VIOLATIVE OF THE CONSTITUTION.

In this petition, Hydro presents the following issues —

56

IV
THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OF IN EXCESS
OF ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION IN
IMPOSING THE AD VALOREM TAX SANS STATUTORY AND LEGAL
BASIS.
The petition is meritorious.
Executive Order No. 860 which was the basis for the imposition of
the 3% ad valorem duty upon the said importations, took effect on
December 21, 1982. The importations were effected in 1978 and
1979 by NIA. Nonetheless, respondent Court of Tax Appeals denied
petitioner's claim for refund because —
"When NIA transferred the equipment in question supposedly 'after
its (HYDRO's) use for a number of years', it cannot be doubted that
these equipment were sold and transferred presumably 'several
years' after the equipment's importation in 1978 and 1979. It is
obvious therefore that the sale or transfer of the ownership of the
57
equipment to petitioner HYDRO were unquestionably made after
the effectivity of PD 882 on January 20, 1976, undisputably said sale
or transfer thereof was (sic) governed by Section 4 of PD 882 and
was correctly applied by respondent. We take particular note of the
fact that we cannot pinpoint with definiteness or exactitude from
the evidence, when or what years after the years 1978 and 1979
importations were the equipment sold or transferred by NIA to
petitioner HYDRO so that we can determine outright whether the
sale or transfers are covered by the mandatory provision of
Executive Order 860 effective on December 21, 1982 imposing 3%
additional ad valorem duty on such importations. Such that if the
sale or transfer of the ownership of the equipment were effected to
petitioner HYDRO after December 21, 1982, the effective date of
Executive Order No. 860, the 3% ad valorem duty is imposable as
said Executive Order 860 was applied prospectively and rightly. If
the sale or transfer of the ownership of the equipment to HYDRO
were (sic) prior to the effectivity of Executive Order No. 860, then
said Executive Order 860 is inapplicable, and petitioner is not liable
to pay the 3% ad valorem duty of P281,591.00 and is entitled to the
refund thereof.
As a rule and principle, it was incumbent upon petitioner-taxpayer
HYDRO to have shown that the sale or transfer of said equipment to
it were made before December 21, 1982, when the Executive Order
No. 860 was effective in order that it shall not be subject to the
imposition of 3% additional ad valorem duty. Failing thus, its claim
for refund in the amount of P281,591.00 unquestionably fails." (pp.
37-38; Rollo).:- nad
The foregoing conclusion is erroneous. The subsequent executions
of the Deeds of Sale of the equipment in question on December 6,
1982 and March 24, 1983 are not relevant and material in the
consideration of the application of Executive Order No. 860 because
said Deeds of Sale were mere formalities in the implementation of
Contract No. MPI-C-1 executed on August 1978, which should be
reckoned and construed as the actual date of sale. This must be so
because the contract of purchase and sale of the NIA-
financed/owned equipment to Hydro took place in 1978 when
Contract No. MPI-C-1 was signed by NIA and HYDRO wherein the
contracting parties provided for their financing, procurement,
delivery, repayment, transfer of possession and ownership. The said
scheme contemplated a Contract of Sale within the purview of Art.
1458 of the Civil Code which provides —
"Art. 1458. 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 thereafter a price certain in
money or its equivalent.
"A contract of sale may be absolute or conditional." (p. 11, Rollo)
58
This view is shared by the Collector of Customs in his decision when
he declared that there being a meeting of the minds between NIA
and HYDRO upon the object of the contract of sale and upon the
price, the contract of sale of the equipment between them was
perfected in 1978. It is a perfected contract of sale subject to a
suspensive condition, the full payment by HYDRO of the
consideration for the subject of the contract is the operative act to
compel NIA to effect the transfer of absolute ownership thereof to
HYDRO. And under Art. 1187 of the Civil Code, the effectivity of said
contract reverts back to the constitution of the contract, in this case
August 1978.
"ART. 1187. The effects of a conditional obligation to give, once the
condition has been fulfilled, shall retroact to the day of the
constitution of the obligation." (p. 12, Rollo)
It is a cardinal rule that laws shall have no retroactive effect, unless
the contrary is provided. (Art. 4, Civil Code) Except for a statement
providing for its immediate execution, Executive Order No. 860 does
not provide for its retroactivity. Moreover, the Deputy Minister of
Finance in his 1st Indorsement to the Central Bank dated March 26,
1983 which was reproduced by the Central Bank Governor in a
circular letter to all authorized agent banks, clarified that letters of
credit opened prior to the effectivity of E.O. 860 are not subject to
the provisions thereof. Consequently, the importations in question
which arrived in 1977 and 1978 are not subject to the 3% additional
ad valorem duty, the same being imposed only on those whose Appeals and Deputy Minister of Finance are SET ASIDE and another
letter of credit were opened after the promulgation of Executive one rendered ordering the refund of the amount of P281,591.00
Order 860. In this regard Judge Alex Reyes in his dissenting opinion representing 3% additional ad valorem duty to petitioner Hydro
correctly observed — Resources Contractors Corporation in the form of tax credit.

"Let it suffice that the procurement of the equipment, as earlier SO ORDERED.

stated, was not on a tax exempt basis as the import liabilities
thereon have been secured to be paid under the terms of the
financial scheme in the contract. The formality of vesting of title
over the equipment was not an unwarranted expectation but a
matter of an implementation of a pre-existing agreement, hence,
the imported articles can only be subject to the rates of import
duties/taxes prevailing at the time of entry or withdrawal from
customs' custody (Sec. 205, TCC) in 1978 and 1979, thus foreclosing
any retroactive application of the 1982 Executive Order.:-cralaw

"Taken in the above light, it would be unfair and incongruous to

hold petitioner to an additional levy sans any statutory basis. The
majority could have fumbled into a precipitate action in taking an
adverse position on petitioner's right to a refund." (pp. 44-45, Rollo)

IN VIEW OF THE FOREGOING CONSIDERATIONS, the petition is

GRANTED; the assailed Decisions of respondents Court of Tax

59
G.R. Nos. L-23236 and L-23254 May 31, 1967

Inasmuch as these two (2) appeals involved the same parties and
identical issues; and the Solicitor General, upon motion, was
CENTRAL AZUCARERA DON PEDRO, petitioner, allowed by this Court to file a consolidated brief in these two cases
vs. we will consider them jointly.

COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL

REVENUE, respondents. In G.R. No. L-23236 (CTA Case No. 1273), the undisputed facts are:

Leido, Andrada, Perez and Associates for petitioner.
Office of the Solicitor General Anturo A. Alafriz, Solicitor A.B.
Afurong and Attorney M.R. Balasbas for respondents.
REYES, J.B.L., J.:
Petitioner Central Azucarera Don Pedro, a domestic corporation
with office at Nasugbu, Batangas, had been filing its income tax
returns on the "fiscal year" basis ending August 31, of every year.
Within the period allowed it under Section 46 of the National
Internal Revenue Code, petitioner filed, on October 24, 1954, with
the Bureau of Internal Revenue, its income tax return for the fiscal
year ending August 31, 1954, for which it paid the total sum of
P491,038.00, as income tax, computed on the basis of said return.

Separate appeals, by the same petitioner, Central Azucarera Don

Pedro, from two (2) decisions of the Court of Tax Appeals, the first
On October 15, 1959, Respondent Commissioner of Internal
(CTA Case No. 1273) holding it liable for the payment of the sum of
Revenue assessed against petitioner the amount of P167,935.00, as
P1,507.30, as ½% monthly (6% per annum) interest on the
deficiency income tax for the abovementioned fiscal year, but he
deficiency income tax assessed against it for the fiscal year ending
did not assess and impose any interest thereon.
August 31, 1954; and, the other (CTA Case No. 1278) denying its
claim for refund in the total amount of P2,307.10, already paid and
collected, as ½% monthly (6% per annum) interest on the deficiency
income taxes assessed against it for the fiscal years ending August
31 — 1955, 1956, 1957 and 1958.

60
Petitioner protested, in a letter dated October 26, 1959, said
deficiency income tax assessment and requested that the same be
cancelled.
Acting on the letter-protest, respondent finally ascertained and
assessed, in a letter dated December 20, 1961, against petitioner
the amount of P10,062.00, as deficiency income tax, to which was
added the sum of P1,509.30 as ½% monthly interest thereon, which
interest was imposed pursuant to Section 51 (d) of the National
Internal Revenue Code, as amended by Republic Act No. 2343
(effective June 20, 1959), and computed from June 20, 1959 to
December 20, 1961 which was the date of the revised assessment.
In the same letter, respondent required petitioner to pay said
revised assessment and interest thereon on or before January 16,
1962.
Petitioner was satisfied with the revised assessment of said
deficiency income tax proper and, accordingly, it paid, on January
16, 1962, the said amount of P10,062.00 to respondent; however, it
objected, in a letter-protest dated January 18, 1962, to the demand
and imposition of interest which was assessed and included for the
first time in respondent's letter of December 20,1961.
Respondent decided said protest in a letter dated September 22,
1962, maintaining the correctness and validity of the imposition of
the interest.
61
In due time petitioner went to the Tax Court in a petition for review,
claiming that the imposition of ½% monthly interest on its
deficiency tax for the fiscal year 1954, Pursuant to Section 51 (d) of
the Revenue Code, as amended by Republic Act No. 2343, is illegal,
because the imposition of interest on efficiency income tax earned
prior to the effectivity of the amendatory law (Rep. Act 2343) will be
tantamount to giving it (Rep. Act No. 2343) retroactive application.
Respondent filed his answer to the petition, and there being no
genuine issue raised therein as to any material fact, petitioner
presented a motion for summary judgment. Respondent did not
oppose the motion.
The Tax Court found that the only issue involved in the case is
purely legal. It ordered the parties to submit their respective
memoranda and, upon so doing, the case was deemed submitted
for decision.
On June 15, 1964, the Tax Court rendered its decision, upholding
the ruling of respondent Commissioner.
In G. R. No. L-23254 (CTA Case No. 1278), the undisputed facts are
as follows:

The same petitioner (Central Azucarera Don Pedro) filed its income
tax returns within the prescribed period for the succeeding fiscal
years ending August 31 — 1955, 1956, 1957, and 1958, for which it
paid the corresponding income taxes, based on said returns.
After verification and examination of petitioner's income tax returns
for the abovestated fiscal years, respondent Commissioner
ascertained and assessed, for each of said fiscal years against
petitioner, deficiency income taxes in the total amount of
P21,330.00, and interest thereon in the total sum of P2,307.10,
which interest were likewise imposed pursuant to Section 51 (d) of
the Internal Revenue Code, as amended by Republic Act No. 2343.
Petitioner paid said deficiency income taxes and interests within the
period prescribed by respondent to pay the same; however, on
January 19, 1962, it filed with the latter a claim for refund or tax
credit of the aforesaid sum of P2,307.00, which was paid as
interests, claiming that said payment was erroneous and the
collection thereof by respondent was illegal, which contention is
similar to that alleged in its previous protest (now CTA Case No.
1273).
Respondent Commissioner was unable to decide immediately this
claim for refund, and view of the fact that the two-year prescriptive
62
period provided for in Section 306 of the Revenue Code was about
to expire, petitioner filed, on October 23, 1962, its petition for
review in the Court of Tax Appeals, disputing the legality and validity
of the imposition of interest on taxable incomes earned prior to,
although assessed after, the effectivity of Republic Act No. 2343,
and praying that the said sum of P2,307.10, which it paid is interest,
be ordered refunded.
Respondent answered the petition, maintaining, among other
things, that the imposition of said interest is in accordance with law.
The issues having been joined, the case was set for hearing wherein
the parties presented their respective evidences which were
entirely documentary. Thereafter, the case was submitted for
decision.
On June 29, 1964, the Court of Tax Appeals rendered its decision,
sustaining the ruling of respondent Commissioner.
In both cases, the Court of Tax Appeals ruled that Congress had
power to impose interest on deficiency income tax due on income
earned prior to the amendatory law, but assessed after its
enactment, that the deficiency income tax in the case it bar was
assessed after the effectivity of the new law (Rep. Act No. 2343),
and inasmuch as the interest imposed thereon has been computed
only from June 20, 1959 (which was the date of effectivity of said
law), Republic Act No. 2343 is not being applied retroactively. It also
ruled that the provision of Section 13 of Republic Act No. 2343
providing that its new tax rates should apply to income earned in
1959, did not indicate that Congress intended to limit the
applicability of the interest prescribed in Section 51 (d) of the
Revenue Code, as amended by Republic Act No. 2343, to the
deficiency income tax on income earned after the effectivity of the
new law, since said Section 51 (d) does not distinguish between
taxable income earned prior to, or after, the effectivity of said
Republic Act No. 2343.
The petitioner appealed in both cases to this Court, insisting on its
original stand previously outlined.
The common issue posed in both cases is: whether or not the
interest of six per centum (6%)per annum (or ½% monthly interest),
provided for in Section 51 (d) of the National Internal Revenue
Code, as amended by Republic Act No. 2343 (effective June 20,
1959) is imposable on deficiency income tax due on income earned
prior to the effectivity of said Republic Act No. 2343, but assessed
after it.
It is not disputed that petitioner is a domestic corporation which
filed its income tax returns on a fiscal year basis; that it filed its
income tax returns and paid the corresponding income taxes, based
63
on said returns, within the period prescribed therefor; that the
taxable incomes, in these two cases, were earned before, but were
assessed after, the effectivity on June 20, 1959 of Republic Act No.
2343; that the deficiency income tax assessments proper, including
the interests in the later case (CTA Case No. 1278) were paid by
petitioner within the period prescribed by respondent
Commissioner to pay the same; and that these deficiency income
tax assessments were made on account of petitioner's erroneous
(but not fraudulent or false) returns.
When petitioner filed its income tax returns and paid the
corresponding income taxes, based on said returns, the pertinent
provisions of the Tax Code then in force (before the effectivity of
Rep. Act 2343) read —
Sec. 51. Assessment and payment of income tax. — (a) Assessment
of Tax. — All assessments shall be made by the Collector of Internal
Revenue and all persons and corporation subject to tax shall be
notified of the amount for which the are respectively liable on or
before the first day of May each successive year.
(b) Time of payment. — The total amount of tax imposed by this
Title shall be paid on or before the fifteenth day of May following
the close of the calendar year, by the person subject to tax, and in
case of a corporation, by the president, vice-president, or other
responsible officer thereof. If the return is made on the basis of a
fiscal year, the total amount of the tax shall be paid on or before the
fifteenth day of the fifth month following the close of the fiscal year.
xxx xxx xxx
(d) Refusal or neglect to make returns; fraudulent returns, etc. — In
case(s) of . . . erroneous . . . returns, the Collector of Internal
Revenue shall, upon discovery thereof, . . . make a return upon
information obtained as provided for in this code or by existing law,
or require the necessary corrections to be made, and the
assessment made by the Collector of Internal Revenue thereon shall
be paid by such person or corporation immediately upon
notification of the amount of such assessment.
(e) Surcharge and interest in case of delinquency.—To any sum or
sums due and unpaid after the dates prescribed in subsections (b),
(c) and (d) for the payment of the same, there shall be added the
sum of five per centum on the amount of tax unpaid and interest at
the rate of one per centum a month upon said tax from the time the
same became due, except from the estates of insane, deceased, or
insolvent persons.1äwphï1.ñët
Sec. 46. Corporation returns. — . . .
64
(b) When to file. — The return shall be rendered on or before the
first day of March of each year for the preceding calendar year, or if
the corporation has designated a fiscal year, then within sixty days
after the close of such fiscal year.
while the pertinent provisions of the same Sections 51 and 46, after
their amendment by Republic Act No. 2343, read as follows:
Sec. 51. Payment and Assessment of income tax. — (a) Payment of
tax. — (1) In general. — The total amount of tax imposed by this
Title shall be paid at the time the return is filed but not later than
the fifteenth day of April following the close of the calendar year,
or, if the return is made on the basis of a fiscal year, then not later
than the fifteenth day of the fourth month following the close of the
fiscal year. Such tax shall be paid by the person subject thereto, and
in the case of a corporation by the President, Vice-President, or
other responsible officer thereof: Provided, That if in any preceding
year, the payer was entitled to a refund of any amount thereof, if
not yet refunded, it may be deducted from the amount of tax to be
paid.
xxx xxx xxx
(b) Assessment and payment of deficiency tax. — After the return is
filed, the Commissioner of Internal Revenue shall examine it and
assess the correct amount of the tax. The tax or deficiency in tax so
discovered shall be paid upon notice and demand from the
Commissioner of Internal Revenue.
xxx xxx xxx
(d) Interest on deficiency. — Interest upon the amount determined
as a deficiency shall be assessed at the same time as the deficiency
and shall be paid upon notice and demand from the Commissioner
of Internal Revenue; and shall be collected as a part of the tax, at
the rate of six per centum per annum from the date prescribed for
the payment of the tax (or, if the tax is paid in installments, from
the date prescribed for the payment of the first installment) to the
date the deficiency is assessed: Provided, That the maximum
amount that may be collected as interest on deficiency shall in no
case exceed the amount corresponding to a period of three years,
the present provisions regarding prescription to the contrary
notwithstanding.
Sec. 46. Corporation returns. — . . . .
(b) When to file. — The return shall be filed on or before the
fifteenth day of April of each year for the preceding calendar year,
or if the corporation has designated a fiscal year, on or before the
65
fifteenth day of the fourth month following the close of such fiscal
year.
and insofar as the effectivity of said Republic Act No. 2343 is
concerned, Section 13 thereof provides —
(c) Sec. 13. This Act shall take effect upon its approval: Provided,
That the rate hereinabove stipulated shall apply to income received
from January first, nineteen hundred and fifty-nine, and for the
fiscal periods ending after June thirty, nineteen hundred and fifty
nine.
From a perusal and comparison of the abovequoted sections of the
Tax Code, before and after its amendment, it will be observed that,
although the Commissioner (formerly Collector) of Internal
Revenue, under the old Section 51 (a) was required to assess the tax
due, based on the taxpayer's return, and notify the taxpayer of said
assessment, still, under subsection (b) of the same old Section 51,
the time prescribed for the payment of tax was fixed, whether or
not a notice of the assessment was given to the taxpayer. Under the
new provision, the time of payment is also fixed and pre-
determined (usually coinciding with the filing of the return) without
the necessity of giving notification of the assessment to the
taxpayer by the Commissioner.
It should further be observed that, under the old Section 51 (e), the
interest on deficiency was imposed from the time the tax became
due; while under the new Section 51 (d), said interest is imposed on
the deficiency from the date prescribed for the payment of the tax.
It is thus evident that petitioner's contention that "interest on such
deficiency accrued only when the taxpayer failed to pay the tax
within the period prescribed therefor by respondent (Commissioner
of Internal Revenue)" is not correct; said interest was imposable in
case of non-payment on time, not only on the basic income tax, but
also on the deficiency tax, since the deficiency was part and parcel
of petitioner's income tax liability.
It appearing that the new Section 51 (d) under Republic Act 2343
expressly provides that the interest on deficiency shall be assessed
at the same time as the deficiency income tax; and that respondent
Commissioner of Internal Revenue imposed and sought to collect
the interest only from June 20, 1959, which was the date of
effectivity of said Republic Act No. 2343; that the deficiency income
taxes in question were assessed and unpaid when said Act was
already in force, the Tax Court correctly held that said Section 51
(d), as amended, is not being applied retroactively as contended by
petitioner herein.
Moreover, the application of said Section 51 (d), as amended, in the
cases at bar, operated and worked in favor of petitioner-appellant,
66
since instead of imposing the rate of one per centum (1%) monthly
interest prescribed in the old section 51 (e) from the time the tax
became due, i.e., from January 15, — 1955, 1956, 1957, 1958 and
1959, respectively, respondent Commissioner merely imposed the
new ½% monthly interest from January 20, 1959, which interests, as
computed, are less than what would be due under the old law.
With respect to the petitioner's contention that the application of
the amended provision (now Sec. 51-d of the Tax Code) to the cases
at bar would run counter to the constitutional restriction against
the enactment of ex post facto laws, it is to be noted that the
collection of interest in these cases is not penal in nature, thus —
the imposition of . . . interest is but a just compensation to the state
for the delay in paying the tax, and for the concomitant use by the
taxpayer of funds that rightfully should be in the government's
hands (U.S. vs. Goldstein, 189 F [2d] 752; Ross vs. U.S., 148 Fed.
Supp. 330; U.S. vs. Joffray, 97 Fed. [2d] 488). The fact that the
interest charged is made proportionate to the period of delay
constitutes the best evidence that such interest is not penal but
compensatory. (Castro vs. Collector of Internal Revenue, G.R. No. L-
12174, Resolution on Motion for Reconsideration, December 28,
1962)
and we had already held that —
The doctrine of unconstitutionality raised by appellant is based on
the prohibition against ex post facto laws. But this prohibition
applies only to criminal or penal matters, and not to laws which
concern civil matters or proceedings generally, or which affect or
regulate civil or private rights (Ex parte Garland, 18 Law Ed., 366; 16
C.J.S., 889-891). (Republic vs. Oasan Vda. de Fernandez, 99 Phil. 934,
937).

Finally, section 13 of the amendatory Republic Act No. 2343 refers

only to the basic tax rates, which are made applicable to income
received in 1959 onward, but does not affect the interest due on
deficiencies, which are left to be governed by section 51 (d).

Wherefore, the decisions under review in G.R. No. L-23236 (CTA

Case No. 1273) and G.R. No. L-23254 (CTA Case No. 1278) should
be, as they are hereby, affirmed. With costs against petitioner-
appellant Central Azucarera Don Pedro in both instances. So
ordered.

67
G.R. No. L-43082 June 18, 1937
PABLO LORENZO, as trustee of the estate of Thomas Hanley,
deceased, plaintiff-appellant,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-
appellant.
Pablo Lorenzo and Delfin Joven for plaintiff-appellant.
Office of the Solicitor-General Hilado for defendant-appellant.
LAUREL, J.:
On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as
trustee of the estate of Thomas Hanley, deceased, brought this
action in the Court of First Instance of Zamboanga against the
defendant, Juan Posadas, Jr., then the Collector of Internal Revenue,
for the refund of the amount of P2,052.74, paid by the plaintiff as
inheritance tax on the estate of the deceased, and for the collection
of interst thereon at the rate of 6 per cent per annum, computed
from September 15, 1932, the date when the aforesaid tax was
[paid under protest. The defendant set up a counterclaim for
P1,191.27 alleged to be interest due on the tax in question and
68
which was not included in the original assessment. From the
decision of the Court of First Instance of Zamboanga dismissing both
the plaintiff's complaint and the defendant's counterclaim, both
parties appealed to this court.
It appears that on May 27, 1922, one Thomas Hanley died in
Zamboanga, Zamboanga, leaving a will (Exhibit 5) and considerable
amount of real and personal properties. On june 14, 1922,
proceedings for the probate of his will and the settlement and
distribution of his estate were begun in the Court of First Instance of
Zamboanga. The will was admitted to probate. Said will provides,
among other things, as follows:
4. I direct that any money left by me be given to my nephew
Matthew Hanley.
5. I direct that all real estate owned by me at the time of my death
be not sold or otherwise disposed of for a period of ten (10) years
after my death, and that the same be handled and managed by the
executors, and proceeds thereof to be given to my nephew,
Matthew Hanley, at Castlemore, Ballaghaderine, County of
Rosecommon, Ireland, and that he be directed that the same be
used only for the education of my brother's children and their
descendants.
6. I direct that ten (10) years after my death my property be given to deliquency in payment consisting of a 1 per cent monthly interest
the above mentioned Matthew Hanley to be disposed of in the way from July 1, 1931 to the date of payment and a surcharge of 25 per
he thinks most advantageous. cent on the tax, amounted to P2,052.74. On March 15, 1932, the
defendant filed a motion in the testamentary proceedings pending
before the Court of First Instance of Zamboanga (Special
xxx xxx xxx proceedings No. 302) praying that the trustee, plaintiff herein, be
ordered to pay to the Government the said sum of P2,052.74. The
motion was granted. On September 15, 1932, the plaintiff paid said
amount under protest, notifying the defendant at the same time
8. I state at this time I have one brother living, named Malachi
that unless the amount was promptly refunded suit would be
Hanley, and that my nephew, Matthew Hanley, is a son of my said
brought for its recovery. The defendant overruled the plaintiff's
brother, Malachi Hanley.
protest and refused to refund the said amount hausted, plaintiff
went to court with the result herein above indicated.

The Court of First Instance of Zamboanga considered it proper for

the best interests of ther estate to appoint a trustee to administer
In his appeal, plaintiff contends that the lower court erred:
the real properties which, under the will, were to pass to Matthew
Hanley ten years after the two executors named in the will, was, on
March 8, 1924, appointed trustee. Moore took his oath of office and
gave bond on March 10, 1924. He acted as trustee until February I. In holding that the real property of Thomas Hanley, deceased,
29, 1932, when he resigned and the plaintiff herein was appointed passed to his instituted heir, Matthew Hanley, from the moment of
in his stead. the death of the former, and that from the time, the latter became
the owner thereof.

During the incumbency of the plaintiff as trustee, the defendant

Collector of Internal Revenue, alleging that the estate left by the II. In holding, in effect, that there was deliquency in the payment of
deceased at the time of his death consisted of realty valued at inheritance tax due on the estate of said deceased.
P27,920 and personalty valued at P1,465, and allowing a deduction
of P480.81, assessed against the estate an inheritance tax in the
amount of P1,434.24 which, together with the penalties for

69
III. In holding that the inheritance tax in question be based upon the
value of the estate upon the death of the testator, and not, as it
should have been held, upon the value thereof at the expiration of
the period of ten years after which, according to the testator's will,
the property could be and was to be delivered to the instituted heir.
IV. In not allowing as lawful deductions, in the determination of the
net amount of the estate subject to said tax, the amounts allowed
by the court as compensation to the "trustees" and paid to them
from the decedent's estate.
V. In not rendering judgment in favor of the plaintiff and in denying
his motion for new trial.
The defendant-appellant contradicts the theories of the plaintiff and
assigns the following error besides:
The lower court erred in not ordering the plaintiff to pay to the
defendant the sum of P1,191.27, representing part of the interest at
the rate of 1 per cent per month from April 10, 1924, to June 30,
1931, which the plaintiff had failed to pay on the inheritance tax
assessed by the defendant against the estate of Thomas Hanley.
70
The following are the principal questions to be decided by this court
in this appeal: (a) When does the inheritance tax accrue and when
must it be satisfied? (b) Should the inheritance tax be computed on
the basis of the value of the estate at the time of the testator's
death, or on its value ten years later? (c) In determining the net
value of the estate subject to tax, is it proper to deduct the
compensation due to trustees? (d) What law governs the case at
bar? Should the provisions of Act No. 3606 favorable to the tax-
payer be given retroactive effect? (e) Has there been deliquency in
the payment of the inheritance tax? If so, should the additional
interest claimed by the defendant in his appeal be paid by the
estate? Other points of incidental importance, raised by the parties
in their briefs, will be touched upon in the course of this opinion.
(a) The accrual of the inheritance tax is distinct from the obligation
to pay the same. Section 1536 as amended, of the Administrative
Code, imposes the tax upon "every transmission by virtue of
inheritance, devise, bequest, gift mortis causa, or advance in
anticipation of inheritance,devise, or bequest." The tax therefore is
upon transmission or the transfer or devolution of property of a
decedent, made effective by his death. (61 C. J., p. 1592.) It is in
reality an excise or privilege tax imposed on the right to succeed to,
receive, or take property by or under a will or the intestacy law, or
deed, grant, or gift to become operative at or after death. Acording
to article 657 of the Civil Code, "the rights to the succession of a
person are transmitted from the moment of his death." "In other
words", said Arellano, C. J., ". . . the heirs succeed immediately to all
of the property of the deceased ancestor. The property belongs to
the heirs at the moment of the death of the ancestor as completely
as if the ancestor had executed and delivered to them a deed for bienes de la herencia o del legado, transcurra mucho o poco
the same before his death." (Bondad vs. Bondad, 34 Phil., 232. See tiempo, pues la adquisicion ha de retrotraerse al momento de la
also, Mijares vs. Nery, 3 Phil., 195; Suilong & Co., vs. Chio-Taysan, 12 muerte, y asi lo ordena el articulo 989, que debe considerarse como
Phil., 13; Lubrico vs. Arbado, 12 Phil., 391; Innocencio vs. Gat- complemento del presente." (5 Manresa, 305; see also, art. 440,
Pandan, 14 Phil., 491; Aliasas vs.Alcantara, 16 Phil., 489; Ilustre vs. par. 1, Civil Code.) Thomas Hanley having died on May 27, 1922, the
Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19 Phil., 434; inheritance tax accrued as of the date.
Bowa vs. Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti
Steamship Co., 41 Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs.
Court of First Instance of Capiz, 51 Phil., 396; Baun vs. Heirs of Baun, From the fact, however, that Thomas Hanley died on May 27, 1922,
53 Phil., 654.) Plaintiff, however, asserts that while article 657 of the it does not follow that the obligation to pay the tax arose as of the
Civil Code is applicable to testate as well as intestate succession, it date. The time for the payment on inheritance tax is clearly fixed by
operates only in so far as forced heirs are concerned. But the section 1544 of the Revised Administrative Code as amended by Act
language of article 657 of the Civil Code is broad and makes no No. 3031, in relation to section 1543 of the same Code. The two
distinction between different classes of heirs. That article does not sections follow:
speak of forced heirs; it does not even use the word "heir". It speaks
of the rights of succession and the transmission thereof from the
moment of death. The provision of section 625 of the Code of Civil
SEC. 1543. Exemption of certain acquisitions and transmissions. —
Procedure regarding the authentication and probate of a will as a
The following shall not be taxed:
necessary condition to effect transmission of property does not
affect the general rule laid down in article 657 of the Civil Code. The
authentication of a will implies its due execution but once probated
and allowed the transmission is effective as of the death of the (a) The merger of the usufruct in the owner of the naked title.
testator in accordance with article 657 of the Civil Code. Whatever
may be the time when actual transmission of the inheritance takes
place, succession takes place in any event at the moment of the (b) The transmission or delivery of the inheritance or legacy by the
decedent's death. The time when the heirs legally succeed to the fiduciary heir or legatee to the trustees.
inheritance may differ from the time when the heirs actually receive
such inheritance. "Poco importa", says Manresa commenting on
article 657 of the Civil Code, "que desde el falleimiento del
causante, hasta que el heredero o legatario entre en posesion de los

71
(c) The transmission from the first heir, legatee, or donee in favor of
another beneficiary, in accordance with the desire of the
predecessor.
In the last two cases, if the scale of taxation appropriate to the new
beneficiary is greater than that paid by the first, the former must
pay the difference.
SEC. 1544. When tax to be paid. — The tax fixed in this article shall
be paid:
(a) In the second and third cases of the next preceding section,
before entrance into possession of the property.
(b) In other cases, within the six months subsequent to the death of
the predecessor; but if judicial testamentary or intestate
proceedings shall be instituted prior to the expiration of said period,
the payment shall be made by the executor or administrator before
delivering to each beneficiary his share.
If the tax is not paid within the time hereinbefore prescribed,
interest at the rate of twelve per centum per annum shall be added
as part of the tax; and to the tax and interest due and unpaid within
72
ten days after the date of notice and demand thereof by the
collector, there shall be further added a surcharge of twenty-five
per centum.
A certified of all letters testamentary or of admisitration shall be
furnished the Collector of Internal Revenue by the Clerk of Court
within thirty days after their issuance.
It should be observed in passing that the word "trustee", appearing
in subsection (b) of section 1543, should read "fideicommissary" or
"cestui que trust". There was an obvious mistake in translation from
the Spanish to the English version.
The instant case does fall under subsection (a), but under
subsection (b), of section 1544 above-quoted, as there is here no
fiduciary heirs, first heirs, legatee or donee. Under the subsection,
the tax should have been paid before the delivery of the properties
in question to P. J. M. Moore as trustee on March 10, 1924.
(b) The plaintiff contends that the estate of Thomas Hanley, in so far
as the real properties are concerned, did not and could not legally
pass to the instituted heir, Matthew Hanley, until after the
expiration of ten years from the death of the testator on May 27,
1922 and, that the inheritance tax should be based on the value of
the estate in 1932, or ten years after the testator's death. The
plaintiff introduced evidence tending to show that in 1932 the real
properties in question had a reasonable value of only P5,787. This
amount added to the value of the personal property left by the
deceased, which the plaintiff admits is P1,465, would generate an
inheritance tax which, excluding deductions, interest and surcharge,
would amount only to about P169.52.
If death is the generating source from which the power of the estate
to impose inheritance taxes takes its being and if, upon the death of
the decedent, succession takes place and the right of the estate to
tax vests instantly, the tax should be measured by the vlaue of the
estate as it stood at the time of the decedent's death, regardless of
any subsequent contingency value of any subsequent increase or
decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C. L., p. 232;
Blakemore and Bancroft, Inheritance Taxes, p. 137. See also
Knowlton vs. Moore, 178 U.S., 41; 20 Sup. Ct. Rep., 747; 44 Law. ed.,
969.) "The right of the state to an inheritance tax accrues at the
moment of death, and hence is ordinarily measured as to any
beneficiary by the value at that time of such property as passes to
him. Subsequent appreciation or depriciation is immaterial." (Ross,
Inheritance Taxation, p. 72.)
Our attention is directed to the statement of the rule in Cyclopedia
of Law of and Procedure (vol. 37, pp. 1574, 1575) that, in the case of
contingent remainders, taxation is postponed until the estate vests
in possession or the contingency is settled. This rule was formerly
followed in New York and has been adopted in Illinois, Minnesota,
73
Massachusetts, Ohio, Pennsylvania and Wisconsin. This rule,
horever, is by no means entirely satisfactory either to the estate or
to those interested in the property (26 R. C. L., p. 231.). Realizing,
perhaps, the defects of its anterior system, we find upon
examination of cases and authorities that New York has varied and
now requires the immediate appraisal of the postponed estate at its
clear market value and the payment forthwith of the tax on its out
of the corpus of the estate transferred. (In re Vanderbilt, 172 N. Y.,
69; 69 N. E., 782; In re Huber, 86 N. Y. App. Div., 458; 83 N. Y. Supp.,
769; Estate of Tracy, 179 N. Y., 501; 72 N. Y., 519; Estate of Brez, 172
N. Y., 609; 64 N. E., 958; Estate of Post, 85 App. Div., 611; 82 N. Y.
Supp., 1079. Vide also, Saltoun vs. Lord Advocate, 1 Peter. Sc. App.,
970; 3 Macq. H. L., 659; 23 Eng. Rul. Cas., 888.) California adheres to
this new rule (Stats. 1905, sec. 5, p. 343).
But whatever may be the rule in other jurisdictions, we hold that a
transmission by inheritance is taxable at the time of the
predecessor's death, notwithstanding the postponement of the
actual possession or enjoyment of the estate by the beneficiary, and
the tax measured by the value of the property transmitted at that
time regardless of its appreciation or depreciation.
(c) Certain items are required by law to be deducted from the
appraised gross in arriving at the net value of the estate on which
the inheritance tax is to be computed (sec. 1539, Revised
Administrative Code). In the case at bar, the defendant and the trial
court allowed a deduction of only P480.81. This sum represents the
expenses and disbursements of the executors until March 10, 1924,
among which were their fees and the proven debts of the deceased.
The plaintiff contends that the compensation and fees of the
trustees, which aggregate P1,187.28 (Exhibits C, AA, EE, PP, HH, JJ,
LL, NN, OO), should also be deducted under section 1539 of the
Revised Administrative Code which provides, in part, as follows: "In
order to determine the net sum which must bear the tax, when an
inheritance is concerned, there shall be deducted, in case of a
resident, . . . the judicial expenses of the testamentary or intestate
proceedings, . . . ."
A trustee, no doubt, is entitled to receive a fair compensation for his
services (Barney vs. Saunders, 16 How., 535; 14 Law. ed., 1047). But
from this it does not follow that the compensation due him may
lawfully be deducted in arriving at the net value of the estate
subject to tax. There is no statute in the Philippines which requires
trustees' commissions to be deducted in determining the net value
of the estate subject to inheritance tax (61 C. J., p. 1705).
Furthermore, though a testamentary trust has been created, it does
not appear that the testator intended that the duties of his
executors and trustees should be separated. (Ibid.; In re Vanneck's
Estate, 161 N. Y. Supp., 893; 175 App. Div., 363; In re Collard's
Estate, 161 N. Y. Supp., 455.) On the contrary, in paragraph 5 of his
will, the testator expressed the desire that his real estate be
handled and managed by his executors until the expiration of the
period of ten years therein provided. Judicial expenses are expenses
of administration (61 C. J., p. 1705) but, in State vs. Hennepin
County Probate Court (112 N. W., 878; 101 Minn., 485), it was said:
". . . The compensation of a trustee, earned, not in the
74
administration of the estate, but in the management thereof for the
benefit of the legatees or devises, does not come properly within
the class or reason for exempting administration expenses. . . .
Service rendered in that behalf have no reference to closing the
estate for the purpose of a distribution thereof to those entitled to
it, and are not required or essential to the perfection of the rights of
the heirs or legatees. . . . Trusts . . . of the character of that here
before the court, are created for the the benefit of those to whom
the property ultimately passes, are of voluntary creation, and
intended for the preservation of the estate. No sound reason is
given to support the contention that such expenses should be taken
into consideration in fixing the value of the estate for the purpose
of this tax."
(d) The defendant levied and assessed the inheritance tax due from
the estate of Thomas Hanley under the provisions of section 1544 of
the Revised Administrative Code, as amended by section 3 of Act
No. 3606. But Act No. 3606 went into effect on January 1, 1930. It,
therefore, was not the law in force when the testator died on May
27, 1922. The law at the time was section 1544 above-mentioned,
as amended by Act No. 3031, which took effect on March 9, 1922.
It is well-settled that inheritance taxation is governed by the statute
in force at the time of the death of the decedent (26 R. C. L., p. 206;
4 Cooley on Taxation, 4th ed., p. 3461). The taxpayer can not
foresee and ought not to be required to guess the outcome of
pending measures. Of course, a tax statute may be made
retroactive in its operation. Liability for taxes under retroactive
legislation has been "one of the incidents of social life." (Seattle vs.
Kelleher, 195 U. S., 360; 49 Law. ed., 232 Sup. Ct. Rep., 44.) But
legislative intent that a tax statute should operate retroactively
should be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep., 491;
Smietanka vs. First Trust & Savings Bank, 257 U. S., 602; Stockdale
vs. Insurance Co., 20 Wall., 323; Lunch vs. Turrish, 247 U. S., 221.) "A
statute should be considered as prospective in its operation,
whether it enacts, amends, or repeals an inheritance tax, unless the
language of the statute clearly demands or expresses that it shall
have a retroactive effect, . . . ." (61 C. J., P. 1602.) Though the last
paragraph of section 5 of Regulations No. 65 of the Department of
Finance makes section 3 of Act No. 3606, amending section 1544 of
the Revised Administrative Code, applicable to all estates the
inheritance taxes due from which have not been paid, Act No. 3606
itself contains no provisions indicating legislative intent to give it
retroactive effect. No such effect can begiven the statute by this
court.
The defendant Collector of Internal Revenue maintains, however,
that certain provisions of Act No. 3606 are more favorable to the
taxpayer than those of Act No. 3031, that said provisions are penal
in nature and, therefore, should operate retroactively in conformity
with the provisions of article 22 of the Revised Penal Code. This is
the reason why he applied Act No. 3606 instead of Act No. 3031.
Indeed, under Act No. 3606, (1) the surcharge of 25 per cent is
based on the tax only, instead of on both the tax and the interest, as
provided for in Act No. 3031, and (2) the taxpayer is allowed twenty
days from notice and demand by rthe Collector of Internal Revenue
75
within which to pay the tax, instead of ten days only as required by
the old law.
Properly speaking, a statute is penal when it imposes punishment
for an offense committed against the state which, under the
Constitution, the Executive has the power to pardon. In common
use, however, this sense has been enlarged to include within the
term "penal statutes" all status which command or prohibit certain
acts, and establish penalties for their violation, and even those
which, without expressly prohibiting certain acts, impose a penalty
upon their commission (59 C. J., p. 1110). Revenue laws, generally,
which impose taxes collected by the means ordinarily resorted to
for the collection of taxes are not classed as penal laws, although
there are authorities to the contrary. (See Sutherland, Statutory
Construction, 361; Twine Co. vs. Worthington, 141 U. S., 468; 12
Sup. Ct., 55; Rice vs. U. S., 4 C. C. A., 104; 53 Fed., 910; Com. vs.
Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler, 44 P., 430; 25
Nev. 143.) Article 22 of the Revised Penal Code is not applicable to
the case at bar, and in the absence of clear legislative intent, we
cannot give Act No. 3606 a retroactive effect.
(e) The plaintiff correctly states that the liability to pay a tax may
arise at a certain time and the tax may be paid within another given
time. As stated by this court, "the mere failure to pay one's tax does
not render one delinqent until and unless the entire period has
eplased within which the taxpayer is authorized by law to make
such payment without being subjected to the payment of penalties
for fasilure to pay his taxes within the prescribed period." (U. S. vs.
Labadan, 26 Phil., 239.)
The defendant maintains that it was the duty of the executor to pay
the inheritance tax before the delivery of the decedent's property
to the trustee. Stated otherwise, the defendant contends that
delivery to the trustee was delivery to the cestui que trust, the
beneficiery in this case, within the meaning of the first paragraph of
subsection (b) of section 1544 of the Revised Administrative Code.
This contention is well taken and is sustained. The appointment of
P. J. M. Moore as trustee was made by the trial court in conformity
with the wishes of the testator as expressed in his will. It is true that
the word "trust" is not mentioned or used in the will but the
intention to create one is clear. No particular or technical words are
required to create a testamentary trust (69 C. J., p. 711). The words
"trust" and "trustee", though apt for the purpose, are not
necessary. In fact, the use of these two words is not conclusive on
the question that a trust is created (69 C. J., p. 714). "To create a
trust by will the testator must indicate in the will his intention so to
do by using language sufficient to separate the legal from the
equitable estate, and with sufficient certainty designate the
beneficiaries, their interest in the ttrust, the purpose or object of
the trust, and the property or subject matter thereof. Stated
otherwise, to constitute a valid testamentary trust there must be a
concurrence of three circumstances: (1) Sufficient words to raise a
trust; (2) a definite subject; (3) a certain or ascertain object; statutes
in some jurisdictions expressly or in effect so providing." (69 C. J.,
pp. 705,706.) There is no doubt that the testator intended to create
a trust. He ordered in his will that certain of his properties be kept
76
together undisposed during a fixed period, for a stated purpose. The
probate court certainly exercised sound judgment in appointment a
trustee to carry into effect the provisions of the will (see sec. 582,
Code of Civil Procedure).
P. J. M. Moore became trustee on March 10, 1924. On that date
trust estate vested in him (sec. 582 in relation to sec. 590, Code of
Civil Procedure). The mere fact that the estate of the deceased was
placed in trust did not remove it from the operation of our
inheritance tax laws or exempt it from the payment of the
inheritance tax. The corresponding inheritance tax should have
been paid on or before March 10, 1924, to escape the penalties of
the laws. This is so for the reason already stated that the delivery of
the estate to the trustee was in esse delivery of the same estate to
the cestui que trust, the beneficiary in this case. A trustee is but an
instrument or agent for the cestui que trust (Shelton vs. King, 299 U.
S., 90; 33 Sup. Ct. Rep., 689; 57 Law. ed., 1086). When Moore
accepted the trust and took possesson of the trust estate he
thereby admitted that the estate belonged not to him but to his
cestui que trust (Tolentino vs. Vitug, 39 Phil.,126, cited in 65 C. J., p.
692, n. 63). He did not acquire any beneficial interest in the estate.
He took such legal estate only as the proper execution of the trust
required (65 C. J., p. 528) and, his estate ceased upon the fulfillment
of the testator's wishes. The estate then vested absolutely in the
beneficiary (65 C. J., p. 542).
The highest considerations of public policy also justify the
conclusion we have reached. Were we to hold that the payment of
the tax could be postponed or delayed by the creation of a trust of
the type at hand, the result would be plainly disastrous. Testators
may provide, as Thomas Hanley has provided, that their estates be
not delivered to their beneficiaries until after the lapse of a certain
period of time. In the case at bar, the period is ten years. In other
cases, the trust may last for fifty years, or for a longer period which
does not offend the rule against petuities. The collection of the tax
would then be left to the will of a private individual. The mere
suggestion of this result is a sufficient warning against the
accpetance of the essential to the very exeistence of government.
(Dobbins vs. Erie Country, 16 Pet., 435; 10 Law. ed., 1022; Kirkland
vs. Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane County vs.
Oregon, 7 Wall., 71; 19 Law. ed., 101; Union Refrigerator Transit Co.
vs. Kentucky, 199 U. S., 194; 26 Sup. Ct. Rep., 36; 50 Law. ed., 150;
Charles River Bridge vs. Warren Bridge, 11 Pet., 420; 9 Law. ed.,
773.) The obligation to pay taxes rests not upon the privileges
enjoyed by, or the protection afforded to, a citizen by the
government but upon the necessity of money for the support of the
state (Dobbins vs. Erie Country, supra). For this reason, no one is
allowed to object to or resist the payment of taxes solely because
no personal benefit to him can be pointed out. (Thomas vs. Gay, 169
U. S., 264; 18 Sup. Ct. Rep., 340; 43 Law. ed., 740.) While courts will
not enlarge, by construction, the government's power of taxation
(Bromley vs. McCaughn, 280 U. S., 124; 74 Law. ed., 226; 50 Sup. Ct.
Rep., 46) they also will not place upon tax laws so loose a
construction as to permit evasions on merely fanciful and
insubstantial distictions. (U. S. vs. Watts, 1 Bond., 580; Fed. Cas. No.
16,653; U. S. vs. Wigglesirth, 2 Story, 369; Fed. Cas. No. 16,690,
77
followed in Froelich & Kuttner vs. Collector of Customs, 18 Phil.,
461, 481; Castle Bros., Wolf & Sons vs. McCoy, 21 Phil., 300; Muñoz
& Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai Banking
Corporation vs. Rafferty, 39 Phil., 145; Luzon Stevedoring Co. vs.
Trinidad, 43 Phil., 803.) When proper, a tax statute should be
construed to avoid the possibilities of tax evasion. Construed this
way, the statute, without resulting in injustice to the taxpayer,
becomes fair to the government.
That taxes must be collected promptly is a policy deeply intrenched
in our tax system. Thus, no court is allowed to grant injunction to
restrain the collection of any internal revenue tax ( sec. 1578,
Revised Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252). In
the case of Lim Co Chui vs. Posadas (47 Phil., 461), this court had
occassion to demonstrate trenchment adherence to this policy of
the law. It held that "the fact that on account of riots directed
against the Chinese on October 18, 19, and 20, 1924, they were
prevented from praying their internal revenue taxes on time and by
mutual agreement closed their homes and stores and remained
therein, does not authorize the Collector of Internal Revenue to
extend the time prescribed for the payment of the taxes or to
accept them without the additional penalty of twenty five per cent."
(Syllabus, No. 3.)
". . . It is of the utmost importance," said the Supreme Court of the
United States, ". . . that the modes adopted to enforce the taxes
levied should be interfered with as little as possible. Any delay in
the proceedings of the officers, upon whom the duty is developed
of collecting the taxes, may derange the operations of government,
and thereby, cause serious detriment to the public." (Dows vs.
Chicago, 11 Wall., 108; 20 Law. ed., 65, 66; Churchill and Tait vs.
Rafferty, 32 Phil., 580.)
It results that the estate which plaintiff represents has been
delinquent in the payment of inheritance tax and, therefore, liable
for the payment of interest and surcharge provided by law in such
cases.
The delinquency in payment occurred on March 10, 1924, the date
when Moore became trustee. The interest due should be computed
from that date and it is error on the part of the defendant to
compute it one month later. The provisions cases is mandatory (see
and cf. Lim Co Chui vs. Posadas, supra), and neither the Collector of
Internal Revenuen or this court may remit or decrease such interest,
no matter how heavily it may burden the taxpayer.
To the tax and interest due and unpaid within ten days after the
date of notice and demand thereof by the Collector of Internal
Revenue, a surcharge of twenty-five per centum should be added
(sec. 1544, subsec. (b), par. 2, Revised Administrative Code).
Demand was made by the Deputy Collector of Internal Revenue
upon Moore in a communiction dated October 16, 1931 (Exhibit
29). The date fixed for the payment of the tax and interest was
78
November 30, 1931. November 30 being an official holiday, the
tenth day fell on December 1, 1931. As the tax and interest due
were not paid on that date, the estate became liable for the
payment of the surcharge.
In view of the foregoing, it becomes unnecessary for us to discuss
the fifth error assigned by the plaintiff in his brief.
We shall now compute the tax, together with the interest and
surcharge due from the estate of Thomas Hanley inaccordance with
the conclusions we have reached.
At the time of his death, the deceased left real properties valued at
P27,920 and personal properties worth P1,465, or a total of
P29,385. Deducting from this amount the sum of P480.81,
representing allowable deductions under secftion 1539 of the
Revised Administrative Code, we have P28,904.19 as the net value
of the estate subject to inheritance tax.
The primary tax, according to section 1536, subsection (c), of the
Revised Administrative Code, should be imposed at the rate of one
per centum upon the first ten thousand pesos and two per centum
upon the amount by which the share exceed thirty thousand pesos,
plus an additional two hundred per centum. One per centum of ten
thousand pesos is P100. Two per centum of P18,904.19 is P378.08.
Adding to these two sums an additional two hundred per centum,
or P965.16, we have as primary tax, correctly computed by the
defendant, the sum of P1,434.24.

To the primary tax thus computed should be added the sums

collectible under section 1544 of the Revised Administrative Code.
First should be added P1,465.31 which stands for interest at the
rate of twelve per centum per annum from March 10, 1924, the
date of delinquency, to September 15, 1932, the date of payment
under protest, a period covering 8 years, 6 months and 5 days. To
the tax and interest thus computed should be added the sum of
P724.88, representing a surhcarge of 25 per cent on both the tax
and interest, and also P10, the compromise sum fixed by the
defendant (Exh. 29), giving a grand total of P3,634.43.

As the plaintiff has already paid the sum of P2,052.74, only the sums
of P1,581.69 is legally due from the estate. This last sum is P390.42
more than the amount demanded by the defendant in his
counterclaim. But, as we cannot give the defendant more than what
he claims, we must hold that the plaintiff is liable only in the sum of
P1,191.27 the amount stated in the counterclaim.

The judgment of the lower court is accordingly modified, with costs

against the plaintiff in both instances. So ordered.

79
U.S. Supreme Court

Smietanka v. First Trust & Savings Bank, 257 U.S. 602 (1922) Page 257 U. S. 603

Smietanka v. First Trust & Savings Bank

2. Semble that the specific inclusion of such income by the Act of

1916 was a legislative interpretation of the earlier act as not
No. 540 including it. P. 257 U. S. 607.

Argued January 19, 1922 Affirmed.

Decided February 27, 1922 Certiorari to a judgment of the circuit court of appeals affirming a
judgment of the district court for the present respondent, in an
action to recover a tax. The district court had first sustained a
257 U.S. 602 demurrer to the declaration, but later, pursuant to a mandate of
reversal (see 268 F. 2.30), overruled it and rendered judgment
against the present petitioner, who stood upon the demurrer. The
CERTIORARI TO THE CIRCUIT COURT OF APPEALS case then went again to the court below, and the judgment was
affirmed.

FOR THE SEVENTH CIRCUIT

MR. CHIEF JUSTICE TAFT delivered the opinion of the Court.

1. The Income Tax Act of 1913 made no provision for taxing income
held and accumulated by a trustee for unborn and unascertained The question presented for decision is whether, under the Income
beneficiaries. P. 257 U. S. 605. chanrobles.com-red Tax Law of 1913, income held and accumulated by a trustee for the
benefit of unborn and unascertained persons was taxable. The

80
accumulations of income were $789,905.65 for the years 1913,
1914, and 1915, and the tax collected by the petitioner as collector,
and paid under protest by the trustee, the respondent, amounted
to $36,638.69. Respondent brought suit for this sum against the
petitioner in the District Court for the Northern District of Illinois,
and judgment was rendered against it on demurrer to the
declaration. The chanrobles.com-red
Page 257 U. S. 604
judgment was reversed by the circuit court of appeals. 268 F.2d 0. T
he district court then overruled the demurrer and, the petitioner
electing not to plead further, rendered a judgment against him,
which was affirmed by the court below on a second appeal. As this
case arises under the revenue laws and the judgment of the circuit
court of appeals is final (§ 128 of the Judicial Code), certiorari issued
under § 240 of the Code.
The income tax here in question was provided for in "an act to
reduce tariff duties and to provide revenue for the government and
for other purposes," enacted October 3, 1913, 38 Stat. 114, and is
embodied in § II of that act (pages 166 et seq.). The tax is imposed
by paragraph A, subd. 1. It levies a normal tax of one percent upon
the entire yearly net income arising from all sources accruing to
every citizen of the United States and to every person in the United
States residing there. In subdivision 2, an additional or surtax is
81
levied on the net income of every individual. Under paragraph G,
the normal tax imposed on individuals is extended to corporations.
Paragraph B defines the net income of individuals, and specifies the
deductions. Paragraph D makes provision for returns by persons,
and then says:
"Guardians, trustees, executors, administrators, agents, receivers,
conservators, and all persons, . . . or associations acting in a
fiduciary capacity, shall make and render a return of the net income
of the person for whom they act, subject to this tax, coming into
their custody or control and management, and be subject to all the
provisions of this section which apply to individuals."
Paragraph E provides that, among others, all lessees or mortgagors
of real or personal property, trustees acting in any trust capacity,
executors, administrators, agents, receivers, conservators, having
control, receipt, custody, disposal or payment of annual gains,
profits and income chanrobles.com-red
Page 257 U. S. 605
of another person, exceeding $3,000 for any taxable year, who are
required to make return in behalf of another, shall deduct the
normal tax on the income and pay it to the United States, and they
are each made personally liable for such tax. It is further declared
that these payments of the tax at the source shall only apply to the unborn beneficiaries for whom income may be accumulating. It may
normal tax thereinbefore imposed on individuals. be that Congress had a general chanrobles.com-red

It is obvious from a reading of the statute, the relevant provisions of Page 257 U. S. 606
which we have summarized, that Congress was seeking to require
fiduciaries to make return and pay the normal tax due from persons
subject to the tax on such income as the fiduciaries were receiving intention to tax all incomes, whether for the benefit of persons
for such persons. There was nowhere in the act a payment required living or unborn, but a general intention of this kind must be carried
of the fiduciary of a tax upon the income of the estate or trust into language which can be reasonably construed to effect it.
property the income from which he collects, except as it is to inure Otherwise the intention cannot be enforced by the courts. The
to the benefit of a person or an individual from whose income he is provisions of such acts are not to be extended by implication. Treat
authorized and required to deduct the normal tax thereon. There v. White, 181 U. S. 264, 181 U. S. 267; United States v. Field, 255 U.
must have been a taxable person for whom the fiduciary was acting S. 257; Gould v. Gould, 245 U. S. 151, 245 U. S. 153.
to make the provisions relied upon by the government applicable.
There was no provision for the payment "at the source" by the
fiduciary of anything but the normal tax. It was intended that the
The Treasury Department did not attempt, for two years, to collect
additional or surtax should be paid by the cestui que trust. Here
tax on income of this character. This was in accord with the ruling of
there was no cestui que trust to pay a surtax.
Deputy Commissioner of Internal Revenue Speer, dated February 9,
1915, published by the Department (Corporation Trust Co. Income
Tax service 1915, p. 426). He held that "the income tax can be levied
No language in the act included a tax on income received by a only on such income as is payable to some natural or artificial
trustee, by him to be accumulated for unborn or unascertained person subject to the provisions of the law."
beneficiaries. There was indicated in the taxing paragraph A the
congressional intention to tax citizens everywhere, and noncitizens,
resident in the United States, including persons, natural and
Subsequently this ruling was changed, and the Commissioner of
corporate, on income from every source less allowed deductions.
Internal Revenue held that
But nowhere were words used which can be stretched to include

82
"when the beneficiary is not in esse and the income of the estate is
retained by the fiduciary, such income will be taxable to the estate
as for an individual, and the fiduciary will pay the tax both normal
and additional."
This seems to us to graft something on the statute that is not there.
It is an amendment, and not a construction, and such an
amendment was made in subsequent income tax laws, as we shall
see.
Counsel for the government cite the case of Merchants' Loan &
Trust Co. v. Smietanka, 255 U. S. 509, to support their contention. It
does not do so because it deals with an amendment of the provision
here under discussion. The issue there was the legality of an income
tax levied against a trustee for income received by him under a
testamentary trust to pay the net income to the widow for life and
afterwards to the children. chanrobles.com-red
Page 257 U. S. 607
It was held that the trustee was a taxable person under the Act of
October 2, 1917, 40 Stat. 331, which required trustees to render a
return of the income for the person, trust, or estate for whom or
which they act.
83
The Act of September 8, 1916, c. 463, 39 Stat. 757, specifically
declared that the income accumulated in trust for the benefit of
unborn or unascertained persons should be taxed and assessed to
the trustee. It is obvious that, in the acts subsequent to that of
1913, Congress sought to make specific provision for the casus
omissus in the earlier act.
This case is not unlike that of United States v. Field, 255 U. S. 257.
The Revenue Act of 1916 imposed a tax on the estate of a decedent
at the time of his death. The government sought to tax property
passing under a decedent's testamentary execution of a general
power of appointment. It was held that, while in equity property
passing under such a power might be treated as assets of the donee
for the use of his creditors if executed in favor of a volunteer, it was
not subject to distribution as part of the estate of the donee, and
was not taxable. In the latter act, such property was expressly
included. This was thought by the court to show at least a legislative
doubt whether the earlier act included such property. This Court
said (p. 255 U. S. 264) that it would have been easy for Congress to
express a purpose to tax such property, but it had not done so. In
the Act of 1913, it would have been easy to require a trustee to pay
an income tax on income received by him for unborn beneficiaries
or for the trust or the estate. But Congress did not do so. In the next
act, it did so. We cannot supply the omission in the earlier act.
The judgment of the circuit court of appeals is Affirmed.
G.R. Nos. 134587 & 134588 July 8, 2005
COMMISSIONER OF INTERNAL REVENUE, Petitioners,
vs.
BENGUET CORPORATION, Respondent.
DECISION
Tinga, J.:
This is a petition for the review of a consolidated Decision of the
Former Fourteenth Division of the Court of Appeals1 ordering the
Commissioner of Internal Revenue to award tax credits to Benguet
Corporation in the amount corresponding to the input value added
taxes that the latter had incurred in relation to its sale of gold to the
Central Bank during the period of 01 August 1989 to 31 July 1991.
Petitioner is the Commissioner of Internal Revenue ("petitioner")
acting in his official capacity as head of the Bureau of Internal
Revenue (BIR), an attached agency of the Department of Finance,2
with the authority, inter alia, to determine claims for refunds or tax
credits as provided by law.3
84
Respondent Benguet Corporation ("respondent") is a domestic
corporation organized and existing by virtue of Philippine laws,
engaged in the exploration, development and operation of mineral
resources, and the sale or marketing thereof to various entities.4
Respondent is a value added tax (VAT) registered enterprise.5
The transactions in question occurred during the period between
1988 and 1991. Under Sec. 99 of the National Internal Revenue
Code (NIRC),6 as amended by Executive Order (E.O.) No. 273 s.
1987, then in effect, any person who, in the course of trade or
business, sells, barters or exchanges goods, renders services, or
engages in similar transactions and any person who imports goods
is liable for output VAT at rates of either 10% or 0% ("zero-rated")
depending on the classification of the transaction under Sec. 100 of
the NIRC. Persons registered under the VAT system7 are allowed to
recognize input VAT, or the VAT due from or paid by it in the course
of its trade or business on importation of goods or local purchases
of goods or service, including lease or use of properties, from a VAT-
registered person.8
In January of 1988, respondent applied for and was granted by the
BIR zero-rated status on its sale of gold to Central Bank.9 On 28
August 1988, Deputy Commissioner of Internal Revenue Eufracio D.
Santos issued VAT Ruling No. 3788-88, which declared that "[t]he
sale of gold to Central Bank is considered as export sale subject to
zero-rate pursuant to Section 100[10] of the Tax Code, as amended
by Executive Order No. 273." The BIR came out with at least six (6) inconsistent BIR issuances. The relevant portions of the ruling
other issuances11 reiterating the zero-rating of sale of gold to the provides, thus:
Central Bank, the latest of which is VAT Ruling No. 036-90 dated 14
February 1990.12
1. In general, for purposes of the term "export sales" only direct
export sales and foreign currency denominated sales, shall be
Relying on its zero-rated status and the above issuances, qualified for zero-rating.
respondent sold gold to the Central Bank during the period of 1
August 1989 to 31 July 1991 and entered into transactions that
resulted in input VAT incurred in relation to the subject sales of ....
gold. It then filed applications for tax refunds/credits corresponding
to input VAT for the amounts13 of ₱46,177,861.12,14

₱19,218,738.44,15 and ₱84,909,247.96.16 Respondent’s
applications were either unacted upon or expressly disallowed by
petitioner.17 In addition, petitioner issued a deficiency assessment
against respondent when, after applying respondent’s creditable
input VAT costs against the retroactive 10% VAT levy, there resulted
a balance of excess output VAT.18
4. Local sales of goods, which by fiction of law are considered export
sales (e.g., the Export Duty Law considers sales of gold to the
Central Bank of the Philippines, as export sale). This transaction
shall not be considered as export sale for VAT purposes.
....

The express disallowance of respondent’s application for

refunds/credits and the issuance of deficiency assessments against [A]ll Orders and Memoranda issued by this Office inconsistent
it were based on a BIR ruling-BIR VAT Ruling No. 008-92 dated 23 herewith are considered withdrawn, modified or superseded."
January 1992-that was issued subsequent to the consummation of (Emphasis supplied)
the subject sales of gold to the Central Bank which provides that
sales of gold to the Central Bank shall not be considered as export
sales and thus, shall be subject to 10% VAT. In addition, BIR VAT
The BIR also issued VAT Ruling No. 059-92 dated 28 April 1992 and
Ruling No. 008-92 withdrew, modified, and superseded all
Revenue Memorandum Order No. 22-92 which decreed that the

85
revocation of VAT Ruling No. 3788-88 by VAT Ruling No. 008-92
would not unduly prejudice mining companies and, thus, could be
applied retroactively.19
Respondent filed three separate petitions for review with the Court
of Tax Appeals (CTA), docketed as CTA Case No. 4945, CTA Case No.
4627, and the consolidated cases of CTA Case Nos. 4686 and 4829.
In the three cases, respondent argued that a retroactive application
of BIR VAT Ruling No. 008-92 would violate Sec. 246 of the NIRC,
which mandates the non-retroactivity of rulings or circulars issued
by the Commissioner of Internal Revenue that would operate to
prejudice the taxpayer. Respondent then discussed in detail the
manner and extent by which it was prejudiced by this retroactive
application.20 Petitioner on the other hand, maintained that BIR
VAT Ruling No. 008-92 is, firstly, not void and entitled to great
respect, having been issued by the body charged with the duty of
administering the VAT law, and secondly, it may validly be given
retroactive effect since it was not prejudicial to respondent.
In three separate decisions,21 the CTA dismissed respondent’s
respective petitions. It held, with Presiding Judge Ernesto D. Acosta
dissenting, that no prejudice had befallen respondent by virtue of
the retroactive application of BIR VAT Ruling No. 008-92, and that,
consequently, the application did not violate Sec. 246 of the
NIRC.22
86
The CTA decisions were appealed by respondent to the Court of
Appeals. The cases were docketed therein as CA-G.R. SP Nos. 37205,
38958, and 39435, and thereafter consolidated. The Court of
Appeals, after evaluating the arguments of the parties, rendered the
questioned Decision reversing the Court of Tax Appeals insofar as
the latter had ruled that BIR VAT Ruling No. 008-92 did not
prejudice the respondent and that the same could be given
retroactive effect.
In its Decision, the appellate court held that respondent suffered
financial damage equivalent to the sum of the disapproved claims. It
stated that had respondent known that such sales were subject to
10% VAT, which rate was not the prevailing rate at the time of the
transactions, respondent would have passed on the cost of the
input taxes to the Central Bank. It also ruled that the remedies
which the CTA supposed would eliminate any resultant prejudice to
respondent were not sufficient palliatives as the monetary values
provided in the supposed remedies do not approximate the
monetary values of the tax credits that respondent lost after the
implementation of the VAT ruling in question. It cited
Manila Mining Corporation v. Commissioner of Internal Revenue,23
in which the Court of Appeals held24 that BIR VAT Ruling No. 008-92
cannot be given retroactive effect. Lastly, the Court of Appeals
observed that R.A. 7716, the "The New Expanded VAT Law," reveals
the intent of the lawmakers with regard to the treatment of sale of
gold to the Central Bank since the amended version therein of Sec.
100 of the NIRC expressly provides that the sale of gold to the
Bangko Sentral ng Pilipinas is an export sale subject to 0% VAT rate.
The appellate court thus allowed respondent’s claims, decreeing in
its dispositive portion, viz:
WHEREFORE, the appealed decision is hereby REVERSED. The
respondent Commissioner of Internal Revenue is ordered to award
the following tax credits to petitioner.
1) In CA-G.R. SP No. 37209 – ₱49,611,914.00
2) in CA-G.R. SP No. 38958 - ₱19,218,738.44
3) in CA-G.R. SP No. 39435 - ₱84,909,247.9625
Dissatisfied with the above ruling, petitioner filed the instant
Petition for Review questioning the determination of the Court of
Appeals that the retroactive application of the subject issuance was
prejudicial to respondent and could not be applied retroactively.
87
Apart from the central issue on the validity of the retroactive
application of VAT Ruling No. 008-92, the question of the validity of
the issuance itself has been touched upon in the pleadings,
including a reference made by respondent to a Court of Appeals
Decision holding that the VAT Ruling had no legal basis.26 For its
part, as the party that raised this issue, petitioner spiritedly defends
the validity of the issuance.27 Effectively, however, the question is a
non-issue and delving into it would be a needless exercise for, as
respondent emphatically pointed out in its Comment, "unlike
petitioner’s formulation of the issues, the only real issue in this case
is whether VAT Ruling No. 008-92 which revoked previous rulings of
the petitioner which respondent heavily relied upon . . . may be
legally applied retroactively to respondent."28 This Court need not
invalidate the BIR issuances, which have the force and effect of law,
unless the issue of validity is so crucially at the heart of the
controversy that the Court cannot resolve the case without having
to strike down the issuances. Clearly, whether the subject VAT
ruling may validly be given retrospective effect is the lis mota in the
case. Put in another but specific fashion, the sole issue to be
addressed is whether respondent’s sale of gold to the Central Bank
during the period when such was classified by BIR issuances as zero-
rated could be taxed validly at a 10% rate after the consummation
of the transactions involved.
In a long line of cases,29 this Court has affirmed that the rulings,
circular, rules and regulations promulgated by the Commissioner of
Internal Revenue would have no retroactive application if to so
apply them would be prejudicial to the taxpayers. In fact, both
petitioner30 and respondent31 agree that the retroactive
application of VAT Ruling No. 008-92 is valid only if such application
would not be prejudicial to the respondent– pursuant to the explicit
mandate under Sec. 246 of the NIRC, thus:
Sec. 246. Non-retroactivity of rulings.- Any revocation, modification
or reversal of any of the rules and regulations promulgated in
accordance with the preceding Section or any of the rulings or
circulars promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification or reversal
will be prejudicial to the taxpayers except in the following cases: (a)
where the taxpayer deliberately misstates or omits material facts
from his return on any document required of him by the Bureau of
Internal Revenue; (b) where the facts subsequently gathered by the
Bureau of Internal Revenue are materially different form the facts
on which the ruling is based; or (c) where the taxpayer acted in bad
faith. (Emphasis supplied)
In that regard, petitioner submits that respondent would not be
prejudiced by a retroactive application; respondent maintains the
contrary. Consequently, the determination of the issue of
retroactivity hinges on whether respondent would suffer prejudice
from the retroactive application of VAT Ruling No. 008-92.
We agree with the Court of Appeals and the respondent.
88
To begin with, the determination of whether respondent had
suffered prejudice is a factual issue. It is an established rule that in
the exercise of its power of review, the Supreme Court is not a trier
of facts. Moreover, in the exercise of the Supreme Court’s power of
review, the findings of facts of the Court of Appeals are conclusive
and binding on the Supreme Court.32 An exception to this rule is
when the findings of fact a quo are conflicting,33 as is in this case.
VAT is a percentage tax imposed at every stage of the distribution
process on the sale, barter, exchange or lease of goods or
properties and rendition of services in the course of trade or
business, or the importation of goods.34 It is an indirect tax, which
may be shifted to the buyer, transferee, or lessee of the goods,
properties, or services.35 However, the party directly liable for the
payment of the tax is the seller.36
In transactions taxed at a 10% rate, when at the end of any given
taxable quarter the output VAT exceeds the input VAT, the excess
shall be paid to the government; when the input VAT exceeds the
output VAT, the excess would be carried over to VAT liabilities for
the succeeding quarter or quarters.37 On the other hand,
transactions which are taxed at zero-rate do not result in any output
tax. Input VAT attributable to zero-rated sales could be refunded or
credited against other internal revenue taxes at the option of the
taxpayer.38
To illustrate, in a zero-rated transaction, when a VAT-registered
person ("taxpayer") purchases materials from his supplier at ₱80.00,
₱7.3039 of which was passed on to him by his supplier as the
latter’s 10% output VAT, the taxpayer is allowed to recover ₱7.30
from the BIR, in addition to other input VAT he had incurred in
relation to the zero-rated transaction, through tax credits or
refunds. When the taxpayer sells his finished product in a zero-rated
transaction, say, for ₱110.00, he is not required to pay any output
VAT thereon. In the case of a transaction subject to 10% VAT, the
taxpayer is allowed to recover both the input VAT of ₱7.30 which he
paid to his supplier and his output VAT of ₱2.70 (10% the ₱30.00
value he has added to the ₱80.00 material) by passing on both costs
to the buyer. Thus, the buyer pays the total 10% VAT cost, in this
case ₱10.00 on the product.
In both situations, the taxpayer has the option not to carry any VAT
cost because in the zero-rated transaction, the taxpayer is allowed
to recover input tax from the BIR without need to pay output tax,
while in 10% rated VAT, the taxpayer is allowed to pass on both
input and output VAT to the buyer. Thus, there is an elemental
similarity between the two types of VAT ratings in that the taxpayer
has the option not to take on any VAT payment for his transactions
by simply exercising his right to pass on the VAT costs in the manner
discussed above.
Proceeding from the foregoing, there appears to be no upfront
economic difference in changing the sale of gold to the Central Bank
89
from a 0% to 10% VAT rate provided that respondent would be
allowed the choice to pass on its VAT costs to the Central Bank. In
the instant case, the retroactive application of VAT Ruling No. 008-
92 unilaterally forfeited or withdrew this option of respondent. The
adverse effect is that respondent became the unexpected and
unwilling debtor to the BIR of the amount equivalent to the total
VAT cost of its product, a liability it previously could have recovered
from the BIR in a zero-rated scenario or at least passed on to the
Central Bank had it known it would have been taxed at a 10% rate.
Thus, it is clear that respondent suffered economic prejudice when
its consummated sales of gold to the Central Bank were taken out of
the zero-rated category. The change in the VAT rating of
respondent’s transactions with the Central Bank resulted in the twin
loss of its exemption from payment of output VAT and its
opportunity to recover input VAT, and at the same time subjected it
to the 10% VAT sans the option to pass on this cost to the Central
Bank, with the total prejudice in money terms being equivalent to
the 10% VAT levied on its sales of gold to the Central Bank.
Petitioner had made its position hopelessly untenable by arguing
that "the deficiency 10% that may be assessable will only be equal
to 1/11th of the amount billed to the [Central Bank] rather than
10% thereof. In short, [respondent] may only be charged based on
the tax amount actually and technically passed on to the [Central
Bank] as part of the invoiced price."40 To the Court, the
aforequoted statement is a clear recognition that respondent would
suffer prejudice in the "amount actually and technically passed on
to the [Central Bank] as part of the invoiced price." In determining
the prejudice suffered by respondent, it matters little how the
amount charged against respondent is computed,41 the point is
that the amount (equal to 1/11th of the amount billed to the
Central Bank) was charged against respondent, resulting in damage
to the latter.
Petitioner posits that the retroactive application of BIR VAT Ruling
No. 008-92 is stripped of any prejudicial effect when viewed in
relation to several available options to recoup whatever liabilities
respondent may have incurred, i.e., respondent’s input VAT may
still be used (1) to offset its output VAT on the sales of gold to the
Central Bank or on its output VAT on other sales subject to 10%
VAT, and (2) as deductions on its income tax under Sec. 29 of the
Tax Code.42
On petitioner’s first suggested recoupment modality, respondent
counters that its other sales subject to 10% VAT are so minimal that
this mode is of little value. Indeed, what use would a credit be
where there is nothing to set it off against? Moreover, respondent
points out that after having been imposed with 10% VAT sans the
opportunity to pass on the same to the Central Bank, it was issued a
deficiency tax assessment because its input VAT tax credits were
not enough to offset the retroactive 10% output VAT. The prejudice
then experienced by respondent lies in the fact that the tax
refunds/credits that it expected to receive had effectively
disappeared by virtue of its newfound output VAT liability against
which petitioner had offset the expected refund/credit.
Additionally, the prejudice to respondent would not simply
90
disappear, as petitioner claims, when a liability (which liability was
not there to begin with) is imposed concurrently with an
opportunity to reduce, not totally eradicate, the newfound liability.
In sum, contrary to petitioner’s suggestion, respondent’s net
income still decreased corresponding to the amount it expected as
its refunds/credits and the deficiency assessments against it, which
when summed up would be the total cost of the 10% retroactive
VAT levied on respondent.
Respondent claims to have incurred further prejudice. In computing
its income taxes for the relevant years, the input VAT cost that
respondent had paid to its suppliers was not treated by respondent
as part of its cost of goods sold, which is deductible from gross
income for income tax purposes, but as an asset which could be
refunded or applied as payment for other internal revenue taxes. In
fact, Revenue Regulation No. 5-87 (VAT Implementing Guidelines),
requires input VAT to be recorded not as part of the cost of
materials or inventory purchased but as a separate entry called
"input taxes," which may then be applied against output VAT, other
internal revenue taxes, or refunded as the case may be.43 In being
denied the opportunity to deduct the input VAT from its gross
income, respondent’s net income was overstated by the amount of
its input VAT. This overstatement was assessed tax at the 32%
corporate income tax rate, resulting in respondent’s overpayment
of income taxes in the corresponding amount. Thus, respondent not
only lost its right to refund/ credit its input VAT and became liable
for deficiency VAT, it also overpaid its income tax in the amount of
32% of its input VAT.
This leads us to the second recourse that petitioner has suggested
to offset any resulting prejudice to respondent as a consequence of
giving retroactive effect to BIR VAT Ruling No. 008-92. Petitioner
submits that granting that respondent has no other sale subject to
10% VAT against which its input taxes may be used in payment,
then respondent is constituted as the final entity against which the
costs of the tax passes-on shall legally stop; hence, the input taxes
may be converted as costs available as deduction for income tax
purposes.44
Even assuming that the right to recover respondent’s excess
payment of income tax has not yet prescribed, this relief would only
address respondent’s overpayment of income tax but not the other
burdens discussed above. Verily, this remedy is not a feasible option
for respondent because the very reason why it was issued a
deficiency tax assessment is that its input VAT was not enough to
offset its retroactive output VAT. Indeed, the burden of having to go
through an unnecessary and cumbersome refund process is
prejudice enough. Moreover, there is in fact nothing left to claim as
a deduction from income taxes.
From the foregoing it is clear that petitioner’s suggested options by
which prejudice would be eliminated from a retroactive application
of VAT Ruling No. 008-92 are either simply inadequate or grossly
unrealistic.
91
At the time when the subject transactions were consummated, the
prevailing BIR regulations relied upon by respondent ordained that
gold sales to the Central Bank were zero-rated. The BIR interpreted
Sec. 100 of the NIRC in relation to Sec. 2 of E.O. No. 581 s. 1980
which prescribed that gold sold to the Central Bank shall be
considered export and therefore shall be subject to the export and
premium duties. In coming out with this interpretation, the BIR also
considered Sec. 169 of Central Bank Circular No. 960 which states
that all sales of gold to the Central Bank are considered
constructive exports.45 Respondent should not be faulted for
relying on the BIR’s interpretation of the said laws and
regulations.46 While it is true, as petitioner alleges, that
government is not estopped from collecting taxes which remain
unpaid on account of the errors or mistakes of its agents and/or
officials and there could be no vested right arising from an
erroneous interpretation of law, these principles must give way to
exceptions based on and in keeping with the interest of justice and
fairplay, as has been done in the instant matter. For, it is primordial
that every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due,
and observe honesty and good faith.47
The case of ABS-CBN Broadcasting Corporation v. Court of Tax
Appeals48 involved a similar factual milieu. There the Commissioner
of Internal Revenue issued Memorandum Circular No. 4-71 revoking
an earlier circular for being "erroneous for lack of legal basis." When
the prior circular was still in effect, petitioner therein relied on it
and consummated its transactions on the basis thereof. We held,
thus:
suddenly, it found itself instead being made to pay deficiency taxes
with petitioner’s retroactive change in the VAT categorization of
respondent’s transactions with the Central Bank. This is the sort of
unjust treatment of a taxpayer which the law in Sec. 246 of the NIRC
abhors and forbids.

. . . .Petitioner was no longer in a position to withhold taxes due

from foreign corporations because it had already remitted all film WHEREFORE, the petition is DENIED for lack of merit. The Decision
rentals and no longer had any control over them when the new of the Court of Appeals is AFFIRMED. No pronouncement as to
Circular was issued. . . . costs.

.... SO ORDERED.

This Court is not unaware of the well-entrenched principle that the

[g]overnment is never estopped from collecting taxes because of
mistakes or errors on the part of its agents. But, like other principles
of law, this also admits of exceptions in the interest of justice and
fairplay. . . .In fact, in the United States, . . . it has been held that the
Commissioner [of Internal Revenue] is precluded from adopting a
position inconsistent with one previously taken where injustice
would result therefrom or where there has been a
misrepresentation to the taxpayer.49

Respondent, in this case, has similarly been put on the receiving end
of a grossly unfair deal. Before respondent was entitled to tax
refunds or credits based on petitioner’s own issuances. Then

92
G.R. No. 153205 January 22, 2007

The CTA summarized the facts, which the Court of Appeals adopted,
as follows:
COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
[Respondent] is a domestic corporation duly organized and existing
BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, under and by virtue of the laws of the Philippines with principal
INC., Respondent. address located at Daruma Building, Jose P. Laurel Avenue, Lanang,
Davao City.

DECISION
It is represented that a foreign consortium composed of Burmeister
and Wain Scandinavian Contractor A/S (BWSC-Denmark), Mitsui
CARPIO, J.: Engineering and Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered
into a contract with the National Power Corporation (NAPOCOR) for
the operation and maintenance of [NAPOCOR’s] two power barges.
The Case The Consortium appointed BWSC-Denmark as its coordination
manager.

This petition for review1 seeks to set aside the 16 April 2002
Decision2 of the Court of Appeals in CA-G.R. SP No. 66341 affirming
the 8 August 2001 Decision3 of the Court of Tax Appeals (CTA). The
CTA ordered the Commissioner of Internal Revenue (petitioner) to
issue a tax credit certificate for P6,994,659.67 in favor of Burmeister
and Wain Scandinavian Contractor Mindanao, Inc. (respondent).
BWSC-Denmark established [respondent] which subcontracted the
actual operation and maintenance of NAPOCOR’s two power barges
as well as the performance of other duties and acts which
necessarily have to be done in the Philippines.

NAPOCOR paid capacity and energy fees to the Consortium in a

The Antecedents mixture of currencies (Mark, Yen, and Peso). The freely convertible

93
non-Peso component is deposited directly to the Consortium’s bank
accounts in Denmark and Japan, while the Peso-denominated
component is deposited in a separate and special designated bank Qtr. Exh. Date Filed Zero-Rated Sales VAT Input
account in the Philippines. On the other hand, the Consortium pays Tax
[respondent] in foreign currency inwardly remitted to the 1st E 04-18-96 P 33,019,651.07
Philippines through the banking system. P608,953.48

2nd F 07-16-96 37,108,863.33 756,802.66

In order to ascertain the tax implications of the above transactions, 3rd G 10-14-96 34,196,372.35 930,279.14
[respondent] sought a ruling from the BIR which responded with BIR
Ruling No. 023-95 dated February 14, 1995, declaring therein that if 4th H 01-20-97 42,992,302.87 1,065,138.86
[respondent] chooses to register as a VAT person and the
Totals
consideration for its services is paid for in acceptable foreign
currency and accounted for in accordance with the rules and P147,317,189.62
regulations of the Bangko Sentral ng Pilipinas, the aforesaid services
shall be subject to VAT at zero-rate. P3,361,174.14

On December 29, 1997, [respondent] availed of the Voluntary

[Respondent] chose to register as a VAT taxpayer. On May 26, 1995,
the Certificate of Registration bearing RDO Control No. 95-113-
007556 was issued in favor of [respondent] by the Revenue District
Office No. 113 of Davao City.
Assessment Program (VAP) of the BIR. It allegedly misinterpreted
Revenue Regulations No. 5-96 dated February 20, 1996 to be
applicable to its case. Revenue Regulations No. 5-96 provides in part
thus:

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations

For the year 1996, [respondent] seasonably filed its quarterly Value- No. 7-95 are hereby amended to read as follows:
Added Tax Returns reflecting, among others, a total zero-rated sales
of P147,317,189.62 with VAT input taxes of P3,361,174.14, detailed
as follows:
Section 4.102-2(b)(2) – "Services other than processing,
manufacturing or repacking for other persons doing business

94
outside the Philippines for goods which are subsequently exported,
as well as services by a resident to a non-resident foreign client such
as project studies, information services, engineering and
architectural designs and other similar services, the consideration
for which is paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the BSP."
x x x x x x x x x x.
In [conformity] with the aforecited Revenue Regulations,
[respondent] subjected its sale of services to the Consortium to the
10% VAT in the total amount of P103,558,338.11 representing April
to December 1996 sales since said Revenue Regulations No. 5-96
became effective only on April 1996. The sum of P43,893,951.07,
representing January to March 1996 sales was subjected to zero
rate. Consequently, [respondent] filed its 1996 amended VAT return
consolidating therein the VAT output and input taxes for the four
calendar quarters of 1996. It paid the amount of P6,994,659.67
through BIR’s collecting agent, PCIBank, as its output tax liability for
the year 1996, computed as follows:
Amount subject to 10% VAT P103,558,338.11
Multiply by 10%
95
VAT Output Tax P 10,355,833.81
Less: 1996 Input VAT P 3,361,174.14
VAT Output Tax Payable P 6,994,659.67
On January 7,1999, [respondent] was able to secure VAT Ruling No.
003-99 from the VAT Review Committee which reconfirmed BIR
Ruling No. 023-95 "insofar as it held that the services being
rendered by BWSCMI is subject to VAT at zero percent (0%)."
On the strength of the aforementioned rulings, [respondent] on
April 22,1999, filed a claim for the issuance of a tax credit certificate
with Revenue District No. 113 of the BIR. [Respondent] believed
that it erroneously paid the output VAT for 1996 due to its
availment of the Voluntary Assessment Program (VAP) of the BIR.4
On 27 December 1999, respondent filed a petition for review with
the CTA in order to toll the running of the two-year prescriptive
period under the Tax Code.
The Ruling of the Court of Tax Appeals
In its 8 August 2001 Decision, the CTA ordered petitioner to issue a
tax credit certificate for P6,994,659.67 in favor of respondent. The
CTA’s ruling stated:
[Respondent’s] sale of services to the Consortium [was] paid for in
acceptable foreign currency inwardly remitted to the Philippines
and accounted for in accordance with the rules and regulations of
Bangko Sentral ng Pilipinas. These were established by various BPI
Credit Memos showing remittances in Danish Kroner (DKK) and US
dollars (US$) as payments for the specific invoices billed by
[respondent] to the consortium. These remittances were further
certified by the Branch Manager x x x of BPI-Davao Lanang Branch
to represent payments for sub-contract fees that came from Den
Danske Aktieselskab Bank-Denmark for the account of [respondent].
Clearly, [respondent’s] sale of services to the Consortium is subject
to VAT at 0% pursuant to Section 108(B)(2) of the Tax Code.
xxxx
The zero-rating of [respondent’s] sale of services to the Consortium
was even confirmed by the [petitioner] in BIR Ruling No. 023-95
dated February 15, 1995, and later by VAT Ruling No. 003-99 dated
January 7,1999, x x x.
96
Since it is apparent that the payments for the services rendered by
[respondent] were indeed subject to VAT at zero percent, it follows
that it mistakenly availed of the Voluntary Assessment Program by
paying output tax for its sale of services. x x x
x x x Considering the principle of solutio indebiti which requires the
return of what has been delivered by mistake, the [petitioner] is
obligated to issue the tax credit certificate prayed for by
[respondent]. x x x5
Petitioner filed a petition for review with the Court of Appeals,
which dismissed the petition for lack of merit and affirmed the CTA
decision.6
Hence, this petition.
The Court of Appeals’ Ruling
In affirming the CTA, the Court of Appeals rejected petitioner’s view
that since respondent’s services are not destined for consumption
abroad, they are not of the same nature as project studies,
information services, engineering and architectural designs, and
other similar services mentioned in Section 4.102-2(b)(2) of
Revenue Regulations No. 5-967 as subject to 0% VAT. Thus,
according to petitioner, respondent’s services cannot legally qualify
for 0% VAT but are subject to the regular 10% VAT.8
The Court of Appeals found untenable petitioner’s contention that
under VAT Ruling No. 040-98, respondent’s services should be
destined for consumption abroad to enjoy zero-rating. Contrary to
petitioner’s interpretation, there are two kinds of transactions or
services subject to zero percent VAT under VAT Ruling No. 040-98.
These are (a) services other than repacking goods for other persons
doing business outside the Philippines which goods are
subsequently exported; and (b) services by a resident to a non-
resident foreign client, such as project studies, information services,
engineering and architectural designs and other similar services, the
consideration for which is paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP).9
The Court of Appeals stated that "only the first classification is
required by the provision to be consumed abroad in order to be
taxed at zero rate. In x x x the absence of such express or implied
stipulation in the statute, the second classification need not be
consumed abroad."10
97
The Court of Appeals further held that assuming petitioner’s
interpretation of Section 4.102-2(b)(2) of Revenue Regulations No.
5-96 is correct, such administrative provision is void being an
amendment to the Tax Code. Petitioner went beyond merely
providing the implementing details by adding another requirement
to zero-rating. "This is indicated by the additional phrase ‘as well as
services by a resident to a non-resident foreign client, such as
project studies, information services and engineering and
architectural designs and other similar services.’ In effect, this
phrase adds not just one but two requisites: (a) services must be
rendered by a resident to a non-resident; and (b) these must be in
the nature of project studies, information services, etc."11
The Court of Appeals explained that under Section 108(b)(2) of the
Tax Code,12 for services which were performed in the Philippines to
enjoy zero-rating, these must comply only with two requisites, to
wit: (1) payment in acceptable foreign currency and (2) accounted
for in accordance with the rules of the BSP. Section 108(b)(2) of the
Tax Code does not provide that services must be "destined for
consumption abroad" in order to be VAT zero-rated.13
The Court of Appeals disagreed with petitioner’s argument that our
VAT law generally follows the destination principle (i.e., exports
exempt, imports taxable).14 The Court of Appeals stated that "if
indeed the ‘destination principle’ underlies and is the basis of the
VAT laws, then petitioner’s proper remedy would be to recommend
an amendment of Section 108(b)(2) to Congress. Without such
amendment, however, petitioner should apply the terms of the
basic law. Petitioner could not resort to administrative legislation,
as what [he] had done in this case."15
The Issue
The lone issue for resolution is whether respondent is entitled to
the refund of P6,994,659.67 as erroneously paid output VAT for the
year 1996.16
The Ruling of the Court
We deny the petition.
At the outset, the Court declares that the denial of the instant
petition is not on the ground that respondent’s services are subject
to 0% VAT. Rather, it is based on the non-retroactivity of the
prejudicial revocation of BIR Ruling No. 023-9517 and VAT Ruling
No. 003-99,18 which held that respondent’s services are subject to
0% VAT and which respondent invoked in applying for refund of the
output VAT.
98
Section 102(b) of the Tax Code,19 the applicable provision in 1996
when respondent rendered the services and paid the VAT in
question, enumerates which services are zero-rated, thus:
(b) Transactions subject to zero-rate. ― The following services
performed in the Philippines by VAT-registered persons shall be
subject to 0%:
(1) Processing, manufacturing or repacking goods for other persons
doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding sub-
paragraph, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose exemption under
special laws or international agreements to which the Philippines is
a signatory effectively subjects the supply of such services to zero
rate;
(4) Services rendered to vessels engaged exclusively in international
shipping; and
(5) Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an enterprise
whose export sales exceed seventy percent (70%) of total annual
production. (Emphasis supplied)
In insisting that its services should be zero-rated, respondent claims
that it complied with the requirements of the Tax Code for zero
rating under the second paragraph of Section 102(b). Respondent
asserts that (1) the payment of its service fees was in acceptable
foreign currency, (2) there was inward remittance of the foreign
currency into the Philippines, and (3) accounting of such remittance
was in accordance with BSP rules. Moreover, respondent contends
that its services which "constitute the actual operation and
management of two (2) power barges in Mindanao" are not "even
remotely similar to project studies, information services and
engineering and architectural designs under Section 4.102-2(b)(2) of
Revenue Regulations No. 5-96." As such, respondent’s services need
not be "destined to be consumed abroad in order to be VAT zero-
rated."
Respondent is mistaken.
99
The Tax Code not only requires that the services be other than
"processing, manufacturing or repacking of goods" and that
payment for such services be in acceptable foreign currency
accounted for in accordance with BSP rules. Another essential
condition for qualification to zero-rating under Section 102(b)(2) is
that the recipient of such services is doing business outside the
Philippines. While this requirement is not expressly stated in the
second paragraph of Section 102(b), this is clearly provided in the
first paragraph of Section 102(b) where the listed services must be
"for other persons doing business outside the Philippines." The
phrase "for other persons doing business outside the Philippines"
not only refers to the services enumerated in the first paragraph of
Section 102(b), but also pertains to the general term "services"
appearing in the second paragraph of Section 102(b). In short,
services other than processing, manufacturing, or repacking of
goods must likewise be performed for persons doing business
outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2). If the
provider and recipient of the "other services" are both doing
business in the Philippines, the payment of foreign currency is
irrelevant. Otherwise, those subject to the regular VAT under
Section 102(a) can avoid paying the VAT by simply stipulating
payment in foreign currency inwardly remitted by the recipient of
services. To interpret Section 102(b)(2) to apply to a payer-recipient
of services doing business in the Philippines is to make the payment
of the regular VAT under Section 102(a) dependent on the
generosity of the taxpayer. The provider of services can choose to
pay the regular VAT or avoid it by stipulating payment in foreign
currency inwardly remitted by the payer-recipient. Such
interpretation removes Section 102(a) as a tax measure in the Tax
Code, an interpretation this Court cannot sanction. A tax is a
mandatory exaction, not a voluntary contribution.
When Section 102(b)(2) stipulates payment in "acceptable foreign
currency" under BSP rules, the law clearly envisions the payer-
recipient of services to be doing business outside the Philippines.
Only those not doing business in the Philippines can be required
under BSP rules20 to pay in acceptable foreign currency for their
purchase of goods or services from the Philippines. In a domestic
transaction, where the provider and recipient of services are both
doing business in the Philippines, the BSP cannot require any party
to make payment in foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature of
export sales since the payer-recipient of services is doing business
outside the Philippines. Under BSP rules,21 the proceeds of export
sales must be reported to the Bangko Sentral ng Pilipinas. Thus,
there is reason to require the provider of services under Section
102(b) (1) and (2) to account for the foreign currency proceeds to
the BSP. The same rationale does not apply if the provider and
recipient of the services are both doing business in the Philippines
since their transaction is not in the nature of an export sale even if
payment is denominated in foreign currency.
100
Further, when the provider and recipient of services are both doing
business in the Philippines, their transaction falls squarely under
Section 102(a) governing domestic sale or exchange of services.
Indeed, this is a purely local sale or exchange of services subject to
the regular VAT, unless of course the transaction falls under the
other provisions of Section 102(b).
Thus, when Section 102(b)(2) speaks of "[s]ervices other than those
mentioned in the preceding subparagraph," the legislative intent is
that only the services are different between subparagraphs 1 and 2.
The requirements for zero-rating, including the essential condition
that the recipient of services is doing business outside the
Philippines, remain the same under both subparagraphs.
Significantly, the amended Section 108(b)22 [previously Section
102(b)] of the present Tax Code clarifies this legislative intent.
Expressly included among the transactions subject to 0% VAT are
"[s]ervices other than those mentioned in the [first] paragraph [of
Section 108(b)] rendered to a person engaged in business
conducted outside the Philippines or to a nonresident person not
engaged in business who is outside the Philippines when the
services are performed, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the BSP."
In this case, the payer-recipient of respondent’s services is the
Consortium which is a joint-venture doing business in the
Philippines. While the Consortium’s principal members are non-
resident foreign corporations, the Consortium itself is doing
business in the Philippines. This is shown clearly in BIR Ruling No.
023-95 which states that the contract between the Consortium and
NAPOCOR is for a 15-year term, thus:
This refers to your letter dated January 14, 1994 requesting for a
clarification of the tax implications of a contract between a
consortium composed of Burmeister & Wain Scandinavian
Contractor A/S ("BWSC"), Mitsui Engineering & Shipbuilding, Ltd.
(MES), and Mitsui & Co., Ltd. ("MITSUI"), all referred to hereinafter
as the "Consortium", and the National Power Corporation
("NAPOCOR") for the operation and maintenance of two 100-
Megawatt power barges ("Power Barges") acquired by NAPOCOR
for a 15-year term.23 (Emphasis supplied)
Considering this length of time, the Consortium’s operation and
maintenance of NAPOCOR’s power barges cannot be classified as a
single or isolated transaction. The Consortium does not fall under
Section 102(b)(2) which requires that the recipient of the services
must be a person doing business outside the Philippines. Therefore,
respondent’s services to the Consortium, not being supplied to a
person doing business outside the Philippines, cannot legally qualify
for 0% VAT.
101
Respondent, as subcontractor of the Consortium, operates and
maintains NAPOCOR’s power barges in the Philippines. NAPOCOR
pays the Consortium, through its non-resident partners, partly in
foreign currency outwardly remitted. In turn, the Consortium pays
respondent also in foreign currency inwardly remitted and
accounted for in accordance with BSP rules. This payment scheme
does not entitle respondent to 0% VAT. As the Court held in
Commissioner of Internal Revenue v. American Express
International, Inc. (Philippine Branch),24 the place of payment is
immaterial, much less is the place where the output of the service is
ultimately used. An essential condition for entitlement to 0% VAT
under Section 102(b)(1) and (2) is that the recipient of the services
is a person doing business outside the Philippines. In this case, the
recipient of the services is the Consortium, which is doing business
not outside, but within the Philippines because it has a 15-year
contract to operate and maintain NAPOCOR’s two 100-megawatt
power barges in Mindanao.
The Court recognizes the rule that the VAT system generally follows
the "destination principle" (exports are zero-rated whereas imports
are taxed). However, as the Court stated in American Express, there
is an exception to this rule.25 This exception refers to the 0% VAT
on services enumerated in Section 102 and performed in the
Philippines. For services covered by Section 102(b)(1) and (2), the
recipient of the services must be a person doing business outside
the Philippines. Thus, to be exempt from the destination principle
under Section 102(b)(1) and (2), the services must be (a) performed
in the Philippines; (b) for a person doing business outside the
Philippines; and (c) paid in acceptable foreign currency accounted
for in accordance with BSP rules.
Respondent’s reliance on the ruling in American Express26 is
misplaced. That case involved a recipient of services, specifically
American Express International, Inc. (Hongkong Branch), doing
business outside the Philippines. There, the Court stated:
Respondent [American Express International, Inc. (Philippine
Branch)] is a VAT-registered person that facilitates the collection
and payment of receivables belonging to its non-resident foreign
client [American Express International, Inc. (Hongkong Branch)], for
which it gets paid in acceptable foreign currency inwardly remitted
and accounted for in accordance with BSP rules and regulations. x x
x x27 (Emphasis supplied)
In contrast, this case involves a recipient of services – the
Consortium – which is doing business in the Philippines. Hence,
American Express’ services were subject to 0% VAT, while
respondent’s services should be subject to 10% VAT.
Nevertheless, in seeking a refund of its excess output tax,
respondent relied on VAT Ruling No. 003-99,28 which reconfirmed
BIR Ruling No. 023-9529 "insofar as it held that the services being
102
rendered by BWSCMI is subject to VAT at zero percent (0%)."
Respondent’s reliance on these BIR rulings binds petitioner.
Petitioner’s filing of his Answer before the CTA challenging
respondent’s claim for refund effectively serves as a revocation of
VAT Ruling No. 003-99 and BIR Ruling No. 023-95. However, such
revocation cannot be given retroactive effect since it will prejudice
respondent. Changing respondent’s status will deprive respondent
of a refund of a substantial amount representing excess output
tax.30 Section 246 of the Tax Code provides that any revocation of a
ruling by the Commissioner of Internal Revenue shall not be given
retroactive application if the revocation will prejudice the taxpayer.
Further, there is no showing of the existence of any of the
exceptions enumerated in Section 246 of the Tax Code for the
retroactive application of such revocation.
However, upon the filing of petitioner’s Answer dated 2 March 2000
before the CTA contesting respondent’s claim for refund,
respondent’s services shall be subject to the regular 10% VAT.31
Such filing is deemed a revocation of VAT Ruling No. 003-99 and BIR
Ruling No. 023-95.
WHEREFORE, the Court DENIES the petition.
SO ORDERED.
G.R. No. L-29485 November 21, 1980
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
AYALA SECURITIES CORPORATION and THE HONORABLE COURT OF
TAX APPEALS, respondents.
TEEHANKEE, J.:
Before the Court is petitioner Commissioner of Internal Revenue's
motion for reconsideration of the Court's decision of April 8, 1976
wherein the Court affirmed in toto the appealed decision of
respondent Court of Tax Appeals, the dispositive portion of which
provides as follows:
WHEREFORE, the decision of the respondent Commissioner of
Internal Revenue assessing petitioner the amount of P758,687.04 as
25% surtax and interest is reversed. Accordingly, said assessment of
respondent for 1955 is hereby cancelled and declared of no force
and effect, Without pronouncement as to costs.
103
This Court's decision under reconsideration held that the
assessment made on February 21, 1961 by petitioner against
respondent corporation (and received by the latter on March 22,
1961) in the sum of P758,687.04 on its surplus of P2,758,442.37 for
its fiscal year ending September 30, 1955 fell under the five-year
prescriptive period provided in section 331 of the National Internal
Revenue Code and that the assessment had, therefore, been made
after the expiration of the said five-year prescriptive period and was
of no binding force and effect .
Petitioner has urged that
A perusal of Sections 331 and 332(a) will reveal that they refer to a
tax, the basis of which is required by law to be reported in a return
such as for example, income tax or sales tax. However, the surtax
imposed by Section 25 of the Tax Code is not one such tax.
Accumulated surplus are never returned for tax purposes, as there
is no law requiring that such surplus be reported in a return for
purposes of the 25% surtax. In fact, taxpayers resort to all means
and devices to cover up the fact that they have unreasonably
accumulated surplus.
Petitioner, therefore, submits that
As there is no law requiring taxpayers to file returns of their
accumulated surplus, it is obvious that neither Section 33 nor
Section 332(a) of the Tax Code applies in a case involving the 25%
surtax imposed by Section 25 of the Tax Code. ...
Petitioner cites the Court of Tax Appeals' ruling in the earlier case of
United Equipment & Supply Company vs. Commissioner of Internal
Revenue (CTA Case No. 1795, October 30, 1971) which was
appealed by petitioner taxpayer to this Court in G. R. No. L-35653
bearing the same title, which appeal was denied by this Court en
banc for lack of merit as per its Resolution of October 25, 1972, In
said case, the tax court squarely ruled that the provisions of
sections 331 and 332 of the National Internal Revenue Code for
prescriptive periods of five 5 and ten (10) years after the filing of the
return do not apply to the tax on the taxpayer's unreasonably
accumulated surplus under section 25 of the Tax Code since no
return is required to be filed by law or by regulation on such unduly
ac cumulated surplus on earnings, reasoning as follows:
In resisting the assessment amounting to P10,864.26 as
accumulated earnings tax for 1957, petitioner also invoked the
defense of prescription against the right of respondent to assess the
said tax. It is contended that since its income tax return for 1957
was filed in 1958, and with the clarification by respondent in his
letter dated May 14, 1963, that the amount sought to be collected
was petitioner's surtax liability under Section 25 rather than
deficiency corporate income tax under Section 24 of the National
104
Internal Revenue Code, the assessment has already prescribed
under Section 331 of the same Code.
Section 331 of the Revenue Code provides:
SEC. 331. Period of limitation upon assessment and collection. —
Except as provided in the succeeding section, internal revenue taxes
shall be assessed within five years after the return was filed, and no
proceeding in court without assessment for the collection of such
taxes shall be begun after the expiration of such period. For the
purpose of this section a return filed before the last day prescribed
by law for the filing thereof shall be considered as filed on such last
day; Provided, That this limitation shall not apply to cases already
investigated prior to the approval of this Code.
Obviously, Section 331 applies to, assessment of National Internal
Revenue Taxes which requires the filing of returns. A return, the
filing of which is necessary to start the running of tile five-year
period for making an assessment, must be one which is required for
the particular tax. Consequently, it has been held that the filing of
an income tax return does not start the running of the statute of
limitation for assessment of the sales tax. (Butuan Sawmill, Inc. v.
Court of Tax Appeals, G.R. No. L-20601, Feb. 28, 1966, 16 SCRA 277).
Although petitioner filed an income tax return, no return was filed
covering its surplus profits which were improperly accumulated. In
fact, no return could have been filed, and the law could not possibly
require, for obvious reasons, the filing of a return covering
unreasonable accumulation of corporate surplus profits. A tax
imposed upon unreasonable accumulation of surplus is in the
nature of a penalty. (Helvering v. National Grocery Co., 304 U.S.
282). It would not be proper for the law to compel a corporation to
report improper accumulation of surplus. Accordingly, Section 331
limiting the right to assess internal revenue taxes within five years
from the date the return was filed or was due does not apply.
Neither does Section 332 apply. Said Section provides:
SEC. 332 Exceptions as to period of limitation of assessment and
collection of taxes.— (a) In the case of a false or fraudulent return
with intent to evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such tax may
be begun without assessment, at any time within ten years after the
discovery of the falsity, fraud, or omission.
(b) Where before the expiration of the time prescribed in the
preceding section for the assessment of the tax, both the
Commissioner of Internal Revenue and the taxpayer have consented
in writing to its assessment after such time, the tax may be assessed
at any time prior to the expiration of the period agreed upon. The
105
period so agreed upon may be extended by subsequent agreements
in writing made before the expiration of the period previously
agreed upon.
(c) Where the assessment of any internal revenue tax has been
made within the period of limitation above-prescribed such tax may
be collected by distraint or levy by a proceeding in court, but only if
begun (1) within five years after the assessment of the tax, or (2)
prior to the expiration of any period for collection agreed upon in
writing by the Commissioner of Internal Revenue and the taxpayer
before the expiration of such five-year period. The period so agreed
upon may be extended by subsequent agreements in writing made
before the expiration of the period previously agreed upon.
It will be noted that Section 332 has reference to national internal
revenue taxes which require the filing of returns. This is implied,
from the provision that the ten-year period for assessment specified
therein treats of the filing of a false or fraudulent return or of a
failure to file a return. There can be no failure or omission to file a
return where no return is required to be filed by law or by
regulation. It is, therefore, our opinion that the ten-year period for
making in assessment under Section 332 does not apply to internal
revenue taxes which do not require the filing of a return.
It is well settled limitations upon the right of the government to
assess and collect taxes will not be presumed in the absence of clear
legislation to the contrary. The existence of a time limit beyond
which the government may recover unpaid taxes is purely
dependent upon some express statutory provision, (51 Am. Jur. 867;
10 Mertens Law of Federal Income Taxation, par. 57. 02.). It follows
that in the absence of express statutory provision, the right of the
government to assess unpaid taxes is imprescriptible. Since there is
no express statutory provision limiting the right of the
Commissioner of Internal Revenue to assess the tax on
unreasonable accumulation of surplus provided in Section 25 of the
Revenue Code, said tax may be assessed at any time. (Emphasis
supplied)
Such ruling was in effect upheld by this Court en banc upon its
dismissal of the taxpayer's appeal for lack of merit as above stated.
The Court is persuaded by the fundamental principle invoked by
petitioner that limitations upon the right of the government to
assess and collect taxes will not be presumed in the absence of clear
legislation to the contrary and that where the government has not
by express statutory provision provided a limitation upon its right to
assess unpaid taxes, such right is imprescriptible.
The Court, therefore, reconsiders its ruling in its decision under
reconsideration that the right to assess and collect the assessment
in question had prescribed after five years, and instead rules that
there is no such time limit on the right of the Commissioner of
106
Internal Revenue to assess the 25% tax on unreasonably
accumulated surplus provided in section 25 of the Tax Code, since
there is no express statutory provision limiting such right or
providing for its prescription. The underlying purpose of the
additional tax in question on a corporation's improperly
accumulated profits or surplus is as set forth in the text of section
25 of the Tax Code itself 1 to avoid the situation where a
corporation unduly retains its surplus instead of declaring and
paving dividends to its shareholders or members who would then
have to pay the income tax due on such dividends received by them.
The record amply shows that respondent corporation is a mere
holding company of its shareholders through its mother company, a
registered co-partnership then set up by the individual shareholders
belonging to the same family and that the prima facie evidence and
presumption set up by the Tax Code, therefore applied without
having been adequately rebutted by the respondent corporation.
Thus, Mr. Lamberto J. Cabral, the accountant of the corporation,
testified before the court as follows:
Atty. Garces
The investigation, Your Honor, shows that for the year 1955, the
Ayala Securities Corporation had 175,000 outstanding shares of
stock and out of these shares of Ayala Securities Corporation, the
Ayala and Company owned 174,996 shares of stock.
 Witness may answer.

Q. Is that right, Mr. Cabral?

A. I think so; yes.

Atty. Ong

Q. And Ayala and Company's owned almost wholly by the Zobel

Family and the Ayala Family?
Objection, Your Honor, on the materiality of the question.

Atty. Ong
Judge Alvarez

If Your Honor please, objection again on the materiality. What

What is the materiality of the question? would counsel for the respondent prove on this point?

Atty. Garces Atty. Garces

We want to prove to this honorable Court that Ayala Securities Same purpose, Your If Honor to prove that Ayala Securities
Corporation is a holding or investment company, the parent corporation is a mere investment or holding company
company being Ayala and Company.

Atty. Ong
Judge Alvarez

107
What is the materiality of the case if it is a mere investment
company. In fact, we are here in court to prove the reasonableness
or unreasonableness of the accumulation of profit. I think counsel
for the respondent is trying to harp on presumption; but actually we
will not be delving on presumption but on actual facts proving the
reasonableness of the accumulation based on actual evidence.
Judge Alvarez
In order to determine the reasonableness or unreasonableness,
there must be a basis. witness will have to answer the question.
A. Yes.
xxx xxx xxx
Q. As of September 30, 1955 when the Ayala Securities Corporation
tiled its income tax return, were the officers of the Ayala Securities
Corporation and the Ayala and Company housed in the same
building?
A. Yes, sir; they were.
108
Q. And also are the employees of the Ayala Securities corporation
and the Ayala and Company the same - meaning that the employees
of the Ayala Securities Corporation are also the employees of the
Ayala and Company?
A. At the time, if I remember right, Ayala and Company was the
operating company and the employees were the employees of the
Ayala and Company; (t.s.n., pp. 32-37).
Another witness, Mr. Salvador J. Lorayes the Secretary and head of
the Legal Department of the corporation, also testified that:
Judge Alvarez questions
Q. May we know from you whether Ayala Securities corporation is
an affiliate of Ayala and Company?
A. Yes, Your honor.
Q. Do we understand from you that Ayala and Company is the
mother corporation of this affiliate?

A. That is correct.
Q. And that the policy of Ayala Securities Corporation is practically
governed by the officers or partners of Ayala and company
A. They have a strong influence over the policy of Ayala Securities
Corporation.
Q. So that whatever is decided by the partners of Ayala and
Company for a certain investment or project would also be followed
by Ayala Securities Corporation?
A. If the project is assigned to Ayala Securities Corporation it will be
followed by Ayala Securities Corporation; if to another affiliate, no
(t.s.n., pp. 149-150). ...
Respondent corporation was therefore fully shown to fall under
Revenue Regulation No. 2 implementing the provisions of the
income tax law which provides on holding and investment
companies that
109
SEC. 20. Holding and Investment Companies. — A corporation
having practically no activities except holding property, and
collecting the income therefrom or investing therein, shall be
considered a holding company within the meaning of section 25.
Petitioner commissioner's plausible alternative contention is that
even if the 25% surtax were to be deemed subject to prescription,
computed from the filing of the income tax return in 1955, the
intent to evade payment of the surtax is an inherent quality of the
violation and the return filed must necessarily partake of a false
and/or fraudulent character which would make applicable the 10-
year prescriptive period provided in section 332(a) of the Tax Code
and since the assessment was made in 1961 (the sixth year), the
assessment was clearly within the 10-year prescriptive period. The
Court sees no necessity, however, for ruling on this point in view of
its adherence to the ruling in the earlier raise of United Equipment
& Supply Co., supra, holding that the 25% surtax is not subject to
any statutory prescriptive period.
ACCORDINGLY, the Court's decision of April 8, 1976 is set aside and
in lieu thereof, judgment is hereby rendered ordering respondent
corporation to pay the assessment in the sum of P758,687.04 as
25% surtax on its unreasonably accumulated surplus, plus the 5%
surcharge and 1% monthly interest thereon, pursuant to section 51
(e) of the National Internal Revenue Code, as amended by R. A.
2343. With Costs.
G.R. No. L-31156 February 27, 1976 municipalities under the Local Autonomy Act (Republic Act No.
2264, as amended, June 19, 1959).

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC.,

plaintiff-appellant, On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling
Company of the Philippines, Inc., commenced a complaint with
vs. preliminary injunction before the Court of First Instance of Leyte for
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET that court to declare Section 2 of Republic Act No. 2264.1 otherwise
AL., defendant appellees. known as the Local Autonomy Act, unconstitutional as an undue
delegation of taxing authority as well as to declare Ordinances Nos.
23 and 27, series of 1962, of the municipality of Tanauan, Leyte, null
and void.
Sabido, Sabido & Associates for appellant.

On July 23, 1963, the parties entered into a Stipulation of Facts, the
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal
material portions of which state that, first, both Ordinances Nos. 23
Bonifacio R Matol and Assistant Solicitor General Conrado T.
and 27 embrace or cover the same subject matter and the
Limcaoco & Solicitor Enrique M. Reyes for appellees.
production tax rates imposed therein are practically the same, and
second, that on January 17, 1963, the acting Municipal Treasurer of
Tanauan, Leyte, as per his letter addressed to the Manager of the
Pepsi-Cola Bottling Plant in said municipality, sought to enforce
compliance by the latter of the provisions of said Ordinance No. 27,
MARTIN, J.:
series of 1962.

This is an appeal from the decision of the Court of First Instance of

Municipal Ordinance No. 23, of Tanauan, Leyte, which was
Leyte in its Civil Case No. 3294, which was certified to Us by the
approved on September 25, 1962, levies and collects "from soft
Court of Appeals on October 6, 1969, as involving only pure
drinks producers and manufacturers a tai of one-sixteenth (1/16) of
questions of law, challenging the power of taxation delegated to
a centavo for every bottle of soft drink corked." 2 For the purpose of

110
computing the taxes due, the person, firm, company or corporation From this judgment, the plaintiff Pepsi-Cola Bottling Company
producing soft drinks shall submit to the Municipal Treasurer a appealed to the Court of Appeals, which, in turn, elevated the case
monthly report, of the total number of bottles produced and corked to Us pursuant to Section 31 of the Judiciary Act of 1948, as
during the month. 3 amended.

On the other hand, Municipal Ordinance No. 27, which was There are three capital questions raised in this appeal:
approved on October 28, 1962, levies and collects "on soft drinks
produced or manufactured within the territorial jurisdiction of this
municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid 1. — Is Section 2, Republic Act No. 2264 an undue delegation of
ounces, U.S.) of volume capacity." 4 For the purpose of computing power, confiscatory and oppressive?
the taxes due, the person, fun company, partnership, corporation or
plant producing soft drinks shall submit to the Municipal Treasurer a
monthly report of the total number of gallons produced or
2. — Do Ordinances Nos. 23 and 27 constitute double taxation and
manufactured during the month. 5
impose percentage or specific taxes?

The tax imposed in both Ordinances Nos. 23 and 27 is denominated

3. — Are Ordinances Nos. 23 and 27 unjust and unfair?
as "municipal production tax.'

1. The power of taxation is an essential and inherent attribute of

On October 7, 1963, the Court of First Instance of Leyte rendered
sovereignty, belonging as a matter of right to every independent
judgment "dismissing the complaint and upholding the
government, without being expressly conferred by the people. 6 It is
constitutionality of [Section 2, Republic Act No. 2264] declaring
a power that is purely legislative and which the central legislative
Ordinance Nos. 23 and 27 legal and constitutional; ordering the
body cannot delegate either to the executive or judicial department
plaintiff to pay the taxes due under the oft the said Ordinances; and
of the government without infringing upon the theory of separation
to pay the costs."
of powers. The exception, however, lies in the case of municipal
corporations, to which, said theory does not apply. Legislative

111
powers may be delegated to local governments in respect of
matters of local concern. 7 This is sanctioned by immemorial
practice. 8 By necessary implication, the legislative power to create
political corporations for purposes of local self-government carries
with it the power to confer on such local governmental agencies the
power to tax. 9 Under the New Constitution, local governments are
granted the autonomous authority to create their own sources of
revenue and to levy taxes. Section 5, Article XI provides: "Each local
government unit shall have the power to create its sources of
revenue and to levy taxes, subject to such limitations as may be
provided by law." Withal, it cannot be said that Section 2 of
Republic Act No. 2264 emanated from beyond the sphere of the
legislative power to enact and vest in local governments the power
of local taxation.
The plenary nature of the taxing power thus delegated, contrary to
plaintiff-appellant's pretense, would not suffice to invalidate the
said law as confiscatory and oppressive. In delegating the authority,
the State is not limited 6 the exact measure of that which is
exercised by itself. When it is said that the taxing power may be
delegated to municipalities and the like, it is meant that there may
be delegated such measure of power to impose and collect taxes as
the legislature may deem expedient. Thus, municipalities may be
permitted to tax subjects which for reasons of public policy the
State has not deemed wise to tax for more general purposes. 10
This is not to say though that the constitutional injunction against
deprivation of property without due process of law may be passed
over under the guise of the taxing power, except when the taking of
the property is in the lawful exercise of the taxing power, as when
112
(1) the tax is for a public purpose; (2) the rule on uniformity of
taxation is observed; (3) either the person or property taxed is
within the jurisdiction of the government levying the tax; and (4) in
the assessment and collection of certain kinds of taxes notice and
opportunity for hearing are provided. 11 Due process is usually
violated where the tax imposed is for a private as distinguished
from a public purpose; a tax is imposed on property outside the
State, i.e., extraterritorial taxation; and arbitrary or oppressive
methods are used in assessing and collecting taxes. But, a tax does
not violate the due process clause, as applied to a particular
taxpayer, although the purpose of the tax will result in an injury
rather than a benefit to such taxpayer. Due process does not
require that the property subject to the tax or the amount of tax to
be raised should be determined by judicial inquiry, and a notice and
hearing as to the amount of the tax and the manner in which it shall
be apportioned are generally not necessary to due process of law.
12
There is no validity to the assertion that the delegated authority can
be declared unconstitutional on the theory of double taxation. It
must be observed that the delegating authority specifies the
limitations and enumerates the taxes over which local taxation may
not be exercised. 13 The reason is that the State has exclusively
reserved the same for its own prerogative. Moreover, double
taxation, in general, is not forbidden by our fundamental law, since
We have not adopted as part thereof the injunction against double
taxation found in the Constitution of the United States and some
states of the Union.14 Double taxation becomes obnoxious only
where the taxpayer is taxed twice for the benefit of the same
governmental entity 15 or by the same jurisdiction for the same
purpose, 16 but not in a case where one tax is imposed by the State
and the other by the city or municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27
constitute double taxation, because these two ordinances cover the
same subject matter and impose practically the same tax rate. The
thesis proceeds from its assumption that both ordinances are valid
and legally enforceable. This is not so. As earlier quoted, Ordinance
No. 23, which was approved on September 25, 1962, levies or
collects from soft drinks producers or manufacturers a tax of one-
sixteen (1/16) of a centavo for .every bottle corked, irrespective of
the volume contents of the bottle used. When it was discovered
that the producer or manufacturer could increase the volume
contents of the bottle and still pay the same tax rate, the
Municipality of Tanauan enacted Ordinance No. 27, approved on
October 28, 1962, imposing a tax of one centavo (P0.01) on each
gallon (128 fluid ounces, U.S.) of volume capacity. The difference
between the two ordinances clearly lies in the tax rate of the soft
drinks produced: in Ordinance No. 23, it was 1/16 of a centavo for
every bottle corked; in Ordinance No. 27, it is one centavo (P0.01)
on each gallon (128 fluid ounces, U.S.) of volume capacity. The
intention of the Municipal Council of Tanauan in enacting Ordinance
No. 27 is thus clear: it was intended as a plain substitute for the
prior Ordinance No. 23, and operates as a repeal of the latter, even
without words to that effect. 18 Plaintiff-appellant in its brief
admitted that defendants-appellees are only seeking to enforce
Ordinance No. 27, series of 1962. Even the stipulation of facts
confirms the fact that the Acting Municipal Treasurer of Tanauan,
113
Leyte sought t6 compel compliance by the plaintiff-appellant of the
provisions of said Ordinance No. 27, series of 1962. The
aforementioned admission shows that only Ordinance No. 27, series
of 1962 is being enforced by defendants-appellees. Even the
Provincial Fiscal, counsel for defendants-appellees admits in his
brief "that Section 7 of Ordinance No. 27, series of 1962 clearly
repeals Ordinance No. 23 as the provisions of the latter are
inconsistent with the provisions of the former."
That brings Us to the question of whether the remaining Ordinance
No. 27 imposes a percentage or a specific tax. Undoubtedly, the
taxing authority conferred on local governments under Section 2,
Republic Act No. 2264, is broad enough as to extend to almost
"everything, accepting those which are mentioned therein." As long
as the text levied under the authority of a city or municipal
ordinance is not within the exceptions and limitations in the law,
the same comes within the ambit of the general rule, pursuant to
the rules of exclucion attehus and exceptio firmat regulum in
cabisus non excepti 19 The limitation applies, particularly, to the
prohibition against municipalities and municipal districts to impose
"any percentage tax or other taxes in any form based thereon nor
impose taxes on articles subject to specific tax except gasoline,
under the provisions of the National Internal Revenue Code." For
purposes of this particular limitation, a municipal ordinance which
prescribes a set ratio between the amount of the tax and the
volume of sale of the taxpayer imposes a sales tax and is null and
void for being outside the power of the municipality to enact. 20
But, the imposition of "a tax of one centavo (P0.01) on each gallon
(128 fluid ounces, U.S.) of volume capacity" on all soft drinks
produced or manufactured under Ordinance No. 27 does not
partake of the nature of a percentage tax on sales, or other taxes in
any form based thereon. The tax is levied on the produce (whether
sold or not) and not on the sales. The volume capacity of the
taxpayer's production of soft drinks is considered solely for
purposes of determining the tax rate on the products, but there is
not set ratio between the volume of sales and the amount of the
tax.21
Nor can the tax levied be treated as a specific tax. Specific taxes are
those imposed on specified articles, such as distilled spirits, wines,
fermented liquors, products of tobacco other than cigars and
cigarettes, matches firecrackers, manufactured oils and other fuels,
coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing
cards, saccharine, opium and other habit-forming drugs. 22 Soft
drink is not one of those specified.
3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity on all softdrinks, produced or manufactured, or an
equivalent of 1-½ centavos per case, 23 cannot be considered unjust
and unfair. 24 an increase in the tax alone would not support the
claim that the tax is oppressive, unjust and confiscatory. Municipal
corporations are allowed much discretion in determining the reates
of imposable taxes. 25 This is in line with the constutional policy of
according the widest possible autonomy to local governments in
matters of local taxation, an aspect that is given expression in the
Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the amount is
114
so excessive as to be prohibitive, courts will go slow in writing off an
ordinance as unreasonable. 27 Reluctance should not deter
compliance with an ordinance such as Ordinance No. 27 if the
purpose of the law to further strengthen local autonomy were to be
realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine
with five but not more than ten crowners or P2,000.00 with ten but
not more than twenty crowners imposed on manufacturers,
producers, importers and dealers of soft drinks and/or mineral
waters under Ordinance No. 54, series of 1964, as amended by
Ordinance No. 41, series of 1968, of defendant Municipality, 29
appears not to affect the resolution of the validity of Ordinance No.
27. Municipalities are empowered to impose, not only municipal
license taxes upon persons engaged in any business or occupation
but also to levy for public purposes, just and uniform taxes. The
ordinance in question (Ordinance No. 27) comes within the second
power of a municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No.
2264, otherwise known as the Local Autonomy Act, as amended, is
hereby upheld and Municipal Ordinance No. 27 of the Municipality
of Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance
No. 23, same series, is hereby declared of valid and legal effect.
Costs against petitioner-appellant. SO ORDERED.
G.R. No. 127105 June 25, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
S.C. JOHNSON AND SON, INC., and COURT OF APPEALS,
respondents.
GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules
of Court seeking to set aside the decision of the Court of Appeals
dated November 7, 1996 in CA-GR SP No. 40802 affirming the
decision of the Court of Tax Appeals in CTA Case No. 5136.
The antecedent facts as found by the Court of Tax Appeals are not
disputed, to wit:
115
[Respondent], a domestic corporation organized and operating
under the Philippine laws, entered into a license agreement with SC
Johnson and Son, United States of America (USA), a non-resident
foreign corporation based in the U.S.A. pursuant to which the
[respondent] was granted the right to use the trademark, patents
and technology owned by the latter including the right to
manufacture, package and distribute the products covered by the
Agreement and secure assistance in management, marketing and
production from SC Johnson and Son, U. S. A.
The said License Agreement was duly registered with the
Technology Transfer Board of the Bureau of Patents, Trade Marks
and Technology Transfer under Certificate of Registration No. 8064
(Exh. "A").
For the use of the trademark or technology, [respondent] was
obliged to pay SC Johnson and Son, USA royalties based on a
percentage of net sales and subjected the same to 25% withholding
tax on royalty payments which [respondent] paid for the period
covering July 1992 to May 1993 in the total amount of
P1,603,443.00 (Exhs. "B" to "L" and submarkings).
On October 29, 1993, [respondent] filed with the International Tax
Affairs Division (ITAD) of the BIR a claim for refund of overpaid
withholding tax on royalties arguing that, "the antecedent facts
attending [respondent's] case fall squarely within the same
circumstances under which said MacGeorge and Gillete rulings were
issued. Since the agreement was approved by the Technology
Transfer Board, the preferential tax rate of 10% should apply to the September 595,956 148,989 59,596 89,393
[respondent]. We therefore submit that royalties paid by the
[respondent] to SC Johnson and Son, USA is only subject to 10%
withholding tax pursuant to the most-favored nation clause of the October 634,405 158,601 63,441 95,161
RP-US Tax Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the
RP-West Germany Tax Treaty [Article 12 (2) (b)]" (Petition for
Review [filed with the Court of Appeals], par. 12). [Respondent's] November 620,885 155,221 62,089 93,133
claim for there fund of P963,266.00 was computed as follows:

December 383,276 95,819 36,328 57,491

Gross 25% 10%

Jan 1993 602,451 170,630 68,245 102,368

Month/ Royalty Withholding Withholding

February 565,845 141,461 56,585 84,877

Year Fee Tax Paid Tax Balance

March 547,253 136,813 54,725 82,088

——— ——— ——— ——— ———

April 660,810 165,203 66,081 99,122

July 1992 559,878 139,970 55,988 83,982

May 603,076 150,769 60,308 90,461

August 567,935 141,984 56,794 85,190

116

———— ———— ———— ———
P6,421,770 P1,605,443 P642,177 P963,2661
======== ======== ======== ========
The Commissioner did not act on said claim for refund. Private
respondent S.C. Johnson & Son, Inc. (S.C. Johnson) then filed a
petition for review before the Court of Tax Appeals (CTA) where the
case was docketed as CTA Case No. 5136, to claim a refund of the
overpaid withholding tax on royalty payments from July 1992 to
May 1993.
On May 7, 1996, the Court of Tax Appeals rendered its decision in
favor of S.C. Johnson and ordered the Commissioner of Internal
Revenue to issue a tax credit certificate in the amount of
P963,266.00 representing overpaid withholding tax on royalty
payments, beginning July, 1992 to May, 1993.2
The Commissioner of Internal Revenue thus filed a petition for
review with the Court of Appeals which rendered the decision
117
subject of this appeal on November 7, 1996 finding no merit in the
petition and affirming in toto the CTA ruling.3
This petition for review was filed by the Commissioner of Internal
Revenue raising the following issue:
THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND
SON, USA IS ENTITLED TO THE "MOST FAVORED NATION" TAX RATE
OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN
RELATION TO THE RP-WEST GERMANY TAX TREATY.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax
Treaty, which is known as the "most favored nation" clause, the
lowest rate of the Philippine tax at 10% may be imposed on
royalties derived by a resident of the United States from sources
within the Philippines only if the circumstances of the resident of
the United States are similar to those of the resident of West
Germany. Since the RP-US Tax Treaty contains no "matching credit"
provision as that provided under Article 24 of the RP-West Germany
Tax Treaty, the tax on royalties under the RP-US Tax Treaty is not
paid under similar circumstances as those obtaining in the RP-West
Germany Tax Treaty. Even assuming that the phrase "paid under
similar circumstances" refers to the payment of royalties, and not
taxes, as held by the Court of Appeals, still, the "most favored
nation" clause cannot be invoked for the reason that when a tax
treaty contemplates circumstances attendant to the payment of a
tax, or royalty remittances for that matter, these must necessarily
refer to circumstances that are tax-related. Finally, petitioner argues
that since S.C. Johnson's invocation of the "most favored nation"
clause is in the nature of a claim for exemption from the application
of the regular tax rate of 25% for royalties, the provisions of the
treaty must be construed strictly against it.
In its Comment, private respondent S.C. Johnson avers that the
instant petition should be denied (1) because it contains a defective
certification against forum shopping as required under SC Circular
No. 28-91, that is, the certification was not executed by the
petitioner herself but by her counsel; and (2) that the "most favored
nation" clause under the RP-US Tax Treaty refers to royalties paid
under similar circumstances as those royalties subject to tax in
other treaties; that the phrase "paid under similar circumstances"
does not refer to payment of the tax but to the subject matter of
the tax, that is, royalties, because the "most favored nation" clause
is intended to allow the taxpayer in one state to avail of more liberal
provisions contained in another tax treaty wherein the country of
residence of such taxpayer is also a party thereto, subject to the
basic condition that the subject matter of taxation in that other tax
treaty is the same as that in the original tax treaty under which the
taxpayer is liable; thus, the RP-US Tax Treaty speaks of "royalties of
the same kind paid under similar circumstances". S.C. Johnson also
contends that the Commissioner is estopped from insisting on her
interpretation that the phrase "paid under similar circumstances"
refers to the manner in which the tax is paid, for the reason that
said interpretation is embodied in Revenue Memorandum Circular
("RMC") 39-92 which was already abandoned by the
118
Commissioner's predecessor in 1993; and was expressly revoked in
BIR Ruling No. 052-95 which stated that royalties paid to an
American licensor are subject only to 10% withholding tax pursuant
to Art 13(2)(b)(iii) of the RP-US Tax Treaty in relation to the RP-West
Germany Tax Treaty. Said ruling should be given retroactive effect
except if such is prejudicial to the taxpayer pursuant to Section 246
of the National Internal Revenue Code.
Petitioner filed Reply alleging that the fact that the certification
against forum shopping was signed by petitioner's counsel is not a
fatal defect as to warrant the dismissal of this petition since Circular
No. 28-91 applies only to original actions and not to appeals, as in
the instant case. Moreover, the requirement that the certification
should be signed by petitioner and not by counsel does not apply to
petitioner who has only the Office of the Solicitor General as
statutory counsel. Petitioner reiterates that even if the phrase "paid
under similar circumstances" embodied in the most favored nation
clause of the RP-US Tax Treaty refers to the payment of royalties
and not taxes, still the presence or absence of a "matching credit"
provision in the said RP-US Tax Treaty would constitute a material
circumstance to such payment and would be determinative of the
said clause's application.1âwphi1.nêt
We address first the objection raised by private respondent that the
certification against forum shopping was not executed by the
petitioner herself but by her counsel, the Office of the Solicitor
General (O.S.G.) through one of its Solicitors, Atty. Tomas M.
Navarro.
SC Circular No. 28-91 provides:
SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS FILED WITH THE
SUPREME COURT AND THE COURT OF APPEALS TO PREVENT
FORUM SHOPPING OR MULTIPLE FILING OF PETITIONS AND
COMPLAINTS
TO: xxx xxx xxx
The attention of the Court has been called to the filing of multiple
petitions and complaints involving the same issues in the Supreme
Court, the Court of Appeals or other tribunals or agencies, with the
result that said courts, tribunals or agencies have to resolve the
same issues.
(1) To avoid the foregoing, in every petition filed with the Supreme
Court or the Court of Appeals, the petitioner aside from complying
with pertinent provisions of the Rules of Court and existing circulars,
must certify under oath to all of the following facts or undertakings:
(a) he has not theretofore commenced any other action or
119
proceeding involving the same issues in the Supreme Court, the
Court of Appeals, or any tribunal or
agency; . . .
(2) Any violation of this revised Circular will entail the following
sanctions: (a) it shall be a cause for the summary dismissal of the
multiple petitions or complaints; . . .
The circular expressly requires that a certificate of non-forum
shopping should be attached to petitions filed before this Court and
the Court of Appeals. Petitioner's allegation that Circular No. 28-91
applies only to original actions and not to appeals as in the instant
case is not supported by the text nor by the obvious intent of the
Circular which is to prevent multiple petitions that will result in the
same issue being resolved by different courts.
Anent the requirement that the party, not counsel, must certify
under oath that he has not commenced any other action involving
the same issues in this Court or the Court of Appeals or any other
tribunal or agency, we are inclined to accept petitioner's submission
that since the OSG is the only lawyer for the petitioner, which is a
government agency mandated under Section 35, Chapter 12, title
III, Book IV of the 1987 Administrative Code4 to be represented only
by the Solicitor General, the certification executed by the OSG in
this case constitutes substantial compliance with Circular No. 28-91.

With respect to the merits of this petition, the main point of
contention in this appeal is the interpretation of Article 13 (2) (b)
(iii) of the RP-US Tax Treaty regarding the rate of tax to be imposed
by the Philippines upon royalties received by a non-resident foreign
corporation. The provision states insofar as pertinent
that —
1) Royalties derived by a resident of one of the Contracting States
from sources within the other Contracting State may be taxed by
both Contracting States.
2) However, the tax imposed by that Contracting State shall not
exceed.
a) In the case of the United States, 15 percent of the gross amount
of the royalties, and
b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of the royalties;
120
(ii) 15 percent of the gross amount of the royalties, where the
royalties are paid by a corporation registered with the Philippine
Board of Investments and engaged in preferred areas of activities;
and
(iii) the lowest rate of Philippine tax that may be imposed on
royalties of the same kind paid under similar circumstances to a
resident of a third State.
xxx xxx xxx
(emphasis supplied)
Respondent S. C. Johnson and Son, Inc. claims that on the basis of
the quoted provision, it is entitled to the concessional tax rate of 10
percent on royalties based on Article 12 (2) (b) of the RP-Germany
Tax Treaty which provides:
(2) However, such royalties may also be taxed in the Contracting
State in which they arise, and according to the law of that State, but
the tax so charged shall not exceed:
xxx xxx xxx xxx xxx xxx

b) 10 percent of the gross amount of royalties arising from the use
of, or the right to use, any patent, trademark, design or model, plan,
secret formula or process, or from the use of or the right to use,
industrial, commercial, or scientific equipment, or for information
concerning industrial, commercial or scientific experience.
b) Subject to the provisions of German tax law regarding credit for
foreign tax, there shall be allowed as a credit against German
income and corporation tax payable in respect of the following
items of income arising in the Republic of the Philippines, the tax
paid under the laws of the Philippines in accordance with this
Agreement on:

For as long as the transfer of technology, under Philippine law, is

subject to approval, the limitation of the tax rate mentioned under xxx xxx xxx
b) shall, in the case of royalties arising in the Republic of the
Philippines, only apply if the contract giving rise to such royalties
has been approved by the Philippine competent authorities. dd) royalties, as defined in paragraph 3 of Article 12;

Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a xxx xxx xxx
tax credit of 20 percent of the gross amount of such royalties
against German income and corporation tax for the taxes payable in
the Philippines on such royalties where the tax rate is reduced to 10
c) For the purpose of the credit referred in subparagraph; b) the
or 15 percent under such treaty. Article 24 of the RP-Germany Tax
Philippine tax shall be deemed to be
Treaty states —

xxx xxx xxx

1) Tax shall be determined in the case of a resident of the Federal
Republic of Germany as follows:

121
cc) in the case of royalties for which the tax is reduced to 10 or 15
per cent according to paragraph 2 of Article 12, 20 percent of the
gross amount of such royalties.
xxx xxx xxx
According to petitioner, the taxes upon royalties under the RP-US
Tax Treaty are not paid under circumstances similar to those in the
RP-West Germany Tax Treaty since there is no provision for a 20
percent matching credit in the former convention and private
respondent cannot invoke the concessional tax rate on the strength
of the most favored nation clause in the RP-US Tax Treaty.
Petitioner's position is explained thus:
Under the foregoing provision of the RP-West Germany Tax Treaty,
the Philippine tax paid on income from sources within the
Philippines is allowed as a credit against German income and
corporation tax on the same income. In the case of royalties for
which the tax is reduced to 10 or 15 percent according to paragraph
2 of Article 12 of the RP-West Germany Tax Treaty, the credit shall
be 20% of the gross amount of such royalty. To illustrate, the royalty
income of a German resident from sources within the Philippines
arising from the use of, or the right to use, any patent, trade mark,
design or model, plan, secret formula or process, is taxed at 10% of
the gross amount of said royalty under certain conditions. The rate
of 10% is imposed if credit against the German income and
122
corporation tax on said royalty is allowed in favor of the German
resident. That means the rate of 10% is granted to the German
taxpayer if he is similarly granted a credit against the income and
corporation tax of West Germany. The clear intent of the "matching
credit" is to soften the impact of double taxation by different
jurisdictions.
The RP-US Tax Treaty contains no similar "matching credit" as that
provided under the RP-West Germany Tax Treaty. Hence, the tax on
royalties under the RP-US Tax Treaty is not paid under similar
circumstances as those obtaining in the RP-West Germany Tax
Treaty. Therefore, the "most favored nation" clause in the RP-West
Germany Tax Treaty cannot be availed of in interpreting the
provisions of the RP-US Tax Treaty.5
The petition is meritorious.
We are unable to sustain the position of the Court of Tax Appeals,
which was upheld by the Court of Appeals, that the phrase "paid
under similar circumstances in Article 13 (2) (b), (iii) of the RP-US
Tax Treaty should be interpreted to refer to payment of royalty, and
not to the payment of the tax, for the reason that the phrase "paid
under similar circumstances" is followed by the phrase "to a
resident of a third state". The respondent court held that "Words
are to be understood in the context in which they are used", and
since what is paid to a resident of a third state is not a tax but a
royalty "logic instructs" that the treaty provision in question should
refer to royalties of the same kind paid under similar circumstances.
The above construction is based principally on syntax or sentence
structure but fails to take into account the purpose animating the
treaty provisions in point. To begin with, we are not aware of any
law or rule pertinent to the payment of royalties, and none has
been brought to our attention, which provides for the payment of
royalties under dissimilar circumstances. The tax rates on royalties
and the circumstances of payment thereof are the same for all the
recipients of such royalties and there is no disparity based on
nationality in the circumstances of such payment.6 On the other
hand, a cursory reading of the various tax treaties will show that
there is no similarity in the provisions on relief from or avoidance of
double taxation7 as this is a matter of negotiation between the
contracting parties.8 As will be shown later, this dissimilarity is true
particularly in the treaties between the Philippines and the United
States and between the Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties
which the Philippines has entered into for the avoidance of double
taxation.9 The purpose of these international agreements is to
reconcile the national fiscal legislations of the contracting parties in
order to help the taxpayer avoid simultaneous taxation in two
different jurisdictions. 10 More precisely, the tax conventions are
drafted with a view towards the elimination of international
juridical double taxation, which is defined as the imposition of
123
comparable taxes in two or more states on the same taxpayer in
respect of the same subject matter and for identical periods. 11 The
apparent rationale for doing away with double taxation is of
encourage the free flow of goods and services and the movement of
capital, technology and persons between countries, conditions
deemed vital in creating robust and dynamic economies. 12 Foreign
investments will only thrive in a fairly predictable and reasonable
international investment climate and the protection against double
taxation is crucial in creating such a climate. 13
Double taxation usually takes place when a person is resident of a
contracting state and derives income from, or owns capital in, the
other contracting state and both states impose tax on that income
or capital. In order to eliminate double taxation, a tax treaty resorts
to several methods. First, it sets out the respective rights to tax of
the state of source or situs and of the state of residence with regard
to certain classes of income or capital. In some cases, an exclusive
right to tax is conferred on one of the contracting states; however,
for other items of income or capital, both states are given the right
to tax, although the amount of tax that may be imposed by the
state of source is limited. 14
The second method for the elimination of double taxation applies
whenever the state of source is given a full or limited right to tax
together with the state of residence. In this case, the treaties make
it incumbent upon the state of residence to allow relief in order to
avoid double taxation. There are two methods of relief — the
exemption method and the credit method. In the exemption
method, the income or capital which is taxable in the state of
source or situs is exempted in the state of residence, although in
some instances it may be taken into account in determining the rate
of tax applicable to the taxpayer's remaining income or capital. On
the other hand, in the credit method, although the income or
capital which is taxed in the state of source is still taxable in the
state of residence, the tax paid in the former is credited against the
tax levied in the latter. The basic difference between the two
methods is that in the exemption method, the focus is on the
income or capital itself, whereas the credit method focuses upon
the tax. 15
In negotiating tax treaties, the underlying rationale for reducing the
tax rate is that the Philippines will give up a part of the tax in the
expectation that the tax given up for this particular investment is
not taxed by the other
country. 16 Thus the petitioner correctly opined that the phrase
"royalties paid under similar circumstances" in the most favored
nation clause of the US-RP Tax Treaty necessarily contemplated
"circumstances that are tax-related".
In the case at bar, the state of source is the Philippines because the
royalties are paid for the right to use property or rights, i.e.
trademarks, patents and technology, located within the Philippines.
17 The United States is the state of residence since the taxpayer, S.
C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax
124
Treaty, the state of residence and the state of source are both
permitted to tax the royalties, with a restraint on the tax that may
be collected by the state of source. 18 Furthermore, the method
employed to give relief from double taxation is the allowance of a
tax credit to citizens or residents of the United States (in an
appropriate amount based upon the taxes paid or accrued to the
Philippines) against the United States tax, but such amount shall not
exceed the limitations provided by United States law for the taxable
year. 19 Under Article 13 thereof, the Philippines may impose one
of three rates — 25 percent of the gross amount of the royalties; 15
percent when the royalties are paid by a corporation registered with
the Philippine Board of Investments and engaged in preferred areas
of activities; or the lowest rate of Philippine tax that may be
imposed on royalties of the same kind paid under similar
circumstances to a resident of a third state.
Given the purpose underlying tax treaties and the rationale for the
most favored nation clause, the concessional tax rate of 10 percent
provided for in the RP-Germany Tax Treaty should apply only if the
taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-
Germany Tax Treaty are paid under similar circumstances. This
would mean that private respondent must prove that the RP-US Tax
Treaty grants similar tax reliefs to residents of the United States in
respect of the taxes imposable upon royalties earned from sources
within the Philippines as those allowed to their German
counterparts under the RP-Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain
similar provisions on tax crediting. Article 24 of the RP-Germany Tax
Treaty, supra, expressly allows crediting against German income
and corporation tax of 20% of the gross amount of royalties paid
under the law of the Philippines. On the other hand, Article 23 of
the RP-US Tax Treaty, which is the counterpart provision with
respect to relief for double taxation, does not provide for similar
crediting of 20% of the gross amount of royalties paid. Said Article
23 reads:
Article 23
Relief from double taxation
Double taxation of income shall be avoided in the following manner:
1) In accordance with the provisions and subject to the limitations
of the law of the United States (as it may be amended from time to
time without changing the general principle thereof), the United
States shall allow to a citizen or resident of the United States as a
credit against the United States tax the appropriate amount of taxes
paid or accrued to the Philippines and, in the case of a United States
corporation owning at least 10 percent of the voting stock of a
Philippine corporation from which it receives dividends in any
taxable year, shall allow credit for the appropriate amount of taxes
125
paid or accrued to the Philippines by the Philippine corporation
paying such dividends with respect to the profits out of which such
dividends are paid. Such appropriate amount shall be based upon
the amount of tax paid or accrued to the Philippines, but the credit
shall not exceed the limitations (for the purpose of limiting the
credit to the United States tax on income from sources within the
Philippines or on income from sources outside the United States)
provided by United States law for the taxable year. . . .
The reason for construing the phrase "paid under similar
circumstances" as used in Article 13 (2) (b) (iii) of the RP-US Tax
Treaty as referring to taxes is anchored upon a logical reading of the
text in the light of the fundamental purpose of such treaty which is
to grant an incentive to the foreign investor by lowering the tax and
at the same time crediting against the domestic tax abroad a figure
higher than what was collected in the Philippines.
In one case, the Supreme Court pointed out that laws are not just
mere compositions, but have ends to be achieved and that the
general purpose is a more important aid to the meaning of a law
than any rule which grammar may lay down. 20 It is the duty of the
courts to look to the object to be accomplished, the evils to be
remedied, or the purpose to be subserved, and should give the law
a reasonable or liberal construction which will best effectuate its
purpose. 21 The Vienna Convention on the Law of Treaties states
that a treaty shall be interpreted in good faith in accordance with
the ordinary meaning to be given to the terms of the treaty in their
context and in the light of its object and
purpose. 22
As stated earlier, the ultimate reason for avoiding double taxation is
to encourage foreign investors to invest in the Philippines — a
crucial economic goal for developing countries. 23 The goal of
double taxation conventions would be thwarted if such treaties did
not provide for effective measures to minimize, if not completely
eliminate, the tax burden laid upon the income or capital of the
investor. Thus, if the rates of tax are lowered by the state of source,
in this case, by the Philippines, there should be a concomitant
commitment on the part of the state of residence to grant some
form of tax relief, whether this be in the form of a tax credit or
exemption. 24 Otherwise, the tax which could have been collected
by the Philippine government will simply be collected by another
state, defeating the object of the tax treaty since the tax burden
imposed upon the investor would remain unrelieved. If the state of
residence does not grant some form of tax relief to the investor, no
benefit would redound to the Philippines, i.e., increased investment
resulting from a favorable tax regime, should it impose a lower tax
rate on the royalty earnings of the investor, and it would be better
to impose the regular rate rather than lose much-needed revenues
to another country.
At the same time, the intention behind the adoption of the
provision on "relief from double taxation" in the two tax treaties in
126
question should be considered in light of the purpose behind the
most favored nation clause.
The purpose of a most favored nation clause is to grant to the
contracting party treatment not less favorable than that which has
been or may be granted to the "most favored" among other
countries. 25 The most favored nation clause is intended to
establish the principle of equality of international treatment by
providing that the citizens or subjects of the contracting nations
may enjoy the privileges accorded by either party to those of the
most favored nation. 26 The essence of the principle is to allow the
taxpayer in one state to avail of more liberal provisions granted in
another tax treaty to which the country of residence of such
taxpayer is also a party provided that the subject matter of taxation,
in this case royalty income, is the same as that in the tax treaty
under which the taxpayer is liable. Both Article 13 of the RP-US Tax
Treaty and Article 12 (2) (b) of the RP-West Germany Tax Treaty,
above-quoted, speaks of tax on royalties for the use of trademark,
patent, and technology. The entitlement of the 10% rate by U.S.
firms despite the absence of a matching credit (20% for royalties)
would derogate from the design behind the most grant equality of
international treatment since the tax burden laid upon the income
of the investor is not the same in the two countries. The similarity in
the circumstances of payment of taxes is a condition for the
enjoyment of most favored nation treatment precisely to
underscore the need for equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax
Treaty does not give a matching tax credit of 20 percent for the
taxes paid to the Philippines on royalties as allowed under the RP-
West Germany Tax Treaty, private respondent cannot be deemed
entitled to the 10 percent rate granted under the latter treaty for
the reason that there is no payment of taxes on royalties under
similar circumstances.

It bears stress that tax refunds are in the nature of tax exemptions.
As such they are regarded as in derogation of sovereign authority
and to be construed strictissimi juris against the person or entity
claiming the exemption. 27 The burden of proof is upon him who
claims the exemption in his favor and he must be able to justify his
claim by the clearest grant of organic or statute law. 28 Private
respondent is claiming for a refund of the alleged overpayment of
tax on royalties; however, there is nothing on record to support a
claim that the tax on royalties under the RP-US Tax Treaty is paid
under similar circumstances as the tax on royalties under the RP-
West Germany Tax Treaty.

WHEREFORE, for all the foregoing, the instant petition is GRANTED.

The decision dated May 7, 1996 of the Court of Tax Appeals and the
decision dated November 7, 1996 of the Court of Appeals are
hereby SET ASIDE.

SO ORDERED.

127
G.R. No. 166494 June 29, 2007

Petitioners are domestic corporations and proprietors operating

drugstores in the Philippines.
CARLOS SUPERDRUG CORP., doing business under the name and
style "Carlos Superdrug," ELSIE M. CANO, doing business under the
name and style "Advance Drug," Dr. SIMPLICIO L. YAP, JR., doing
business under the name and style "City Pharmacy," MELVIN S. Public respondents, on the other hand, include the Department of
Social Welfare and Development (DSWD), the Department of Health
DELA SERNA, doing business under the name and style "Botica dela
Serna," and LEYTE SERV-WELL CORP., doing business under the (DOH), the Department of Finance (DOF), the Department of Justice
(DOJ), and the Department of Interior and Local Government (DILG)
name and style "Leyte Serv-Well Drugstore," petitioners,
which have been specifically tasked to monitor the drugstores’
vs. compliance with the law; promulgate the implementing rules and
regulations for the effective implementation of the law; and
DEPARTMENT OF SOCIAL WELFARE and DEVELOPMENT (DSWD), prosecute and revoke the licenses of erring drugstore
DEPARTMENT OF HEALTH (DOH), DEPARTMENT OF FINANCE (DOF),
establishments.
DEPARTMENT OF JUSTICE (DOJ), and DEPARTMENT OF INTERIOR
and LOCAL GOVERNMENT (DILG), respondents.

The antecedents are as follows:

DECISION

On February 26, 2004, R.A. No. 9257, amending R.A. No. 7432,3 was
signed into law by President Gloria Macapagal-Arroyo and it
AZCUNA, J.: became effective on March 21, 2004. Section 4(a) of the Act states:

This is a petition1 for Prohibition with Prayer for Preliminary

SEC. 4. Privileges for the Senior Citizens. – The senior citizens shall
Injunction assailing the constitutionality of Section 4(a) of Republic be entitled to the following:
Act (R.A.) No. 9257,2 otherwise known as the "Expanded Senior
Citizens Act of 2003."

128
(a) the grant of twenty percent (20%) discount from all
establishments relative to the utilization of services in hotels and
similar lodging establishments, restaurants and recreation centers,
and purchase of medicines in all establishments for the exclusive
use or enjoyment of senior citizens, including funeral and burial
services for the death of senior citizens;
...
The establishment may claim the discounts granted under (a), (f),
(g) and (h) as tax deduction based on the net cost of the goods sold
or services rendered: Provided, That the cost of the discount shall
be allowed as deduction from gross income for the same taxable
year that the discount is granted. Provided, further, That the total
amount of the claimed tax deduction net of value added tax if
applicable, shall be included in their gross sales receipts for tax
purposes and shall be subject to proper documentation and to the
provisions of the National Internal Revenue Code, as amended.4
On May 28, 2004, the DSWD approved and adopted the
Implementing Rules and Regulations of R.A. No. 9257, Rule VI,
Article 8 of which states:
Article 8. Tax Deduction of Establishments. – The establishment may
claim the discounts granted under Rule V, Section 4 – Discounts for
129
Establishments;5 Section 9, Medical and Dental Services in Private
Facilities[,]6 and Sections 107 and 118 – Air, Sea and Land
Transportation as tax deduction based on the net cost of the goods
sold or services rendered. Provided, That the cost of the discount
shall be allowed as deduction from gross income for the same
taxable year that the discount is granted; Provided, further, That the
total amount of the claimed tax deduction net of value added tax if
applicable, shall be included in their gross sales receipts for tax
purposes and shall be subject to proper documentation and to the
provisions of the National Internal Revenue Code, as amended;
Provided, finally, that the implementation of the tax deduction shall
be subject to the Revenue Regulations to be issued by the Bureau of
Internal Revenue (BIR) and approved by the Department of Finance
(DOF).9
On July 10, 2004, in reference to the query of the Drug Stores
Association of the Philippines (DSAP) concerning the meaning of a
tax deduction under the Expanded Senior Citizens Act, the DOF,
through Director IV Ma. Lourdes B. Recente, clarified as follows:
1) The difference between the Tax Credit (under the Old Senior
Citizens Act) and Tax Deduction (under the Expanded Senior Citizens
Act).
1.1. The provision of Section 4 of R.A. No. 7432 (the old Senior
Citizens Act) grants twenty percent (20%) discount from all
establishments relative to the utilization of transportation services,
hotels and similar lodging establishment, restaurants and recreation
centers and purchase of medicines anywhere in the country, the
costs of which may be claimed by the private establishments
concerned as tax credit.
Effectively, a tax credit is a peso-for-peso deduction from a
taxpayer’s tax liability due to the government of the amount of
discounts such establishment has granted to a senior citizen. The
establishment recovers the full amount of discount given to a senior
citizen and hence, the government shoulders 100% of the discounts
granted.
It must be noted, however, that conceptually, a tax credit scheme
under the Philippine tax system, necessitates that prior payments of
taxes have been made and the taxpayer is attempting to recover
this tax payment from his/her income tax due. The tax credit
scheme under R.A. No. 7432 is, therefore, inapplicable since no tax
payments have previously occurred.
1.2. The provision under R.A. No. 9257, on the other hand, provides
that the establishment concerned may claim the discounts under
Section 4(a), (f), (g) and (h) as tax deduction from gross income,
based on the net cost of goods sold or services rendered.
130
Under this scheme, the establishment concerned is allowed to
deduct from gross income, in computing for its tax liability, the
amount of discounts granted to senior citizens. Effectively, the
government loses in terms of foregone revenues an amount
equivalent to the marginal tax rate the said establishment is liable
to pay the government. This will be an amount equivalent to 32% of
the twenty percent (20%) discounts so granted. The establishment
shoulders the remaining portion of the granted discounts.
It may be necessary to note that while the burden on [the]
government is slightly diminished in terms of its percentage share
on the discounts granted to senior citizens, the number of potential
establishments that may claim tax deductions, have however, been
broadened. Aside from the establishments that may claim tax
credits under the old law, more establishments were added under
the new law such as: establishments providing medical and dental
services, diagnostic and laboratory services, including professional
fees of attending doctors in all private hospitals and medical
facilities, operators of domestic air and sea transport services,
public railways and skyways and bus transport services.
A simple illustration might help amplify the points discussed above,
as follows:
Tax Deduction Tax Credit
Gross Sales x x x x x x x x x x x x
Less : Cost of goods sold x x x x x x x x x x
Net Sales x x x x x x x x x x x x
Less: Operating Expenses:
Tax Deduction on Discounts x x x x --
Other deductions: x x x x x x x x
Net Taxable Income x x x x x x x x x x
Tax Due x x x x x x
131
Less: Tax Credit -- ______x x
Net Tax Due -- x x
As shown above, under a tax deduction scheme, the tax deduction
on discounts was subtracted from Net Sales together with other
deductions which are considered as operating expenses before the
Tax Due was computed based on the Net Taxable Income. On the
other hand, under a tax credit scheme, the amount of discounts
which is the tax credit item, was deducted directly from the tax due
amount.10
Meanwhile, on October 1, 2004, Administrative Order (A.O.) No.
171 or the Policies and Guidelines to Implement the Relevant
Provisions of Republic Act 9257, otherwise known as the "Expanded
Senior Citizens Act of 2003"11 was issued by the DOH, providing the
grant of twenty percent (20%) discount in the purchase of
unbranded generic medicines from all establishments dispensing
medicines for the exclusive use of the senior citizens.
On November 12, 2004, the DOH issued Administrative Order No
17712 amending A.O. No. 171. Under A.O. No. 177, the twenty
percent discount shall not be limited to the purchase of unbranded
generic medicines only, but shall extend to both prescription and
non-prescription medicines whether branded or generic. Thus, it
stated that "[t]he grant of twenty percent (20%) discount shall be
provided in the purchase of medicines from all establishments
dispensing medicines for the exclusive use of the senior citizens."
Petitioners assail the constitutionality of Section 4(a) of the
Expanded Senior Citizens Act based on the following grounds:13
1) The law is confiscatory because it infringes Art. III, Sec. 9 of the
Constitution which provides that private property shall not be taken
for public use without just compensation;
2) It violates the equal protection clause (Art. III, Sec. 1) enshrined in
our Constitution which states that "no person shall be deprived of
life, liberty or property without due process of law, nor shall any
person be denied of the equal protection of the laws;" and
3) The 20% discount on medicines violates the constitutional
guarantee in Article XIII, Section 11 that makes "essential goods,
health and other social services available to all people at affordable
cost."14
Petitioners assert that Section 4(a) of the law is unconstitutional
because it constitutes deprivation of private property. Compelling
132
drugstore owners and establishments to grant the discount will
result in a loss of profit
and capital because 1) drugstores impose a mark-up of only 5% to
10% on branded medicines; and 2) the law failed to provide a
scheme whereby drugstores will be justly compensated for the
discount.
Examining petitioners’ arguments, it is apparent that what
petitioners are ultimately questioning is the validity of the tax
deduction scheme as a reimbursement mechanism for the twenty
percent (20%) discount that they extend to senior citizens.
Based on the afore-stated DOF Opinion, the tax deduction scheme
does not fully reimburse petitioners for the discount privilege
accorded to senior citizens. This is because the discount is treated
as a deduction, a tax-deductible expense that is subtracted from the
gross income and results in a lower taxable income. Stated
otherwise, it is an amount that is allowed by law15 to reduce the
income prior to the application of the tax rate to compute the
amount of tax which is due.16 Being a tax deduction, the discount
does not reduce taxes owed on a peso for peso basis but merely
offers a fractional reduction in taxes owed.
Theoretically, the treatment of the discount as a deduction reduces impose upon private establishments the burden of partly
the net income of the private establishments concerned. The subsidizing a government program.
discounts given would have entered the coffers and formed part of
the gross sales of the private establishments, were it not for R.A.
No. 9257. The Court believes so.

The permanent reduction in their total revenues is a forced subsidy
corresponding to the taking of private property for public use or
benefit.17 This constitutes compensable taking for which
petitioners would ordinarily become entitled to a just
compensation.
The Senior Citizens Act was enacted primarily to maximize the
contribution of senior citizens to nation-building, and to grant
benefits and privileges to them for their improvement and well-
being as the State considers them an integral part of our society.20

The priority given to senior citizens finds its basis in the Constitution
Just compensation is defined as the full and fair equivalent of the as set forth in the law itself. Thus, the Act provides:
property taken from its owner by the expropriator. The measure is
not the taker’s gain but the owner’s loss. The word just is used to
intensify the meaning of the word compensation, and to convey the
SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:
idea that the equivalent to be rendered for the property to be taken
shall be real, substantial, full and ample.18

SECTION 1. Declaration of Policies and Objectives. – Pursuant to

A tax deduction does not offer full reimbursement of the senior
citizen discount. As such, it would not meet the definition of just
compensation.19
Having said that, this raises the question of whether the State, in
promoting the health and welfare of a special group of citizens, can
Article XV, Section 4 of the Constitution, it is the duty of the family
to take care of its elderly members while the State may design
programs of social security for them. In addition to this, Section 10
in the Declaration of Principles and State Policies provides: "The
State shall provide social justice in all phases of national
development." Further, Article XIII, Section 11, provides: "The State
shall adopt an integrated and comprehensive approach to health

133
development which shall endeavor to make essential goods, health
and other social services available to all the people at affordable
cost. There shall be priority for the needs of the underprivileged
sick, elderly, disabled, women and children." Consonant with these
constitutional principles the following are the declared policies of
this Act:
...
(f) To recognize the important role of the private sector in the
improvement of the welfare of senior citizens and to actively seek
their partnership.21
To implement the above policy, the law grants a twenty percent
discount to senior citizens for medical and dental services, and
diagnostic and laboratory fees; admission fees charged by theaters,
concert halls, circuses, carnivals, and other similar places of culture,
leisure and amusement; fares for domestic land, air and sea travel;
utilization of services in hotels and similar lodging establishments,
restaurants and recreation centers; and purchases of medicines for
the exclusive use or enjoyment of senior citizens. As a form of
reimbursement, the law provides that business establishments
extending the twenty percent discount to senior citizens may claim
the discount as a tax deduction.
134
The law is a legitimate exercise of police power which, similar to the
power of eminent domain, has general welfare for its object. Police
power is not capable of an exact definition, but has been purposely
veiled in general terms to underscore its comprehensiveness to
meet all exigencies and provide enough room for an efficient and
flexible response to conditions and circumstances, thus assuring the
greatest benefits. 22 Accordingly, it has been described as "the
most essential, insistent and the least limitable of powers,
extending as it does to all the great public needs."23 It is "[t]he
power vested in the legislature by the constitution to make, ordain,
and establish all manner of wholesome and reasonable laws,
statutes, and ordinances, either with penalties or without, not
repugnant to the constitution, as they shall judge to be for the good
and welfare of the commonwealth, and of the subjects of the
same."24
For this reason, when the conditions so demand as determined by
the legislature, property rights must bow to the primacy of police
power because property rights, though sheltered by due process,
must yield to general welfare.25
Police power as an attribute to promote the common good would
be diluted considerably if on the mere plea of petitioners that they
will suffer loss of earnings and capital, the questioned provision is
invalidated. Moreover, in the absence of evidence demonstrating
the alleged confiscatory effect of the provision in question, there is
no basis for its nullification in view of the presumption of validity
which every law has in its favor.26
Given these, it is incorrect for petitioners to insist that the grant of
the senior citizen discount is unduly oppressive to their business,
because petitioners have not taken time to calculate correctly and
come up with a financial report, so that they have not been able to
show properly whether or not the tax deduction scheme really
works greatly to their disadvantage.27
In treating the discount as a tax deduction, petitioners insist that
they will incur losses because, referring to the DOF Opinion, for
every ₱1.00 senior citizen discount that petitioners would give,
₱0.68 will be shouldered by them as only ₱0.32 will be refunded by
the government by way of a tax deduction.
To illustrate this point, petitioner Carlos Super Drug cited the anti-
hypertensive maintenance drug Norvasc as an example. According
to the latter, it acquires Norvasc from the distributors at ₱37.57 per
tablet, and retails it at ₱39.60 (or at a margin of 5%). If it grants a
20% discount to senior citizens or an amount equivalent to ₱7.92,
then it would have to sell Norvasc at ₱31.68 which translates to a
loss from capital of ₱5.89 per tablet. Even if the government will
allow a tax deduction, only ₱2.53 per tablet will be refunded and
not the full amount of the discount which is ₱7.92. In short, only
32% of the 20% discount will be reimbursed to the drugstores.28
135
Petitioners’ computation is flawed. For purposes of reimbursement,
the law states that the cost of the discount shall be deducted from
gross income,29 the amount of income derived from all sources
before deducting allowable expenses, which will result in net
income. Here, petitioners tried to show a loss on a per transaction
basis, which should not be the case. An income statement, showing
an accounting of petitioners’ sales, expenses, and net profit (or loss)
for a given period could have accurately reflected the effect of the
discount on their income. Absent any financial statement,
petitioners cannot substantiate their claim that they will be
operating at a loss should they give the discount. In addition, the
computation was erroneously based on the assumption that their
customers consisted wholly of senior citizens. Lastly, the 32% tax
rate is to be imposed on income, not on the amount of the discount.
Furthermore, it is unfair for petitioners to criticize the law because
they cannot raise the prices of their medicines given the cutthroat
nature of the players in the industry. It is a business decision on the
part of petitioners to peg the mark-up at 5%. Selling the medicines
below acquisition cost, as alleged by petitioners, is merely a result
of this decision. Inasmuch as pricing is a property right, petitioners
cannot reproach the law for being oppressive, simply because they
cannot afford to raise their prices for fear of losing their customers
to competition.
The Court is not oblivious of the retail side of the pharmaceutical WHEREFORE, the petition is DISMISSED for lack of merit.
industry and the competitive pricing component of the business.
While the Constitution protects property rights, petitioners must
accept the realities of business and the State, in the exercise of No costs.
police power, can intervene in the operations of a business which
may result in an impairment of property rights in the process.

SO ORDERED.

Moreover, the right to property has a social dimension. While

Article XIII of the Constitution provides the precept for the
protection of property, various laws and jurisprudence, particularly
on agrarian reform and the regulation of contracts and public
utilities, continuously serve as a reminder that the right to property
can be relinquished upon the command of the State for the
promotion of public good.30

Undeniably, the success of the senior citizens program rests largely

on the support imparted by petitioners and the other private
establishments concerned. This being the case, the means
employed in invoking the active participation of the private sector,
in order to achieve the purpose or objective of the law, is
reasonably and directly related. Without sufficient proof that
Section 4(a) of R.A. No. 9257 is arbitrary, and that the continued
implementation of the same would be unconscionably detrimental
to petitioners, the Court will refrain from quashing a legislative
act.31

136
G.R. Nos. L-33665-68 February 27, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
VICENTE A. RUFINO and REMEDIOS S. RUFINO, ERNESTO D. RUFINO
and ELVIRA B. RUFINO, RAFAEL R. RUFINO and JULIETA A. RUFINO,
MANUEL S. GALVEZ and ESTER R. GALVEZ, and COURT OF TAX
APPEALS, respondents.
Leonardo Abola for respondents.
CRUZ, J.:
Petition for review on certiorari of the decision of the Court of Tax
Appeals absolving the private respondents from liability for capital
gains tax on the stocks received by them from the Eastern Theatrical
Inc. These were originally four cages involving appeals from the
decision of the Commissioner of Internal Revenue dated July 11,
1966, holding the said respondents, Vicente A. Rufino and Remedies
S. Rufino, Ernesto D. Rufino and Elvira B. Rufino, Rafael R. Rufino
and Julieta A. Rufino, and Manuel S. Galvez and Ester R. Galvez,
liable for deficiency income tax, surcharge and interest in the sums
137
of P44,294.88, P27,229.44, P58,082.60 and P58,074.24,
respectively, for the year 1959.
The facts, as narrated by the Court of Tax Appeals, are as follows:
The private respondents were the majority stockholders of the
defunct Eastern Theatrical Co., Inc., a corporation organized in
1934, for a period of twenty-five years terminating on January 25,
1959. It had an original capital stock of P500,000.00, which was
increased in 1949 to P2,000,000.00, divided into 200,000 shares at
P10.00 per share, and was organized to engage in the business of
operating theaters, opera houses, places of amusement and other
related business enterprises, more particularly the Lyric and Capitol
Theaters in Manila. The President of this corporation (hereinafter
referred to as the Old Corporation) during the year in question was
Ernesto D. Rufino.
The private respondents are also the majority and controlling
stockholders of another corporation, the Eastern Theatrical Co Inc.,
which was organized on December 8, 1958, for a term of 50 years,
with an authorized capital stock of P200,000.00, each share having a
par value of P10.00. This corporation is engaged in the same kind of
business as the Old Corporation. The General-Manager of this
corporation (hereinafter referred to as the New Corporation) at the
time was Vicente A. Rufino.

In a special meeting of stockholders of the Old Corporation on
December 17, 1958, to provide for the continuation of its business
after the end of its corporate life, and upon the recommendation of
its board of directors, a resolution was passed authorizing the Old
Corporation to merge with the New Corporation by transferring its
business, assets, goodwill, and liabilities to the latter, which in
exchange would issue and distribute to the shareholders of the Old
Corporation one share for each share held by them in the said
Corporation.
It was expressly declared that the merger of the Old Corporation
with the New Corporation was necessary to continue the exhibition
of moving pictures at the Lyric and Capitol Theaters even after the
expiration of the corporate existence of the former, in view of its
pending booking contracts, not to mention its collective bargaining
agreements with its employees.
Pursuant to the said resolution, the Old Corporation, represented by
Ernesto D. Rufino as President, and the New Corporation,
represented by Vicente A. Rufino as General Manager, signed on
January 9, 1959, a Deed of Assignment providing for the conveyance
and transfer of all the business, property, assets and goodwill of the
Old Corporation to the New Corporation in exchange for the latter's
shares of stock to be distributed among the shareholders on the
basis of one stock for each stock held in the Old Corporation except
that no new and unissued shares would be issued to the
138
shareholders of the Old Corporation; the delivery by the New
Corporation to the Old Corporation of 125,005-3/4 shares to be
distributed to the shareholders of the Old Corporation as their
corresponding shares of stock in the New Corporation; the
assumption by the New Corporation of all obligations and liabilities
of the Old Corporation under its bargaining agreement with the
Cinema Stage & Radio Entertainment Free Workers (FFW) which
included the retention of all personnel in the latter's employ; and
the increase of the capitalization of the New Corporation in
compliance with their agreement. This agreement was made
retroactive to January 1, 1959.
The aforesaid transfer was eventually made by the Old Corporation
to the New Corporation, which continued the operation of the Lyric
and Capitol Theaters and assumed all the obligations and liabilities
of the Old Corporation beginning January 1, 1959.
The resolution of the Old Corporation of December 17, 1958, and
the Deed of Assignment of January 9, 1959, were approved in a
resolution by the stockholders of the New Corporation in their
special meeting on January 12, 1959. In the same meeting, the
increased capitalization of the New Corporation to P2,000,000.00
was also divided into 200,000 shares at P10.00 par value each share,
and the said increase was registered on March 5, 1959, with the
Securities and Exchange Commission, which approved the same on
August 20,1959.
As agreed, and in exchange for the properties, and other assets of
the Old Corporation, the New Corporation issued to the
stockholders of the former stocks in the New Corporation equal to
the stocks each one held in the Old Corporation, as follows:
Mr. & Mrs. Vicente A. Rufino............... 17,083 shares
Mr. & Mrs. Rafael R. Rufino ................. 16,881 shares
Mr. & Mrs. Ernesto D. Rufino .............. 18,347 shares
Mr. & Mrs. Manuel S. Galvez ............... 16,882 shares
It was this above-narrated series of transactions that the Bureau of
Internal Revenue examined later, resulting in the petitioner
declaring that the merger of the aforesaid corporations was not
undertaken for a bona fide business purpose but merely to avoid
liability for the capital gains tax on the exchange of the old for the
new shares of stock. Accordingly, he imposed the deficiency
assessments against the private respondents for the amounts
already mentioned. The private respondents' request for
reconsideration having been denied, they elevated the matter to
the Court of Tax Appeals, which reversed the petitioner.
139
We have given due course to the instant petition questioning the
decision of the said court holding that there was a valid merger
between the Old Corporation and the New Corporation and
declaring that:
It is well established that where stocks for stocks were exchanged,
and distributed to the stockholders of the corporations, parties to
the merger or consolidation, pursuant to a plan of reorganization,
such exchange is exempt from capital gains tax . . .
In view of the foregoing, we are of the opinion and so hold that no
taxable gain was derived by petitioners from the exchange of their
old stocks solely for stocks of the New Corporation pursuant to
Section 35(c) (2), in relation to (c) (5), of the National Internal
Revenue Code, as amended by Republic Act 1921. 1
The above-cited Section 35 of the Tax Code, on the proper
interpretation and application of which the resolution of this case
depends, provides in material part as follows:
Sec. 35. Determination of gain or loss from the sale or other
disposition of property. — The gain derived or loss sustained from
the sale or other disposition of property, real, personal or mixed, xxx xxx xxx
shall be determined in accordance with the following schedule:

(5) Definitions.-(a) x x x (b) The term "merger" or "consolidation,"

xxx xxx xxx when used in this section, shall be understood to mean: (1) The
ordinary merger or consolidation, or (2) the acquisition by one
corporation of all or substantially all the properties of another
(c) Exchange of property- corporation solely for stock; Provided, That for a transaction to be
regarded as a merger or consolidation within the purview of this
section, it must be undertaken for a bona fide business purpose and
not solely for the purpose of escaping the burden of taxation;
(1) General Rule. — Except as herein provided upon the sale or
Provided further, That in determining whether a bona fide business
exchange of property, the entire amount of the gain or loss, as the
purpose exists, each and every step of the transaction shall be
case may be, shall be recognized.
considered and the whole transaction or series of transactions shall
be treated as a single unit: ...

(2) Exceptions. — No gain or loss shall be recognized if in pursuance

of a plan of merger or consolidation (a) a corporation which is a
In support of its position that the Deed of Assignment was
party to a merger or consolidation, exchanges property solely for
concluded by the private respondents merely to evade the burden
stock in a corporation which is a party to the merger or
of taxation, the petitioner points to the fact that the New
consolidation, (b) a shareholder exchanges stock in a corporation
Corporation did not actually issue stocks in exchange for the
which is a party to the merger or consolidation solely for the stock
properties of the Old Corporation at the time of the supposed
of another corporation, also a party to the merger or consolidation,
merger on January 9, 1959. The exchange, he says, was only on
or (c) a security holder of a corporation which is a party to the
paper. The increase in capitalization of the New Corporation was
merger or consolidation exchanges his securities in such corporation
registered with the Securities and Exchange Commission only on
solely for stock or securities in another corporation, a party to the
March 5, 1959, or 37 days after the Old Corporation expired on
merger or consolidation.
January 25, 1959. Prior to such registration, it was not possible for
the New Corporation to effect the exchange provided for in the said
agreement because it was capitalized only at P200,000.00 as against

140
the capitalization of the Old Corporation at P2,000,000.00.
Consequently, as there was no merger, the automatic dissolution of
the Old Corporation on its expiry date resulted in its liquidation, for
which the respondents are now liable in taxes on their capital gains.
For their part, the private respondents insist that there was a
genuine merger between the Old Corporation and the New
Corporation pursuant to a plan aimed at enabling the latter to
continue the business of the former in the operation of places of
amusement, specifically the Capitol and Lyric Theaters. The plan
was evolved through the series of transactions above narrated, all
of which could be treated as a single unit in accordance with the
requirements of Section 35. Obviously, all these steps did not have
to be completed at the time of the merger, as there were some of
them, such as the increase and distribution of the stock of the New
Corporation, which necessarily had to come afterwards. Moreover,
the Old Corporation was dissolved on January 1, 1959, pursuant to
the Deed of Assignment, and not on January 25, 1959, its original
expiry date. As the properties of the Old Corporation were
transferred to the New Corporation before that expiry date, there
could not have been any distribution of liquidating dividends by the
Old Corporation for which the private respondents should be held
liable in taxes.
We sustain the Court of Tax Appeals. We hold that it did not err in
finding that no taxable gain was derived by the private respondents
from the questioned transaction.
141
Contrary to the claim of the petitioner, there was a valid merger
although the actual transfer of the properties subject of the Deed of
Assignment was not made on the date of the merger. In the nature
of things, this was not possible. Obviously, it was necessary for the
Old Corporation to surrender its net assets first to the New
Corporation before the latter could issue its own stock to the
shareholders of the Old Corporation because the New Corporation
had to increase its capitalization for this purpose. This required the
adoption of the resolution to this effect at the special stockholders
meeting of the New Corporation on January 12, 1959, the
registration of such issuance with the SEC on March 5, 1959, and its
approval by that body on August 20, 1959. All these took place after
the date of the merger but they were deemed part and parcel of,
and indispensable to the validity and enforceability of, the Deed of
Assignment.
The Court finds no impediment to the exchange of property for
stock between the two corporations being considered to have been
effected on the date of the merger. That, in fact, was the intention,
and the reason why the Deed of Assignment was made retroactive
to January 1, 1959. Such retroaction provided in effect that all
transactions set forth in the merger agreement shall be deemed to
be taking place simultaneously on January 1, 1959, when the Deed
of Assignment became operative.
The certificates of stock subsequently delivered by the New
Corporation to the private respondents were only evidence of the
ownership of such stocks. Although these certificates could be
issued to them only after the approval by the SEC of the increase in
capitalization of the New Corporation, the title thereto, legally
speaking, was transferred to them on the date the merger took
effect, in accordance with the Deed of Assignment.
The basic consideration, of course, is the purpose of the merger, as
this would determine whether the exchange of properties involved
therein shall be subject or not to the capital gains tax. The criterion
laid down by the law is that the merger" must be undertaken for a
bona fide business purpose and not solely for the purpose of
escaping the burden of taxation." We must therefore seek and
ascertain the intention of the parties in the light of their conduct
contemporaneously with, and especially after, the questioned
merger pursuant to the Deed of Assignment of January 9, 1959.
It has been suggested that one certain indication of a scheme to
evade the capital gains tax is the subsequent dissolution of the new
corporation after the transfer to it of the properties of the old
corporation and the liquidation of the former soon thereafter. This
highly suspect development is likely to be a mere subterfuge aimed
at circumventing the requirements of Section 35 of the Tax Code
while seeming to be a valid corporate combination. Speaking of
such a device, Justice Sutherland declared for the United States
Supreme Court in Helvering v. Gregory:
142
When subdivision (b) speaks of a transfer of assets by one
corporation to another, it means a transfer made 'in pursuance of a
plan of reorganization' (Section 112[g]) of corporate business; and
not a transfer of assets by one corporation to another in pursuance
of a plan having no relation to the business of either, as plainly is
the case here. Putting aside, then, the question of motive in respect
of taxation altogether, and fixing the character of proceeding by
what actually occurred, what do we find? Simply an operation
having no business or corporate purpose — a mere devise which
put on the form of a corporate reorganization as a disguise for
concealing its real character, and the sole object and
accomplishment of which was the consummation of a preconceived
plan, not to reorganize a business or any part of a business, but to
transfer a parcel of corporate shares to the petitioner. No doubt, a
new and valid corporation was created. But that corporation was
nothing more than a contrivance to the end last described. It was
brought into existence for no other purpose; it performed, as it was
intended from the beginning it should perform, no other function.
When that limited function had been exercised, it immediately was
put to death.
In these circumstances, the facts speak for themselves and are
susceptible of but one interpretation. The whole undertaking,
though conducted according to the terms of subdivision (b), was in
fact an elaborate and devious form of conveyance masquerading as
a corporate reorganization and nothing else. The rule which
excludes from consideration the motive of tax avoidance is not
pertinent to the situation, because the transaction upon its face lies
outside the plain intent of the statute. To hold otherwise would be
to exalt artifice above reality and to deprive the statutory provision
in question of all serious purpose. 2
We see no such furtive intention in the instant case. It is clear, in
fact, that the purpose of the merger was to continue the business of
the Old Corporation, whose corporate life was about to expire,
through the New Corporation to which all the assets and obligations
of the former had been transferred. What argues strongly, indeed,
for the New Corporation is that it was not dissolved after the
merger agreement in 1959. On the contrary, it continued to operate
the places of amusement originally owned by the Old Corporation
and transfered to the New Corporation, particularly the Capitol and
Lyric Theaters, in accordance with the Deed of Assignment. The
New Corporation, in fact, continues to do so today after taking over
the business of the Old Corporation twenty-seven years ago.
It may be recalled at this point that under the original provisions of
the old Corporation Law, which was in effect when the merger
agreement was concluded in 1959, it was not possible for a
corporation, by mere amendment of its charter, to extend its life
beyond the time fixed in the original articles; in fact, this was
specifically prohibited by Section 18, which provided that "any
corporation may amend its articles of incorporation by a majority
vote of its board of directors or trustees and the vote or written
assent of two-thirds of its members, if it be a non-stock corporation,
143
or if it be a stock corporation, by the vote or written assent of the
stockholders representing at least two-thirds of the subscribed
capital stock of the corporation ... : Provided, however, That the life
of said corporation shall not be extended by said amendment
beyond the fixed in the original articles ... "
This prohibition, which incidentally has since been deleted, made it
necessary for the Old and New Corporations to enter into the
questioned merger, to enable the former to continue its unfinished
business through the latter.
The procedure for such merger was prescribed in Section 28 1/2 of
the old Corporation Law which, although not expressly authorizing a
merger by name (as the new Corporation Code now does in its
Section 77), provided that "a corporation may, by action taken at
any meeting of its board of directors, sell, lease, exchange, or
otherwise dispose of all or substantially all of its property and
assets, including its goodwill, upon such terms and conditions and
for such considerations, which may be money, stocks, bond, or
other instruments for the payment of money or other property or
other considerations, as its board of directors deem expedient." The
transaction contemplated in the old law covered the second type of
merger defined by Section 35 of the Tax Code as "the acquisition by
one corporation of all or substantially all of the properties of
another corporation solely for stock," which is precisely what
happened in the present case.
What is also worth noting is that, as in the case of the Old
Corporation when it was dissolved on December 31, 1958, there has
been no distribution of the assets of the New Corporation since
then and up to now, as far as the record discloses. To date, the
private respondents have not derived any benefit from the merger
of the Old Corporation and the New Corporation almost three
decades earlier that will make them subject to the capital gains tax
under Section 35. They are no more liable now than they were
when the merger took effect in 1959, as the merger, being genuine,
exempted them under the law from such tax.
By this decision, the government is, of course, not left entirely
without recourse, at least in the future. The fact is that the merger
had merely deferred the claim for taxes, which may be asserted by
the government later, when gains are realized and benefits are
distributed among the stockholders as a result of the merger. In
other words, the corresponding taxes are not forever foreclosed or
forfeited but may at the proper time and without prejudice to the
government still be imposed upon the private respondents, in
accordance with Section 35(c) (4) of the Tax Code. Then, in
assessing the tax, "the basis of the property transferred in the hands
of the transferee shall be the same as it would be in the hands of
the transferor, increased by the amount of gain recognized to the
transferor on the transfer." The only inhibition now is that time has
not yet come.
144
The reason for this conclusion is traceable to the purpose of the
legislature in adopting the provision of law in question. The basic
Idea was to correct the Tax Code which, by imposing taxes on
corporate combinations and expansions, discouraged the same to
the detriment of economic progress, particularly the promotion of
local industry. Speaking of this problem, HB No. 7233, which was
subsequently enacted into R.A. No. 1921 embodying Section 35 as
now worded, declared in the Explanatory Note:
The exemption from the tax of the gain derived from exchanges of
stock solely for stock of another corporation resulting from
corporate mergers or consolidations under the above provisions, as
amended, was intended to encourage corporations in pooling,
combining or expanding their resources conducive to the economic
development of the country. 3
Our ruling then is that the merger in question involved a pooling of
resources aimed at the continuation and expansion of business and
so came under the letter and intendment of the National Internal
Revenue Code, as amended by the abovecited law, exempting from
the capital gains tax exchanges of property effected under lawful
corporate combinations.
WHEREFORE, the decision of the Court of Tax Appeals is affirmed in
full, without any pronouncement as to costs. SO ORDERED.
G.R. No. L-69259 January 26, 1988
DELPHER TRADES CORPORATION, and DELPHIN PACHECO,
petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES,
INC., respondents.
GUTIERREZ, JR., J.:
The petitioners question the decision of the Intermediate Appellate
Court which sustained the private respondent's contention that the
deed of exchange whereby Delfin Pacheco and Pelagia Pacheco
conveyed a parcel of land to Delpher Trades Corporation in
exchange for 2,500 shares of stock was actually a deed of sale which
violated a right of first refusal under a lease contract.
Briefly, the facts of the case are summarized as follows:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the
owners of 27,169 square meters of real estate Identified as Lot. No.
145
1095, Malinta Estate, in the Municipality of Polo (now Valenzuela),
Province of Bulacan (now Metro Manila) which is covered by
Transfer Certificate of Title No. T-4240 of the Bulacan land registry.
On April 3, 1974, the said co-owners leased to Construction
Components International Inc. the same property and providing
that during the existence or after the term of this lease the lessor
should he decide to sell the property leased shall first offer the
same to the lessee and the letter has the priority to buy under
similar conditions (Exhibits A to A-5)
On August 3, 1974, lessee Construction Components International,
Inc. assigned its rights and obligations under the contract of lease in
favor of Hydro Pipes Philippines, Inc. with the signed conformity and
consent of lessors Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-
6 inclusive)
The contract of lease, as well as the assignment of lease were
annotated at he back of the title, as per stipulation of the parties
(Exhs. A to D-3 inclusive)
On January 3, 1976, a deed of exchange was executed between
lessors Delfin and Pelagia Pacheco and defendant Delpher Trades
Corporation whereby the former conveyed to the latter the leased
property (TCT No.T-4240) together with another parcel of land also
located in Malinta Estate, Valenzuela, Metro Manila (TCT No. 4273) The lower court's decision was affirmed on appeal by the
for 2,500 shares of stock of defendant corporation with a total value Intermediate Appellate Court.
of P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)

The defendants-appellants, now the petitioners, filed a petition for

On the ground that it was not given the first option to buy the
leased property pursuant to the proviso in the lease agreement,
respondent Hydro Pipes Philippines, Inc., filed an amended
complaint for reconveyance of Lot. No. 1095 in its favor under
conditions similar to those whereby Delpher Trades Corporation
acquired the property from Pelagia Pacheco and Delphin Pacheco.
certiorari to review the appellate court's decision.
We initially denied the petition but upon motion for
reconsideration, we set aside the resolution denying the petition
and gave it due course.

After trial, the Court of First Instance of Bulacan ruled in favor of the The petitioners allege that:
plaintiff. The dispositive portion of the decision reads:

The denial of the petition will work great injustice to the petitioners,
ACCORDINGLY, the judgment is hereby rendered declaring the valid in that:
existence of the plaintiffs preferential right to acquire the subject
property (right of first refusal) and ordering the defendants and all
persons deriving rights therefrom to convey the said property to
1. Respondent Hydro Pipes Philippines, Inc, ("private respondent")
plaintiff who may offer to acquire the same at the rate of P14.00
will acquire from petitioners a parcel of industrial land consisting of
per square meter, more or less, for Lot 1095 whose area is 27,169
27,169 square meters or 2.7 hectares (located right after the
square meters only. Without pronouncement as to attorney's fees
Valenzuela, Bulacan exit of the toll expressway) for only P14/sq.
and costs. (Appendix I; Rec., pp. 246- 247). (Appellant's Brief, pp. 1-
meter, or a total of P380,366, although the prevailing value thereof
2; p. 134, Rollo)
is approximately P300/sq. meter or P8.1 Million;

146
2. Private respondent is allowed to exercise its right of first refusal
even if there is no "sale" or transfer of actual ownership interests by
petitioners to third parties; and
3. Assuming arguendo that there has been a transfer of actual
ownership interests, private respondent will acquire the land not
under "similar conditions" by which it was transferred to petitioner
Delpher Trades Corporation, as provided in the same contractual
provision invoked by private respondent. (pp. 251-252, Rollo)
The resolution of the case hinges on whether or not the "Deed of
Exchange" of the properties executed by the Pachecos on the one
hand and the Delpher Trades Corporation on the other was meant
to be a contract of sale which, in effect, prejudiced the private
respondent's right of first refusal over the leased property included
in the "deed of exchange."
Eduardo Neria, a certified public accountant and son-in-law of the
late Pelagia Pacheco testified that Delpher Trades Corporation is a
family corporation; that the corporation was organized by the
children of the two spouses (spouses Pelagia Pacheco and Benjamin
Hernandez and spouses Delfin Pacheco and Pilar Angeles) who
owned in common the parcel of land leased to Hydro Pipes
Philippines in order to perpetuate their control over the property
through the corporation and to avoid taxes; that in order to
accomplish this end, two pieces of real estate, including Lot No.
147
1095 which had been leased to Hydro Pipes Philippines, were
transferred to the corporation; that the leased property was
transferred to the corporation by virtue of a deed of exchange of
property; that in exchange for these properties, Pelagia and Delfin
acquired 2,500 unissued no par value shares of stock which are
equivalent to a 55% majority in the corporation because the other
owners only owned 2,000 shares; and that at the time of
incorporation, he knew all about the contract of lease of Lot. No.
1095 to Hydro Pipes Philippines. In the petitioners' motion for
reconsideration, they refer to this scheme as "estate planning." (p.
252, Rollo)
Under this factual backdrop, the petitioners contend that there was
actually no transfer of ownership of the subject parcel of land since
the Pachecos remained in control of the property. Thus, the
petitioners allege: "Considering that the beneficial ownership and
control of petitioner corporation remained in the hands of the
original co-owners, there was no transfer of actual ownership
interests over the land when the same was transferred to petitioner
corporation in exchange for the latter's shares of stock. The transfer
of ownership, if anything, was merely in form but not in substance.
In reality, petitioner corporation is a mere alter ego or conduit of
the Pacheco co-owners; hence the corporation and the co-owners
should be deemed to be the same, there being in substance and in
effect an Identity of interest." (p. 254, Rollo)
The petitioners maintain that the Pachecos did not sell the property.
They argue that there was no sale and that they exchanged the land
for shares of stocks in their own corporation. "Hence, such transfer
is not within the letter, or even spirit of the contract. There is a sale
when ownership is transferred for a price certain in money or its
equivalent (Art. 1468, Civil Code) while there is a barter or exchange
when one thing is given in consideration of another thing (Art. 1638,
Civil Code)." (pp. 254-255, Rollo)
On the other hand, the private respondent argues that Delpher
Trades Corporation is a corporate entity separate and distinct from
the Pachecos. Thus, it contends that it cannot be said that Delpher
Trades Corporation is the Pacheco's same alter ego or conduit; that
petitioner Delfin Pacheco, having treated Delpher Trades
Corporation as such a separate and distinct corporate entity, is not a
party who may allege that this separate corporate existence should
be disregarded. It maintains that there was actual transfer of
ownership interests over the leased property when the same was
transferred to Delpher Trades Corporation in exchange for the
latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by
subscription or by purchasing stock directly from the corporation or
from individual owners thereof (Salmon, Dexter & Co. v. Unson, 47
148
Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609). In the case at
bar, in exchange for their properties, the Pachecos acquired 2,500
original unissued no par value shares of stocks of the Delpher
Trades Corporation. Consequently, the Pachecos became
stockholders of the corporation by subscription "The essence of the
stock subscription is an agreement to take and pay for original
unissued shares of a corporation, formed or to be formed."
(Rohrlich 243, cited in Agbayani, Commentaries and Jurisprudence
on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p.
430) It is significant that the Pachecos took no par value shares in
exchange for their properties.
A no-par value share does not purport to represent any stated
proportionate interest in the capital stock measured by value, but
only an aliquot part of the whole number of such shares of the
issuing corporation. The holder of no-par shares may see from the
certificate itself that he is only an aliquot sharer in the assets of the
corporation. But this character of proportionate interest is not
hidden beneath a false appearance of a given sum in money, as in
the case of par value shares. The capital stock of a corporation
issuing only no-par value shares is not set forth by a stated amount
of money, but instead is expressed to be divided into a stated
number of shares, such as, 1,000 shares. This indicates that a
shareholder of 100 such shares is an aliquot sharer in the assets of
the corporation, no matter what value they may have, to the extent
of 100/1,000 or 1/10. Thus, by removing the par value of shares, the
attention of persons interested in the financial condition of a
corporation is focused upon the value of assets and the amount of
its debts. (Agbayani, Commentaries and Jurisprudence on the
Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 107).
ATTY. LINSANGAN:

Moreover, there was no attempt to state the true or current market

value of the real estate. Land valued at P300.00 a square meter was
turned over to the family's corporation for only P14.00 a square
meter.
Q Mr. Neria, from the point of view of taxation, is there any benefit
to the spouses Hernandez and Pacheco in connection with their
execution of a deed of exchange on the properties for no par value
shares of the defendant corporation?

It is to be stressed that by their ownership of the 2,500 no par

shares of stock, the Pachecos have control of the corporation. Their A Yes, sir.
equity capital is 55% as against 45% of the other stockholders, who
also belong to the same family group.
COURT:

In effect, the Delpher Trades Corporation is a business conduit of

the Pachecos. What they really did was to invest their properties Q What do you mean by "point of view"?
and change the nature of their ownership from unincorporated to
incorporated form by organizing Delpher Trades Corporation to take
control of their properties and at the same time save on inheritance A To take advantage for both spouses and corporation in entering in
taxes. the deed of exchange.

As explained by Eduardo Neria: ATTY. LINSANGAN:

xxx xxx xxx

149
Q (What do you mean by "point of view"?) What are these benefits
to the spouses of this deed of exchange?
A Continuous control of the property, tax exemption benefits, and
other inherent benefits in a corporation.
Q What are these advantages to the said spouses from the point of
view of taxation in entering in the deed of exchange?
A Having fulfilled the conditions in the income tax law, providing for
tax free exchange of property, they were able to execute the deed
of exchange free from income tax and acquire a corporation.
Q What provision in the income tax law are you referring to?
A I refer to Section 35 of the National Internal Revenue Code under
par. C-sub-par. (2) Exceptions regarding the provision which I quote:
"No gain or loss shall also be recognized if a person exchanges his
property for stock in a corporation of which as a result of such
exchange said person alone or together with others not exceeding
four persons gains control of said corporation."
150
Q Did you explain to the spouses this benefit at the time you
executed the deed of exchange?
A Yes, sir
Q You also, testified during the last hearing that the decision to
have no par value share in the defendant corporation was for the
purpose of flexibility. Can you explain flexibility in connection with
the ownership of the property in question?
A There is flexibility in using no par value shares as the value is
determined by the board of directors in increasing capitalization.
The board can fix the value of the shares equivalent to the capital
requirements of the corporation.
Q Now also from the point of taxation, is there any flexibility in the
holding by the corporation of the property in question?
A Yes, since a corporation does not die it can continue to hold on to
the property indefinitely for a period of at least 50 years. On the
other hand, if the property is held by the spouse the property will
be tied up in succession proceedings and the consequential
payments of estate and inheritance taxes when an owner dies.
 ownership from one form to another. The ownership remained in
the same hands. Hence, the private respondent has no basis for its
Q Now what advantage is this continuity in relation to ownership by claim of a light of first refusal under the lease contract.
a particular person of certain properties in respect to taxation?

WHEREFORE, the instant petition is hereby GRANTED, The

A The property is not subjected to taxes on succession as the
corporation does not die.
Q So the benefit you are talking about are inheritance taxes?
questioned decision and resolution of the then Intermediate
Appellate Court are REVERSED and SET ASIDE. The amended
complaint in Civil Case No. 885-V-79 of the then Court of First
Instance of Bulacan is DISMISSED. No costs.

SO ORDERED.
A Yes, sir. (pp. 3-5, tsn., December 15, 1981)

The records do not point to anything wrong or objectionable about

this "estate planning" scheme resorted to by the Pachecos. "The
legal right of a taxpayer to decrease the amount of what otherwise
could be his taxes or altogether avoid them, by means which the
law permits, cannot be doubted." (Liddell & Co., Inc. v. The collector
of Internal Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293
U.S. 465, 7 L. ed. 596).

The "Deed of Exchange" of property between the Pachecos and

Delpher Trades Corporation cannot be considered a contract of sale.
There was no transfer of actual ownership interests by the Pachecos
to a third party. The Pacheco family merely changed their

151
G.R. No. 147188 September 14, 2004 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.
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs. The case at bar stemmed from a Notice of Assessment sent to CIC
THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co- by the Commissioner of Internal Revenue for deficiency income tax
administrators Lorna Kapunan and Mario Luza Bautista, arising from an alleged simulated sale of a 16-storey commercial
respondents. building known as Cibeles Building, situated on two parcels of land
on Ayala Avenue, Makati City.

DECISION
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
DAVIDE, JR., C.J.:
building stands for an amount of not less than ₱90 million.4

This Court is called upon to determine in this case whether the tax
On 30 August 1989, Toda purportedly sold the property for ₱100
planning scheme adopted by a corporation constitutes tax evasion
million to Rafael A. Altonaga, who, in turn, sold the same property
that would justify an assessment of deficiency income tax.
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
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.
For the sale of the property to RMI, Altonaga paid capital gains tax
Case No. 5328,3 which held that the respondent Estate of Benigno
in the amount of ₱10 million.6
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

152
On 16 April 1990, CIC filed its corporate annual income tax return7 from the Commissioner of Internal Revenue for deficiency income
for the year 1989, declaring, among other things, its gain from the tax for the year 1989 in the amount of ₱79,099,999.22, computed
sale of real property in the amount of ₱75,728.021. After crediting as follows:
withholding taxes of ₱254,497.00, it paid ₱26,341,2078 for its net
taxable income of ₱75,987,725.
Income Tax – 1989

On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Net Income per return ₱75,987,725.00
Hun T. Choa for ₱12.5 million, as evidenced by a Deed of Sale of Add: Additional gain on sale of real property taxable under ordinary
Shares of Stocks.9 Three and a half years later, or on 16 January corporate income but were substituted with individual capital
1994, Toda died. gains(₱200M – 100M)

On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an 100,000,000.00

assessment notice10 and demand letter to the CIC for deficiency
income tax for the year 1989 in the amount of ₱79,099,999.22. Total Net Taxable Income per investigation ₱175,987,725.00

Tax Due thereof at 35% ₱ 61,595,703.75

The new CIC asked for a reconsideration, asserting that the Less: Payment already made
assessment should be directed against the old CIC, and not against
1. Per return ₱26,595,704.00
the new CIC, which is owned by an entirely different set of
stockholders; moreover, Toda had undertaken to hold the buyer of 2. Thru Capital Gains Tax made
his stockholdings and the CIC free from all tax liabilities for the fiscal
years 1987-1989.11 by R.A. Altonaga 10,000,000.00 36,595,704.00 Balance of
tax due

On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented

by special co-administrators Lorna Kapunan and Mario Luza ₱ 24,999,999.75
Bautista, received a Notice of Assessment12 dated 9 January 1995

153
Add: 50% Surcharge

12,499,999.88 On 15 February 1996, the Estate filed a petition for review15 with
the CTA alleging that the Commissioner erred in holding the Estate
25% Surcharge liable for income tax deficiency; that the inference of fraud of the
6,249,999.94 sale of the properties is unreasonable and unsupported; and that
the right of the Commissioner to assess CIC had already prescribed.
Total

₱ 43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94 (.808) 35,349,999.65
TOTAL AMT. DUE & COLLECTIBLE
₱ 79,099,999.22
==============
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 controlled by Toda by
covering up the additional gain of ₱100 million, which resulted in
the change in the income structure of the proceeds of the sale of
the two parcels of land and the building thereon to an individual
capital gains, thus evading the higher corporate income tax rate of
35%.
In his Answer16 and Amended Answer,17 the Commissioner argued
that the two transactions actually constituted a single sale of the
property by CIC to RMI, and that Altonaga was neither the buyer of
the property from CIC nor the seller of the same property to RMI.
The additional gain of ₱100 million (the difference between the
second simulated sale for ₱200 million and the first simulated sale
for ₱100 million) realized by CIC was taxed at the rate of only 5%
purportedly as capital gains tax of Altonaga, instead of at the rate of
35% as corporate income tax of CIC. The income tax return filed by
CIC for 1989 with intent to evade payment of the tax was thus false
or fraudulent. Since such falsity or fraud was discovered by the BIR
only on 8 March 1991, the assessment issued on 9 January 1995
was well within the prescriptive period prescribed by Section 223 (a)
of the National Internal Revenue Code of 1986, which provides that
tax may be assessed within ten years from the discovery of the
falsity or fraud. With the sale being tainted with fraud, the separate
corporate personality of CIC should be disregarded. Toda, being the
registered owner of the 99.991% shares of stock of CIC and the
beneficial owner of the remaining 0.009% shares registered in the
name of the individual directors of CIC, should be held liable for the
deficiency income tax, especially because the gains realized from

154
the sale were withdrawn by him as cash advances or paid to him as
cash dividends. Since he is already dead, his estate shall answer for
his liability.
In its decision18 of 3 January 2000, the CTA held that the
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 same constituted
mere tax avoidance, and not tax evasion. There being no proof of
fraudulent transaction, the applicable period for the BIR to assess
CIC is that prescribed in Section 203 of the NIRC of 1986, which is
three years after the last day prescribed by law for the filing of the
return. Thus, the government’s right to assess CIC prescribed on 15
April 1993. The assessment issued on 9 January 1995 was,
therefore, no longer valid. The CTA also ruled that the mere
ownership by Toda of 99.991% of the capital stock of CIC was not in
itself sufficient ground for piercing the separate corporate
personality of CIC. Hence, the CTA declared that the Estate is not
liable for deficiency income tax of ₱79,099,999.22 and, accordingly,
cancelled and set aside the assessment issued by the Commissioner
on 9 January 1995.
by CIC and derived his salary from a foreign corporation (Aerobin,
Inc.) duly owned by Toda for representation services rendered. The
CTA denied20 the motion for reconsideration, prompting the
Commissioner to file a petition for review21 with the Court of
Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals
affirmed the decision of the CTA, reasoning that the CTA, being
more advantageously situated and having the necessary expertise in
matters of taxation, is "better situated to determine the
correctness, propriety, and legality of the income tax assessments
assailed by the Toda Estate."22
Unsatisfied with the decision of the Court of Appeals, the
Commissioner filed the present petition invoking the following
grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT
COMMITTED NO FRAUD WITH INTENT TO EVADE THE TAX ON THE
SALE OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION.

In its motion for reconsideration,19 the Commissioner insisted that

the sale of the property owned by CIC was the result of the
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE
connivance between Toda and Altonaga. She further alleged that
SEPARATE CORPORATE PERSONALITY OF CIBELES INSURANCE
the latter was a representative, dummy, and a close business
CORPORATION.
associate of the former, having held his office in a property owned

155
 To resolve the grounds raised by the Commissioner, the following
questions are pertinent:
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF
PETITIONER TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX
FOR THE YEAR 1989 HAD PRESCRIBED.
1. Is this a case of tax evasion or tax avoidance?

The Commissioner reiterates her arguments in her previous

pleadings and insists that the sale by CIC of the Cibeles property was 2. Has the period for assessment of deficiency income tax for the
in connivance with its dummy Rafael Altonaga, who was financially year 1989 prescribed? and
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; 3. Can respondent Estate be held liable for the deficiency income
(2) the Deed of Absolute Sale between Altonaga and RMI was tax of CIC for the year 1989, if any?
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, We shall discuss these questions in seriatim.
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
Is this a case of tax evasion or tax avoidance?
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.
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
For its part, respondent Estate asserts that the Commissioner failed
should be used by the taxpayer in good faith and at arms length. Tax
to present the income tax return of Altonaga to prove that the latter
evasion, on the other hand, is a scheme used outside of those lawful
is financially incapable of purchasing the Cibeles property.
means and when availed of, it usually subjects the taxpayer to
further or additional civil or criminal liabilities.23

156

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,25 and 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.lavvphi1.net
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 investigation conducted by the BIR disclosed that Altonaga was

a close business associate and one of the many trusted corporate The scheme resorted to by CIC in making it appear that there were
executives of Toda. This information was revealed by Mr. Boy two sales of the subject properties, i.e., from CIC to Altonaga, and
Prieto, the assistant accountant of CIC and an old timer in the then from Altonaga to RMI cannot be considered a legitimate tax
company.27 But Mr. Prieto did not testify on this matter, hence, planning. Such scheme is tainted with fraud.
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

157
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.lavvphi1.net
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
158
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:
159
Sec. 269. Exceptions as to period of limitation of assessment and
collection of taxes.-(a) In the case of a false or fraudulent return
with intent to evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court 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
160
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 SO ORDERED.
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.

161