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G.R. No. 179115 September 26, 2012ASIA INTERNATIONAL AUCTIONEERS, INC., Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

R E S O L U T I O NPERLAS-BERNABE, J.:Before the Court is a Petition for Review seeking to reverse and set aside the Decision dated August 3, 2007 of the Court of Tax Appeals (CTA) En Banc, 1 and the Resolutions dated November 20, 20062 and February 22, 20073 of the CTA First Division dismissing Asia International Auctioneers, Inc.’s (AIA) appeal due to its alleged failure to timely protest the Commissioner of Internal Revenue’s (CIR) tax assessment.The Factual AntecedentsAIA is a duly organized corporation operating within the Subic Special Economic Zone. It is engaged in the importation of used motor vehicles and heavy equipment which it sells to the public through auction.4

On August 25, 2004, AIA received from the CIR a Formal Letter of Demand, dated July 9, 2004, containing an assessment for deficiency value added tax (VAT) and excise tax in the amounts of P 102,535,520.00 and P4,334,715.00, respectively, or a total amount of P 106,870,235.00, inclusive of penalties and interest, for auction sales conducted on February 5, 6, 7, and 8, 2004.5

AIA claimed that it filed a protest letter dated August 29, 2004 through registered mail on August 30, 2004.6 It also submitted additional supporting documents on September 24, 2004 and November 22, 2004.7

The CIR failed to act on the protest, prompting AIA to file a petition for review before the CTA on June 20, 2005,8to which the CIR filed its Answer on July 26, 2005.9

On March 8, 2006, the CIR filed a motion to dismiss10 on the ground of lack of jurisdiction citing the alleged failure of AIA to timely file its protest which thereby rendered the assessment final and executory. The CIR denied receipt of the protest letter dated August 29, 2004 claiming that it only received the protest letter dated September 24, 2004 on September 27, 2004, three days after the lapse of the 30-day period prescribed in Section 22811 of the Tax Code.12

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In opposition to the CIR’s motion to dismiss, AIA submitted the following evidence to prove the filing and the receipt of the protest letter dated August 29, 2004: (1) the protest letter dated August 29, 2004 with attached Registry Receipt No. 3824;13 (2) a Certification dated November 15, 2005 issued by Wilfredo R. De Guzman, Postman III, of the Philippine Postal Corporation of Olongapo City, stating that Registered Letter No. 3824 dated August 30, 2004 , addressed to the CIR, was dispatched under Bill No. 45 Page 1 Line 11 on September 1, 2004 from Olongapo City to Quezon City;14 (3) a Certification dated July 5, 2006 issued by Acting Postmaster, Josefina M. Hora, of the Philippine Postal Corporation-NCR, stating that Registered Letter No. 3824 was delivered to the BIR Records Section and was duly received by the authorized personnel on September 8, 2004;15 and (4) a certified photocopy of the Receipt of Important Communication Delivered issued by the BIR Chief of Records Division, Felisa U. Arrojado, showing that Registered Letter No. 3824 was received by the BIR.16 AIA also presented Josefina M. Hora and Felisa U. Arrojado as witnesses to testify on the due execution and the contents of the foregoing documents.Ruling of the Court of Tax AppealsAfter hearing both parties, the CTA First Division rendered the first assailed Resolution dated November 20, 2006 granting the CIR’s motion to dismiss. Citing Republic v. Court of Appeals,17 it ruled that "while a mailed letter is deemed received by the addressee in the course of the mail, still, this is merely a disputable presumption, subject to controversion, and a direct denial of the receipt thereof shifts the burden upon the party favored by the presumption to prove that the mailed letter indeed was received by the addressee."18

The CTA First Division faulted AIA for failing to present the registry return card of the subject protest letter. Moreover, it noted that the text of the protest letter refers to a Formal Demand Letter dated June 9, 2004 and not the subject Formal Demand Letter dated July 9, 2004. Furthermore, it rejected AIA’s argument that the September 24, 2004 letter merely served as a cover letter to the submission of its supporting documents pointing out that there was no mention therein of a prior separate protest letter.19

AIA’s motion for reconsideration was subsequently denied by the CTA First Division in its second assailed Resolution dated February 22, 2007. On appeal, the CTA En Banc in its Decision dated August 3, 2007 affirmed the ruling of the CTA First Division holding that AIA’s evidence was not sufficient to prove receipt by the CIR of the protest letter dated August 24, 2004.Hence, the instant petition.Issue Before the CourtBoth parties discussed the legal bases for AIA’s tax liability, unmindful of the fact that this case stemmed from the CTA’s dismissal of AIA’s petition for review for failure to file a timely protest, without passing upon the substantive merits of the case.Relevantly, on January 30, 2008, AIA filed a Manifestation and Motion with Leave of the Honorable Court to Defer or Suspend Further Proceedings20 on the ground that it availed of the Tax Amnesty Program under Republic Act 948021 (RA 9480), otherwise known as the Tax Amnesty Act of 2007. On February 13, 2008, it submitted to the Court a Certification of Qualification22 issued by the BIR on February 5, 2008 stating that AIA "has availed and is qualified for Tax Amnesty for the Taxable Year 2005 and Prior Years" pursuant to RA 9480.With AIA’s availment of the Tax Amnesty Program under RA 9480, the Court is tasked to first determine its effects on the instant petition.Ruling of the CourtA tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of violating a tax law. It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate.23

A tax amnesty, much like a tax exemption, is never favored or presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority.24

In 2007, RA 9480 took effect granting a tax amnesty to qualified taxpayers for all national internal revenue taxes for the taxable year 2005 and prior years, with or without assessments duly issued therefor, that have remained unpaid as of December 31, 2005.25

The Tax Amnesty Program under RA 9480 may be availed of by any person except those who are disqualified under Section 8 thereof, to wit:Section 8. Exceptions. — The tax amnesty provided in Section 5 hereof shall not extend to the following persons or cases existing as of the effectivity of this Act:(a) Withholding agents with respect to their withholding tax liabilities;(b) Those with pending cases falling under the jurisdiction of the Presidential Commission on Good Government;(c) Those with pending cases involving unexplained or unlawfully acquired wealth or under the Anti-Graft and Corrupt Practices Act;(d) Those with pending cases filed in court involving violation of the Anti-Money Laundering Law;(e) Those with pending criminal cases for tax evasion and other criminal offenses under Chapter II of Title X of the National Internal Revenue Code of 1997, as amended, and the felonies of frauds, illegal exactions and transactions, and malversation of public funds and property under Chapters III and IV of Title VII of the Revised Penal Code; and(f) Tax cases subject of final and executory judgment by the courts.(Emphasis supplied)The CIR contends that AIA is disqualified under Section 8(a) of RA 9480 from availing itself of the Tax Amnesty Program because it is "deemed" a withholding agent for the deficiency taxes. This argument is untenable.


The CIR did not assess AIA as a withholding agent that failed to withhold or remit the deficiency VAT and excise tax to the BIR under relevant provisions of the Tax Code. Hence, the argument that AIA is "deemed" a withholding agent for these deficiency taxes is fallacious.Indirect taxes, like VAT and excise tax, are different from withholding taxes.1âwphi1 To distinguish, in indirect taxes, the incidence of taxation falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it.26 On the other hand, in case of withholding taxes, the incidence and burden of taxation fall on the same entity, the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who merely collects, by withholding, the tax due from income payments to entities arising from certain transactions27and remits the same to the government. Due to this difference, the deficiency VAT and excise tax cannot be "deemed" as withholding taxes merely because they constitute indirect taxes. Moreover, records support the conclusion that AIA was assessed not as a withholding agent but, as the one directly liable for the said deficiency taxes.28

The CIR also argues that AIA, being an accredited investor/taxpayer situated at the Subic Special Economic Zone, should have availed of the tax amnesty granted under RA 939929 and not under RA 9480. This is also untenable.RA 9399 was passed prior to the passage of RA 9480. RA 9399 does not preclude taxpayers within its coverage from availing of other tax amnesty programs available or enacted in futuro like RA 9480. More so, RA 9480 does not exclude from its coverage taxpayers operating within special economic zones. As long as it is within the bounds of the law, a taxpayer has the liberty to choose which tax amnesty program it wants to avail.Lastly, the Court takes judicial notice of the "Certification of Qualification"30 issued by Eduardo A. Baluyut, BIR Revenue District Officer, stating that AlA "has availed and is qualified for Tax Amnesty for the Taxable Year 2005 and Prior Years" pursuant to RA 9480. In the absence of sufficient evidence proving that the certification was issued in excess of authority, the presumption that it was issued in the regular performance of the revenue district officer's official duty stands.31

WHEREFORE, the petition is DENIED for being MOOT and ACADEMIC in view of Asia International Auctioneers, Inc.'s (AlA) availment of the Tax Amnesty Program under RA 9480. Accordingly, the outstanding deficiency taxes of AlA are deemed fully settled.


ANGELES UNIVERSITY FOUNDATION, Petitioner, - versus - CITY OF ANGELES, JULIET G.QUINSAAT, in her capacity as

G.R. No. 189999 Present: LEONARDO-DE CASTRO,J.,*

Acting Chairperson, BERSAMIN, VILLARAMA, JR., PEREZ,** and PERLAS-BERNABE,*** JJ.

Treasurer of Angeles City and ENGR. DONATO N. DIZON, in his capacity as Acting Angeles City Building Official, Respondents.

Promulgated: June 27, 2012

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -xDECISION

VILLARAMA, JR., J.:Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, which seeks to reverse and set aside the Decision[1] dated July 28, 2009 and Resolution[2] dated October 12, 2009 of the Court of Appeals (CA) in CA-G.R. CV No. 90591. The CA reversed the Decision[3] dated September 21, 2007 of the Regional Trial Court of Angeles City, Branch 57 in Civil Case No. 12995 declaring petitioner exempt from the payment of building permit and other fees and ordering respondents to refund the same with interest at the legal rate.The factual antecedents:Petitioner Angeles University Foundation (AUF) is an educational institution established on May 25, 1962 and was converted into a non-stock, non-profit education foundation under the provisions of Republic Act (R.A.) No. 6055[4] on December 4, 1975.Sometime in August 2005, petitioner filed with the Office of the City Building Official an application for a building permit for the construction of an 11-storey building of the Angeles University Foundation Medical Center in its main campus located at MacArthur Highway, Angeles City, Pampanga. Said office issued a Building Permit Fee Assessment in the amount of P126,839.20. An Order of Payment was also issued by the City Planning and Development Office, Zoning Administration Unit requiring petitioner to pay the sum of P238,741.64 as Locational Clearance Fee.[5]

In separate letters dated November 15, 2005 addressed to respondents City Treasurer Juliet G. Quinsaat and Acting City Building Official Donato N. Dizon, petitioner claimed that it is exempt from the payment of the building permit and locational clearance fees, citing legal opinions rendered by the Department of Justice (DOJ). Petitioner also reminded the respondents that they have previously issued building permits acknowledging such exemption from payment of building permit fees on the construction of petitioner’s 4-storey AUF Information Technology Center building and the AUF Professional Schools building on July 27, 2000 and March 15, 2004, respectively.[6]

Respondent City Treasurer referred the matter to the Bureau of Local Government Finance (BLGF) of the Department of Finance, which in turn endorsed the query to the DOJ. Then Justice Secretary Raul M. Gonzalez, in his letter-reply dated December 6, 2005, cited previous issuances of his office (Opinion No. 157, s. 1981 and Opinion No. 147, s. 1982) declaring petitioner to be exempt from the payment of building permit fees. Under the 1st Indorsement dated January 6, 2006, BLGF reiterated the aforesaid opinion of the DOJ stating further that “xxx the Department of Finance, thru this Bureau, has no authority to review the resolution or the decision of the DOJ.”[7]

Petitioner wrote the respondents reiterating its request to reverse the disputed assessments and invoking the DOJ legal opinions which have been affirmed by Secretary Gonzalez. Despite petitioner’s plea, however, respondents refused to issue the building permits for the construction of the AUF Medical Center in the main campus and renovation of a school building located at Marisol Village. Petitioner then appealed the matter to City Mayor Carmelo F. Lazatin but no written response was received by petitioner.[8]

Consequently, petitioner paid under protest[9] the following:

Medical Center (new construction) Building Permit and Electrical Fee P 217,475.20Locational Clearance Fee 283,741.64Fire Code Fee 144,690.00 Total - P 645,906.84


School Building (renovation) Building Permit and Electrical Fee P 37,857.20Locational Clearance Fee 6,000.57Fire Code Fee 5,967.74 Total - P 49,825.51

Petitioner likewise paid the following sums as required by the City Assessor’s Office:

Real Property Tax – Basic Fee P 86,531.10 SEF 43,274.54 Locational Clearance Fee 1,125.00 Total – P130,930.64[10]

[GRAND TOTAL - P 826,662.99]

By reason of the above payments, petitioner was issued the corresponding Building Permit, Wiring Permit, Electrical Permit and Sanitary Building Permit. On June 9, 2006, petitioner formally requested the respondents to refund the fees it paid under protest. Under letters dated June 15, 2006 and August 7, 2006, respondent City Treasurer denied the claim for refund.[11]

On August 31, 2006, petitioner filed a Complaint[12] before the trial court seeking the refund of P826,662.99 plus interest at the rate of 12% per annum, and also praying for the award of attorney’s fees in the amount of P300,000.00 and litigation expenses. In its Answer,[13] respondents asserted that the claim of petitioner cannot be granted because its structures are not among those mentioned in Sec. 209 of the National Building Code as exempted from the building permit fee. Respondents argued that R.A. No. 6055 should be considered repealed on the basis of Sec. 2104 of the National Building Code. Since the disputed assessments are regulatory in nature, they are not taxes from which petitioner is exempt. As to the real property taxes imposed on petitioner’s property located in Marisol Village, respondents pointed out that said premises will be used as a school dormitory which cannot be considered as a use exclusively for educational activities. Petitioner countered that the subject building permit are being collected on the basis of Art. 244 of the Implementing Rules and Regulations of the Local Government Code , which impositions are really taxes considering that they are provided under the chapter on “Local Government Taxation” in reference to the “revenue raising power” of local government units (LGUs). Moreover, petitioner contended that, as held in Philippine Airlines, Inc. v. Edu,[14] fees may be regarded as taxes depending on the purpose of its exaction. In any case, petitioner pointed out that the Local Government Code of 1991 provides in Sec. 193 that non-stock and non-profit educational institutions like petitioner retained the tax exemptions or incentives which have been granted to them. Under Sec. 8 of R.A. No. 6055 and applicable jurisprudence and DOJ rulings, petitioner is clearly exempt from the payment of building permit fees.[15]

On September 21, 2007, the trial court rendered judgment in favor of the petitioner and against the respondents. The dispositive portion of the trial court’s decision[16] reads:WHEREFORE, premises considered, judgment is rendered as follows:a. Plaintiff is exempt from the payment of building permit and other fees Ordering the Defendants to refund the total amount of Eight Hundred Twenty Six Thousand Six Hundred Sixty Two Pesos and 99/100 Centavos (P826,662.99) plus legal interest thereon at the rate of twelve percent (12%) per annum commencing on the date of extra-judicial demand or June 14, 2006, until the aforesaid amount is fully paid.b. Finding the Defendants liable for attorney’s fees in the amount of Seventy Thousand Pesos (Php70,000.00), plus litigation expenses.c. Ordering the Defendants to pay the costs of the suit.SO ORDERED.[17]

Respondents appealed to the CA which reversed the trial court, holding that while petitioner is a tax-free entity, it is not exempt from the payment of regulatory fees. The CA noted that under R.A. No. 6055, petitioner was granted exemption only from income tax derived from its educational activities and real property used exclusively for educational purposes. Regardless of the repealing clause in the National Building Code, the CA held that petitioner is still not exempt because a building permit cannot be considered as the other “charges” mentioned in Sec. 8 of R.A. No. 6055 which refers to impositions in the nature of tax, import duties, assessments and other collections for revenue purposes, following the ejusdem generisrule. The CA further stated that petitioner has not shown that the fees collected were excessive and more than the cost of surveillance, inspection and regulation. And while petitioner may be exempt from the payment of real property tax, petitioner in this case merely alleged that “the subject property is to be used actually, directly and exclusively for educational purposes,” declaring merely that such premises is intended to house the sports and other facilities of the university but by reason of the occupancy of informal settlers on the area, it cannot yet utilize the same for its intended use. Thus, the CA concluded that


petitioner is not entitled to the refund of building permit and related fees, as well as real property tax it paid under protest. Petitioner filed a motion for reconsideration which was denied by the CA. Hence, this petition raising the following grounds:THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORDANCE WITH LAW AND THE APPLICABLE DECISIONS OF THE HONORABLE COURT AND HAS DEPARTED FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS NECESSITATING THE HONORABLE COURT’S EXERCISE OF ITS POWER OF SUPERVISION CONSIDERING THAT:I. IN REVERSING THE TRIAL COURT’S DECISION DATED 21 SEPTEMBER 2007, THE COURT OF APPEALS EFFECTIVELY WITHDREW THE PRIVILEGE OF EXEMPTION GRANTED TO NON-STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS BY VIRTUE OF RA 6055 WHICH WITHDRAWAL IS BEYOND THE AUTHORITY OF THE COURT OF APPEALS TO DO.A. INDEED, RA 6055 REMAINS VALID AND IS IN FULL FORCE AND EFFECT. HENCE, THE COURT OF APPEALS ERRED WHEN IT RULED IN THE QUESTIONED DECISION THAT NON-STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS ARE NOT EXEMPT.B. THE COURT OF APPEALS’ APPLICATION OF THE PRINCIPLE OF EJUSDEM GENERIS IN RULING IN THE QUESTIONED DECISION THAT THE TERM “OTHER CHARGES IMPOSED BY THE GOVERNMENT” UNDER SECTION 8 OF RA 6055 DOES NOT INCLUDE BUILDING PERMIT AND OTHER RELATED FEES AND/OR CHARGES IS BASED ON ITS ERRONEOUS AND UNWARRANTED ASSUMPTION THAT THE TAXES, IMPORT DUTIES AND ASSESSMENTS AS PART OF THE PRIVILEGE OF EXEMPTION GRANTED TO NON-STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS ARE LIMITED TO COLLECTIONS FOR REVENUE PURPOSES.C. EVEN ASSUMING THAT THE BUILDING PERMIT AND OTHER RELATED FEES AND/OR CHARGES ARE NOT INCLUDED IN THE TERM “OTHER CHARGES IMPOSED BY THE GOVERNMENT” UNDER SECTION 8 OF RA 6055, ITS IMPOSITION IS GENERALLY A TAX MEASURE AND THEREFORE, STILL COVERED UNDER THE PRIVILEGE OF EXEMPTION.II. THE COURT OF APPEALS’ DENIAL OF PETITIONER AUF’S EXEMPTION FROM REAL PROPERTY TAXES CONTAINED IN ITS QUESTIONED DECISION AND QUESTIONED RESOLUTION IS CONTRARY TO APPLICABLE LAW AND JURISPRUDENCE.[18]

Petitioner stresses that the tax exemption granted to educational stock corporations which have converted into non-profit foundations was broadened to include any other charges imposed by the Government as one of the incentives for such conversion. These incentives necessarily included exemption from payment of building permit and related fees as otherwise there would have been no incentives for educational foundations if the privilege were only limited to exemption from taxation, which is already provided under the Constitution. Petitioner further contends that this Court has consistently held in several cases that the primary purpose of the exaction determines its nature. Thus, a charge of a fixed sum which bears no relation to the cost of inspection and which is payable into the general revenue of the state is a tax rather than an exercise of the police power. The standard set by law in the determination of the amount that may be imposed as license fees is such that is commensurate with the cost of regulation, inspection and licensing. But in this case, the amount representing the building permit and related fees and/or charges is such an exorbitant amount as to warrant a valid imposition; such amount exceeds the probable cost of regulation. Even with the alleged criteria submitted by the respondents (e.g., character of occupancy or use of building/structure, cost of construction, floor area and height), and the construction by petitioner of an 11-storey building, the costs of inspection will not amount to P645,906.84, presumably for the salary of inspectors or employees, the expenses of transportation for inspection and the preparation and reproduction of documents. Petitioner thus concludes that the disputed fees are substantially and mainly for purposes of revenue rather than regulation, so that even these fees cannot be deemed “charges” mentioned in Sec. 8 of R.A. No. 6055, they should properly be treated as tax from which petitioner is exempt. In their Comment, respondents maintain that petitioner is not exempt from the payment of building permit and related fees since the only exemptions provided in the National Building Code are public buildings and traditional indigenous family dwellings. Inclusio unius est exclusio alterius. Because the law did not include petitioner’s buildings from those structures exempt from the payment of building permit fee, it is therefore subject to the regulatory fees imposed under the National Building Code. Respondents assert that the CA correctly distinguished a building permit fee from those “other charges” mentioned in Sec. 8 of R.A. No. 6055. As stated by petitioner itself, charges refer to pecuniary liability, as rents, and fees against persons or property. Respondents point out that a building permit is classified under the term “fee.” A fee is generally imposed to cover the cost of regulation as activity or privilege and is essentially derived from the exercise of police power; on the other hand, impositions for services rendered by the local government units or for conveniences furnished, are referred to as “service charges”. Respondents also disagreed with petitioner’s contention that the fees imposed and collected are exorbitant and exceeded the probable expenses of regulation. These fees are based on computations and assessments made by the responsible officials of the City Engineer’s Office in accordance with the Schedule of Fees and criteria provided in the National Building Code. The bases of assessment cited by petitioner (e.g. salary of employees, expenses of transportation and preparation and reproduction of documents) refer to charges and fees on business and occupation under Sec. 147 of the Local Government Code, which do not apply to building permit fees. The


parameters set by the National Building Code can be considered as complying with the reasonable cost of regulation in the assessment and collection of building permit fees. Respondents likewise contend that the presumption of regularity in the performance of official duty applies in this case. Petitioner should have presented evidence to prove its allegations that the amounts collected are exorbitant or unreasonable. For resolution are the following issues: (1) whether petitioner is exempt from the payment of building permit and related fees imposed under the National Building Code; and (2) whether the parcel of land owned by petitioner which has been assessed for real property tax is likewise exempt. R.A. No. 6055 granted tax exemptions to educational institutions like petitioner which converted to non-stock, non-profit educational foundations. Section 8 of said law provides:SECTION 8. The Foundation shall be exempt from the payment of all taxes, import duties, assessments, and other charges imposed by the Government onall income derived from or property, real or personal, used exclusively for the educational activities of the Foundation.(Emphasis supplied.) On February 19, 1977, Presidential Decree (P.D.) No. 1096 was issued adopting the National Building Code of the Philippines. The said Code requires every person, firm or corporation, including any agency or instrumentality of the government to obtain a building permit for any construction, alteration or repair of any building or structure. [19]Building permit refers to “a document issued by the Building Official x x x to anowner/applicant to proceed with the construction, installation, addition, alteration, renovation, conversion, repair, moving, demolition or other work activity of a specific project/building/structure or portions thereof after the accompanying principal plans, specifications and other pertinent documents with the duly notarized application are found satisfactory and substantially conforming with the National Building Code of the Philippines x x x and its Implementing Rules and Regulations (IRR).”[20] Building permit fees refers to the basic permit fee and other charges imposed under the National Building Code. Exempted from the payment of building permit fees are: (1) public buildings and (2) traditional indigenous family dwellings.[21] Not being expressly included in the enumeration of structures to which the building permit fees do not apply, petitioner’s claim for exemption rests solely on its interpretation of the term “other charges imposed by the National Government” in the tax exemption clause of R.A. No. 6055. A “charge” is broadly defined as the “price of, or rate for, something,” while the word “fee” pertains to a “charge fixed by law for services of public officers or for use of a privilege under control of government.”[22] As used in the Local Government Code of 1991 (R.A. No. 7160),charges refers to pecuniary liability, as rents or fees against persons or property, while fee means a charge fixed by law or ordinance for the regulation or inspection of a business or activity.[23]

That “charges” in its ordinary meaning appears to be a general term which could cover a specific “fee” does not support petitioner’s position that building permit fees are among those “other charges” from which it was expressly exempted. Note that the “other charges” mentioned in Sec. 8 of R.A. No. 6055 is qualified by the words “imposed by the Government on all x x x property used exclusively for the educational activities of the foundation.” Building permit fees are not impositions on property but on the activity subject of government regulation. While it may be argued that the fees relate to particular properties, i.e., buildings and structures, they are actually imposed on certain activities the owner may conduct either to build such structures or to repair, alter, renovate or demolish the same. This is evident from the following provisions of the National Building Code: Section 102. Declaration of Policy It is hereby declared to be the policy of the State to safeguard life, health, property, and public welfare, consistent with theprinciples of sound environmental management and control; and tothis end, make it the purpose of this Code to provide for allbuildings and structures, a framework of minimum standards and requirements to regulate and control their location, site, design quality of materials, construction, use, occupancy, and maintenance. Section 103. Scope and Application(a) The provisions of this Code shall apply to the design,location, sitting, construction, alteration, repair,conversion, use, occupancy, maintenance, moving, demolitionof, and addition to public and private buildings andstructures, except traditional indigenous family dwellingsas defined herein. x x x xSection 301. Building PermitsNo person, firm or corporation, including any agency orinstrumentality of the government shall erect, construct, alter, repair, move, convert or demolish any building or structure or causethe same to be done without first obtaining a building permittherefor from the Building Official assigned in the place where thesubject building is located or the building work is to be done. (Italics supplied.)That a building permit fee is a regulatory imposition is highlighted by the fact that in processing an application for a building permit, the Building Official shall see to it that the applicant satisfies and conforms with approved standard requirements on zoning and land use, lines and grades, structural design, sanitary and sewerage, environmental health, electrical and mechanical safety as well as with other rules and regulations implementing the National Building Code.[24] Thus, ancillary permits such as electrical permit, sanitary permit and zoning clearance must also be secured and the corresponding fees paid before a building permit may be issued. And as can be gleaned from the implementing rules and regulations of the National Building Code, clearances from various government authorities exercising and enforcing regulatory functions affecting buildings/structures, like local government units, may be further required before a building permit may be issued.[25]


Since building permit fees are not charges on property, they are not impositions from which petitioner is exempt.As to petitioner’s argument that the building permit fees collected by respondents are in reality taxes because the primary purpose is to raise revenues for the local government unit, the same does not hold water. A charge of a fixed sum which bears no relation at all to the cost of inspection and regulation may be held to be a tax rather than an exercise of the police power.[26] In this case, the Secretary of Public Works and Highways who is mandated to prescribe and fix the amount of fees and other charges that the Building Official shall collect in connection with the performance of regulatory functions,[27] has promulgated and issued the Implementing Rules and Regulations[28] which provide for the bases of assessment of such fees, as follows:1. Character of occupancy or use of building2. Cost of construction “ 10,000/sq.m (A,B,C,D,E,G,H,I), 8,000 (F), 6,000 (J)3. Floor area4. HeightPetitioner failed to demonstrate that the above bases of assessment were arbitrarily determined or unrelated to the activity being regulated. Neither has petitioner adduced evidence to show that the rates of building permit fees imposed and collected by the respondents were unreasonable or in excess of the cost of regulation and inspection.In Chevron Philippines, Inc. v. Bases Conversion Development Authority,[29] this Court explained:In distinguishing tax and regulation as a form of police power, the determining factor is the purpose of the implemented measure. If the purpose is primarily to raise revenue, then it will be deemed a tax even though the measure results in some form of regulation. On the other hand, if the purpose is primarily to regulate, then it is deemed a regulation and an exercise of the police power of the state, even though incidentally, revenue is generated. Thus, in Gerochi v. Department of Energy, the Court stated:“The conservative and pivotal distinction between these two (2) powers rests in the purpose for which the charge is made. If generation of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised does not make the imposition a tax.”[30] (Emphasis supplied.)Concededly, in the case of building permit fees imposed by the National Government under the National Building Code, revenue is incidentally generated for the benefit of local government units. Thus:Section 208. FeesEvery Building Official shall keep a permanent record and accurate account of all fees and other charges fixed and authorized by the Secretary to be collected and received under this Code.Subject to existing budgetary, accounting and auditing rules and regulations, the Building Official is hereby authorized to retain not more than twenty percent of his collection for the operating expenses of his office.The remaining eighty percent shall be deposited with the provincial, city or municipal treasurer and shall accrue to the General Fund of the province, city or municipality concerned.Petitioner’s reliance on Sec. 193 of the Local Government Code of 1991 is likewise misplaced. Said provision states:SECTION 193. Withdrawal of Tax Exemption Privileges. -- Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis supplied.) Considering that exemption from payment of regulatory fees was not among those “incentives” granted to petitioner under R.A. No. 6055, there is no such incentive that is retained under the Local Government Code of 1991. Consequently, no reversible error was committed by the CA in ruling that petitioner is liable to pay the subject building permit and related fees. Now, on petitioner’s claim that it is exempted from the payment of real property tax assessed against its real property presently occupied by informal settlers. Section 28(3), Article VI of the 1987 Constitution provides:x x x x(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation.x x x x (Emphasis supplied.)Section 234(b) of the Local Government Code of 1991 implements the foregoing constitutional provision by declaring that --SECTION 234. Exemptions from Real Property Tax.– The following are exempted from payment of the real property tax:x x x x(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable or educational purposes;x x x x (Emphasis supplied.)


In Lung Center of the Philippines v. Quezon City,[31] this Court held that only portions of the hospital actually, directly and exclusively used for charitable purposes are exempt from real property taxes, while those portions leased to private entities and individuals are not exempt from such taxes. We explained the condition for the tax exemption privilege of charitable and educational institutions, as follows:Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes.“Exclusive” is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and “exclusively” is defined, “in a manner to exclude; as enjoying a privilege exclusively.” If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. The words “dominant use” or “principal use” cannot be substituted for the words “used exclusively” without doing violence to the Constitutions and the law. Solely is synonymous with exclusively.What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes.[32] (Emphasis and underscoring supplied.) Petitioner failed to discharge its burden to prove that its real property is actually, directly and exclusively used for educational purposes. While there is no allegation or proof that petitioner leases the land to its present occupants, still there is no compliance with the constitutional and statutory requirement that said real property is actually, directly and exclusively used for educational purposes. The respondents correctly assessed the land for real property taxes for the taxable period during which the land is not being devoted solely to petitioner’s educational activities. Accordingly, the CA did not err in ruling that petitioner is likewise not entitled to a refund of the real property tax it paid under protest. WHEREFORE, the petition is DENIED. The Decision dated July 28, 2009 and Resolution dated October 12, 2009 of the Court of Appeals in CA-G.R. CV No. 90591 are AFFIRMED.


THIRD DIVISION

RIZAL COMMERCIAL BANKING CORPORATION, Petitioner,

- versus -

COMMISSIONER OF INTERNAL REVENUE,Respondent.

G.R. No. 170257 Present: VELASCO, JR., J.,Chairperson,PERALTA,ABAD,VILLARAMA, JR.,* andMENDOZA, JJ. Promulgated: September 7, 2011

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

D E C I S I O N MENDOZA, J.: This is a petition for review on certiorari under Rule 45 seeking to set aside the July 27, 2005 Decision [1] and October 26, 2005 Resolution[2] of the Court of Tax Appeals En Banc (CTA-En Banc) in C.T.A. E.B. No. 83 entitled “Rizal Commercial Banking Corporation v. Commissioner of Internal Revenue.”

THE FACTS Petitioner Rizal Commercial Banking Corporation (RCBC) is a corporation engaged in general banking operations. It seasonably filed its Corporation Annual Income Tax Returns for Foreign Currency Deposit Unit for the calendar years 1994 and 1995.[3] On August 15, 1996, RCBC received Letter of Authority No. 133959 issued by then Commissioner of Internal Revenue (CIR)Liwayway Vinzons-Chato, authorizing a special audit team to examine the books of accounts and other accounting records for all internal revenue taxes from January 1, 1994 to December 31, 1995.[4]

On January 23, 1997, RCBC executed two Waivers of the Defense of Prescription Under the Statute of Limitations of the National Internal Revenue Code covering the internal revenue taxes due for the years 1994 and 1995, effectively extending the period of the Bureau of Internal Revenue (BIR) to assess up to December 31, 2000.[5]

Subsequently, on January 27, 2000, RCBC received a Formal Letter of Demand together with Assessment Notices from the BIR for the following deficiency tax assessments:[6]

Particulars Basic Tax InterestCompromise Penalties Total

Deficiency Income Tax 1995 (ST-INC-95-0199-2000) ₱ 252,150,988.01 ₱ 191,496,585.96 ₱ 25,000.00 ₱ 443,672,573.971994 (ST-INC-94-0200-2000) 216,478,397.90 207,819,261.99 25,000.00 424,322,659.89Deficiency Gross Receipts Tax 1995 (ST-GRT-95-0201-2000) 13,697,083.68 12,428,696.21 2,819,745.52 28,945,525.411994 (ST-GRT-94-0202-2000) 2,488,462.38 2,755,716.42 25,000.00 5,269,178.80Deficiency Final Withholding Tax

1995 (ST-EWT-95-0203-2000) 64,365,610.12 58,757,866.78 25,000.00 123,148,477.151994 (ST-EWT-94-0204-2000) 53,058,075.25 59,047,096.34 25,000.00 112,130,171.59Deficiency Final Tax on FCDU Onshore Income

1995 (ST-OT-95-0205-2000) 81,508,718.20 61,901,963,.52 25,000.00 143,435,681.721994 (ST-OT-94-0206-2000) 34,429,503.10 33,052,322.98 25,000.00 67,506,826.08Deficiency Expanded Withholding Tax

1995 (ST-EWT-95-0207-2000) 5,051,415.22 4,583,640.33 113,000.00 9,748,055.551994 (ST-EWT-94-0208-2000) 4,482,740.35 4,067,626.31 78,200.00 8,628,566.66Deficiency Documentary Stamp Tax


1995 (ST-DST1-95-0209-2000) 351,900,539.39 315,804,946.26 250,000.00 667,955,485.651995 (ST-DST2-95-0210-2000) 367,207,105.29 331,535,844.68 300,000.00 699,042,949.971994 (ST-DST3-94-0211-2000) 460,370,640.05 512,193,460.02 300,000.00 972,864,100.071994 (ST-DST4-94-0212-2000) 223,037,675.89 240,050,706.09 300,000.00 463,388,381.98TOTALS ₱

2,130,226,954.83₱

2,035,495,733.89₱ 4,335,945.52 ₱

4,170,058,634.49

Disagreeing with the said deficiency tax assessment, RCBC filed a protest on February 24, 2000 and later submitted the relevant documentary evidence to support it. Much later on November 20, 2000, it filed a petition for review before the CTA, pursuant to Section 228 of the 1997 Tax Code.[7]

On December 6, 2000, RCBC received another Formal Letter of Demand with Assessment Notices dated October 20, 2000, following the reinvestigation it requested, which drastically reduced the original amount of deficiency taxes to the following:[8]

Particulars Basic Tax InterestSurcharge &/ Compromise Total

Deficiency Income Tax 1995 (INC-95-000003) ₱ 374,348.45 ₱ 346,656.92 ₱ 721,005.371994 (INC-94-000002) 1,392,366.28 1,568,605.52 2,960,971.80Deficiency Gross Receipts Tax 1995 (GRT-95-000004) 2,000,926.96 3,322,589.63 ₱ 1,367,222.04 6,690,738.631994 (GRT-94-000003) 138,368.61 161,872.32 300,240.93Deficiency Final Withholding Tax 1995 (FT-95-000005) 362,203.47 351,287.75 713,491.221994 (FT-94-000004) 188,746.43 220,807.47 409,553.90Deficiency Final Tax on FCDU Onshore Income

1995 (OT-95-000006) 81,508,718.20 79,052,291.08 160,561,009.281994 (OT-94-000005) 34,429,503.10 40,277,802.26 74,707,305.36Deficiency Expanded Withholding Tax

1995 (EWT-95-000004) 520,869.72 505,171.80 25,000.00 1,051,041.031994 (EWT-94-000003) 297,949.95 348,560.63 25,000.00 671,510.58Deficiency Documentary Stamp Tax

1995 (DST-95-000006) 599,890.72 149,972.68 749,863.401995 (DST2-95-000002) 24,953,842.46 6,238,460.62 31,192,303.081994 (DST-94-000005) 905,064.74 226,266.18 1,131,330.921994 (DST2-94-000001) 17,040,104.84 4,260,026.21 21,300,131.05TOTALS ₱ 164,712,903.44 ₱ 126,155,645.38 ₱ 12,291,947.73 ₱ 303,160,496.55

On the same day, RCBC paid the following deficiency taxes as assessed by the BIR:[9]

Particulars 1994 1995 TotalDeficiency Income Tax ₱ 2,965,549.44 ₱ 722,236.11 ₱ 3,687,785.55Deficiency Gross Receipts Tax 300,695.84 6,701,893.17 7,002,589.01Deficiency Final Withholding Tax 410,174.44 714,682.02 1,124,856.46Deficiency Expanded Withholding Tax

672,490.14 1,052,753.48 1,725,243.62

Deficiency Documentary Stamp Tax

1,131,330.92 749,863.40 1,881,194.32

TOTALS ₱ 5,480,240.78 ₱ 9,941,428.18 ₱ 15,421,668.96

RCBC, however, refused to pay the following assessments for deficiency onshore tax and documentary stamp tax which remained to be the subjects of its petition for review:[10]

Particulars 1994 1995 TotalDeficiency Final Tax on FCDU Onshore Income

Basic ₱ 34,429,503.10 ₱ 81,508,718.20 ₱ 115,938,221.30


Interest 40,277,802.26 79,052,291.08 119,330,093.34Sub Total ₱ 74,707,305.36 ₱ 160,561,009.28 ₱ 235,268,314.64Deficiency Documentary Stamp Tax

Basic ₱ 17,040,104.84 ₱ 24,953,842.46 ₱ 41,993,947.30Surcharge 4,260,026.21 6,238,460.62 10,498,486.83Sub Total ₱ 21,300,131.05 ₱ 31,192,303.08 ₱ 52,492,434.13TOTALS ₱ 96,007,436.41 ₱ 191,753,312.36 ₱ 287,760,748.77

RCBC argued that the waivers of the Statute of Limitations which it executed on January 23, 1997 were not valid because the same were not signed or conformed to by the respondent CIR as required under Section 222(b) of the Tax Code.[11] As regards the deficiency FCDU onshore tax, RCBC contended that because the onshore tax was collected in the form of a final withholding tax, it was the borrower, constituted by law as the withholding agent, that was primarily liable for the remittance of the said tax.[12]

On December 15, 2004, the First Division of the Court of Tax Appeals (CTA-First Division) promulgated its Decision[13]which partially granted the petition for review. It considered as closed and terminated the assessments for deficiency income tax, deficiency gross receipts tax, deficiency final withholding tax, deficiency expanded withholding tax, and deficiency documentary stamp tax (not an industry issue) for 1994 and 1995. [14] It, however, upheld the assessment for deficiency final tax on FCDU onshore income and deficiency documentary stamp tax for 1994 and 1995 and ordered RCBC to pay the following amounts plus 20% delinquency tax:[15]

Particulars 1994 1995 TotalDeficiency Final Tax on FCDU Onshore Income

Basic ₱ 22,356,324.43 ₱ 16,067,952.86 ₱ 115,938, 221.30Interest 26,153,837.08 15,583,713.19 119,330,093.34Sub Total 48,510,161.51 31,651,666.05 119,330,093.34Deficiency Documentary Stamp Tax (Industry Issue)

Basic ₱ 17,040,104.84 ₱ 24,953,842.46 ₱ 41,993,947.30Surcharge 4,260,026.21 6,238,460.62 10,498,486.83Sub Total 21,300,131.05 31,192,303.08 52,492,434.13TOTALS ₱69,810,292.56 ₱62,843,969.13 ₱171,822,527.47

Unsatisfied, RCBC filed its Motion for Reconsideration on January 21, 2005, arguing that: (1) the CTA erred in its addition of the total amount of deficiency taxes and the correct amount should only be ₱132,654,261.69 and not ₱171,822,527.47; (2) the CTA erred in holding that RCBC was estopped from questioning the validity of the waivers; (3) it was the payor-borrower as withholding tax agent, and not RCBC, who was liable to pay the final tax on FCDU, and (4) RCBC’s special savings account was not subject to documentary stamp tax.[16]

In its Resolution[17] dated April 11, 2005, the CTA-First Division substantially upheld its earlier ruling, except for its inadvertence in the addition of the total amount of deficiency taxes. As such, it modified its earlier decision and ordered RCBC to pay the amount of ₱132,654,261.69 plus 20% delinquency tax.[18]

RCBC elevated the case to the CTA-En Banc where it raised the following issues:

I.Whether or not the right of the respondent to assess deficiency onshore tax and documentary stamp tax for taxable year 1994 and 1995 had already prescribed when it issued the formal letter of demand and assessment notices for the said taxable years.

II. Whether or not petitioner is liable for deficiency onshore tax for taxable year 1994 and 1995.

III.

Whether or not petitioner’s special savings account is subject to documentary stamp tax under then Section 180 of the 1993 Tax Code.[19]


The CTA-En Banc, in its assailed Decision, denied the petition for lack of merit. It ruled that by receiving, accepting and paying portions of the reduced assessment, RCBC bound itself to the new assessment, implying that it recognized the validity of the waivers.[20] RCBC could not assail the validity of the waivers after it had received and accepted certain benefits as a result of the execution of the said waivers.[21] As to the deficiency onshore tax, it held that because the payor-borrower was merely designated by law to withhold and remit the said tax, it would then follow that the tax should be imposed on RCBC as the payee-bank.[22] Finally, in relation to the assessment of the deficiency documentary stamp tax on petitioner’s special savings account, it held that petitioner’s special savings account was a certificate of deposit and, as such, was subject to documentary stamp tax.[23]

Hence, this petition. While awaiting the decision of this Court, RCBC filed its Manifestation dated July 22, 2009, informing the Court that this petition, relative to the DST deficiency assessment, had been rendered moot and academic by its payment of the tax deficiencies on Documentary Stamp Tax (DST) on Special Savings Account (SSA) for taxable years 1994 and 1995 after the BIR approved its applications for tax abatement.[24]

In its November 17, 2009 Comment to the Manifestation, the CIR pointed out that the only remaining issues raised in the present petition were those pertaining to RCBC’s deficiency tax on FCDU Onshore Income for taxable years 1994 and 1995 in the aggregate amount of ₱80,161,827.56 plus 20% delinquency interest per annum. The CIR prayed that RCBC be considered to have withdrawn its appeal with respect to the CTA-En Banc ruling on its DST on SSA deficiency for taxable years 1994 and 1995 and that the questioned CTA decision regarding RCBC’s deficiency tax on FCDU Onshore Income for the same period be affirmed.[25]

THE ISSUES

Thus, only the following issues remain to be resolved by this Court: Whether petitioner, by paying the other tax assessment covered by the waivers of the statute of limitations, is rendered estopped from questioning the validity of the said waivers with respect to the assessment of deficiency onshore tax.[26]

and

Whether petitioner, as payee-bank, can be held liable for deficiency onshore tax, which is mandated by law to be collected at source in the form of a final withholding tax.[27]

THE COURT’S RULING Petitioner is estopped fromquestioning the validity of the waivers RCBC assails the validity of the waivers of the statute of limitations on the ground that the said waivers were merely attested to by Sixto Esquivias, then Coordinator for the CIR, and that he failed to indicate acceptance or agreement of the CIR, as required under Section 223 (b) of the 1977 Tax Code. [28] RCBC further argues that the principle of estoppel cannot be applied against it because its payment of the other tax assessments does not signify a clear intention on its part to give up its right to question the validity of the waivers.[29]

The Court disagrees. Under Article 1431 of the Civil Code, the doctrine of estoppel is anchored on the rule that “an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon.” A party is precluded from denying his own acts, admissions or representations to the prejudice of the other party in order to prevent fraud and falsehood.[30]

Estoppel is clearly applicable to the case at bench. RCBC, through its partial payment of the revised assessments issued within the extended period as provided for in the questioned waivers, impliedly admitted the validity of those waivers. Had petitioner truly believed that the waivers were invalid and that the assessments were issued beyond the prescriptive period, then it should not have paid the reduced amount of taxes in the revised assessment. RCBC’s subsequent action effectively belies its insistence that the waivers are invalid. The records show that on December 6, 2000, upon receipt of the revised assessment, RCBC immediately made payment on the uncontested taxes. Thus, RCBC is estopped from questioning the validity of the waivers. To hold otherwise and


allow a party to gainsay its own act or deny rights which it had previously recognized would run counter to the principle of equity which this institution holds dear.[31]

Liability for DeficiencyOnshore Withholding Tax RCBC is convinced that it is the payor-borrower, as withholding agent, who is directly liable for the payment of onshore tax, citing Section 2.57(A) of Revenue Regulations No. 2-98 which states: (A) Final Withholding Tax. — Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent. The payee is not required to file an income tax return for the particular income. (Emphasis supplied) The petitioner is mistaken. Before any further discussion, it should be pointed out that RCBC erred in citing the abovementioned Revenue Regulations No. 2-98 because the same governs collection at source on income paid only on or after January 1, 1998. The deficiency withholding tax subject of this petition was supposed to have been withheld on income paid during the taxable years of 1994 and 1995. Hence, Revenue Regulations No. 2-98 obviously does not apply in this case. In Chamber of Real Estate and Builders’ Associations, Inc. v. The Executive Secretary ,[32] the Court has explained that the purpose of the withholding tax system is three-fold: (1) to provide the taxpayer with a convenient way of paying his tax liability; (2) to ensure the collection of tax, and (3) to improve the government’s cashflow. Under the withholding tax system, the payor is the taxpayer upon whom the tax is imposed, while the withholding agent simply acts as an agent or a collector of the government to ensure the collection of taxes.[33]

It is, therefore, indisputable that the withholding agent is merely a tax collector and not a taxpayer, as elucidated by this Court in the case of Commissioner of Internal Revenue v. Court of Appeals,[34] to wit: In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an agent of the government for the collection of the tax in order to ensure its payments; the payer is the taxpayer – he is the person subject to tax imposed by law; and the payee is the taxing authority. In other words, the withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His (agent) liability is direct and independent from the taxpayer, because the income tax is still imposed on and due from the latter. The agent is not liable for the tax as no wealth flowed into him – he earned no income. The Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to withhold as distinguished from its duty to pay tax since: “the government’s cause of action against the withholding agent is not for the collection of income tax, but for the enforcement of the withholding provision of Section 53 of the Tax Code , compliance with which is imposed on the withholding agent and not upon the taxpayer.”[35] (Emphases supplied) Based on the foregoing, the liability of the withholding agent is independent from that of the taxpayer. The former cannot be made liable for the tax due because it is the latter who earned the income subject to withholding tax. The withholding agent is liable only insofar as he failed to perform his duty to withhold the tax and remit the same to the government. The liability for the tax, however, remains with the taxpayer because the gain was realized and received by him. While the payor-borrower can be held accountable for its negligence in performing its duty to withhold the amount of tax due on the transaction, RCBC, as the taxpayer and the one which earned income on the transaction, remains liable for the payment of tax as the taxpayer shares the responsibility of making certain that the tax is properly withheld by the withholding agent, so as to avoid any penalty that may arise from the non-payment of the withholding tax due.


RCBC cannot evade its liability for FCDU Onshore Tax by shifting the blame on the payor-borrower as the withholding agent. As such, it is liable for payment of deficiency onshore tax on interest income derived from foreign currency loans, pursuant to Section 24(e)(3) of the National Internal Revenue Code of 1993: Sec. 24. Rates of tax on domestic corporations.

xxxx(e) Tax on certain incomes derived by domestic corporations

xxxx(3) Tax on income derived under the Expanded Foreign Currency Deposit System. – Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the Central Bank to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system shall be exempt from all taxes, except taxable income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board to be subject to the usual income tax payable by banks: Provided, That interest income from foreign currency loans granted by such depository banks under said expanded system to residents (other than offshore banking units in the Philippines or other depository banks under the expanded system) shall be subject to a 10% tax. (Emphasis supplied) As a final note, this Court has consistently held that findings and conclusions of the CTA shall be accorded the highest respect and shall be presumed valid, in the absence of any clear and convincing proof to the contrary.[36] The CTA, as a specialized court dedicated exclusively to the study and resolution of tax problems, has developed an expertise on the subject of taxation.[37] As such, its decisions shall not be lightly set aside on appeal, unless this Court finds that the questioned decision is not supported by substantial evidence or there is a showing of abuse or improvident exercise of authority on the part of the Tax Court.[38]

WHEREFORE, the petition is DENIED.


COMMISSIONER OF INTERNAL REVENUE, Petitioner,

-versus-

FILINVEST DEVELOPMENT CORPORATION, Respondent. x-------------------------------------x COMMISSIONER OF INTERNAL REVENUE, Petitioner, -versus- FILINVEST DEVELOPMENT CORPORATION, Respondent.

G. R. No. 163653

G. R. No. 167689 Promulgated: July 19, 2011

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

D E C I S I O N

PEREZ, J.: Assailed in these twin petitions for review on certiorari filed pursuant to Rule 45 of the 1997 Rules of Civil Procedure are the decisions rendered by the Court of Appeals (CA) in the following cases: (a) Decision dated 16 December 2003 of the then Special Fifth Division in CA-G.R. SP No. 72992; [1] and, (b) Decision dated 26 January 2005 of the then Fourteenth Division in CA-G.R. SP No. 74510.[2]

The Facts

The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc. (FAI), respondent Filinvest Development Corporation (FDC) is a holding company which also owned 67.42% of the outstanding shares of Filinvest Land, Inc. (FLI). On 29 November 1996, FDC and FAI entered into a Deed of Exchange with FLI whereby the former both transferred in favor of the latter parcels of land appraised at P4,306,777,000.00. In exchange for said parcels which were intended to facilitate development of medium-rise residential and commercial buildings, 463,094,301 shares of stock of FLI were issued to FDC and FAI.[3] As a result of the exchange, FLI’s ownership structure was changed to the extent reflected in the following tabular précis, viz.:

Stockholder Number and Percentage of Shares Held Prior to the Exchange

Number of Additional Shares Issued

Number and Percentage of Shares Held After the Exchange

FDC 2,537,358,000 67.42% 42,217,000 2,579,575,000 61.03%

FAI 0 0 420,877,000 420,877,000 9.96%

OTHERS 1,226,177,000 32.58% 0 1,226,177,000 29.01%

----------------- -----------

-------------- ---------------

3,763,535,000 100% 463,094,301 4,226,629,000 (100%)

On 13 January 1997, FLI requested a ruling from the Bureau of Internal Revenue (BIR) to the effect that no gain or loss should be recognized in the aforesaid transfer of real properties. Acting on the request, the BIR issued Ruling No. S-34-046-97 dated 3 February 1997, finding that the exchange is among those contemplated under


Section 34 (c) (2) of the old National Internal Revenue Code (NIRC)[4] which provides that “(n)o gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for a stock in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation."[5] With the BIR’s reiteration of the foregoing ruling upon the 10 February 1997 request for clarification filed by FLI,[6] the latter, together with FDC and FAI, complied with all the requirements imposed in the ruling.[7] On various dates during the years 1996 and 1997, in the meantime, FDC also extended advances in favor of its affiliates, namely, FAI, FLI, Davao Sugar Central Corporation (DSCC) and Filinvest Capital, Inc. (FCI).[8] Duly evidenced by instructional letters as well as cash and journal vouchers, said cash advances amounted to P2,557,213,942.60 in 1996[9] and P3,360,889,677.48 in 1997.[10] On 15 November 1996, FDC also entered into a Shareholders’ Agreement with Reco Herrera PTE Ltd. (RHPL) for the formation of a Singapore-based joint venture company called Filinvest Asia Corporation (FAC), tasked to develop and manage FDC’s 50% ownership of its PBCom Office Tower Project (the Project). With their equity participation in FAC respectively pegged at 60% and 40% in the Shareholders’ Agreement, FDC subscribed to P500.7 million worth of shares in said joint venture company to RHPL’s subscription worth P433.8 million. Having paid its subscription by executing a Deed of Assignment transferring to FAC a portion of its rights and interest in the Project worth P500.7 million, FDC eventually reported a net loss of P190,695,061.00 in its Annual Income Tax Return for the taxable year 1996.[11]

On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to pay deficiency income and documentary stamp taxes, plus interests and compromise penalties,[12] covered by the following Assessment Notices, viz.: (a) Assessment Notice No. SP-INC-96-00018-2000 for deficiency income taxes in the sum of P150,074,066.27 for 1996; (b) Assessment Notice No. SP-DST-96-00020-2000 for deficiency documentary stamp taxes in the sum of P10,425,487.06 for 1996; (c) Assessment Notice No. SP-INC-97-00019-2000 for deficiency income taxes in the sum of P5,716,927.03 for 1997; and (d) Assessment Notice No. SP-DST-97-00021-2000 for deficiency documentary stamp taxes in the sum of P5,796,699.40 for 1997.[13] The foregoing deficiency taxes were assessed on the taxable gain supposedly realized by FDC from the Deed of Exchange it executed with FAI and FLI, on the dilution resulting from the Shareholders’ Agreement FDC executed with RHPL as well as the “arm’s-length” interest rate and documentary stamp taxes imposable on the advances FDC extended to its affiliates.[14]

On 3 January 2000, FAI similarly received from the BIR a Formal Letter of Demand for deficiency income taxes in the sum ofP1,477,494,638.23 for the year 1997.[15] Covered by Assessment Notice No. SP-INC-97-0027-2000,[16] said deficiency tax was also assessed on the taxable gain purportedly realized by FAI from the Deed of Exchange it executed with FDC and FLI.[17] On 26 January 2000 or within the reglementary period of thirty (30) days from notice of the assessment, both FDC and FAI filed their respective requests for reconsideration/protest, on the ground that the deficiency income and documentary stamp taxes assessed by the BIR were bereft of factual and legal basis.[18] Having submitted the relevant supporting documents pursuant to the 31 January 2000 directive from the BIR Appellate Division, FDC and FAI filed on 11 September 2000 a letter requesting an early resolution of their request for reconsideration/protest on the ground that the 180 days prescribed for the resolution thereof under Section 228 of the NIRC was going to expire on 20 September 2000.[19] In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to resolve their request for reconsideration/protest within the aforesaid period, FDC and FAI filed on 17 October 2000 a petition for review with the Court of Tax Appeals (CTA) pursuant to Section 228 of the 1997 NIRC. Docketed before said court as CTA Case No. 6182, the petition alleged, among other matters, that as previously opined in BIR Ruling No. S-34-046-97, no taxable gain should have been assessed from the subject Deed of Exchange since FDC and FAI collectively gained further control of FLI as a consequence of the exchange; that correlative to the CIR's lack of authority to impute theoretical interests on the cash advances FDC extended in favor of its affiliates, the rule is settled that interests cannot be demanded in the absence of a stipulation to the effect; that not being promissory notes or certificates of obligations, the instructional letters as well as the cash and journal vouchers evidencing said cash advances were not subject to documentary stamp taxes; and, that no income tax may be imposed on the prospective gain from the supposed appreciation of FDC's shareholdings in FAC. As a consequence, FDC and FAC both prayed that the subject assessments for deficiency income and documentary stamp taxes for the years 1996 and 1997 be cancelled and annulled.[20]

On 4 December 2000, the CIR filed its answer, claiming that the transfer of property in question should not be considered tax free since, with the resultant diminution of its shares in FLI, FDC did not gain further control of said corporation. Likewise calling attention to the fact that the cash advances FDC extended to its affiliates were interest free despite the interest bearing loans it obtained from banking institutions, the CIR invoked Section 43 of the old NIRC which, as implemented by Revenue Regulations No. 2, Section 179 (b) and (c), gave him "the power to allocate, distribute or apportion income or deductions between or among such organizations, trades or business in order to prevent evasion of taxes." The CIR justified the imposition of documentary stamp taxes on the instructional letters as well as cash and journal vouchers for said cash advances on the strength of Section 180 of the NIRC and Revenue Regulations No. 9-94 which provide that loan transactions are subject to said tax


irrespective of whether or not they are evidenced by a formal agreement or by mere office memo. The CIR also argued that FDC realized taxable gain arising from the dilution of its shares in FAC as a result of its Shareholders' Agreement with RHPL.[21]

At the pre-trial conference, the parties filed a Stipulation of Facts, Documents and Issues[22] which was admitted in the 16 February 2001 resolution issued by the CTA. With the further admission of the Formal Offer of Documentary Evidence subsequently filed by FDC and FAI[23] and the conclusion of the testimony of Susana Macabelda anent the cash advances FDC extended in favor of its affiliates,[24] the CTA went on to render the Decision dated 10 September 2002 which, with the exception of the deficiency income tax on the interest income FDC supposedly realized from the advances it extended in favor of its affiliates, cancelled the rest of deficiency income and documentary stamp taxes assessed against FDC and FAI for the years 1996 and 1997,[25] thus: WHEREFORE, in view of all the foregoing, the court finds the instant petition partly meritorious. Accordingly, Assessment Notice No. SP-INC-96-00018-2000 imposing deficiency income tax on FDC for taxable year 1996, Assessment Notice No. SP-DST-96-00020-2000 and SP-DST-97-00021-2000 imposing deficiency documentary stamp tax on FDC for taxable years 1996 and 1997, respectively and Assessment Notice No. SP-INC-97-0027-2000 imposing deficiency income tax on FAI for the taxable year 1997 are hereby CANCELLED and SET ASIDE. However, [FDC] is hereby ORDERED to PAY the amount of P5,691,972.03 as deficiency income tax for taxable year 1997. In addition, petitioner is also ORDERED to PAY 20% delinquency interest computed from February 16, 2000 until full payment thereof pursuant to Section 249 (c) (3) of the Tax Code.[26]

Finding that the collective increase of the equity participation of FDC and FAI in FLI rendered the gain derived from the exchange tax-free, the CTA also ruled that the increase in the value of FDC's shares in FAC did not result in economic advantage in the absence of actual sale or conversion thereof. While likewise finding that the documents evidencing the cash advances FDC extended to its affiliates cannot be considered as loan agreements that are subject to documentary stamp tax, the CTA enunciated, however, that the CIR was justified in assessing undeclared interests on the same cash advances pursuant to his authority under Section 43 of the NIRC in order to forestall tax evasion. For persuasive effect, the CTA referred to the equivalent provision in the Internal Revenue Code of the United States (IRC-US), i.e., Sec. 482, as implemented by Section 1.482-2 of 1965-1969 Regulations of the Law of Federal Income Taxation.[27]

Dissatisfied with the foregoing decision, FDC filed on 5 November 2002 the petition for review docketed before the CA as CA-G.R. No. 72992, pursuant to Rule 43 of the 1997 Rules of Civil Procedure. Calling attention to the fact that the cash advances it extended to its affiliates were interest-free in the absence of the express stipulation on interest required under Article 1956 of theCivil Code, FDC questioned the imposition of an arm's-length interest rate thereon on the ground, among others, that the CIR's authority under Section 43 of the NIRC: (a) does not include the power to impute imaginary interest on said transactions; (b) is directed only against controlled taxpayers and not against mother or holding corporations; and, (c) can only be invoked in cases of understatement of taxable net income or evident tax evasion.[28] Upholding FDC's position, the CA's then Special Fifth Division rendered the herein assailed decision dated 16 December 2003,[29] the decretal portion of which states: WHEREFORE, premises considered, the instant petition is hereby GRANTED. The assailed Decision dated September 10, 2002 rendered by the Court of Tax Appeals in CTA Case No. 6182 directing petitioner Filinvest Development Corporation to pay the amount ofP5,691,972.03 representing deficiency income tax on allegedly undeclared interest income for the taxable year 1997, plus 20% delinquency interest computed from February 16, 2000 until full payment thereof is REVERSED and SET ASIDE and, a new one entered annulling Assessment Notice No. SP-INC-97-00019-2000 imposing deficiency income tax on petitioner for taxable year 1997. No pronouncement as to costs.[30]

With the denial of its partial motion for reconsideration of the same 11 December 2002 resolution issued by the CTA,[31] the CIR also filed the petition for review docketed before the CA as CA-G.R. No. 74510. In essence, the CIR argued that the CTA reversibly erred in cancelling the assessment notices: (a) for deficiency income taxes on the exchange of property between FDC, FAI and FLI; (b) for deficiency documentary stamp taxes on the documents evidencing FDC's cash advances to its affiliates; and (c) for deficiency income tax on the gain FDC purportedly realized from the increase of the value of its shareholdings in FAC.[32] The foregoing petition was, however, denied due course and dismissed for lack of merit in the herein assailed decision dated 26 January 2005 [33] rendered by the CA's then Fourteenth Division, upon the following findings and conclusions, to wit: 1. As affirmed in the 3 February 1997 BIR Ruling No. S-34-046-97, the 29 November 1996 Deed of Exchange resulted in the combined control by FDC and FAI of more than 51% of the outstanding shares of FLI, hence, no taxable gain can be recognized from the transaction under Section 34 (c) (2) of the old NIRC;


2. The instructional letters as well as the cash and journal vouchers evidencing the advances FDC extended to its affiliates are not subject to documentary stamp taxes pursuant to BIR Ruling No. 116-98, dated 30 July 1998, since they do not partake the nature of loan agreements; 3. Although BIR Ruling No. 116-98 had been subsequently modified by BIR Ruling No. 108-99, dated 15 July 1999, to the effect that documentary stamp taxes are imposable on inter-office memos evidencing cash advances similar to those extended by FDC, said latter ruling cannot be given retroactive application if to do so would be prejudicial to the taxpayer; 4. FDC's alleged gain from the increase of its shareholdings in FAC as a consequence of the Shareholders' Agreement it executed with RHPL cannot be considered taxable income since, until actually converted thru sale or disposition of said shares, they merely represent unrealized increase in capital.[34]

Respectively docketed before this Court as G.R. Nos. 163653 and 167689, the CIR's petitions for review on certiorariassailing the 16 December 2003 decision in CA-G.R. No. 72992 and the 26 January 2005 decision in CA-G.R. SP No. 74510 were consolidated pursuant to the 1 March 2006 resolution issued by this Court’s Third Division.

The Issues

In G.R. No. 163653, the CIR urges the grant of its petition on the following ground: THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE COURT OF TAX APPEALS AND IN HOLDING THAT THE ADVANCES EXTENDED BY RESPONDENT TO ITS AFFILIATES ARE NOT SUBJECT TO INCOME TAX.[35]

In G.R. No. 167689, on the other hand, petitioner proffers the following issues for resolution:

I

THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION IN HOLDING THAT THE EXCHANGE OF SHARES OF STOCK FOR PROPERTY AMONG FILINVEST DEVELOPMENT CORPORATION (FDC), FILINVEST ALABANG, INCORPORATED (FAI) AND FILINVEST LAND INCORPORATED (FLI) MET ALL THE REQUIREMENTS FOR THE NON-RECOGNITION OF TAXABLE GAIN UNDER SECTION 34 (c) (2) OF THE OLD NATIONAL INTERNAL REVENUE CODE (NIRC) (NOW SECTION 40 (C) (2) (c) OF THE NIRC.

II THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING THAT THE LETTERS OF INSTRUCTION OR CASH VOUCHERS EXTENDED BY FDC TO ITS AFFILIATES ARE NOT DEEMED LOAN AGREEMENTS SUBJECT TO DOCUMENTARY STAMP TAXES UNDER SECTION 180 OF THE NIRC.

III

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT GAIN ON DILUTION AS A RESULT OF THE INCREASE IN THE VALUE OF FDC’S SHAREHOLDINGS IN FAC IS NOT TAXABLE.[36]

The Court’s Ruling

While the petition in G.R. No. 163653 is bereft of merit, we find the CIR’s petition in G.R. No. 167689 impressed with partial merit. In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTA’s finding that theoretical interests can be imputed on the advances FDC extended to its affiliates in 1996 and 1997 considering that, for said purpose, FDC resorted to interest-bearing fund borrowings from commercial banks. Since considerable interest expenses were deducted by FDC when said funds were borrowed, the CIR theorizes that interest income should likewise be declared when the same funds were sourced for the advances FDC extended to its affiliates. Invoking Section 43 of the 1993 NIRC in relation to Section 179(b) of Revenue Regulation No. 2, the CIR maintains that it is vested with the power to allocate, distribute or apportion income or deductions between or among controlled organizations, trades or businesses even in the absence of fraud, since said power is intended “to prevent evasion of taxes or clearly to reflect the income of any such organizations, trades or businesses.” In addition, the CIR asseverates that the CA should have accorded weight and respect to the findings of the CTA which, as the specialized court dedicated to the study and consideration of tax matters, can take judicial notice of US income tax laws and regulations.[37]

Admittedly, Section 43 of the 1993 NIRC[38] provides that, “(i)n any case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner of Internal Revenue is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he


determines that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business.” In amplification of the equivalent provision[39] under Commonwealth Act No. 466,[40] Sec. 179(b) of Revenue Regulation No. 2 states as follows: Determination of the taxable net income of controlled taxpayer. – (A) DEFINITIONS. – When used in this section –(1) The term “organization” includes any kind, whether it be a sole proprietorship, a partnership, a trust, an estate, or a corporation or association, irrespective of the place where organized, where operated, or where its trade or business is conducted, and regardless of whether domestic or foreign, whether exempt or taxable, or whether affiliated or not.(2) The terms “trade” or “business” include any trade or business activity of any kind, regardless of whether or where organized, whether owned individually or otherwise, and regardless of the place where carried on.(3) The term “controlled” includes any kind of control, direct or indirect, whether legally enforceable, and however exercisable or exercised. It is the reality of the control which is decisive, not its form or mode of exercise. A presumption of control arises if income or deductions have been arbitrarily shifted.(4) The term “controlled taxpayer” means any one of two or more organizations, trades, or businesses owned or controlled directly or indirectly by the same interests.(5) The term “group” and “group of controlled taxpayers” means the organizations, trades or businesses owned or controlled by the same interests.(6) The term “true net income” means, in the case of a controlled taxpayer, the net income (or as the case may be, any item or element affecting net income) which would have resulted to the controlled taxpayer, had it in the conduct of its affairs (or, as the case may be, any item or element affecting net income) which would have resulted to the controlled taxpayer, had it in the conduct of its affairs (or, as the case may be, in the particular contract, transaction, arrangement or other act) dealt with the other members or members of the group at arm’s length. It does not mean the income, the deductions, or the item or element of either, resulting to the controlled taxpayer by reason of the particular contract, transaction, or arrangement, the controlled taxpayer, or the interest controlling it, chose to make (even though such contract, transaction, or arrangement be legally binding upon the parties thereto). (B) SCOPE AND PURPOSE. - The purpose of Section 44 of the Tax Code is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining, according to the standard of an uncontrolled taxpayer, the true net income from the property and business of a controlled taxpayer. The interests controlling a group of controlled taxpayer are assumed to have complete power to cause each controlled taxpayer so to conduct its affairs that its transactions and accounting records truly reflect the net income from the property and business of each of the controlled taxpayers. If, however, this has not been done and the taxable net income are thereby understated, the statute contemplates that the Commissioner of Internal Revenue shall intervene, and, by making such distributions, apportionments, or allocations as he may deem necessary of gross income or deductions, or of any item or element affecting net income, between or among the controlled taxpayers constituting the group, shall determine the true net income of each controlled taxpayer. The standard to be applied in every case is that of an uncontrolled taxpayer. Section 44 grants no right to a controlled taxpayer to apply its provisions at will, nor does it grant any right to compel the Commissioner of Internal Revenue to apply its provisions. (C) APPLICATION – Transactions between controlled taxpayer and another will be subjected to special scrutiny to ascertain whether the common control is being used to reduce, avoid or escape taxes. In determining the true net income of a controlled taxpayer, the Commissioner of Internal Revenue is not restricted to the case of improper accounting, to the case of a fraudulent, colorable, or sham transaction, or to the case of a device designed to reduce or avoid tax by shifting or distorting income or deductions. The authority to determine true net income extends to any case in which either by inadvertence or design the taxable net income in whole or in part, of a controlled taxpayer, is other than it would have been had the taxpayer in the conduct of his affairs been an uncontrolled taxpayer dealing at arm’s length with another uncontrolled taxpayer.[41]

As may be gleaned from the definitions of the terms “controlled” and "controlled taxpayer" under paragraphs (a) (3) and (4) of the foregoing provision, it would appear that FDC and its affiliates come within the purview of Section 43 of the 1993 NIRC. Aside from owning significant portions of the shares of stock of FLI, FAI, DSCC and FCI, the fact that FDC extended substantial sums of money as cash advances to its said affiliates for the purpose of providing them financial assistance for their operational and capital expenditures seemingly indicate that the situation sought to be addressed by the subject provision exists. From the tenor of paragraph (c) of Section 179 of Revenue Regulation No. 2, it may also be seen that the CIR's power to distribute, apportion or allocate gross income or deductions between or among controlled taxpayers may be likewise exercised whether or not fraud inheres in the transaction/s under scrutiny. For as long as the controlled taxpayer's taxable income is not reflective of that which it would have realized had it been dealing at arm's length with an uncontrolled taxpayer, the CIR can make the necessary rectifications in order to prevent evasion of taxes. Despite the broad parameters provided, however, we find that the CIR's powers of distribution, apportionment or allocation of gross income and deductions under Section 43 of the 1993 NIRC and Section 179 of Revenue


Regulation No. 2 does not include the power to impute "theoretical interests" to the controlled taxpayer's transactions. Pursuant to Section 28 of the 1993 NIRC,[42] after all, the term “gross income” is understood to mean all income from whatever source derived, including, but not limited to the following items: compensation for services, including fees, commissions, and similar items; gross income derived from business; gains derived from dealings in property;” interest; rents; royalties; dividends; annuities; prizes and winnings; pensions; and partner’s distributive share of the gross income of general professional partnership.[43] While it has been held that the phrase "from whatever source derived" indicates a legislative policy to include all income not expressly exempted within the class of taxable income under our laws, the term "income" has been variously interpreted to mean "cash received or its equivalent", "the amount of money comingto a person within a specific time" or "something distinct from principal or capital."[44] Otherwise stated, there must be proof of the actual or, at the very least, probable receipt or realization by the controlled taxpayer of the item of gross income sought to be distributed, apportioned or allocated by the CIR. Our circumspect perusal of the record yielded no evidence of actual or possible showing that the advances FDC extended to its affiliates had resulted to the interests subsequently assessed by the CIR. For all its harping upon the supposed fact that FDC had resorted to borrowings from commercial banks, the CIR had adduced no concrete proof that said funds were, indeed, the source of the advances the former provided its affiliates. While admitting that FDC obtained interest-bearing loans from commercial banks,[45]Susan Macabelda - FDC's Funds Management Department Manager who was the sole witness presented before the CTA - clarified that the subject advances were sourced from the corporation's rights offering in 1995 as well as the sale of its investment in BonifacioLand in 1997.[46] More significantly, said witness testified that said advances: (a) were extended to give FLI, FAI, DSCC and FCI financial assistance for their operational and capital expenditures; and, (b) were all temporarily in nature since they were repaid within the duration of one week to three months and were evidenced by mere journal entries, cash vouchers and instructional letters.”[47] Even if we were, therefore, to accord precipitate credulity to the CIR's bare assertion that FDC had deducted substantial interest expense from its gross income, there would still be no factual basis for the imputation of theoretical interests on the subject advances and assess deficiency income taxes thereon. More so, when it is borne in mind that, pursuant to Article 1956 of the Civil Code of the Philippines, no interest shall be due unless it has been expressly stipulated in writing. Considering that taxes, being burdens, are not to be presumed beyond what the applicable statute expressly and clearly declares,[48] the rule is likewise settled that tax statutes must be construed strictly against the government and liberally in favor of the taxpayer.[49] Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication.[50] While it is true that taxes are the lifeblood of the government, it has been held that their assessment and collection should be in accordance with law as any arbitrariness will negate the very reason for government itself.[51]

In G.R. No. 167689, we also find a dearth of merit in the CIR's insistence on the imposition of deficiency income taxes on the transfer FDC and FAI effected in exchange for the shares of stock of FLI. With respect to the Deed of Exchange executed between FDC, FAI and FLI, Section 34 (c) (2) of the 1993 NIRC pertinently provides as follows: Sec. 34. Determination of amount of and recognition of gain or loss.- x x x x (c) Exception – x x x x No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for shares of stock in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation; Provided, That stocks issued for services shall not be considered as issued in return of property. As even admitted in the 14 February 2001 Stipulation of Facts submitted by the parties, [52] the requisites for the non-recognition of gain or loss under the foregoing provision are as follows: (a) the transferee is a corporation; (b) the transferee exchanges its shares of stock for property/ies of the transferor; (c) the transfer is made by a person, acting alone or together with others, not exceeding four persons; and, (d) as a result of the exchange the transferor, alone or together with others, not exceeding four, gains control of the transferee.[53] Acting on the 13 January 1997 request filed by FLI, the BIR had, in fact, acknowledged the concurrence of the foregoing requisites in the Deed of Exchange the former executed with FDC and FAI by issuing BIR Ruling No. S-34-046-97.[54] With the BIR's reiteration of said ruling upon the request for clarification filed by FLI,[55] there is also no dispute that said transferee and transferors subsequently complied with the requirements provided for the non-recognition of gain or loss from the exchange of property for tax, as provided under Section 34 (c) (2) of the 1993 NIRC.[56]


Then as now, the CIR argues that taxable gain should be recognized for the exchange considering that FDC's controlling interest in FLI was actually decreased as a result thereof. For said purpose, the CIR calls attention to the fact that, prior to the exchange, FDC owned 2,537,358,000 or 67.42% of FLI's 3,763,535,000 outstanding capital stock. Upon the issuance of 443,094,000 additional FLI shares as a consequence of the exchange and with only 42,217,000 thereof accruing in favor of FDC for a total of 2,579,575,000 shares, said corporation’s controlling interest was supposedly reduced to 61%.03 when reckoned from the transferee's aggregate 4,226,629,000 outstanding shares. Without owning a share from FLI's initial 3,763,535,000 outstanding shares, on the other hand, FAI's acquisition of 420,877,000 FLI shares as a result of the exchange purportedly resulted in its control of only 9.96% of said transferee corporation's 4,226,629,000 outstanding shares. On the principle that the transaction did not qualify as a tax-free exchange under Section 34 (c) (2) of the 1993 NIRC, the CIR asseverates that taxable gain in the sum of P263,386,921.00 should be recognized on the part of FDC and in the sum of P3,088,711,367.00 on the part of FAI.[57]

The paucity of merit in the CIR's position is, however, evident from the categorical language of Section 34 (c) (2) of the 1993 NIRC which provides that gain or loss will not be recognized in case the exchange of property for stocks results in the control of the transferee by the transferor, alone or with other transferors not exceeding four persons. Rather than isolating the same as proposed by the CIR, FDC's 2,579,575,000 shares or 61.03% control of FLI's 4,226,629,000 outstanding shares should, therefore, be appreciated in combination with the 420,877,000 new shares issued to FAI which represents 9.96% control of said transferee corporation. Together FDC's 2,579,575,000 shares (61.03%) and FAI's 420,877,000 shares (9.96%) clearly add up to 3,000,452,000 shares or 70.99% of FLI's 4,226,629,000 shares. Since the term "control" is clearly defined as "ownership of stocks in a corporation possessing at least fifty-one percent of the total voting power of classes of stocks entitled to one vote" under Section 34 (c) (6) [c] of the 1993 NIRC, the exchange of property for stocks between FDC FAI and FLI clearly qualify as a tax-free transaction under paragraph 34 (c) (2) of the same provision. Against the clear tenor of Section 34(c) (2) of the 1993 NIRC, the CIR cites then Supreme Court Justice Jose Vitug and CTA Justice Ernesto D. Acosta who, in their book Tax Law and Jurisprudence, opined that said provision could be inapplicable if control is already vested in the exchangor prior to exchange.[58] Aside from the fact that that the 10 September 2002 Decision in CTA Case No. 6182 upholding the tax-exempt status of the exchange between FDC, FAI and FLI was penned by no less than Justice Acosta himself,[59] FDC and FAI significantly point out that said authors have acknowledged that the position taken by the BIR is to the effect that "the law would apply even when the exchangor already has control of the corporation at the time of the exchange."[60] This was confirmed when, apprised in FLI's request for clarification about the change of percentage of ownership of its outstanding capital stock, the BIR opined as follows: Please be informed that regardless of the foregoing, the transferors, Filinvest Development Corp. and Filinvest Alabang, Inc. still gained control of Filinvest Land, Inc. The term 'control' shall mean ownership of stocks in a corporation by possessing at least 51% of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stocks received, i.e., total subscribed, whether for property or for services by the transferor or transferors. In determining the 51% stock ownership, only those persons who transferred property for stocks in the same transaction may be counted up to the maximum of five (BIR Ruling No. 547-93 dated December 29, 1993.[61]

At any rate, it also appears that the supposed reduction of FDC's shares in FLI posited by the CIR is more apparent than real. As the uncontested owner of 80% of the outstanding shares of FAI, it cannot be gainsaid that FDC ideally controls the same percentage of the 420,877,000 shares issued to its said co-transferor which, by itself, represents 7.968% of the outstanding shares of FLI. Considered alongside FDC's 61.03% control of FLI as a consequence of the 29 November 1996 Deed of Transfer, said 7.968% add up to an aggregate of 68.998% of said transferee corporation's outstanding shares of stock which is evidently still greater than the 67.42% FDC initially held prior to the exchange. This much was admitted by the parties in the 14 February 2001 Stipulation of Facts, Documents and Issues they submitted to the CTA.[62] Inasmuch as the combined ownership of FDC and FAI of FLI's outstanding capital stock adds up to a total of 70.99%, it stands to reason that neither of said transferors can be held liable for deficiency income taxes the CIR assessed on the supposed gain which resulted from the subject transfer. On the other hand, insofar as documentary stamp taxes on loan agreements and promissory notes are concerned, Section 180 of the NIRC provides follows: Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts, instruments and securities issued by the government or any of its instrumentalities, certificates of deposit bearing interest and others not payable on sight or demand. – On all loan agreements signed abroad wherein the object of the contract is located or used in the Philippines; bill of exchange (between points within the Philippines), drafts, instruments and securities issued by the Government or any of its instrumentalities or certificates of deposits drawing interest, or orders for the payment of any sum of money otherwise than at sight or on demand, or on all promissory notes,


whether negotiable or non-negotiable, except bank notes issued for circulation, and on each renewal of any such note, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each two hundred pesos, or fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit or note: Provided, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan, whichever will yield a higher tax: Provided however, That loan agreements or promissory notes the aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000.00) executed by an individual for his purchase on installment for his personal use or that of his family and not for business, resale, barter or hire of a house, lot, motor vehicle, appliance or furniture shall be exempt from the payment of documentary stamp tax provided under this Section. When read in conjunction with Section 173 of the 1993 NIRC,[63] the foregoing provision concededly applies to "(a)ll loan agreements, whether made or signed in the Philippines, or abroad when the obligation or right arises from Philippine sources or the property or object of the contract is located or used in the Philippines." Correlatively, Section 3 (b) and Section 6 of Revenue Regulations No. 9-94 provide as follows: Section 3. Definition of Terms. – For purposes of these Regulations, the following term shall mean: (b) 'Loan agreement' – refers to a contract in writing where one of the parties delivers to another money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid. The term shall include credit facilities, which may be evidenced by credit memo, advice or drawings. The terms 'Loan Agreement" under Section 180 and "Mortgage' under Section 195, both of the Tax Code, as amended, generally refer to distinct and separate instruments. A loan agreement shall be taxed under Section 180, while a deed of mortgage shall be taxed under Section 195." "Section 6. Stamp on all Loan Agreements. – All loan agreements whether made or signed in the Philippines, or abroad when the obligation or right arises from Philippine sources or the property or object of the contract is located in the Philippines shall be subject to the documentary stamp tax of thirty centavos (P0.30) on each two hundred pesos, or fractional part thereof, of the face value of any such agreements, pursuant to Section 180 in relation to Section 173 of the Tax Code. In cases where no formal agreements or promissory notes have been executed to cover credit facilities, the documentary stamp tax shall be based on the amount of drawings or availment of the facilities, which may be evidenced by credit/debit memo, advice or drawings by any form of check or withdrawal slip, under Section 180 of the Tax Code. Applying the aforesaid provisions to the case at bench, we find that the instructional letters as well as the journal and cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and 1997 qualified as loan agreements upon which documentary stamp taxes may be imposed. In keeping with the caveat attendant to every BIR Ruling to the effect that it is valid only if the facts claimed by the taxpayer are correct, we find that the CA reversibly erred in utilizing BIR Ruling No. 116-98, dated 30 July 1998 which, strictly speaking, could be invoked only by ASB Development Corporation, the taxpayer who sought the same. In said ruling, the CIR opined that documents like those evidencing the advances FDC extended to its affiliates are not subject to documentary stamp tax, to wit: On the matter of whether or not the inter-office memo covering the advances granted by an affiliate company is subject to documentary stamp tax, it is informed that nothing in Regulations No. 26 (Documentary Stamp Tax Regulations) and Revenue Regulations No. 9-94 states that the same is subject to documentary stamp tax. Such being the case, said inter-office memo evidencing the lendings or borrowings which is neither a form of promissory note nor a certificate of indebtedness issued by the corporation-affiliate or a certificate of obligation, which are, more or less, categorized as 'securities', is not subject to documentary stamp tax imposed under Section 180, 174 and 175 of the Tax Code of 1997, respectively. Rather, the inter-office memo is being prepared for accounting purposes only in order to avoid the co-mingling of funds of the corporate affiliates. In its appeal before the CA, the CIR argued that the foregoing ruling was later modified in BIR Ruling No. 108-99 dated 15 July 1999, which opined that inter-office memos evidencing lendings or borrowings extended by a corporation to its affiliates are akin to promissory notes, hence, subject to documentary stamp taxes.[64] In brushing aside the foregoing argument, however, the CA applied Section 246 of the 1993 NIRC[65] from which proceeds the settled principle that rulings, circulars, rules and regulations promulgated by the BIR have no retroactive application if to so apply them would be prejudicial to the taxpayers.[66] Admittedly, this rule does not apply: (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) where the taxpayer


acted in bad faith.[67] Not being the taxpayer who, in the first instance, sought a ruling from the CIR, however, FDC cannot invoke the foregoing principle on non-retroactivity of BIR rulings. Viewed in the light of the foregoing considerations, we find that both the CTA and the CA erred in invalidating the assessments issued by the CIR for the deficiency documentary stamp taxes due on the instructional letters as well as the journal and cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and 1997. In Assessment Notice No. SP-DST-96-00020-2000, the CIR correctly assessed the sum of P6,400,693.62 for documentary stamp tax, P3,999,793.44 in interests andP25,000.00 as compromise penalty, for a total of P10,425,487.06. Alongside the sum of P4,050,599.62 for documentary stamp tax, the CIR similarly assessed P1,721,099.78 in interests and P25,000.00 as compromise penalty in Assessment Notice No. SP-DST-97-00021-2000 or a total of P5,796,699.40. The imposition of deficiency interest is justified under Sec. 249 (a) and (b) of the NIRC which authorizes the assessment of the same “at the rate of twenty percent (20%), or such higher rate as may be prescribed by regulations”, from the date prescribed for the payment of the unpaid amount of tax until full payment.[68] The imposition of the compromise penalty is, in turn, warranted under Sec. 250[69] of the NIRC which prescribes the imposition thereof “in case of each failure to file an information or return, statement or list, or keep any record or supply any information required” on the date prescribed therefor. To our mind, no reversible error can, finally, be imputed against both the CTA and the CA for invalidating the Assessment Notice issued by the CIR for the deficiency income taxes FDC is supposed to have incurred as a consequence of the dilution of its shares in FAC. Anent FDC’s Shareholders’ Agreement with RHPL, the record shows that the parties were in agreement about the following factual antecedents narrated in the 14 February 2001 Stipulation of Facts, Documents and Issues they submitted before the CTA,[70] viz.: “1.11. On November 15, 1996, FDC entered into a Shareholders’ Agreement (‘SA’) with Reco Herrera Pte. Ltd. (‘RHPL’) for the formation of a joint venture company named Filinvest Asia Corporation (‘FAC’) which is based in Singapore (pars. 1.01 and 6.11, Petition, pars. 1 and 7, Answer). 1.12. FAC, the joint venture company formed by FDC and RHPL, is tasked to develop and manage the 50% ownership interest of FDC in its PBCom Office Tower Project (‘Project’) with the Philippine Bank of Communications (par. 6.12, Petition; par. 7, Answer). 1.13. Pursuant to the SA between FDC and RHPL, the equity participation of FDC and RHPL in FAC was 60% and 40% respectively. 1.14. In accordance with the terms of the SA, FDC subscribed to P500.7 million worth of shares of stock representing a 60% equity participation in FAC. In turn, RHPL subscribed to P433.8 million worth of shares of stock of FAC representing a 40% equity participation in FAC. 1.15. In payment of its subscription in FAC, FDC executed a Deed of Assignment transferring to FAC a portion of FDC’s right and interests in the Project to the extent of P500.7 million. 1.16. FDC reported a net loss of P190,695,061.00 in its Annual Income Tax Return for the taxable year 1996.”[71]

Alongside the principle that tax revenues are not intended to be liberally construed,[72] the rule is settled that the findings and conclusions of the CTA are accorded great respect and are generally upheld by this Court, unless there is a clear showing of a reversible error or an improvident exercise of authority. [73] Absent showing of such error here, we find no strong and cogent reasons to depart from said rule with respect to the CTA's finding that no deficiency income tax can be assessed on the gain on the supposed dilution and/or increase in the value of FDC's shareholdings in FAC which the CIR, at any rate, failed to establish. Bearing in mind the meaning of "gross income" as above discussed, it cannot be gainsaid, even then, that a mere increase or appreciation in the value of said shares cannot be considered income for taxation purposes. Since “a mere advance in the value of the property of a person or corporation in no sense constitute the ‘income’ specified in the revenue law,” it has been held in the early case of Fisher vs. Trinidad,[74] that it “constitutes and can be treated merely as an increase of capital.” Hence, the CIR has no factual and legal basis in assessing income tax on the increase in the value of FDC's shareholdings in FAC until the same is actually sold at a profit. WHEREFORE, premises considered, the CIR's petition for review on certiorari in G.R. No. 163653 is DENIED for lack of merit and the CA’s 16 December 2003 Decision in G.R. No. 72992 is AFFIRMED in toto. The CIR’s petition in G.R. No. 167689 is PARTIALLY GRANTED and the CA’s 26 January 2005 Decision in CA-G.R. SP No. 74510 is MODIFIED.


Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SP-DST-97-00021-2000 issued for deficiency documentary stamp taxes due on the instructional letters as well as journal and cash vouchers evidencing the advances FDC extended to its affiliates are declared valid. The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SP-INC-97-00019-2000 and SP-INC-97-0027-2000 issued for deficiency income assessed on (a) the “arms-length” interest from said advances; (b) the gain from FDC’s Deed of Exchange with FAI and FLI; and (c) income from the dilution resulting from FDC’s Shareholders’ Agreement with RHPL is, however, upheld. SO ORDERED.


EN BANC

RENATO V. DIAZ and G.R. No. 193007AURORA MA. F. TIMBOL, Petitioners, - versus THE SECRETARY OF FINANCEand THE COMMISSIONER OF Promulgated:INTERNAL REVENUE, Respondents. July 19, 2011 x ---------------------------------------------------------------------------------------- x

DECISION

ABAD, J.: May toll fees collected by tollway operators be subjected to value- added tax?

The Facts and the Case Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory relief[1] assailing the validity of the impending imposition of value-added tax (VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway operators. Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as regular users of tollways in stopping the BIR action. Additionally, Diaz claims that he sponsored the approval of Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law) and Republic Act 8424 (the 1997 National Internal Revenue Code or the NIRC) at the House of Representatives. Timbol, on the other hand, claims that she served as Assistant Secretary of the Department of Trade and Industry and consultant of the Toll Regulatory Board (TRB) in the past administration. Petitioners allege that the BIR attempted during the administration of President Gloria Macapagal-Arroyo to impose VAT on toll fees. The imposition was deferred, however, in view of the consistent opposition of Diaz and other sectors to such move. But, upon President Benigno C. Aquino III’s assumption of office in 2010, the BIR revived the idea and would impose the challenged tax on toll fees beginning August 16, 2010 unless judicially enjoined. Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees within the meaning of “sale of services” that are subject to VAT; that a toll fee is a “user’s tax,” not a sale of services; that to impose VAT on toll fees would amount to a tax on public service; and that, since VAT was never factored into the formula for computing toll fees, its imposition would violate the non-impairment clause of the constitution. On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the implementation of the VAT. The Court required the government, represented by respondents Cesar V. Purisima, Secretary of the Department of Finance, and Kim S. Jacinto-Henares, Commissioner of Internal Revenue, to comment on the petition within 10 days from notice.[2] Later, the Court issued another resolution treating the petition as one for prohibition.[3] On August 23, 2010 the Office of the Solicitor General filed the government’s comment.[4] The government avers that the NIRC imposes VAT on all kinds of services of franchise grantees, including tollway operations, except where the law provides otherwise; that the Court should seek the meaning and intent of the law from the words used in the statute; and that the imposition of VAT on tollway operations has been the subject as early as 2003 of several BIR rulings and circulars.[5] The government also argues that petitioners have no right to invoke the non-impairment of contracts clause since they clearly have no personal interest in existing toll operating agreements (TOAs) between the government and tollway operators. At any rate, the non-impairment clause cannot limit the State’s sovereign taxing power which is generally read into contracts.


Finally, the government contends that the non-inclusion of VAT in the parametric formula for computing toll rates cannot exempt tollway operators from VAT. In any event, it cannot be claimed that the rights of tollway operators to a reasonable rate of return will be impaired by the VAT since this is imposed on top of the toll rate. Further, the imposition of VAT on toll fees would have very minimal effect on motorists using the tollways. In their reply[6] to the government’s comment, petitioners point out that tollway operators cannot be regarded as franchise grantees under the NIRC since they do not hold legislative franchises. Further, the BIR intends to collect the VAT by rounding off the toll rate and putting any excess collection in an escrow account. But this would be illegal since only the Congress can modify VAT rates and authorize its disbursement. Finally, BIR Revenue Memorandum Circular 63-2010 (BIR RMC 63-2010), which directs toll companies to record an accumulated input VAT of zero balance in their books as of August 16, 2010, contravenes Section 111 of the NIRC which grants entities that first become liable to VAT a transitional input tax credit of 2% on beginning inventory. For this reason, the VAT on toll fees cannot be implemented.

The Issues Presented The case presents two procedural issues: 1. Whether or not the Court may treat the petition for declaratory relief as one for prohibition; and 2. Whether or not petitioners Diaz and Timbol have legal standing to file the action. The case also presents two substantive issues: 1. Whether or not the government is unlawfully expanding VAT coverage by including tollway operators and tollway operations in the terms “franchise grantees” and “sale of services” under Section 108 of the Code; and 2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and not a tax on services; b) will impair the tollway operators’ right to a reasonable return of investment under their TOAs; and c) is not administratively feasible and cannot be implemented.

The Court’s Rulings A. On the Procedural Issues : On August 24, 2010 the Court issued a resolution, treating the petition as one for prohibition rather than one for declaratory relief, the characterization that petitioners Diaz and Timbol gave their action. The government has sought reconsideration of the Court’s resolution,[7] however, arguing that petitioners’ allegations clearly made out a case for declaratory relief, an action over which the Court has no original jurisdiction. The government adds, moreover, that the petition does not meet the requirements of Rule 65 for actions for prohibition since the BIR did not exercise judicial, quasi-judicial, or ministerial functions when it sought to impose VAT on toll fees. Besides, petitioners Diaz and Timbol has a plain, speedy, and adequate remedy in the ordinary course of law against the BIR action in the form of an appeal to the Secretary of Finance. But there are precedents for treating a petition for declaratory relief as one for prohibition if the case has far-reaching implications and raises questions that need to be resolved for the public good.[8] The Court has also held that a petition for prohibition is a proper remedy to prohibit or nullify acts of executive officials that amount to usurpation of legislative authority.[9]

Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would impact, not only on the more than half a million motorists who use the tollways everyday, but more so on the government’s effort to raise revenue for funding various projects and for reducing budgetary deficits. To dismiss the petition and resolve the issues later, after the challenged VAT has been imposed, could cause more mischief both to the tax-paying public and the government. A belated declaration of nullity of the BIR action would make any attempt to refund to the motorists what they paid an administrative nightmare with no solution. Consequently, it is not only the right, but the duty of the Court to take cognizance of and resolve the issues that the petition raises. Although the petition does not strictly comply with the requirements of Rule 65, the Court has ample power to waive such technical requirements when the legal questions to be resolved are of great importance to the public. The same may be said of the requirement of locus standi which is a mere procedural requisite.[10]

B. On the Substantive Issues :


One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied, assessed, and collected, according to Section 108, on the gross receipts derived from the sale or exchange of services as well as from the use or lease of properties. The third paragraph of Section 108 defines “sale or exchange of services” as follows: The phrase ‘sale or exchange of services’ means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes; common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines; sales of electricity by generation companies, transmission, and distribution companies; services of franchise grantees of electric utilities, telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. (Underscoring supplied) It is plain from the above that the law imposes VAT on “all kinds of services” rendered in the Philippines for a fee, including those specified in the list. The enumeration of affected services is not exclusive.[11] By qualifying “services” with the words “all kinds,” Congress has given the term “services” an all-encompassing meaning. The listing of specific services are intended to illustrate how pervasive and broad is the VAT’s reach rather than establish concrete limits to its application. Thus, every activity that can be imagined as a form of “service” rendered for a fee should be deemed included unless some provision of law especially excludes it. Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the Toll Operation Decree establishes the legal basis for the services that tollway operators render. Essentially, tollway operators construct, maintain, and operate expressways, also called tollways, at the operators’ expense. Tollways serve as alternatives to regular public highways that meander through populated areas and branch out to local roads. Traffic in the regular public highways is for this reason slow-moving. In consideration for constructing tollways at their expense, the operators are allowed to collect government-approved fees from motorists using the tollways until such operators could fully recover their expenses and earn reasonable returns from their investments. When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter’s use of the tollway facilities over which the operator enjoys private proprietary rights[12] that its contract and the law recognize. In this sense, the tollway operator is no different from the following service providers under Section 108 who allow others to use their properties or facilities for a fee: 1. Lessors of property, whether personal or real;2. Warehousing service operators;3. Lessors or distributors of cinematographic films;4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;5. Lending investors (for use of money);6. Transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes; and7. Common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines. It does not help petitioners’ cause that Section 108 subjects to VAT “all kinds of services” rendered for a fee “regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties.” This means that “services” to be subject to VAT need not fall under the traditional concept of services, the personal or professional kinds that require the use of human knowledge and skills. And not only do tollway operators come under the broad term “all kinds of services,” they also come under the specific class described in Section 108 as “all other franchise grantees” who are subject to VAT, “except those under Section 119 of this Code.” Tollway operators are franchise grantees and they do not belong to exceptions (the low-income radio and/or television broadcasting companies with gross annual incomes of less than P10 million and gas and water utilities)


that Section 119[13] spares from the payment of VAT. The word “franchise” broadly covers government grants of a special right to do an act or series of acts of public concern.[14]

Petitioners of course contend that tollway operators cannot be considered “franchise grantees” under Section 108 since they do not hold legislative franchises. But nothing in Section 108 indicates that the “franchise grantees” it speaks of are those who hold legislative franchises. Petitioners give no reason, and the Court cannot surmise any, for making a distinction between franchises granted by Congress and franchises granted by some other government agency. The latter, properly constituted, may grant franchises. Indeed, franchises conferred or granted by local authorities, as agents of the state, constitute as much a legislative franchise as though the grant had been made by Congress itself.[15] The term “franchise” has been broadly construed as referring, not only to authorizations that Congress directly issues in the form of a special law, but also to those granted by administrative agencies to which the power to grant franchises has been delegated by Congress.[16]

Tollway operators are, owing to the nature and object of their business, “franchise grantees.” The construction, operation, and maintenance of toll facilities on public improvements are activities of public consequence that necessarily require a special grant of authority from the state. Indeed, Congress granted special franchise for the operation of tollways to the Philippine National Construction Company, the former tollway concessionaire for the North and South Luzon Expressways. Apart from Congress, tollway franchises may also be granted by the TRB, pursuant to the exercise of its delegated powers under P.D. 1112.[17] The franchise in this case is evidenced by a “Toll Operation Certificate.”[18]

Petitioners contend that the public nature of the services rendered by tollway operators excludes such services from the term “sale of services” under Section 108 of the Code. But, again, nothing in Section 108 supports this contention. The reverse is true. In specifically including by way of example electric utilities, telephone, telegraph, and broadcasting companies in its list of VAT-covered businesses, Section 108 opens other companies rendering public service for a fee to the imposition of VAT. Businesses of a public nature such as public utilities and the collection of tolls or charges for its use or service is a franchise.[19]

Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the course of congressional deliberations of the would-be law. As the Court said in South African Airways v. Commissioner of Internal Revenue,[20]“statements made by individual members of Congress in the consideration of a bill do not necessarily reflect the sense of that body and are, consequently, not controlling in the interpretation of law.” The congressional will is ultimately determined by the language of the law that the lawmakers voted on. Consequently, the meaning and intention of the law must first be sought “in the words of the statute itself, read and considered in their natural, ordinary, commonly accepted and most obvious significations, according to good and approved usage and without resorting to forced or subtle construction.” Two. Petitioners argue that a toll fee is a “user’s tax” and to impose VAT on toll fees is tantamount to taxing a tax.[21] Actually, petitioners base this argument on the following discussion in Manila International Airport Authority (MIAA) v. Court of Appeals:[22]

No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like “roads, canals, rivers, torrents, ports and bridges constructed by the State,” are owned by the State. The term “ports” includes seaports and airports. TheMIAA Airport Lands and Buildings constitute a “port” constructed by the State. Under Article 420 of the Civil Code, the MIAAAirport Lands and Buildings are properties of public dominion and thus owned by the State or the Republic of the Philippines. x x x The operation by the government of a tollway does not change the character of the road as one for public use. Someone must pay for the maintenance of the road, either the public indirectly through the taxes they pay the government, or only those among the public who actually use the road through the toll fees they pay upon using the road. The tollway system is even a more efficient and equitable manner of taxing the public for the maintenance of public roads. The charging of fees to the public does not determine the character of the property whether it is for public dominion or not. Article 420 of the Civil Code defines property of public dominion as “one intended for public use.” Even if the government collects toll fees, the road is still “intended for public use” if anyone can use the road under the same terms and conditions as the rest of the public.The charging of fees, the limitation on the kind of vehicles that can use the road, the speed restrictions and other conditions for the use of the road do not affect the public character of the road. The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines, constitute the bulk of the income that maintains the operations of MIAA. The collection of such fees does not change the character of MIAA as an airport for public use. Such fees are often termed user’s tax. This means taxing those among the public who actually use a public facility instead of taxing all the public including those who never use


the particular public facility. A user’s tax is more equitable – a principle of taxation mandated in the 1987 Constitution.”[23] (Underscoring supplied) Petitioners assume that what the Court said above, equating terminal fees to a “user’s tax” must also pertain to tollway fees. But the main issue in the MIAA case was whether or not Parañaque City could sell airport lands and buildings under MIAA administration at public auction to satisfy unpaid real estate taxes. Since local governments have no power to tax the national government, the Court held that the City could not proceed with the auction sale. MIAA forms part of the national government although not integrated in the department framework.”[24] Thus, its airport lands and buildings are properties of public dominion beyond the commerce of man under Article 420(1)[25] of the Civil Code and could not be sold at public auction. As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to establish a rule that tollway fees are user’s tax, but to make the point that airport lands and buildings are properties of public dominion and that the collection of terminal fees for their use does not make them private properties. Tollway fees are not taxes. Indeed, they are not assessed and collected by the BIR and do not go to the general coffers of the government. It would of course be another matter if Congress enacts a law imposing a user’s tax, collectible from motorists, for the construction and maintenance of certain roadways. The tax in such a case goes directly to the government for the replenishment of resources it spends for the roadways. This is not the case here. What the government seeks to tax here are fees collected from tollways that are constructed, maintained, and operated by private tollway operators at their own expense under the build, operate, and transfer scheme that the government has adopted for expressways.[26] Except for a fraction given to the government, the toll fees essentially end up as earnings of the tollway operators. In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. A tax is imposed under the taxing power of the government principally for the purpose of raising revenues to fund public expenditures.[27] Toll fees, on the other hand, are collected by private tollway operators as reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the tollways, as well as to assure them a reasonable margin of income. Although toll fees are charged for the use of public facilities, therefore, they are not government exactions that can be properly treated as a tax. Taxes may be imposed only by the government under its sovereign authority, toll fees may be demanded by either the government or private individuals or entities, as an attribute of ownership.[28] Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an indirect tax. In indirect taxation, a distinction is made between the liability for the tax and burden of the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods, properties or services to the buyer. In such a case, what is transferred is not the seller’s liability but merely the burden of the VAT.[29]

Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its burden since the amount of VAT paid by the former is added to the selling price. Once shifted, the VAT ceases to be a tax[30] and simply becomes part of the cost that the buyer must pay in order to purchase the good, property or service. Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway operator. Under Section 105 of the Code, [31] VAT is imposed on any person who, in the course of trade or business, sells or renders services for a fee. In other words, the seller of services, who in this case is the tollway operator, is the person liable for VAT. The latter merely shifts the burden of VAT to the tollway user as part of the toll fees. For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a “user’s tax.” VAT is assessed against the tollway operator’s gross receipts and not necessarily on the toll fees. Although the tollway operator may shift the VAT burden to the tollway user, it will not make the latter directly liable for the VAT. The shifted VAT burden simply becomes part of the toll fees that one has to pay in order to use the tollways.[32]

Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause on behalf of private investors in the tollway projects. She will neither be prejudiced by nor be affected by the alleged diminution in return of investments that may result from the VAT imposition. She has no interest at all in the profits to be earned under the TOAs. The interest in and right to recover investments solely belongs to the private tollway investors. Besides, her allegation that the private investors’ rate of recovery will be adversely affected by imposing VAT on tollway operations is purely speculative. Equally presumptuous is her assertion that a stipulation in the TOAs known as the Material Adverse Grantor Action will be activated if VAT is thus imposed. The Court cannot rule on matters that are manifestly conjectural. Neither can it prohibit the State from exercising its sovereign taxing power based on uncertain, prophetic grounds.


Four. Finally, petitioners assert that the substantiation requirements for claiming input VAT make the VAT on tollway operations impractical and incapable of implementation. They cite the fact that, in order to claim input VAT, the name, address and tax identification number of the tollway user must be indicated in the VAT receipt or invoice. The manner by which the BIR intends to implement the VAT – by rounding off the toll rate and putting any excess collection in an escrow account – is also illegal, while the alternative of giving “change” to thousands of motorists in order to meet the exact toll rate would be a logistical nightmare. Thus, according to them, the VAT on tollway operations is not administratively feasible.[33] Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax system should be capable of being effectively administered and enforced with the least inconvenience to the taxpayer. Non-observance of the canon, however, will not render a tax imposition invalid “except to the extent that specific constitutional or statutory limitations are impaired.”[34] Thus, even if the imposition of VAT on tollway operations may seem burdensome to implement, it is not necessarily invalid unless some aspect of it is shown to violate any law or the Constitution. Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway operations. Any declaration by the Court that the manner of its implementation is illegal or unconstitutional would be premature. Although the transcript of the August 12, 2010 Senate hearing provides some clue as to how the BIR intends to go about it,[35] the facts pertaining to the matter are not sufficiently established for the Court to pass judgment on. Besides, any concern about how the VAT on tollway operations will be enforced must first be addressed to the BIR on whom the task of implementing tax laws primarily and exclusively rests. The Court cannot preempt the BIR’s discretion on the matter, absent any clear violation of law or the Constitution. For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010 which directs toll companies to record an accumulated input VAT of zero balance in their books as of August 16, 2010, the date when the VAT imposition was supposed to take effect. The issuance allegedly violates Section 111(A) [36] of the Code which grants first time VAT payers a transitional input VAT of 2% on beginning inventory. In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of negotiations with tollway operators who have been assessed VAT as early as 2005, but failed to charge VAT-inclusive toll fees which by now can no longer be collected. The tollway operators agreed to waive the 2% transitional input VAT, in exchange for cancellation of their past due VAT liabilities. Notably, the right to claim the 2% transitional input VAT belongs to the tollway operators who have not questioned the circular’s validity. They are thus the ones who have a right to challenge the circular in a direct and proper action brought for the purpose.

Conclusion In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand the VAT law’s coverage when she sought to impose VAT on tollway operations. Section 108(A) of the Code clearly states that services of all other franchise grantees are subject to VAT, except as may be provided under Section 119 of the Code. Tollway operators are not among the franchise grantees subject to franchise tax under the latter provision. Neither are their services among the VAT-exempt transactions under Section 109 of the Code. If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly allege, then it would have been well for the law to clearly say so. Tax exemptions must be justified by clear statutory grant and based on language in the law too plain to be mistaken.[37] But as the law is written, no such exemption obtains for tollway operators. The Court is thus duty-bound to simply apply the law as it is found. Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive prerogative of Congress. The Court’s role is to merely uphold this legislative policy, as reflected first and foremost in the language of the tax statute. Thus, any unwarranted burden that may be perceived to result from enforcing such policy must be properly referred to Congress. The Court has no discretion on the matter but simply applies the law. The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716 or the Expanded Value-Added Tax law was passed. It is only now, however, that the executive has earnestly pursued the VAT imposition against tollway operators. The executive exercises exclusive discretion in matters pertaining to the implementation and execution of tax laws. Consequently, the executive is more properly suited to deal with the immediate and practical consequences of the VAT imposition. WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of Internal Revenue’s motion for reconsideration of its August 24, 2010 resolution, DISMISSES the petitioners Renato V. Diaz and Aurora Ma. F. Timbol’s petition for lack of merit, and SETS ASIDE the Court’s temporary restraining order dated August 13, 2010.


THIRD DIVISION

SUPREME TRANSLINER, INC., MOISES C. ALVAREZ and PAULITA S. ALVAREZ, Petitioners, - versus - BPI FAMILY SAVINGS BANK, INC., Respondent.

G.R. No. 165617

x- - - - - - - - - - - - - - - - - - - - - - - - - -x BPI FAMILY SAVINGS BANK, INC., Petitioner, - versus -

SUPREME TRANSLINER, INC., MOISES C. ALVAREZand PAULITA S. ALVAREZ, Respondents.

G.R. No. 165837 Promulgated: February 25, 2011

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DECISION

VILLARAMA, JR., J.: This case involves the question of the correct redemption price payable to a mortgagee bank as purchaser of the property in a foreclosure sale. On April 24, 1995, Supreme Transliner, Inc. represented by its Managing Director, Moises C. Alvarez, and Paulita S. Alvarez, obtained a loan in the amount of P9,853,000.00 from BPI Family Savings Bank with a 714-square meter lot covered by Transfer Certificate of Title No. T-79193 in the name of Moises C. Alvarez and Paulita S. Alvarez, as collateral.[1] For non-payment of the loan, the mortgage was extrajudicially foreclosed and the property was sold to the bank as the highest bidder in the public auction conducted by the Office of the Provincial Sheriff of Lucena City. On August 7, 1996, a Certificate of Sale[2] was issued in favor of the bank and the same was registered on October 1, 1996. Before the expiration of the one-year redemption period, the mortgagors notified the bank of their intention to redeem the property. Accordingly, the following Statement of Account[3] was prepared by the bank indicating the total amount due under the mortgage loan agreement: x x x x

Balance of PrincipalAdd: Interest Due Late Payment Charges MRI Fire Insurance Foreclosure Expenses

P 9,551,827.641,417,761.24155,546.25

0.000.00

155,817.23 Sub-totalLess: Unapplied Payment

P 11,280,952.36 908,241.01

Total Amount Due As Of 08/07/96 (Auction Date)

10,372,711.35

Add: Attorney’s Fees (15%) 1,555,906.70 Liquidated Damages (15%) 1,555,906.70 Interest on P 10,372,711.35 from 08/07/96 to 04/07/97 (243 days) at 17.25% p.a.

1,207,772.58 x x x x Asset Acquired Expenses:


Documentary Stamps 155,595.00 Capital Gains Tax 518,635.57 Foreclosure Fee 207,534.23 Registration and Filing Fee 23,718.00 Add’l. Registration & Filing Fee 660.00 906,142.79 Interest on P 906,142.79 from 08/07/96 to 04/07/97 (243 days) at 17.25% p.a.

105,509.00 Cancellation Fee 300.00 Total Amount Due As Of 04/07/97 (Subject to Audit)

P 15,704,249.12

x x x x The mortgagors requested for the elimination of liquidated damages and reduction of attorney’s fees and interest (1% per month) but the bank refused. On May 21, 1997, the mortgagors redeemed the property by paying the sum of P15,704,249.12. A Certificate of Redemption[4] was issued by the bank on May 27, 1997. On June 11, 1997, the mortgagors filed a complaint against the bank to recover the allegedly unlawful and excessive charges totaling P5,331,237.77, with prayer for damages and attorney’s fees, docketed as Civil Case No. 97-72 of the Regional Trial Courtof Lucena City, Branch 57. In its Answer with Special and Affirmative Defenses and Counterclaim, the bank asserted that the redemption price reflecting the stipulated interest, charges and/or expenses, is valid, legal and in accordance with documents duly signed by the mortgagors. The bank further contended that the claims are deemed waived and the mortgagors are already estopped from questioning the terms and conditions of their contract. On September 30, 1997, the bank filed a motion to set the case for hearing on the special and affirmative defenses by way of motion to dismiss. The trial court denied the motion on January 8, 1998 and also denied the bank’s motion for reconsideration. The bank elevated the matter to the Court of Appeals (CA-G.R. SP No. 47588) which dismissed the petition for certiorari onFebruary 26, 1999. On February 14, 2002, the trial court rendered its decision[5] dismissing the complaint and the bank’s counterclaims. The trial court held that plaintiffs-mortgagors are bound by the terms of the mortgage loan documents which clearly provided for the payment of the following interest, charges and expenses: 18% p.a. on the loan, 3% post-default penalty, 15% liquidated damages, 15% attorney’s fees and collection and legal costs. Plaintiffs-mortgagors’ claim that they paid the redemption price demanded by the defendant bank under extreme pressure was rejected by the trial court since there was active negotiation for the final redemption price between the bank’s representatives and plaintiffs-mortgagors who at the time had legal advice from their counsel, together with Orient Development Banking Corporation which committed to finance the redemption. According to the trial court, plaintiffs-mortgagors are estopped from questioning the correctness of the redemption price as they had freely and voluntarily signed the letter-agreement prepared by the defendant bank, and along with Orient Bank expressed their conformity to the terms and conditions therein, thus: May 14, 1997 ORIENT DEVELOPMENT BANKING CORPORATION7th Floor Ever Gotesco Corporate CenterC.M. Recto Avenue corner Matapang StreetManila Attention: MS. AIDA C. DELA ROSA Senior Vice-PresidentGentlemen: This refers to your undertaking to settle the account of SUPREME TRANS LINER, INC. and spouses MOISES C. ALVAREZ and PAULITA S. ALVAREZ, covering the real estate property located in the Poblacion, City of Lucena under TCT No. T-79193 which was foreclosed by BPI FAMILY SAVINGS BANK, INC. With regard to the proposed refinancing of the account, we interpose no objection to the annotation of your mortgage lien thereon subject to the following conditions: 1. That all expenses for the registration of the annotation of mortgage and other incidental registration and cancellation expenses shall be borne by the borrower.2. That you will recognize our mortgage liens as first and superior until the loan with us is fully paid.3. That you will annotate your mortgage lien and pay us the full amount to close the loan within five (5) working days from the receipt of the titles. If within this period, you have not registered the same and paid us in full, you will immediately and unconditionally return the titles to us without need of demand, free from liens/encumbrances other than our lien.4. That in case of loss of titles, you will undertake and shoulder the cost of re-issuance of a new owner’s titles.


5. That we will issue the Certificate of Redemption after full payment of P15,704,249.12. representing the outstanding balance of the loan as of May 15, 1997 including interest and other charges thereof within a period of five (5) working days after clearance of the check payment.6. That we will release the title and the Certificate of Redemption and other pertinent papers only to your authorized representative with complete authorization and identification.7. That all expenses related to the cancellation of your annotated mortgage lien should the Bank be not fully paid on the period above indicated shall be charged to you.If you find the foregoing conditions acceptable, please indicate your conformity on the space provided below and return to us the duplicate copy. Very truly yours, BPI FAMILY BANK BY: (SGD.) LOLITA C. CARRIDO Manager

C O N F O R M E :

ORIENT DEVELOPMENT BANKING CORPORATION

(SGD.) AIDA C. DELA ROSASenior Vice President

C O N F O R M E :

SUPREME TRANS LINER, INC.

(SGD.) MOISES C. ALVAREZ/PAULITA S. ALVAREZMortgagors[6]

(Underscoring in the original; emphasis supplied.) As to plaintiffs-mortgagors’ contention that the amounts representing attorney’s fees and liquidated damages were already included in the P10,372,711.35 bid price, the trial court said this was belied by their own evidence, the Statement of Account showing the breakdown of the redemption price as computed by the defendant bank. The mortgagors appealed to the CA (CA-G.R. CV No. 74761) which, by Decision [7] dated April 6, 2004 reversed the trial court and decreed as follows:WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and SET ASIDE. A new one is hereby entered as follows:1. Plaintiffs-appellants’ complaint for damages against defendant-appellee is hereby REINSTATED;2. Defendant-appellee is hereby ORDERED to return to plaintiffs-appellees (sic) the invalidly collected amount of P3,111,813.40 plus six (6) percent legal interest from May 21, 1997 until fully returned;3. Defendant-appellee is hereby ORDERED to pay plaintiffs-appellees (sic) the amount of P100,000.00 as moral damages, P100,000.00 as exemplary damages and P100,000.00 as attorney’s fees;4. Costs against defendant-appellee.SO ORDERED.[8]

The CA ruled that attorney’s fees and liquidated damages were already included in the bid price of P10,372,711.35 as per the recitals in the Certificate of Sale that said amount was paid to the foreclosing mortgagee to satisfy not only the principal loan but also “interest and penalty charges, cost of publication and expenses of the foreclosure proceedings.” These “penalty charges” consist of 15% attorney’s fees and 15% liquidated damages which the bank imposes as penalty in cases of violation of the terms of the mortgage deed. The total redemption price thus should only be P12,592,435.72 and the bank should return the amount ofP3,111,813.40 representing attorney’s fees and liquidated damages. The appellate court further stated that the mortgagors cannot be deemed estopped to question the propriety of the charges because from the very start they had repeatedly questioned the imposition of attorney’s fees and liquidated damages and were merely constrained to pay the demanded redemption price for fear that the redemption period will expire without them redeeming their property.[9]

By Resolution[10] dated October 12, 2004, the CA denied the parties’ respective motions for reconsideration. Hence, these petitions separately filed by the mortgagors and the bank. In G.R. No. 165617, the petitioners-mortgagors raise the single issue of whether the foreclosing mortgagee should pay capital gains tax upon execution of the certificate of sale, and if paid by the mortgagee, whether the same should be shouldered by the redemptioner. They specifically prayed for the return of all asset-acquired


expenses consisting of documentary stamps tax, capital gains tax, foreclosure fee, registration and filing fee, and additional registration and filing fee totaling P906,142.79, with 6% interest thereon from May 21, 1997.[11]

On the other hand, the petitioner bank in G.R. No. 165837 assails the CA in holding that –1. … the Certificate of Sale, the bid price of P10,372,711.35 includes penalty charges and as such for purposes of computing the redemption price petitioner can no longer impose upon the private respondents the penalty charges in the form of 15% attorney’s fees and the 15% liquidated damages in the aggregate amount of P3,111,813.40, although the evidence presented by the parties show otherwise. 2. … private respondents cannot be considered to be under estoppel to question the propriety of the aforestated penalty charges despite the fact that, as found by the Honorable Trial Court, “there was very active negotiation between the parties in the computation of the redemption price” culminating into the signing freely and voluntarily by the petitioner, the private respondents and Orient Bank, which financed the redemption of the foreclosed property, of Exhibit “3”, wherein they mutually agreed that the redemption price is in the sum of P15,704,249.12.3. … petitioner [to] pay private respondents damages in the aggregate amount of P300,000.00 on the ground that the former acted in bad faith in the imposition upon them of the aforestated penalty charges, when in truth it is entitled thereto as the law and the contract expressly provide and that private respondents agreed to pay the same.[12]

On the correct computation of the redemption price, Section 78 of Republic Act No. 337, otherwise known as the General Banking Act, governs in cases where the mortgagee is a bank.[13] Said provision reads: SEC. 78. x x x In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan granted before the passage of this Act or under the provisions of this Act, the mortgagor or debtor whose real property has been sold at public auction, judicially or extrajudicially, for the full or partial payment of an obligation to any bank, banking or credit institution, within the purview of this Act shall have the right, within one year after the sale of the real estate as a result of the foreclosure of the respective mortgage, to redeem the property by paying the amount fixed by the court in the order of execution, or the amount due under the mortgage deed, as the case may be,with interest thereon at the rate specified in the mortgage, and all the costs, and judicial and other expenses incurred by the bank or institution concerned by reason of the execution and sale and as a result of the custody of said property less the income received from the property . x x x x (Emphasis supplied.) Under the Mortgage Loan Agreement,[14] petitioners-mortgagors undertook to pay the attorney’s fees and the costs of registration and foreclosure. The following contract terms would show that the said items are separate and distinct from the bid price which represents only the outstanding loan balance with stipulated interest thereon.23. Application of Proceeds of Foreclosure Sale. The proceeds of sale of the mortgaged property/ies shall be applied as follows:a) To the payment of the expenses and cost of foreclosure and sale, including the attorney’s fees as herein provided;b) To the satisfaction of all interest and charges accruing upon the obligations herein and hereby secured.c) To the satisfaction of the principal amount of the obligations herein and hereby secured.d) To the satisfaction of all other obligations then owed by the Borrower/Mortgagor to the Bank or any of its subsidiaries/affiliates such as, but not limited to BPI Credit Corporation; or to Bank of the Philippine Islands or any of its subsidiaries/affiliates such as, but not limited to BPI Leasing Corporation, BPI Express Card Corporation, BPI Securities Corporation and BPI Agricultural Development Bank; ande) The balance, if any, to be due to the Borrower/Mortgagor.x x x x31. Attorney’s Fees: In case the Bank should engage the services of counsel to enforce its rights under this Agreement, the Borrower/Mortgagor shall pay an amount equivalent to fifteen (15%) percent of the total amount claimed by the Bank, which in no case shall be less than P2,000.00, Philippine currency, plus costs, collection expenses and disbursements allowed by law, all of which shall be secured by this mortgage.[15]

Additionally, the Disclosure Statement on Loan/Credit Transaction[16] also duly signed by the petitioners-mortgagors provides:10. ADDITIONAL CHARGES IN CASE CERTAIN STIPULATIONS ARE NOT MET BY THE BORROWER a. Post Default Penalty 3.00% per monthb. Attorney’s Services 15% of sum due but not less than P2,000.00c. Liquidated Damages 15% of sum due but not less than P10,000.00d. Collection & Legal Cost As provided by the Rules of Courte. Others (Specify) As correctly found by the trial court, that attorney’s fees and liquidated damages were not yet included in the bid price ofP10,372,711.35 is clearly shown by the Statement of Account as of April 4, 1997 prepared by the petitioner bank and given to petitioners-mortgagors. On the other hand, par. 23 of the Mortgage Loan Agreement


indicated that asset acquired expenses were to be added to the redemption price as part of “costs and other expenses incurred” by the mortgagee bank in connection with the foreclosure sale. Coming now to the issue of capital gains tax, we find merit in petitioners-mortgagors’ argument that there is no legal basis for the inclusion of this charge in the redemption price. Under Revenue Regulations (RR) No. 13-85 (December 12, 1985), every sale or exchange or other disposition of real property classified as capital asset under Section 34(a)[17] of the Tax Code shall be subject to the final capital gains tax. The term sale includes pacto de retro and other forms of conditional sale. Section 2.2 of Revenue Memorandum Order (RMO) No. 29-86 (as amended by RMO No. 16-88 and as further amended by RMO Nos. 27-89 and 6-92) states that these conditional sales “necessarily include mortgage foreclosure sales (judicial and extrajudicial foreclosure sales).” Further, for real property foreclosed by a bank on or after September 3, 1986, the capital gains tax and documentary stamp tax must be paid before title to the property can be consolidated in favor of the bank.[18]

Under Section 63 of Presidential Decree No. 1529 otherwise known as the Property Registration Decree, if no right of redemption exists, the certificate of title of the mortgagor shall be cancelled, and a new certificate issued in the name of the purchaser. But where the right of redemption exists, the certificate of title of the mortgagor shall not be cancelled, but the certificate of sale and the order confirming the sale shall be registered by brief memorandum thereof made by the Register of Deeds upon the certificate of title. In the event the property is redeemed, the certificate or deed of redemption shall be filed with the Register of Deeds, and a brief memorandum thereof shall be made by the Register of Deeds on the certificate of title.It is therefore clear that in foreclosure sale, there is no actual transfer of the mortgaged real property until after the expiration of the one-year redemption period as provided in Act No. 3135 and title thereto is consolidated in the name of the mortgagee in case of non-redemption. In the interim, the mortgagor is given the option whether or not to redeem the real property. The issuance of the Certificate of Sale does not by itself transfer ownership.[19] RR No. 4-99 issued on March 16, 1999, further amends RMO No. 6-92 relative to the payment of Capital Gains Tax and Documentary Stamp Tax on extrajudicial foreclosure sale of capital assets initiated by banks, finance and insurance companies. SEC. 3. CAPITAL GAINS TAX. –(1) In case the mortgagor exercises his right of redemption within one year from the issuance of the certificate of sale, no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. x x x(2) In case of non-redemption, the capital gains [tax] on the foreclosure sale imposed under Secs. 24(D)(1) and 27(D)(5) of the Tax Code of 1997 shall become due based on the bid price of the highest bidder but only upon the expiration of the one-year period of redemption provided for under Sec. 6 of Act No. 3135, as amended by Act No. 4118, and shall be paid within thirty (30) days from the expiration of the said one-year redemption period.SEC. 4. DOCUMENTARY STAMP TAX. –(1) In case the mortgagor exercises his right of redemption, the transaction shall only be subject to the P15.00 documentary stamp tax imposed under Sec. 188 of the Tax Code of 1997 because no land or realty was sold or transferred for a consideration.(2) In case of non-redemption, the corresponding documentary stamp tax shall be levied, collected and paid by the person making, signing, issuing, accepting, or transferring the real property wherever the document is made, signed, issued, accepted or transferred where the property is situated in the Philippines. x x x (Emphasis supplied.)Although the subject foreclosure sale and redemption took place before the effectivity of RR No. 4-99, its provisions may be given retroactive effect in this case. Section 246 of the NIRC of 1997 states:SEC. 246. Non-Retroactivity of Rulings. – Any revocation, modification, or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive applicationif the revocation, modification, or reversal will be prejudicial to the taxpayers, except in the following cases:(a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue;(b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or(c) where the taxpayer acted in bad faith.In this case, the retroactive application of RR No. 4-99 is more consistent with the policy of aiding the exercise of the right of redemption. As the Court of Tax Appeals concluded in one case, RR No. 4-99 “has curbed the inequity of imposing a capital gains tax even before the expiration of the redemption period [since] there is yet no transfer of title and no profit or gain is realized by the mortgagor at the time of foreclosure sale but only upon expiration of the redemption period.”[20] In his commentaries, De Leon expressed the view that while revenue regulations as a general rule have no retroactive effect, if the revocation is due to the fact that the regulation is erroneous or contrary to law, such revocation shall have retroactive operation as to affect past transactions, because a wrong construction of the law cannot give rise to a vested right that can be invoked by a taxpayer.[21]

Considering that herein petitioners-mortgagors exercised their right of redemption before the expiration of the statutory one-year period, petitioner bank is not liable to pay the capital gains tax due on the extrajudicial


foreclosure sale. There was no actual transfer of title from the owners-mortgagors to the foreclosing bank. Hence, the inclusion of the said charge in the total redemption price was unwarranted and the corresponding amount paid by the petitioners-mortgagors should be returned to them. WHEREFORE, premises considered, both petitions are PARTLY GRANTED. In G.R. No. 165617, BPI Family Savings Bank, Inc. is hereby ordered to RETURN the amounts representing capital gains and documentary stamp taxes as reflected in the Statement of Account To Redeem as of April 7, 1997, to petitioners Supreme Transliner, Inc., Moises C. Alvarez and Paulita Alvarez, and to retain only the sum provided in RR No. 4-99 as documentary stamps tax due on the foreclosure sale. In G.R. No. 165837, petitioner BPI Family Savings Bank, Inc. is hereby declared entitled to the attorney’s fees and liquidated damages included in the total redemption price paid by Supreme Transliner, Inc., Moises C. Alvarez and Paulita Alvarez. The sums awarded as moral and exemplary damages, attorney’s fees and costs in favor of Supreme Transliner, Inc., Moises C. Alvarez and Paulita Alvarez are DELETED. The Decision dated April 6, 2004 of the Court of Appeals in CA-G.R. CV No. 74761 is accordingly MODIFIED.


PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,

- versus -

THE BUREAU OF INTERNAL REVENUE (BIR), represented herein by HON. JOSE MARIO BUÑAG, in his official capacity as COMMISSIONER OF INTERNAL REVENUE, Public Respondent, JOHN DOE and JANE DOE, who are persons acting for, in behalf, or under the authority of Respondent. Public and Private Respondents.

G.R. No. 172087 Promulgated: March 15, 2011

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D E C I S I O N

PERALTA, J.: For resolution of this Court is the Petition for Certiorari and Prohibition[1] with prayer for the issuance of a Temporary Restraining Order and/or Preliminary Injunction, dated April 17, 2006, of petitioner Philippine Amusement and Gaming Corporation (PAGCOR), seeking the declaration of nullity of Section 1 of Republic Act (R.A.) No. 9337 insofar as it amends Section 27 (c) of the National Internal Revenue Code of 1997, by excluding petitioner from exemption from corporate income tax for being repugnant to Sections 1 and 10 of Article III of the Constitution. Petitioner further seeks to prohibit the implementation of Bureau of Internal Revenue (BIR) Revenue Regulations No. 16-2005 for being contrary to law. The undisputed facts follow. PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A [2] on January 1, 1977. Simultaneous to its creation, P.D. No. 1067-B[3] (supplementing P.D. No. 1067-A) was issued exempting PAGCOR from the payment of any type of tax, except a franchise tax of five percent (5%) of the gross revenue.[4] Thereafter, on June 2, 1978, P.D. No. 1399 was issued expanding the scope of PAGCOR's exemption.[5]

To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D. No. 1869 [6] was issued. Section 13 thereof reads as follows: Sec. 13. Exemptions. — x x x (1) Customs Duties, taxes and other imposts on importations. - All importations of equipment, vehicles, automobiles, boats, ships, barges, aircraft and such other gambling paraphernalia, including accessories or related facilities, for the sole and exclusive use of the casinos, the proper and efficient management and administration thereof and such other clubs, recreation or amusement places to be established under and by virtue of this Franchise shall be exempt from the payment of duties, taxes and other imposts, including all kinds of fees, levies, or charges of any kind or nature. Vessels and/or accessory ferry boats imported or to be imported by any corporation having existing contractual arrangements with the Corporation, for the sole and exclusive use of the casino or to be used to service the operations and requirements of the casino, shall likewise be totally exempt from the payment of all customs duties, taxes and other imposts, including all kinds of fees, levies, assessments or charges of any kind or nature, whether National or Local.


(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges, or levies of whatever nature, whether National or Local, shall be assessed and collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any way to the earnings of the Corporation, except a Franchise Tax of five percent (5%)of the gross revenue or earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied, established, or collected by any municipal, provincial or national government authority. (b) Others: The exemption herein granted for earnings derived from the operations conducted under the franchise, specifically from the payment of any tax, income or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and extend to corporation(s), association(s), agency(ies), or individual(s) with whom the Corporation or operator has any contractual relationship in connection with the operations of the casino(s) authorized to be conducted under this Franchise and to those receiving compensation or other remuneration from the Corporation as a result of essential facilities furnished and/or technical services rendered to the Corporation or operator. The fee or remuneration of foreign entertainers contracted by the Corporation or operator in pursuance of this provision shall be free of any tax. (3) Dividend Income. − Notwithstanding any provision of law to the contrary, in the event the Corporation should declare a cash dividend income corresponding to the participation of the private sector shall, as an incentive to the beneficiaries, be subject only to a final flat income rate of ten percent (10%) of the regular income tax rates. The dividend income shall not in such case be considered as part of the beneficiaries' taxable income; provided, however, that such dividend income shall be totally exempted from income or other form of taxes if invested within six (6) months from the date the dividend income is received in the following: (a) operation of the casino(s) or investments in any affiliate activity that will ultimately redound to the benefit of the Corporation; or any other corporation with whom the Corporation has any existing arrangements in connection with or related to the operations of the casino(s);(b) Government bonds, securities, treasury notes, or government debentures; or(c) BOI-registered or export-oriented corporation(s).[7]

PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was later restored by Letter of Instruction No. 1430, which was issued in September 1984. On January 1, 1998, R.A. No. 8424,[8] otherwise known as the National Internal Revenue Code of 1997, took effect. Section 27 (c) of R.A. No. 8424 provides that government-owned and controlled corporations (GOCCs) shall pay corporate income tax, except petitioner PAGCOR, the Government Service and Insurance Corporation, the Social Security System, the Philippine Health Insurance Corporation, and the Philippine Charity Sweepstakes Office, thus:(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of existing special general laws to the contrary notwithstanding, all corporations, agencies or instrumentalities owned and controlled by the Government, except the Government Service and Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in similar business, industry, or activity.[9]

With the enactment of R.A. No. 9337[10] on May 24, 2005, certain sections of the National Internal Revenue Code of 1997 were amended. The particular amendment that is at issue in this case is Section 1 of R.A. No. 9337, which amended Section 27 (c) of the National Internal Revenue Code of 1997 by excluding PAGCOR from the enumeration of GOCCs that are exempt from payment of corporate income tax, thus: (c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of existing special general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned and controlled by the Government, except the Government Service and Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), and the Philippine Charity Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in similar business, industry, or activity. Different groups came to this Court via petitions for certiorari and prohibition[11] assailing the validity and constitutionality of R.A. No. 9337, in particular:


1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of goods and properties; Section 5, which imposes a 10% VAT on importation of goods; and Section 6, which imposes a 10% VAT on sale of services and use or lease of properties, all contain a uniform proviso authorizing the President, upon the recommendation of the Secretary of Finance, to raise the VAT rate to 12%. The said provisions were alleged to be violative of Section 28 (2), Article VI of the Constitution, which section vests in Congress the exclusive authority to fix the rate of taxes, and of Section 1, Article III of the Constitution on due process, as well as of Section 26 (2), Article VI of the Constitution, which section provides for the "no amendment rule" upon the last reading of a bill; 2) Sections 8 and 12 were alleged to be violative of Section 1, Article III of the Constitution, or the guarantee of equal protection of the laws, and Section 28 (1), Article VI of the Constitution; and 3) other technical aspects of the passage of the law, questioning the manner it was passed. On September 1, 2005, the Court dismissed all the petitions and upheld the constitutionality of R.A. No. 9337.[12]

On the same date, respondent BIR issued Revenue Regulations (RR) No. 16-2005,[13] specifically identifying PAGCOR as one of the franchisees subject to 10% VAT imposed under Section 108 of the National Internal Revenue Code of 1997, as amended by R.A. No. 9337. The said revenue regulation, in part, reads: Sec. 4. 108-3. Definitions and Specific Rules on Selected Services. — x x x x (h) x x x Gross Receipts of all other franchisees, other than those covered by Sec. 119 of the Tax Code, regardless of how their franchisees may have been granted, shall be subject to the 10% VAT imposed under Sec.108 of the Tax Code. This includes, among others, the Philippine Amusement and Gaming Corporation (PAGCOR), and its licensees or franchisees. Hence, the present petition for certiorari. PAGCOR raises the following issues:

I

WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING REPUGNANT TO THE EQUAL PROTECTION [CLAUSE] EMBODIED IN SECTION 1, ARTICLE III OF THE 1987 CONSTITUTION.

IIWHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING REPUGNANT TO THE NON-IMPAIRMENT [CLAUSE] EMBODIED IN SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.

IIIWHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH (H) IS NULL AND VOID AB INITIO FOR BEING BEYOND THE SCOPE OF THE BASIC LAW, RA 8424, SECTION 108, INSOFAR AS THE SAID REGULATION IMPOSED VAT ON THE SERVICES OF THE PETITIONER AS WELL AS PETITIONER’S LICENSEES OR FRANCHISEES WHEN THE BASIC LAW, AS INTERPRETED BY APPLICABLE JURISPRUDENCE, DOES NOT IMPOSE VAT ON PETITIONER OR ON PETITIONER’S LICENSEES OR FRANCHISEES.[14]

The BIR, in its Comment[15] dated December 29, 2006, counters:

ISECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D. 1869 ARE BOTH VALID AND CONSTITUTIONAL PROVISIONS OF LAWS THAT SHOULD BE HARMONIOUSLY CONSTRUED TOGETHER SO AS TO GIVE EFFECT TO ALL OF THEIR PROVISIONS WHENEVER POSSIBLE.IISECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF SECTION 1 AND SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.IIIBIR REVENUE REGULATIONS ARE PRESUMED VALID AND CONSTITUTIONAL UNTIL STRICKEN DOWN BY LAWFUL AUTHORITIES.


The Office of the Solicitor General (OSG), by way of Manifestation In Lieu of Comment,[16] concurred with the arguments of the petitioner. It added that although the State is free to select the subjects of taxation and that the inequity resulting from singling out a particular class for taxation or exemption is not an infringement of the constitutional limitation, a tax law must operate with the same force and effect to all persons, firms and corporations placed in a similar situation. Furthermore, according to the OSG, public respondent BIR exceeded its statutory authority when it enacted RR No. 16-2005, because the latter's provisions are contrary to the mandates of P.D. No. 1869 in relation to R.A. No. 9337. The main issue is whether or not PAGCOR is still exempt from corporate income tax and VAT with the enactment of R.A. No. 9337. After a careful study of the positions presented by the parties, this Court finds the petition partly meritorious. Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal Revenue Code of 1977, petitioner is no longer exempt from corporate income tax as it has been effectively omitted from the list of GOCCs that are exempt from it. Petitioner argues that such omission is unconstitutional, as it is violative of its right to equal protection of the laws under Section 1, Article III of the Constitution: Sec. 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws..In City of Manila v. Laguio, Jr.,[17] this Court expounded the meaning and scope of equal protection, thus: Equal protection requires that all persons or things similarly situated should be treated alike, both as to rights conferred and responsibilities imposed. Similar subjects, in other words, should not be treated differently, so as to give undue favor to some and unjustly discriminate against others. The guarantee means that no person or class of persons shall be denied the same protection of laws which is enjoyed by other persons or other classes in like circumstances. The "equal protection of the laws is a pledge of the protection of equal laws." It limits governmental discrimination. The equal protection clause extends to artificial persons but only insofar as their property is concerned. x x x x Legislative bodies are allowed to classify the subjects of legislation. If the classification is reasonable, the law may operate only on some and not all of the people without violating the equal protection clause. The classification must, as an indispensable requisite, not be arbitrary. To be valid, it must conform to the following requirements: 1) It must be based on substantial distinctions.2) It must be germane to the purposes of the law.3) It must not be limited to existing conditions only.4) It must apply equally to all members of the class.[18]

It is not contested that before the enactment of R.A. No. 9337, petitioner was one of the five GOCCs exempted from payment of corporate income tax as shown in R.A. No. 8424, Section 27 (c) of which, reads:(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies or instrumentalities owned and controlled by the Government, except the Government Service and Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in similar business, industry, or activity.[19]

A perusal of the legislative records of the Bicameral Conference Meeting of the Committee on Ways on Means dated October 27, 1997 would show that the exemption of PAGCOR from the payment of corporate income tax was due to the acquiescence of the Committee on Ways on Means to the request of PAGCOR that it be exempt from such tax.[20] The records of the Bicameral Conference Meeting reveal: HON. R. DIAZ. The other thing, sir, is we --- I noticed we imposed a tax on lotto winnings. CHAIRMAN ENRILE. Wala na, tinanggal na namin yon. HON. R. DIAZ. Tinanggal na ba natin yon? CHAIRMAN ENRILE. Oo.


HON. R. DIAZ. Because I was wondering whether we covered the tax on --- Whether on a universal basis, we included a tax on cockfighting winnings. CHAIRMAN ENRILE. No, we removed the --- HON. R. DIAZ. I . . . (inaudible) natin yong lotto? CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon request. CHAIRMAN JAVIER. Yeah, Philippine Insurance Commission. CHAIRMAN ENRILE. Philippine Insurance --- Health, health ba. Yon ang request ng Chairman, I will accept. (laughter) Pag-Pag-ibig yon, maliliit na sa tao yon. HON. ROXAS. Mr. Chairman, I wonder if in the revenue gainers if we factored in an amount that would reflect the VAT and other sales taxes--- CHAIRMAN ENRILE. No, we’re talking of this measure only. We will not --- (discontinued) HON. ROXAS. No, no, no, no, from the --- arising from the exemption. Assuming that when we release the money into the hands of the public, they will not use that to --- for wallpaper. They will spend that eh, Mr. Chairman. So when they spend that--- CHAIRMAN ENRILE. There’s a VAT. HON. ROXAS. There will be a VAT and there will be other sales taxes no. Is there a quantification? Is there an approximation? CHAIRMAN JAVIER. Not anything. HON. ROXAS. So, in effect, we have sterilized that entire seven billion. In effect, it is not circulating in the economy which is unrealistic. CHAIRMAN ENRILE. It does, it does, because this is taken and spent by government, somebody receives it in the form of wages and supplies and other services and other goods. They are not being taken from the public and stored in a vault. CHAIRMAN JAVIER. That 7.7 loss because of tax exemption. That will be extra income for the taxpayers. HON. ROXAS. Precisely, so they will be spending it.[21] The discussion above bears out that under R.A. No. 8424, the exemption of PAGCOR from paying corporate income tax was not based on a classification showing substantial distinctions which make for real differences, but to reiterate, the exemption was granted upon the request of PAGCOR that it be exempt from the payment of corporate income tax.With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424, PAGCOR has been excluded from the enumeration of GOCCs that are exempt from paying corporate income tax. The records of the Bicameral Conference Meeting dated April 18, 2005, of the Committee on the Disagreeing Provisions of Senate Bill No. 1950 and House Bill No. 3555, show that it is the legislative intent that PAGCOR be subject to the payment of corporate income tax, thus: THE CHAIRMAN (SEN. RECTO). Yes, Osmeña, the proponent of the amendment. SEN. OSMEÑA. Yeah. Mr. Chairman, one of the reasons why we're even considering this VAT bill is we want to show the world who our creditors, that we are increasing official revenues that go to the national budget. Unfortunately today, Pagcor is unofficial. Now, in 2003, I took a quick look this morning, Pagcor had a net income of 9.7 billion after paying some small taxes that they are subjected to. Of the 9.7 billion, they claim they remitted to national government seven billion. Pagkatapos, there are other specific remittances like to the Philippine Sports Commission, etc., as mandated by various laws, and then about 400 million to the President's Social Fund. But all in all, their net profit today should be about 12 billion. That's why I am questioning this two billion. Because while essentially they claim that the money goes to government, and I will accept that just for the sake of argument. It does not pass through the appropriation process. And I think that at least if we can capture 35 percent or 32 percent through the budgetary process, first, it is reflected in our official income of government which is applied to the national budget, and secondly, it goes through what is constitutionally mandated as Congress appropriating and defining where the money is spent and not through a board of directors that has absolutely no accountability. REP. PUENTEBELLA. Well, with all due respect, Mr. Chairman, follow up lang.


There is wisdom in the comments of my good friend from Cebu, Senator Osmeña. SEN. OSMEÑA. And Negros. REP. PUENTEBELLA. And Negros at the same time ay Kasimanwa. But I would not want to put my friends from the Department of Finance in a difficult position, but may we know your comments on this knowing that as Senator Osmeña just mentioned, he said, “I accept that that a lot of it is going to spending for basic services,” you know, going to most, I think, supposedly a lot or most of it should go to government spending, social services and the like. What is your comment on this? This is going to affect a lot of services on the government side. THE CHAIRMAN (REP. LAPUS). Mr. Chair, Mr. Chair. SEN. OSMEÑA. It goes from pocket to the other, Monico. REP. PUENTEBELLA. I know that. But I wanted to ask them, Mr. Senator, because you may have your own pre-judgment on this and I don't blame you. I don't blame you. And I know you have your own research. But will this not affect a lot, the disbursements on social services and other? REP. LOCSIN. Mr. Chairman. Mr. Chairman, if I can add to that question also. Wouldn't it be easier for you to explain to, say, foreign creditors, how do you explain to them that if there is a fiscal gap some of our richest corporations has [been] spared [from] taxation by the government which is one rich source of revenues. Now, why do you save, why do you spare certain government corporations on that, like Pagcor? So, would it be easier for you to make an argument if everything was exposed to taxation? REP. TEVES. Mr. Chair, please. THE CHAIRMAN (REP. LAPUS). Can we ask the DOF to respond to those before we call Congressman Teves? MR. PURISIMA. Thank you, Mr. Chair. Yes, from definitely improving the collection, it will help us because it will then enter as an official revenue although when dividends declare it also goes in as other income. (sic) x x x x REP. TEVES. Mr. Chairman. x x x x THE CHAIRMAN (REP. LAPUS). Congressman Teves. REP. TEVES. Yeah. Pagcor is controlled under Section 27, that is on income tax. Now, we are talking here on value-added tax. Do you mean to say we are going to amend it from income tax to value-added tax, as far as Pagcor is concerned? THE CHAIRMAN (SEN. RECTO). No. We are just amending that section with regard to the exemption from income tax of Pagcor. x x x x REP. NOGRALES. Mr. Chairman, Mr. Chairman. Mr. Chairman. THE CHAIRMAN (REP. LAPUS). Congressman Nograles. REP. NOGRALES. Just a point of inquiry from the Chair. What exactly are the functions of Pagcor that are VATable? What will we VAT in Pagcor? THE CHAIRMAN (REP. LAPUS). This is on own income tax. This is Pagcor income tax. REP. NOGRALES. No, that's why. Anong i-va-Vat natin sa kanya. Sale of what?


x x x x REP. VILLAFUERTE. Mr. Chairman, my question is, what are we VATing Pagcor with, is it the . . . REP. NOGRALES. Mr. Chairman, this is a secret agreement or the way they craft their contract, which basis? THE CHAIRMAN (SEN. RECTO). Congressman Nograles, the Senate version does not discuss a VAT on Pagcor but it just takes away their exemption from non-payment of income tax. [22]

Taxation is the rule and exemption is the exception.[23] The burden of proof rests upon the party claiming exemption to prove that it is, in fact, covered by the exemption so claimed. [24] As a rule, tax exemptions are construed strongly against the claimant.[25]Exemptions must be shown to exist clearly and categorically, and supported by clear legal provision.[26]

In this case, PAGCOR failed to prove that it is still exempt from the payment of corporate income tax, considering that Section 1 of R.A. No. 9337 amended Section 27 (c) of the National Internal Revenue Code of 1997 by omitting PAGCOR from the exemption. The legislative intent, as shown by the discussions in the Bicameral Conference Meeting, is to require PAGCOR to pay corporate income tax; hence, the omission or removal of PAGCOR from exemption from the payment of corporate income tax. It is a basic precept of statutory construction that the express mention of one person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio alterius.[27] Thus, the express mention of the GOCCs exempted from payment of corporate income tax excludes all others. Not being excepted, petitioner PAGCOR must be regarded as coming within the purview of the general rule that GOCCs shall pay corporate income tax, expressed in the maxim: exceptio firmat regulam in casibus non exceptis.[28]

PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative records of the Bicameral Conference Meeting dated October 27, 1997, of the Committee on Ways and Means, show that PAGCOR’s exemption from payment of corporate income tax, as provided in Section 27 (c) of R.A. No. 8424, or the National Internal Revenue Code of 1997, was not made pursuant to a valid classification based on substantial distinctions and the other requirements of a reasonable classification by legislative bodies, so that the law may operate only on some, and not all, without violating the equal protection clause. The legislative records show that the basis of the grant of exemption to PAGCOR from corporate income tax was PAGCOR’s own request to be exempted. Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab initio for violating the non-impairment clause of the Constitution. Petitioner avers that laws form part of, and is read into, the contract even without the parties expressly saying so. Petitioner states that the private parties/investors transacting with it considered the tax exemptions, which inure to their benefit, as the main consideration and inducement for their decision to transact/invest with it. Petitioner argues that the withdrawal of its exemption from corporate income tax by R.A. No. 9337 has the effect of changing the main consideration and inducement for the transactions of private parties with it; thus, the amendatory provision is violative of the non-impairment clause of the Constitution. Petitioner’s contention lacks merit. The non-impairment clause is contained in Section 10, Article III of the Constitution, which provides that no law impairing the obligation of contracts shall be passed. The non-impairment clause is limited in application to laws that derogate from prior acts orcontracts by enlarging, abridging or in any manner changing the intention of the parties.[29] There is impairment if a subsequent law changes the terms of a contract between the parties, imposes new conditions, dispenses with those agreed upon or withdraws remedies for the enforcement of the rights of the parties.[30]

As regards franchises, Section 11, Article XII of the Constitution[31] provides that no franchise or right shall be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires.[32]

In Manila Electric Company v. Province of Laguna,[33] the Court held that a franchise partakes the nature of a grant, which is beyond the purview of the non-impairment clause of the Constitution.[34] The pertinent portion of the case states:


While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as being in the nature of contracts and a part of the inducement for carrying on the franchise, these exemptions, nevertheless, are far from being strictly contractual in nature. Contractual tax exemptions, in the real sense of the term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the obligations of contracts. These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. A franchise partakes the nature of a grant which is beyond the purview of the non-impairment clause of the Constitution. Indeed, Article XII, Section 11, of the 1987 Constitution, like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit that no franchise for the operation of a public utility shall be granted except under the condition that such privilege shall be subject to amendment, alteration or repeal by Congress as and when the common good so requires.[35]

In this case, PAGCOR was granted a franchise to operate and maintain gambling casinos, clubs and other recreation or amusement places, sports, gaming pools, i.e., basketball, football, lotteries, etc., whether on land or sea, within the territorial jurisdiction of the Republic of the Philippines.[36] Under Section 11, Article XII of the Constitution, PAGCOR’s franchise is subject to amendment, alteration or repeal by Congress such as the amendment under Section 1 of R.A. No. 9377. Hence, the provision in Section 1 of R.A. No. 9337, amending Section 27 (c) of R.A. No. 8424 by withdrawing the exemption of PAGCOR from corporate income tax, which may affect any benefits to PAGCOR’s transactions with private parties, is not violative of the non-impairment clause of the Constitution. Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to 10% VAT is invalid for being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that petitioner can be subjected to VAT. R.A. No. 9337 is clear only as to the removal of petitioner's exemption from the payment of corporate income tax, which was already addressed above by this Court. As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT pursuant to Section 7 (k) thereof, which reads: Sec. 7. Section 109 of the same Code, as amended, is hereby further amended to read as follows: Section 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: x x x x (k) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except Presidential Decree No. 529.[37]

Petitioner is exempt from the payment of VAT, because PAGCOR’s charter, P.D. No. 1869, is a special law that grants petitioner exemption from taxes. Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337, which retained Section 108 (B) (3) of R.A. No. 8424, thus: [R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as amended, is hereby further amended to read as follows: SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: x x x x x x x (B) Transactions Subject to Zero Percent (0%) Rate. — The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate; x x x x


(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; x x x x[38]

As pointed out by petitioner, although R.A. No. 9337 introduced amendments to Section 108 of R.A. No. 8424 by imposing VAT on other services not previously covered, it did not amend the portion of Section 108 (B) (3) that subjects to zero percent rate services performed by VAT-registered persons to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to 0% rate. Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been thoroughly and extensively discussed in Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation.[39] Acesite was the owner and operator of the Holiday Inn Manila Pavilion Hotel. It leased a portion of the hotel’s premises to PAGCOR. It incurred VAT amounting toP30,152,892.02 from its rental income and sale of food and beverages to PAGCOR from January 1996 to April 1997. Acesite tried to shift the said taxes to PAGCOR by incorporating it in the amount assessed to PAGCOR. However, PAGCOR refused to pay the taxes because of its tax-exempt status. PAGCOR paid only the amount due to Acesite minus VAT in the sum of P30,152,892.02. Acesite paid VAT in the amount of P30,152,892.02 to the Commissioner of Internal Revenue, fearing the legal consequences of its non-payment. In May 1998, Acesite sought the refund of the amount it paid as VAT on the ground that its transaction with PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. The Court ruled that PAGCOR and Acesite were both exempt from paying VAT, thus: x x x x PAGCOR is exempt from payment of indirect taxes It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the payment of taxes. Section 13 of P.D. 1869 pertinently provides: Sec. 13. Exemptions. — x x x x (2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever nature, whether National or Local, shall be assessed and collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any way to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied, established or collected by any municipal, provincial, or national government authority. (b) Others: The exemptions herein granted for earnings derived from the operations conducted under the franchise specifically from the payment of any tax, income or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and extend to corporation(s), association(s), agency(ies), or individual(s) with whom the Corporation or operator has any contractual relationship in connection with the operations of the casino(s) authorized to be conducted under this Franchise and to those receiving compensation or other remuneration from the Corporation or operator as a result of essential facilities furnished and/or technical services rendered to the Corporation or operator. Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax liability and not to indirect taxes, like the VAT. We disagree. A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no distinction on whether the taxes are direct or indirect. We are one with the CA ruling that PAGCOR is also exempt from indirect taxes, like VAT, as follows: Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers to PAGCOR. Although the law does not specifically mention PAGCOR's exemption from indirect taxes, PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes persons or entities contracting with PAGCOR in


casino operations. Although, differently worded, the provision clearly exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting tax exempt status to persons dealing with PAGCOR in casino operations. The unmistakable conclusion is that PAGCOR is not liable for the P30, 152,892.02 VAT and neither is Acesite as the latter is effectively subject to zero percent rate under Sec. 108 B (3), R.A. 8424. (Emphasis supplied.) Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature clearly granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in the instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods, properties, or services subject to VAT. Thus, by extending the tax exemption to entities or individuals dealing with PAGCOR in casino operations, it is exempting PAGCOR from being liable to indirect taxes. The manner of charging VAT does not make PAGCOR liable to said tax. It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or leased, in which case it is computed as 1/11 of such value, or charged as an additional 10% to the value. Verily, the seller or lessor has the option to follow either way in charging its clients and customer. In the instant case, Acesite followed the latter method, that is, charging an additional 10% of the gross sales and rentals. Be that as it may, the use of either method, and in particular, the first method, does not denigrate the fact that PAGCOR is exempt from an indirect tax, like VAT.VAT exemption extends to Acesite Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not liable for the payment of it as it is exempt in this particular transaction by operation of law to pay the indirect tax. Such exemption falls within the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of R.A. 8424), which provides: Section 102. Value-added tax on sale of services.- (a) Rate and base of tax - There shall be levied, assessed and collected, a value-added tax equivalent to 10% of gross receipts derived by any person engaged in the sale of services x x x; Provided, that the following services performed in the Philippines by VAT registered persons shall be subject to 0%. x x x x (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero (0%) rate (emphasis supplied). The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such exemption to entities or individuals dealing with PAGCOR in casino operations are best elucidated from the 1987 case of Commissioner of Internal Revenue v. John Gotamco &Sons, Inc., where the absolute tax exemption of the World Health Organization (WHO) upon an international agreement was upheld. We held in said case that the exemption of contractee WHO should be implemented to mean that the entity or person exempt is the contractor itself who constructed the building owned by contractee WHO, and such does not violate the rule that tax exemptions are personal because the manifest intention of the agreement is to exempt the contractor so that no contractor's tax may be shifted to the contractee WHO. Thus, the proviso in P.D. 1869, extending the exemption to entities or individuals dealing with PAGCOR in casino operations, is clearly to proscribe any indirect tax, like VAT, that may be shifted to PAGCOR.[40]

Although the basis of the exemption of PAGCOR and Acesite from VAT in the case of The Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation was Section 102 (b) of the 1977 Tax Code, as amended, which section was retained as Section 108 (B) (3) in R.A. No. 8424,[41] it is still applicable to this case, since the provision relied upon has been retained in R.A. No. 9337.[42]

It is settled rule that in case of discrepancy between the basic law and a rule or regulation issued to implement said law, the basic law prevails, because the said rule or regulation cannot go beyond the terms and provisions of the basic law.[43] RR No. 16-2005, therefore, cannot go beyond the provisions of R.A. No. 9337. Since PAGCOR is exempt from VAT under R.A. No. 9337, the BIR exceeded its authority in subjecting PAGCOR to 10% VAT under RR No. 16-2005; hence, the said regulatory provision is hereby nullified. WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending Section 27 (c) of the National Internal Revenue Code of 1997, by excluding petitioner Philippine Amusement and Gaming Corporation from the enumeration of government-owned and controlled corporations exempted from corporate income tax is valid and constitutional, while BIR Revenue Regulations No. 16-2005 insofar as it subjects PAGCOR to


10% VAT is null and void for being contrary to the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337.


SUPREME TRANSLINER, INC., MOISES C. ALVAREZ and PAULITA S. ALVAREZ, Petitioners, - versus - BPI FAMILY SAVINGS BANK, INC., Respondent.

G.R. No. 165617

x- - - - - - - - - - - - - - - - - - - - - - - - - -x BPI FAMILY SAVINGS BANK, INC., Petitioner, - versus -

SUPREME TRANSLINER, INC., MOISES C. ALVAREZand PAULITA S. ALVAREZ, Respondents.

G.R. No. 165837 Promulgated: February 25, 2011

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

DECISION

VILLARAMA, JR., J.: This case involves the question of the correct redemption price payable to a mortgagee bank as purchaser of the property in a foreclosure sale. On April 24, 1995, Supreme Transliner, Inc. represented by its Managing Director, Moises C. Alvarez, and Paulita S. Alvarez, obtained a loan in the amount of P9,853,000.00 from BPI Family Savings Bank with a 714-square meter lot covered by Transfer Certificate of Title No. T-79193 in the name of Moises C. Alvarez and Paulita S. Alvarez, as collateral.[1] For non-payment of the loan, the mortgage was extrajudicially foreclosed and the property was sold to the bank as the highest bidder in the public auction conducted by the Office of the Provincial Sheriff of Lucena City. On August 7, 1996, a Certificate of Sale[2] was issued in favor of the bank and the same was registered on October 1, 1996. Before the expiration of the one-year redemption period, the mortgagors notified the bank of their intention to redeem the property. Accordingly, the following Statement of Account[3] was prepared by the bank indicating the total amount due under the mortgage loan agreement: x x x x

Balance of PrincipalAdd: Interest Due Late Payment Charges MRI Fire Insurance Foreclosure Expenses

P 9,551,827.641,417,761.24155,546.25

0.000.00

155,817.23 Sub-totalLess: Unapplied Payment

P 11,280,952.36 908,241.01

Total Amount Due As Of 08/07/96 (Auction Date)

10,372,711.35

Add: Attorney’s Fees (15%) 1,555,906.70 Liquidated Damages (15%) 1,555,906.70 Interest on P 10,372,711.35 from 08/07/96 to 04/07/97 (243 days) at 17.25% p.a.

1,207,772.58 x x x x Asset Acquired Expenses:


http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn5



Documentary Stamps 155,595.00 Capital Gains Tax 518,635.57 Foreclosure Fee 207,534.23 Registration and Filing Fee 23,718.00 Add’l. Registration & Filing Fee 660.00 906,142.79 Interest on P 906,142.79 from 08/07/96 to 04/07/97 (243 days) at 17.25% p.a.

105,509.00 Cancellation Fee 300.00 Total Amount Due As Of 04/07/97 (Subject to Audit)

P 15,704,249.12

x x x x The mortgagors requested for the elimination of liquidated damages and reduction of attorney’s fees and interest (1% per month) but the bank refused. On May 21, 1997, the mortgagors redeemed the property by paying the sum of P15,704,249.12. A Certificate of Redemption[4] was issued by the bank on May 27, 1997. On June 11, 1997, the mortgagors filed a complaint against the bank to recover the allegedly unlawful and excessive charges totaling P5,331,237.77, with prayer for damages and attorney’s fees, docketed as Civil Case No. 97-72 of the Regional Trial Courtof Lucena City, Branch 57. In its Answer with Special and Affirmative Defenses and Counterclaim, the bank asserted that the redemption price reflecting the stipulated interest, charges and/or expenses, is valid, legal and in accordance with documents duly signed by the mortgagors. The bank further contended that the claims are deemed waived and the mortgagors are already estopped from questioning the terms and conditions of their contract. On September 30, 1997, the bank filed a motion to set the case for hearing on the special and affirmative defenses by way of motion to dismiss. The trial court denied the motion on January 8, 1998 and also denied the bank’s motion for reconsideration. The bank elevated the matter to the Court of Appeals (CA-G.R. SP No. 47588) which dismissed the petition for certiorari onFebruary 26, 1999. On February 14, 2002, the trial court rendered its decision[5] dismissing the complaint and the bank’s counterclaims. The trial court held that plaintiffs-mortgagors are bound by the terms of the mortgage loan documents which clearly provided for the payment of the following interest, charges and expenses: 18% p.a. on the loan, 3% post-default penalty, 15% liquidated damages, 15% attorney’s fees and collection and legal costs. Plaintiffs-mortgagors’ claim that they paid the redemption price demanded by the defendant bank under extreme pressure was rejected by the trial court since there was active negotiation for the final redemption price between the bank’s representatives and plaintiffs-mortgagors who at the time had legal advice from their counsel, together with Orient Development Banking Corporation which committed to finance the redemption. According to the trial court, plaintiffs-mortgagors are estopped from questioning the correctness of the redemption price as they had freely and voluntarily signed the letter-agreement prepared by the defendant bank, and along with Orient Bank expressed their conformity to the terms and conditions therein, thus: May 14, 1997 ORIENT DEVELOPMENT BANKING CORPORATION7th Floor Ever Gotesco Corporate CenterC.M. Recto Avenue corner Matapang StreetManila Attention: MS. AIDA C. DELA ROSA Senior Vice-PresidentGentlemen: This refers to your undertaking to settle the account of SUPREME TRANS LINER, INC. and spouses MOISES C. ALVAREZ and PAULITA S. ALVAREZ, covering the real estate property located in the Poblacion, City of Lucena under TCT No. T-79193 which was foreclosed by BPI FAMILY SAVINGS BANK, INC. With regard to the proposed refinancing of the account, we interpose no objection to the annotation of your mortgage lien thereon subject to the following conditions: 1. That all expenses for the registration of the annotation of mortgage and other incidental registration and cancellation expenses shall be borne by the borrower.2. That you will recognize our mortgage liens as first and superior until the loan with us is fully paid.3. That you will annotate your mortgage lien and pay us the full amount to close the loan within five (5) working days from the receipt of the titles. If within this period, you have not registered the same and paid us in full, you will immediately and unconditionally return the titles to us without need of demand, free from liens/encumbrances other than our lien.4. That in case of loss of titles, you will undertake and shoulder the cost of re-issuance of a new owner’s titles.




5. That we will issue the Certificate of Redemption after full payment of P15,704,249.12. representing the outstanding balance of the loan as of May 15, 1997 including interest and other charges thereof within a period of five (5) working days after clearance of the check payment.6. That we will release the title and the Certificate of Redemption and other pertinent papers only to your authorized representative with complete authorization and identification.7. That all expenses related to the cancellation of your annotated mortgage lien should the Bank be not fully paid on the period above indicated shall be charged to you.If you find the foregoing conditions acceptable, please indicate your conformity on the space provided below and return to us the duplicate copy. Very truly yours, BPI FAMILY BANK BY: (SGD.) LOLITA C. CARRIDO Manager

C O N F O R M E :

ORIENT DEVELOPMENT BANKING CORPORATION

(SGD.) AIDA C. DELA ROSASenior Vice President

C O N F O R M E :

SUPREME TRANS LINER, INC.

(SGD.) MOISES C. ALVAREZ/PAULITA S. ALVAREZMortgagors[6]

(Underscoring in the original; emphasis supplied.) As to plaintiffs-mortgagors’ contention that the amounts representing attorney’s fees and liquidated damages were already included in the P10,372,711.35 bid price, the trial court said this was belied by their own evidence, the Statement of Account showing the breakdown of the redemption price as computed by the defendant bank. The mortgagors appealed to the CA (CA-G.R. CV No. 74761) which, by Decision [7] dated April 6, 2004 reversed the trial court and decreed as follows:WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and SET ASIDE. A new one is hereby entered as follows:1. Plaintiffs-appellants’ complaint for damages against defendant-appellee is hereby REINSTATED;2. Defendant-appellee is hereby ORDERED to return to plaintiffs-appellees (sic) the invalidly collected amount of P3,111,813.40 plus six (6) percent legal interest from May 21, 1997 until fully returned;3. Defendant-appellee is hereby ORDERED to pay plaintiffs-appellees (sic) the amount of P100,000.00 as moral damages, P100,000.00 as exemplary damages and P100,000.00 as attorney’s fees;4. Costs against defendant-appellee.SO ORDERED.[8]

The CA ruled that attorney’s fees and liquidated damages were already included in the bid price of P10,372,711.35 as per the recitals in the Certificate of Sale that said amount was paid to the foreclosing mortgagee to satisfy not only the principal loan but also “interest and penalty charges, cost of publication and expenses of the foreclosure proceedings.” These “penalty charges” consist of 15% attorney’s fees and 15% liquidated damages which the bank imposes as penalty in cases of violation of the terms of the mortgage deed. The total redemption price thus should only be P12,592,435.72 and the bank should return the amount ofP3,111,813.40 representing attorney’s fees and liquidated damages. The appellate court further stated that the mortgagors cannot be deemed estopped to question the propriety of the charges because from the very start they had repeatedly questioned the imposition of attorney’s fees and liquidated damages and were merely constrained to pay the demanded redemption price for fear that the redemption period will expire without them redeeming their property.[9]

By Resolution[10] dated October 12, 2004, the CA denied the parties’ respective motions for reconsideration. Hence, these petitions separately filed by the mortgagors and the bank. In G.R. No. 165617, the petitioners-mortgagors raise the single issue of whether the foreclosing mortgagee should pay capital gains tax upon execution of the certificate of sale, and if paid by the mortgagee, whether the same should be shouldered by the redemptioner. They specifically prayed for the return of all asset-acquired expenses consisting of documentary stamps tax, capital gains tax, foreclosure fee, registration and filing fee, and additional registration and filing fee totaling P906,142.79, with 6% interest thereon from May 21, 1997.[11]

On the other hand, the petitioner bank in G.R. No. 165837 assails the CA in holding that –1. … the Certificate of Sale, the bid price of P10,372,711.35 includes penalty charges and as such for purposes of computing the redemption price petitioner can no longer impose upon the private respondents the penalty








charges in the form of 15% attorney’s fees and the 15% liquidated damages in the aggregate amount of P3,111,813.40, although the evidence presented by the parties show otherwise. 2. … private respondents cannot be considered to be under estoppel to question the propriety of the aforestated penalty charges despite the fact that, as found by the Honorable Trial Court, “there was very active negotiation between the parties in the computation of the redemption price” culminating into the signing freely and voluntarily by the petitioner, the private respondents and Orient Bank, which financed the redemption of the foreclosed property, of Exhibit “3”, wherein they mutually agreed that the redemption price is in the sum of P15,704,249.12.3. … petitioner [to] pay private respondents damages in the aggregate amount of P300,000.00 on the ground that the former acted in bad faith in the imposition upon them of the aforestated penalty charges, when in truth it is entitled thereto as the law and the contract expressly provide and that private respondents agreed to pay the same.[12]

On the correct computation of the redemption price, Section 78 of Republic Act No. 337, otherwise known as the General Banking Act, governs in cases where the mortgagee is a bank.[13] Said provision reads: SEC. 78. x x x In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan granted before the passage of this Act or under the provisions of this Act, the mortgagor or debtor whose real property has been sold at public auction, judicially or extrajudicially, for the full or partial payment of an obligation to any bank, banking or credit institution, within the purview of this Act shall have the right, within one year after the sale of the real estate as a result of the foreclosure of the respective mortgage, to redeem the property by paying the amount fixed by the court in the order of execution, or the amount due under the mortgage deed, as the case may be,with interest thereon at the rate specified in the mortgage, and all the costs, and judicial and other expenses incurred by the bank or institution concerned by reason of the execution and sale and as a result of the custody of said property less the income received from the property . x x x x (Emphasis supplied.) Under the Mortgage Loan Agreement,[14] petitioners-mortgagors undertook to pay the attorney’s fees and the costs of registration and foreclosure. The following contract terms would show that the said items are separate and distinct from the bid price which represents only the outstanding loan balance with stipulated interest thereon.23. Application of Proceeds of Foreclosure Sale. The proceeds of sale of the mortgaged property/ies shall be applied as follows:a) To the payment of the expenses and cost of foreclosure and sale, including the attorney’s fees as herein provided;b) To the satisfaction of all interest and charges accruing upon the obligations herein and hereby secured.c) To the satisfaction of the principal amount of the obligations herein and hereby secured.d) To the satisfaction of all other obligations then owed by the Borrower/Mortgagor to the Bank or any of its subsidiaries/affiliates such as, but not limited to BPI Credit Corporation; or to Bank of the Philippine Islands or any of its subsidiaries/affiliates such as, but not limited to BPI Leasing Corporation, BPI Express Card Corporation, BPI Securities Corporation and BPI Agricultural Development Bank; ande) The balance, if any, to be due to the Borrower/Mortgagor.x x x x31. Attorney’s Fees: In case the Bank should engage the services of counsel to enforce its rights under this Agreement, the Borrower/Mortgagor shall pay an amount equivalent to fifteen (15%) percent of the total amount claimed by the Bank, which in no case shall be less than P2,000.00, Philippine currency, plus costs, collection expenses and disbursements allowed by law, all of which shall be secured by this mortgage.[15]

Additionally, the Disclosure Statement on Loan/Credit Transaction[16] also duly signed by the petitioners-mortgagors provides:10. ADDITIONAL CHARGES IN CASE CERTAIN STIPULATIONS ARE NOT MET BY THE BORROWER a. Post Default Penalty 3.00% per monthb. Attorney’s Services 15% of sum due but not less than P2,000.00c. Liquidated Damages 15% of sum due but not less than P10,000.00d. Collection & Legal Cost As provided by the Rules of Courte. Others (Specify) As correctly found by the trial court, that attorney’s fees and liquidated damages were not yet included in the bid price ofP10,372,711.35 is clearly shown by the Statement of Account as of April 4, 1997 prepared by the petitioner bank and given to petitioners-mortgagors. On the other hand, par. 23 of the Mortgage Loan Agreement indicated that asset acquired expenses were to be added to the redemption price as part of “costs and other expenses incurred” by the mortgagee bank in connection with the foreclosure sale. Coming now to the issue of capital gains tax, we find merit in petitioners-mortgagors’ argument that there is no legal basis for the inclusion of this charge in the redemption price. Under Revenue Regulations (RR) No. 13-85 (December 12, 1985), every sale or exchange or other disposition of real property classified as capital asset under Section 34(a)[17] of the Tax Code shall be subject to the final capital gains tax. The term sale includes pacto de








retro and other forms of conditional sale. Section 2.2 of Revenue Memorandum Order (RMO) No. 29-86 (as amended by RMO No. 16-88 and as further amended by RMO Nos. 27-89 and 6-92) states that these conditional sales “necessarily include mortgage foreclosure sales (judicial and extrajudicial foreclosure sales).” Further, for real property foreclosed by a bank on or after September 3, 1986, the capital gains tax and documentary stamp tax must be paid before title to the property can be consolidated in favor of the bank.[18]

Under Section 63 of Presidential Decree No. 1529 otherwise known as the Property Registration Decree, if no right of redemption exists, the certificate of title of the mortgagor shall be cancelled, and a new certificate issued in the name of the purchaser. But where the right of redemption exists, the certificate of title of the mortgagor shall not be cancelled, but the certificate of sale and the order confirming the sale shall be registered by brief memorandum thereof made by the Register of Deeds upon the certificate of title. In the event the property is redeemed, the certificate or deed of redemption shall be filed with the Register of Deeds, and a brief memorandum thereof shall be made by the Register of Deeds on the certificate of title.It is therefore clear that in foreclosure sale, there is no actual transfer of the mortgaged real property until after the expiration of the one-year redemption period as provided in Act No. 3135 and title thereto is consolidated in the name of the mortgagee in case of non-redemption. In the interim, the mortgagor is given the option whether or not to redeem the real property. The issuance of the Certificate of Sale does not by itself transfer ownership.[19] RR No. 4-99 issued on March 16, 1999, further amends RMO No. 6-92 relative to the payment of Capital Gains Tax and Documentary Stamp Tax on extrajudicial foreclosure sale of capital assets initiated by banks, finance and insurance companies. SEC. 3. CAPITAL GAINS TAX. –(1) In case the mortgagor exercises his right of redemption within one year from the issuance of the certificate of sale, no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. x x x(2) In case of non-redemption, the capital gains [tax] on the foreclosure sale imposed under Secs. 24(D)(1) and 27(D)(5) of the Tax Code of 1997 shall become due based on the bid price of the highest bidder but only upon the expiration of the one-year period of redemption provided for under Sec. 6 of Act No. 3135, as amended by Act No. 4118, and shall be paid within thirty (30) days from the expiration of the said one-year redemption period.SEC. 4. DOCUMENTARY STAMP TAX. –(1) In case the mortgagor exercises his right of redemption, the transaction shall only be subject to the P15.00 documentary stamp tax imposed under Sec. 188 of the Tax Code of 1997 because no land or realty was sold or transferred for a consideration.(2) In case of non-redemption, the corresponding documentary stamp tax shall be levied, collected and paid by the person making, signing, issuing, accepting, or transferring the real property wherever the document is made, signed, issued, accepted or transferred where the property is situated in the Philippines. x x x (Emphasis supplied.)Although the subject foreclosure sale and redemption took place before the effectivity of RR No. 4-99, its provisions may be given retroactive effect in this case. Section 246 of the NIRC of 1997 states:SEC. 246. Non-Retroactivity of Rulings. – Any revocation, modification, or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive applicationif the revocation, modification, or reversal will be prejudicial to the taxpayers, except in the following cases:(a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue;(b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or(c) where the taxpayer acted in bad faith.In this case, the retroactive application of RR No. 4-99 is more consistent with the policy of aiding the exercise of the right of redemption. As the Court of Tax Appeals concluded in one case, RR No. 4-99 “has curbed the inequity of imposing a capital gains tax even before the expiration of the redemption period [since] there is yet no transfer of title and no profit or gain is realized by the mortgagor at the time of foreclosure sale but only upon expiration of the redemption period.”[20] In his commentaries, De Leon expressed the view that while revenue regulations as a general rule have no retroactive effect, if the revocation is due to the fact that the regulation is erroneous or contrary to law, such revocation shall have retroactive operation as to affect past transactions, because a wrong construction of the law cannot give rise to a vested right that can be invoked by a taxpayer.[21]

Considering that herein petitioners-mortgagors exercised their right of redemption before the expiration of the statutory one-year period, petitioner bank is not liable to pay the capital gains tax due on the extrajudicial foreclosure sale. There was no actual transfer of title from the owners-mortgagors to the foreclosing bank. Hence, the inclusion of the said charge in the total redemption price was unwarranted and the corresponding amount paid by the petitioners-mortgagors should be returned to them. WHEREFORE, premises considered, both petitions are PARTLY GRANTED. In G.R. No. 165617, BPI Family Savings Bank, Inc. is hereby ordered to RETURN the amounts representing capital gains and documentary stamp taxes as reflected in the Statement of Account To Redeem as of April 7, 1997, to






petitioners Supreme Transliner, Inc., Moises C. Alvarez and Paulita Alvarez, and to retain only the sum provided in RR No. 4-99 as documentary stamps tax due on the foreclosure sale. In G.R. No. 165837, petitioner BPI Family Savings Bank, Inc. is hereby declared entitled to the attorney’s fees and liquidated damages included in the total redemption price paid by Supreme Transliner, Inc., Moises C. Alvarez and Paulita Alvarez. The sums awarded as moral and exemplary damages, attorney’s fees and costs in favor of Supreme Transliner, Inc., Moises C. Alvarez and Paulita Alvarez are DELETED. The Decision dated April 6, 2004 of the Court of Appeals in CA-G.R. CV No. 74761 is accordingly MODIFIED.



- versus -

METRO STAR SUPERAMA, INC., Respondent.

G.R. No. 185371 Promulgated: December 8, 2010

D E C I S I O N MENDOZA, J.: This petition for review on certiorari under Rule 45 of the Rules of Court filed by the petitioner Commissioner of Internal Revenue (CIR) seeks to reverse and set aside the 1] September 16, 2008 Decision[1] of the Court of Tax Appeals En Banc (CTA-En Banc), in C.T.A. EB No. 306 and 2] its November 18, 2008 Resolution[2] denying petitioner’s motion for reconsideration. The CTA-En Banc affirmed in toto the decision of its Second Division (CTA-Second Division) in CTA Case No. 7169 reversing the February 8, 2005 Decision of the CIR which assessed respondent Metro Star Superama, Inc. (Metro Star) of deficiency value-added tax and withholding tax for the taxable year 1999. Based on a Joint Stipulation of Facts and Issues[3] of the parties, the CTA Second Division summarized the factual and procedural antecedents of the case, the pertinent portions of which read: Petitioner is a domestic corporation duly organized and existing by virtue of the laws of the Republic of the Philippines, x x x. On January 26, 2001, the Regional Director of Revenue Region No. 10, Legazpi City, issued Letter of Authority No. 00006561 for Revenue Officer Daisy G. Justiniana to examine petitioner’s books of accounts and other accounting records for income tax and other internal revenue taxes for the taxable year 1999. Said Letter of Authority was revalidated on August 10, 2001 by Regional Director Leonardo Sacamos. For petitioner’s failure to comply with several requests for the presentation of records and Subpoena Duces Tecum, [the] OIC of BIR Legal Division issued an Indorsement dated September 26, 2001 informing Revenue District Officer of Revenue Region No. 67, Legazpi City to proceed with the investigation based on the best evidence obtainable preparatory to the issuance of assessment notice. On November 8, 2001, Revenue District Officer Socorro O. Ramos-Lafuente issued a Preliminary 15-day Letter, which petitioner received on November 9, 2001. The said letter stated that a post audit review was held and it was ascertained that there was deficiency value-added and withholding taxes due from petitioner in the amount of P 292,874.16. On April 11, 2002, petitioner received a Formal Letter of Demand dated April 3, 2002 from Revenue District No. 67, Legazpi City, assessing petitioner the amount of Two Hundred Ninety Two Thousand Eight Hundred Seventy Four Pesos and Sixteen Centavos (P292,874.16.) for deficiency value-added and withholding taxes for the taxable year 1999, computed as follows:

ASSESSMENT NOTICE NO. 067-99-003-579-072 VALUE ADDED TAXGross Sales P 1,697,718.90 Output Tax P 154,338.08Less: Input Tax VAT Payable P 154,338.08Add: 25% Surcharge P 38,584.54 20% Interest 79,746.49 Compromise Penalty Late Payment P16,000.00 Failure to File VAT returns 2,400.00 18,400.00 136,731.01 TOTAL P 291,069.09


WITHHOLDING TAXCompensation 2,772.91Expanded 110,103.92 Total Tax Due P 112,876.83Less: Tax Withheld 111,848.27 Deficiency Withholding Tax P 1,028.56Add: 20% Interest p.a. 576.51 Compromise Penalty 200.00TOTAL P 1,805.07 *Expanded Withholding Tax P1,949,334.25 x 5% 97,466.71 Film Rental 10,000.25 x 10% 1,000.00 Audit Fee 193,261.20 x 5% 9,663.00 Rental Expense 41,272.73 x 1% 412.73 Security Service 156,142.01 x 1% 1,561.42 Service Contractor P 110,103.92 Total SUMMARIES OF DEFICIENCIES VALUE ADDED TAX P 291,069.09 WITHHOLDING TAX 1,805.07TOTAL P 292,874.16 Subsequently, Revenue District Office No. 67 sent a copy of the Final Notice of Seizure dated May 12, 2003, which petitioner received on May 15, 2003, giving the latter last opportunity to settle its deficiency tax liabilities within ten (10) [days] from receipt thereof, otherwise respondent BIR shall be constrained to serve and execute the Warrants of Distraint and/or Levy and Garnishment to enforce collection. On February 6, 2004, petitioner received from Revenue District Office No. 67 a Warrant of Distraint and/or Levy No. 67-0029-23 dated May 12, 2003 demanding payment of deficiency value-added tax and withholding tax payment in the amount of P292,874.16. On July 30, 2004, petitioner filed with the Office of respondent Commissioner a Motion for Reconsideration pursuant to Section 3.1.5 of Revenue Regulations No. 12-99. On February 8, 2005, respondent Commissioner, through its authorized representative, Revenue Regional Director of Revenue Region 10, Legaspi City, issued a Decision denying petitioner’s Motion for Reconsideration. Petitioner, through counsel received said Decision on February 18, 2005. x x x. Denying that it received a Preliminary Assessment Notice (PAN) and claiming that it was not accorded due process, Metro Star filed a petition for review[4] with the CTA. The parties then stipulated on the following issues to be decided by the tax court: 1. Whether the respondent complied with the due process requirement as provided under the National Internal Revenue Code and Revenue Regulations No. 12-99 with regard to the issuance of a deficiency tax assessment; 1.1 Whether petitioner is liable for the respective amounts of P291,069.09 and P1,805.07 as deficiency VAT and withholding tax for the year 1999; 1.2. Whether the assessment has become final and executory and demandable for failure of petitioner to protest the same within 30 days from its receipt thereof on April 11, 2002, pursuant to Section 228 of the National Internal Revenue Code; 2. Whether the deficiency assessments issued by the respondent are void for failure to state the law and/or facts upon which they are based. 2.2 Whether petitioner was informed of the law and facts on which the assessment is made in compliance with Section 228 of the National Internal Revenue Code; 3. Whether or not petitioner, as owner/operator of a movie/cinema house, is subject to VAT on sales of services under Section 108(A) of the National Internal Revenue Code;4. Whether or not the assessment is based on the best evidence obtainable pursuant to Section 6(b) of the National Internal Revenue Code.


The CTA-Second Division found merit in the petition of Metro Star and, on March 21, 2007, rendered a decision, the decretal portion of which reads: WHEREFORE, premises considered, the Petition for Review is hereby GRANTED. Accordingly, the assailed Decision dated February 8, 2005 is hereby REVERSED and SET ASIDE and respondent is ORDERED TO DESIST from collecting the subject taxes against petitioner. The CTA-Second Division opined that “[w]hile there [is] a disputable presumption that a mailed letter [is] deemed received by the addressee in the ordinary course of mail, a direct denial of the receipt of mail shifts the burden upon the party favored by the presumption to prove that the mailed letter was indeed received by the addressee.”[5] It also found that there was no clear showing that Metro Star actually received the alleged PAN, dated January 16, 2002. It, accordingly, ruled that the Formal Letter of Demand dated April 3, 2002, as well as the Warrant of Distraint and/or Levy dated May 12, 2003 were void, as Metro Star was denied due process.[6]

The CIR sought reconsideration[7] of the decision of the CTA-Second Division, but the motion was denied in the latter’s July 24, 2007 Resolution.[8]

Aggrieved, the CIR filed a petition for review[9] with the CTA-En Banc, but the petition was dismissed after a determination that no new matters were raised. The CTA-En Banc disposed: WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and DISMISSED for lack of merit. Accordingly, the March 21, 2007 Decision and July 27, 2007 Resolution of the CTA Second Division in CTA Case No. 7169 entitled, “Metro Star Superama, Inc., petitioner vs. Commissioner of Internal Revenue, respondent” are hereby AFFIRMEDin toto. SO ORDERED. The motion for reconsideration[10] filed by the CIR was likewise denied by the CTA-En Banc in its November 18, 2008Resolution.[11]

The CIR, insisting that Metro Star received the PAN, dated January 16, 2002, and that due process was served nonetheless because the latter received the Final Assessment Notice (FAN), comes now before this Court with the sole issue of whether or not Metro Star was denied due process. The general rule is that the Court will not lightly set aside the conclusions reached by the CTA which, by the very nature of its functions, has accordingly developed an exclusive expertise on the resolution unless there has been an abuse or improvident exercise of authority.[12] In Barcelon, Roxas Securities, Inc. (now known as UBP Securities, Inc.) v. Commissioner of Internal Revenue,[13] the Court wrote: Jurisprudence has consistently shown that this Court accords the findings of fact by the CTA with the highest respect. In Sea-Land Service Inc. v. Court of Appeals [G.R. No. 122605, 30 April 2001, 357 SCRA 441, 445-446], this Court recognizes that the Court of Tax Appeals, which by the very nature of its function is dedicated exclusively to the consideration of tax problems, has necessarily developed an expertise on the subject, and its conclusions will not be overturned unless there has been an abuse or improvident exercise of authority. Such findings can only be disturbed on appeal if they are not supported by substantial evidence or there is a showing of gross error or abuse on the part of the Tax Court. In the absence of any clear and convincing proof to the contrary, this Court must presume that the CTA rendered a decision which is valid in every respect. On the matter of service of a tax assessment, a further perusal of our ruling in Barcelon is instructive, viz: Jurisprudence is replete with cases holding that if the taxpayer denies ever having received an assessment from the BIR, it is incumbent upon the latter to prove by competent evidence that such notice was indeed received by the addressee. The onus probandi was shifted to respondent to prove by contrary evidence that the Petitioner received the assessment in the due course of mail. The Supreme Court has consistently held that while a mailed letter is deemed received by the addressee in the course of mail, this is merely a disputable presumption subject to controversion and a direct denial thereof shifts the burden to the party favored by the presumption to prove that the mailed letter was indeed received by the addressee (Republic vs. Court of Appeals, 149 SCRA 351). Thus as held by the Supreme Court in Gonzalo P. Nava vs. Commissioner of Internal Revenue, 13 SCRA 104, January 30, 1965: "The facts to be proved to raise this presumption are (a) that the letter was properly addressed with postage prepaid, and (b) that it was mailed. Once these facts are proved, the presumption is that the letter was received by the addressee as soon as it could have been transmitted to him in the ordinary course of the mail. But if one of


the said facts fails to appear, the presumption does not lie. (VI, Moran, Comments on the Rules of Court, 1963 ed, 56-57 citing Enriquez vs. Sunlife Assurance of Canada, 41 Phil 269)." x x x. What is essential to prove the fact of mailing is the registry receipt issued by the Bureau of Posts or the Registry return card which would have been signed by the Petitioner or its authorized representative. And if said documents cannot be located, Respondent at the very least, should have submitted to the Court a certification issued by the Bureau of Posts and any other pertinent document which is executed with the intervention of the Bureau of Posts. This Court does not put much credence to the self serving documentations made by the BIR personnel especially if they are unsupported by substantial evidence establishing the fact of mailing. Thus: "While we have held that an assessment is made when sent within the prescribed period, even if received by the taxpayer after its expiration (Coll. of Int. Rev. vs. Bautista, L-12250 and L-12259, May 27, 1959), this ruling makes it the more imperative that the release, mailing or sending of the notice be clearly and satisfactorily proved. Mere notations made without the taxpayer’s intervention, notice or control, without adequate supporting evidence cannot suffice; otherwise, the taxpayer would be at the mercy of the revenue offices, without adequate protection or defense." (Nava vs. CIR, 13 SCRA 104, January 30, 1965). x x x. The failure of the respondent to prove receipt of the assessment by the Petitioner leads to the conclusion that no assessment was issued. Consequently, the government’s right to issue an assessment for the said period has already prescribed. (Industrial Textile Manufacturing Co. of the Phils., Inc. vs. CIR CTA Case 4885, August 22, 1996). (Emphases supplied.) The Court agrees with the CTA that the CIR failed to discharge its duty and present any evidence to show that Metro Star indeed received the PAN dated January 16, 2002. It could have simply presented the registry receipt or the certification from the postmaster that it mailed the PAN, but failed. Neither did it offer any explanation on why it failed to comply with the requirement of service of the PAN. It merely accepted the letter of Metro Star’s chairman dated April 29, 2002, that stated that he had received theFAN dated April 3, 2002, but not the PAN; that he was willing to pay the tax as computed by the CIR; and that he just wanted to clarify some matters with the hope of lessening its tax liability. This now leads to the question: Is the failure to strictly comply with notice requirements prescribed under Section 228 of the National Internal Revenue Code of 1997 and Revenue Regulations (R.R.) No. 12-99 tantamount to a denial of due process? Specifically, are the requirements of due process satisfied if only the FAN stating the computation of tax liabilities and a demand to pay within the prescribed period was sent to the taxpayer? The answer to these questions require an examination of Section 228 of the Tax Code which reads: SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings : provided, however, that a preassessment notice shall not be required in the following cases: (a) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or (b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or(d) When the excise tax due on exciseable articles has not been paid; or(e) When the article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons. The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings.Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing


rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable. (Emphasis supplied). Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first be informed that he is liable for deficiency taxes through the sending of a PAN. He must be informed of the facts and the law upon which the assessment is made. The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection without first establishing a valid assessment is evidently violative of the cardinal principle in administrative investigations - that taxpayers should be able to present their case and adduce supporting evidence.[14]

This is confirmed under the provisions R.R. No. 12-99 of the BIR which pertinently provide: SECTION 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment. — 3.1 Mode of procedures in the issuance of a deficiency tax assessment: 3.1.1 Notice for informal conference. — The Revenue Officer who audited the taxpayer's records shall, among others, state in his report whether or not the taxpayer agrees with his findings that the taxpayer is liable for deficiency tax or taxes. If the taxpayer is not amenable, based on the said Officer's submitted report of investigation, the taxpayer shall be informed, in writing, by the Revenue District Office or by the Special Investigation Division, as the case may be (in the case Revenue Regional Offices) or by the Chief of Division concerned (in the case of the BIR National Office) of the discrepancy or discrepancies in the taxpayer's payment of his internal revenue taxes, for the purpose of "Informal Conference," in order to afford the taxpayer with an opportunity to present his side of the case. If the taxpayer fails to respond within fifteen (15) days from date of receipt of the notice for informal conference, he shall be considered in default, in which case, the Revenue District Officer or the Chief of the Special Investigation Division of the Revenue Regional Office, or the Chief of Division in the National Office, as the case may be, shall endorse the case with the least possible delay to the Assessment Division of the Revenue Regional Office or to the Commissioner or his duly authorized representative, as the case may be, for appropriate review and issuance of a deficiency tax assessment, if warranted. 3.1.2 Preliminary Assessment Notice (PAN). — If after review and evaluation by the Assessment Division or by the Commissioner or his duly authorized representative, as the case may be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to the taxpayer, at least by registered mail, a Preliminary Assessment Notice (PAN) for the proposed assessment, showing in detail, the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based (see illustration in ANNEX A hereof). If the taxpayer fails to respond within fifteen (15) days from date of receipt of the PAN, he shall be considered in default, in which case, a formal letter of demand and assessment notice shall be caused to be issued by the said Office, calling for payment of the taxpayer's deficiency tax liability, inclusive of the applicable penalties. 3.1.3 Exceptions to Prior Notice of the Assessment. — The notice for informal conference and the preliminary assessment notice shall not be required in any of the following cases, in which case, issuance of the formal assessment notice for the payment of the taxpayer's deficiency tax liability shall be sufficient: (i) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax appearing on the face of the tax return filed by the taxpayer; or (ii) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or (iii) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or (iv) When the excise tax due on excisable articles has not been paid; or (v) When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.


3.1.4 Formal Letter of Demand and Assessment Notice. — The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the taxpayer's deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void (see illustration in ANNEX B hereof). The same shall be sent to the taxpayer only by registered mail or by personal delivery. If sent by personal delivery, the taxpayer or his duly authorized representative shall acknowledge receipt thereof in the duplicate copy of the letter of demand, showing the following: (a) His name; (b) signature; (c) designation and authority to act for and in behalf of the taxpayer, if acknowledged received by a person other than the taxpayer himself; and (d) date of receipt thereof. x x x. From the provision quoted above, it is clear that the sending of a PAN to taxpayer to inform him of the assessment made is but part of the “due process requirement in the issuance of a deficiency tax assessment,” the absence of which renders nugatory any assessment made by the tax authorities. The use of the word “shall” in subsection 3.1.2 describes the mandatory nature of the service of a PAN. The persuasiveness of the right to due process reaches both substantial and procedural rights and the failure of the CIR to strictly comply with the requirements laid down by law and its own rules is a denial of Metro Star’s right to due process.[15]Thus, for its failure to send the PAN stating the facts and the law on which the assessment was made as required by Section 228 of R.A. No. 8424, the assessment made by the CIR is void. The case of CIR v. Menguito[16] cited by the CIR in support of its argument that only the non-service of the FAN is fatal to the validity of an assessment, cannot apply to this case because the issue therein was the non-compliance with the provisions of R. R. No. 12-85 which sought to interpret Section 229 of the old tax law. RA No. 8424 has already amended the provision of Section 229 on protesting an assessment. The old requirement of merely notifying the taxpayer of the CIR’s findings was changed in 1998 toinforming the taxpayer of not only the law, but also of the facts on which an assessment would be made. Otherwise, the assessment itself would be invalid.[17] The regulation then, on the other hand, simply provided that a notice be sent to the respondent in the form prescribed, and that no consequence would ensue for failure to comply with that form. The Court need not belabor to discuss the matter of Metro Star’s failure to file its protest, for it is well-settled that a void assessment bears no fruit.[18]

It is an elementary rule enshrined in the 1987 Constitution that no person shall be deprived of property without due process of law.[19] In balancing the scales between the power of the State to tax and its inherent right to prosecute perceived transgressors of the law on one side, and the constitutional rights of a citizen to due process of law and the equal protection of the laws on the other, the scales must tilt in favor of the individual, for a citizen’s right is amply protected by the Bill of Rights under the Constitution. Thus, while “taxes are the lifeblood of the government,” the power to tax has its limits, in spite of all its plenitude. Hence inCommissioner of Internal Revenue v. Algue, Inc.,[20] it was said – Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. xxx xxx xxx It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for the lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one’s hard-earned income to taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate x x x that the law has not been observed.[21] (Emphasis supplied).


PHILIPPINE FISHERIES DEVELOPMENT AUTHORITY (PFDA),Petitioner, - versus - CENTRAL BOARD OF ASSESSMENT APPEALS, LOCAL BOARD OF ASSESSMENT APPEALS OF LUCENA CITY, CITY OF LUCENA, LUCENA CITY ASSESSOR AND LUCENA CITY TREASURER,Respondents.

G.R. No. 178030

. Promulgated: December 15, 2010

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D E C I S I O N CARPIO, J.:

The CaseThis petition for review1 assails the 9 May 2007 Decision2 of the Court of Tax Appeals in C.T.A. EB No. 193, affirming the 5 October 2005 Decision of the Central Board of Assessment Appeals (CBAA) in CBAA Case No. L-33. The CBAA dismissed the appeal of petitioner Philippine Fisheries Development Authority (PFDA) from the Decision of the Local Board of Assessment Appeals (LBAA) ofLucena City, ordering PFDA to pay the real property taxes imposed by the City Government of Lucena on the Lucena Fishing Port Complex.

The Facts

The facts as found by the CBAA are as follows: The records show that the Lucena Fishing Port Complex (LFPC) is one of the fishery infrastructure projects undertaken by the National Government under the Nationwide Fish Port-Package. Located at Barangay Dalahican, Lucena City, the fish port was constructed on a reclaimed land with an area of 8.7 hectares more or less, at a total cost of PHP 296,764,618.77 financed through a loan (L/A PH-25 and 51) from the Overseas Economic Cooperation Fund (OECF) of Japan, dated November 9, 1978 and May 31, 1978, respectively. The Philippine Fisheries Development Authority (PFDA) was created by virtue of P.D. 977 as amended by E.O. 772, with functions and powers to (m)anage, operate, and develop the Navotas Fishing Port Complex and such other fishing port complexes that may be established by the Authority. Pursuant thereto, Petitioner-Appellant PFDA took over the management and operation of LFPC in February 1992. On October 26, 1999, in a letter addressed to PFDA, the City Government of Lucena demanded payment of realty taxes on the LFPC property for the period from 1993 to 1999 in the total amount of P39,397,880.00. This was received by PFDA on November 24, 1999. On October 17, 2000 another demand letter was sent by the Government of Lucena City on the same LFPC property, this time in the amount of P45,660,080.00 covering the period from 1993 to 2000. On December 18, 2000 Petitioner-Appellant filed its Appeal before the Local Board of Assessment Appeals of Lucena City, which was dismissed for lack of merit. On November 6, 2001 Petitioner-Appellant filed its motion for reconsideration; this was denied by the Appellee Local Board on December 10, 2001.3

PFDA appealed to the CBAA. In its Decision dated 5 October 2005, the CBAA dismissed the appeal for lack of merit. The CBAA ruled:Ownership of LFPC however has, before hand, been handed over to the PFDA, as provided for under Sec. 11 of P.D. No. 977, as amended, and declared under the MCIAA case [Mactan Cebu International Airport Authority v. Marcos, G.R. No. 120082, 11 September 1996, 261 SCRA 667]. The allegations therefore that PFDA is not the beneficial user of LFPC and not a taxable person are rendered moot and academic by such ownership of PFDA over LFPC.

x x x


PFDA’s Charter, P.D. 977, provided for exemption from income tax under Par. 2, Sec. 10 thereof: “(t)he Authority shall be exempted from the payment of income tax”. Nothing was said however about PFDA’s exemption from payment of real property tax: PFDA therefore was not to lay claim for realty tax exemption on its Fishing Port Complexes. Reading Sec. 40 of P.D. 464 and Sec. 234 of R.A. 7160 however, provided such ground: LFPC is owned by the Republic of the Philippines, PFDA is only tasked to manage, operate, and develop the same. Hence, LFPC is exempted from payment of realty tax.

x x x

The ownership of LFPC as passed on by the Republic of the Philippines to PFDA is bourne by Direct evidence: P.D. 977, as amended (supra). Therefore, Petitioner-Appellant’s claim for realty tax exemption on LFPC is untenable. WHEREFORE, for all of the foregoing, the herein Appeal is hereby dismissed for lack of merit. SO ORDERED.4

PFDA moved for reconsideration, which the CBAA denied in its Resolution dated 7 June 2006.5 On appeal, the Court of Tax Appeals denied PFDA’s petition for review and affirmed the 5 October 2005 Decision of the CBAA. Hence, this petition for review.

The Ruling of the Court of Tax Appeals

The Court of Tax Appeals held that PFDA is a government-owned or controlled corporation, and is therefore subject to the real property tax imposed by local government units pursuant to Section 232 in relation to Sections 193 and 234 of the Local Government Code. Furthermore, the Court of Tax Appeals ruled that PFDA failed to prove that it is exempt from real property tax pursuant to Section 234 of the Local Government Code or any of its provisions.

The Issue The sole issue raised in this petition is whether PFDA is liable for the real property tax assessed on the Lucena Fishing Port Complex.

The Ruling of the Court

The petition is meritorious.In ruling that PFDA is not exempt from paying real property tax, the Court of Tax Appeals cited Sections 193, 232, and 234 of the Local Government Code which read: Section 193. Withdrawal of Tax Exemption Privileges. ‒ Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or -controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. Section 232. Power to Levy Real Property Tax. ‒ A province or city or a municipality within the Metropolitan Manila Area may levy an annual ad valorem tax on real property such as land, building, machinery, and other improvement not hereinafter specifically exempted. Section 234. Exemptions from Real Property Tax. ‒ The following are exempted from payment of the real property tax:(a) Real property owned by the Republic of the Philippines or any of its political subdivision except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person;(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, nonprofit or religious cemeteries and all lands, buildings and improvements actually, directly, and exclusively used for religious, charitable or educational purposes;(c) All machineries and equipment that are actually, directly and exclusively used by local water districts and government-owned or -controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power;(d) All real property owned by duly registered cooperatives as provided for under R.A. No. 6938; and(e) Machinery and equipment used for pollution control and environmental protection.


Except as provided herein, any exemption from payment of real property tax previously granted to, or presently enjoyed by, all persons, whether natural or juridical, including all government-owned or -controlled corporations are hereby withdrawn upon the effectivity of this Code. The Court of Tax Appeals held that as a government-owned or controlled corporation, PFDA is subject to real property tax imposed by local government units having jurisdiction over its real properties pursuant to Section 232 of the Local Government Code. According to the Court of Tax Appeals, Section 193 of the Local Government Code withdrew all tax exemptions granted to government-owned or controlled corporations. Furthermore, Section 234 of the Local Government Code explicitly provides that any exemption from payment of real property tax granted to government-owned or controlled corporations have already been withdrawn upon the effectivity of the Local Government Code. The ruling of the Court of Tax Appeals is anchored on the wrong premise that the PFDA is a government-owned or controlled corporation. On the contrary, this Court has already ruled that the PFDA is a government instrumentality and not a government-owned or controlled corporation. In the 2007 case of Philippine Fisheries Development Authority v. Court of Appeals,6 the Court resolved the issue of whether the PFDA is a government-owned or controlled corporation or an instrumentality of the national government. In that case, the City of Iloilo assessed real property taxes on the Iloilo Fishing Port Complex (IFPC), which was managed and operated by PFDA. The Court held that PFDA is an instrumentality of the government and is thus exempt from the payment of real property tax, thus: The Court rules that the Authority [PFDA] is not a GOCC but an instrumentality of the national government which is generally exempt from payment of real property tax. However, said exemption does not apply to the portions of the IFPC which the Authority leased to private entities. With respect to these properties, the Authority is liable to pay property tax. Nonetheless, the IFPC, being a property of public dominion cannot be sold at public auction to satisfy the tax delinquency.

x x x

Indeed, the Authority is not a GOCC but an instrumentality of the government. The Authority has a capital stock but it is not divided into shares of stocks. Also, it has no stockholders or voting shares. Hence it is not a stock corporation. Neither is it a non-stock corporation because it has no members. The Authority is actually a national government instrumentality which is defined as an agency of the national government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. When the law vests in a government instrumentality corporate powers, the instrumentality does not become a corporation. Unless the government instrumentality is organized as a stock or non-stock corporation, it remains a government instrumentality exercising not only governmental but also corporate powers.7 (Emphasis supplied) This ruling was affirmed by the Court in a subsequent PFDA case involving the Navotas Fishing Port Complex, which is also managed and operated by the PFDA. In consonance with the previous ruling, the Court held in the subsequent PFDA case that the PFDA is a government instrumentality not subject to real property tax except those portions of the Navotas Fishing Port Complex that were leased to taxable or private persons and entities for their beneficial use.8

Similarly, we hold that as a government instrumentality, the PFDA is exempt from real property tax imposed on the Lucena Fishing Port Complex, except those portions which are leased to private persons or entities. The exercise of the taxing power of local government units is subject to the limitations enumerated in Section 133 of the Local Government Code.9 Under Section 133(o)10 of the Local Government Code, local government units have no power to tax instrumentalities of the national government like the PFDA. Thus, PFDA is not liable to pay real property tax assessed by the Office of the City Treasurer of Lucena City on the Lucena Fishing Port Complex, except those portions which are leased to private persons or entities. Besides, the Lucena Fishing Port Complex is a property of public dominion intended for public use, and is therefore exempt from real property tax under Section 234(a)11 of the Local Government Code. Properties of public dominion are owned by the State or the Republic of the Philippines.12 Thus, Article 420 of the Civil Code provides: Art. 420. The following things are property of public dominion:


(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges constructed by the State, banks, shores, roadsteads, and others of similar character;(2) Those which belong to the State, without being for public use, and are intended for some public service or for the development of the national wealth. (Emphasis supplied) The Lucena Fishing Port Complex, which is one of the major infrastructure projects undertaken by the National Government under the Nationwide Fishing Ports Package, is devoted for public use and falls within the term “ports.” The Lucena Fishing Port Complex “serves as PFDA’s commitment to continuously provide post-harvest infrastructure support to the fishing industry, especially in areas where productivity among the various players in the fishing industry need to be enhanced.”13 As property of public dominion, the LucenaFishing Port Complex is owned by the Republic of the Philippines and thus exempt from real estate tax.WHEREFORE, we GRANT the petition. We SET ASIDE the Decision dated 9 May 2007 of the Court of Tax Appeals in C.T.A. EB No. 193. We DECLARE the Lucena Fishing Port Complex EXEMPT from real property tax imposed by the City of Lucena. We declareVOID all the real property tax assessments issued by the City of Lucena on the Lucena Fishing Port Complex managed by Philippine Fisheries Development Authority, EXCEPT for the portions that the Philippine Fisheries Development Authority has leased to private parties.


COMMISSIONER OF INTERNAL REVENUE, Petitioner, - versus -

G.R. No. 177279 Present: CARPIO MORALES, J., Chairperson, BRION, BERSAMIN, VILLARAMA, JR., and SERENO, JJ.

HON. RAUL M. GONZALEZ, Secretary of Justice, L. M. CAMUS ENGINEERING CORPORATION (represented by LUIS M. CAMUS and LINO D. MENDOZA), Respondents.

Promulgated: October 13, 2010

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DECISION

VILLARAMA, JR., J.: This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing the Decision[1] dated October 31, 2006 and Resolution[2] dated March 6, 2007 of the Court of Appeals (CA) in CA-G.R. SP No. 93387 which affirmed the Resolution[3] dated December 13, 2005 of respondent Secretary of Justice in I.S. No. 2003-774 for violation of Sections 254 and 255 of the National Internal Revenue Code of 1997 (NIRC).The facts as culled from the records:Pursuant to Letter of Authority (LA) No. 00009361 dated August 25, 2000 issued by then Commissioner of Internal Revenue (petitioner) Dakila B. Fonacier, Revenue Officers Remedios C. Advincula, Jr., Simplicio V. Cabantac, Jr., Ricardo L. Suba, Jr. and Aurelio Agustin T. Zamora supervised by Section Chief Sixto C. Dy, Jr. of the Tax Fraud Division (TFD), National Office, conducted a fraud investigation for all internal revenue taxes to ascertain/determine the tax liabilities of respondent L. M. Camus Engineering Corporation (LMCEC) for the taxable years 1997, 1998 and 1999.[4] The audit and investigation against LMCEC was precipitated by the information provided by an “informer” that LMCEC had substantial underdeclared income for the said period. For failure to comply with the subpoena duces tecum issued in connection with the tax fraud investigation, a criminal complaint was instituted by the Bureau of Internal Revenue (BIR) against LMCEC on January 19, 2001 for violation of Section 266 of the NIRC (I.S. No. 00-956 of the Office of the City Prosecutor of Quezon City).[5] Based on data obtained from an “informer” and various clients of LMCEC,[6] it was discovered that LMCEC filed fraudulent tax returns with substantial underdeclarations of taxable income for the years 1997, 1998 and 1999. Petitioner thus assessed the company of total deficiency taxes amounting to P430,958,005.90 (income tax - P318,606,380.19 and value-added tax [VAT] -P112,351,625.71) covering the said period. The Preliminary Assessment Notice (PAN) was received by LMCEC on February 22, 2001.[7]

LMCEC’s alleged underdeclared income was summarized by petitioner as follows:

Year Income Per ITR

Income Per Investigation

Undeclared Income

Percentage ofUnderdeclaration

1997 96,638,540.00 283,412,140.84 186,733,600.84 193.30% 1998 86,793,913.00 236,863,236.81 150,069,323.81 172.90% 1999 88,287,792.00 251,507,903.13 163,220,111.13 184.90%[8]

In view of the above findings, assessment notices together with a formal letter of demand dated August 7, 2002 were sent to LMCEC through personal service on October 1, 2002.[9] Since the company and its representatives refused to receive the said notices and demand letter, the revenue officers resorted to constructive service[10] in accordance with Section 3, Revenue Regulations (RR) No. 12-99[11].On May 21, 2003, petitioner, through then Commissioner Guillermo L. Parayno, Jr., referred to the Secretary of Justice for preliminary investigation its complaint against LMCEC, Luis M. Camus and Lino D. Mendoza, the latter two were sued in their capacities as President and Comptroller, respectively. The case was docketed as I.S. No. 2003-774. In the Joint Affidavit executed by the revenue officers who conducted the tax fraud investigation, it was alleged that despite the receipt of the final assessment notice and formal demand letter on October 1, 2002, LMCEC failed and refused to pay the deficiency tax assessment in the total amount ofP630,164,631.61, inclusive of


increments, which had become final and executory as a result of the said taxpayer’s failure to file a protest thereon within the thirty (30)-day reglementary period.[12]

Camus and Mendoza filed a Joint Counter-Affidavit contending that LMCEC cannot be held liable whatsoever for the alleged tax deficiency which had become due and demandable. Considering that the complaint and its annexes all showed that the suit is a simple civil action for collection and not a tax evasion case, the Department of Justice (DOJ) is not the proper forum for BIR’s complaint. They also assail as invalid the assessment notices which bear no serial numbers and should be shown to have been validly served by an Affidavit of Constructive Service executed and sworn to by the revenue officers who served the same. As stated in LMCEC’s letter-protest dated December 12, 2002 addressed to Revenue District Officer (RDO) Clavelina S. Nacar of RD No. 40, Cubao, Quezon City, the company had already undergone a series of routine examinations for the years 1997, 1998 and 1999; under the NIRC, only one examination of the books of accounts is allowed per taxable year.[13] LMCEC further averred that it had availed of the Bureau’s Tax Amnesty Programs (Economic Recovery Assistance Payment [ERAP] Program and the Voluntary Assessment Program [VAP]) for 1998 and 1999; for 1997, its tax liability was terminated and closed under Letter of Termination[14] dated June 1, 1999 issued by petitioner and signed by the Chief of the Assessment Division.[15] LMCEC claimed it made payments of income tax, VAT and expanded withholding tax (EWT), as follows:

TAXABLE YEAR

AMOUNT OF TAXES PAID

1997 Termination Letter Under Letter of Authority No. 174600 DatedNovember 4, 1998

EWT - P 6,000.00VAT - 540,605.02IT - 3,000.00

1998 ERAP Program pursuantto RR #2-99

WC - 38,404.55VAT - 61,635.40

1999 VAP Program pursuantto RR #8-2001

IT - 878,495.28VAT - 1,324,317.00[16]

LMCEC argued that petitioner is now estopped from further taking any action against it and its corporate officers concerning the taxable years 1997 to 1999. With the grant of immunity from audit from the company’s availment of ERAP and VAP, which have a feature of a tax amnesty, the element of fraud is negated the moment the Bureau accepts the offer of compromise or payment of taxes by the taxpayer. The act of the revenue officers in finding justification under Section 6(B) of the NIRC (Best Evidence Obtainable) is misplaced and unavailing because they were not able to open the books of the company for the second time, after the routine examination, issuance of termination letter and the availment of ERAP and VAP. LMCEC thus maintained that unless there is a prior determination of fraud supported by documents not yet incorporated in the docket of the case, petitioner cannot just issue LAs without first terminating those previously issued. It emphasized the fact that the BIR officers who filed and signed the Affidavit-Complaint in this case were the same ones who appeared as complainants in an earlier case filed against Camus for his alleged “failure to obey summons in violation of Section 5 punishable under Section 266 of the NIRC of 1997” (I.S. No. 00-956 of the Office of the City Prosecutor of Quezon City). After preliminary investigation, said case was dismissed for lack of probable cause in a Resolution issued by the Investigating Prosecutor on May 2, 2001.[17]

LMCEC further asserted that it filed on April 20, 2001 a protest on the PAN issued by petitioner for having no basis in fact and law. However, until now the said protest remains unresolved. As to the alleged informant who purportedly supplied the “confidential information,” LMCEC believes that such person is fictitious and his true identity and personality could not be produced. Hence, this case is another form of harassment against the company as what had been found by the Office of the City Prosecutor of Quezon City in I.S. No. 00-956. Said case and the present case both have something to do with the audit/examination of LMCEC for taxable years 1997, 1998 and 1999 pursuant to LA No. 00009361.[18]

In the Joint Reply-Affidavit executed by the Bureau’s revenue officers, petitioner disagreed with the contention of LMCEC that the complaint filed is not criminal in nature, pointing out that LMCEC and its officers Camus and Mendoza were being charged for the criminal offenses defined and penalized under Sections 254 (Attempt to Evade or Defeat Tax) and 255 (Willful Failure to Pay Tax) of the NIRC. This finds support in Section 205 of the same Code which provides for administrative (distraint, levy, fine, forfeiture, lien, etc.) and judicial (criminal or civil action) remedies in order to enforce collection of taxes. Both remedies may be pursued either independently or simultaneously. In this case, the BIR decided to simultaneously pursue both remedies and thus aside from this criminal action, the Bureau also initiated administrative proceedings against LMCEC.[19]

On the lack of control number in the assessment notice, petitioner explained that such is a mere office requirement in the Assessment Service for the purpose of internal control and monitoring; hence, the unnumbered assessment notices should not be interpreted as irregular or anomalous. Petitioner stressed that LMCEC already lost its right to file a protest letter after the lapse of the thirty (30)-day reglementary period. LMCEC’s protest-letter dated December 12, 2002 to RDO Clavelina S. Nacar, RD No. 40, Cubao, Quezon City was actually filed only on December 16, 2002, which was disregarded by the petitioner for being filed out of


time. Even assuming for the sake of argument that the assessment notices were invalid, petitioner contended that such could not affect the present criminal action,[20] citing the ruling in the landmark case of Ungab v. Cusi, Jr.[21] As to the Letter of Termination signed by Ruth Vivian G. Gandia of the Assessment Division, Revenue Region No. 7, Quezon City, petitioner pointed out that LMCEC failed to mention that the undated Certification issued by RDO Pablo C. Cabreros, Jr. of RD No. 40, Cubao, Quezon City stated that the report of the 1997 Internal Revenue taxes of LMCEC had already been submitted for review and approval of higher authorities. LMCEC also cannot claim as excuse from the reopening of its books of accounts the previous investigations and examinations. Under Section 235 (a), an exception was provided in the rule on once a year audit examination in case of “fraud, irregularity or mistakes, as determined by the Commissioner”. Petitioner explained that the distinction between a Regular Audit Examination and Tax Fraud Audit Examination lies in the fact that the former is conducted by the district offices of the Bureau’s Regional Offices, the authority emanating from the Regional Director, while the latter is conducted by the TFD of the National Office only when instances of fraud had been determined by the petitioner.[22]

Petitioner further asserted that LMCEC’s claim that it was granted immunity from audit when it availed of the VAP and ERAP programs is misleading. LMCEC failed to state that its availment of ERAP under RR No. 2-99 is not a grant of absolute immunity from audit and investigation, aside from the fact that said program was only for income tax and did not cover VAT and withholding tax for the taxable year 1998. As for LMCEC’S availment of VAP in 1999 under RR No. 8-2001 dated August 1, 2001 as amended by RR No. 10-2001 dated September 3, 2001, the company failed to state that it covers only income tax and VAT, and did not include withholding tax. However, LMCEC is not actually entitled to the benefits of VAP under Section 1 (1.1 and 1.2) of RR No. 10-2001. As to the principle of estoppel invoked by LMCEC, estoppel clearly does not lie against the BIR as this involved the exercise of an inherent power by the government to collect taxes.[23]

Petitioner also pointed out that LMCEC’s assertion correlating this case with I.S. No. 00-956 is misleading because said case involves another violation and offense (Sections 5 and 266 of the NIRC). Said case was filed by petitioner due to the failure of LMCEC to submit or present its books of accounts and other accounting records for examination despite the issuance of subpoenaduces tecum against Camus in his capacity as President of LMCEC. While indeed a Resolution was issued by Asst. City Prosecutor Titus C. Borlas on May 2, 2001 dismissing the complaint, the same is still on appeal and pending resolution by the DOJ. The determination of probable cause in said case is confined to the issue of whether there was already a violation of the NIRC by Camus in not complying with the subpoena duces tecum issued by the BIR.[24]

Petitioner contended that precisely the reason for the issuance to the TFD of LA No. 00009361 by the Commissioner is because the latter agreed with the findings of the investigating revenue officers that fraud exists in this case. In the conduct of their investigation, the revenue officers observed the proper procedure under Revenue Memorandum Order (RMO) No. 49-2000 wherein it is required that before the issuance of a Letter of Authority against a particular taxpayer, a preliminary investigation should first be conducted to determine if a prima facie case for tax fraud exists. As to the allegedly unresolved protest filed on April 20, 2001 by LMCEC over the PAN, this has been disregarded by the Bureau for being pro forma and having been filed beyond the 15-day reglementary period. A subsequent letter dated April 20, 2001 was filed with the TFD and signed by a certain Juan Ventigan. However, this was disregarded and considered a mere scrap of paper since the said signatory had not shown any prior authorization to represent LMCEC. Even assuming said protest letter was validly filed on behalf of the company, the issuance of a Formal Demand Letter and Assessment Notice through constructive service on October 1, 2002 is deemed an implied denial of the said protest. Lastly, the details regarding the “informer” being confidential, such information is entitled to some degree of protection, including the identity of the informant against LMCEC.[25] In their Joint Rejoinder-Affidavit,[26] Camus and Mendoza reiterated their argument that the identity of the alleged informant is crucial to determine if he/she is qualified under Section 282 of the NIRC. Moreover, there was no assessment that has already become final, the validity of its issuance and service has been put in issue being anomalous, irregular and oppressive. It is contended that for criminal prosecution to proceed before assessment, there must be a prima facie showing of a willful attempt to evade taxes. As to LMCEC’s availment of the VAP and ERAP programs, the certificate of immunity from audit issued to it by the BIR is plain and simple, but petitioner is now saying it has the right to renege with impunity from its undertaking. Though petitioner deems LMCEC not qualified to avail of the benefits of VAP, it must be noted that if it is true that at the time the petitioner filed I.S. No. 00-956 sometime in January 2001 it had already in its custody that “Confidential Information No. 29-2000 dated July 7, 2000”, these revenue officers could have rightly filed the instant case and would not resort to filing said criminal complaint for refusal to comply with a subpoena duces tecum.On September 22, 2003, the Chief State Prosecutor issued a Resolution[27] finding no sufficient evidence to establish probable cause against respondents LMCEC, Camus and Mendoza. It was held that since the payments were made by LMCEC under ERAP and VAP pursuant to the provisions of RR Nos. 2-99 and 8-2001 which were offered to taxpayers by the BIR itself, the latter is now in estoppel to insist on the criminal prosecution of the respondent taxpayer. The voluntary payments made thereunder are in the nature of a tax amnesty. The unnumbered assessment notices were found highly irregular and thus their validity is suspect; if the amounts indicated therein were collected, it is uncertain how these will be accounted for and if it would go to the coffers of the government or elsewhere. On the required prior determination of fraud, the Chief State Prosecutor declared that the Office of the City Prosecutor in I.S. No. 00-956 has already squarely ruled that (1) there was no prior determination of fraud, (2) there was indiscriminate issuance of LAs, and (3) the complaint was more of harassment. In view of such findings, any ensuing LA is thus defective and allowing the collection on the assailed


assessment notices would already be in the context of a “fishing expedition” or “witch-hunting.” Consequently, there is nothing to speak of regarding the finality of assessment notices in the aggregate amount ofP630,164,631.61.Petitioner filed a motion for reconsideration which was denied by the Chief State Prosecutor.[28]

Petitioner appealed to respondent Secretary of Justice but the latter denied its petition for review under Resolution datedDecember 13, 2005.[29]

The Secretary of Justice found that petitioner’s claim that there is yet no finality as to LMCEC’s payment of its 1997 taxes since the audit report was still pending review by higher authorities, is unsubstantiated and misplaced. It was noted that the Termination Letter issued by the Commissioner on June 1, 1999 is explicit that the matter is considered closed. As for taxable year 1998, respondent Secretary stated that the record shows that LMCEC paid VAT and withholding tax in the amount of P61,635.40 and P38,404.55, respectively. This eventually gave rise to the issuance of a certificate of immunity from audit for 1998 by the Office of the Commissioner of Internal Revenue. For taxable year 1999, respondent Secretary found that pursuant to earlier LA No. 38633 dated July 4, 2000, LMCEC’s 1999 tax liabilities were still pending investigation for which reason LMCEC assailed the subsequent issuance of LA No. 00009361 dated August 25, 2000 calling for a similar investigation of its alleged 1999 tax deficiencies when no final determination has yet been arrived on the earlier LA No. 38633.[30]

On the allegation of fraud, respondent Secretary ruled that petitioner failed to establish the existence of the following circumstances indicating fraud in the settlement of LMCEC’s tax liabilities: (1) there must be intentional and substantial understatement of tax liability by the taxpayer; (2) there must be intentional and substantial overstatement of deductions or exemptions; and (3) recurrence of the foregoing circumstances. First, petitioner miserably failed to explain why the assessment notices were unnumbered; second, the claim that the tax fraud investigation was precipitated by an alleged “informant” has not been corroborated nor was it clearly established, hence there is no other conclusion but that the Bureau engaged in a “fishing expedition”; and furthermore, petitioner’s course of action is contrary to Section 235 of the NIRC allowing only once in a given taxable year such examination and inspection of the taxpayer’s books of accounts and other accounting records. There was no convincing proof presented by petitioner to show that the case of LMCEC falls under the exceptions provided in Section 235. Respondent Secretary duly considered the issuance of Certificate of Immunity from Audit and Letter of Termination dated June 1, 1999 issued to LMCEC.[31] Anent the earlier case filed against the same taxpayer (I.S. No. 00-956), the Secretary of Justice found petitioner to have engaged in forum shopping in view of the fact that while there is still pending an appeal from the Resolution of the City Prosecutor of Quezon City in said case, petitioner hurriedly filed the instant case, which not only involved the same parties but also similar substantial issues (the joint complaint-affidavit also alleged the issuance of LA No. 00009361 dated August 25, 2000). Clearly, the evidence of litis pendentia is present. Finally, respondent Secretary noted that if indeed LMCEC committed fraud in the settlement of its tax liabilities, then at the outset, it should have been discovered by the agents of petitioner, and consequently petitioner should not have issued the Letter of Termination and the Certificate of Immunity From Audit. Petitioner thus should have been more circumspect in the issuance of said documents.[32]

Its motion for reconsideration having been denied, petitioner challenged the ruling of respondent Secretary via a certiorari petition in the CA.On October 31, 2006, the CA rendered the assailed decision[33] denying the petition and concurred with the findings and conclusions of respondent Secretary. Petitioner’s motion for reconsideration was likewise denied by the appellate court.[34] It appears that entry of judgment was issued by the CA stating that its October 31, 2006 Decision attained finality on March 25, 2007.[35] However, the said entry of judgment was set aside upon manifestation by the petitioner that it has filed a petition for review before this Court subsequent to its receipt of the Resolution dated March 6, 2007 denying petitioner’s motion for reconsideration onMarch 20, 2007.[36]

The petition is anchored on the following grounds:I.

The Honorable Court of Appeals erroneously sustained the findings of the Secretary of Justice who gravely abused his discretion by dismissing the complaint based on grounds which are not even elements of the offenses charged.

II.The Honorable Court of Appeals erroneously sustained the findings of the Secretary of Justice who gravely abused his discretion by dismissing petitioner’s evidence, contrary to law.

III.The Honorable Court of Appeals erroneously sustained the findings of the Secretary of Justice who gravely abused his discretion by inquiring into the validity of a Final Assessment Notice which has become final, executory and demandable pursuant to Section 228 of the Tax Code of 1997 for failure of private respondent to file a protest against the same.[37]

The core issue to be resolved is whether LMCEC and its corporate officers may be prosecuted for violation of Sections 254 (Attempt to Evade or Defeat Tax) and 255 (Willful Failure to Supply Correct and Accurate Information and Pay Tax). Petitioner filed the criminal complaint against the private respondents for violation of the following provisions of the NIRC, as amended:SEC. 254. Attempt to Evade or Defeat Tax. – Any person who willfully attempts in any manner to evade or defeat any tax imposed under this Code or the payment thereof shall, in addition to other penalties provided by law,


upon conviction thereof, be punished by a fine of not less than Thirty thousand pesos (P30,000) but not more than One hundred thousand pesos (P100,000) and suffer imprisonment of not less than two (2) years but not more than four (4) years: Provided, That the conviction or acquittal obtained under this Section shall not be a bar to the filing of a civil suit for the collection of taxes.SEC. 255. Failure to File Return, Supply Correct and Accurate Information, Pay Tax, Withhold and Remit Tax and Refund Excess Taxes Withheld on Compensation. – Any person required under this Code or by rules and regulations promulgated thereunder to pay any tax, make a return, keep any record, or supply any correct and accurate information, who willfully fails to pay such tax, make such return, keep such record, or supply such correct and accurate information, or withhold or remit taxes withheld, or refund excess taxes withheld on compensations at the time or times required by law or rules and regulations shall, in addition to other penalties provided by law, upon conviction thereof, be punished by a fine of not less than Ten thousand pesos (P10,000) and suffer imprisonment of not less than one (1) year but not more than ten (10) years. x x x x (Emphasis supplied.)Respondent Secretary concurred with the Chief State Prosecutor’s conclusion that there is insufficient evidence to establish probable cause to charge private respondents under the above provisions, based on the following findings: (1) the tax deficiencies of LMCEC for taxable years 1997, 1998 and 1999 have all been settled or terminated, as in fact LMCEC was issued a Certificate of Immunity and Letter of Termination, and availed of the ERAP and VAP programs; (2) there was no prior determination of the existence of fraud; (3) the assessment notices are unnumbered, hence irregular and suspect; (4) the books of accounts and other accounting records may be subject to audit examination only once in a given taxable year and there is no proof that the case falls under the exceptions provided in Section 235 of the NIRC; and (5) petitioner committed forum shopping when it filed the instant case even as the earlier criminal complaint (I.S. No. 00-956) dismissed by the City Prosecutor of Quezon City was still pending appeal.Petitioner argues that with the finality of the assessment due to failure of the private respondents to challenge the same in accordance with Section 228 of the NIRC, respondent Secretary has no jurisdiction and authority to inquire into its validity. Respondent taxpayer is thereby allowed to do indirectly what it cannot do directly – to raise a collateral attack on the assessment when even a direct challenge of the same is legally barred. The rationale for dismissing the complaint on the ground of lack of control number in the assessment notice likewise betrays a lack of awareness of tax laws and jurisprudence, such circumstance not being an element of the offense. Worse, the final, conclusive and undisputable evidence detailing a crime under our taxation laws is swept under the rug so easily on mere conspiracy theories imputed on persons who are not even the subject of the complaint. We grant the petition.There is no dispute that prior to the filing of the complaint with the DOJ, the report on the tax fraud investigation conducted on LMCEC disclosed that it made substantial underdeclarations in its income tax returns for 1997, 1998 and 1999. Pursuant to RR No. 12-99,[38] a PAN was sent to and received by LMCEC on February 22, 2001 wherein it was notified of the proposed assessment of deficiency taxes amounting to P430,958,005.90 (income tax - P318,606,380.19 and VAT - P112,351,625.71) covering taxable years 1997, 1998 and 1999.[39] In response to said PAN, LMCEC sent a letter-protest to the TFD, which denied the same on April 12, 2001 for lack of legal and factual basis and also for having been filed beyond the 15-day reglementary period.[40]

As mentioned in the PAN, the revenue officers were not given the opportunity to examine LMCEC’s books of accounts and other accounting records because its officers failed to comply with the subpoena duces tecum earlier issued, to verify its alleged underdeclarations of income reported by the Bureau’s informant under Section 282 of the NIRC. Hence, a criminal complaint was filed by the Bureau against private respondents for violation of Section 266 which provides:SEC. 266. Failure to Obey Summons. – Any person who, being duly summoned to appear to testify, or to appear and produce books of accounts, records, memoranda, or other papers, or to furnish information as required under the pertinent provisions of this Code, neglects to appear or to produce such books of accounts, records, memoranda, or other papers, or to furnish such information, shall, upon conviction, be punished by a fine of not less than Five thousand pesos (P5,000) but not more than Ten thousand pesos (P10,000) and suffer imprisonment of not less than one (1) year but not more than two (2) years. It is clear that I.S. No. 00-956 involves a separate offense and hence litis pendentia is not present considering that the outcome of I.S. No. 00-956 is not determinative of the issue as to whether probable cause exists to charge the private respondents with the crimes of attempt to evade or defeat tax and willful failure to supply correct and accurate information and pay tax defined and penalized under Sections 254 and 255, respectively. For the crime of tax evasion in particular, compliance by the taxpayer with such subpoena, if any had been issued, is irrelevant. As we held in Ungab v. Cusi, Jr.,[41] “[t]he crime is complete when the [taxpayer] has x x x knowingly and willfully filed [a] fraudulent [return] with intent to evade and defeat x x x the tax.” Thus, respondent Secretary erred in holding that petitioner committed forum shopping when it filed the present criminal complaint during the pendency of its appeal from the City Prosecutor’s dismissal of I.S. No. 00-956 involving the act of disobedience to the summons in the course of the preliminary investigation on LMCEC’s correct tax liabilities for taxable years 1997, 1998 and 1999. In the Details of Discrepancies attached as Annex B of the PAN,[42] private respondents were already notified that inasmuch as the revenue officers were not given the opportunity to examine LMCEC’s books of accounts,


accounting records and other documents, said revenue officers gathered information from third parties. Such procedure is authorized under Section 5 of the NIRC, which provides:SEC. 5. Power of the Commissioner to Obtain Information, and to Summon, Examine, and Take Testimony of Persons. – In ascertaining the correctness of any return, or in making a return when none has been made, or in determining the liability of any person for any internal revenue tax, or in collecting any such liability, or in evaluating tax compliance, the Commissioner is authorized:(A) To examine any book, paper, record or other data which may be relevant or material to such inquiry;(B) To obtain on a regular basis from any person other than the person whose internal revenue tax liability is subject to audit or investigation, or from any office or officer of the national and local governments, government agencies and instrumentalities, including the Bangko Sentral ng Pilipinas and government-owned or -controlled corporations, any information such as, but not limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers, and the names, addresses, and financial statements of corporations, mutual fund companies, insurance companies, regional operating headquarters of multinational companies, joint accounts, associations, joint ventures or consortia and registered partnerships, and their members;(C) To summon the person liable for tax or required to file a return, or any officer or employee of such person, or any person having possession, custody, or care of the books of accounts and other accounting records containing entries relating to the business of the person liable for tax, or any other person, to appear before the Commissioner or his duly authorized representative at a time and place specified in the summons and to produce such books, papers, records, or other data, and to give testimony;(D) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry; x x xx x x x (Emphasis supplied.)Private respondents’ assertions regarding the qualifications of the “informer” of the Bureau deserve scant consideration. We have held that the lack of consent of the taxpayer under investigation does not imply that the BIR obtained the information from third parties illegally or that the information received is false or malicious. Nor does the lack of consent preclude the BIR from assessing deficiency taxes on the taxpayer based on the documents.[43] In the same vein, herein private respondents cannot be allowed to escape criminal prosecution under Sections 254 and 255 of the NIRC by mere imputation of a “fictitious” or disqualified informant under Section 282 simply because other than disclosure of the official registry number of the third party “informer,” the Bureau insisted on maintaining the confidentiality of the identity and personal circumstances of said “informer.” Subsequently, petitioner sent to LMCEC by constructive service allowed under Section 3 of RR No. 12-99, assessment notice and formal demand informing the said taxpayer of the law and the facts on which the assessment is made, as required by Section 228 of the NIRC. Respondent Secretary, however, fully concurred with private respondents’ contention that the assessment notices were invalid for being unnumbered and the tax liabilities therein stated have already been settled and/or terminated. We do not agree. A notice of assessment is:[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a Pre-Assessment Notice (PAN) within the prescribed period of time, or whose reply to the PAN was found to be without merit. The Notice of Assessment shall inform the [t]axpayer of this fact, and that the report of investigation submitted by the Revenue Officer conducting the audit shall be given due course.The formal letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the fact, the law, rules and regulations or jurisprudence on which the assessment is based, otherwise the formal letter of demand and the notice of assessment shall be void.[44]

As it is, the formality of a control number in the assessment notice is not a requirement for its validity but rather the contents thereof which should inform the taxpayer of the declaration of deficiency tax against said taxpayer. Both the formal letter of demand and the notice of assessment shall be void if the former failed to state the fact, the law, rules and regulations or jurisprudence on which the assessment is based, which is a mandatory requirement under Section 228 of the NIRC.Section 228 of the NIRC provides that the taxpayer shall be informed in writing of the law and the facts on which the assessment is made. Otherwise, the assessment is void. To implement the provisions of Section 228 of the NIRC, RR No. 12-99 was enacted. Section 3.1.4 of the revenue regulation reads:3.1.4. Formal Letter of Demand and Assessment Notice. – The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void. The same shall be sent to the taxpayer only by registered mail or by personal delivery. x x x.[45](Emphasis supplied.)The Formal Letter of Demand dated August 7, 2002 contains not only a detailed computation of LMCEC’s tax deficiencies but also details of the specified discrepancies, explaining the legal and factual bases of the assessment. It also reiterated that in the absence of accounting records and other documents necessary for the proper determination of the company’s internal revenue tax liabilities, the investigating revenue officers resorted to the “Best Evidence Obtainable” as provided in Section 6(B) of the NIRC (third party information) and in accordance with the procedure laid down in RMC No. 23-2000 dated November 27, 2000. Annex “A” of the Formal Letter of Demand thus stated:


Thus, to verify the validity of the information previously provided by the informant, the assigned revenue officers resorted to third party information. Pursuant to Section 5(B) of the NIRC of 1997, access letters requesting for information and the submission of certain documents (i.e., Certificate of Income Tax Withheld at Source and/or Alphabetical List showing the income payments made to L.M. Camus Engineering Corporation for the taxable years 1997 to 1999) were sent to the various clients of the subject corporation, including but not limited to the following:1. Ayala Land Inc.2. Filinvest Alabang Inc.3. D.M. Consunji, Inc.4. SM Prime Holdings, Inc.5. Alabang Commercial Corporation6. Philam Properties Corporation7. SM Investments, Inc.8. Shoemart, Inc.9. Philippine Securities Corporation10. Makati Development CorporationFrom the documents gathered and the data obtained therein, the substantial underdeclaration as defined under Section 248(B) of the NIRC of 1997 by your corporation of its income had been confirmed . x x x x[46] (Emphasis supplied.)In the same letter, Assistant Commissioner Percival T. Salazar informed private respondents that the estimated tax liabilities arising from LMCEC’s underdeclaration amounted to P186,773,600.84 in 1997, P150,069,323.81 in 1998 and P163,220,111.13 in 1999. These figures confirmed that the non-declaration by LMCEC for the taxable years 1997, 1998 and 1999 of an amount exceeding 30% income[47] declared in its return is considered a substantial underdeclaration of income, which constituted prima facie evidence of false or fraudulent return under Section 248(B)[48] of the NIRC, as amended.[49]

On the alleged settlement of the assessed tax deficiencies by private respondents, respondent Secretary found the latter’s claim as meritorious on the basis of the Certificate of Immunity From Audit issued on December 6, 1999 pursuant to RR No. 2-99 and Letter of Termination dated June 1, 1999 issued by Revenue Region No. 7 Chief of Assessment Division Ruth Vivian G. Gandia. Petitioner, however, clarified that the certificate of immunity from audit covered only income tax for the year 1997 and does not include VAT and withholding taxes, while the Letter of Termination involved tax liabilities for taxable year 1997 (EWT, VAT and income taxes) but which was submitted for review of higher authorities as per the Certification of RD No. 40 District Officer Pablo C. Cabreros, Jr.[50] For 1999, private respondents supposedly availed of the VAP pursuant to RR No. 8-2001. RR No. 2-99 issued on February 7, 1999 explained in its Policy Statement that considering the scarcity of financial and human resources as well as the time constraints within which the Bureau has to “clean the Bureau’s backlog of unaudited tax returns in order to keep updated and be focused with the most current accounts” in preparation for the full implementation of a computerized tax administration, the said revenue regulation was issued “providing for last priority in audit and investigation of tax returns” to accomplish the said objective “without, however, compromising the revenue collection that would have been generated from audit and enforcement activities.” The program named as “Economic Recovery Assistance Payment (ERAP) Program” granted immunity from audit and investigation of income tax, VAT and percentage tax returns for 1998. It expressly excluded withholding tax returns (whether for income, VAT, or percentage tax purposes). Since such immunity from audit and investigation does not preclude the collection of revenues generated from audit and enforcement activities, it follows that the Bureau is likewise not barred from collecting any tax deficiency discovered as a result of tax fraud investigations. Respondent Secretary’s opinion that RR No. 2-99 contains the feature of a tax amnesty is thus misplaced. Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also gives the government a chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax case.[51] Even assumingarguendo that the issuance of RR No. 2-99 is in the nature of tax amnesty, it bears noting that a tax amnesty, much like a tax exemption, is never favored nor presumed in law and if granted by statute, the terms of the amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing authority.[52]

For the same reason, the availment by LMCEC of VAP under RR No. 8-2001 as amended by RR No. 10-2001, through payment supposedly made in October 29, 2001 before the said program ended on October 31, 2001, did not amount to settlement of its assessed tax deficiencies for the period 1997 to 1999, nor immunity from prosecution for filing fraudulent return and attempt to evade or defeat tax. As correctly asserted by petitioner, from the express terms of the aforesaid revenue regulations, LMCEC is not qualified to avail of the VAP granting taxpayers the privilege of last priority in the audit and investigation of all internal revenue taxes for the taxable year 2000 and all prior years under certain conditions, considering that first, it was issued a PAN on February 19, 2001, and second, it was the subject of investigation as a result of verified information filed by a Tax Informer under Section 282 of the NIRC duly recorded in the BIR Official Registry as Confidential Information (CI) No. 29-2000[53] even prior to the issuance of the PAN. Section 1 of RR No. 8-2001 provides:SECTION 1. COVERAGE. – x x x


Any person, natural or juridical, including estates and trusts, liable to pay any of the above-cited internal revenue taxes for the above specified period/s who, due to inadvertence or otherwise, erroneously paid his internal revenue tax liabilities or failed to file tax return/pay taxes may avail of the Voluntary Assessment Program (VAP), except those falling under any of the following instances:1.1 Those covered by a Preliminary Assessment Notice (PAN), Final Assessment Notice (FAN), or Collection Letter issued on or before July 31, 2001; or1.2 Persons under investigation as a result of verified information filed by a Tax Informer under Section 282 of the Tax Code of 1997, duly processed and recorded in the BIR Official Registry Book on or before July 31, 2001;1.3 Tax fraud cases already filed and pending in courts for adjudication; andx x x x (Emphasis supplied.)Moreover, private respondents cannot invoke LMCEC’s availment of VAP to foreclose any subsequent audit of its account books and other accounting records in view of the strong finding of underdeclaration in LMCEC’s payment of correct income tax liability by more than 30% as supported by the written report of the TFD detailing the facts and the law on which such finding is based, pursuant to the tax fraud investigation authorized by petitioner under LA No. 00009361. This conclusion finds support in Section 2 of RR No. 8-2001 as amended by RR No. 10-2001 provides:SEC. 2. TAXPAYER’S BENEFIT FROM AVAILMENT OF THE VAP. – A taxpayer who has availed of the VAP shall not be audited except upon authorization and approval of the Commissioner of Internal Revenue when there is strong evidence or finding of understatement in the payment of taxpayer’s correct tax liability by more than thirty percent (30%) as supported by a written report of the appropriate office detailing the facts and the law on which such finding is based: Provided, however, that any VAP payment should be allowed as tax credit against the deficiency tax due, if any, in case the concerned taxpayer has been subjected to tax audit.x x x xGiven the explicit conditions for the grant of immunity from audit under RR No. 2-99, RR No. 8-2001 and RR No. 10-2001, we hold that respondent Secretary gravely erred in declaring that petitioner is now estopped from assessing any tax deficiency against LMCEC after issuance of the aforementioned documents of immunity from audit/investigation and settlement of tax liabilities. It is axiomatic that the State can never be in estoppel, and this is particularly true in matters involving taxation. The errors of certain administrative officers should never be allowed to jeopardize the government’s financial position.[54]

Respondent Secretary’s other ground for assailing the course of action taken by petitioner in proceeding with the audit and investigation of LMCEC -- the alleged violation of the general rule in Section 235 of the NIRC allowing the examination and inspection of taxpayer’s books of accounts and other accounting records only once in a taxable year -- is likewise untenable. As correctly pointed out by petitioner, the discovery of substantial underdeclarations of income by LMCEC for taxable years 1997, 1998 and 1999 upon verified information provided by an “informer” under Section 282 of the NIRC, as well as the necessity of obtaining information from third parties to ascertain the correctness of the return filed or evaluation of tax compliance in collecting taxes (as a result of the disobedience to the summons issued by the Bureau against the private respondents), are circumstances warranting exception from the general rule in Section 235.[55]

As already stated, the substantial underdeclared income in the returns filed by LMCEC for 1997, 1998 and 1999 in amounts equivalent to more than 30% (the computation in the final assessment notice showed underdeclarations of almost 200%) constitutesprima facie evidence of fraudulent return under Section 248(B) of the NIRC. Prior to the issuance of the preliminary and final notices of assessment, the revenue officers conducted a preliminary investigation on the information and documents showing substantial understatement of LMCEC’s tax liabilities which were provided by the Informer, following the procedure under RMO No. 15-95.[56] Based on the prima facie finding of the existence of fraud, petitioner issued LA No. 00009361 for the TFD to conduct a formal fraud investigation of LMCEC.[57] Consequently, respondent Secretary’s ruling that the filing of criminal complaint for violation of Sections 254 and 255 of the NIRC cannot prosper because of lack of prior determination of the existence of fraud, is bereft of factual basis and contradicted by the evidence on record. Tax assessments by tax examiners are presumed correct and made in good faith, and all presumptions are in favor of the correctness of a tax assessment unless proven otherwise.[58] We have held that a taxpayer’s failure to file a petition for review with the Court of Tax Appeals within the statutory period rendered the disputed assessment final, executory and demandable, thereby precluding it from interposing the defenses of legality or validity of the assessment and prescription of the Government’s right to assess.[59] Indeed, any objection against the assessment should have been pursued following the avenue paved in Section 229 (now Section 228) of the NIRC on protests on assessments of internal revenue taxes.[60]

Records bear out that the assessment notice and Formal Letter of Demand dated August 7, 2002 were duly served on LMCEC on October 1, 2002. Private respondents did not file a motion for reconsideration of the said assessment notice and formal demand; neither did they appeal to the Court of Tax Appeals. Section 228 of the NIRC[61] provides the remedy to dispute a tax assessment within a certain period of time. It states that an assessment may be protested by filing a request for reconsideration or reinvestigation within 30 days from receipt of the assessment by the taxpayer. No such administrative protest was filed by private respondents seeking reconsideration of the August 7, 2002 assessment notice and formal letter of demand. Private respondents cannot belatedly assail the said assessment, which they allowed to lapse into finality, by raising issues as to its validity and correctness during the


preliminary investigation after the BIR has referred the matter for prosecution under Sections 254 and 255 of the NIRC. As we held in Marcos II v. Court of Appeals[62]:It is not the Department of Justice which is the government agency tasked to determine the amount of taxes due upon the subject estate, but the Bureau of Internal Revenue, whose determinations and assessments are presumed correct and made in good faith. The taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful where it does not appear to have been arrived at arbitrarily or capriciously. The burden of proof is upon the complaining party to show clearly that the assessment is erroneous. Failure to present proof of error in the assessment will justify the judicial affirmance of said assessment. x x x.Moreover, these objections to the assessments should have been raised, considering the ample remedies afforded the taxpayer by the Tax Code, with the Bureau of Internal Revenue and the Court of Tax Appeals, as described earlier, and cannot be raised now via Petition for Certiorari, under the pretext of grave abuse of discretion. The course of action taken by the petitioner reflects his disregard or even repugnance of the established institutions for governance in the scheme of a well-ordered society. The subject tax assessments having become final, executory and enforceable, the same can no longer be contested by means of a disguised protest. In the main, Certiorari may not be used as a substitute for a lost appeal or remedy. This judicial policy becomes more pronounced in view of the absence of sufficient attack against the actuations of government. (Emphasis supplied.) The determination of probable cause is part of the discretion granted to the investigating prosecutor and ultimately, the Secretary of Justice. However, this Court and the CA possess the power to review findings of prosecutors in preliminary investigations. Although policy considerations call for the widest latitude of deference to the prosecutor’s findings, courts should never shirk from exercising their power, when the circumstances warrant, to determine whether the prosecutor’s findings are supported by the facts, or by the law. In so doing, courts do not act as prosecutors but as organs of the judiciary, exercising their mandate under the Constitution, relevant statutes, and remedial rules to settle cases and controversies.[63] Clearly, the power of the Secretary of Justice to review does not preclude this Court and the CA from intervening and exercising our own powers of review with respect to the DOJ’s findings, such as in the exceptional case in which grave abuse of discretion is committed, as when a clear sufficiency or insufficiency of evidence to support a finding of probable cause is ignored.[64]

WHEREFORE, the petition is GRANTED. The Decision dated October 31, 2006 and Resolution dated March 6, 2007 of the Court of Appeals in CA-G.R. SP No. 93387 are hereby REVERSED and SET ASIDE. The Secretary of Justice is hereby DIRECTED to order the Chief State Prosecutor to file before the Regional Trial Court of Quezon City, National Capital Judicial Region, the corresponding Information against L. M. Camus Engineering Corporation, represented by its President Luis M. Camus and Comptroller Lino D. Mendoza, for Violation of Sections 254 and 255 of the National Internal Revenue Code of 1997.



- versus -

FORT BONIFACIO DEVELOPMENT CORPORATION,

Respondent.

G.R. No. 167606 Promulgated: August 11, 2010

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

D E C I S I O N

MENDOZA, J.: At bar is a petition for review under Rule 45 of the Rules of Court, filed by the Commissioner of Internal Revenue (CIR)against Fort Bonifacio Development Corporation (FBDC), challenging the Resolutions of the Court of Appeals (CA) dated: (1)January 27, 2003,[1] denying the prayer of petitioner CIR and the Revenue District Officer, Revenue District No. 44, Taguig and Pateros, Bureau of Internal Revenue (BIR), to admit the Amended Petition for Review; and (2) March 18, 2005,[2] denying their motion for the reconsideration thereof. In its decision[3] dated December 7, 2001, the Court of Tax Appeals (CTA) granted the petition of FBDC and ordered the CIR and the Revenue District Officer, Revenue District No. 44, Taguig and Pateros, BIR, to refund or issue a Tax Credit Certificatein the total amount of P15,036,891.26 in favor of FBDC for the fourth quarter of taxable year 1997. The CIR sought to appeal the CTA decision to the CA. The appeal was docketed as CA-G.R. SP No. UDK-4443. OnDecember 28, 2001, petitioner filed, by registered mail, a motion[4] praying for an extension of fifteen (15) days from December 28, 2001, the last day for filing the petition for review, or until January 12, 2002 within which to file the petition.

On January 21, 2002, the petitioner filed a Motion for Re-Extension of Time to File Petition for Review praying for another extension of fifteen (15) days or until January 27, 2002.[5]

On January 29, 2002, the Court of Appeals, acting on the first motion for extension, issued a Resolution[6] dismissing the petition for non-payment of docket and other legal fees pursuant to Section 1 (c) Rule 50 of the 1997 Rules of Civil Procedure. Notably, it was FBDC, and not CIR, that was designated as petitioner in the latter’s Motion for Extension of Time to File Petition for Review.[7] FBDC is not exempt from the payment of docket and other legal fees. In its Manifestation[8] dated February 7, 2002, FBDC pointed out the defects in the motion filed by the CIR. Thus: 1.00. On February 1, 2002, the undersigned counsel received a copy of the Resolution of this Honorable Court dated January 29, 2002, denying the “MOTION FOR EXTENSION OF TIME TO FILE PETITION FOR REVIEW” (dated December 21, 2001) filed by the Commissioner of Internal Revenue (“Commissioner”) as well as the Petition for Review. 1.01. The title of the above-entitled case is wrong. The petitioner should be the Commissioner of Internal Revenue. The decision of the Court of Tax Appeals (“CTA”) in CTA Case No. 5962 subject of the above-entitled case is favorable to FBDC and the latter is not appealing said decision to this Court. 2.00. Earlier, on January 17, 2002, undersigned counsel received a copy of the Commissioner’s “MOTION FOR RE-EXTENSION OF TIME TO FILE PETITION FOR REVIEW” dated January 14, 2002. 2.01. It will be noted that in the aforesaid second motion for extension, the Commissioner prayed for “an extension of fifteen (15) days from January 12, 2002 or until January 27, 2002.” Thus, when the Commissioner filed his motion for second extension, dated January 14, 2002, the first extension prayed for had already expired.


http://sc.judiciary.gov.ph/jurisprudence/2010/august2010/167606.htm#_ftn9








2.02. Moreover, the second motion for extension does not show that there is a “most compelling reason” for the second extension prayed for. Section 4 of Rule 9 of the Revised Internal Rules of the Court of Appeals (“RIRCA”) provides that “No further extension shall be granted except for the most compelling reason and in no case to exceed fifteen (15) days.” An identical provision is found in the 1997 Rules of Civil Procedure (“RCP”) (Sec. 4, Rule 43). 3.00. On February 5, 2002, undersigned counsel received a copy of the Commissioner’s “PETITION FOR REVIEW,” dated January 28, 2002. The following has been noted in said Petition: 3.01. It is not “accompanied by a clearly legible duplicate original or a certified true copy of the award, judgment, final order or resolution appealed from, together with certified true copies of such material portions of the record referred to therein and other supporting papers” (Sec. 6[c], Rule 9, RIRCA; Sec. 6, Rule 43, RCP). 3.02. The Petition does not “[s]tate the specific material dates showing that it was filed within the period fixed herein” (Sec. 6[e], Rule 9, RIRC; Sec. 6, Rule 43, RCP). 3.03. It is not accompanied by proof of service of a copy of the Petition on the Court of Tax Appeals (Sec. 5, RCP). On June 10, 2002, the CIR and the Revenue District Officer filed a Manifestation[9] dated May 16, 2002 acknowledging their inadvertence in failing to correct the title of the petition where FBDC was designated as petitioner and attaching a copy of the Amended Petition for Review.[10] FBDC then filed a Counter-Manifestation[11] insisting on the denial of the admission of petitioners’ amended petition on the same grounds stated in its February 7, 2002 Manifestation. It further argued that the original petition for review[12] could no longer be amended as the same was only filed on January 31, 2002, or past the deadline of January 27, 2002, as prayed for in the second motion for extension. FBDC further stressed that the CA Resolution dated January 29, 2002, denying the “Motion for Extension of Time to File Petition for Review” and dismissing the petition, had already become final and executory for the CIR’s failure to file a motion for reconsideration.[13]

In its assailed January 27, 2003 Resolution, the CA denied the prayer of petitioners to admit the amended petition for review, thus, reiterating the dismissal of the petition for review. The CA gave the following reasons: 1) The dismissal of the petition for review and denial of the amended petition are premised on: (a) the late filing of the original petition for review earlier filed by the petitioner CIR et al.; (b) the absence of a motion for reconsideration of the Resolution dated January 29, 2002;[14] and (c) lack of authority of Atty. Alberto R. Bomediano, Jr., legal officer of the BIR Region 8, Makati City, to pursue the case on behalf of the petitioner CIR. 2) It should be noted that the first extension to file petition for review prayed for a period of fifteen (15) days from December 28, 2001 or until January 12, 2002. The second motion for extension prayed for an extension of another fifteen (15) days from January 12, 2002 or until January 27, 2002. The second motion was dated January 14, 2002. Clearly, the second motion for extension dated January 14, 2002 was filed after the expiration of the first extension on January 12, 2002, hence, there was no more period to extend. There was no reason for the petitioners to assume that the motion for re-extension of time would be granted. 3) The last day of filing of the petition for review was on January 12, 2002. The filing of the petition for review on January 31, 2002 was definitely beyond the extension prayed for. The timeliness of the appeal is a jurisdictional caveat. 4) When petitioners received the Resolution dated January 29, 2002, denying the motion for extension of time to file petition, thus, dismissing the petition for review on February 4, 2002, they did not file a motion for reconsideration. Said resolution, therefore, had already become final and executory. 5) The proper officer that should have filed the case was the Solicitor General, citing the case of CIR v. La Suerte Cigar and Cigarette Factory,[15] not an officer of the BIR.

Petitioners, this time through the Office of the Solicitor General (OSG), filed a Motion for Reconsideration (Re: Resolution dated January 27, 2003)[16] but it was denied by the CA in a Resolution[17] dated March 18, 2005. The CA stated that it would have been more sympathetic to the pleas of the petitioner had the procedural flaws been isolated and non-jurisdictional.











Aggrieved, petitioner CIR seeks relief from this Court via this petition for review anchored on the following:

I THE COURT OF APPEALS ERRED IN DISMISSING THE AMENDED PETITION FOR REVIEW DATED MAY 16, 2002 ON PURE TECHNICALITY AND IN NOT ADJUDICATING THE CASE ON THE MERITS CONSIDERING ITS IMPORTANCE AS IT INVOLVES AN ENORMOUS AMOUNT OF MONEY WHICH THE GOVERNMENT STANDS TO LOSE SHOULD THE PETITION BE DISMISSED OUTRIGHT. II THE COURT OF APPEALS ERRED IN HASTILY DISMISSING THE AMENDED PETITION FOR REVIEW CONSIDERING THAT THE PETITIONER HAS MERITORIOUS GROUNDS SHOWING WANT OF BASIS OF RESPONDENT’S CLAIM FOR REFUND IN THE AMOUNT OF P15,036,891.26, THEREBY DEPRIVING THE GOVERNMENT OT ITS RIGHT TO DUE PROCESS.[18] On February 22, 2006, the Court resolved to give due course to the petition and directed the parties to submit their respective memoranda within thirty (30) days from notice.[19]

Petitioner and respondent filed their respective memoranda.[20] It appears that the only issue to be resolved by this Court is whether or not the Court of Appeals correctly dismissed the original Petition for Review, and denied admission of the Amended Petition for Review. We resolve the issue in the affirmative.

The then applicable rule, Rule 43 of the Rules of Court,[21] provided: SECTION 1. Scope.—This Rule shall apply to appeals from judgments or final orders of the Court of Tax Appeals and from awards, judgments, final orders or resolutions of or authorized by any quasi-judicial agency in the exercise of its quasi-judicial functions. Among these agencies are the Civil Service Commission, Central Board of Assessment Appeals, Securities and Exchange Commission, Office of the President, Land Registration Authority, Social Security Commission, Civil Aeronautics Board, Bureau of Patents, Trademarks and Technology Transfer, National Electrification Administration, Energy Regulatory Board, National Telecommunications Commission, Department of Agrarian Reform under Republic Act No. 6657, Government Service Insurance System, Employees Compensation Commission, Agricultural Inventions Board, Insurance Commission, Philippine Atomic Energy Commission, Board of Investments, Construction Industry Arbitration Commission, and voluntary arbitrators authorized by law. (n)

x x x x x x x x x SEC. 3. Where to appeal.—An appeal under this Rule may be taken to the Court of Appeals within the period and in the manner herein provided, whether the appeal involves questions of fact, of law, or mixed questions of fact and law. (n) SEC. 4. Period of appeal.—The appeal shall be taken within fifteen (15) days from notice of the award, judgment, final order or resolution, or from the date of its last publication, if publication is required by law for its effectivity, or of the denial of petitioner’s motion for new trial or reconsideration duly filed in accordance with the governing law of the court or agency aquo. Only one (1) motion for reconsideration shall be allowed. Upon proper motion and the payment of the full amount of the docket fee before the expiration of the reglementary period, the Court of Appeals may grant an additional period of fifteen (15) days only within which to file the petition for review. No further extension shall be granted except for the most compelling reason and in no case to exceed fifteen (15) days. (n)”

The right to appeal is not a natural right. It is also not part of due process. It is merely a statutory privilege and may be exercised only in the manner and in accordance with the provisions of law. Thus, one who seeks to avail of the right to appeal must comply with the requirements of the Rules. Failure to do so often leads to the loss of the right to appeal.[22]

The failure to timely perfect an appeal cannot simply be dismissed as a mere technicality, for it is jurisdictional.[23] Thus: Nor can petitioner invoke the doctrine that rules of technicality must yield to the broader interest of substantial justice. While every litigant must be given the amplest opportunity for the proper and just determination of his cause, free from the constraints of technicalities, the failure to perfect an appeal within the reglementary period is








not a mere technicality. It raises a jurisdictional problem as it deprives the appellate court of jurisdiction over the appeal. The failure to file the notice of appeal within the reglementary period is akin to the failure to pay the appeal fee within the prescribed period. In both cases, the appeal is not perfected in due time .[24] [Emphases supplied] As to the claim that the government would suffer loss of substantial amount if not allowed to recover the tax refund in the amount of more than P15M, the Court is of the view that said problem has been caused by petitioner’s own doing or undoing. While We understand its counsel’s predicament of being burdened with a heavy case load, We cannot always rule in favor of the Government. In this case, petitioner even failed to sufficiently explain its failure to observe the Rules. Petitioner merely pointed out that due to plain oversight, the motions for extension of time and the petition for review that it filed were erroneously titled as “Fort Bonifacio Development Corporation v. Commissioner of Internal Revenue” when it should have been “Commissioner of Internal Revenue v. Fort Bonifacio Development Corporation;”[25] that “on the assumption that it was respondent which filed the motion, the Court of Appeals, in its Resolution dated January 29, 2002, denied the motion for extension of time to file petition for review on the ground of failure to pay docket and other legal fees;”[26] that respondent filed a manifestation stating that the case was incorrectly titled as it was not the one who appealed the CTA decision to the CA;[27] and that in order to rectify the error, petitioner filed an Amended Petition for Review.[28] To recognize the foregoing statements would render the mandatory rule on appeals meaningless and nugatory. The point of reference of Our discussion is not the CA’s Resolution dated January 29, 2002 but its January 27, 2003Resolution. Records bear out that the assailed January 27, 2003 Resolution reiterated the dismissal of the petition for review and thus denied the admission of the amended petition but NOT on the basis of the earlier (January 29, 2002) resolution dismissing the petition for non-payment of docket and other legal fees as there was clearly an error in the designation of FBDC as petitioner in the first motion for extension of time filed by the CIR. Indeed, the CIR is exempted from payment of docket and other legal fees, as a government official representing the BIR. It bears emphasizing that the dismissal of the petition for review and the denial of the amended petition were premised rather on: (1) the late filing of the original petition for review by the CIR; (2) the absence of a motion for reconsideration of the January 29, 2002 Resolution; and (3) lack of authority of Atty. Alberto R. Bomediano, Jr., legal officer of the BIR Region 8, Makati City, to pursue the case on behalf of petitioner CIR.[29] It has been ruled that perfection of an appeal in the manner and within the period laid down by law is not only mandatory but also jurisdictional. The failure to perfect an appeal as required by the rules has the effect of defeating the right to appeal of a party and precluding the appellate court from acquiring jurisdiction over the case. At the risk of being repetitious, We declare that the right to appeal is not a natural right nor a part of due process. It is merely a statutory privilege, and may be exercised only in the manner and in accordance with the provisions of the law. Public policy and sound practice demand that judgments of courts should become final and irrevocable at some definite time fixed by law. Such rules are necessary incidents to the proper, efficient and orderly discharge of judicial functions. Just as a losing party has the privilege to file an appeal within the prescribed period, so does the winner also have the correlative right to enjoy the fruits of his victory. Failure to meet the requirements of an appeal deprives the appellate court of jurisdiction to entertain any appeal.[30] Undeniably, there are exceptions to this rule. Petitioner, however, did not present any circumstances that would justify the relaxation of said rule.

It need not be overemphasized that it is the responsibility of the counsel to check and keep track of the period of time left to file an appeal. He cannot escape from the inflexible observance of this rule which is jurisdictional. The rules, particularly on the statutory requirement for perfecting an appeal within the reglementary period provided, must be strictly followed. If an appeal is not taken within the period prescribed therefor, the judgment becomes final and the court loses all jurisdiction over the case.










ANGELES CITY, G.R. No. 166134Petitioner,

Present:

- versus - CORONA, C. J., Chairperson, VELASCO, JR., LEONARDO-DE CASTRO,

ANGELES CITY ELECTRIC DEL CASTILLO, andCORPORATION and PEREZ, JJ.REGIONAL TRIAL COURT BRANCH 57, ANGELES CITY, Promulgated:

Respondents. June 29, 2010

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

D E C I S I O N

DEL CASTILLO, J.: The prohibition on the issuance of a writ of injunction to enjoin the collection of taxes applies only to national internal revenue taxes, and not to local taxes. This Petition[1] for Certiorari under Rule 65 of the Rules of Court seeks to set aside the Writ of Preliminary Injunction issued by the Regional Trial Court (RTC) of Angeles City, Branch 57, in Civil Case No. 11401, enjoining Angeles City and its City Treasurer from levying, seizing, disposing and selling at public auction the properties owned by Angeles Electric Corporation (AEC).Factual Antecedents On June 18, 1964, AEC was granted a legislative franchise under Republic Act No. (RA) 4079[2] to construct, maintain and operate an electric light, heat, and power system for the purpose of generating and distributing electric light, heat and power for sale in Angeles City, Pampanga. Pursuant to Section 3-A thereof,[3] AEC’s payment of franchise tax for gross earnings from electric current sold was in lieu of all taxes, fees and assessments. On September 11, 1974, Presidential Decree No. (PD) 551 reduced the franchise tax of electric franchise holders. Section 1 of PD 551 provided that: SECTION 1. Any provision of law or local ordinance to the contrary notwithstanding, the franchise tax payable by all grantees of franchises to generate, distribute and sell electric current for light, heat and power shall be two percent (2%) of their gross receipts received from the sale of electric current and from transactions incident to the generation, distribution and sale of electric current. Such franchise tax shall be payable to the Commissioner of Internal Revenue or his duly authorized representative on or before the twentieth day of the month following the end of each calendar quarter or month as may be provided in the respective franchise or pertinent municipal regulation and shall, any provision of the Local Tax Code or any other law to the contrary notwithstanding, be in lieu of all taxes and assessments of whatever nature imposed by any national or local authority on earnings, receipts, income and privilege of generation, distribution and sale of electric current. On January 1, 1992, RA 7160 or the Local Government Code (LGC) of 1991 was passed into law, conferring upon provinces and cities the power, among others, to impose tax on businesses enjoying franchise.[4] In accordance with the LGC, theSangguniang Panlungsod of Angeles City enacted on December 23, 1993 Tax Ordinance No. 33, S-93, otherwise known as the Revised Revenue Code of Angeles City (RRCAC). On February 7, 1994, a petition seeking the reduction of the tax rates and a review of the provisions of the RRCAC was filed with the Sangguniang Panlungsod by Metro Angeles Chamber of Commerce and Industry Inc. (MACCI) of which AEC is a member. There being no action taken by the Sangguniang Panlungsod on the matter, MACCI elevated the petition[5] to the Department of Finance, which referred the same to the Bureau of Local Government Finance (BLGF). In the petition, MACCI alleged that the RRCAC is oppressive, excessive, unjust and confiscatory; that it was published only once, simultaneously


onJanuary 22, 1994; and that no public hearings were conducted prior to its enactment. Acting on the petition, the BLGF issued a First Indorsement[6] to the City Treasurer of Angeles City, instructing the latter to make representations with the Sangguniang Panlungsod for the appropriate amendment of the RRCAC in order to ensure compliance with the provisions of the LGC, and to make a report on the action taken within five days. Thereafter, starting July 1995, AEC has been paying the local franchise tax to the Office of the City Treasurer on a quarterly basis, in addition to the national franchise tax it pays every quarter to the Bureau of Internal Revenue (BIR). Proceedings before the City Treasurer On January 22, 2004, the City Treasurer issued a Notice of Assessment[7] to AEC for payment of business tax, license fee and other charges for the period 1993 to 2004 in the total amount of P94,861,194.10. Within the period prescribed by law, AEC protested the assessment claiming that: (a) pursuant to RA 4079, it is exempt from paying local business tax; (b) since it is already paying franchise tax on business, the payment of business tax would result in double taxation; (c) the period to assess had prescribed because under the LGC, taxes and fees can only be assessed and collected within five (5) years from the date they become due; and (d) the assessment and collection of taxes under the RRCAC cannot be made retroactive to 1993 or prior to its effectivity.[8]

On February 17, 2004, the City Treasurer denied the protest for lack of merit and requested AEC to settle its tax liabilities.[9]

Proceedings before the RTC Aggrieved, AEC appealed the denial of its protest to the RTC of Angeles City via a Petition for Declaratory Relief,[10]docketed as Civil Case No. 11401. On April 5, 2004, the City Treasurer levied on the real properties of AEC.[11] A Notice of Auction Sale[12] was published and posted announcing that a public auction of the levied properties of AEC would be held on May 7, 2004. This prompted AEC to file with the RTC, where the petition for declaratory relief was pending, an Urgent Motion for Issuance of Temporary Restraining Order and/or Writ of Preliminary Injunction[13] to enjoin Angeles City and its City Treasurer from levying, annotating the levy, seizing, confiscating, garnishing, selling and disposing at public auction the properties of AEC. Meanwhile, in response to the petition for declaratory relief filed by AEC, Angeles City and its City Treasurer filed an Answer with Counterclaim[14] to which AEC filed a Reply.[15]

After due notice and hearing, the RTC issued a Temporary Restraining Order (TRO)[16] on May 4, 2004, followed by an Order[17] dated May 24, 2004 granting the issuance of a Writ of Preliminary Injunction, conditioned upon the filing of a bond in the amount of P10,000,000.00. Upon AEC’s posting of the required bond, the RTC issued a Writ of Preliminary Injunction on May 28, 2004,[18] which was amended on May 31, 2004 due to some clerical errors.[19]

On August 5, 2004, Angeles City and its City Treasurer filed a “Motion for Dissolution of Preliminary Injunction and Motion for Reconsideration of the Order dated May 24, 2004,”[20] which was opposed by AEC.[21]

Finding no compelling reason to disturb and reconsider its previous findings, the RTC denied the joint motion on October 14, 2004.[22]

Issue

Being a special civil action for certiorari, the issue in the instant case is limited to the determination of whether the RTC gravely abused its discretion in issuing the writ of preliminary injunction enjoining Angeles City and its City Treasurer from levying, selling, and disposing the properties of AEC. All other matters pertaining to the validity of the tax assessment and AEC’s tax exemption must therefore be left for the determination of the RTC where the main case is pending decision.

Petitioner’s Arguments


Petitioner’s main argument is that the collection of taxes cannot be enjoined by the RTC, citing Valley Trading Co., Inc. v. Court of First Instance of Isabela, Branch II,[23] wherein the lower court’s denial of a motion for the issuance of a writ of preliminary injunction to enjoin the collection of a local tax was upheld. Petitioner further reasons that since the levy and auction of the properties of a delinquent taxpayer are proper and lawful acts specifically allowed by the LGC, these cannot be the subject of an injunctive writ. Petitioner likewise insists that AEC must first pay the tax before it can protest the assessment. Finally, petitioner contends that the tax exemption claimed by AEC has no legal basis because RA 4079 has been expressly repealed by the LGC. Private respondent’s Arguments Private respondent AEC on the other hand asserts that there was no grave abuse of discretion on the part of the RTC in issuing the writ of preliminary injunction because it was issued after due notice and hearing, and was necessary to prevent the petition from becoming moot. In addition, AEC claims that the issuance of the writ of injunction was proper since the tax assessment issued by the City Treasurer is not yet final, having been seasonably appealed pursuant to Section 195[24] of the LGC. AEC likewise points out that following the case of Pantoja v. David,[25] proceedings to invalidate a warrant of distraint and levy to restrain the collection of taxes do not violate the prohibition against injunction to restrain the collection of taxes because the proceedings are directed at the right of the City Treasurer to collect the tax by distraint or levy. As to its tax liability, AEC maintains that it is exempt from paying local business tax. In any case, AEC counters that the issue of whether it is liable to pay the assessed local business tax is a factual issue that should be determined by the RTC and not by the Supreme Court via a petition for certiorari under Rule 65 of the Rules of Court.

Our Ruling

We find the petition bereft of merit. The LGC does not specifically prohibit an injunction enjoining the collection of taxes A principle deeply embedded in our jurisprudence is that taxes being the lifeblood of the government should be collected promptly,[26] without unnecessary hindrance[27] or delay.[28] In line with this principle, the National Internal Revenue Code of 1997 (NIRC) expressly provides that no court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the code.[29] An exception to this rule obtains only when in the opinion of the Court of Tax Appeals (CTA) the collection thereof may jeopardize the interest of the government and/or the taxpayer.[30] The situation, however, is different in the case of the collection of local taxes as there is no express provision in the LGC prohibiting courts from issuing an injunction to restrain local governments from collecting taxes. Thus, in the case of Valley Trading Co., Inc. v. Court of First Instance of Isabela, Branch II, cited by the petitioner, we ruled that: Unlike the National Internal Revenue Code, the Local Tax Code[31] does not contain any specific provision prohibiting courts from enjoining the collection of local taxes. Such statutory lapse or intent, however it may be viewed, may have allowed preliminary injunction where local taxes are involved but cannot negate the procedural rules and requirements under Rule 58.[32]

In light of the foregoing, petitioner’s reliance on the above-cited case to support its view that the collection of taxes cannot be enjoined is misplaced. The lower court’s denial of the motion for the issuance of a writ of preliminary injunction to enjoin the collection of the local tax was upheld in that case, not because courts are prohibited from granting such injunction, but because the circumstances required for the issuance of writ of injunction were not present. Nevertheless, it must be emphasized that although there is no express prohibition in the LGC, injunctions enjoining the collection of local taxes are frowned upon. Courts therefore should exercise extreme caution in issuing such injunctions. No grave abuse of discretion was committed by the RTC Section 3, Rule 58, of the Rules of Court lays down the requirements for the issuance of a writ of preliminary injunction, viz: (a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in restraining the commission or continuance of the acts complained of, or in the performance of an act or acts, either for a limited period or perpetually; (b) That the commission, continuance or non-performance of the act or acts complained of during the litigation would probably work injustice to the applicant; or


(c) That a party, court, or agency or a person is doing, threatening, or attempting to do, or is procuring or suffering to be done, some act or acts probably in violation of the rights of the applicant respecting the subject of the action or proceeding, and tending to render the judgment ineffectual. Two requisites must exist to warrant the issuance of a writ of preliminary injunction, namely: (1) the existence of a clear and unmistakable right that must be protected; and (2) an urgent and paramount necessity for the writ to prevent serious damage.[33]

In issuing the injunction, the RTC ratiocinated that: It is very evident on record that petitioner[34] resorted and filed an urgent motion for issuance of a temporary restraining order and preliminary injunction to stop the scheduled auction sale only when a warrant of levy was issued and published in the newspaper setting the auction sale of petitioner’s property by the City Treasurer, merely few weeks after the petition for declaratory relief has been filed, because if the respondent will not be restrained, it will render this petition moot and academic. To the mind of the Court, since there is no other plain, speedy and adequate remedy available to the petitioner in the ordinary course of law except this application for a temporary restraining order and/or writ of preliminary injunction to stop the auction sale and/or to enjoin and/or restrain respondents from levying, annotating the levy, seizing, confiscating, garnishing, selling and disposing at public auction the properties of petitioner, or otherwise exercising other administrative remedies against the petitioner and its properties, this alone justifies the move of the petitioner in seeking the injunctive reliefs sought for. Petitioner in its petition is questioning the assessment or the ruling of the City Treasurer on the business tax and fees, and not the local ordinance concerned. This being the case, the Court opines that notice is not required to the Solicitor General since what is involved is just a violation of a private right involving the right of ownership and possession of petitioner’s properties. Petitioner, therefore, need not comply with Section 4, Rule 63 requiring such notice to the Office of the Solicitor General. The Court is fully aware of the Supreme Court pronouncement that injunction is not proper to restrain the collection of taxes. The issue here as of the moment is the restraining of the respondent from pursuing its auction sale of the petitioner’s properties. The right of ownership and possession of the petitioner over the properties subject of the auction sale is at stake. Respondents assert that not one of the witnesses presented by the petitioner have proven what kind of right has been violated by the respondent, but merely mentioned of an injury which is only a scenario based on speculation because of petitioner’s claim that electric power may be disrupted. Engr. Abordo’s testimony reveals and even his Affidavit Exhibit “S” showed that if the auction sale will push thru, petitioner will not only lose control and operation of its facility, but its employees will also be denied access to equipments vital to petitioner’s operations, and since only the petitioner has the capability to operate Petersville sub station, there will be a massive power failure or blackout which will adversely affect business and economy, if not lives and properties in Angeles City and surrounding communities. Petitioner, thru its witnesses, in the hearing of the temporary restraining order, presented sufficient and convincing evidence proving irreparable damages and injury which were already elaborated in the temporary restraining order although the same may be realized only if the auction sale will proceed. And unless prevented, restrained, and enjoined, grave and irreparable damage will be suffered not only by the petitioner but all its electric consumers in Angeles, Clark, Dau and Bacolor, Pampanga. The purpose of injunction is to prevent injury and damage from being incurred, otherwise, it will render any judgment in this case ineffectual. “As an extraordinary remedy, injunction is calculated to preserve or maintain the status quo of things and is generally availed of to prevent actual or threatened acts, until the merits of the case can be heard” (Cagayan de Oro City Landless Res. Assn. Inc. vs. CA, 254 SCRA 220) It appearing that the two essential requisites of an injunction have been satisfied, as there exists a right on the part of the petitioner to be protected, its right[s] of ownership and possession of the properties subject of the auction sale, and that the acts (conducting an auction sale) against which the injunction is to be directed, are violative of the said rights of the petitioner, the Court has no other recourse but to grant the prayer for the issuance of a writ of preliminary injunction considering that if the respondent will not be restrained from doing the acts complained of, it will preempt the Court from properly adjudicating on the merits the various issues between the parties, and will render moot and academic the proceedings before this court.[35]


As a rule, the issuance of a preliminary injunction rests entirely within the discretion of the court taking cognizance of the case and will not be interfered with, except where there is grave abuse of discretion committed by the court. [36] For grave abuse of discretion to prosper as a ground for certiorari, it must be demonstrated that the lower court or tribunal has exercised its power in an arbitrary and despotic manner, by reason of passion or personal hostility, and it must be patent and gross as would amount to an evasion or to a unilateral refusal to perform the duty enjoined or to act in contemplation of law.[37] In other words, mere abuse of discretion is not enough.[38]

Guided by the foregoing, we find no grave abuse of discretion on the part of the RTC in issuing the writ of injunction. Petitioner, who has the burden to prove grave abuse of discretion,[39] failed to show that the RTC acted arbitrarily and capriciously in granting the injunction. Neither was petitioner able to prove that the injunction was issued without any factual or legal justification. In assailing the injunction, petitioner primarily relied on the prohibition on the issuance of a writ of injunction to restrain the collection of taxes. But as we have already said, there is no such prohibition in the case of local taxes. Records also show that before issuing the injunction, the RTC conducted a hearing where both parties were given the opportunity to present their arguments. During the hearing, AEC was able to show that it had a clear and unmistakable legal right over the properties to be levied and that it would sustain serious damage if these properties, which are vital to its operations, would be sold at public auction. As we see it then, the writ of injunction was properly issued. A final note. While we are mindful that the damage to a taxpayer’s property rights generally takes a back seat to the paramount need of the State for funds to sustain governmental functions,[40] this rule finds no application in the instant case where the disputed tax assessment is not yet due and demandable. Considering that AEC was able to appeal the denial of its protest within the period prescribed under Section 195 of the LGC, the collection of business taxes [41] through levy at this time is, to our mind, hasty, if not premature.[42] The issues of tax exemption, double taxation, prescription and the alleged retroactive application of the RRCAC, raised in the protest of AEC now pending with the RTC, must first be resolved before the properties of AEC can be levied. In the meantime, AEC’s rights of ownership and possession must be respected. WHEREFORE, the petition is hereby DISMISSED. SO ORDERED.


CHAMBER OF REAL G.R. No. 160756ESTATE AND BUILDERS’ASSOCIATIONS, INC., Petitioner, - v e r s u s

THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO,THE HON. ACTING SECRETARY OFFINANCE JUANITA D. AMATONG,and THE HON. COMMISSIONER OFINTERNAL REVENUE GUILLERMOPARAYNO, JR.,Respondents. Promulgated: March 9, 2010 x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

D E C I S I O N

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

Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents. Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and creditable withholding tax (CWT) on sales of real properties classified as ordinary assets. Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98. Petitioner argues that the MCIT violates the due process clause because it levies income tax even if there is no realized gain. Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of CWT on the sale of real properties categorized as ordinary assets. Petitioner contends that these revenue regulations are contrary to law for two reasons: first, they ignore the different treatment by RA 8424 of ordinary assets and capital assets and second, respondent Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross selling price or fair market value of the real properties classified as ordinary assets. Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due process clause because, like the MCIT, the government collects income tax even when the net income has not yet been determined. They contravene the equal protection clause as well because the CWT is being levied upon real estate enterprises but not on other business enterprises, more particularly those in the manufacturing sector. The issues to be resolved are as follows: (1) whether or not this Court should take cognizance of the present case;(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and(3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

OVERVIEW OF THE ASSAILED PROVISIONS


http://sc.judiciary.gov.ph/jurisprudence/2010/march2010/160756.htm#_ftn3



Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of 2% of its gross income when such MCIT is greater than the normal corporate income tax imposed under Section 27(A).[4] If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT. Any excess of the MCIT over the normal tax shall be carried forward and credited against the normal income tax for the three immediately succeeding taxable years. Section 27(E) of RA 8424 provides: Section 27 (E). [MCIT] on Domestic Corporations. - (1) Imposition of Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year. (2) Carry Forward of Excess Minimum Tax. – Any excess of the [MCIT] over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years. (3) Relief from the [MCIT] under certain conditions. – The Secretary of Finance is hereby authorized to suspend the imposition of the [MCIT] on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulations that shall define the terms and conditions under which he may suspend the imposition of the [MCIT] in a meritorious case. (4) Gross Income Defined. – For purposes of applying the [MCIT] provided under Subsection (E) hereof, the term ‘gross income’ shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. “Cost of goods sold” shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. For trading or merchandising concern, “cost of goods sold” shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. For a manufacturing concern, “cost of goods manufactured and sold” shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of service, “gross income” means gross receipts less sales returns, allowances, discounts and cost of services. “Cost of services” shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, that in the case of banks, “cost of services” shall include interest expense. On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the Commissioner of Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E).[5] The pertinent portions thereof read: Sec. 2.27(E) [MCIT] on Domestic Corporations. – (1) Imposition of the Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year (whether calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon any domestic corporation beginning the fourth (4th) taxable year immediately following the taxable year in which such corporation commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of minimum corporate income tax is greater than the normal income tax due from such corporation. For purposes of these Regulations, the term, “normal income tax” means the income tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1, 2000 and thereafter.




xxx xxx xxx (2) Carry forward of excess [MCIT]. – Any excess of the [MCIT] over the normal income tax as computed under Sec. 27(A) of the Code shall be carried forward on an annual basis and credited against the normal income tax for the three (3) immediately succeeding taxable years. xxx xxx xxx Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR, promulgated RR 2-98 implementing certain provisions of RA 8424 involving the withholding of taxes. [6] Under Section 2.57.2(J) of RR No. 2-98, income payments from the sale, exchange or transfer of real property, other than capital assets, by persons residing in the Philippines and habitually engaged in the real estate business were subjected to CWT: Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon: xxx xxx xxx (J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of. – Real property, other than capital assets, sold by an individual, corporation, estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate business in accordance with the following schedule –

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

exchange, as determined in the Income Tax Regulations shall be used. Where the consideration or part thereof is payable on installment, no withholding tax is required to be made on the periodic installment payments where the buyer is an individual not engaged in trade or business. In such a case, the applicable rate of tax based on the entire consideration shall be withheld on the last installment or installments to be paid to the seller. However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall be deducted and withheld by the buyer on every installment. This provision was amended by RR 6-2001 on July 31, 2001:Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon: xxx xxx xxx(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of real property classified as ordinary asset. - A [CWT] based on the gross selling price/total amount of consideration or the fair market value determined in accordance with Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be imposed upon the withholding agent,/buyer, in accordance with the following schedule:

Where the seller/transferor is exempt from [CWT] in accordance with Sec. 2.57.5 of these regulations.

Exempt


Those which are exempt from a withholding tax at source as prescribed in Sec. 2.57.5 of these regulations.

Exempt

With a selling price of five hundred thousand pesos (P500,000.00) or less.

1.5%

With a selling price of more than five hundred thousand pesos (P500,000.00) but not more than two million pesos (P2,000,000.00).

3.0%

With selling price of more than two million pesos (P2,000,000.00)

5.0%


Upon the following values of real property, where the seller/transferor is habitually engaged in the real estate business.

With a selling price of Five Hundred Thousand Pesos (P500,000.00) or less.

1.5%

With a selling price of more than Five Hundred Thousand Pesos (P500,000.00) but not more than Two Million Pesos (P2,000,000.00).

3.0%

With a selling price of more than two Million Pesos (P2,000,000.00).

5.0%

xxx xxx xxx Gross selling price shall remain the consideration stated in the sales document or the fair market value determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange, the fair market value of the property received in exchange shall be considered as the consideration. xxx xxx xxx However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall apply: (i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not exceed 25% of the selling price), the tax shall be deducted and withheld by the buyer on every installment. (ii) If, on the other hand, the sale is on a “cash basis” or is a “deferred-payment sale not on the installment plan” (that is, payments in the year of sale exceed 25% of the selling price), the buyer shall withhold the tax based on the gross selling price or fair market value of the property, whichever is higher, on the first installment. In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the [CWT] due on the sale, transfer or exchange of real property other than capital asset has been fully paid. (Underlined amendments in the original) Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or exchange subject to the CWT will not be recorded by the Registry of Deeds until the CIR has certified that such transfers and conveyances have been reported and the taxes thereof have been duly paid:[7]

Sec. 2.58.2. Registration with the Register of Deeds. – Deeds of conveyances of land or land and building/improvement thereon arising from sales, barters, or exchanges subject to the creditable expanded withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his duly authorized representative has certified that such transfers and conveyances have been reported and the expanded withholding tax, inclusive of the documentary stamp tax, due thereon have been fully paid xxxx. On February 11, 2003, RR No. 7-2003[8] was promulgated, providing for the guidelines in determining whether a particular real property is a capital or an ordinary asset for purposes of imposing the MCIT, among others. The pertinent portions thereof state: Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived from sale, exchange, or other disposition of real properties shall, unless otherwise exempt, be subject to applicable taxes imposed under the Code, depending on whether the subject properties are classified as capital assets or ordinary assets; a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident aliens engaged in trade or business in the Philippines; xxx xxx xxx




(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income. xxx xxx xxx c. In the case of domestic corporations. – xxx xxx xxx (ii) The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may become subject to the [MCIT] under Sec. 27(E) of the Code, whichever is applicable. xxx xxx xxx We shall now tackle the issues raised.

EXISTENCE OF A JUSTICIABLE CONTROVERSY

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

Respondents aver that the first three requisites are absent in this case. According to them, there is no actual case calling for the exercise of judicial power and it is not yet ripe for adjudication because [petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed by the BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did petitioner allege that its members have shut down their businesses as a result of the payment of the MCIT or CWT. Petitioner has raised concerns in mere abstract and hypothetical form without any actual, specific and concrete instances cited that the assailed law and revenue regulations have actually and adversely affected it. Lacking empirical data on which to base any conclusion, any discussion on the constitutionality of the MCIT or CWT on sales of real property is essentially an academic exercise. Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating abstract issues. Otherwise, adjudication would be no different from the giving of advisory opinion that does not really settle legal issues.[10]

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

Contrary to respondents’ assertion, we do not have to wait until petitioner’s members have shut down their operations as a result of the MCIT or CWT. The assailed provisions are already being implemented. As we stated in Didipio Earth-Savers’ Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:[13] By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said to have ripened into a judicial controversy even without any other overt act. Indeed, even a singular violation of the Constitution and/or the law is enough to awaken judicial duty.[14]

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








Respondents next argue that petitioner has no legal standing to sue: Petitioner is an association of some of the real estate developers and builders in the Philippines. Petitioners did not allege that [it] itself is in the real estate business. It did not allege any material interest or any wrong that it may suffer from the enforcement of [the assailed provisions].[15]

Legal standing or locus standi is a party’s personal and substantial interest in a case such that it has sustained or will sustain direct injury as a result of the governmental act being challenged.[16] In Holy Spirit Homeowners Association, Inc. v. Defensor,[17]we held that the association had legal standing because its members stood to be injured by the enforcement of the assailed provisions: Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute that the individual members of petitioner association are residents of the NGC. As such they are covered and stand to be either benefited or injured by the enforcement of the IRR, particularly as regards the selection process of beneficiaries and lot allocation to qualified beneficiaries. Thus, petitioner association may assail those provisions in the IRR which it believes to be unfavorable to the rights of its members. xxx Certainly, petitioner and its members have sustained direct injury arising from the enforcement of the IRR in that they have been disqualified and eliminated from the selection process.[18]

In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the requirements of an actual case, ripeness or legal standing when paramount public interest is involved.[19] The questioned MCIT and CWT affect not only petitioners but practically all domestic corporate taxpayers in our country. The transcendental importance of the issues raised and their overreaching significance to society make it proper for us to take cognizance of this petition.[20] CONCEPT AND RATIONALE OF THE MCIT The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation system. It came about as a result of the perceived inadequacy of the self-assessment system in capturing the true income of corporations.[21] It was devised as a relatively simple and effective revenue-raising instrument compared to the normal income tax which is more difficult to control and enforce. It is a means to ensure that everyone will make some minimum contribution to the support of the public sector. The congressional deliberations on this are illuminating: Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting constantly a loss in their operations to avoid the payment of taxes, and thus avoid sharing in the cost of government. In this regard, the Tax Reform Act introduces for the first time a new concept called the [MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in the country and for administrative convenience. … This will go a long way in ensuring that corporations will pay their just share in supporting our public life and our economic advancement.[22]

Domestic corporations owe their corporate existence and their privilege to do business to the government. They also benefit from the efforts of the government to improve the financial market and to ensure a favorable business climate. It is therefore fair for the government to require them to make a reasonable contribution to the public expenses. Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report minimal or negative net income resulting in minimal or zero income taxes year in and year out, through under-declaration of income or over-deduction of expenses otherwise called tax shelters.[23]

Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy, that is why they have proposed the [MCIT]. Because from experience too, you have corporations which have been losing year in and year out and paid no tax. So, if the corporation has been losing for the past five years to ten years, then that corporation has no business to be in business. It is dead. Why continue if you are losing year in and year out? So, we have this provision to avoid this type of tax shelters, Your Honor.[24] The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after operations of a corporation or consistent reports of minimal net income render its financial statements and its tax payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are allowed in our jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes achieved through sophisticated and artful manipulations of deductions and other stratagems. Since the tax base was broader, the tax rate was lowered.












To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the law: First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures, the imposition of the MCIT commences only on the fourth taxable year immediately following the year in which the corporation commenced its operations.[25] This grace period allows a new business to stabilize first and make its ventures viable before it is subjected to the MCIT.[26]

Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax which shall be credited against the normal income tax for the three immediately succeeding years.[27] Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force majeure and legitimate business reverses.[28] Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries already had their own system of minimum corporate income taxation. Our lawmakers noted that most developing countries, particularly Latin American and Asian countries, have the same form of safeguards as we do. As pointed out during the committee hearings: [Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for underdeclaration of gross receipts have this same form of safeguards. In the case of Thailand, half a percent (0.5%), there’s a minimum of income tax of half a percent (0.5%) of gross assessable income. In Korea a 25% of taxable income before deductions and exemptions. Of course the different countries have different basis for that minimum income tax. The other thing you’ll notice is the preponderance of Latin American countries that employed this method. Okay, those are additional Latin American countries.[29]

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

MCIT IS NOT VIOLATIVE OF DUE PROCESS

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of law. It explains that gross income as defined under said provision only considers the cost of goods sold and other direct expenses; other major expenditures, such as administrative and interest expenses which are equally necessary to produce gross income, were not taken into account.[31] Thus, pegging the tax base of the MCIT to a corporation’s gross income is tantamount to a confiscation of capital because gross income, unlike net income, is not “realized gain.”[32] We disagree. Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The exercise of taxing power derives its source from the very existence of the State whose social contract with its citizens obliges it to promote public interest and the common good.[33]

Taxation is an inherent attribute of sovereignty.[34] It is a power that is purely legislative.[35] Essentially, this means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation.[36] It has the authority to prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its jurisdiction. In other words, the legislature wields the power to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and where it shall be imposed. As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the tax) to its constituency who are to pay it.[37] Nevertheless, it is circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation carries a presumption of constitutionality.















The constitutional safeguard of due process is embodied in the fiat “[no] person shall be deprived of life, liberty or property without due process of law.” In Sison, Jr. v. Ancheta, et al.,[38] we held that the due process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure[39] when it amounts to a confiscation of property.[40] But in the same case, we also explained that we will not strike down a revenue measure as unconstitutional (for being violative of the due process clause) on the mere allegation of arbitrariness by the taxpayer.[41] There must be a factual foundation to such an unconstitutional taint.[42] This merely adheres to the authoritative doctrine that, where the due process clause is invoked, considering that it is not a fixed rule but rather a broad standard, there is a need for proof of such persuasive character.[43] Petitioner is correct in saying that income is distinct from capital.[44] Income means all the wealth which flows into the taxpayer other than a mere return on capital. Capital is a fund or property existing at one distinct point in time while income denotes a flow of wealth during a definite period of time.[45] Income is gain derived and severed from capital.[46] For income to be taxable, the following requisites must exist: (1) there must be gain;(2) the gain must be realized or received and(3) the gain must not be excluded by law or treaty from taxation.[47] Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital. The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods[48] and other direct expenses from gross sales. Clearly, the capital is not being taxed. Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporation’s gross income. Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the same time reducing the applicable tax rate.[49]

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or constitutional, unless it interferes with interstate commerce or violates the requirement as to uniformity of taxation.[50]

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

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system growing from large numbers of taxpayers with large incomes who were yet paying no taxes. xxx xxx xxx We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a rational means of obtaining a broad-based tax, and therefore is constitutional.[54]

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

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






















Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base of the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable. Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members nor does it present empirical data to show that the implementation of the MCIT resulted in the confiscation of their property. In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and confiscatory. The Court cannot strike down a law as unconstitutional simply because of its yokes.[58] Taxation is necessarily burdensome because, by its nature, it adversely affects property rights.[59] The party alleging the law’s unconstitutionality has the burden to demonstrate the supposed violations in understandable terms.[60]

RR 9-98 MERELY CLARIFIESSECTION 27(E) OF RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT is being imposed and collected even when there is actually a loss, or a zero or negative taxable income: Sec. 2.27(E) [MCIT] on Domestic Corporations. — (1) Imposition of the Tax. — xxx The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of [MCIT] is greater than the normal income tax due from such corporation. (Emphasis supplied) RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable income, merely defines the coverage of Section 27(E). This means that even if a corporation incurs a net loss in its business operations or reports zero income after deducting its expenses, it is still subject to an MCIT of 2% of its gross income. This is consistent with the law which imposes the MCIT on gross income notwithstanding the amount of the net income. But the law also states that the MCIT is to be paid only if it is greater than the normal net income. Obviously, it may well be the case that the MCIT would be less than the net income of the corporation which posts a zero or negative taxable income. We now proceed to the issues involving the CWT.

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

Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424, contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated “with grave abuse of discretion amounting to lack of jurisdiction” and “patently in contravention of law”[62] because they ignore such distinctions. Petitioner’s conclusion is based on the following premises: (a) the revenue regulations use gross selling price (GSP) or fair market value (FMV) of the real estate as basis for determining the income tax for the sale of real estate classified as ordinary assets and (b) they mandate the collection of income tax on a per transaction basis, i.e., upon consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the net income at the end of the taxable period.[63] Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents cannot disregard the distinctions set by the legislators as regards the tax base, modes of collection and payment of taxes on income from the sale of capital and ordinary assets. Petitioner’s arguments have no merit.

AUTHORITY OF THE SECRETARY OF FINANCE TO ORDER THE COLLECTION OF CWT ON SALES OF REAL PROPERTY CONSIDERED AS ORDINARY ASSETS








The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the necessary rules and regulations for the effective enforcement of the provisions of the law. Such authority is subject to the limitation that the rules and regulations must not override, but must remain consistent and in harmony with, the law they seek to apply and implement.[64] It is well-settled that an administrative agency cannot amend an act of Congress.[65] We have long recognized that the method of withholding tax at source is a procedure of collecting income tax which is sanctioned by our tax laws.[66] The withholding tax system was devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns and third, to improve the government’s cash flow.[67] This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through more complicated means and remedies.[68]

Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any person, national or juridical, residing in the Philippines. Such authority is derived from Section 57(B) of RA 8424 which provides: SEC. 57. Withholding of Tax at Source. – xxx xxx xxx (B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the [CIR], require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year. The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is imposed on the income payable and the tax is creditable against the income tax liability of the taxpayer for the taxable year.

EFFECT OF RRS ON THE TAX BASE FOR THE INCOME TAX OF INDIVIDUALS OR CORPORATIONS ENGAGED IN THE REAL ESTATE BUSINESS

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business’ income tax from net income to GSP or FMV of the property sold. Petitioner is wrong. The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its possible tax obligation.[69] They are installments on the annual tax which may be due at the end of the taxable year.[70]

Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets remains to be the entity’s net income imposed under Section 24 (resident individuals) or Section 27 (domestic corporations) in relation to Section 31 of RA 8424, i.e. gross income less allowable deductions. The CWT is to be deducted from the net income tax payable by the taxpayer at the end of the taxable year. [71] Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale of real property classified as ordinary assets remains to be the net taxable income: Section 4. – Applicable taxes on sale, exchange or other disposition of real property . - Gains/Income derived from sale, exchange, or other disposition of real properties shall unless otherwise exempt, be subject to applicable taxes imposed under the Code, depending on whether the subject properties are classified as capital assets or ordinary assets; xxx xxx xxx










a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident aliens engaged in trade or business in the Philippines; xxx xxx xxx (ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current [FMV] as determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income. xxx xxx xxx c. In the case of domestic corporations. The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may become subject to the [MCIT] under Sec. 27(E) of the same Code, whichever is applicable. (Emphasis supplied) Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes withheld (by the withholding agent/buyer) against its tax due. If the tax due is greater than the tax withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax withheld, the taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed on its net income. The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of practicality and convenience. Obviously, the withholding agent/buyer who is obligated to withhold the tax does not know, nor is he privy to, how much the taxpayer/seller will have as its net income at the end of the taxable year. Instead, said withholding agent’s knowledge and privity are limited only to the particular transaction in which he is a party. In such a case, his basis can only be the GSP or FMV as these are the only factors reasonably known or knowable by him in connection with the performance of his duties as a withholding agent.

NO BLURRING OF DISTINCTIONS BETWEEN ORDINARY ASSETS AND CAPITAL ASSETS

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the gain presumed to be realized from the sale of a capital asset based on its GSP or FMV. This final tax is also withheld at source.[72] The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary assets are not treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are distinguished as follows:

FWT CWTa) The amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income.

a) Taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income.

b)The liability for payment of the tax rests primarily on the payor as a withholding agent.

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

c) The payee is not required to file an income tax

c) The income recipient is still required to file an



return for the particular income.[73] income tax return, as prescribed in Sec. 51 and Sec. 52 of the NIRC, as amended.[74]

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the sale of ordinary assets. The inherent and substantial differences between FWT and CWT disprove petitioner’s contention that ordinary assets are being lumped together with, and treated similarly as, capital assets in contravention of the pertinent provisions of RA 8424. Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to the provisions of RA 8424 on the manner and time of filing of the return, payment and assessment of income tax involving ordinary assets.[75]

The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT. The withholding agent/buyer’s act of collecting the tax at the time of the transaction by withholding the tax due from the income payable is the essence of the withholding tax method of tax collection.

NO RULE THAT ONLY PASSIVEINCOMES CAN BE SUBJECT TO CWT

Petitioner submits that only passive income can be subjected to withholding tax, whether final or creditable. According to petitioner, the whole of Section 57 governs the withholding of income tax on passive income. The enumeration in Section 57(A) refers to passive income being subjected to FWT. It follows that Section 57(B) on CWT should also be limited to passive income: SEC. 57. Withholding of Tax at Source. — (A) Withholding of Final Tax on Certain Incomes. — Subject to rules and regulations, the [Secretary] may promulgate, upon the recommendation of the [CIR], requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code. (B) Withholding of Creditable Tax at Source. — The [Secretary] may, upon the recommendation of the [CIR], require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year. (Emphasis supplied) This line of reasoning is non sequitur. Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates these as passive income. The BIR defines passive income by stating what it is not: …if the income is generated in the active pursuit and performance of the corporation’s primary purposes, the same is not passive income…[76]

It is income generated by the taxpayer’s assets. These assets can be in the form of real properties that return rental income, shares of stock in a corporation that earn dividends or interest income received from savings. On the other hand, Section 57(B) provides that the Secretary can require a CWT on “income payable to natural or juridical persons, residing in the Philippines.” There is no requirement that this income be passive income. If that were the intent of Congress, it could have easily said so. Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to CWT. The former covers the kinds of passive income enumerated therein and the latter encompasses any income






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

NO DEPRIVATION OF PROPERTYWITHOUT DUE PROCESS

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets deprives its members of their property without due process of law because, in their line of business, gain is never assured by mere receipt of the selling price. As a result, the government is collecting tax from net income not yet gained or earned. Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the end of the taxable year. The seller will be able to claim a tax refund if its net income is less than the taxes withheld. Nothing is taken that is not due so there is no confiscation of property repugnant to the constitutional guarantee of due process. More importantly, the due process requirement applies to the power to tax.[79] The CWT does not impose new taxes nor does it increase taxes.[80] It relates entirely to the method and time of payment. Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers have to wait years and may even resort to litigation before they are granted a refund.[81] This argument is misleading. The practical problems encountered in claiming a tax refund do not affect the constitutionality and validity of the CWT as a method of collecting the tax. Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay labor wages, materials, cost of money and other expenses which can then save the entity from having to obtain loans entailing considerable interest expense. Petitioner also lists the expenses and pitfalls of the trade which add to the burden of the realty industry: huge investments and borrowings; long gestation period; sudden and unpredictable interest rate surges; continually spiraling development/construction costs; heavy taxes and prohibitive “up-front” regulatory fees from at least 20 government agencies.[82]

Petitioner’s lamentations will not support its attack on the constitutionality of the CWT. Petitioner’s complaints are essentially matters of policy best addressed to the executive and legislative branches of the government. Besides, the CWT is applied only on the amounts actually received or receivable by the real estate entity. Sales on installment are taxed on a per-installment basis.[83]Petitioner’s desire to utilize for its operational and capital expenses money earmarked for the payment of taxes may be a practical business option but it is not a fundamental right which can be demanded from the court or from the government. NO VIOLATION OF EQUAL PROTECTION Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT is being levied only on real estate enterprises. Specifically, petitioner points out that manufacturing enterprises are not similarly imposed a CWT on their sales, even if their manner of doing business is not much different from that of a real estate enterprise. Like a manufacturing concern, a real estate business is involved in a continuous process of production and it incurs costs and expenditures on a regular basis. The only difference is that “goods” produced by the real estate business are house and lot units.[84]

Again, we disagree. The equal protection clause under the Constitution means that “no person or class of persons shall be deprived of the same protection of laws which is enjoyed by other persons or other classes in the same place and in like circumstances.”[85] Stated differently, all persons belonging to the same class shall be taxed alike. It follows that the guaranty of the equal protection of the laws is not violated by legislation based on a reasonable











classification. Classification, to be valid, must (1) rest on substantial distinctions; (2) be germane to the purpose of the law; (3) not be limited to existing conditions only and (4) apply equally to all members of the same class.[86]

The taxing power has the authority to make reasonable classifications for purposes of taxation.[87] Inequalities which result from a singling out of one particular class for taxation, or exemption, infringe no constitutional limitation.[88] The real estate industry is, by itself, a class and can be validly treated differently from other business enterprises. Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize that what distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the CWT, is not their production processes but the prices of their goods sold and the number of transactions involved. The income from the sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome for the parties to comply with the withholding tax scheme. On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand customers every month involving both minimal and substantial amounts. To require the customers of manufacturing enterprises, at present, to withhold the taxes on each of their transactions with their tens or hundreds of suppliers may result in an inefficient and unmanageable system of taxation and may well defeat the purpose of the withholding tax system. Petitioner counters that there are other businesses wherein expensive items are also sold infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other capital goods yet these are not similarly subjected to the CWT.[89] As already discussed, the Secretary may adopt any reasonable method to carry out its functions.[90] Under Section 57(B), it may choose what to subject to CWT. A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner’s argument is not accurate. The sales of manufacturers who have clients within the top 5,000 corporations, as specified by the BIR, are also subject to CWT for their transactions with said 5,000 corporations.[91]

SECTION 2.58.2 OF RR NO. 2-98 MERELY IMPLEMENTS SECTION 58 OF RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not effect the regisration of any document transferring real property unless a certification is issued by the CIR that the withholding tax has been paid. Petitioner proffers hardly any reason to strike down this rule except to rely on its contention that the CWT is unconstitutional. We have ruled that it is not. Furthermore, this provision uses almost exactly the same wording as Section 58(E) of RA 8424 and is unquestionably in accordance with it: Sec. 58. Returns and Payment of Taxes Withheld at Source. – (E) Registration with Register of Deeds. - No registration of any document transferring real property shall be effected by the Register of Deeds unless the [CIR] or his duly authorized representative has certified that such transfer has been reported, and the capital gains or [CWT], if any, has been paid: xxxx any violation of this provision by the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code. (Emphasis supplied) CONCLUSION The renowned genius Albert Einstein was once quoted as saying “[the] hardest thing in the world to understand is the income tax.”[92] When a party questions the constitutionality of an income tax measure, it has to contend not only with Einstein’s observation but also with the vast and well-established jurisprudence in support of the plenary powers of Congress to impose taxes. Petitioner has miserably failed to discharge its burden of convincing the Court that the imposition of MCIT and CWT is unconstitutional. WHEREFORE, the petition is hereby DISMISSED.









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