SECOND DIVISION

G.R. No. L-69136 September 30, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

MEGA GENERAL MERCHANDISING CORPORATION and THE COURT OF

TAX APPEALS, respondents.

 

PARAS, J.:

This is a petition for review of the decision of the Court of Tax Appeals,

promulgated on May 21, 1984, in CTA Case No. 3078 entitled "Mega General

Merchandising Corporation vs. Commissioner of Internal Revenue," holding

that respondent corporation is not liable for specific tax in the sum of

P275,652.00 on its importations of crude paraffin wax on June 21 and

August 17, 1977 under Section 142(i) of the Tax Code, as amended by P.D.

No. 392, but to 7% advance sales tax, (now Section 197 II) in relation to

Section 186 (now Section 200 of the Tax Code) and further ordering the

Commissioner of Internal Revenue to refund or credit to petitioner the said

assessment (Rollo, Annex "C", pp. 38-47).

The antecedent facts of this case are as follows:

Prior to the promulgation of P.D. No. 392 on February 18, 1974, all

importations of paraffin wax, irrespective of kind and nature, were subject to

7% advance sales tax on landed costs plus 25% mark up pursuant to Section

183(b) now Section 197(II) in relation to Section 186 (now Section 200) of

the Tax Code.

With the promulgation of P.D. No. 392, a new provision for the imposition of

specific tax was added to Section 142 of the Tax Code, that is, sub- section

(i) which reads:

Section 142. Specific tax on manufactured oils and other fuels.—On refined

and manufactured mineral oils and other motor fuels, there shall be

collected the following taxes:

xxx xxx xxx

(i) Greases, waxes and petroleum, per kilogram, thirty-five centavos; ...

Therefore, beginning February 18,1974, the date of effectivity of P.D. No.

392, all importations of paraffin wax were subject to the specific tax

imposed under Section 142(i) of the Tax Code, instead of the former 7%

sales tax.

Hence, respondent corporation paid the corresponding specific tax thereon

in the total amount of P177,750.00 which applies to its total importation of

crude paraffin on April 18, 1975, or exactly 1 year and 2 months after the

effectivity of P.D. No. 392.

On April 22, 1975, the respondent corporation wrote the Commissioner of

Internal Revenue for clarification as to whether imported crude paraffin wax

is subject to specific tax under Section 142 (i) of the Tax Code, as amended

by P.D. No. 392, or to the 7% advance sales tax.

Former Commissioner Misael P. Vera in his reply to said query dated May 14,

1975 ruled that only wax used as high pressure lubricant and micro

crystallin is subject to specific tax; that paraffin which was used as raw

material in the manufacture of candles, wax paper, matches, crayons,

drugs, appointments etc., is subject to the 7% advance sales tax, the tax to

be based on the landed cost thereof, plus 25% mark-up.

Due to Commissioner Vera's ruling of May 14, 1975, several importers

including respondent corporation filed several claims for tax refund or tax

credit of specific tax paid by them on importation of crude paraffin wax.

Considering that respondent corporation had paid the amount of

P477,750.00 as specific tax pursuant to Section 142(i) of the Tax Code on its

importation of crude paraffin wax on April 18, 1975 (an amount bigger than

the 7% advance sales tax prescribed under Section 183(b) (now Section 197

II) in relation to Section 186 (now Sec. 200 of the Tax Code) respondent

corporation in a letter, dated November 27, 1975, requested for a refund or

tax credit of the amount of P321,436.79 representing the difference

between the amount paid as specific tax and the 7% advance sales tax.

Since the law (Section 142(i) of the Tax Code, amended by P.D. No. 392)

does not make any distinction as to the kind of wax subject to specific tax,

then Acting Commissioner of Internal Revenue Efren I. Plana, on January 28,

1977 denied respondent Corporation's claim for refund or tax credit of the

amount of P321,436,79. On this ruling, respondent corporation filed a

request for reconsideration. This was denied by petitioner.

During the pendency of respondent corporation's request for

reconsideration, an investigation was conducted by the Bureau of Internal

Revenue in connection with the importations of wax and petroleum that

arrived in the country on or subsequent to the date of the ruling of January

28, 1977 and it was ascertained that respondent Corporation owes the

government specific tax for importation of 1,214,400 kilograms of paraffin

wax on June 21, 1977 and August 17, 1977 which gave rise to the letter of

assessment dated May 8, 1978 for P275,652.00 re the subject matter in this

case.

Prior, however, to the issuance of the said letter of assessment of May 8,

1978, petitioner in a letter dated January 11, 1978, granted respondent

corporation's claim for refund or tax credit of the amount of P321,436.79

since the importation which had arrived in Manila on April 18, 1975 was

covered by the ruling of May 14, 1975 (before its revocation by the ruling of

January 28, 1977).

Respondent corporation protested the tax assessment of May 8,1978 in the

amount of P275,652.00 in a letter dated June 5, 1978 alleging that crude

paraffin wax is subject to 7% advance sales tax pursuant to petitioner's

ruling of May 14, 1975. The protest was denied by petitioner in a letter

dated February 15, 1980.

During the pendency of the request of respondent corporation for

reconsideration, it appealed to respondent Court of Tax Appeals (Annex "A",

Rollo, pp. 26-35) and petitioner filed his answer on September 10, 1980

(Annex "B", Rollo, pp. 3647).

On May 21,1984, respondent Court of Tax Appeals rendered its decision, the

dispositive portion of which reads as follows:

WHEREFORE, the decision of the Commissioner of Internal Revenue

appealed from is hereby reversed. Petitioner is not liable for specific tax on

its importation of crude paraffin wax in the sum of P275,652.00 imposed

against petitioner, but only subject to the 7% advance sales tax which

petitioner had already paid. Accordingly, respondent is hereby ordered to

refund or credit petitioner specific tax it paid in the sum of P275,652.00.

Without pronouncement as to costs.

SO ORDERED.

(p. 9, Decision; p. 46, Rollo)

This was later amended to read:

WHEREFORE the decision of the Commissioner of Internal Revenue appealed

from is hereby reversed. Petitioner is not liable for specific tax on its

importation of crude paraffin wax in the sum of P275,652.00 imposed

against petitioner but only subject to the 7% D advance sales tax which

petitioner had already paid. Without pro- announcement as to costs.

SO ORDERED.

Hence, this petition filed on January 15, 1984 (Rollo, pp. 824).

The sole issue raised by petitioner is whether or not respondent

corporation's importation of crude paraffin wax on June 21 and August 17,

1977 are subject to specific tax under Section 142(i) of the Tax Code, as

amended by P.D. No. 392, promulgated on February 18, 1974.

Petitioner contends that the controlling interpretation is that given by

Commissioner Plana and not that of Commissioner Vera.

Petitioner further argues that respondent corporation's request for refund of

the amount of P321,436.79 was granted in the letter of petitioner dated

January 11, 1978 because the importation of private respondent was made

on April 18,1975 wherein petitioner made clear that all importation of crude

paraffin wax only after the ruling of January 28, 1977, is subject to specific

tax prescribed in Section 142(i) of the Tax Code as amended by P.D. No.

392.

Moreover, the importation which gave rise to the assessment in the amount

of P275,652.00 subject of this case, was made on June 27, 1977 and August

17, 1977 and that the petitioner's ruling of January 28,1977 was not revoked

or overruled by his letter of January 11, 1978 granting respondent

corporation's request for refund of the amount of P321,436.79.

Petitioner's contention is completely meritorious.

The Court of Tax Appeals' decision aptly stated:

It will be starkly noted that in a ruling of respondent Commissioner of

Internal Revenue dated January 11, 1978 (p. 204, BIR Rec.), the request for

reconsideration of petitioner of the ruling holding it liable for specific tax and

for the tax credit of the sum of P321,436.79 paid as specific tax was granted

by the Commissioner of Internal Revenue. In effect, this ruling overrules that

of January 28, 1977 holding petitioner liable for specific tax on its

importations of crude paraffin wax. The ruling of January 11, 1978 having

overruled that of January 28, 1977, the importations of crude paraffin made

on June 21 and August 17, 1977 ostensibly became once more subject to

the ruling of May 14, 1975 which held such importation of crude paraffin

wax as not liable to specific tax under the provisions of Section 142(i) of the

National Internal Revenue Code, as amended by PD 392. In other words,

there was no other ruling which is prior to or was made to apply to the

importations of petitioner of crude paraffin wax on June 21 and August 17,

1977, except only that ruling of the Commissioner of Internal Revenue of

May 14, 1975 which applied Section 142(i), as amended by PD 392, of the

National Revenue Code, which took effect on February 18, 1974, and that

this provision of Section 142(i), as amended, has remained unchanged since

then. It is clearly and legally justified to conclude that this ruling of the

Commissioner of Internal Revenue of May 14, 1975 shall prospectively apply

in favor of the importations of crude paraffin wax on June 21 and August 17,

1977 in question. This is the ruling which assured the taxpayer, Mega

General Merchandising Corporation, that for its importations of crude

paraffin wax, it shall only be liable to 7% advance sales tax and no more. To

make petitioner liable for specific tax after it has made the importations,

would surely prejudice petitioner as it would be subject to a tax liability of

which the Bureau of Internal Revenue has not made it fully aware. As a

result, the rulings of May 8, 1978 and February 15, 1980 having been issued

long after the importations on June 21 and August 1 7, 1977 in question

cannot be applied with legal effect in this case because to do so will violate

the prohibition against retroactive application of the rulings of executive

bodies. Rulings or circulars promulgated by the Commissioner of Internal

Revenue, such as the rulings of January 28, 1977 and those of May 8, 1978

and February 15, 1980, can not have any retroactive application, where to

do so, as it did in the case at bar, would prejudice the taxpayer. (ABS-CBN

Broadcasting Corp. vs. Court of Tax Appeals & Com. of Int. Revenue, G.R.

No. L-523b6, October 23, 1981). Also, the re-enactment of Section 142(i) of

the National Internal Revenue Code, as amended by PD 392, which provision

of law has substantially remained unchanged is a clear indication that

Congress has adopted its prior executive construction and which means that

imported crude paraffin wax is not subject to specific tax thereunder

pursuant to the BIR ruling dated May 14, 1975. (Alexander Howden & Co.,

Ltd. vs. Coll. of Int. Rev., 13 SCRA 601). (pp. 11-13, Petition; pp. 18-20,

Rollo)

Contrary to the Court of Tax Appeals' ruling, We believe that the letter of

Commissioner Plana dated January 11, 1978 did not in any way revoke his

ruling dated January 28,1977 which ruling applied the specific tax to wax

(without distinction). The reason he removed in 1978 private respondent's

liability for the specific tax was NOT (as erroneously pointed out by the

Court of Tax Appeals) because he wanted to revoke, expressly or implicitly,

his ruling of January 28, 1977 but because the P321,436.79 tax referred to

importation BEFORE January 28, 1977 and hence still covered by the ruling

of Commissioner Vera, and not by the January 28,1977 ruling of

Commissioner Plana.

PREMISES CONSIDERED, the decision of the Court of Tax Appeals is hereby

REVERSED and SET ASIDE, and the private respondent is ordered to pay the

tax as assessed by the Commissioner of Internal Revenue, together with

interest. No costs.

SO ORDERED.

FIRST DIVISION

G.R. No. L-52306 October 12, 1981

ABS-CBN BROADCASTING CORPORATION, petitioner,

vs.

COURT OF TAX APPEALS and THE COMMISSIONER OF INTERNAL

REVENUE, respondents.

 

MELENCIO-HERRERA, J.:

This is a Petition for Review on certiorari of the Decision of the Court of Tax

Appeals in C.T.A. Case No. 2809, dated November 29, 1979, which affirmed

the assessment by the Commissioner of Internal Revenue, dated April 16,

1971, of a deficiency withholding income tax against petitioner, ABS-CBN

Broadcasting Corporation, for the years 1965, 1966, 1967 and 1968 in the

respective amounts of P75,895.24, P99,239.18, P128,502.00 and P222,

260.64, or a total of P525,897.06.

During the period pertinent to this case, petitioner corporation was engaged

in the business of telecasting local as well as foreign films acquired from

foreign corporations not engaged in trade or business within the Philippines.

for which petitioner paid rentals after withholding income tax of 30%of one-

half of the film rentals.

In so far as the income tax on non-resident corporations is concerned,

section 24 (b) of the National Internal Revenue Code, as amended by

Republic Act No. 2343 dated June 20, 1959, used to provide:

(b) Tax on foreign corporations.—(1) Non-resident corporations.— There

shall be levied, collected, and paid for each taxable year, in lieu of the tax

imposed by the preceding paragraph, upon the amount received by every

foreign corporation not engaged in trade or business within the Philippines,

from sources within the Philippines, as interest, dividends, rents, salaries,

wages, premiums, annuities, compensations, remunerations, emoluments,

or other fixed or determinable annual or periodical gains, profits, and

income, a tax equal to thirty per centum of such amount. (Emphasis

supplied)

On April 12, 1961, in implementation of the aforequoted provision, the

Commissioner of Internal Revenue issued General Circular No. V-334 reading

thus:

In connection with Section 24 (b) of Tax Code, the amendment introduced

by Republic Act No. 2343, under which an income tax equal to 30% is levied

upon the amount received by every foreign corporation not engaged in

trade or business within the Philippines from all sources within this country

as interest, dividends, rents, salaries, wages, premiums, annuities,

compensations, remunerations, emoluments, or other fixed or determinable

annual or periodical gains, profits, and income, it has been determined that

the tax is still imposed on income derived from capital, or labor, or both

combined, in accordance with the basic principle of income taxation (Sec.

39, Income Tax Regulations), and that a mere return of capital or

investment is not income (Par. 5,06, 1 Mertens Law of Federal 'Taxation).

Since according to the findings of the Special Team who inquired into

business of the non-resident foreign film distributors, the distribution or

exhibition right on a film is invariably acquired for a consideration, either for

a lump sum or a percentage of the film rentals, whether from a parent

company or an independent outside producer, apart of the receipts of a non-

resident foreign film distributor derived from said film represents, therefore,

a return of investment.

xxx xxx xxx

4. The local distributor should withhold 30% of one-half of the film rentals

paid to the non-resident foreign film distributor and pay the same to this

office in accordance with law unless the non- resident foreign film distributor

makes a prior settlement of its income tax liability. (Emphasis ours).

Pursuant to the foregoing, petitioner dutifully withheld and turned over to

the Bureau of Internal Revenue the amount of 30% of one-half of the film

rentals paid by it to foreign corporations not engaged in trade or business

within the Philippines. The last year that petitioner withheld taxes pursuant

to the foregoing Circular was in 1968.

On June 27, 1968, Republic Act No. 5431 amended Section 24 (b) of the Tax

Code increasing the tax rate from 30 % to 35 % and revising the tax basis

from "such amount" referring to rents, etc. to "gross income," as follows:

(b) Tax on foreign corporations.—(1) Non-resident corporations.—A foreign

corporation not engaged in trade or business in the Philippines including a

foreign life insurance company not engaged in the life insurance business in

the Philippines shall pay a tax equal to thirty-five per cent of the gross

income received during each taxable year from all sources within the

Philippines, as interests, dividends, rents, royalties, salaries, wages,

premiums, annuities, compensations, remunerations for technical services

or otherwise, emoluments or other fixed or determinable annual, periodical

or casual gains, profits, and income, and capital gains, Provided however,

That premiums shah not include reinsurance premiums. (Emphasis supplied)

On February 8, 1971, the Commissioner of Internal Revenue issued Revenue

Memorandum Circular No. 4-71, revoking General Circular No. V-334, and

holding that the latter was "erroneous for lack of legal basis," because "the

tax therein prescribed should be based on gross income without deduction

whatever," thus:

After a restudy and analysis of Section 24 (b) of the National Internal

Revenue Code, as amended by Republic Act No. 5431, and guided by the

interpretation given by tax authorities to a similar provision in the Internal

Revenue Code of the United States, on which the aforementioned provision

of our Tax Code was patterned, this Office has come to the conclusion that

the tax therein prescribed should be based on gross income without t

deduction whatever. Consequently, the ruling in General Circular No. V-334,

dated April 12, 1961, allowing the deduction of the proportionate cost of

production or exhibition of motion picture films from the rental income of

non- resident foreign corporations, is erroneous for lack of legal basis.

In view thereof, General Circular No. V-334, dated April 12, 1961, is hereby

revoked and henceforth, local films distributors and exhibitors shall deduct

and withhold 35% of the entire amount payable by them to non-resident

foreign corporations, as film rental or royalty, or whatever such payment

may be denominated, without any deduction whatever, pursuant to Section

24 (b), and pay the withheld taxes in accordance with Section 54 of the Tax

Code, as amended.

All rulings inconsistent with this Circular is likewise revoked. (Emphasis ours)

On the basis of this new Circular, respondent Commissioner of Internal

Revenue issued against petitioner a letter of assessment and demand dated

April 15, 1971, but allegedly released by it and received by petitioner on

April 12, 1971, requiring them to pay deficiency withholding income tax on

the remitted film rentals for the years 1965 through 1968 and film royalty as

of the end of 1968 in the total amount of P525,897.06 computed as follows:

1965

Total amount remitted

P 511,059.48

Withholding tax due thereon

153,318.00

Less: Amount already assessed

89,000.00

Balance

P64,318.00

Add: 1/2% mo. int. fr. 4-16-66 to 4-16-69

11,577.24

Total amount due & collectible

P 75,895.24

1966

Total amount remitted

P373,492.24

Withholding tax due thereon

112,048.00

Less: Amount already assessed

27,947.00

Balance

84,101.00

Add: 11/2%mo. int. fr. 4-16-67 to 4-116-70

15,138.18

Total amount due & collectible

P99,239.18

1967

Total amount remitted

P601,160.65

Withholding tax due thereon

180,348.00

Less: Amount already assessed

71,448.00

Balance

108,900.00

Add: 1/2% mo. int. fr. 4-16-68 to 4-16-71

19,602.00

Total amount due & collectible

P128,502.00

1968

Total amount remitted

P881,816.92

Withholding tax due thereon

291,283.00

Less: Amount already assessed

92,886.00

Balance

P198,447.00

Add: 1/2% mo. int. fr. 4-16-69 to 4-29-71

23,813.64

Total amount due & collectible

P222,260.44 1

On May 5, 1971, petitioner requested for a reconsideration and withdrawal

of the assessment. However, without acting thereon, respondent, on April 6,

1976, issued a warrant of distraint and levy over petitioner's personal as

well as real properties. The petitioner then filed its Petition for Review with

the Court of Tax Appeals whose Decision, dated November 29, 1979, is, in

turn, the subject of this review. The Tax Court held:

For the reasons given, the Court finds the assessment issued by respondent

on April 16, 1971 against petitioner in the amounts of P75,895.24, P

99,239.18, P128,502.00 and P222,260.64 or a total of P525,897.06 as

deficiency withholding income tax for the years 1965, 1966, 1967 and 1968,

respectively, in accordance with law. As prayed for, the petition for review

filed in this case is dismissed, and petitioner ABS-CBN Broadcasting

Corporation is hereby ordered to pay the sum of P525,897.06 to respondent

Commissioner of Internal Revenue as deficiency withholding income tax for

the taxable years 1965 thru 1968, plus the surcharge and interest which

have accrued thereon incident to delinquency pursuant to Section 51 (e) of

the National Internal Revenue Code, as amended.

WHEREFORE, the decision appealed from is hereby affirmed at petitioner's

cost.

SO ORDERED. 2

The issues raised are two-fold:

I. Whether or not respondent can apply General Circular No. 4-71

retroactively and issue a deficiency assessment against petitioner in the

amount of P 525,897.06 as deficiency withholding income tax for the years

1965, 1966, 1967 and 1968.

II. Whether or not the right of the Commissioner of Internal Revenue to

assess the deficiency withholding income tax for the year 196,5 has

prescribed. 3

Upon the facts and circumstances of the case, review is warranted.

In point is Sec. 338-A (now Sec. 327) of the Tax Code. As inserted by

Republic Act No. 6110 on August 9, 1969, it provides:

Sec. 338-A. Non-retroactivity of rulings. — Any revocation, modification, or

reversal of and of the rules and regulations promulgated in accordance with

the preceding section or any of the rulings or circulars promulgated by the

Commissioner of Internal Revenue shall not be given retroactive application

if the relocation, modification, or reversal will be prejudicial to the

taxpayers, except in the following cases: (a) where the taxpayer deliberately

mis-states or omits material facts from his return or any document required

of him by the Bureau of Internal Revenue: (b) where the facts subsequently

gathered by the Bureau of Internal Revenue are materially different from the

facts on which the ruling is based; or (c) where the taxpayer acted in bad

faith. (italics for emphasis)

It is clear from the foregoing that rulings or circulars promulgated by the

Commissioner of Internal Revenue have no retroactive application where to

so apply them would be prejudicial to taxpayers. The prejudice to petitioner

of the retroactive application of Memorandum Circular No. 4-71 is beyond

question. It was issued only in 1971, or three years after 1968, the last year

that petitioner had withheld taxes under General Circular No. V-334. The

assessment and demand on petitioner to pay deficiency withholding income

tax was also made three years after 1968 for a period of time commencing

in 1965. Petitioner was no longer in a position to withhold taxes due from

foreign corporations because it had already remitted all film rentals and no

longer had any control over them when the new Circular was issued. And in

so far as the enumerated exceptions are concerned, admittedly, petitioner

does not fall under any of them.

Respondent claims, however, that the provision on non-retroactivity is

inapplicable in the present case in that General Circular No. V-334 is a

nullity because in effect, it changed the law on the matter. The Court of Tax

Appeals sustained this position holding that: "Deductions are wholly and

exclusively within the power of Congress or the law-making body to grant,

condition or deny; and where the statute imposes a tax equal to a specified

rate or percentage of the gross or entire amount received by the taxpayer,

the authority of some administrative officials to modify or change, much less

reduce, the basis or measure of the tax should not be read into law." 4

Therefore, the Tax Court concluded, petitioner did not acquire any vested

right thereunder as the same was a nullity.

The rationale behind General Circular No. V-334 was clearly stated therein,

however: "It ha(d) been determined that the tax is still imposed on income

derived from capital, or labor, or both combined, in accordance with the

basic principle of income taxation ...and that a mere return of capital or

investment is not income ... ." "A part of the receipts of a non-resident

foreign film distributor derived from said film represents, therefore, a return

of investment." The Circular thus fixed the return of capital at 50% to

simplify the administrative chore of determining the portion of the rentals

covering the return of capital." 5

Were the "gross income" base clear from Sec. 24 (b), perhaps, the

ratiocination of the Tax Court could be upheld. It should be noted, however,

that said Section was not too plain and simple to understand. The fact that

the issuance of the General Circular in question was rendered necessary

leads to no other conclusion than that it was not easy of comprehension and

could be subjected to different interpretations.

In fact, Republic Act No. 2343, dated June 20, 1959, supra, which was the

basis of General Circular No. V-334, was just one in a series of enactments

regarding Sec. 24 (b) of the Tax Code. Republic Act No. 3825 came next on

June 22, 1963 without changing the basis but merely adding a proviso (in

bold letters).

(b) Tax on foreign corporation.—(1) Non-resident corporations. — There shall

be levied, collected and paid for each taxable year, in lieu of the tax

imposed by the preceding paragraph, upon the amount received by every

foreign corporation not engaged in trade or business within the Philippines,

from all sources within the Philippines, as interest, dividends, rents, salaries,

wages, premiums annuities, compensations, remunerations, emoluments, or

other fixed or determinable annual or periodical gains, profits, and income, a

tax equal to thirty per centum of such amount: PROVIDED, HOWEVER, THAT

PREMIUMS SHALL NOT INCLUDE REINSURANCE PREMIUMS. (double

emphasis ours).

Republic Act No. 3841, dated likewise on June 22, 1963, followed after,

omitting the proviso and inserting some words (also in bold letters).

(b) Tax on foreign corporations.—(1) Non-resident corporations.—There shall

be levied, collected and paid for each taxable year, in lieu of the tax

imposed by the preceding paragraph, upon the amount received by every

foreign corporation not engaged in trade or business within the Philippines,

from all sources within the Philippines, as interest, dividends, rents, salaries,

wages, premiums, annuities, compensations, remunerations, emoluments,

or other fixed or determinable annual or periodical OR CASUAL gains, profits

and income, AND CAPITAL GAINS, a tax equal to thirty per centum of such

amount. 6 (double emphasis supplied)

The principle of legislative approval of administrative interpretation by re-

enactment clearly obtains in this case. It provides that "the re-enactment of

a statute substantially unchanged is persuasive indication of the adoption by

Congress of a prior executive construction. 7 Note should be taken of the

fact that this case involves not a mere opinion of the Commissioner or ruling

rendered on a mere query, but a Circular formally issued to "all internal

revenue officials" by the then Commissioner of Internal Revenue.

It was only on June 27, 1968 under Republic Act No. 5431, supra, which

became the basis of Revenue Memorandum Circular No. 4-71, that Sec. 24

(b) was amended to refer specifically to 35% of the "gross income."

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

Government is never estopped from collecting taxes because of mistakes or

errors on the part of its

agents. 8 In fact, utmost caution should be taken in this regard. 9 But, like

other principles of law, this also admits of exceptions in the interest of

justice and fairplay. The insertion of Sec. 338-A into the National Internal

Revenue Code, as held in the case of Tuason, Jr. vs. Lingad, 10 is indicative of

legislative intention to support the principle of good faith. In fact, in the

United States, from where Sec. 24 (b) was patterned, it has been held that

the Commissioner of Collector is precluded from adopting a position

inconsistent with one previously taken where injustice would result

therefrom, 11 or where there has been a misrepresentation to the taxpayer.

12

We have also noted that in its Decision, the Court of Tax Appeals further

required the petitioner to pay interest and surcharge as provided for in Sec.

51 (e) of the Tax Code in addition to the deficiency withholding tax of P

525,897.06. This additional requirement is much less called for because the

petitioner relied in good faith and religiously complied with no less than a

Circular issued "to all internal revenue officials" by the highest official of the

Bureau of Internal Revenue and approved by the then Secretary of Finance.

13

With the foregoing conclusions arrived at, resolution of the issue of

prescription becomes unnecessary.

WHEREFORE, the judgment of the Court of Tax Appeals is hereby reversed,

and the questioned assessment set aside. No costs.

SO ORDERED.

Footnotes

1 Comment of Respondents, Rollo, pp. 73-74.

2 Decision, Annex "A", Rollo, pp. 53-,54.

3 Memorandum of Petitioner, Rollo. p. 97.

4 Decision, Annex "A", Rollo, p. 41

5 Comment of Commissioner of Internal Revenue, p. 3.

6 The omission of the proviso "Provided, however, That premiums shall not include reinsurance premiums" appears to be due to

oversight as the purpose of the amendment was to include capital gains in gross income of foreign non-resident corporations.

See footnote 13, Filipinas Life Assurance Co. vs. Court of Tax Appeals, 21 SCRA 622 (1967).

7 Biddle vs. Commissioner, 302 U.S., 573 (1938); Alexander Howden & Co., Ltd. vs. Collector of Internal Revenue, 13 SCRA 601

(1965).

8 Visayan Cebu Terminal Co., Inc. vs. Commissioner of Internal Revenue, 13 SCRA 357 (1965); Zamora vs. Court of Tax

Appeals, 36 SCRA 77 (1970); Balmaceda vs. Corominas & Co., Inc. 66 SCRA 555 (1975).

9 Senator James Couzens 11 BTA 1040 (1928), 48 Harvard Law Review 1281, 1300, cited in 10A Metens Law of Federal Income

Taxation, Sec. 60.13, p. 189.

10 58 SCRA 170 (1974).

11 Ford Motor Co..vs.U.S.,9 F.Supp.590(1935).

12 J. W. Carter Music Co. vs. Bass, 20 F. 2d 390 (1927).

13 Tuason, Jr. vs. Lingad, 58 SCRA 170 (1974); Connel Bros. Co. Phil. vs. Collector of Internal Revenue, 10 SCRA 470 (1964).

* Justice Pacifico P. de Castro was designated to sit in the First Division, Justice Claudio Teehankee being on official leave.

EN BANC

G.R. No. L-20563            October 29, 1968

CEBU PORTLAND CEMENT COMPANY, petitioner,

vs.

COLLECTOR (Now COMMISSIONER) OF INTERNAL REVENUE,

respondent.

ANGELES, J.:

This case involves petitioner's claim for refund of P458,241.45 sales tax paid

from November 1, 1954 to March, 1955, and P427,552.95 ad valorem tax

paid from April, 1955 to September 30, 1956 from the sale of APO portland

cement produced by the petitioner.

Prior to the effectivity of Republic Act No. 1299 on June 16, 1955,1 the

petitioner had been paying the sales tax (known also as percentage tax) of

APO Portland cement produced by it,2 computed at 7% of the gross selling

price inclusive of the cost of the bag containers of cement and the gypsum3

used in the manufacture of said product. After the approval of the

amendment of the law petitioner stopped paying sales tax on its gross sales

and instead paid the ad valorem tax4 on the selling price of the product after

deducting therefrom the corresponding cost of the containers thereof.

It appears, however, that since 1952, petitioner had been protesting the

imposition of the sales tax on its APO portland cement, and on January 16,

1953, it also protested the payment of ad valorem taxes. A written claim for

refund of sales and ad valorem taxes paid by petitioner was filed two years

later (September 1955) which was reiterated on July 26, 1956.

Without awaiting respondent's ruling on said claims for refund, petitioner, on

January 24, 1957, filed with the Court of Tax Appeals a petition for review "of

the action of the Collector of Internal Revenue in refusing to entertain

petitioner's claim for refund of the percentage tax on sales of its APO

cement." It was alleged in the petition that the percentage taxes collected

by respondent are refundable since under Republic Act 1299, producers of

cement are exempt from the payment of said tax. The petition was

amended on October 24, 1959, and again amended on June 23, 1961, to

include a claim for refund of ad valorem taxes alleged to have been

overpaid through double payments.

After hearing and consideration of the evidence submitted in connection

therewith, the Court of Tax Appeals rendered judgment dismissing the

petition for review, holding: (1) that petitioner was not exempt from

payment of the sales taxes on its APO portland cement prior to the

effectivity of Republic Act No. 1299, it being then considered a

manufactured product; (2) that petitioner is not entitled to deduction from

the gross selling price of the cost of raw materials, the value of the bag

containers and gypsum in the absence of evidence that they had been

previously subjected to the 7% tax imposed by sections 186 and 190 of the

Tax Code; (3) that for so much of the sales taxes that were billed, charged

to, and paid for by its customers, the petitioner is not the proper party to

claim for refund; and (4) that the right to claim for refund of taxes alleged to

have been erroneously paid thru wrong computation, double payment, or

otherwise, is already barred by prescription. Dissatisfied with the findings of

the Tax Court, the petitioner elevated the case to the Supreme Court on a

petition for review of the decision, assigning as errors the conclusions as

above enumerated.

The first assigned error calls for a ruling on the prospective or retrospective

application of Republic Act No. 1299, which became effective upon its

approval on June 16, 1955, amending section 246 of the National Internal

Revenue Code, as follows:

SEC. 246. Definitions of the terms "gross output", "minerals" and "mineral

products" — disposition of royalties and ad valorem taxes. — The term

"gross output" shall be interpreted as the actual market value of minerals or

products, or of bullion from each mine or mineral products, or of bullion from

each mine or mineral lands operated as a separate entity without any

deduction from mining, milling, refining, transporting, handling, marketing,

or any other expenses: Provided, however, That if the minerals or mineral

products are sold or consigned abroad by the lessee or owner of the mine

under C.K.F. terms, the actual cost of ocean freight and insurance shall be

deducted. The output of any group of contiguous mining claims shall not be

subdivided. The word "Minerals" shall mean all inorganic substances found

in nature whether in solid, liquid, gaseous, or any intermediate state. The

term "mineral products" shall mean things produced by the lessee,

concessionaire or owner of mineral lands, at least eighty per cent of which

things must be minerals extracted by such lessee, concessionaire, or owner

of mineral lands. Ten per centum of the royalties and ad valorem taxes

herein provided shall accrue to the municipality and ten per centum to the

province where the mines are situated, and eighty per centum to the

national treasury.

The only change brought about by said amendment is the incorporation of

the definition of the word "minerals" and the term "mineral products".

It is urged by petitioner that since the purpose of the amendment was

merely to clarify the meaning of said terms, the section should be construed

as if it had been originally passed in its amended form, so that cement

should be considered as "mineral product" even before the enactment of

Republic Act 1299,5 and therefore exempt from the sales or percentage tax,

pursuant to the provision of section 188(c) of the National Internal Revenue

Code.6

We cannot subscribe to this view. It is a settled rule in statutory construction

that a statute operates prospectively only and never retroactively, unless

the legislative intent to the contrary is made manifest either by the express

terms of the statute or by necessary implication.7 In every case of doubt, the

doubt must be resolved against the retrospective effect.8 There is nothing in

the context of the provision in question that would manifest the

Legislature's intention to have the provision apply to taxes due in the past.

On the other hand, the use of the word, "shall" gives the unmistakable

impression that the lawmakers intended this enactment to be effective only

in futuro. Quite recently, in Central Azucarera Don Pedro vs. Court of Tax

Appeals,9 this Court sustained the holding of the respondent Court that

section 51(d) of the Tax Code, as amended, which imposes the collection of

interest on a deficiency income tax assessment, became effective only on

the approval of the amendment, observing that the provision uses the

phrase "shall be assessed at the same time."

Furthermore, careful perusal of the explanatory note to House Bill No. 3251,

which was later approved as Republic Act No. 1299, and the portions of the

record of the discussions in Congress relative thereto, reveals nothing that

would suggest that the amendment was enacted to operate retrospectively.

While the purpose of the amendment, as mentioned in the explanatory note

to the bill, was not only to "accelerate the collection of mining royalties and

ad valorem taxes but also clarify the doubt of the tax-paying public on the

interpretative scope of the two terms," it, certainly, could not have been the

intention of the lawmakers to unsettle previously consumated transactions

between the taxpayer and the Government, no matter in what manner the

meaning of the terms were construed in the past. No mention was made, in

the deliberations, about the taxes previously collected or on the sales of

cement, although Congress must have been aware of these assessments

due to an admitted confusion as to the meaning of the terms defined in the

amendment.

Indeed, like other statutes, tax laws operate prospectively, whether they

enact, amend or repeal, unless, as aforesaid, the purpose of the Legislature

to give retrospective effect is expressly declared or may clearly be implied

from the language used.10 It thus results that before the enactment of the

amendment to section 246 of the Tax Code, when cement was not yet

placed under the category of either "minerals" or "mineral products" it was

not exempt from the percentage tax imposed by section 186 of said Code,

and was, therefore, taxable as a manufactured product. 11

However, We agree with the petitioner that the gypsum and bag containers

used in the production and sale of cement are deductible from the gross

selling price in computing the 7% compensating tax levied on the sale of

cement before Republic Act 1299. In the absence of any showing that the

petitioner itself manufactured the bag containers, the inference is that these

bags were bought from others from whom taxes had been levied for the

original sale thereof. The same holds true with the gypsum used in the

process of the manufacture of cement, considering that said component is

imported,12 and subject to compensating tax.13

Again, We agree with the petitioner in assigning as error of the respondent

Court its conclusion that for so much of the sales taxes that were billed,

charged, and paid for by the petitioner's customers, the petitioner is not the

proper party to claim refund. The first paragraph of section 186 of the Tax

Code, pursuant to which the 7% sales taxes were collected from the

petitioner, reads:

SEC. 186. Percentage tax on sales of other articles. — There shall be levied,

assessed and collected once only on every original sale, barter, exchange,

and similar transaction either for nominal or valuable considerations

intended to transfer ownership of, or title to, the articles not enumerated in

sections one hundred and eighty-four, and one hundred and eighty-five a

tax equivalent to seven per centum of the gross selling price or grass value

in money of the articles so sold, bartered, exchanged, or transferred, such

tax to be paid by the manufacturer or producer: Provided, That where the

articles subject to tax under this section are manufactured out of materials

likewise subject to tax under this section, and section one hundred and

eighty-nine, the total cost of such materials, as duly established shall be

deductible from the gross selling price or gross value in money of such

manufactured articles.

The tax provided under this section of the Code is imposed upon the

manufacturer or producer and not on the purchaser. On this matter of who

bears the burden of the sales tax, this Court, after an extensive research on

the subject, said:14

We begin with an analysis on the nature of the percentage (sales) tax

imposed by section 186 of the Code. Is it a tax on the producer or on the

purchaser? Statutes of the type under consideration, which impose a tax on

sales, have been described as "act(s) with schizophrenic symptoms" as they

apparently have two faces — one that of a vendor tax, and the other, a

vendee tax. Fortunately, for us, the provisions of the Code throw some light

on the problem. The Code states that the sales tax "shall be paid by the

manufacturer or producer," who must make a true and complete return of

the amount of his, her or its gross monthly sales, receipts or earnings or

gross value of output actually removed from the factory or mill warehouse

and within twenty days after the end of each month, pay the tax due

thereon.

xxx           xxx           xxx

It may indeed be that the economic burden of the tax finally falls on the

purchaser; when it does the tax becomes a part of the price which the

purchaser must pay. It does not matter that an additional amount is billed as

tax to the purchaser. The method of listing the price and the tax separately

and defining taxable gross receipts as the amount received less the amount

of the tax added, merely avoids payment by the seller of a tax on the

amount of the tax. The effect is still the same, namely, that the purchaser

does not pay the tax. He pays, or may pay the seller more for the goods

because of the seller's obligation, but that is all and the amount added

because of the tax is paid to get the goods and for nothing else.

But the tax burden may not even be shifted to the purchaser at all. A

decision to absorb the burden of the tax is largely a matter of economics.

Then it can no longer be contended that a sales tax is a tax on the

purchaser.

It follows that it is petitioner, and not its customers, that may ask for a

refund of whatever amounts it is entitled for the percentage or sales taxes it

paid before the amendment of section 246 of the Tax Code.

Petitioner finally disputes the ruling of the respondent Court that the action

for refund has prescribed. Its contention is that the defense of prescription

was belated in that it was raised for the first time in the answer of

respondent when the original petition was amended to incorporate more

explicitly petitioner's claim for refund of ad valorem taxes paid on cement

produced during the period from April 1, 1955 to September 30, 1956.

In analyzing this issue, We need to first have a complete perspective of the

original and amended pleadings filed by the parties in the Court of Tax

Appeals, thus — On January 24, 1957, the petitioner filed its petition for

review, claiming refund of sales or percentage taxes amounting to

P448,893.63. In its answer of February 27, 1957, respondent did not raise

the defense of prescription. On September 3, 1959, respondent filed an

amended answer but again said defense was not included. On October 24,

1959 the petitioner asked for leave to file an amended petition for review in

which amendment it added the sum of P400,499.99 representing overpaid

ad valorem taxes, in its claim for refund. On December 28, 1959, the

amended petition was deemed admitted as of the date of its filing on

October 24, 1959, and respondent was given time to file his answer. The

respondent filed his answer on February 26, 1960, this time pleading

prescription as a defense insofar as portion of the sales tax sought to be

refunded was paid more than two years from the date the petition for review

was filed with the Tax Court. On June 23, 1961, the petitioner re-amended

its petition with said court praying, finally, that respondent be ordered to

refund the amount of P458,241.45 paid as percentage taxes, and the

amount of P427,552.95, representing overpayments of ad valorem taxes; or

alternatively, the amount of P590,649.92, or P854,619.89, depending on the

correct basis for the computation of the ad valorem tax.

Section 306 of the Tax Code provides:

Recovery of tax erroneously or illegally collected. — No suit or proceeding

shall be maintained in any court for the recovery of any national internal

revenue tax hereafter alleged to have been erroneously or illegally assessed

or collected, or of any penalty claimed to have been collected without

authority, or of any sum alleged to have been excessively or in any manner

wrongfully collected, until a claim for refund or credit has been duly filed

with the Collector of Internal Revenue; but such suit or proceeding may be

maintained, whether or not such tax, penalty, or sum has been paid under

protest or duress. In any case, no such suit or proceeding shall be begun

after the expiration of two years from the date of payment of the tax or

penalty.

Construing the above provision, this Court has ruled that the two

requirements — (1) filing of a written claim for refund with the

Commissioner of Internal Revenue; and (2) institution of a suit or proceeding

in court within two years from the date of payment — are mandatory and

noncompliance therewith is fatal.15

As there appears to be no dispute on the written claims filed with the

Commissioner of Internal Revenue, We shall proceed to analyze the effect of

the prescriptive period in relation to the pleadings filed with the Court of Tax

Appeals. For the refund of the 7% sales or percentage taxes covering the

period from November 1, 1954, to March, 1955, amounting to P446,898.63,

as shown in Annex A of the Amended Petition, the suit is deemed to have

been instituted on January 24, 1957, when the original petition was filed.

Counting two years back, that is to January 25, 1955, all taxes paid after this

date may still be properly refunded, speaking from the prescription angle.

As to the allegedly overpaid ad valorem taxes of 1-1/2% for the period from

April, 1955 to September, 1956 amounting to P400,499.99, the suit should

be deemed to have been instituted only with the filing of the amended

petition on October 24, 1959, which added as a new cause of action the

recovery of said overpaid ad valorem taxes. Again, counting two years back

from October 24, 1959, when the amended complaint was filed, to October

25, 1957 — all taxes paid thereafter may still be recovered. It is not claimed,

however, nor is there any showing, that among the alleged over payments

of ad valorem taxes were remitted after October 25, 1957.

Petitioner's claim that the defense of prescription had been waived, for

failure of the respondent Commissioner to raise it in his original answer,

does not hold water. Respondent's answer to the amended petition for

review, dated February 26, 1960, wherein it was pleaded the defense of

prescription, superseded the answers filed February 27, 1957 and

September 3, 1959, respectively, so that any defense or defenses raised in

his latest answer would be considered as though contained in his original

answer. For the rule is that "an amended complaint and the answer thereto,

when filed, take the place of the originals. The latter are then regarded as

abandoned and cease to perform any further functions as pleadings."16

Anent the contention that "with respect to the ad valorem taxes paid for the

period from April 1, 1955 though not explicitly included in the original

petition, was actually mentioned therein and should therefore be deemed

filed on the date of the original petition," We note that the aforesaid ad

valorem taxes were only mentioned in Annex "A" to the petition as part of

the tabulation of taxes paid by petitioner to the respondent, but in the body

of the petition itself, the refund of said payments was not sought. All the

allegations in said original petition pertain to and are in support of

petitioner's claim for refund of the sales taxes in question.

In recapitulation, We hold:

1. That before the effectivity of Republic Act No. 1299, amending section

246 of the National Internal Revenue Code, cement was taxable as a

manufactured product under section 186, in connection with section 194 (x)

of said Code;

2. That in computing the gross selling price, of the cement as basis for the

7% percentage tax levied in pursuance to section 186, the cost of the bag

containers used in the sale, and the gypsum used in the manufacture, of

cement should be deducted;

3. That the petitioner, and not its customers, is the proper party to seek

refund of taxes erroneously paid under section 186 of the Tax Code;

4. That the action for refund has not prescribed in so far as concerns the

sales or percentage taxes paid after January 25, 1953;

5. That action for refund has prescribed for sales or percentage taxes paid

before January 25, 1955, and for all ad valorem taxes alleged in the

amended petition, which were paid more than two years back from October

24, 1959, when said taxes were sought to be refunded for the first time.

PREMISES CONSIDERED, the decision appealed from is modified as hereby

above-stated, and as thus modified, the decision is affirmed.

Footnotes

1 An Act amending further section 246 of The Internal Revenue Code, as amended, by defining the words "minerals" and

"mineral products".

2 Pursuant to sec. 196 of the Tax Code.

3 A constituent of cement, imported from abroad.

4 See Sec. 243, Tax Code.

5 But see Cebu Portland Cement Co. vs. Commissioner of Internal Revenue, G.R. No. L-18649, decision of Feb. 27, 1965 and

resolution of Dec. 29, 1967; see also another case between the same parties, G.R. No. L-22603, Jan. 17, 1968. In both cases, it

was held that for purposes of Sec. 243 of the Tax Code, what is taxable are the quarried minerals used in producing cement, in

which case cement is not considered as mineral product.

6 which provides: In computing the tax imposed in sections 184, 185 and 186, transactions in the following commodities shall

be excluded: ... (c) Minerals and mineral products when sold, bartered, or exchanged by the lessee, concessionaire or owner of

the mineral land from which removed.

7 Universal Corn Products, Inc., et al. vs. Rice & Corn Board, G.R. L-21013, Aug. 17, 1967, quoting Segovia vs. Noel, 47 Phil. 543,

546.

8 Ibid, citing Montilla vs. Agustinian Corp., 24 Phil, 220, 222.

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

10 Lorenzo v. Posadas, 64 Phil. 353; Commissioner of Internal Revenue v. Filipinas Compañia de Seguros, 58 O.G. 3, p. 460;

Pacific Oxygen & Acetylene Co. v. Commissioner of Internal Revenue, G R. No. L-17708, April 30, 1965.

11 See Sec. 194 (x), National Int. Rev. Code.

12 As stated in Cebu Portland Cement Co. vs. Commissioner of Int. Rev., G. R. No. L-22603, supra.

13 The compensating tax is the equivalent of the sales tax. Their difference is that the former is levied on products coming from

abroad, while the littter is levied on products manufactured locally. Sec. 190 of the Tax Code requires that the compensating

tax to be paid in pursuance thereof be "equivalent to the percentage taxes imposed under this Title on original transactions

affected merchants, importers, or manufacturers, such tax to be paid before the withdrawal or removal of said commodities,

goods, wares, or merchandise from the customhouse or the post office."

14 In Philippine Acetylene Co., Inc. vs. Commissioner of Internal Revenue & Court of Tax Appeals, G.R. No. L-19707, August 17,

1967.

15 Johnston Lumber Co., Inc. v. Court of Tax Appeals, G. R. No. L-9292, April 23, 1957; Guagua Electric Light Plant Co, Inc. v.

Collector of Internal Revenue, et al., G.R. No. L-14421, April 29, 1961.

16 Reynes v. La Compania General de Tabacos de Filipinas, et al., 21 Phil. 416.

THIRD DIVISION

 

G.R. Nos. 83583-84 March 25, 1992

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

RIO TUBA NICKEL MINING CORPORATION and THE COURT OF TAX

APPEALS, respondents.

R E S O L U T I O N

 

GUTIERREZ, JR., J.:

Private respondent Rio Tuba Nickel Mining Corporation (Rio Tuba) seeks a

reconsideration of the Court's decision in G.R. Nos. 83583-84 dated

September 30, 1991 denying its claim for refund of specific taxes paid on

manufactured oils and diesel fuel oil.

The Court ruled in the decision that Section 5 of Republic Act (R.A) No. 1435,

which granted to lumber and mining companies the privilege of refund of

twenty five (25%) percent of specific taxes paid by them when such oils are

used in their operations, was impliedly repealed by Presidential Decree

(P.D.) No. 711 which abolished all special and fiduciary funds.

Under R.A. No. 1435, the specific taxes on manufactured oils and diesel fuel

oil accrued to the Highway Special Fund. The Court stated that miners and

lumbermen were accorded refund privileges under R.A. No. 1435 because

they seldom use the national highways since they have their own roads and

it was unfair to subject them to the increased tax rates and in effect make

them subsidize the construction of highways from which they did not

directly benefit. According to the Court, since by virtue of P.D. No. 711, all

funds that have accrued from the various special funds are channeled to the

so-called General Fund, there is, therefore, no need for justification for the

continued special treatment of these miners and loggers. Thus, reasoned

the Court, since under P.D. No. 711 any government project can be the

beneficiary of such funds as long as it is for the general welfare of the

masses and it is inevitable that sooner or later the miners and loggers will

stand to benefit from these government benefits, then the refund privilege

in R.A. No. 1435 has become an anachronism. The Court ruled that the

refund privilege granted to miners and loggers under R.A. 1435 was

impliedly repealed by P.D. No. 711.

This decision was premised on the assumption that the Highway Special

Fund was one of those funds abolished and transferred to the General Fund

by P.D. No. 711 which took effect on July 1, 1975.

Despite the mandate of P.D. No. 711, however, several special funds were

still retained and the Highway Special Funds was one of them.

Proof that some of these special and fiduciary funds were retained may be

extracted from the provisions of P.D. No. 1741 dated October 31, 1980

which governs the computation of national internal revenue allotments to

local government units. Section 2 of said decree provides:

Sec. 2. Magnitude of Assistance. — A maximum of twenty per cent (20%) of

national internal revenue taxes shall be available for national assistance to

local government units. Provided, That the national revenue used as basis in

computation shall exclude receipts accruing to Special or Fiduciary Funds

and to Special Accounts in the General Fund, amounts authorized by law to

be used by the collecting agency, and amounts recorded as income of the

General Fund but which are charged to appropriations in the Central or

other Appropriations Laws. (Emphasis Supplied)

The Internal Revenue Allotments annually prepared by the Bureau of

Internal Revenue in accordance with the foregoing decree showed that the

Highway Special Fund continued its existence up to 1985 and was

channeled to the General Fund only in 1986.

It is not clear why the Highway Special Fund was maintained for 10 years

after the effectivity P.D. No. 711 or why it was abolished in 1986. The stark

fact remains that it retained its status as a special fund up to 1985.

With the foregoing consideration, we cannot therefore state with

definiteness that it was P.D. No. 711 which impliedly repealed Section 5 of

R.A. No. 1435. We can however safely conclude that Section 5 of R.A. No.

1435 is now an anachronism because the Highway Special Fund, after 1985,

no longer exists.

The rationale for the Court's decision denying the private respondent's twin

claims for refund was that the specific taxes on these manufactured oils

paid by the mining and lumber companies no longer accrued to the Highway

Special Fund. But given the added circumstance that the Highway Special

Fund which was financed by these specific taxes still continued up to 1985,

it will be highly inequitable for the private respondent if we were to rule that

no refund of specific taxes paid up to 1985 which actually accrued to the

Highway Special Fund (not the General Fund) may be given. The private

respondent still did not directly benefit from the projects supported by the

Highway Special Fund.

We therefore, modify our decision in this case and rule that mining and

logging companies are entitled to the refund privilege granted by R.A. No.

1435 on specific taxes paid up to 1985 on manufactured and diesel fuel oils.

Since the private respondent's claim for refund covers specific taxes paid

from 1980 to July 1983 then we find that the private respondent is entitled

to a refund. It should be made clear, however, that Rio Tuba is not entitled

the whole amount it claims as refund.

The specific taxes on oils which Rio Tuba paid for the aforesaid period were

no longer based on the rates specified by Sections 1 and 2 of R.A. No. 1435

but on the increased rates mandated under Sections 153 and 156 of the

National Internal Revenue Code of 1977. We note, however, that the latter

law does not specifically provide for a refund to these mining and lumber

companies of specific taxes paid on manufactured and diesel fuel oils.

In Insular Lumber Co. v. Court of Tax Appeals, (104 SCRA 710 [1981]), the

Court held that the authorized partial refund under section 5 of R.A. No.

1435 partakes of the nature of a tax exemption and therefore cannot be

allowed unless granted in the most explicit and categorical language. Since

the grant of refund privileges must be strictly construed against the

taxpayer, the basis for the refund shall be the amounts deemed paid under

Sections 1 and 2 of R.A. No. 1435.

ACCORDINGLY, the decision in G.R. Nos. 83583-84 is hereby MODIFIED. The

private respondent's CLAIM for REFUND is GRANTED, computed on the basis

of the amounts deemed paid under Sections 1 and 2 of R.A. No. 1435,

without interest.

SO ORDERED.

 

SECOND DIVISION

G.R. No. L-34526 August 9, 1988

HIJO PLANTATION INC., DAVAO FRUITS CORPORATION, TWIN RIVERS

PLANTATION, INC. and MARSMAN & CO., INC., for themselves and in

behalf of other persons and entities similarly situated, petitioners,

vs.

CENTRAL BANK OF THE PHILIPPINES, respondent.

 

PARAS, J.:

This is a petition for certiorari and prohibition which seeks: (1) to declare

Monetary Board Resolution No. 1995, series of 1971, as null and void; (2) to

prohibit the Central Bank from collecting the stabilization tax on banana

exports shipped during the period January 1, 1972 to June 30, 1982; and (3)

a refund of the amount collected as stabilization tax from the Central Bank.

The facts of this case as culled from the records are as follows:

Hijo Plantation, Inc., Davao Fruits Corporation, Twin Rivers Plantation, Inc.

and Marsman Plantation (Manifestation, Rollo, P. 18), collectively referred to

herein as petitioners, are domestic corporations duly organized and existing

under the laws of the Philippines, all of which are engaged in the production

and exportation of bananas in and from Mindanao.

Owing to the difficulty of determining the exchange rate of the peso to the

dollar because of the floating rate and the promulgation of Central Bank

Circular No. 289 which imposes an 80% retention scheme on all dollar

earners, Congress passed Republic Act No. 6125 entitled "an act imposing

STABILIZATION TAX ON CONSIGNMENTS ABROAD TO ACCELERATE THE

ECONOMIC DEVELOPMENT OF THE PHILIPPINES AND FOR OTHER

PURPOSES," approved and made effective on May 1, 1970 (Comment on

Petition, Rollo, p, 32), to eliminate the necessity for said circular and to

stabilize the peso. Among others, it provides as follows:

SECTION 1. There shall be imposed, assessed and collected a stabilization

tax on the gross F.O.B. peso proceeds, based on the rate of exchange

prevailing at the time of receipt of such proceeds, whether partial or total, of

any exportation of the following products in accordance with the following

schedule:

a. In the case of logs, copra, centrifugal sugar, and copper ore and

concentrates:

Ten per centum of the F.O.B. peso proceeds of exports received on or after

the date of effectivity of this Act to June thirty, nineteen hundred seventy

one;

Eight per centum of the F.O.B. peso proceeds of exports received from July

first, nineteen hundred seventy-one to June thirty, nineteen hundred

seventy-two;

Six per centum of the F.O.B. peso proceeds of exports received from July

first, nineteen hundred seventy two to June thirty, nineteen hundred

seventy- three; and

Four per centum of the F.O.B. peso proceeds of exports received from July

first, nineteen hundred seventy-three to June thirty, nineteen hundred

seventy-four.

b. In the case of molasses, coconut oil, dessicated coconut, iron ore and

concentrates, chromite ore and concentrates, copra meal or cake,

unmanufactured abaca, unmanufactured tobacco, veneer core and sheets,

plywood (including plywood panels faced with plastics), lumber, canned

pineapples, and bunker fuel oil;

Eight per centum of the F.O.B. peso proceeds of exports shipped on or after

the date of effectivity of this Act to June thirty, nineteen hundred seventy-

one;

Six per centum of the F.O.B. peso proceeds of exports shipped from July

first, nineteen hundred seventy one to June thirty nineteen hundred

seventy- two;

Four per centum of the F.O.B. peso proceeds of exports shipped from July

first, nineteen hundred seventy-two to June thirty nineteen hundred

seventy-three; and

Two per centum of the F.O.B. peso proceeds of exports shipped from July

first, nineteen hundred seventy three to June thirty nineteen hundred

seventy-four.

Any export product the aggregate annual F.O.B. value of which shall exceed

five million United States dollars in any one calendar year during the

effectivity of this Act shall likewise be subject to the rates of tax in force

during the fiscal years following its reaching the said aggregate value.

(Emphasis supplied).

During the first nine (9) months of calendar year 1971, the total banana

export amounted to an annual aggregate F.O.B. value of P8,949,000.00

(Answer, Rollo, p. 73) thus exceeding the aggregate F.O.B. value of five

million United States Dollar, bringing it within the ambit of Republic Act No.

6125. Consequently, the banana industry was in a dilemma as to when the

stabilization tax was to become due and collectible from it and under what

schedule of Section 1 (b) of Republic Act 6125 should said tax be collected.

Accordingly, petitioners through their counsel, by letter dated November 5,

1971, sought the authoritative pronouncement of the Central Bank (herein

referred to as respondent), therein advancing the opinion that the

stabilization tax does not become due and collectible from the petitioners

until July 1, 1972 at the rate of 4% of the F.O.B. peso proceeds of the

exports shipped from July 1, 1972 to June 30,1973. Replying by letter dated

December 17,1971 (Rollo, p. 11), the Central Bank called attention to

Monetary Board Resolution No. 1995 dated December 3, 1971 which

clarified that:

1) For exports of bananas shipped during the period from January 1, 1972 to

June 30, 1972; the stabilization tax shall be at the rate of 6%;

2) For exports of bananas shipped during the period from July 1, 1972 to

June 30, 1973, the stabilization tax shall be at the rate of 4%; and

3) For exports of bananas shipped during the period from July 1, 1973, to

June 30, 1974, the stabilization tax shall be at the rate of 2%."

Contending that said Board Resolution No. 1995 was manifestly contrary to

the legislative intent, petitioners sought a reconsideration of said Board

Resolution by letter dated December 27, 1971 (Rollo, p. 12) which request

for reconsideration was denied by the respondent, also by letter dated

January 20, 1972 (Rollo, p. 24). With the denial of petitioners' request for

reconsideration, respondent thru its agent Bank, Rizal Commercial Banking

Corporation has been collecting from the petitioners who have been forced

to pay under protest, such stabilization tax.

Petitioners view respondent's act as a clear violation of the provision of

Republic Act No. 6125, and as an act in excess of its jurisdiction, hence, this

petition.

The sole issue in this case is whether or not respondent acted with grave

abuse of discretion amounting to lack of jurisdiction when it issued Monetary

Board Resolution No. 1995, series of 1971 which in effect reaffirmed Central

Bank Circular No. 309, enacted pursuant to Monetary Board Resolution No.

1179.

There is here no dispute that the banana industry is liable to pay the

stabilization tax prescribed under Republic Act No. 1995, it being the

admission of both parties, that the Industry has indeed reached and for the

first time in the calendar year 1971, a total banana export exceeding the

aggregate annual F.O.B. value of five million United States dollars. The crux

of the controversy, however, is the manner of implementation of Republic

Act No. 6125.

Section 1 of R.A. 6125 clearly provides as follows:

An export product the aggregate annual F.O.B. value of which shall exceed

five million US dollars in any one calendar year during the effectivity of the

act shall likewise be subject to the rates of tax in force during the fiscal year

following its reaching the said aggregate value."

Petitioners contend that the stabilization tax to be collected from the

banana industry does not become due and collectible until July 1, 1972 at

the rate of 4% of the F.O.B. peso proceeds of the export shipped from July 1,

1972 to June 30,1973. They further contend that respondent gave

retroactive effect to the law (RA 6125) by ruling in Monetary Board

Resolution No. 1995 dated December 3, 1 971, that the export stabilization

tax on banana industry would start to accrue on January 1, 1972 at the rate

of 6% of the F.O.B. peso proceeds of export shipped from July 1, 1971 to

June 30, 1972 (Rollo, pp. 3-4).

Respondent, on the other hand, contends that the aforecited provision of RA

6125 merely prescribes the rates that may be imposed but does not provide

when the tax shall be collected and makes no reference to any definite fixed

period when the tax shall begin to be collected (Rollo, pp. 77-78).

There is merit in this petition.

In the very nature of things, in many cases it becomes impracticable for the

legislative department of the Government to provide general regulations for

the various and varying details for the management of a particular

department of the Government. It therefore becomes convenient for the

legislative department of the government, by law, in a most general way, to

provide for the conduct, control, and management of the work of the

particular department of the government; to authorize certain persons, in

charge of the management and control of such department (United States v.

Tupasi Molina, 29 Phil. 119 [19141).

Such is the case in RA 6125, which provided in its Section 6, as follows:

All rules and regulations for the purpose of carrying out the provisions of the

act shall be promulgated by the Central Bank of the Philippines and shall

take effect fifteen days after publication in three newspapers of general

circulation throughout the Philippines, one of which shall be in the national

language.

Such regulations have uniformly been held to have the force of law,

whenever they are found to be in consonance and in harmony with the

general purposes and objects of the law. Such regulations once established

and found to be in conformity with the general purposes of the law, are just

as binding upon all the parties, as if the regulation had been written in the

original law itself (29 Phil. 119, Ibid). Upon the other hand, should the

regulation conflict with the law, the validity of the regulation cannot be

sustained (Director of Forestry vs. Muroz 23 SCRA 1183).

Pursuant to the aforecited provision, the Monetary Board issued Resolution

No. 1179 which contained the rules and regulations for the implementation

of said provision which Board resolution was subsequently embodied in

Central Bank Circular No. 309, dated August 10, 1970 (duly published in the

Official Gazette, Vol. 66, No. 34, August 24, 1940, p. 7855 and in three

newspapers of general circulation throughout the Philippines namely, the

Manila Times, Manila Chronicle and Manila Daily Bulletin). Section 3 of

Central Bank Circular No. 309, "provides that the stabilization tax shall begin

to apply on January first following the calendar year during which such

export products shall have reached the aggregate annual F.O.B. value of

more than $5 million and the applicable tax rates shall be the rates

prescribed in schedule (b) of Section 1 of RA No. 6125 for the fiscal year

following the reaching of the said aggregate value." Central Bank Circular

No. 309 was subsequently reaffirmed in Monetary Board Resolution No.

1995 herein assailed by petitioners for being null and void (Rollo, pp. 97-

98).

In its comment (Rollo, p. 40), respondent argues that the request for

authoritative pronouncement of petitioners was made because there was no

express provision in Section 1 of RA 6125 which categorically states, when

the stabilization tax shall begin to accrue on those aggregate annual F.O.B.

values exceeding five (5) million United States dollars in any one calendar

year during the effectivity of said act. For which reason, the law itself

authorized it under Section 7 to promulgate rules and regulations to carry

out the provisions of said law.

In petitioner's reply (Rollo, p. 154) they argue that since the Banana Exports

reached the aggregate annual F.O.B. value of US $5 million in August 1971,

the stabilization tax on banana should be imposed only on July 1, 1972, the

fiscal year following the calendar year during which the industry attained

the $5 million mark. Their argument finds support in the very language of

the law and upon congressional record where a clarification on the

applicability of the law was categorically made by the then Senator Aytona

who stated that the tax shall be applicable only after the $5 million

aggregate value is reached, making such tax prospective in application and

for a period of one year- referring to the fiscal year (Annex 8, Comment of

Respondent; Rollo, p. 60). Clearly such clarification was indicative of the

legislative intent. Further, they argue that respondent bank through the

Monetary Board clearly overstepped RA 6125 which empowered it to

promulgate rules and regulations for the purpose of carrying out the

provisions of said act, because while Section 1 of the law authorizes it to

levy a stabilization tax on petitioners only in the fiscal year following their

reaching the aggregate annual F.O.B. value of US $5 million, that is, the

fiscal year July 1, 1972 to June 30, 1973, at a tax rate of 4% of the F.O.B.

peso proceeds, respondent in gross violation of the law, instead issued

Resolution No. 1995 which impose a 6% stabilization tax for the calendar

year January 1, 1972 to June 30, 1972, which obviously is in excess of its

jurisdiction. It was further argued that in directing its agent bank to collect

the stabilization tax in accordance with Monetary Board Resolution No.

1995, it acted whimsically and capriciously. (Rollo, p. 155).

It will be observed that while Monetary Board Resolution No. 1995 cannot be

said to be the product of grave abuse of discretion but rather the result of

respondent's overzealous desire to carry into effect the provisions of RA

6125, it is evident that the Board acted beyond its authority under the law

and the Constitution. Hence, the petition for certiorari and prohibition in the

case at bar, is proper.

Moreover, there is no dispute that in case of discrepancy between the basic

law and a rule or regulation issued to implement said law, the basic law

prevails because said rule or regulation cannot go beyond the terms and

provisions of the basic law (People vs. Lim, 108 Phil. 1091). Rules that

subvert the statute cannot be sanctioned (University of Sto. Tomas v. Board

of Tax Appeals, 93 Phil. 376; Del Mar v. Phil. Veterans Administration, 51

SCRA 340). Except for constitutional officials who can trace their

competence to act to the fundamental law itself, a public official must locate

to the statute relied upon a grant of power before he can exercise it.

Department zeal may not be permitted to outrun the authority conferred by

statute (Radio Communications of the Philippines, Inc. v. Santiago L-29236,

August 21, 1974, 58 SCRA 493; cited in Tayug Rural Bank v. Central Bank, L-

46158, November 28,1986,146 SCRA 120,130).

PREMISES CONSIDERED, this petition is hereby GRANTED.

SO ORDERED.

 

EN BANC

G.R. No. L-14880             April 29, 1960

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

FILIPINAS COMPAÑIA DE SEGUROS, respondent.

Assistant Solicitor General Jose P. Alejandro and Special Attorney Jaime M.

Maza for petitioner.

Ramon T. Garcia for respondent.

BARRERA, J.:

Respondent Filipinas Compañia de Seguros, an insurance company, is also

engaged in business as a real estate dealer. On January 4, 1956,

respondent, in accordance with the single rate then prescribed under

Section 182 of the National Internal Revenue Code.1 paid the amount of

P150.00 as real estate dealer's fixed annual tax for the year 1956.

Subsequently said Section 182 of the Code was amended by Republic Act

No. 1612, which took effect on August 24, 1956, by providing a small of

graduated rates: P150 if the annual income of the real estate dealer from his

business as such is P4,000, but does not exceed P10,000; P300, if such

annual income exceeds P10,000 but does not exceed P30,000; and P500 if

such annual income exceeds P30,000.

On June 17, 1957, petitioner Commissioner of Internal Revenue assessed

and demanded from respondent (whose annual income exceeded

P30,000.00) the amount of P350.00 as additional real estate dealer's fixed

annual tax for the year 1956. On July 16, 1957, respondent wrote a letter to

petitioner stating that the "records will show that the real estate dealer's

fixed tax for 1956 of this Company was fully paid by us prior to the

effectivity of Republic Act No. 1612 which amended, among other things,

Sections 178 and 192 of the National Internal Revenue Code." And, as to the

retroactive effect of said Republic Act No. 1612, respondent added that the

Republic Act No. 1856 which, among other things, amended Section 182 of

the National Internal Revenue Code, Congress has clearly shown its

intention when it provided that the increase in rates of taxes envisioned by

Republic Act No. 1612 is to be made effective as of 1 January 1957".

On October 23, 1957, petitioner informed respondent that "Republic Act No.

1856 which took effect June 22, 1957 amended the date of effectivity of

Republic Act 1612 to January 1, 1957. However, the said amendment applies

only to fixed taxes on occupation and not to fixed taxes on business."

Hence, petitioner insisted that respondent should pay the amount of

P350.00 as additional real estate dealer's fixed annual tax for the year 1956.

On November 20, 1957, respondent filed with the Court of Tax Appeals a

petition for review. To this petition, petitioner filed his answer on December

6, 1957. As petitioner practically admitted the material factual allegations in

the petition for review, the case was submitted for judgment on the

pleadings.

On November 22, 1958, the Court of Tax Appeals rendered a decision

sustaining the contention of respondent company and ordering the

petitioner Commissioner of Internal Revenue to desist from collecting the

P350.00 additional assessment. From this decision, petitioner appealed to

us.

As a rule, laws have no retroactive effect, unless the contrary is provided.

(Art. 4, Civil Code of the Philippines; Manila Trading and Supply Co. vs.

Santos, et al., 66 Phil., 237; La Provisora Filipina vs. Ledda, 66 Ph 573.)

Otherwise stated, a state shou!d be consider as prospective in its operation

whether it enacts, amen or repeals a tax, unless the language of the statute

clearly demands or expresses that it shall have a retroactive effect (61 C. J.

1602, cited in Loremo vs. Posadas, 64 Phi 353.) The rule applies with greater

force to the case bar, considering that Republic Act No. 1612, which imposes

the new and higher rates of real estate dealer's annual fixed tax, expressly

provides in Section 21 thereof the said Act "shall take effect upon its

approval" on August 24, 1956.

The instant case involves the fixed annual real estat dealer's tax for 1956.

There is no dispute that before the enactment of Republic Act No. 1612 on

August 2 1956, the uniform fixed annual real estate dealer's was P150.00 for

all owners of rental properties receiving an aggregate amount of P3,000.00

or more a year in the form of rentals2 and that. "the yearly fixed taxes are

due on the first of January of each year" unless tendered in semi-annual or

quarterly installments.3 Since the petitioner indisputably paid in full on

January 4, 1956, the total annual tax then prescribed for the year 1956,

require it to pay an additional sum of P350.00 to complete the P500.00

provided in Republic Act No. 1612 which became effective by its very terms

only on August 24 1956, would, in the language of the Court of Tax Appeals

result in the imposition upon respondent of a tax burden to which it was not

liable before the enactment of said amendatory act, thus rendering its

operation retroactive rather than prospective, which cannot be done, as it

would contravene the aforecited Section 21 of Republic Act No. 1612 as well

as the established rule regarding prospectivity of operation of statutes.

The view that Congress did intend to impose said increased rates of real

estate dealer's annual tax prospectively and not retroactively, finds some

affirmation in Republic Act No. 1856, approved on June 22, 1957, which

fixed the effective date of said new rates under Republic Act No. 1612 by

inserting the following proviso in Section 182 of the National Internal

Revenue Code:

Provided, further, That any amount collected in excess of the rates in effect

prior to January one, nineteen hundred and fifty-seven, shall be refunded or

credited to the taxpayer concerned subject to the provisions of section three

hundred and nine of this Code. (Sec. 182 (b) (2) (1).)

Petitioner, however, contends that the above-quoted provision refers only to

fixed taxes on occupation and does not cover fixed taxes on business, such

as the real estate dealer's fixed tax herein involved. This is technically

correct, but we note from the deliberations in the Senate, where the proviso

in question was introduced as an amendment, that said House Bill No. 5919

which became Republic Act No. 1856 was considered, amended, and

enacted into law, in order precisely that the "iniquitous effects" which were

then being felt by taxpayers. in general, on account of the approval of

Republic Act No. 1612, Which was being given retroactive effect by the

Bureau of Internal Revenue by collecting these taxes retroactively from

January 1, 1956, be eliminated and complaints against such action be finally

settled. (See Senate Congressional Record, May 4, 1957, pp. 10321033.)

It is also to be observed that said House Bill No. 5819 as originally

presented, was expressly intended to amend certain provisions of the

National Internal Revenue Code dealing on fixed taxes on business. The

provisions in respect of fixed tax on occupation were merely subsequently

added. This would seem to indicate that the proviso in question was

intended to cover not only fixed taxes on occupation, but also fixed taxes on

business. (Senate Congressional Record, March 7, 1957, p. 444.)The fact

that said proviso was placed only at the end of paragraph "(B) On

occupation" is not, therefore, view of the circumstances, decisive and

unmistakable indication that Congress limited the proviso to occupation

taxes.

Even though the primary purpose of the proviso is to limit restrain the

general language of a statute, the legislature, unfotunately, does not always

use it with technical correctness; consequently, where its use creates an

ambiguity, it is the duty of the court to ascertain the legislative intention,

through resort to usual rules of construction applicable to statutes, generally

an give it effect even though the statute is thereby enlarged, or the proviso

made to assume the force of an independent enactment and although a

proviso as such has no existence apart from provision which it is designed to

limit or to qualify. (Statutory Construction by E. T. Crawford, pp. 604-605.)

. . . When construing a statute, the reason for its enactment should be kept

in mind, and the statute should be construe with reference to its intended

scope and purpose. (Id. at p. 249.)

On the general principle of prospectivity of statute on the language of

Republic Act 1612 itself, especially Section 21 thereof, and on the basis of

its intended scope and purpose as disclosed in the Congressional Record we

find ourselves in agreement with the Court of Tax Appeals.

Wherefore, the decision appealed from is hereby affirmed without costs. So

ordered.

Paras, C.J., Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion,

Endencia and Gutierrez David, JJ. concur.

 

Footnotes

1 In relation to Republic Act No. 588.

2 Republic Act No. 588.

3 See Section 180, Com. Act No. 466, before its amendment on June22, 1957 by Republic Act No. 2025.

EN BANC

[G.R. No. 132527.  July 29, 2005]

COCONUT OIL REFINERS ASSOCIATION, INC. represented by its

President, JESUS L. ARRANZA, PHILIPPINE ASSOCIATION OF MEAT

PROCESSORS, INC. (PAMPI), represented by its Secretary, ROMEO

G. HIDALGO, FEDERATION OF FREE FARMERS (FFF), represented by

its President, JEREMIAS U. MONTEMAYOR, and BUKLURAN NG

MANGGAGAWANG PILIPINO (BMP), represented by its Chairperson,

FELIMON C. LAGMAN, petitioners, vs. HON. RUBEN TORRES, in his

capacity as Executive Secretary; BASES CONVERSION AND

DEVELOPMENT AUTHORITY, CLARK DEVELOPMENT CORPORATION,

SUBIC BAY METROPOLITAN AUTHORITY, 88 MART DUTY FREE,

FREEPORT TRADERS, PX CLUB, AMERICAN HARDWARE, ROYAL DUTY

FREE SHOPS, INC., DFS SPORTS, ASIA PACIFIC, MCI DUTY FREE

DISTRIBUTOR CORP. (formerly MCI RESOURCES, CORP.), PARK &

SHOP, DUTY FREE COMMODITIES, L. FURNISHING, SHAMBURGH,

SUBIC DFS, ARGAN TRADING CORP., ASIPINE CORP., BEST BUY, INC.,

PX CLUB, CLARK TRADING, DEMAGUS TRADING CORP., D.F.S.

SPORTS UNLIMITED, INC., DUTY FREE FIRST SUPERSTORE, INC.,

FREEPORT, JC MALL DUTY FREE INC. (formerly 88 Mart [Clark] Duty

Free Corp.), LILLY HILL CORP., MARSHALL, PUREGOLD DUTY FREE,

INC., ROYAL DFS and ZAXXON PHILIPPINES, INC., respondents.

D E C I S I O N

AZCUNA, J.:

This is a Petition for Prohibition and Injunction seeking to enjoin and prohibit

the Executive Branch, through the public respondents Ruben Torres in his

capacity as Executive Secretary, the Bases Conversion Development

Authority (BCDA), the Clark Development Corporation (CDC) and the Subic

Bay Metropolitan Authority (SBMA), from allowing, and the private

respondents from continuing with, the operation of tax and duty-free shops

located at the Subic Special Economic Zone (SSEZ) and the Clark Special

Economic Zone (CSEZ), and to declare the following issuances as

unconstitutional, illegal, and void:

1.  Section 5 of Executive Order No. 80,[1] dated April 3, 1993, regarding the

CSEZ.

2.  Executive Order No. 97-A, dated June 19, 1993, pertaining to the SSEZ.

3.  Section 4 of BCDA Board Resolution No.  93-05-034,[2] dated May 18,

1993, pertaining to the CSEZ.

Petitioners contend that the aforecited issuances are unconstitutional and

void as they constitute executive lawmaking, and that they are contrary to

Republic Act No. 7227[3] and in violation of the Constitution, particularly

Section 1, Article III (equal protection clause), Section 19, Article XII

(prohibition of unfair competition and combinations in restraint of trade),

and Section 12, Article XII (preferential use of Filipino labor, domestic

materials and locally produced goods).

The facts are as follows:

On March 13, 1992, Republic Act No. 7227 was enacted, providing for,

among other things, the sound and balanced conversion of the Clark and

Subic military reservations and their extensions into alternative productive

uses in the form of special economic zones in order to promote the

economic and social development of Central Luzon in particular and the

country in general. Among the salient provisions are as follows:

SECTION 12.  Subic Special Economic Zone. — 

. . .

The abovementioned zone shall be subject to the following policies:

(a)     Within the framework and subject to the mandate and limitations of

the Constitution and the pertinent provisions of the Local Government Code,

the Subic Special Economic Zone shall be developed into a self-sustaining,

industrial, commercial, financial and investment center to generate

employment opportunities in and around the zone and to attract and

promote productive foreign investments;

(b)     The Subic Special Economic Zone shall be operated and managed as a

separate customs territory ensuring free flow or movement of goods and

capital within, into and exported   out of the Subic Special Economic Zone, as

well as provide incentives such as tax and duty-free importations of raw

materials, capital and equipment. However, exportation or removal of goods

from the territory of the Subic Special Economic Zone to the other parts of

the Philippine territory shall be subject to customs duties and taxes under

the Customs and Tariff Code and other relevant tax laws of the Philippines;

[4]

(c)     The provision of existing laws, rules and regulations to the contrary

notwithstanding, no taxes, local and national, shall be imposed within the

Subic Special Economic Zone.  In lieu of paying taxes, three percent  (3%) of

the gross income earned by all businesses and enterprises within the Subic

Special Ecoomic Zone shall be remitted to the National Government, one

percent (1%) each to the local government units affected by the declaration

of the zone in proportion to their population area, and other factors.  In

addition, there is hereby established a development fund of one percent

(1%) of the gross income earned by all businesses and enterprises within

the Subic Special Economic Zone to be utilized for the development of 

municipalities outside the City of Olangapo and the Municipality of Subic,

and other municipalities contiguous to the base areas.

. . .

SECTION 15.             Clark and Other Special Economic Zones. — Subject to

the concurrence by resolution of the local government units directly

affected, the President is hereby authorized to create by executive

proclamation a Special Economic Zone covering the lands occupied by the

Clark military reservations and its contiguous extensions as embraced,

covered and defined by the 1947 Military Bases Agreement between the

Philippines and the United States of America, as amended, located within

the territorial jurisdiction of Angeles City, Municipalities of Mabalacat and

Porac, Province of Pampanga and the Municipality of Capas, Province of

Tarlac, in accordance with the policies as herein provided insofar as

applicable to the Clark military reservations.

The governing body of the Clark Special Economic Zone shall likewise be

established by executive proclamation with such powers and functions

exercised by the Export Processing Zone Authority pursuant to Presidential

Decree No. 66 as amended.

The policies to govern and regulate the Clark Special Economic Zone shall

be determined upon consultation with the inhabitants of the local

government units directly affected which shall be conducted within six (6)

months upon approval of this Act.

Similarly, subject to the concurrence by resolution of the local government

units directly affected, the President shall create other Special Economic

Zones, in the base areas of Wallace Air Station in San Fernando, La Union

(excluding areas designated for communications, advance warning and

radar requirements of the Philippine Air Force to be determined by the

Conversion Authority) and Camp John Hay in the City of Baguio.

Upon recommendation of the Conversion Authority, the President is likewise

authorized to create Special Economic Zones covering the Municipalities of

Morong, Hermosa, Dinalupihan, Castillejos and San Marcelino.

On April 3, 1993, President Fidel V. Ramos issued Executive Order No. 80,

which declared, among others, that Clark shall have all the applicable

incentives granted to the Subic Special Economic and Free Port Zone under

Republic Act No. 7227.  The pertinent provision assailed therein  is as

follows:

SECTION 5. Investments Climate in the CSEZ. — Pursuant to Section 5(m)

and Section 15 of RA 7227, the BCDA shall promulgate all necessary

policies, rules and regulations governing the CSEZ, including investment

incentives, in consultation with the local government units and pertinent

government departments for implementation by the CDC.

Among others, the CSEZ shall have all the applicable incentives in the Subic

Special Economic and Free Port Zone under RA 7227 and those applicable

incentives granted in the Export Processing Zones, the Omnibus

Investments Code of 1987, the Foreign Investments Act of 1991 and new

investments laws which may hereinafter be enacted.

The CSEZ Main Zone covering the Clark Air Base proper shall have all the

aforecited investment incentives, while the CSEZ Sub-Zone covering the rest

of the CSEZ shall have limited incentives.  The full incentives in the Clark

SEZ Main Zone and the limited incentives in the Clark SEZ Sub-Zone shall be

determined by the BCDA.

Pursuant to the directive under Executive Order No. 80, the BCDA passed

Board Resolution No. 93-05-034 on May 18, 1993, allowing the tax and duty-

free sale at retail of consumer goods imported via Clark for consumption

outside the CSEZ. The assailed provisions of said resolution read, as follows:

Section 4. SPECIFIC INCENTIVES IN THE CSEZ MAIN ZONE. – The CSEZ-

registered enterprises/businesses shall be entitled to all the incentives

available under R.A. No. 7227, E.O. No. 226 and R.A. No. 7042 which shall

include, but not limited to, the following:

I.        As in Subic Economic and Free Port Zone:

A.    Customs:

. . .

4.    Tax and duty-free purchase and consumption of goods/articles (duty

free shopping) within the CSEZ Main Zone.

5.    For individuals, duty-free consumer goods may be brought out of the

CSEZ Main Zone into the Philippine Customs territory but not to exceed

US$200.00 per month per CDC-registered person, similar to the limits

imposed in the Subic SEZ. This privilege shall be enjoyed only once a month.

Any excess shall be levied taxes and duties by the Bureau of Customs.

On June 10, 1993, the President issued Executive Order No. 97, “Clarifying

the Tax and Duty Free Incentive Within the Subic Special Economic Zone

Pursuant to R.A. No. 7227.” Said issuance in part states, thus:

SECTION 1.  On Import Taxes and Duties – Tax and duty-free importations

shall apply only to raw materials, capital goods and equipment brought in by

business enterprises into the SSEZ. Except for these items, importations of

other goods into the SSEZ, whether by business enterprises or resident

individuals, are subject to taxes and duties under relevant Philippine laws.

The exportation or removal of tax and duty-free goods from the territory of

the SSEZ to other parts of the Philippine territory shall be subject to duties

and taxes under relevant Philippine laws.

Nine days after, on June 19, 1993, Executive Order No. 97-A was issued,

“Further Clarifying the Tax and Duty-Free Privilege Within the Subic Special

Economic and Free Port Zone.” The relevant provisions read, as follows:

SECTION 1.  The following guidelines shall govern the tax and duty-free

privilege within the Secured Area of the Subic Special Economic and Free

Port Zone:

1.1          The Secured Area consisting of the presently fenced-in former

Subic Naval Base shall be the only completely tax and duty-free area in the

SSEFPZ.  Business enterprises and individuals (Filipinos and foreigners)

residing within the Secured Area are free to import raw materials, capital

goods, equipment, and consumer items tax and duty-free.  Consumption

items, however, must be consumed within the Secured Area.  Removal of

raw materials, capital goods, equipment and consumer items out of the

Secured Area for sale to non-SSEFPZ registered enterprises shall be subject

to the usual taxes and duties, except as may be provided herein.

1.2.         Residents of the SSEFPZ living outside the Secured Area can enter

the Secured Area and consume any quantity of consumption items in hotels

and restaurants within the Secured Area. However, these residents can

purchase and bring out of the Secured Area to other parts of the Philippine

territory consumer items worth not exceeding US$100 per month per

person. Only residents age 15 and over are entitled to this privilege.

1.3.         Filipinos not residing within the SSEFPZ can enter the Secured Area

and consume any quantity of consumption items in hotels and restaurants

within the Secured Area. However, they can purchase and bring out [of] the

Secured Area to other parts of the Philippine territory consumer items worth

not exceeding US$200 per year per person. Only Filipinos age 15 and over

are entitled to this privilege.

Petitioners assail the $100 monthly and $200 yearly tax-free shopping

privileges granted by the aforecited provisions respectively to SSEZ

residents living outside the Secured Area of the SSEZ and to Filipinos aged

15 and over residing outside the SSEZ.

On February 23, 1998, petitioners thus filed the instant petition, seeking the

declaration of nullity of the assailed issuances on the following grounds:

I.

EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND

SECTION 4 OF BCDA BOARD RESOLUTION NO. 93-05-034 ARE NULL AND

VOID [FOR] BEING AN EXERCISE OF EXECUTIVE LAWMAKING.

II.

EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND

SECTION 4 OF BCDA BOARD RESOLUTION NO. 93-05-034 ARE

UNCONSTITUTIONAL FOR BEING VIOLATIVE OF THE EQUAL PROTECTION

CLAUSE AND THE PROHIBITION AGAINST UNFAIR COMPETITION AND

PRACTICES IN RESTRAINT OF TRADE.

III.

EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND

SECTION 4 OF BCDA BOARD RESOLUTION NO. 93-05-034 ARE NULL AND

VOID [FOR] BEING VIOLATIVE OF REPUBLIC ACT NO. 7227.

IV.

THE CONTINUED IMPLEMENTATION OF THE CHALLENGED ISSUANCES IF NOT

RESTRAINED WILL CONTINUE TO CAUSE PETITIONERS TO SUFFER GRAVE

AND IRREPARABLE INJURY.[5]

In their Comments, respondents point out procedural issues, alleging lack of

petitioners’ legal standing, the unreasonable delay in the filing of the

petition, laches, and the propriety of the remedy of prohibition.

Anent the claim on lack of legal standing, respondents argue that

petitioners, being mere suppliers of the local retailers operating outside the

special economic zones, do not stand to suffer direct injury in the

enforcement of the issuances being assailed herein.  Assuming this is true,

this Court has nevertheless held that in cases of paramount importance

where serious constitutional questions are involved, the standing

requirements may be relaxed and a suit may be allowed to prosper even

where there is no direct injury to the party claiming the right of judicial

review.[6]

In the same vein, with respect to the other alleged procedural flaws, even

assuming the existence of such defects, this Court, in the exercise of its

discretion, brushes aside these technicalities and takes cognizance of the

petition considering the importance to the public of the present case and in

keeping with the duty to determine whether the other branches of the

government have kept themselves within the limits of the Constitution.[7]

Now, on the constitutional arguments raised:

As this Court enters upon the task of passing on the validity of an act of a

co-equal and coordinate branch of the Government, it bears emphasis that

deeply ingrained in our jurisprudence is the time-honored principle that a

statute is presumed to be valid.[8] This presumption is rooted in the doctrine

of separation of powers which enjoins upon the three coordinate

departments of the Government a becoming courtesy for each other’s acts.

[9] Hence, to doubt is to sustain.  The theory is that before the act was done

or the law was enacted, earnest studies were made by Congress, or the

President, or both, to insure that the Constitution would not be breached.[10]

This Court, however, may declare a law, or portions thereof, unconstitutional

where a petitioner has shown a clear and unequivocal breach of the

Constitution, not merely a doubtful or argumentative one.[11] In other words,

before a statute or a portion thereof may be declared unconstitutional, it

must be shown that the statute or issuance violates the Constitution clearly,

palpably and plainly, and in such a manner as to leave no doubt or

hesitation in the mind of the Court.[12]

The Issue on Executive Legislation

Petitioners claim that the assailed issuances (Executive Order No. 97-A;

Section 5 of Executive Order No. 80; and Section 4 of BCDA Board

Resolution No. 93-05-034) constitute executive legislation, in violation of the

rule on separation of powers. Petitioners argue that the Executive

Department, by allowing through the questioned issuances the setting up of

tax and duty-free shops and the removal of consumer goods and items from

the zones without payment of corresponding duties and taxes, arbitrarily

provided additional exemptions to the limitations imposed by Republic Act

No. 7227, which limitations petitioners identify as follows:

(1)   [Republic Act No. 7227] allowed only tax and duty-free importation of

raw materials, capital and equipment.

(2)   It provides that any exportation or removal of goods from the territory

of the Subic Special Economic Zone to other parts of the Philippine territory

shall be subject to customs duties and taxes under the Customs and Tariff

Code and other relevant tax laws of the Philippines.

Anent the first alleged limitation, petitioners contend that the wording of

Republic Act No. 7227 clearly limits the grant of tax incentives to the

importation of raw materials, capital and equipment only. Hence, they claim

that the assailed issuances constitute executive legislation for invalidly

granting tax incentives in the importation of consumer goods such as those

being sold in the duty-free shops, in violation of the letter and intent of

Republic Act No. 7227.

A careful reading of Section 12 of Republic Act No. 7227, which pertains to

the SSEZ, would show that it does not restrict the duty-free importation only

to “raw materials, capital and equipment.” Section 12 of the cited law is

partly reproduced, as follows:

SECTION 12.  Subic Special Economic Zone. —

. . .

The abovementioned zone shall be subject to the following policies:

. . .

(b)   The Subic Special Economic Zone shall be operated and managed as a

separate customs territory ensuring free flow or movement of goods and

capital within, into and exported out of the Subic Special Economic Zone, as

well as provide incentives such as tax and duty-free importations of raw

materials, capital and equipment. However, exportation or removal of goods

from the territory of the Subic Special Economic Zone to the other parts of

the Philippine territory shall be subject to customs duties and taxes under

the Customs and Tariff Code and other relevant tax laws of the Philippines.

[13]

While it is true that Section 12 (b) of Republic Act No. 7227 mentions only

raw materials, capital and equipment, this does not necessarily mean that

the tax and duty-free buying privilege is limited to these types of articles to

the exclusion of consumer goods. It must be remembered that in construing

statutes, the proper course is to start out and follow the true intent of the

Legislature and to adopt that sense which harmonizes best with the context

and promotes in the fullest manner the policy and objects of the Legislature.

[14]

In the present case, there appears to be no logic in following the narrow

interpretation petitioners urge.  To limit the tax-free importation privilege of

enterprises located inside the special economic zone only to raw materials,

capital and equipment clearly runs counter to the intention of the

Legislature to create a free port where the “free flow of goods or capital

within, into, and out of the zones” is insured.

The phrase “tax and duty-free importations of raw materials, capital and

equipment” was merely cited as an example of incentives that may be given

to entities operating within the zone. Public respondent SBMA correctly

argued that the maxim expressio unius est exclusio alterius, on which

petitioners impliedly rely to support their restrictive interpretation, does not

apply when words are mentioned by way of example.[15] It is obvious from

the wording of Republic Act No. 7227, particularly the use of the phrase

“such as,” that the enumeration only meant to illustrate incentives that the

SSEZ is authorized to grant, in line with its being a free port zone.

Furthermore, said legal maxim should be applied only as a means of

discovering legislative intent which is not otherwise manifest, and should

not be permitted to defeat the plainly indicated purpose of the Legislature.

[16]

The records of the Senate containing the discussion of the concept of

“special economic zone” in Section 12 (a) of Republic Act No. 7227 show the

legislative intent that consumer goods entering the SSEZ which satisfy the

needs of the zone and are consumed there are not subject to duties

and taxes in accordance with Philippine laws, thus:

Senator Guingona.  . . . The concept of Special Economic Zone is one that

really includes the concept of a free port, but it is broader.  While a free port

is necessarily included in the Special Economic Zone, the reverse is not true

that a free port would include a special economic zone.

Special Economic Zone, Mr. President, would include not only the incoming

and outgoing of vessels, duty-free and tax-free, but it would involve also

tourism, servicing, financing and all the appurtenances of an investment

center.  So, that is the concept, Mr. President.  It is broader.  It includes the

free port concept and would cater to the greater needs of Olangapo City,

Subic Bay and the surrounding municipalities.

Senator Enrile.  May I know then if a factory located within the jurisdiction

of Morong, Bataan that was originally a part of the Subic Naval reservation,

be entitled to a free port treatment or just a special economic zone

treatment?

Senator Guingona.  As far as the goods required for manufacture is

concerned, Mr. President, it would have privileges of duty-free and tax-free. 

But in addition, the Special Economic Zone could embrace the needs of

tourism, could embrace the needs of servicing, could embrace the needs of

financing and other investment aspects.

Senator Enrile.  When a hotel is constructed, Mr. President, in this

geographical unit which we call a special economic zone, will the goods

entering to be consumed by the customers or guests of the hotel be subject

to duties?

Senator Guingona.  That is the concept that we are crafting, Mr. President.

Senator Enrile.  No.  I am asking whether those goods will be duty-free,

because it is constructed within a free port.

Senator Guingona.  For as long as it services the needs of the Special

Economic Zone, yes.

Senator Enrile.  For as long as the goods remain within the zone, whether

we call it an economic zone or a free port, for as long as we say in this law

that all goods entering this particular territory will be duty-free and tax-free,

for as long as they remain there, consumed there or reexported or

destroyed in that place, then they are not subject to the duties and taxes in

accordance with the laws of the Philippines?

Senator Guingona. Yes.[17]

Petitioners rely on Committee Report No. 1206 submitted by the Ad Hoc

Oversight Committee on Bases Conversion on June 26, 1995.  Petitioners put

emphasis on the report’s finding that the setting up of duty-free stores

never figured in the minds of the authors of Republic Act No. 7227 in

attracting foreign investors to the former military baselands.  They maintain

that said law aimed to attract manufacturing and service enterprises that

will employ the dislocated former military base workers, but not investors

who would buy consumer goods from duty-free stores.

The Court is not persuaded.  Indeed, it is well-established that opinions

expressed in the debates and proceedings of the Legislature, steps taken in

the enactment of a law, or the history of the passage of the law through the

Legislature, may be resorted to as aids in the interpretation of a statute with

a doubtful meaning.[18] Petitioners’ posture, however, overlooks the fact

that the 1995 Committee Report they are referring to came into being well

after the enactment of Republic Act No. 7227 in 1993.  Hence, as pointed

out by respondent Executive Secretary Torres, the aforementioned report

cannot be said to form part of Republic Act No. 7227’s legislative history.

Section 12 of Republic Act No. 7227, provides in part, thus:

SEC. 12.  Subic Special Economic Zone. -- . . .

The abovementioned zone  shall be  subject to the following policies:

(a)     Within the  framework and subject to the mandate and limitations of

the Constitution and the pertinent provisions of the Local Government Code,

the Subic Special Economic Zone  shall be developed into a self-sustaining,

industrial, commercial, financial and investment center to generate

employment opportunities in and around the zone and to attract and

promote productive foreign investments. [19]

The aforecited policy was mentioned as a basis for the issuance of 

Executive Order No. 97-A, thus:

WHEREAS, Republic Act No. 7227 provides that within the framework and

subject to the mandate and limitations of the Constitution and the pertinent

provisions of the Local Government Code, the Subic Special Economic and

Free Port Zone (SSEFPZ) shall be developed into a self-sustaining industrial,

commercial, financial and investment center to generate employment

opportunities in and around the zone and to attract and promote productive

foreign investments; and

WHEREAS, a special tax and duty-free privilege within a Secured Area in the

SSEFPZ subject, to existing laws has been determined necessary to attract

local and foreign visitors to the zone.

Executive Order No. 97-A provides guidelines to govern   the “tax and duty-

free privileges within the Secured Area of the Subic Special Economic and

Free Port Zone.”  Paragraph 1.6 thereof states that “(t)he sale of tax and

duty-free consumer items in the Secured Area shall only be allowed in duly

authorized duty-free shops.”

The Court finds that the setting up of such commercial establishments

which  are the only ones duly authorized  to sell consumer items tax and

duty-free is  still well within  the policy enunciated in Section 12 of Republic

Act No. 7227 that  “. . .the Subic Special Economic Zone  shall be

developed into a self-sustaining, industrial, commercial, financial

and investment center to generate employment opportunities in

and around the zone and to attract and promote productive foreign

investments.” (Emphasis supplied.)

However, the Court reiterates that the second sentences of paragraphs

1.2 and 1.3 of Executive Order No. 97-A, allowing tax and duty-free

removal of goods to certain individuals, even in a limited amount, from

the Secured Area of the SSEZ, are null and void for being contrary to

Section 12 of Republic Act No. 7227.  Said Section clearly provides that

“exportation or removal of goods from the territory of the Subic Special

Economic Zone to the other parts of the Philippine territory shall be subject

to customs duties and taxes under the Customs and Tariff Code and other

relevant tax laws of the Philippines.”

On the other hand, insofar as the CSEZ is concerned, the case for an invalid

exercise of executive legislation is tenable.

In John Hay Peoples Alternative Coalition, et al. v. Victor Lim, et al.,[20] this Court

resolved an issue, very much like the one herein, concerning the legality of

the tax exemption benefits given to the John Hay Economic Zone under

Presidential Proclamation No. 420, Series of 1994, “CREATING AND

DESIGNATING A PORTION OF THE AREA COVERED BY THE FORMER CAMP

JOHN AS THE JOHN HAY SPECIAL ECONOMIC ZONE PURSUANT TO REPUBLIC

ACT NO. 7227.”

In that case, among the arguments raised was that the granting of tax

exemptions to John Hay was an invalid and illegal exercise by the President

of the powers granted only to the Legislature.  Petitioners therein argued

that Republic Act No. 7227 expressly granted tax exemption only to Subic

and not to the other economic zones yet to be established. Thus, the grant

of tax exemption to John Hay by Presidential Proclamation contravenes the

constitutional mandate that “[n]o law granting any tax exemption shall be

passed without the concurrence of a majority of all the members of

Congress.”[21]

This Court sustained the argument and ruled that the incentives under

Republic Act No. 7227 are exclusive only to the SSEZ. The President,

therefore, had no authority to extend their application to John Hay.  To quote

from the Decision:

More importantly, the nature of most of the assailed privileges is one of tax

exemption. It is the legislature, unless limited by a provision of a state

constitution, that has full power to exempt any person or corporation or

class of property from taxation, its power to exempt being as broad as its

power to tax. Other than Congress, the Constitution may itself provide for

specific tax exemptions, or local governments may pass ordinances on

exemption only from local taxes.

The challenged grant of tax exemption would circumvent the Constitution’s

imposition that a law granting any tax exemption must have the

concurrence of a majority of all the members of Congress. In the same vein,

the other kinds of privileges extended to the John Hay SEZ are by tradition

and usage for Congress to legislate upon.

Contrary to public respondents’ suggestions, the claimed statutory

exemption of the John Hay SEZ from taxation should be manifest and

unmistakable from the language of the law on which it is based; it must be

expressly granted in a statute stated in a language too clear to be mistaken.

Tax exemption cannot be implied as it must be categorically and

unmistakably expressed.

If it were the intent of the legislature to grant to John Hay SEZ the same tax

exemption and incentives given to the Subic  SEZ, it would have so

expressly provided in R.A. No. 7227.[22]

In the present case, while Section 12 of Republic Act No. 7227 expressly

provides for the grant of incentives to the SSEZ, it fails to make any similar

grant in favor of other economic zones, including the CSEZ.  Tax and duty-

free incentives being in the nature of tax exemptions, the basis thereof

should be categorically and unmistakably expressed from the language of

the statute. Consequently, in the absence of any express grant of tax and

duty-free privileges to the CSEZ in Republic Act No. 7227, there would be no

legal basis to uphold the questioned portions of two issuances:   Section 5 of

Executive Order No. 80 and Section 4 of BCDA Board Resolution No. 93-05-

034, which both pertain to the CSEZ.

Petitioners also contend that the questioned issuances constitute executive

legislation for allowing the removal of consumer goods and items from the

zones without payment of corresponding duties and taxes in violation of

Republic Act No. 7227 as Section 12 thereof provides for the taxation of

goods that are exported or removed from the SSEZ to other parts of the

Philippine territory.

 On September 26, 1997, Executive Order No. 444 was issued, curtailing the

duty-free shopping privileges in the SSEZ and the CSEZ “to prevent abuse of

duty-free privilege and to protect local industries from unfair competition.”

The pertinent provisions of said issuance state, as follows:

SECTION 3. Special Shopping Privileges Granted During the Year-round

Centennial Anniversary Celebration in 1998. — Upon effectivity of this Order

and up to the Centennial Year 1998, in addition to the permanent residents,

locators and employees of the fenced-in areas of the Subic Special Economic

and Freeport Zone and the Clark Special Economic Zone who are allowed

unlimited duty free purchases, provided these are consumed within said

fenced-in areas of the Zones, the residents of the municipalities adjacent to

Subic and Clark as respectively provided in R.A. 7227 (1992) and E.O. 97-A

s. 1993 shall continue to be allowed One Hundred US Dollars (US$100)

monthly shopping privilege until 31 December 1998. Domestic tourists

visiting Subic and Clark shall be allowed a shopping privilege of US$25 for

consumable goods which shall be consumed only in the fenced-in area

during their visit therein.

SECTION 4. Grant of Duty Free Shopping Privileges Limited Only To

Individuals Allowed by Law. — Starting 1 January 1999, only the following

persons shall continue to be eligible to shop in duty free shops/outlets with

their corresponding purchase limits:

a.    Tourists and Filipinos traveling to or returning from foreign destinations

under E.O. 97-A s. 1993 — One Thousand US Dollars (US$1,000) but not to

exceed Ten Thousand US Dollars (US$10,000) in any given year;

b.    Overseas Filipino Workers (OFWs) and Balikbayans defined under R.A.

6768 dated 3 November 1989 — Two Thousand US Dollars (US$2,000);

c.    Residents, eighteen (18) years old and above, of the fenced-in areas of

the freeports under R.A. 7227 (1992) and E.O. 97-A s. 1993 — Unlimited

purchase as long as these are for consumption within these freeports.

The term "Residents" mentioned in item c above shall refer to individuals

who, by virtue of domicile or employment, reside on permanent basis within

the freeport area. The term excludes (1) non-residents who have entered

into short- or long-term property lease inside the freeport, (2) outsiders

engaged in doing business within the freeport, and (3) members of private

clubs (e.g., yacht and golf clubs) based or located within the freeport. In this

regard, duty free privileges granted to any of the above individuals (e.g.,

unlimited shopping privilege, tax-free importation of cars, etc.) are hereby

revoked.[23]

A perusal of the above provisions indicates that effective January 1, 1999,

the grant of duty-free shopping privileges to domestic tourists and to

residents living adjacent to SSEZ and the CSEZ had been revoked. Residents

of the fenced-in area of the free port are still allowed unlimited purchase of

consumer goods, “as long as these are for consumption within these

freeports.” Hence, the only individuals allowed by law to shop in the duty-

free outlets and remove consumer goods out of the free ports tax-free are

tourists and Filipinos traveling to or returning from foreign destinations, and

Overseas Filipino Workers and Balikbayans as defined under Republic Act

No. 6768.[24]

Subsequently, on October 20, 2000, Executive Order No. 303 was issued,

amending Executive Order No. 444. Pursuant to the limited duration of the

privileges granted under the preceding issuance, Section 2 of Executive

Order No. 303 declared that “[a]ll special shopping privileges as granted

under Section 3 of Executive Order 444, s. 1997, are hereby deemed

terminated. The grant of duty free shopping privileges shall be restricted to

qualified individuals as provided by law.”

It bears noting at this point that the shopping privileges currently being

enjoyed by Overseas Filipino Workers, Balikbayans, and tourists traveling to

and from foreign destinations, draw authority not from the issuances being

assailed herein, but from Executive Order No. 46[25] and Republic Act No.

6768, both enacted prior to the promulgation of Republic Act No. 7227.

From the foregoing, it appears that petitioners’ objection to the allowance of

tax-free removal of goods from the special economic zones as previously

authorized by the questioned issuances has become moot and academic.

In any event, Republic Act No. 7227, specifically Section 12 (b) thereof,

clearly provides that “exportation or removal of goods from the territory of

the Subic Special Economic Zone to the other parts of the Philippine territory

shall be subject to customs duties and taxes under the Customs and Tariff

Code and other relevant tax laws of the Philippines.”

Thus, the removal of goods from the SSEZ to other parts of the Philippine

territory without payment of said customs duties and taxes is not authorized

by the Act. Consequently, the following italicized provisions found in the

second sentences of paragraphs 1.2 and 1.3, Section 1 of Executive Order

No. 97-A are null and void:

1.2   Residents of the SSEFPZ living outside the Secured Area can enter and

consume any quantity of consumption items in hotels and restaurants within

the Secured Area.  However, these residents can purchase and bring out of

the Secured Area to other  parts of the Philippine territory consumer items

worth not exceeding US $100 per month per person.  Only residents age 15

and over are entitled to this privilege.

1.3   Filipinos not residing within the SSEFPZ can enter the Secured Area and

consume any quantity of consumption items in hotels and restaurants within

the Secured Area.  However, they can   purchase and bring out of the

Secured Area to other parts of the Philippine territory consumer items worth

not exceeding US $200 per year per person. Only Filipinos age 15 and over

are entitled to this privilege.[26]

A similar provision found in paragraph 5, Section 4(A) of BCDA Board

Resolution No. 93-05-034 is also null and void.  Said Resolution applied the

incentives given to the SSEZ under Republic Act No. 7227 to the CSEZ,

which, as aforestated, is without legal basis.

Having concluded earlier that the CSEZ is excluded from the tax and duty-

free incentives provided under Republic Act No. 7227, this Court will resolve

the remaining arguments only with regard to the operations of the SSEZ. 

Thus, the assailed issuance that will be discussed is solely Executive Order

No. 97-A, since it is the only one among the three questioned issuances

which pertains to the SSEZ.

Equal Protection of the Laws

Petitioners argue that the assailed issuance (Executive Order No. 97-A) is

violative of their right to equal protection of the laws, as enshrined in

Section 1, Article III of the Constitution. To support this argument, they

assert that private respondents operating inside the SSEZ are not different

from the retail establishments located outside, the products sold being

essentially the same. The only distinction, they claim, lies in the products’

variety and source, and the fact that private respondents import their items

tax-free, to the prejudice of the retailers and manufacturers located outside

the zone.

Petitioners’ contention cannot be sustained. It is an established principle of

constitutional law that the guaranty of the equal protection of the laws is not

violated by a legislation based on a reasonable classification.[27]

Classification, to be valid, must  (1) rest on substantial distinction, (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.[28]

Applying the foregoing test to the present case, this Court finds no violation

of the right to equal protection of the laws. First, contrary to petitioners’

claim, substantial distinctions lie between the establishments inside and

outside the zone, justifying the difference in their treatment.  In Tiu v. Court

of Appeals,[29] the constitutionality of Executive Order No. 97-A was

challenged for being violative of the equal protection clause. In that case,

petitioners claimed that Executive Order No. 97-A was discriminatory in

confining the application of Republic Act No. 7227 within a secured area of

the SSEZ, to the exclusion of those outside but are, nevertheless, still within

the economic zone.

Upholding the constitutionality of Executive Order No. 97-A, this Court

therein found substantial differences between the retailers inside and

outside the secured area, thereby justifying a valid and reasonable

classification:

Certainly, there are substantial differences between the big investors who

are being lured to establish and operate their industries in the so-called

“secured area” and the present business operators outside the area. On the

one hand, we are talking of billion-peso investments and thousands of new

jobs.  On the other hand, definitely none of such magnitude. In the first, the

economic impact will be national; in the second, only local. Even more

important, at this time the business activities outside the “secured area” are

not likely to have any impact in achieving the purpose of the law, which is to

turn the former military base to productive use for the benefit of the

Philippine economy. There is, then, hardly any reasonable basis to extend to

them the benefits and incentives accorded in R.A. 7227. Additionally, as the

Court of Appeals pointed out, it will be easier to manage and monitor the

activities within the “secured area,” which is already fenced off, to prevent

“fraudulent importation of merchandise” or smuggling.

It is well-settled that the equal-protection guarantee does not require

territorial uniformity of laws. As long as there are actual and material

differences between territories, there is no violation of the constitutional

clause. And of course, anyone, including the petitioners, possessing the

requisite investment capital can always avail of the same benefits by

channeling his or her resources or business operations into the fenced-off

free port zone.[30]

The Court in Tiu found real and substantial distinctions between residents

within the secured area and those living within the economic zone but

outside the fenced-off area.  Similarly, real and substantial differences exist

between the establishments herein involved.  A significant distinction

between the two groups is that enterprises outside the zones maintain their

businesses within Philippine customs territory, while private respondents

and the other duly-registered zone enterprises operate within the so-called

“separate customs territory.” To grant the same tax incentives given to

enterprises within the zones to businesses operating outside the zones, as

petitioners insist, would clearly defeat the statute’s intent to carve a

territory out of the military reservations in Subic Bay where free flow of

goods and capital is maintained.

The classification is germane to the purpose of Republic Act No. 7227. As

held in Tiu, the real concern of Republic Act No. 7227 is to convert the lands

formerly occupied by the US military bases into economic or industrial

areas. In furtherance of such objective, Congress deemed it necessary to

extend economic incentives to the establishments within the zone to attract

and encourage foreign and local investors.  This is the very rationale behind

Republic Act No. 7227 and other similar special economic zone laws which

grant a complete package of tax incentives and other benefits.

The classification, moreover, is not limited to the existing conditions when

the law was promulgated, but to future conditions as well, inasmuch as the

law envisioned the former military reservation to ultimately develop into a

self-sustaining investment center.

And, lastly, the classification applies equally to all retailers found within the

“secured area.” As ruled in Tiu, the individuals and businesses within the

“secured area,” being in like circumstances or contributing directly to the

achievement of the end purpose of the law, are not categorized further. 

They are all similarly treated, both in privileges granted and in obligations

required.

With all the four requisites for a reasonable classification present, there is no

ground to invalidate Executive Order No. 97-A for being violative of the

equal protection clause.

Prohibition against Unfair Competition

and Practices in Restraint of Trade

Petitioners next argue that the grant of special tax exemptions and

privileges gave the private respondents undue advantage over local

enterprises which do not operate inside the SSEZ, thereby creating unfair

competition in violation of the constitutional prohibition against unfair

competition and practices in restraint of trade.

The argument is without merit.  Just how the assailed issuance is violative of

the prohibition against unfair competition and practices in restraint of trade

is not clearly explained in the petition. Republic Act No. 7227, and

consequently Executive Order No. 97-A, cannot be said to be distinctively

arbitrary against the welfare of businesses outside the zones. The mere fact

that incentives and privileges are granted to certain enterprises to the

exclusion of others does not render the issuance unconstitutional for

espousing unfair competition. Said constitutional prohibition cannot hinder

the Legislature from using tax incentives as a tool to pursue its policies.

Suffice it to say that Congress had justifiable reasons in granting incentives

to the private respondents, in accordance with Republic Act No. 7227’s

policy of developing the SSEZ into a self-sustaining entity that will generate

employment and attract foreign and local investment. If petitioners had

wanted to avoid any alleged unfavorable consequences on their profits, they

should upgrade their standards of quality so as to effectively compete in the

market. In the alternative, if petitioners really wanted the preferential

treatment accorded to the private respondents, they could have opted to

register with SSEZ in order to operate within the special economic zone.

Preferential Use of Filipino Labor, Domestic Materials

and Locally Produced Goods

Lastly, petitioners claim that the questioned issuance (Executive Order No.

97-A) openly violated the State policy of promoting the preferential use of

Filipino labor, domestic materials and locally produced goods and adopting

measures to help make them competitive.

Again, the argument lacks merit. This Court notes that petitioners failed to

substantiate their sweeping conclusion that the issuance has violated the

State policy of giving preference to Filipino goods and labor. The mere fact

that said issuance authorizes the importation and trade of foreign goods

does not suffice to declare it unconstitutional on this ground.

Petitioners cite Manila Prince Hotel v. GSIS [31] which, however, does not

apply.  That case dealt with the policy enunciated under the second

paragraph of Section 10, Article XII of the Constitution,[32] applicable to the

grant of rights, privileges, and concessions “covering the national economy

and patrimony,” which is different from the policy invoked in this petition,

specifically that of giving preference to Filipino materials and labor found

under Section 12 of the same Article of the Constitution. (Emphasis

supplied).

In Tañada v. Angara,[33] this Court elaborated on the meaning of Section 12,

Article XII of the Constitution in this wise:

[W]hile the Constitution indeed mandates a bias in favor of Filipino goods,

services, labor and enterprises, at the same time, it recognizes the need for

business exchange with the rest of the world on the bases of equality and

reciprocity and limits protection of Filipino enterprises only against foreign

competition and trade practices that are unfair. In other words, the

Constitution did not intend to pursue an isolationist policy. It did not shut out

foreign investments, goods and services in the development of the

Philippine economy. While the Constitution does not encourage the

unlimited entry of foreign goods, services and investments into the country,

it does not prohibit them either. In fact, it allows an exchange on the basis

of equality and reciprocity, frowning only on foreign competition that is

unfair.[34]

This Court notes that the Executive Department, with its subsequent

issuance of Executive Order Nos. 444 and 303, has provided certain

measures to prevent unfair competition. In particular, Executive Order Nos.

444 and 303 have restricted the special shopping privileges to certain

individuals.[35] Executive Order No. 303 has limited the range of items that

may be sold in the duty-free outlets,[36] and imposed sanctions to curb

abuses of duty-free privileges.[37] With these measures, this Court finds no

reason to strike down Executive Order No. 97-A for allegedly being

prejudicial to Filipino labor, domestic materials and locally produced goods.

WHEREFORE, the petition is PARTLY GRANTED.  Section 5 of Executive

Order No. 80 and Section 4 of BCDA Board Resolution No. 93-05-034 are

hereby declared NULL and VOID and are accordingly declared of no legal

force and effect. Respondents are hereby enjoined from implementing the

aforesaid void provisions. All portions of Executive Order No. 97-A are valid

and effective, except the second sentences in paragraphs 1.2 and 1.3 of

said Executive Order, which are hereby declared INVALID.

No costs.

SO ORDERED.

Footnotes

[1] Executive Order No. 80 is entitled, “Authorizing the Establishment of the Clark Development Corporation as the

Implementing Arm of the Bases Conversion and Development Authority for the Clark Special Economic Zone, and Directing all

Heads of Departments, Bureaus, Offices, Agencies and Instrumentalities of Government to Support the Program.”

[2] BCDA  Board Resolution No. 93-05-034 is entitled, “Prescribing the Investment Climate in the Clark Special Economic Zone

for Implementation by the Clark Development Corporation.”

[3] Bases Conversion and Development Act of 1992.

[4] Underscoring supplied.

[5] Rollo, pp. 13, 15, 17, and 18.

[6] Bayan (Bagong Alyansang Makabayan) v. Zamora , G.R. No. 138570 , October 10, 2000, 342 SCRA 449,

citing Kilosbayan v. Guingona, Jr., G.R. No. 113375, May 5, 1994, 232 SCRA 110.

[7] Osmeña v. Commission on Elections, G.R. Nos. 100318, 100417, and 100420, July 30, 1991, 199 SCRA 750.

[8] Basco v. Phil. Amusements and Gaming Corporation, G.R. No. 91649, May 14, 1991, 197 SCRA 52.

[9] Cawaling, Jr. v. Commission on Elections, G.R. Nos. 146319 and 146342, October 26, 2001, 368

SCRA 453.

[10] Association of Small Landowners in the Philippines., Inc., v. Secretary of Agrarian Reform, G.R. No. 78742, July 14, 1989,

175 SCRA 343.

[11] Cawaling, Jr., v. Commission on Elections, supra, note 9.

[12] Misolas v. Panga, G.R. No. 83341, January 30, 1990, 181 SCRA 648.

[13] Underscoring supplied.

[14] Eugenio v. Drilon , G.R. No. 109404 , January 22, 1996, 252 SCRA 106.

[15] Gomez v. Ventura and Board of Medical Examiners, No. 32441, March 29, 1930, 54 Phil. 726.

[16] Dimaporo v. Mitra, Jr.,  G.R. No. 96859, October 15, 1991, 202 SCRA 779; Primero v. Court of Appeals, G.R. Nos. 48468-

69, November 22, 1989, 179 SCRA 542.

[17] Emphasis supplied.

[18] Esso Standard Eastern, Inc. v. Commissioner of Internal Revenue, G.R. No. 28508-9, July 7, 1989, 175 SCRA 149.

[19] Emphasis supplied.

[20] G.R. No. 119775, October 24, 2003, 414 SCRA 356.

[21] Section 28(4), Article VI of the Constitution.

[22] Supra, note 20, at 377.

[23] Underscoring supplied.

[24] Republic Act No. 6768 entitled, “AN ACT INSTITUTING A BALIKBAYAN PROGRAM.”

[25] E.O. No. 46,  “GRANTING THE MINISTRY OF TOURISM, THROUGH THE PHILIPPINE TOURISM AUTHORITY (PTA), AUTHORITY

TO ESTABLISH AND OPERATE A DUTY AND TAX FREE MERCHANDISING SYSEM IN THE PHILIPPINES” . . . .

 “SEC. 1.  The Ministry of Tourism, through the Philippine Tourism Authority (PTA) is hereby authorized to establish a duty and

tax free merchandising system in the Philippines to augment the service facilities for tourists and to generate foreign exchange

and revenue for the government.  Under this system, the Philippine Tourism Authority shall have the exclusive authority to

operate stores and shops that would sell, among others, tax and duty free merchandise, goods and articles, in international

airports and sea ports throughout the country in accordance with the rules and regulations issued by the Ministry of Tourism.”

[26] Italics supplied.

[27] People v. Cayat, G.R. No. 45987, May 5, 1939, 68 Phil. 12.

[28] Tiu v. Court of Appeals, G.R. No. 127410, January 20, 1999, 301 SCRA 278.

[29] Ibid.

[30] Id. at 291.

[31] G.R. No. 122156, February 3, 1997, 267 SCRA 408.

[32] Sec. 10, Art. XII, provides that:

. . .

In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give preference

to qualified Filipinos. . . .

[33] G.R. No. 118295, May 2, 1997, 272 SCRA 18.

[34] Id. at 58-59.

[35] Executive Order No. 303, Section 3; Executive Order No.  444, Section 4.

[36] Executive Order No. 303, Section 3.

[37] Executive Order No. 303, Section 5.

FIRST DIVISION

 

G.R. No. L-29987 October 22, 1975

MANILA ELECTRIC COMPANY, petitioner,

vs.

MISAEL P. VERA, in his capacity as Commissioner of Internal

Revenue, respondent.

G.R. No. L-23847 October 22, 1975

MANILA ELECTRIC COMPANY, petitioner,

vs.

BENJAMIN. TABIOS, as Commissioner of Internal Revenue,

respondent.

 

MUÑOZ PALMA, J.:

Manila Electric Company, petitioner in these two cases, poses a single

before Us: is Manila Electric Company (MERALCO for short) exempt from

payment of a compensating tax on poles, wires, transformers, and insulators

imported by it for use in the operation of its electric light, heat, and power

system? MERALCO answers the query in the affirmative while the

Commissioner of Internal Revenue asserts the contrary.

MERALCO is the holder of a franchise to construct, maintain, and operate an

electric light, heat, and power system in the City of Manila and its suburbs. 1

In 1962, MERALCO imported and received from abroad on various dates

copper wires, transformers, and insulators for use in the operation of its

business on which, the Collector of Customs, as Deputy of Commissioner of

Internal Revenue, levied and collected a compensating tax amounting to a

total of P62,335.00. A claim for refund of said amount was presented by

MERALCO and because no action was taken by the Commissioner of Internal

Revenue on its claim, it appealed to the Court of Tax Appeals by filing a

petition for review on February 25, 1964 (CTA Case No. 1495). On November

28, 1968, the Court of Tax Appeals denied MERALCO claim, forthwith, the

case was elevated to the Court on appeal (L-29987).

Again in 1963, MERALCO imported certain quantities of copper wires,

transformers and insulators also to be used in its business and again a

compensating tax of P6,587.00 on said purchases was collected. Its claim for

refund of the amount having been denied by the Commissioner of Internal

Revenue on January 23, 1964, MERALCO filed with the Court of Tax Appeals

CTA Case No. 1493. On September 23, 1964 the Court of Tax Appeals

decided against petitioner, and the latter filed with this Court the

corresponding Petition for Review of said decision docketed herein as G.R.

No. L-23847.

Inasmuch as the two appeals raise the same issue, they are consolidated in

this Decision.

The law under which the Commissioner of Internal Revenue, respondent in

these two cases, assessed and collected the corresponding compensating

taxes in 1962 and 1963 was found in Section 190 of the National Internal

Revenue Code(Commonwealth Act No. 466, as amended) the pertinent

provision of which read at the time as follows:

Sec. 190. Compensating Tax. — All persons residing or doing business in the

Philippines, who purchase or receive from without the Philippines any

commodities, goods, wares, or merchandise, excepting those subject to

specific taxes under Title IV of this Code, shall pay on the total value thereof

at the time they are received by such persons, including freight, postage,

insurance, commission and all similar charges, a compensating tax

equivalent to the percentage taxes imposed under this Title on original

transactions effected by merchants, importers, or manufacturers, such tax

to be paid before the withdrawal or removal of said commodities, goods,

wares, or merchandise from the customhouse or the post office: ... 2

In deciding against petitioner, the Court of Tax Appeals held that following

the ruling of the Supreme Court in the case of Panay Electric Co. vs.

Collector of Internal Revenue, G.R. No. L-6753, July 30, 1955, Manila Gas

Corp. vs. Collector of Internal Revenue, G.R. No. L-11784, October 24, 1958,

and Borja vs. Collector of Internal Revenue, G.R. No. L-12134, November

30,1961, MERALCO is not exempt from paying the compensating tax

provided for in Section 190 of the National Internal Revenue Code, the

purpose of which is to "place casual importers, who are not merchants on

equal putting with established merchants who pay sales tax on articles

imported by them." The court further stated that MERALCO's claim for

exemption from the payment of the compensating tax is not clear or

expressed, contrary to the cardinal rule in taxation that "exemptions from

taxation are highly disfavored in law, and he who claims exemption must be

able to justify his claim by the clearest grant of organic or statute law. (pp.

10-11, L-23847, rollo)

Petitioner, on the other hand, bases its claim for exemption from the

compensating tax on poles, wires, transformers and insulators purchased by

it from abroad on paragraph 9 of its franchise which We quote from its brief:

PARAGRAPH 9. The grantee shall be liable to pay the same taxes upon its

real estate, buildings, plant (not including poles, wires, transformers, and

insulators), machinery, and personal property as other persons are or may

be hereafter by law to pay. In consideration of Part Two of the franchise

herein granted, to wit, the right to build and maintain in the City of Manila

and its suburbs a plant for the conveying and furnishing of electric current

for light, heat, and power, and to charge for the same, the grantee shall pay

to the City of Manila a five per centum of the gross earnings received form

its business under this franchise in the City and its suburbs: PROVIDED, That

two and one-half per centum of the gross earnings received from the

business of the line to Malabon shall be paid to the Province of Rizal. Said

percentage shall be due and payable at the times stated in paragraph

nineteen of Part One hereof, and after an audit, like that provided in

paragraph twenty of Part One hereof, and shall be in lieu of all taxes and

assessments of whatsoever nature, and by whatsoever authority upon the

privileges, earnings, income, franchise, and poles, wires, transformers, and

insulators of the grantee, from which taxes and assessments the grantee is

hereby expressly exempted. (Petitioner's brief, p. 4, G.R. No. L-29987; see

also pp. 3-4, petitioner's brief, L-23847)

Petitioner argues that the abovequoted provision in plain and unambiguous

terms makes two references to the exemption of the articles in question

from all taxes except the franchise tax. Thus, after prescribing in the

opening sentence that "the grantee shall be liable to pay the said taxes

upon its real estate buildings, plant (not including poles, wires, transformers

and insulators), machinery and personal property as other persons are or

may be hereinafter required by law to pay," par. 9, specifically provides that

the percentage tax payable by petitioner as fixed therein "shall be in lieu of

all taxes and assessments of whatsoever nature, and by whatsoever

authority upon the privileges, earnings, income, franchise, and poles, wires,

transformers and insulators of the grantee from which taxes and

assessments the grantee is hereby expressly exempted." Petitioner further

states that while par. 9 does not specifically mention the compensating tax

for the obvious reason that petitioner's original franchise was an earlier

enactment, the words "in lieu of all taxes and assessments of whatsoever

nature and by whatsoever authority" are broad and sweeping enough to

include the compensating tax. (p. 5, petitioner's brief, L-29987; pp, 4-5, ibid,

L-23847)

Petitioner also contends that the ruling of this Court in the cases of Panay

Electric Co., Manila Gas Corporation, and Borja (supra) are not applicable to

its situation.

We find no merit in petitioner's cause.

1. One who claims to be exempt from the payment of a particular tax must

do so under clear and unmistakable terms found in the statute. Tax

exemptions are strictly construed against the taxpayer, they being highly

disfavored and may almost be said "to be odious to the law." He who claims

an exemption must be able to print to some positive provision of law

creating the right; it cannot be allowed to exist upon a mere vague

implication or inference. 3 The right of taxation will not beheld to have been

surrendered unless the intention to surrender is manifested by words too

plain to be mistaken (Ohio Life Insurance & Trust Co. vs. Debolt, 60 Howard,

416), for the state cannot strip itself of the most essential power of taxation

by doubtful words; it cannot, by ambiguous language, be deprived of this

highest attribute of sovereignty (Erie Railway Co. vs. Commonwealth of

Pennsylvania, 21 Wallace 492, 499). So, when exemption is claimed, it must

be shown indubitably to exist, for every presumption is against it, and a

well-founded doubt is fatal to the claim (Farrington vs. Tennessee & County

of Shelby, 95 U.S. 679, 686). 4

2. Petitioner's submission that its right to exemption is supported by the

"plain and unambiguous" term of paragraph 9 of its franchise is positively

without basis.

First, the Court cannot overlook the tax court's finding that, and We quote:

At the outset it should be noted that the franchise by the Municipal Board of

the City of Manila to Mr. Charles M. Swift and later assumed and taken over

by petitioner (see Rep. Act No. 150, CTA rec. p. 84), is a municipal franchise

and not a legal franchise. While it is true that Section 1 of Act No. 484 of the

Philippine Commission of 1902 authorizes the Municipal Board of the City of

Manila to grant a franchise to the person making the most favorable bid for

the construction and maintenance of an electric street railway and the

construction, maintenance, and operation of an electric light, heat, and

power system in Manila and its suburbs, Section 2 of the same Act authorize

the said Municipal Board to make necessary amendments to be fixed by the

terms of the successful bid; otherwise, the form of the franchise to be

granted shall be in the words and figures appearing in Act No. 484 of the

Philippine Commission, which includes Par. 9. Part Two, thereof, supra.

This Court is not aware whether or not the tax exemption provisions

contained in Par. 9, Part Two of Act No. 484 of the Philippine Commission of

1902 was incorporated in the municipal franchise granted to Mr. Charles M.

Swift by the Municipal Board of the City of Manila and later assumed and

taken over by petitioner because no admissible copy of Ordinance No. 44 of

the said Board was ever presented in evidence by the herein petitioner.

Neither is this Court aware of any amendment to the terms of this franchise

granted by the aforesaid Municipal Board to the successful bidder in the

absence of Ordinance No. 44 and the amendment thereto, if any. In the

circumstances, we are at a Las to interpret and apply the tax exemption

provisions relied upon by petitioner. (pp. 11-13, rollo, L-29987)

Second, and this is the controlling reason for the denial of petitioner's claim

in these cases, We do not see in paragraph 9 of its petitioner's franchise, on

the assumption that it does exist as worded, what may be considered as

"plain and unambiguous terms" declaring petitioner MERALCO exempt from

paying a compensating tax on its imports of poles, wires, transformers, and

insulators. What MERALCO really wants Us to do, but which We cannot under

the principles enumerated earlier, is to infer and imply that there is such an

exemption from the following phrase: "... the grantee shall pay to the City of

Manila five per centum of the gross earnings received from its business ...

and shall be in lieu of all taxes and assessments of whatsoever nature, and

by whatsoever authority upon the privileges, earnings, income, franchise,

and poles, wires, transformers, and insulators of the grantee, from which

taxes and assessments the grantee is hereby expressly exempted."

Note that what the above provision exempts petitioner from, is the payment

of property, tax on its poles, wires, transformers, and insulators; it does not

exempt it from payment of taxes like the one in question which, by mere

necessity or consequence alone, fall upon property. The first sentence of

paragraph 9 of petitioner's franchise expressly states that the grantee like

any other taxpayer shall pay taxes upon its real estate, buildings, plant (not

including poles, wires, transformers, and insulators),machinery, and

personal property. These are direct taxes imposed upon the thing or

property itself. Thus, while the grantee is to pay tax on its plant, its poles,

wires, transformers, and insulators as forming part of the plant or

installation(significantly the enumeration is in parenthesis and follows the

word "plant") are exempt and as such are not to be included in the

assessment of the property tax to be paid.

The ending clause of paragraph 9 providing in effect that the percentage tax

imposed upon petitioner shall be in lieu of "all taxes and assessments of

what and by whatsoever authority" cannot be said to have granted it

exemption from payment of compensating tax. The phrase "all taxes and

assessments of whatsoever nature and by whatsoever authority" is not so

broad and sweeping, as petitioner would have Us think, as to include the tax

in question because there is an immediately succeeding phrase which limits

the scope of exemption to taxes and assessments "upon the privileges

earnings, income, franchise, and poles, wires, transformers, and insulators

of the grantee." The last clause of paragraph 9 merely reaffirms, with

regards to poles, wires, transformers, and insulators, what has been

expressed in the that first sentence of the same paragraph namely,

exemption of petitioner from payment of property tax. It is a principle of

statutory construction that general terms may be restricted by specific

words, with the result that the general language will be limited by the

specific language which indicates the statute's object and purpose.

(Statutory Construction by Crawford, 1940 ed. p. 324-325)

3. It is a well-settled rule or principle in taxation that a compensating tax is

not a property tax but is an excise tax. 5 Generally stated, an excise tax is

one that is imposed on the performance of an act, the engaging in an

occupation, or the enjoyment of a privilege. 6 A tax upon property because

of its ownership its a direct tax, whereas one levied upon property because

of its use is an excise duty. (Manufacturer's Trust Co. vs. United States, Ct.

Cl., 32 F. Supp. 289, 296) Thus, where a tax which is not on the property as

such, is upon certain kinds of property, having reference to their origin and

their intended use, that is an excise tax. (State v. Wynne, 133 S.W. 2d 951,

956,957, 133 Tex. 622)

The compensating tax being imposed upon petitioner herein, MERALCO, is

an impost on its use of imported articles and is not in the nature of a direct

tax on the articles themselves, the latter tax falling within the exemption.

Thus, in International Business Machine Corp. vs. Collector of Internal

Revenue, 1956, 98 Phil. Reports 595, 593, which involved the collection of a

compensating tax from the plaintiff-petitioner on business machines

imported by it, this Court stated in unequivocal terms that "it is not the act

of importation that is taxed under section 190, but the use of imported

goods not subjected to sales tax" because "the compensating tax was

expressly designed as a substitute to make up or compensate for the

revenue lost to the government through the avoidance of sales taxes by

means of direct purchases abroad. ..."

It is true that upon the collection of a compensating tax on petitioner's

poles, wires, transformers, and insulators purchased from abroad, the tax

falls on the goods themselves; this fact leads petitioner to claim that what is

being imposed upon it is a property tax. But petitioner loses sight of the

principle that "every excise necessarily must finally fall upon and be paid by

property, and so may be indirectly a tax upon property; but if it is really

imposed upon the performance of an act, the enjoyment of a privilege, or

the engaging in an occupation, it will be considered an excise." (51 Am. Jur.

1d, Taxation, Sec. 34, emphasis supplied) And so, to reiterate, what is being

taxed here is the use of goods purchased from out of the country, and the

imposition is in the nature of an excise tax.

4. There is no valid reason for Us not to apply to petitioner the ruling of the

Court in Panay Electric Co. and Borja, supra, for MERALCO is similarly

situated.

Panay Electric Co. sought exemption from payment of a compensating tax

on equipments purchased abroad for use in its electric plant. A provision in

its franchise reads:

Sec 8. ... Said percentage shall be due and payable quarterly and shall be

lieu of all taxes of any kind levied, established, or collected by any authority

whatsoever, now or in the future, on its poles, wires, insulators, switches,

transformers and other structures, installations, conductors, and

accessories, placed in and over the public streets, avenues, roads,

thoroughfares, squares, bridges, and other places on its franchise, from

which taxes the grantee is hereby expressly exempted. (113 Phil. 570)

This Court rejected the exemption sought by Panay Electric and held that

the cited provision in its franchise exempts from taxation those rights and

privileges which are not enjoyed by the public in general but only by the

grantee of a franchise, but do not include the common right or privileges of

every citizen to make purchases anywhere; and that we must bear in mind

the purpose for the imposition of compensating tax which as explained in

the report of the Tax Commission is as follows:

The purpose of this proposal is to place persons purchasing goods from

dealers doing business in the Philippines on an equal footing, for tax

purposes, with those who purchase goods directly from without the

Philippines. Under the present tax law, the former bear the burden of the

local sales tax because it is shifted to them as part of the selling price

demanded by the local merchants, while the latter do not. The proposed tax

will do away with this inequality and render justice to merchants and firms

of all nationalities who are in legitimate business here, paying taxes and

giving employment to a large number of people. (113 Phil. 571)

In Borja, petitioner Consuelo P. Borja, a grantee of a legislative franchise,

also claimed to be free from paying the compensating tax imposed on the

materials and equipment such as wires, insulators, transformers,

conductors, etc. imported from Japan, on the basis of Sec. 10 of Act No.

3636 (Model Electric Light and Power Franchise Act) which has been

incorporated by reference in franchise under Act No. 3810. Section 10

provides:

The grantee shall pay the same taxes as are now or may "hereafter be

required by law from other individuals, co-partnerships, private, public or

quasi-public associations, corporations, or joint-stock companies, on his (its)

real estate, buildings, plants, machinery; and other personal property,

except property section. In consideration of the franchise and rights hereby

granted, the grantee shall pay into the municipal treasury of the (of each)

municipality in which it is supplying electric current to the public under this

franchise, a tax equal to two per centum of the gross earnings from electric

current sold or supplied under this franchise in said (each) municipality. Said

tax shall be due and payable quarterly and shall be in lieu of any and all

taxes of any kind, nature or description levied, established, or collected by

any authority whatsoever, municipal, provincial or insular, now or in the

future, on its poles, wires, insulators, switches; transformers and structures,

installations, conductors, and accessories, placed in and over and under all

public property, including public streets and highways, provincial roads,

bridges and public squares, and on its franchise, rights, privileges, receipts,

revenues and profits, from which taxes the grantee is hereby expressly

exempted. (113 Phil. 569-570)

The Court applying the ruling in Panay Electric denied the exemption with

the added statement that

Considering, therefore, the fact that section 190 of the Tax Code is a sort of

an equalizer, to place casual importers, who are not merchants on equal

footing with established merchants who pay sales tax on articles imported

by them ... We may conclude that it was not the intention of the law to

exempt the payment of compensating tax on the personal properties in

question. The principle and legal philosophy underlying the imposition of

compensating tax, as enunciated in the above case (referring to Borja), are

fundamentally correct, and no plausible reason is advanced for their non-

application to the case at bar. (p. 572, ibid.)

Petitioner claims that there exists a difference between paragraph 9 of its

franchise and the corresponding provisions of the franchise of Panay Electric

and Borja in that in the latter, unlike in the former, there is no statement

that the grantee is exempt from "all taxes of whatsoever nature and

whatsoever authority." In addition, petitioner points out, the franchise of

Panay Electric and Borja contains a qualifying phrase, to wit: "placed in and

over the public streets, avenues, roads, thoroughfares, etc."

A comparison of the pertinent provisions mentioned by petitioner and which

are quoted in the preceding pages reveals no substantial or fundamental

distinction as to remove petitioner MERALCO from the ambit of the Panay

Electric and Borja ruling. There may be differences in the phraseology used,

but the intent to exempt the grantee from the payment only of property tax

on its poles, wires, transformers, and insulators is evidently common to the

three; withal, in all the franchises in question there is no specific mention of

exemption of the grantee from the payment of compensating tax.

Petitioner disputes, however, the applicability of the stare decisis principle

to its case claiming that this Court should not blindly follow the doctrine of

Panay Electric and Borja, and that in Philippine Trust Co. et al. vs. Mitchell,

59 Phil. 30, 36, the Court had occasion to state: ,the rule of stare decisis is

entitled to respect. Stability in the law, particularly in the business field, is

desirable. But idolatrous reverence for precedent, simply as precedent, no

longer rules. More important than anything else is that the court should be

right." (pp. 18-19, petitioner's brief, L-29987)

But what possible ground can there be for deviating from the decisions of

this Court in these two cases? A doctrine buttressed by the law, reason, and

logic is not to be simply brushed aside to suit the convenience of a

particular party or interest or to avoid hardship to one. As We view this legal

problem, no justification can be found for giving petitioner herein

preferential treatment by reading into its franchise an exemption from a

particular kind of tax which is not there. If it had been the legislative intent

to exempt MERALCO from paying a tax on the use of imported equipments,

the legislative body could have easily done so by expanding the provision of

paragraph 9 and adding to the exemption such words as "compensating

tax" or "purchases from abroad for use in its business," and the like. We

cannot ignore the principle that express mention in a statute of one

exemption precludes reading others into it. (Hoard vs. Sears, Roebuck & Co.,

122 Conn. 185, 193, 188 A. 269)

On this point, the Government correctly argues that the provision in

petitioner's franchise that the payment of the percentage tax on the gross

earnings shall be "in lieu of all taxes and assessments of whatsoever nature,

and whatsoever authority" is not to be given a literal meaning as to preclude

the imposition of the compensating tax in this particular case, and cites for

its authority the Opinion of the Supreme Court of Connecticut rendered in

Connecticut Light & Power Co., et al. vs. Walsh, 1948, which involved the

construction of a statute imposing a sales and use tax, and which inter alia

held:

The broad statement that the tax upon the gross earning of telephone

companies shall be "in lieu of all other taxation" upon them is not

necessarily to be given a literal meaning. "In construing the act it is our duty

to seek the real intent of the legislature, even though by so doing we may

limit the literal meaning of the broad language used." Greenwich Trust Co. v.

Tyson, 129 Conn. 211, 222, 27 A. 2d 166, 172. It is not reasonable to

assume that the General Assembly intended by the provisions we have

quoted that the tax on gross earnings should take the place of taxes of a

kind not then anywhere imposed and entire outside its knowledge. ... ." (57

A.R., 2d S, pp. 129, 133-134, emphasis supplied)

In 1902 when Act 484 of the Philippine Commission was enacted,

"compensating tax' was certainly not generally known or in use, hence, to

paraphrase the above-mentioned Connecticut decision, the Court cannot

assume that the Philippine Commission in providing that the gross earnings

taxes imposed on the grantee of the electric light franchise shall be in lieu of

all taxes and assessments, meant to include impositions in the nature of a

compensating tax which came into use in this country only upon the

enactment of Commonwealth Act 466 in 1939.

5. One last argument of petitioner to support its cause is that just as a new

and necessary industry was held to be exempt from paying a compensating

tax on its imports under the tax exemption provision of Republic Act 901, so

should MERALCO be exempt from such a tax under the general clause in its

franchise, to wit: "... in lieu of all taxes and assessments of whatsoever

nature and whatsoever authority upon poles, wires, etc."

We agree with the court below that there can be no analogy between

MERALCO and what is considered as a new and necessary industry under

Republic Act 35 now superseded by Republic Act 901.

The rationale of Republic Act 901 is "to encourage the establishment or

exploitation of new and necessary industries to promote the economic

growth of the country," and because "an entrepreneur engaging in a new

and necessary industry faces uncertainty and assumes a risk bigger than

one engaging in a venture already known and developed ... the law grants

him tax exemption — to lighten onerous financial burdens and reduce

losses." (Marcelo Steel Corporation vs. Collector of Internal Revenue, 109

Phil. 921, 926) This intendment of the legislature in enacting Republic Act

901 is not the motivation behind the tax exemption clause found in

petitioner MERALCO's franchise; consequently, there can be no analogy

between the two.

IN VIEW OF THE FOREGOING, We find no merit in these Petitions for Review

and We hereby AFFIRM the decision of the Court of Tax Appeals in these two

cases, with costs against petitioner in both instances.

So Ordered.

 

Footnotes

1 Act No. 484 of the Philippine Commission enacted on October 20, 1902, granted to the Municipal Board of the City of Manila

authority to award to the person or persons making the most favorable bid a franchise to construct and maintain in the streets

of Manila and its suburbs an electric street railway and a franchise to construct, maintain, and operate an electric light, heat,

and power system in the city of Manila and its subsurbs. (Sec. 1) Pursuant to this authority, the Municipal Board of Manila in its

Ordinance No. 44 granted the franchise to Charles M. Swift who on March 27, 1903 transferred said franchise to Manila Railway

and Light Company now known as the Manila Electric Company. (see Sec. 1, Act No. 1112 of the Philippine Commission, Vol. IV,

Public Laws Annotated, Guevara, p. 101) The franchise of the Manila Electric Company was extended for a period of twenty

years under Republic Act 150, and was further extended for another thirty years under Republic Act 4159, approved on June 20,

1964.

2 The original text of Sec. 190 of Commonwealth Act 466 was amended by:

CA 503 section 4 and 6 effective October 1, 1939; RA 48 sections 8 and 14 effective October 1, 1946; RA 253 sections 2 and 4

effective July 1, 1948; RA 361 sections 1 and 2 effective June 9, 1949; RA 1511 sections 2 and 3 effective June 16, 1956; RA

1612 sections 11 and 21 effective August 24, 1956; RA 2362 sections 1 and 2 effective June 20, 1959; RA 3176 sections 1 and 2

effective June 17, 1961; RA 4103 sections 1 and 2 effective June 19, 1964.

After the proclamation of martial law, Sec. 190 saw several changes under Presidential Decrees Nos. 69, 237, and 413.

3 Asiatic Petroleum vs. Llanes, 49 Phil. 466, 471; Union Garment Co., Inc. vs. Court of Tax Appeals, L-16809, January 31, 1962,

4 SCRA 304; Philippine Acetylene Co., Inc. vs. Commissioner of Internal Revenue, L-19707, August 17, 1967, 20 SCRA 1056;

Republic Flour Mills, Inc. vs Commissioner of Internal Revenue, L-25602, February 18, 1970, 31 SCRA 520; Commissioner of

Customs vs. Philippine Acetylene Co. & CTA, L-22443, May 29, 1971, 39 SCRA 71; Davao Light and Power Co., Inc. vs.

Commissioner of Customs, L-28902, March 29, 1972, 44 SCRA 122.

4 see Asiatic Petroleum Co. vs. Llanes, supra, wherein all the above mentioned American doctrines are cited and quoted with

approval.

5 129 A.L.R. p. 223, 230; 103 A.L.R. 93; Hennefored v. Silas Mason Co., 81 L Ed 814; Connecticut Light and Power Co. v. Walsh,

1 A.L.R. 2d 453; Watson Industries v. Shaw, 69 SE 2d 505, 510; Northern P.R. Co. v. Hennefored [1936; DC], 15 F Supp 302.

6 State vs. Brown, 148 N.E. 95, 112 Ohio St. 590; Buckstaff BathHouse Co. vs. McKinley, 127 S.W. 2d 802, 806, 198 Ark. 91;

State vs. Fields, Ohio App., 35 N.E. 2d 744, 747.

EN BANC

G.R. No. L-10431             July 31, 1962

COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.

LA TONDEÑA INC., and THE COURT OF TAX APPEALS, respondents.

PAREDES, J.:

The respondent "La Tondeña, Inc." a duly licensed rectifier, has been

engaged in the business of manufacturing wines, and liquors, with a

distillery at 1068 Velasquez, Tondo, Manila. The principal products of the

respondent are "Ginebra San Miguel", "Manila Rum", "Oak Barrel Rum",

"Mallorca Wine", "Anizado", "Creme de Mente", "Creme de Cacao", etc.

Since 1929, respondent has been purchasing the alcohol used in the

manufacture of its products, principally from Binalbagan Isabela Sugar

Central, Negros Occidental and Central Azcarera Don Pedro in Nasugbu,

Batangas, and has been removing this alcohol from the centrals to

respondent's distillery under joint bonds, without prepayment of specific

taxes, with the express permission and approval of the petitioner Collector

of Internal Revenue. The quantity of alcohol purchased and received by the

respondent from the centrals are recorded and entered in the BIR Official

Register Books of "La Tondeña, Inc. A-Account", under the column "CRUDE

spirit" (Exhs. A, A-1, G, G-1), attested by the Inspector of the Bureau

assigned to respondent's distillery. In the manufacture of "Manila Rum",

respondent uses as basic materials low test alcohol, purchased in crude

form from the suppliers, which it re-rectifies or subjects to further

distillation, in order to suit the purpose of respondent in producing only high

quality products. In the process of further rectification or distillation, losses

thru evaporation had necessarily been incurred, for which the petitioner in

the past had given the respondent allowance of not exceeding 7% for said

losses. Respondent stated that the process adopted by it in the manufacture

of its "Manila Rum", has now made this product the largest selling rum in the

Philippines and the specific taxes that it had been paying the government,

had steadily increased from P3,172,515.30 in 1950 to P4,973,123.40 in

1954. On May 8, 1954, petitioner wrote a demand letter to respondent for

the payment of specific taxes, in the total amount of P154,663.10 on alcohol

lost by evaporation, thru re-rectification or re-redistillation, covering the

period from June 7, 1950 to February 7, 1954. A first extension of 30 days

within which to reply was granted the respondent by the petitioner. On July

26, 1954, it asked for another 30-day extension to reply (Exh. I-3). On

August 2, 1954, petitioner granted 5 days only, from August 2, 1954 (Exh. I-

f), or until August 7, 1954. On August 6, 1954, respondent answered the

demand letter dated May 8, 1954 (Exh. I), protesting against the said

assessment (Exhs. 1-5 and 1-b). In a letter dated August 26, 1954, the

petitioner made manifest its refusal to reconsider the assessment and urged

the respondent to pay within 3 days from receipt, the amount of the

assessment, which communication was received by the respondent on

August 31, 1954 (Exh. I-7). On September 1, 1954, the respondent appealed

the decision to the Conference Staff in the same Bureau (Exh. I-8). On

September 3, 1954, the Conference Staff gave the appeal due course (Exh.

I-9).

Before any hearing could be had in the Conference Staff, on January 8,

1955, the respondent received a letter from the petitioner dated December

22, 1954, requiring it to comply with Department of Finance Order No. 213,

to deposit one-half of the amount of assessment in cash and the balance

guaranteed by a surety bond (Exh. 1-11). Respondent requested for

reconsideration of this requirement (Exh. I-1a) on January 10, 1955, which

was denied on February 10, 1955 (Exh. I-13). A second motion for

reconsideration presented on February 15, 1955 (Exh. I-14), followed by a

supplementary letter (Exh. I-15) dated February 17, 1955 was denied, same

having been received by respondent on March 16, 1955, and gave the

respondent 5 days from receipt thereof, within which to comply with the

said Order. Not satisfied with the said rulings, the La Tondeña, Inc.

presented an action with the respondent Court of Tax Appeals on March 18,

1955. The Tax Court on December 7, 1955, rendered the following judgment

—

IN VIEW OF THE FOREGOING CONSIDERATION, the decision of respondent

Collector of Internal Revenue, dated May 8, 1954, is hereby modified, and

petitioner La Tondeña, Inc., is hereby ordered to pay the respondent

Collector of Internal Revenue the sum of P672.15, by way of specific tax.

However, with respect to the balance of the assessment amounting to

P153,990.95, which corresponds to the period after January 1, 1951 and up

to February 27, 1954, pursuant to Republic Act No. 592, the petitioner is

declared exempt from liability for the specific taxes assessed therefor.

Without pronouncement as to costs.

On appeal to this Court, the petitioner alleges that the Court of Tax Appeals

erred (1) In exempting the respondent La Tondeña, Inc. from the payment of

the specific tax on rectified alcohol lost in process of further rectification,

during the period from January 1, 1951 to February 27, 1954; and (2) In

assuming jurisdiction over the case.

It appears that the specific taxes in question were assessed by the

petitioner "in accordance with section 133 the Tax Code". Up to December

31, 1950, said section reads:

SEC 133. Specific tax on distilled spirits. — On distilled spirits there shall be

collected, except as hereinafter provided, specific taxes as follows:

(a) If produced from sap of the nipa, coconut, casava, camote, or buri palm,

or from the juice syrup, or sugar of the cane, per proof liter, forty-five

centavo.

(b) If produced from any other material, per proof liter, one peso and

seventy centavos.

This tax shall be proportionately increased for any strength of the spirits

taxed over proof spirits.

"Distilled spirits", as here used, includes all substances known as ethyl

alcohol, dehydrated oxide of ethyl, or spirits of wine, which are commonly

produced by the fermentation and subsequent distillation of grain starch,

molasses, or sugar, or of some syrup of sap, including all dilutions or

mixtures; and the tax shall attach to this substance as soon as it is in

existence as such, whether it be subsequently separated as pure or impure

spirits, or be immediately or at any subsequent time transformed into any

other substance either in process of original production or by any

subsequent process.

Pursuant to the above provision of law, therefore, "the tax shall attach to

this substance as soon is it is in existence as such" etc. However, on January

1, 1951, Republic Act No. 592 took effect, amending section 133 and the

clause underlined above had been eliminated. The evident intention of the

law maker in deleting the all embracing underlined clauses, was to subject

to specific tax not all kinds of alcoholic substances, but only distilled spirits

as finished products, actually removed from the factory or bonded

warehouse. The said amendment could not mean anything else; it is in

harmony with section 129, of the same Tax Code which provides —

SEC 129. Removal of spirits or cigar under bond. — Spirits requiring

rectification may be removed from the place of their manufacture to some

other establishment for the purpose of rectification without the prepayment

of the specific tax, provided the distiller removing such spirits and the

rectifier receiving them shall file with the Collector of Internal Revenue their

joint bond conditioned upon the future payment by the rectifier of the

specific tax that may be due on any finished product. . . . .

And if one would consider that the Tax Code does no prohibit further

rectification or distillation and defines in section 194 thereof, a rectifier as a

person who rectifies, purifies or refines distilled spirits, the conclusion is

logical that when alcohol, even if already distilled (as in the present case) or

rectified, is again rectified, purified or refined, the specific tax should be

based on the finished product, and not on the evaporated alcohol. The

intention not to subject to specific tax all kinds of alcoholic substances but

only distilled spirits as finished products, is reflected in former Senator

Garcia's observation on the floor of the Senate, during the discussion of

House Bill No. 1443 (now Rep. Act No. 592), when he proposed the

elimination of the phrase "and the tax shall attach to this substances as

soon as it is in existence as such, etc." He said —

x x x           x x x           x x x

That is why, Mr. President, in Section 1 of this Bill now under consideration. I

have some serious objections to the provision where all kinds of alcoholic

substance which falls under the definition of proof spirits in the last

paragraph of the same Section I of the proposed measure are taxable

because this is one of those that I consider of deterrent effect to the

industrialization of this country . . . (Senate Diario No. 6, Jan. 15, 1951,

Original 4th Special Session; Emphasis supplied.)

And on August 23, 1956, upon the recommendation of the Bureau of

Internal Revenue itself, Rep. Act No. 1608 was passed, amending section

133 of the Tax Code, as amended by R. A. No. 592, restoring the very same

clause which was eliminated (Sec. 7, R.A. No. 1608). The inference,

therefore, is clear that from January 1, 1951, when Rep. Act No. 592, took

effect, until August 23, 1956, when R.A. No. 1608 became a law, the tax on

alcohol did not attach as soon as it was in existence as such, but on the

finished product. And this must be so, otherwise a great injustice would be

caused upon a duly licensed rectifier, who, like the respondent herein, will

be made to pay the specific tax on the alcohol lost thru evaporation, from

which no one has been benefited, based on the provision of laws then

extant, of doubtful application. In every case of doubt, tax statutes are

construed most strongly against the government and in favor of the citizens,

because burdens are not to be imposed beyond what the statutes expressly

and clearly import (MRR Co. v. Coll. of Customs, 52 Phil. 950 Luzon Stev. Co.

v. Trinidad, 43 Phil. 803, 809). It should be pointed out also that said section

129 was amended adding the following —

And provided, further, That in cases where alcohol has already been

rectified either by original and continuous distillation or by redistillation is

further rectified, no loss for rectification and handling shall be allowed and

the rectifier thereof shall pay the specific tax due on such losses (Sec. 5,

Rep. Act No. 1608).

which obviously reveals that the purpose of the amendment is to tax, only

now, alcohol lost, in further distillation or rectification. This law certainly

should not be given retroactive effect, so as to cover the period in question

(January 1, 1951 to February 27, 1954). It is only after August 23, 1956 that

the government woke up from its lethargy and hastened to fill the hiatus.

The second assignment of error is predicated upon the proposition, that the

respondent Court of Tax Appeals had no jurisdiction over the case, because

the petition for review was not filed within the 30-day period as provided by

section 11 of Rep. Act No. 1125 (Law creating the CTA), which states —

SEC. 11. Who may appeal; effect of appeal. — Any person, association or

corporation adversely affected by a decision or ruling of the Collector of

Internal Revenue, the Collector of Customs . . . or any provincial or city

Board of Assessment Appeals, may file an appeal in the Court of Tax

Appeals within thirty days after the receipt of such decision or ruling . . .

Conceding for the purpose of argument that the ruling appealable was the

letter-assessment dated May 1, 1954, still We believe that the petition for

review to the Tax Court was filed within the time. The intra-office

arrangement in the Bureau of Internal Revenue allowed a taxpayer to

appeal from the ruling of the Collector to a Conference Staff of the same

Bureau. The appeal made on September 1, 1954, to the Conference Staff,

from said letter-assessment dated May 8, 1954 (received by the respondent

on May 28, 1954), which was reiterated in petitioner's letter of August 26,

1954, (received by the respondent on August 31, 1954), had suspended the

period because it was a remedy prescribed by the petitioner himself, made

available to the respondent (Collector of Int. Rev. v. Suyoc Consolidated

Mining Co., L-11527, Nov. 25, 1958). When the Conference Staff gave due

course to the appeal on September 3, 1954, the petitioner gave the

impression that his letter-assessments of May 8 and August 26, 1954, were

still subject to review by his Conference Staff. And when the Conference

Staff finally refused to reconsider its ruling requiring respondent to deposit

½ of the amount of the tax in cash, and payment of the balance or

guaranteed by a surety bond, after the submission of two requests for

reconsideration, the second denial having been received by respondent only

on March 16, 1955 (Exh. I-16), said it was then only, that the petitioner may

or can be said to have rejected the administrative appeal and gave finality

to his letter of August 26, 1954. We believe that petitioner did not create the

Conference Staff and permitted a taxpayer to appeal to it from his ruling, as

a mere administrative expediency, to delay the taxpayer from appealing to

the Tax Court, and thus allow the period of his appeal to lapse. We should

presume that this injurious result was not intended by the Government. This

being the case, as it is the case, when respondent lodged its petition for

review with the Tax Court on March 18, 1955, only three (3) days in all, had

elapsed, out of the period. The period within which the review must be

sought, should be counted from the denial of the motion for reconsideration

because of the principle that all administrative remedies must be exhausted

before recourse to the courts can be had against orders or decisions of

administrative bodies (Sec. of Agriculture, etc., et al. v. Hora, et al., G.R. No.

L-7752, May 27, 1955). If, as it should be, the final appealable ruling of the

petitioner, was that received by respondent on March 16, 1955, then only

two (2) days had been consumed by the respondent of the statutory period.

In either case, the appeal to the Tax Court was presented on time and the

latter has jurisdiction to take cognizance of the case.

WHEREFORE, the decision appealed from is hereby affirmed, without

pronouncement as to costs.

EN BANC

 

G.R. No. 104037 May 29, 1992

REYNALDO V. UMALI, petitioner,

vs.

HON. JESUS P. ESTANISLAO, Secretary of Finance, and HON. JOSE U.

ONG, Commissioner of Internal Revenue, respondents.

G.R. No. 104069 May 29, 1992

RENE B. GOROSPE, LEIGHTON R. SIAZON, MANUEL M. SUNGA, PAUL

D. UNGOS, BIENVENIDO T. JAMORALIN, JR., JOSE D. FLORES, JR.,

EVELYN G. VILLEGAS, DOMINGO T. LIGOT, HENRY E. LARON, PASTOR

M. DALMACION, JR., and, JULIUS NORMAN C. CERRADA, petitioners,

vs

COMMISSIONER OF INTERNAL REVENUE, respondent.

 

PADILLA, J.:

These consolidated cases are petitions for mandamus and prohibition,

premised upon the following undisputed facts:

Congress enacted Rep. Act 7167, entitled "AN ACT ADJUSTING THE BASIC

PERSONAL AND ADDITIONAL EXEMPTIONS ALLOWABLE TO INDIVIDUALS FOR

INCOME TAX PURPOSES TO THE POVERTY THRESHOLD LEVEL, AMENDING

FOR THE PURPOSE SECTION 29, PARAGRAPH (L), ITEMS (1) AND (2) (A) OF

THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER

PURPOSES." It provides as follows:

Sec. (1). The first paragraph of item (1), paragraph (1) of Section 29 of the

National Internal Revenue Code, as amended, is hereby further amended to

read as follows:

(1) Personal Exemptions allowable to individuals –– (1) Basic personal

exemption as follows:

For single individual or married individual judicially decreed as legally

separated with no qualified dependents P9,000

For head of a family P12,000

For married individual P18,000

Provided, That husband and wife electing to compute their income tax

separately shall be entitled to a personal exemption of P9,000 each.

Sec. 2. The first paragraph of item (2) (A), paragraph (1) of Section 29 of the

same Code, as amended, is hereby further amended to read as follows:

(2) Additional exemption.

(a) Taxpayers with dependents. –– A married individual or a head of family

shall be allowed an additional exemption of Five Thousand Pesos (P5,000)

for each dependent: Provided, That the total number of dependents for

which additional exemptions may be claimed shall not exceed four

dependents: Provided, further, That an additional exemption of One

Thousand Pesos (1,000) shall be allowed for each child who otherwise

qualified as dependent prior to January 1, 1980: Provided, finally, That the

additional exemption for dependents shall be claimed by only one of the

spouses in case of married individuals electing to compute their income tax

liabilities separately.

Sec. 3. This act shall take effect upon its approval.

Approved. 1

The said act was signed and approved by the President on 19 December

1991 and published on 14 January 1992 in "Malaya" a newspaper of general

circulation.

On 26 December 1991, respondents promulgated Revenue Regulations No.

1-92, the pertinent portions of which read as follows:

Sec. 1. SCOPE –– Pursuant to Sections 245 and 72 of the National Internal

Revenue Code in relation to Republic Act No. 7167, these Regulations are

hereby promulgated prescribing the collection at source of income tax on

compensation income paid on or after January 1, 1992 under the Revised

Withholding Tax Tables (ANNEX "A") which take into account the increase of

personal and additional exemptions.

xxx xxx xxx

Sec. 3. Section 8 of Revenue Regulations No. 6-82 is amended by Revenue

Regulations No. 1-86 is hereby further amended to read as follows:

Section 8. –– Right to claim the following exemptions. . . .

Each employee shall be allowed to claim the following amount of exemption

with respect to compensation paid on or after January 1, 1992.

xxx xxx xxx

Sec. 5. EFFECTIVITY. –– These regulations shall take effect on compensation

income from January 1, 1992.

On 27 February 1992, the petitioner in G.R. No. 104037, a taxpayer and a

resident of Gitnang Bayan Bongabong, Oriental Mindoro, filed a petition for

mandamus for himself and in behalf all individual Filipino taxpayers, to

COMPEL the respondents to implement Rep. Act 7167 with respect to

taxable income of individual taxpayers earned or received on or after 1

January 1991 or as of taxable year ending 31 December 1991.

On 28 February 1992, the petitioners in G.R. No. 104069 likewise filed a

petition for mandamus and prohibition on their behalf as well as for those

other individual taxpayers who might be similarly situated, to compel the

Commissioner of Internal Revenue to implement the mandate of Rep. Act

7167 adjusting the personal and additional exemptions allowable to

individuals for income tax purposes in regard to income earned or received

in 1991, and to enjoin the respondents from implementing Revenue

Regulations No. 1-92.

In the Court's resolution of 10 March 1992, these two (2) cases were

consolidated. Respondents were required to comment on the petitions,

which they did within the prescribed period.

The principal issues to be resolved in these cases are: (1) whether or not

Rep. Act 7167 took effect upon its approval by the President on 19

December 1991, or on 30 January 1992, i.e., after fifteen (15) days following

its publication on 14 January 1992 in the "Malaya" a newspaper of general

circulation; and (2) assuming that Rep. Act 7167 took effect on 30 January

1992, whether or not the said law nonetheless covers or applies to

compensation income earned or received during calendar year 1991.

In resolving the first issue, it will be recalled that the Court in its resolution

in Caltex (Phils.), Inc. vs. The Commissioner of Internal Revenue, G.R. No.

97282, 26 June 1991 –– which is on all fours with this case as to the first

issue –– held:

The central issue presented in the instant petition is the effectivity of R.A.

6965 entitled "An Act Revising The Form of Taxation on Petroleum Products

from Ad Valorem to Specific, Amending For the Purpose Section 145 of the

National Internal Revenue Code, As amended by Republic Act Numbered

Sixty Seven Hundred Sixty Seven."

Sec. 3 of R.A. 6965 contains the effectivity clause which provides. "This Act

shall take effect upon its approval"

R.A. 6965 was approved on September 19, 1990. It was published in the

Philippine Journal, a newspaper of general circulation in the Philippines, on

September 20, 1990. Pursuant to the Act, an implementing regulation was

issued by the Commissioner of Internal Revenue, Revenue Memorandum

Circular 85-90, stating that R.A. 6965 took effect on October 5, 1990.

Petitioner took exception thereof and argued that the law took effect on

September 20, 1990 instead.

Pertinent is Article 2 of the Civil Code (as amended by Executive Order No.

200) which provides:

Art. 2. Laws shall take effect after fifteen days following the completion of

their publication either in the official Gazette or in a newspaper of general

circulation in the Philippines, unless it is otherwise provided. . . .

In the case of Tanada vs. Tuvera (L-63915, December 29, 1986, 146 SCRA

446, 452) we construed Article 2 of the Civil Code and laid down the rule:

. . .: the) clause "unless it is otherwise provided" refers to the date of

effectivity and not to the requirement of publication itself, which cannot in

any event be omitted. This clause does not mean that the legislator may

make the law effective immediately upon approval, or on any other date

without its previous publication.

Publication is indispensable in every case, but the legislature may in its

discretion provide that the usual fifteen-day period shall be shortened or

extended. . . .

Inasmuch as R.A. 6965 has no specific date for its effectivity and neither can

it become effective upon its approval notwithstanding its express statement,

following Article 2 of the Civil Code and the doctrine enunciated in Tanada,

supra, R.A. 6965 took effect fifteen days after September 20, 1990, or

specifically, on October 5, 1990.

Accordingly, the Court rules that Rep. Act 7167 took effect on 30 January

1992, which is after fifteen (15) days following its publication on 14 January

1992 in the "Malaya."

Coming now to the second issue, the Court is of the considered view that

Rep. Act 7167 should cover or extend to compensation income earned or

received during calendar year 1991.

Sec. 29, par. (L), Item No. 4 of the National Internal Revenue Code, as

amended, provides:

Upon the recommendation of the Secretary of Finance, the President shall

automatically adjust not more often than once every three years, the

personal and additional exemptions taking into account, among others, the

movement in consumer price indices, levels of minimum wages, and bare

subsistence levels.

As the personal and additional exemptions of individual taxpayers were last

adjusted in 1986, the President, upon the recommendation of the Secretary

of Finance, could have adjusted the personal and additional exemptions in

1989 by increasing the same even without any legislation providing for such

adjustment. But the President did not.

However, House Bill 28970, which was subsequently enacted by Congress as

Rep. Act 7167, was introduced in the House of Representatives in 1989

although its passage was delayed and it did not become effective law until

30 January 1992. A perusal, however, of the sponsorship remarks of

Congressman Hernando B. Perez, Chairman of the House Committee on

Ways and Means, on House Bill 28970, provides an indication of the intent of

Congress in enacting Rep. Act 7167. The pertinent legislative journal

contains the following:

At the outset, Mr. Perez explained that the Bill Provides for increased

personal additional exemptions to individuals in view of the higher standard

of living.

The Bill, he stated, limits the amount of income of individuals subject to

income tax to enable them to spend for basic necessities and have more

disposable income.

xxx xxx xxx

Mr. Perez added that inflation has raised the basic necessities and that it

had been three years since the last exemption adjustment in 1986.

xxx xxx xxx

Subsequently, Mr. Perez stressed the necessity of passing the measure to

mitigate the effects of the current inflation and of the implementation of the

salary standardization law. Stating that it is imperative for the government

to take measures to ease the burden of the individual income tax filers, Mr.

Perez then cited specific examples of how the measure can help assuage

the burden to the taxpayers.

He then reiterated that the increase in the prices of commodities has eroded

the purchasing power of the peso despite the recent salary increases and

emphasized that the Bill will serve to compensate the adverse effects of

inflation on the taxpayers. . . . (Journal of the House of Representatives, May

23, 1990, pp. 32-33).

It will also be observed that Rep. Act 7167 speaks of the adjustments that it

provides for, as adjustments "to the poverty threshold level." Certainly, "the

poverty threshold level" is the poverty threshold level at the time Rep. Act

7167 was enacted by Congress, not poverty threshold levels in futuro, at

which time there may be need of further adjustments in personal

exemptions. Moreover, the Court can not lose sight of the fact that these

personal and additional exemptions are fixed amounts to which an

individual taxpayer is entitled, as a means to cushion the devastating effects

of high prices and a depreciated purchasing power of the currency. In the

end, it is the lower-income and the middle-income groups of taxpayers (not

the high-income taxpayers) who stand to benefit most from the increase of

personal and additional exemptions provided for by Rep. Act 7167. To that

extent, the act is a social legislation intended to alleviate in part the present

economic plight of the lower income taxpayers. It is intended to remedy the

inadequacy of the heretofore existing personal and additional exemptions

for individual taxpayers.

And then, Rep. Act 7167 says that the increased personal exemptions that it

provides for shall be available thenceforth, that is, after Rep. Act 7167 shall

have become effective. In other words, these exemptions are available upon

the filing of personal income tax returns which is, under the National

Internal Revenue Code, done not later than the 15th day of April after the

end of a calendar year. Thus, under Rep. Act 7167, which became effective,

as aforestated, on 30 January 1992, the increased exemptions are literally

available on or before 15 April 1992 (though not before 30 January 1992).

But these increased exemptions can be available on 15 April 1992 only in

respect of compensation income earned or received during the calendar

year 1991.

The personal exemptions as increased by Rep. Act 7167 cannot be regarded

as available in respect of compensation income received during the 1990

calendar year; the tax due in respect of said income had already accrued,

and been presumably paid, by 15 April 1991 and by 15 July 1991, at which

time Rep. Act 7167 had not been enacted. To make Rep. Act 7167 refer

back to income received during 1990 would require language explicitly

retroactive in purport and effect, language that would have to authorize the

payment of refunds of taxes paid on 15 April 1991 and 15 July 1991: such

language is simply not found in Rep. Act 7167.

The personal exemptions as increased by Rep. Act 7167 cannot be regarded

as available only in respect of compensation income received during 1992,

as the implementing Revenue Regulations No. 1-92 purport to provide.

Revenue Regulations No. 1-92 would in effect postpone the availability of

the increased exemptions to 1 January-15 April 1993, and thus literally defer

the effectivity of Rep. Act 7167 to 1 January 1993. Thus, the implementing

regulations collide frontally with Section 3 of Rep. Act 7167 which states

that the statute "shall take effect upon its approval." The objective of the

Secretary of Finance and the Commissioner of Internal Revenue in

postponing through Revenue Regulations No. 1-92 the legal effectivity of

Rep. Act 7167 is, of course, entirely understandable –– to defer to 1993 the

reduction of governmental tax revenues which irresistibly follows from the

application of Rep. Act 7167. But the law-making authority has spoken and

the Court can not refuse to apply the law-maker's words. Whether or not the

government can afford the drop in tax revenues resulting from such

increased exemptions was for Congress (not this Court) to decide.

WHEREFORE, Sections 1, 3 and 5 of Revenue Regulations No. 1-92 which

provide that the regulations shall take effect on compensation income

earned or received from 1 January 1992 are hereby SET ASIDE. They should

take effect on compensation income earned or received from 1 January

1991.

Since this decision is promulgated after 15 April 1992, the individual

taxpayers entitled to the increased exemptions on compensation income

earned during calendar year 1991 who may have filed their income tax

returns on or before 15 April 1992 (later extended to 24 April 1992) without

the benefit of such increased exemptions, are entitled to the corresponding

tax refunds and/or credits, and respondents are ordered to effect such

refunds and/or credits. No costs.

SO ORDERED.

Footnotes

1 Before the enactment of Rep. Act 7167, Executive Order No. 37 approved by the President on 31 July 1986, provided for the

following personal and additional exemptions for individual taxpayers:

(1) Personal exemptions allowable to individuals. –– (1) Basic personal exemption. –– For the purpose of determining the tax

provided in Section 21(a) of this Title, there shall be allowed a basic personal exemption as follows:

For single individual or married individual

judicially decreed as legally separated

with no qualified dependents P6,000

For head of a family P7,500

For married individual P12,000

Provided, That husband and wife electing to compute their income tax separately shall be entitled to a personal exemption of

P6,000 each.

For purposes of this paragraph, the term "Head of Family" means an unmarried or legally separated man or woman with one or

both parents, or with one or more brothers or sisters, or with one or more legitimate, recognized natural or legally adopted

children living with and dependent upon him for their chief support, where such brothers or sisters or children are not more

than twenty-one (21) years of age, unmarried and not gainfully employed or where such children, brothers or sisters, regardless

of age are incapable of self-support because of mental or physical defect.

(2) Additional exemption

(A) Taxpayers with dependents. –– A married individual or a head of family shall be allowed an additional exemption of Three

thousand pesos (P3,000) for each dependent: Provided, That the total number of dependents for which additional exemptions

may be claimed shall not exceed four dependents: Provided, further, That an additional exemption of One thousand pesos

(P1,000) shall be allowed for each child who otherwise qualified as dependent prior to January 1, 1980; and Provided, finally,

That the additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals

electing to compute their income tax liabilities separately.

In case of legally separated spouses, additional exemptions may be claimed only by the spouse who was awarded custody of

the child or children: Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed

the maximum additional exemptions herein allowed:

For purposes of this paragraph, a dependent means a legitimate, recognized natural or legally adopted child chiefly dependent

upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully

employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.

SECOND DIVISION

G.R. No. L-36130 January 17, 1985

LA SUERTE CIGAR AND CIGARETTE FACTORY, BATAAN CIGAR AND

CIGARETTE FACTORY, INC., LA PERLA INDUSTRIES, INC., PIONEER

TOBACCO CORPORATION, INSULAR-YEBANA TOBACCO

CORPORATION, LAS BUENAS FABRICA DE CIGARILLOS, INC., LA

DICHA CIGAR & CIGARETTE FACTORY, CONSOLIDATED TOBACCO

INDUSTRIES OF THE PHILIPPINES, INC., LA CAMPANA FABRICA DE

TABACOS, INC., ASSOCIATED ANGLO-AMERICAN TOBACCO

CORPORATION, FORTUNE TOBACCO CORPORATION, BAGUMBUHAY

CIGAR AND CIGARETTE FACTORY, STANDARD CIGARETTE

MANUFACTURING CO., INC., and D.L. TERUEL TOBACCO CO., INC.,

petitioners,

vs.

COURT OF TAX APPEALS and HON. MISAEL P. VERA, in his capacity

as Commissioner of Internal Revenue, respondents.

G.R. No. L-36131 January 17, 1985

ALHAMBRA INDUSTRIES, INC., LA FLOR DE LA ISABELA,

INCORPORADA and COLUMBIA TOBACCO COMPANY, INC., petitioners,

vs.

COURT OF TAX APPEALS and HON. MISAEL P. VERA, in his capacity

as Commissioner of Internal Revenue, respondents.

 

CUEVAS, J.:

Petition for Review on certiorari of the decisions 1 of the Court of Tax

Appeals in CTA Cases Nos. 2048 and 2031, denying petitioners' claims for

the refund of P1,606,509.83 imposed and collected by respondent

Commissioner of Internal Revenue as tobacco inspection fees on cigars and

cigarettes manufactured for domestic sale and/or consumption.

These two cases were heard jointly by the Court of Tax Appeals the parties

being represented by one and the same counsel and involving as they do,

the same legal issues. The amounts involved are not disputed.

On August 22, 1967, respondent Commissioner of Internal Revenue issued

Memorandum Circular No. 30-67 2 requiring the inspection of (a) all locally

produced leaf tobacco and partially manufactured tobacco intended for

domestic sale, for factory use or for export; (b) all manufactured products of

tobacco contemplated in Sec. 194(m) of the Tax Code intended for domestic

sale; and (c) all imported foreign leaf tobacco and partially manufactured

tobacco for domestic sale or factory use, and the collection of the

corresponding inspection fees.

Pursuant to said Memorandum respondent collected from petitioners, over

the latter's vehement protests, the following inspection fees:

(a) 199,632.19 during the period from September 1967 to April 1969, in CTA

Case No. 2031;

(b) 1,406,877.64 during the period from September 1967 to August 1969, in

CTA Case No. 2048.

Petitioners in two separate cases, sought the refund of the aforementioned

inspection fees collected from them CTA Case No. 2031 was submitted by

petitioners for summary judgment. In a decision dated November 28, 1970,

CTA denied the claim for the refund of the amount of P199,632.19.

Before the finality of the said decision, however, petitioners moved for a

reconsideration thereby praying that in case of a denial, CTA Case No. 2031

be reopened for the reception of evidence in support of their argument that

there was no inspection made by the BIR nor were inspection labels affixed

to the boxes and packages containing the cigars and cigarettes which would

warrant the imposition and collection of the disputed tobacco inspection

fees.

On September 28, 1971, the CTA granted petitioners' motion to reopen but

denied the motion for reconsideration. Said court likewise ordered that CTA

Cases Nos. 2048 and 2031 be heard jointly. After hearing, the CTA on

December 15, 1972 denied both claims.

Petitioners contend that the CTA erred:

I

IN REACHING A CONCLUSION CONTRARY TO PETITIONERS' POSITION THAT

INSPECTION FEES COLLECTED FROM THEM BY RESPONDENT ON THE CIGARS

AND CIGARETTES MANUFACTURED BY THEM FOR DOMESTIC SALE OR

CONSUMPTION WERE SO COLLECTED ILLEGALLY AND HENCE, SHOULD BE

REFUNDED TO THEM;

II

IN REFUSING TO HOLD THAT RESPONDENT COMMISSIONER'S REVENUE

MEMORANDUM CIRCULAR WHICH PURPORTS TO DECLARE PETITIONERS

LIABLE FOR THE AFORESAID INSPECTION FEES, AND IN VIRTUE OF WHICH,

THE SAID FEES WERE COLLECTED, IS WITHOUT ANY BINDING FORCE AND

EFFECT ON THE LATTER, BECAUSE OF THE ADMITTED FACT THAT IT IS NOT A

REGULATION PROMULGATED BY THE SECRETARY OF FINANCE, AS REQUIRED

BY SECTION 4(j) AND 338 OF THE NIRC, AND FURTHER, BECAUSE OF THE

EQUALLY ADMITTED FACT THAT IT HAS NEVER BEEN PUBLISHED IN THE

OFFICIAL GAZETTE, AS REQUIRED NOT ONLY BY ART. 2 OF THE CIVIL CODE,

BUT ALSO BY SEC. 79(b) OF THE REVISED ADMINISTRATIVE CODE;

III

IN DISREGARDING THE FACT BORNE OUT BY UNDISPUTED EVIDENCE THAT

NO INSPECTION OF THE CIGARS AND CIGARETTES AFOREMENTIONED WAS

ACTUALLY CONDUCTED FOR WHICH REASON NO COLLECTION OF

INSPECTION FEES WAS LEGALLY WARRANTED; and

IV

IN FAILING TO HOLD THAT THE PROVISIONS OF THE TOBACCO INSPECTION

LAW (SEC. 6[c]) UNDER WHICH THE SAID REVENUE MEMORANDUM

CIRCULAR PURPORTS TO DECLARE PETITIONERS' CIGAR AND CIGARETTES

FOR DOMESTIC SALE OR CONSUMPTION SUBJECT TO INSPECTION AND THE

PAYMENT OF INSPECTION FEES, REFER ALONE TO LEAF TOBACCO FOR

DOMESTIC SALE OR FACTORY USE, NOT TO CIGARS AND CIGARETTES FOR

DOMESTIC CONSUMPTION, AND HENCE, THE SAID MEMORANDUM CIRCULAR

IS ULTRA VIRES AND VOID.

Section 6(c) of Act 2613 (Tobacco Inspection Law), before its amendment by

Republic Act No. 3 1, provides:

Sec. 6. The Commissioner of Internal Revenue shall have the power and it

shall be his duty: ...

xxx xxx xxx

(c) To require, whenever it shall be deemed expedient, the inspection of and

affixture of inspection labels to tobacco removed from the province before

such removal or to tobacco for domestic sale or factory use.

As amended, (by RA 31) said Section 6, Republic Act No. 31 (October 1,

1946) now reads:

Sec. 6. The Commissioner of Internal Revenue shall have the power and it

shall be his duty:

xxx xxx xxx

(c) To require, whenever it shall be deemed expedient, the inspection of and

affixture of inspection labels to tobacco removed from province of its origin

to another or other provinces before such removal or to tobacco for

domestic sale or factory use. (Emphasis supplied)

The amendatory bill (House Bill No. 735) which later on became Republic Act

No. 31, carried the following explanatory note:

EXPLANATORY NOTE

Under Section 6 of the Tobacco Inspection Law (Act No. 2613), the Collector

of Internal Revenue is authorized to promulgate rules relative to the

classification, marking and packaging of leaf tobacco for domestic sale or for

exportation in order to insure the use of leaf tobacco of good quality and its

handling under sanitary conditions. Section 1 of the attached bill seeks to

extend this regulatory power of the Collector of Internal Revenue to leaf

tobacco intended for factory use.

xxx xxx xxx

xxx xxx xxx

Under the present law only leaf and manufactured tobacco for export to the

United States are subject to inspection. Under the proposed amendment,

the standard type and packing of all leaf and manufactured tobacco for

export to any foreign country will come under the regulatory power of the

Collector of Internal Revenue. (Emphasis supplied)

It was petitioners' contention that the amendatory portion reading "or to

tobacco for domestic sale or factory use" in Sec. 6(c) of Act 2613, refers to

leaf tobacco whether for local sale or factory use and does not include cigars

and cigarettes for domestic sale or consumption.

We do not agree.

Prior to the amendment of said Act, Sec. 6 and 7 thereof, already covered

the inspection of leaf tobacco, partially manufactured tobacco or local sale

and leaf tobacco and its products for export. If the intention of Congress was

to apply the amendment to those items already covered by Act 2613, then

the word "leaf" should have been easily included to modify the term

"tobacco". The omission of the word "leaf" is a clear indication that Congress

intended to include within the purview of the law a new item; namely,

manufactured tobacco products for domestic sale and imported tobacco for

factory use.

As aptly held by the CTA:

xxx xxx xxx

Petitioners' contention that the phrase 'tobacco for domestic sale' refers to

leaf tobacco alone is restrictive, misleading, and against sound statutory

construction.

Webster's New International Dictionary 2nd Edition, p. 2653 defines tobacco

as the leaves of the tobacco plant, prepared by drying and various

manufacturing processes, and use either for smoking or chewing, or as

snuff, or the manufactured products from tobacco leave smoking or chewing

tobacco cigar cigarette etc. collectively

From the above definition, it is clear that the word "tobacco" refers both to

leaf and manufactured tobacco such as cigars, and cigarettes It is to be

noted that either Section 6(c) of Act No. 2613 or the amendatory law does

not make a distinction as to the meaning of the word "tobacco". Since our la

g body used the word tobacco in the general sense without any

qualification, this Court is powerless to give it a restrictive meaning.

xxx xxx xxx

If Congress of the Philippines really intended to restrict the meaning of the

word 'tobacco' under Republic Act No. 31, which took effect on October 1,

1946, in order to limit the scope of the term tobacco under the law originally

passed in 1916 and its implementing Regulations Nos. 17 and 47, it could

have easily inserted the word "leaf" to modify "tobacco" contained in the

amendatory law. An examination of Sections 6(a), 6(b) and 7, supra, reveals

that, if our lawmaking body intended to limit the coverage of said sections

to either leaf or manufactured tobacco, it qualified the word 'tobacco' with

such antecedent words. In Section 6(c) of Act 2613, as amended, no such

qualification was made by Congress, thereby showing the broad scope and

meaning of the word tobacco. For the Court to adopt petitioners'

construction that tobacco means 'leaf tobacco' would be engaging in

unauthorized judicial legislation by rewriting the law and inserting words and

phrases not found in it.

xxx xxx xxx

Settled is the rule that where the law does not distinguish, we should not

distinguish. 3

The validity and efficacy of Revenue Memorandum Circular No. 30-67 is now

being assailed by petitioners on the ground that it is not a regulation

promulgated by the Secretary of Finance (now Minister of Finance) and that

it has never been published in the Official Gazette as required by the Civil

Code and the Revised Administrative Code.

As herein earlier mentioned, the word "leaf", although used to modify the

term "tobacco" only in the Explanatory Note to then House Bill No. 735 was

omitted when the Bill was signed into law (RA 31). However, when General

Circular No. V-27 dated October 29, 1946 was issued by then Collector of

Internal Revenue Bibiano L. Meer to implement the provisions of Sections 6,

7 and 14 of Act 2613 (Tobacco Inspection Law), the word "leaf" was

erroneously included therein, causing damage to the financial stability of the

Government as the inspection fees due on cigars and cigarettes for

domestic sale and imported leaf and partially manufactured tobacco for

factory use were not collected for more than twenty (20) years. Such error

was only discovered when an Assistant Chief of the Tobacco Inspection

Service of the BIR appeared in a public hearing of the Joint Legislative-

Executive Tax Commission. As a result thereof, the Philippine Tobacco

Board, a policy making body of the National Government on Tobacco

Authority, adopted Resolution No. 2-67 interpreting the phrase "tobacco for

domestic sale" as referring to wholesale disposal of tobacco products by

cigar and cigarettes factories to its dealers while the phrase "tobacco for

factory use" meant "imported leaf tobacco" intended for use by cigar and

cigarette factories in the manufacture of tobacco products. The approval of

this Resolution on May 31, 1967 prompted respondent Commissioner to

promulgate Memorandum Circular No. 30-67 which was approved by then

Secretary of Finance Eduardo Z. Romualdez and the effectivity of which is

specifically dated September 1, 1967 and not contingent on its publication

in the Official Gazette.

Thus, the assailed Revenue Memorandum Circular was issued to rectify the

error in General Circular No. V-27 and to interpret the phrase "tobacco for

domestic sale or factory use" with the view of arresting huge losses of

tobacco inspection fees which were not collected and imposed since the said

Circular (No. V-27) took effect. Furthermore, the questioned Revenue

Memorandum Circular was also issued to apprise those concerned of the

construction and interpretation which should be accorded to Act No. 2613,

as amended, and which respondent is duty bound to enforce. It is an opinion

on how the law should be construed and there was no attempt whatsoever

to enlarge or restrict the meaning of the law.

The basis for the issuance of said Memorandum Circular was so stated in

Resolution No. 2-67 of the Tobacco Board, wherein petitioners as members

of the Manila Tobacco Association, Inc. were duly represented, the pertinent

portions of which read:

xxx xxx xxx

WHEREAS, tills original recommendation of Mr. Hernandez was perfectly in

accordance with eating law, more particularly Sec. 1 of Republic Act No. 31

which took effect since September 25, 1946, but perhaps thru oversight by

the former Commissioners and officers of the Tobacco Inspection Service the

property and legality of effecting the inspection of tobacco products for local

sales and imported leaf tobacco for factory use might have overlooked

resulting in huge losses of tobacco inspection fees ... (Emphasis supplied)

As admitted by counsel for petitioners, the latter were each furnished with a

copy of the Revenue Memorandum Circular in question and the purpose of

the law, that is to inform or notify those who may be affected, has been

substantially complied with. Since it was further admitted by petitioners that

said Memorandum is but a "Memorandum Circular for purposes of the

internal administration of the BIR and not a regulation within the

contemplation of Sections 4 and 338 of the NIRC and Section 79(b) of the

Revised Administrative Code", said circular needs no publication in the

Official Gazette as erroneously argued by the petitioners.

Section 79(b) of the Revised Administrative Code so provides:

Chiefs, of bureaus or offices, may, however, be authorized to promulgate

circulars or information or instructions for the government of the officers

and employees in the interior administration of the business of each bureau

or office, and in such case said circular shall not be required to be published.

When an administrative agency renders an opinion by means of a circular or

Memorandum, it merely interprets a pre-existing law, and no publication is

necessary for its validity. 4 Construction by an executive branch of

government of a particular law although not binding upon courts must be

given weight as the construction come from the branch of the government

called upon to implement the law. 5

The promulgation of Revenue Memorandum Circular No. 30-67 being in

accordance with the Revised Administrative Code, having been issued by

the Commissioner of Internal Revenue with the approval of the Secretary

(now Minister) of Finance for the implementation of the Tobacco Inspection

Law, has therefore the force and effect of law.

Tobacco Inspection fees are undoubtedly National Internal Revenue taxes,

they being one of the miscellaneous taxes provided for under the Tax Code.

Section 228 (formerly Section 302) of Chapter VII of the Code specifically

provides for the collection and manner of payment of the said inspection

fees. It is within the power and duty of the Commissioner to collect the

same, even without inspection, should tobacco products be removed

clandestinely or surreptitiously from the establishment of the wholesaler,

manufacturer or redrying plant and from the customs custody in case of

imported leaf tobacco. Errors, omissions or flaws committed by BIR

inspectors and representatives while in the performance of their duties

cannot be set up as estoppel nor estop the Government from collecting a

tax legally due. 6 Tobacco inspection fees are levied and collected for

purposes of regulation and control and also as a source of revenue since

fifty percentum (50%) of said fees shall accrue to the Tobacco Inspection

Fee Fund created by Sec. 12 of Act No. 2613, as amended and the other fifty

percentum to the Cultural Center of the Philippines. (Sec. 88, Chapter VII,

NIRC)

Under the circumstances, a refund of the tobacco inspection fees collected

from petitioners is not legally warranted.

As disclosed by the records, the party-litigants agreed that Mr. Vicente

Chua's, (Production Manager of La Suerte Cigar & Cigarette Factory)

testimony shall be considered as the Procedure of inspection followed in all

factories of petitioners, thus: 7

... before the cigarettes were removed from the factory, they were invoiced

by the revenue agents assigned there to check on the number of cases of

cigarettes to be removed; revenue agents checked the quantity of

cigarettes manufactured, quantity of cigarettes removed, strip stamps

affixed; and early in the morning before the start of the operation, the

revenue agents checked the cigarette bobbins strip stamps and saw to it

that cigarettes removed were properly recorded in the books.

From the testimonies of other witnesses for petitioners, it was shown that

revenue agents and tobacco inspectors "saw to it that an raw materials for

use in the manufacture of the finished products were duly recorded; and in

the process of manufacture, all tobacco products found unfit for sales were

segregated by the factory employees thru the supervision of the revenue

agents."

The CTA held that the foregoing belie petitioners' assertions that no actual

inspection was conducted to justify the collection of the tobacco inspection

fees. The findings of the Tax Court are duly supported by evidence. We find

no cogent reason to disturb the same. They are therefore binding on this

Court.

Accordingly, the petition for review is hereby DISMISSED. Costs against

petitioners.

SO ORDERED.

 

Footnotes

1 CTA Decision, pages 40-60, Rollo.

2 Pages, 61-62, Rollo.

3 Colgate-Palmolive (Phils.), Inc. vs. Gimenez, 1 SCRA 267.

4 Romualdez vs. Arca, 27 SCRA 828.

5 Salaria vs. Buenviaje 81 SCRA 722.

6 Phil. American Drug Co. vs. Collector of BIR, 106 Phil. 161.

7 Pages 57-58, Rollo.

THIRD DIVISION

[G.R. No. 153866.  February 11, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE

TECHNOLOGY (PHILIPPINES), respondent.

D E C I S I O N

PANGANIBAN, J.:

Business companies registered in and operating from the Special Economic

Zone in Naga, Cebu -- like herein respondent -- are entities exempt from all

internal revenue taxes and the implementing rules relevant thereto,

including the value-added taxes or VAT.  Although export sales are not

deemed exempt transactions, they are nonetheless zero-rated.  Hence, in

the present case, the distinction between exempt entities and exempt

transactions has little significance, because the net result is that the

taxpayer is not liable for the VAT.  Respondent, a VAT-registered enterprise,

has complied with all requisites for claiming a tax refund of or credit for the

input VAT it paid on capital goods it purchased.  Thus, the Court of Tax

Appeals and the Court of Appeals did not err in ruling that it is entitled to

such refund or credit.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court,

seeking to set aside the May 27, 2002 Decision[2] of the Court of Appeals

(CA) in CA-GR SP No. 66093.  The decretal portion of the Decision reads as

follows:

“WHEREFORE, foregoing premises considered, the petition for review is

DENIED for lack of merit.”[3]

The Facts

The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as

follows:

“As jointly stipulated by the parties, the pertinent facts x x x involved in this

case are as follows:

1.  [Respondent] is a resident foreign corporation duly registered with the

Securities and Exchange Commission to do business in the Philippines, with

principal office address at the new Cebu Township One, Special Economic

Zone, Barangay Cantao-an, Naga, Cebu;

2.  [Petitioner] is sued in his official capacity, having been duly appointed

and empowered to perform the duties of his office, including, among others,

the duty to act and approve claims for refund or tax credit;

3.  [Respondent] is registered with the Philippine Export Zone Authority

(PEZA) and has been issued PEZA Certificate No. 97-044 pursuant to

Presidential Decree No. 66, as amended, to engage in the manufacture of

recording components primarily used in computers for export.  Such

registration was made on 6 June 1997;

4.  [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced

by VAT Registration Certification No. 97-083-000600-V issued on 2 April

1997;

5.  VAT returns for the period 1 April 1998 to 30 June 1999 have been filed

by [respondent];

6.  An administrative claim for refund of VAT input taxes in the amount of

P28,369,226.38 with supporting documents (inclusive of the P12,267,981.04

VAT input taxes subject of this Petition for Review), was filed on 4 October

1999 with Revenue District Office No. 83, Talisay Cebu;

7.  No final action has been received by [respondent] from [petitioner] on

[respondent’s] claim for VAT refund.

“The administrative claim for refund by the [respondent] on October 4, 1999

was not acted upon by the [petitioner] prompting the [respondent] to

elevate the case to [the CTA] on July 21, 2000 by way of Petition for Review

in order to toll the running of the two-year prescriptive period.

“For his part, [petitioner] x x x raised the following Special and Affirmative

Defenses, to wit:

1.  [Respondent’s] alleged claim for tax refund/credit is subject to

administrative routinary investigation/examination by [petitioner’s] Bureau;

2.  Since ‘taxes are presumed to have been collected in accordance with

laws and regulations,’ the [respondent] has the burden of proof that the

taxes sought to be refunded were erroneously or illegally collected x x x;

3.  In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme

Court ruled that:

“A claimant has the burden of proof to establish the factual basis of his or

her claim for tax credit/refund.”

4.  Claims for tax refund/tax credit are construed in ‘strictissimi juris’ against

the taxpayer.  This is due to the fact that claims for refund/credit [partake

of] the nature of an exemption from tax.  Thus, it is incumbent upon the

[respondent] to prove that it is indeed entitled to the refund/credit sought. 

Failure on the part of the [respondent] to prove the same is fatal to its claim

for tax credit.  He who claims exemption must be able to justify his claim by

the clearest grant of organic or statutory law.  An exemption from the

common burden cannot be permitted to exist upon vague implications;

5.  Granting, without admitting, that [respondent] is a Philippine Economic

Zone Authority (PEZA) registered Ecozone Enterprise, then its business is

not subject to VAT pursuant to Section 24 of Republic Act No. ([RA]) 7916 in

relation to Section 103 of the Tax Code, as amended.  As [respondent’s]

business is not subject to VAT, the capital goods and services it alleged to

have purchased are considered not used in VAT taxable business.  As such,

[respondent] is not entitled to refund of input taxes on such capital goods

pursuant to Section 4.106.1 of Revenue Regulations No. ([RR])7-95, and of

input taxes on services pursuant to Section 4.103 of said regulations.

6.  [Respondent] must show compliance with the provisions of Section 204

(C) and 229 of the 1997 Tax Code on filing of a written claim for refund

within two (2) years from the date of payment of tax.’

“On July 19, 2001, the Tax Court rendered a decision granting the claim for

refund.”[4]

Ruling of the Court of Appeals

The CA affirmed the Decision of the CTA granting the claim for refund or

issuance of a tax credit certificate (TCC) in favor of respondent in the

reduced amount of P12,122,922.66.  This sum represented the unutilized

but substantiated input VAT paid on capital goods purchased for the period

covering April 1, 1998 to June 30, 1999.

The appellate court reasoned that respondent had availed itself only of the

fiscal incentives under Executive Order No. (EO) 226 (otherwise known as

the Omnibus Investment Code of 1987), not of those under both Presidential

Decree No. (PD) 66, as amended, and Section 24 of RA 7916.  Respondent

was, therefore, considered exempt only from the payment of income tax

when it opted for the income tax holiday in lieu of the 5 percent preferential

tax on gross income earned.  As a VAT-registered entity, though, it was still

subject to the payment of other national internal revenue taxes, like the

VAT.

Moreover, the CA held that neither Section 109 of the Tax Code nor Sections

4.106-1 and 4.103-1 of RR 7-95 were applicable.  Having paid the input VAT

on the capital goods it purchased, respondent correctly filed the

administrative and judicial claims for its refund within the two-year

prescriptive period.  Such payments were -- to the extent of the refundable

value -- duly supported by VAT invoices or official receipts, and were not yet

offset against any output VAT liability.

Hence this Petition.[5]

Sole Issue

Petitioner submits this sole issue for our consideration:

“Whether or not respondent is entitled to the refund or issuance of Tax

Credit Certificate in the amount of P12,122,922.66 representing alleged

unutilized input VAT paid on capital goods purchased for the period April 1,

1998 to June 30, 1999.”[6]

The Court’s Ruling

The Petition is unmeritorious.

Sole Issue:

Entitlement of a VAT-Registered PEZA Enterprise to

a Refund of or Credit for Input VAT

No doubt, as a PEZA-registered enterprise within a special economic zone,[7]

respondent is entitled to the fiscal incentives and benefits[8] provided for in

either PD 66[9] or EO 226.[10] It shall, moreover, enjoy all privileges,

benefits, advantages or exemptions under both Republic Act Nos. (RA)

7227[11] and 7844.[12]

Preferential Tax Treatment

Under Special Laws

If it avails itself of PD 66, notwithstanding the provisions of other laws to the

contrary, respondent shall not be subject to internal revenue laws and

regulations for raw materials, supplies, articles, equipment, machineries,

spare parts and wares, except those prohibited by law, brought into the

zone to be stored, broken up, repacked, assembled, installed, sorted,

cleaned, graded or otherwise processed, manipulated, manufactured, mixed

or used directly or indirectly in such activities.[13] Even so, respondent

would enjoy a net-operating loss carry over; accelerated depreciation;

foreign exchange and financial assistance; and exemption from export

taxes, local taxes and licenses.[14]

Comparatively, the same exemption from internal revenue laws and

regulations applies if EO 226[15] is chosen.  Under this law, respondent shall

further be entitled to an income tax holiday; additional deduction for labor

expense; simplification of customs procedure; unrestricted use of consigned

equipment; access to a bonded manufacturing warehouse system; privileges

for foreign nationals employed; tax credits on domestic capital equipment,

as well as for taxes and duties on raw materials; and exemption from

contractors’ taxes, wharfage dues, taxes and duties on imported capital

equipment and spare parts, export taxes, duties, imposts and fees,[16] local

taxes and licenses, and real property taxes.[17]

A privilege available to respondent under the provision in RA 7227 on tax

and duty-free importation of raw materials, capital and equipment[18] -- is,

ipso facto, also accorded to the zone[19] under RA 7916.  Furthermore, the

latter law -- notwithstanding other existing laws, rules and regulations to the

contrary -- extends[20] to that zone the provision stating that no local or

national taxes shall be imposed therein.[21]  No exchange control policy shall

be applied; and free markets for foreign exchange, gold, securities and

future shall be allowed and maintained.[22] Banking and finance shall also be

liberalized under minimum Bangko Sentral regulation with the establishment

of foreign currency depository units of local commercial banks and offshore

banking units of foreign banks.[23]

In the same vein, respondent benefits under RA 7844 from negotiable tax

credits[24] for locally-produced materials used as inputs.  Aside from the

other incentives possibly already granted to it by the Board of Investments,

it also enjoys preferential credit facilities[25] and exemption from PD 1853.

[26]

From the above-cited laws, it is immediately clear that petitioner enjoys

preferential tax treatment.[27] It is not subject to internal revenue laws and

regulations and is even entitled to tax credits.  The VAT on capital goods is

an internal revenue tax from which petitioner as an entity is exempt. 

Although the transactions involving such tax are not exempt, petitioner as a

VAT-registered person,[28] however, is entitled to their credits.

Nature of the VAT and

the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent

to 10 percent levied on every importation of goods, whether or not in the

course of trade or business, or imposed on each sale, barter, exchange or

lease of goods or properties or on each rendition of services in the course of

trade or business[29] as they pass along the production and distribution

chain, the tax being limited only to the value added[30] to such goods,

properties or services by the seller, transferor or lessor.[31] It is an indirect

tax that may be shifted or passed on to the buyer, transferee or lessee of

the goods, properties or services.[32] As such, it should be understood not in

the context of the person or entity that is primarily, directly and legally

liable for its payment, but in terms of its nature as a tax on consumption.

[33]  In either case, though, the same conclusion is arrived at.

The law[34] that originally imposed the VAT in the country, as well as the

subsequent amendments of that law, has been drawn from the tax credit

method.[35] Such method adopted the mechanics and self-enforcement

features of the VAT as first implemented and practiced in Europe and

subsequently adopted in New Zealand and Canada.[36] Under the present

method that relies on invoices, an entity can credit against or subtract from

the VAT charged on its sales or outputs the VAT paid on its purchases,

inputs and imports.[37]

If at the end of a taxable quarter the output taxes[38] charged by a seller[39]

are equal to the input taxes[40] passed on by the suppliers, no payment is

required.  It is when the output taxes exceed the input taxes that the excess

has to be paid.[41] If, however, the input taxes exceed the output taxes, the

excess shall be carried over to the succeeding quarter or quarters.[42]

Should the input taxes result from zero-rated or effectively zero-rated

transactions or from the acquisition of capital goods,[43] any excess over the

output taxes shall instead be refunded[44] to the taxpayer or credited[45]

against other internal revenue taxes.[46]

Zero-Rated and Effectively

Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ

from effectively zero-rated transactions as to their source.

Zero-rated transactions generally refer to the export sale of goods and

supply of services.[47] The tax rate is set at zero.[48] When applied to the tax

base, such rate obviously results in no tax chargeable against the

purchaser.  The seller of such transactions charges no output tax,[49] but

can claim a refund of or a tax credit certificate for the VAT previously

charged by suppliers.

Effectively zero-rated transactions, however, refer to the sale of goods[50] or

supply of services[51] to persons or entities whose exemption under special

laws or international agreements to which the Philippines is a signatory

effectively subjects such transactions to a zero rate.[52] Again, as applied to

the tax base, such rate does not yield any tax chargeable against the

purchaser.  The seller who charges zero output tax on such transactions can

also claim a refund of or a tax credit certificate for the VAT previously

charged by suppliers.

Zero Rating and

Exemption

In terms of the VAT computation, zero rating and exemption are the same,

but the extent of relief that results from either one of them is not.

Applying the destination principle[53] to the exportation of goods, automatic

zero rating[54] is primarily intended to be enjoyed by the seller who is

directly and legally liable for the VAT, making such seller internationally

competitive by allowing the refund or credit of input taxes that are

attributable to export sales.[55] Effective zero rating, on the contrary, is

intended to benefit the purchaser who, not being directly and legally liable

for the payment of the VAT, will ultimately bear the burden of the tax shifted

by the suppliers.

In both instances of zero rating, there is total relief for the purchaser from

the burden of the tax.[56] But in an exemption there is only partial relief,[57]

because the purchaser is not allowed any tax refund of or credit for input

taxes paid.[58]

Exempt Transaction

and Exempt Party

The object of exemption from the VAT may either be the transaction itself or

any of the parties to the transaction.[59]

An exempt transaction, on the one hand, involves goods or services which,

by their nature, are specifically listed in and expressly exempted from the

VAT under the Tax Code, without regard to the tax status -- VAT-exempt or

not -- of the party to the transaction.[60] Indeed, such transaction is not

subject to the VAT, but the seller is not allowed any tax refund of or credit

for any input taxes paid.

An exempt party, on the other hand, is a person or entity granted VAT

exemption under the Tax Code, a special law or an international agreement

to which the Philippines is a signatory, and by virtue of which its taxable

transactions become exempt from the VAT.[61] Such party is also not subject

to the VAT, but may be allowed a tax refund of or credit for input taxes paid,

depending on its registration as a VAT or non-VAT taxpayer.

As mentioned earlier, the VAT is a tax on consumption, the amount of which

may be shifted or passed on by the seller to the purchaser of the goods,

properties or services.[62] While the liability is imposed on one person, the

burden may be passed on to another.  Therefore, if a special law merely

exempts a party as a seller from its direct liability for payment of the VAT,

but does not relieve the same party as a purchaser from its indirect burden

of the VAT shifted to it by its VAT-registered suppliers, the purchase

transaction is not exempt.  Applying this principle to the case at bar, the

purchase transactions entered into by respondent are not VAT-exempt.

Special laws may certainly exempt transactions from the VAT.[63] However,

the Tax Code provides that those falling under PD 66 are not.  PD 66 is the

precursor of RA 7916 -- the special law under which respondent was

registered.  The purchase transactions it entered into are, therefore, not

VAT-exempt.  These are subject to the VAT; respondent is required to

register.

Its sales transactions, however, will either be zero-rated or taxed at the

standard rate of 10 percent,[64] depending again on the application of the

destination principle.[65]

If respondent enters into such sales transactions with a purchaser -- usually

in a foreign country -- for use or consumption outside the Philippines, these

shall be subject to 0 percent.[66] If entered into with a purchaser for use or

consumption in the Philippines, then these shall be subject to 10 percent,[67]

unless the purchaser is exempt from the indirect burden of the VAT, in which

case it shall also be zero-rated.

Since the purchases of respondent are not exempt from the VAT, the rate to

be applied is zero.  Its exemption under both PD 66 and RA 7916 effectively

subjects such transactions to a zero rate,[68] because the ecozone within

which it is registered is managed and operated by the PEZA as a separate

customs territory.[69] This means that in such zone is created the legal

fiction of foreign territory.[70] Under the cross-border principle[71] of the VAT

system being enforced by the Bureau of Internal Revenue (BIR),[72] no VAT

shall be imposed to form part of the cost of goods destined for consumption

outside of the territorial border of the taxing authority.  If exports of goods

and services from the Philippines to a foreign country are free of the VAT,[73]

then the same rule holds for such exports from the national territory --

except specifically declared areas -- to an ecozone.

Sales made by a VAT-registered person in the customs territory to a PEZA-

registered entity are considered exports to a foreign country; conversely,

sales by a PEZA-registered entity to a VAT-registered person in the customs

territory are deemed imports from a foreign country.[74] An ecozone --

indubitably a geographical territory of the Philippines -- is, however,

regarded in law as foreign soil.[75] This legal fiction is necessary to give

meaningful effect to the policies of the special law creating the zone.[76] If

respondent is located in an export processing zone[77] within that ecozone,

sales to the export processing zone, even without being actually exported,

shall in fact be viewed as constructively exported under EO 226.[78]

Considered as export sales,[79] such purchase transactions by respondent

would indeed be subject to a zero rate.[80]

Tax Exemptions

Broad and Express

Applying the special laws we have earlier discussed, respondent as an entity

is exempt from internal revenue laws and regulations.

This exemption covers both direct and indirect taxes, stemming from the

very nature of the VAT as a tax on consumption, for which the direct liability

is imposed on one person but the indirect burden is passed on to another. 

Respondent, as an exempt entity, can neither be directly charged for the

VAT on its sales nor indirectly made to bear, as added cost to such sales, the

equivalent VAT on its purchases.  Ubi lex non distinguit, nec nos distinguere

debemus.  Where the law does not distinguish, we ought not to distinguish.

Moreover, the exemption is both express and pervasive for the following

reasons:

First, RA 7916 states that “no taxes, local and national, shall be imposed on

business establishments operating within the ecozone.”[81] Since this law

does not exclude the VAT from the prohibition, it is deemed included. 

Exceptio firmat regulam in casibus non exceptis.  An exception confirms the

rule in cases not excepted; that is, a thing not being excepted must be

regarded as coming within the purview of the general rule.

Moreover, even though the VAT is not imposed on the entity but on the

transaction, it may still be passed on and, therefore, indirectly imposed on

the same entity -- a patent circumvention of the law.  That no VAT shall be

imposed directly upon business establishments operating within the

ecozone under RA 7916 also means that no VAT may be passed on and

imposed indirectly.  Quando aliquid prohibetur ex directo prohibetur et per

obliquum.  When anything is prohibited directly, it is also prohibited

indirectly.

Second, when RA 8748 was enacted to amend RA 7916, the same

prohibition applied, except for real property taxes that presently are

imposed on land owned by developers.[82] This similar and repeated

prohibition is an unambiguous ratification of the law’s intent in not imposing

local or national taxes on business enterprises within the ecozone.

Third, foreign and domestic merchandise, raw materials, equipment and the

like “shall not be subject to x x x internal revenue laws and regulations”

under PD 66[83] -- the original charter of PEZA (then EPZA) that was later

amended by RA 7916.[84]  No provisions in the latter law modify such

exemption.

Although this exemption puts the government at an initial disadvantage, the

reduced tax collection ultimately redounds to the benefit of the national

economy by enticing more business investments and creating more

employment opportunities.[85]

Fourth, even the rules implementing the PEZA law clearly reiterate that

merchandise -- except those prohibited by law -- “shall not be subject to x x

x internal revenue laws and regulations x x x”[86] if brought to the ecozone’s

restricted area[87] for manufacturing by registered export enterprises,[88] of

which respondent is one.  These rules also apply to all enterprises registered

with the EPZA prior to the effectivity of such rules.[89]

Fifth, export processing zone enterprises registered[90] with the Board of

Investments (BOI) under EO 226 patently enjoy exemption from national

internal revenue taxes on imported capital equipment reasonably needed

and exclusively used for the manufacture of their products;[91] on required

supplies and spare part for consigned equipment;[92] and on foreign and

domestic merchandise, raw materials, equipment and the like -- except

those prohibited by law -- brought into the zone for manufacturing.[93]  In

addition, they are given credits for the value of the national internal revenue

taxes imposed on domestic capital equipment also reasonably needed and

exclusively used for the manufacture of their products,[94] as well as for the

value of such taxes imposed on domestic raw materials and supplies that

are used in the manufacture of their export products and that form part

thereof.[95]

Sixth, the exemption from local and national taxes granted under RA

7227[96] are ipso facto accorded to ecozones.[97] In case of doubt, conflicts

with respect to such tax exemption privilege shall be resolved in favor of the

ecozone.[98]

And seventh, the tax credits under RA 7844 -- given for imported raw

materials primarily used in the production of export goods,[99] and for locally

produced raw materials, capital equipment and spare parts used by

exporters of non-traditional products[100] -- shall also be continuously

enjoyed by similar exporters within the ecozone.[101]  Indeed, the latter

exporters are likewise entitled to such tax exemptions and credits.

Tax Refund as

Tax Exemption

To be sure, statutes that grant tax exemptions are construed strictissimi

juris[102] against the taxpayer[103] and liberally in favor of the taxing

authority.[104]

Tax refunds are in the nature of such exemptions.[105] Accordingly, the

claimants of those refunds bear the burden of proving the factual basis of

their claims;[106] and of showing, by words too plain to be mistaken, that the

legislature intended to exempt them.[107] In the present case, all the cited

legal provisions are teeming with life with respect to the grant of tax

exemptions too vivid to pass unnoticed.  In addition, respondent easily

meets the challenge.

Respondent, which as an entity is exempt, is different from its transactions

which are not exempt.  The end result, however, is that it is not subject to

the VAT.  The non-taxability of transactions that are otherwise taxable is

merely a necessary incident to the tax exemption conferred by law upon it

as an entity, not upon the transactions themselves.[108]  Nonetheless, its

exemption as an entity and the non-exemption of its transactions lead to the

same result for the following considerations:

First, the contemporaneous construction of our tax laws by BIR authorities

who are called upon to execute or administer such laws[109] will have to be

adopted.  Their prior tax issuances have held inconsistent positions brought

about by their probable failure to comprehend and fully appreciate the

nature of the VAT as a tax on consumption and the application of the

destination principle.[110] Revenue Memorandum Circular No. (RMC) 74-99,

however, now clearly and correctly provides that any VAT-registered

supplier’s sale of goods, property or services from the customs territory to

any registered enterprise operating in the ecozone -- regardless of the class

or type of the latter’s PEZA registration -- is legally entitled to a zero rate.

[111]

Second, the policies of the law should prevail.  Ratio legis est anima.  The

reason for the law is its very soul.

In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well

as the establishment of export processing zones, seeks “to encourage and

promote foreign commerce as a means of x x x strengthening our export

trade and foreign exchange position, of hastening industrialization, of

reducing domestic unemployment, and of accelerating the development of

the country.”[112]

RA 7916, as amended by RA 8748, declared that by creating the PEZA and

integrating the special economic zones, “the government shall actively

encourage, promote, induce and accelerate a sound and balanced industrial,

economic and social development of the country x x x through the

establishment, among others, of special economic zones x x x that shall

effectively attract legitimate and productive foreign investments.”[113]

Under EO 226, the “State shall encourage x x x foreign investments in

industry x x x which shall x x x meet the tests of international

competitiveness[,] accelerate development of less developed regions of the

country[,] and result in increased volume and value of exports for the

economy.”[114] Fiscal incentives that are cost-efficient and simple to

administer shall be devised and extended to significant projects “to

compensate for market imperfections, to reward performance contributing

to economic development,”[115] and “to stimulate the establishment and

assist initial operations of the enterprise.”[116]

Wisely accorded to ecozones created under RA 7916[117] was the

government’s policy -- spelled out earlier in RA 7227 -- of converting into

alternative productive uses[118] the former military reservations and their

extensions,[119] as well as of providing them incentives[120] to enhance the

benefits that would be derived from them[121] in promoting economic and

social development.[122]

Finally, under RA 7844, the State declares the need “to evolve export

development into a national effort”[123] in order to win international

markets.  By providing many export and tax incentives,[124] the State is able

to drive home the point that exporting is indeed “the key to national survival

and the means through which the economic goals of increased employment

and enhanced incomes can most expeditiously be achieved.”[125]

The Tax Code itself seeks to “promote sustainable economic growth x x x; x

x x increase economic activity; and x x x create a robust environment for

business to enable firms to compete better in the regional as well as the

global market.”[126] After all, international competitiveness requires

economic and tax incentives to lower the cost of goods produced for export. 

State actions that affect global competition need to be specific and selective

in the pricing of particular goods or services.[127]

All these statutory policies are congruent to the constitutional mandates of

providing incentives to needed investments,[128] as well as of promoting the

preferential use of domestic materials and locally produced goods and

adopting measures to help make these competitive.[129] Tax credits for

domestic inputs strengthen backward linkages.  Rightly so, “the rule of law

and the existence of credible and efficient public institutions are essential

prerequisites for sustainable economic development.”[130]

VAT Registration, Not Application

for Effective Zero Rating,

Indispensable to VAT Refund

Registration is an indispensable requirement under our VAT law.[131]

Petitioner alleges that respondent did register for VAT purposes with the

appropriate Revenue District Office.  However, it is now too late in the day

for petitioner to challenge the VAT-registered status of respondent, given

the latter’s prior representation before the lower courts and the mode of

appeal taken by petitioner before this Court.

The PEZA law, which carried over the provisions of the EPZA law, is clear in

exempting from internal revenue laws and regulations the equipment --

including capital goods -- that registered enterprises will use, directly or

indirectly, in manufacturing.[132]  EO 226 even reiterates this privilege

among the incentives it gives to such enterprises.[133] Petitioner merely

asserts that by virtue of the PEZA registration alone of respondent, the latter

is not subject to the VAT.  Consequently, the capital goods and services

respondent has purchased are not considered used in the VAT business, and

no VAT refund or credit is due.[134] This is a non sequitur.  By the VAT’s very

nature as a tax on consumption, the capital goods and services respondent

has purchased are subject to the VAT, although at zero rate.  Registration

does not determine taxability under the VAT law.

Moreover, the facts have already been determined by the lower courts. 

Having failed to present evidence to support its contentions against the

income tax holiday privilege of respondent,[135] petitioner is deemed to

have conceded.  It is a cardinal rule that “issues and arguments not

adequately and seriously brought below cannot be raised for the first time

on appeal.”[136] This is a “matter of procedure”[137] and a “question of

fairness.”[138]  Failure to assert “within a reasonable time warrants a

presumption that the party entitled to assert it either has abandoned or

declined to assert it.”[139]

The BIR regulations additionally requiring an approved prior application for

effective zero rating[140] cannot prevail over the clear VAT nature of

respondent’s transactions.  The scope of such regulations is not “within the

statutory authority x x x granted by the legislature.[141]

First, a mere administrative issuance, like a BIR regulation, cannot amend

the law; the former cannot purport to do any more than interpret the latter.

[142] The courts will not countenance one that overrides the statute it seeks

to apply and implement.[143]

Other than the general registration of a taxpayer the VAT status of which is

aptly determined, no provision under our VAT law requires an additional

application to be made for such taxpayer’s transactions to be considered

effectively zero-rated.  An effectively zero-rated transaction does not and

cannot become exempt simply because an application therefor was not

made or, if made, was denied.  To allow the additional requirement is to give

unfettered discretion to those officials or agents who, without fluid

consideration, are bent on denying a valid application.  Moreover, the State

can never be estopped by the omissions, mistakes or errors of its officials or

agents.[144]

Second, grantia argumenti that such an application is required by law, there

is still the presumption of regularity in the performance of official duty.[145]

Respondent’s registration carries with it the presumption that, in the

absence of contradictory evidence, an application for effective zero rating

was also filed and approval thereof given.  Besides, it is also presumed that

the law has been obeyed[146] by both the administrative officials and the

applicant.

Third, even though such an application was not made, all the special laws

we have tackled exempt respondent not only from internal revenue laws but

also from the regulations issued pursuant thereto.  Leniency in the

implementation of the VAT in ecozones is an imperative, precisely to spur

economic growth in the country and attain global competitiveness as

envisioned in those laws.

A VAT-registered status, as well as compliance with the invoicing

requirements,[147] is sufficient for the effective zero rating of the

transactions of a taxpayer.  The nature of its business and transactions can

easily be perused from, as already clearly indicated in, its VAT registration

papers and photocopied documents attached thereto.  Hence, its

transactions cannot be exempted by its mere failure to apply for their

effective zero rating.  Otherwise, their VAT exemption would be determined,

not by their nature, but by the taxpayer’s negligence -- a result not at all

contemplated.  Administrative convenience cannot thwart legislative

mandate.

Tax Refund or

Credit in Order

Having determined that respondent’s purchase transactions are subject to a

zero VAT rate, the tax refund or credit is in order.

As correctly held by both the CA and the Tax Court, respondent had chosen

the fiscal incentives in EO 226 over those in RA 7916 and PD 66.  It opted for

the income tax holiday regime instead of the 5 percent preferential tax

regime.

The latter scheme is not a perfunctory aftermath of a simple registration

under the PEZA law,[148] for EO 226[149] also has provisions to contend

with.  These two regimes are in fact incompatible and cannot be availed of

simultaneously by the same entity.  While EO 226 merely exempts it from

income taxes, the PEZA law exempts it from all taxes.

Therefore, respondent can be considered exempt, not from the VAT, but

only from the payment of income tax for a certain number of years,

depending on its registration as a pioneer or a non-pioneer enterprise. 

Besides, the remittance of the aforesaid 5 percent of gross income earned in

lieu of local and national taxes imposable upon business establishments

within the ecozone cannot outrightly determine a VAT exemption.  Being

subject to VAT, payments erroneously collected thereon may then be

refunded or credited.

Even if it is argued that respondent is subject to the 5 percent preferential

tax regime in RA 7916, Section 24 thereof does not preclude the VAT.  One

can, therefore, counterargue that such provision merely exempts

respondent from taxes imposed on business.  To repeat, the VAT is a tax

imposed on consumption, not on business.  Although respondent as an

entity is exempt, the transactions it enters into are not necessarily so.  The

VAT payments made in excess of the zero rate that is imposable may

certainly be refunded or credited.

Compliance with All Requisites

for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the

requisites for claiming a VAT refund or credit.[150]

First, respondent is a VAT-registered entity.  This fact alone distinguishes

the present case from Contex, in which this Court held that the petitioner

therein was registered as a non-VAT taxpayer.[151] Hence, for being merely

VAT-exempt, the petitioner in that case cannot claim any VAT refund or

credit.

Second, the input taxes paid on the capital goods of respondent are duly

supported by VAT invoices and have not been offset against any output

taxes.  Although enterprises registered with the BOI after December 31,

1994 would no longer enjoy the tax credit incentives on domestic capital

equipment -- as provided for under Article 39(d), Title III, Book I of EO

226[152] -- starting January 1, 1996, respondent would still have the same

benefit under a general and express exemption contained in both Article

77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227,

extended to the ecozones by RA 7916.

There was a very clear intent on the part of our legislators, not only to

exempt investors in ecozones from national and local taxes, but also to

grant them tax credits.  This fact was revealed by the sponsorship speeches

in Congress during the second reading of House Bill No. 14295, which later

became RA 7916, as shown below:

”MR. RECTO.  x x x  Some of the incentives that this bill provides are

exemption from national and local taxes; x x x tax credit for locally-sourced

inputs x x x.“

x x x                             x x x                             x x x

”MR. DEL MAR. x x x  To advance its cause in encouraging investments and

creating an environment conducive for investors, the bill offers incentives

such as the exemption from local and national taxes, x x x tax credits for

locally sourced inputs x x x.“[153]

And third, no question as to either the filing of such claims within the

prescriptive period or the validity of the VAT returns has been raised.  Even

if such a question were raised, the tax exemption under all the special laws

cited above is broad enough to cover even the enforcement of internal

revenue laws, including prescription.[154]

Summary

To summarize, special laws expressly grant preferential tax treatment to

business establishments registered and operating within an ecozone, which

by law is considered as a separate customs territory.  As such, respondent is

exempt from all internal revenue taxes, including the VAT, and regulations

pertaining thereto.  It has opted for the income tax holiday regime, instead

of the 5 percent preferential tax regime.  As a matter of law and procedure,

its registration status entitling it to such tax holiday can no longer be

questioned.  Its sales transactions intended for export may not be exempt,

but like its purchase transactions, they are zero-rated.  No prior application

for the effective zero rating of its transactions is necessary.  Being VAT-

registered and having satisfactorily complied with all the requisites for

claiming a tax refund of or credit for the input VAT paid on capital goods

purchased, respondent is entitled to such VAT refund or credit.

WHEREFORE, the Petition is DENIED and the Decision AFFIRMED.  No

pronouncement as to costs.

SO ORDERED.

[1] Rollo, pp. 8-20.

[2] Id., pp. 21-30.  Thirteenth Division.  Penned by Justice Mercedes Gozo-Dadole, with the concurrence of Justices Salvador J. Valdez Jr.

(chair) and Amelita G. Tolentino (member).

[3] CA Decision, p. 10; rollo, p. 30.  Bold types and caps in the original.

[4] CA Decision, pp. 2-4; rollo, pp. 22-24.  Citations omitted.

[5] The Petition was deemed submitted for decision on April 3, 2003, upon receipt by the Court of petitioner’s Memorandum, signed by

Assistant Solicitors General Cecilio O. Estoesta and Fernanda Lampas Peralta and Associate Solicitor Romeo D. Galzote.  Respondent’s

Memorandum, signed by Attys. Dennis G. Dimagiba and Franklin A. Prestousa, was filed on March 7, 2003.

[6] Petitioner’s Memorandum, p. 5; rollo, p. 99.  Original in upper case.

[7] Referred to as ecozone, it is a selected area with highly developed, or which has the potential to be developed into, agro-industrial,

industrial, tourist/recreational, commercial, banking, investment and financial centers.  §4(a), Chapter I of RA 7916, otherwise known as

“The Special Economic Zone Act of 1995.”

[8] §35, Chapter III of RA 7916.

[9] PD 66 is the law creating the Export Processing Zone Authority or EPZA.  See 1st paragraph of §23, Chapter III of RA 7916.

[10] EO 226, in Article 1 thereof, is also known as the “Omnibus Investments Code” of 1987.  See 1st paragraph of §23, Chapter III of RA

7916.

[11] RA 7227, in §1 thereof, is also known as the “Bases Conversion and Development Act of 1992.”  See §51, Chapter VI of RA 7916.

[12] RA 7844, in §1 thereof, is also known as the “Export Development Act of 1994.”  See 2nd paragraph of §23, Chapter III of RA 7916.

[13] §17(1) of PD 66.

[14] §18 of PD 66.

[15] Article 77(1), Book VI of EO 226.

[16] Article 39 of EO 226, certain paragraphs of which are expressly repealed by the 2nd paragraph of §20 of RA 7716, otherwise known

as the “Expanded Value Added Tax Law,” deemed effective May 27, 1994.  See Commissioner of Internal Revenue v.

Michel J. Lhuillier Pawnshop, Inc., 406 SCRA 178, 187, July 15, 2003.

[17] Article 78 of EO 226.

[18] (b) of the 2nd paragraph of §12 of RA 7227.

[19] §51, Chapter VI of RA 7916.

[20] §51, Chapter VI of RA 7916.

[21] (c) of the 2nd paragraph of §12 of RA 7227.

[22] (d) of the 2nd paragraph of §12 of RA 7227.

[23] Referred to as the Central Bank under (e) of the 2nd paragraph of §12 of RA 7227.

[24] §17 of RA 7844.

[25] §16 of RA 7844.  See 2nd paragraph of §23, Chapter III of RA 7916.

[26] PD 1853 was the law that took effect in 1983, requiring deposits of duties upon the opening of letters of credit to cover imports.

[27] 2nd paragraph of §4, Chapter I of RA 7916.

[28] A “VAT-registered person” is a taxable person who has registered for VAT purposes under §236 of the Tax Code.  Deoferio and

Mamalateo, The Value Added Tax in the Philippines (1st ed., 2000), p. 265.  See 9th paragraph of §4.107-1(a) of Revenue Regulations No.

(RR) 7-95, implemented beginning January 1, 1996, as amended by §6 of RR 6-97, effective January 1, 1997.

[29] §§105 to 109 of RA 8424, as amended, otherwise known as the Tax Code.

[30] Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc., 163 SCRA 371, 378-379, June 30, 1988.

[31] De Leon, The Fundamentals of Taxation (12th ed., 1998), p. 131.

[32] 2nd paragraph of §105 of the Tax Code.

[33] Deoferio Jr. and Mamalateo, The Value Added Tax in the Philippines (1st ed., 2000), pp. 33 & 36.

[34] EO 273.

[35] Vitug, J. and Acosta, Tax Law and Jurisprudence (2nd ed., 2000), p. 227.

                        See §193(d) of the National Internal Revenue Code of 1977 as further amended by §1 of Pres. Decree No. 1358 dated

April 21, 1978, wherein the tax credit method, instead of the cost deduction method, was mandated to be applied in computing the VAT

due.

[36] Deoferio Jr. and Mamalateo, supra, p. 34.

[37] Id., pp. 34-35.

[38] “Output taxes” refer to the VAT due on the sale or lease of taxable goods, properties or services by a VAT-registered or VAT-

registrable person.  See last paragraph of §110(A)(3) and §236 of the Tax Code.

[39] Presumed to be VAT-registered.

[40] By “input taxes” is meant the VAT due from or paid by a VAT-registered person in the course of trade or business on the

importation of goods or local purchases of goods or services, including the lease or use of property from a VAT-registered person.  See

penultimate paragraph of §110(A)(3) of the Tax Code.

[41] §110(B) of the Tax Code.

                        VAT-registered persons shall pay the VAT on a monthly basis.  §114(A) of the Tax Code.

[42] §110(B) of the Tax Code.

[43] These are goods or properties with estimated useful lives greater than one year and which are treated as depreciable assets under

§34(F) [formerly §29(f)] of the Tax Code, used directly or indirectly in the production or sale of taxable goods or services.  3rd paragraph

of §4.106-1(b) of RR 7-95.

                        These goods also refer to “capital assets” as this term is defined in §39(A)(1) of the Tax Code.

[44] De Leon, p. 135.

[45] Deoferio Jr. and Mamalateo, supra, p. 244.

[46] Subject to the provisions of §§106, 108 and 112 of the Tax Code.

[47] De Leon, p. 133.

[48] Deoferio Jr. and Mamalateo, supra, p. 190.

[49] De Leon, p. 133.

[50] §106(A)(2)(c) of the Tax Code.

[51] §108(B)(3) of the Tax Code.

[52] Deoferio Jr. and Mamalateo, supra, p. 215.

[53] Under this principle, goods and services are taxed only in the country where these are consumed.  Thus, exports are zero-rated,

but imports are taxed.  Id., p. 43.

[54] In business parlance, “automatic zero rating” refers to the standard zero rating as provided for in the Tax Code.

[55] Deoferio Jr. and Mamalateo, supra, p. 189.

[56] Id., p. 43.

[57] Id., p. 121.

[58] De Leon, pp. 133 & 135.

[59] Deoferio Jr. and Mamalateo, supra, p. 118.

[60] Id., p. 132.

[61] Id., pp. 132-133.

[62] De Leon, p. 132.

[63] §109(q) of the Tax Code.

[64] Deoferio Jr. and Mamalateo, supra, p. 187.

[65] Id., p. 69.

[66] §106(A)(2) of the Tax Code.

[67] §106(A)(1) of the Tax Code.

[68] §106(A)(2)(c) of the Tax Code.

[69] 1st paragraph of §8, Chapter I of RA 7916.

                        A “customs territory” means the national territory of the Philippines outside of the proclaimed boundaries of the

ecozones, except those areas specifically declared by other laws and/or presidential proclamations to have the status of special

economic zones and/or free ports.  §2.g, Rule 1, Part I of the “Rules and Regulations to Implement Republic Act No. 7916, otherwise

known as ‘The Special Economic Zone Act of 1995.’”

[70] Deoferio Jr. and Mamalateo, supra, p. 227.

[71] This principle is not clearly defined by any law or administrative issuance.  See Id., p. 227.

[72] §2 of Revenue Memorandum Circular No. (RMC) 74-99 dated October 15, 1999.

                        This circular is an example of an agency statement of general applicability that takes the form of a revenue tax

issuance “bearing on internal revenue tax rules and regulations.”  Commissioner of Internal Revenue v. CA, 329 Phil. 987, 1009, August

29, 1996, per Vitug, J., citing RMC 10-86.  See §2(2), Chapter 1, Book VII of Executive Order No. (EO) 292, otherwise known as the

“Administrative Code of 1987” dated July 25, 1987.

[73] §106(A)(2)(a) of the Tax Code.

[74] See Deoferio Jr. and Mamalateo, supra, p. 201.

[75] This zone is akin to the former army bases or installations within the Philippines.  Saura Import and Export Co., Inc. v. Meer, 88

Phil. 199, 202, February 26, 1951.

[76] Deoferio Jr. and Mamalateo, supra, p. 199.

[77] An “export processing zone” is a specialized industrial estate located physically and/or administratively outside customs territory,

predominantly oriented to export production, and may be contained in an ecozone.  §4(a) and (d), Chapter I of RA 7916.

[78] Article 23, Chapter I, Title I, Book I of EO 226.  See §2.mm.2), Rule I, Part I of the “Rules and Regulations to Implement Republic Act

No. 7916, otherwise known as ‘The Special Economic Zone Act of 1995.’”

[79] Article 77(2), Book VI of EO 226.

[80] §106(A)(2)(a)(5) of the Tax Code.

[81] §24, Chapter III of RA 7916.

[82] §24, Chapter III of RA 7916, as amended by §4 of RA 8748 dated June 1, 1999.

[83] §17(1) of PD 66.

[84] Estate of Salud Jimenez v. Philippine Export Processing Zone, 349 SCRA 240, 260-261, January 16, 2001.  See 4th paragraph, §11,

Chapter II of RA 7916.

[85] Commissioner of Customs v. Philippine Phosphate Fertilizer Corp. , GR No. 144440 , September 1, 2004, p. 7.

[86] §1, Rule VIII, Part V and Rule XV of the “Rules and Regulations to Implement Republic Act No. 7916, otherwise known as ‘The

Special Economic Zone Act of 1995.’”

[87] A “restricted area” is a specific area within an ecozone that is classified and/or fenced-in as an export processing zone.  §2.h, Rule

I, Part I of the “Rules and Regulations to Implement Republic Act No. 7916, otherwise known as ‘The Special Economic Zone Act of

1995.’”

[88] A “registered export enterprise” is one that is registered with the PEZA, and that engages in manufacturing activities within the

purview of the PEZA law for the exportation of its production.  §2.i, Rule I, Part I of the “Rules and Regulations to Implement Republic Act

No. 7916, otherwise known as ‘The Special Economic Zone Act of 1995.’”

[89] §1, Rule XXV of the “Rules and Regulations to Implement Republic Act No. 7916, otherwise known as ‘The Special Economic Zone

Act of 1995.’”  See §56, Chapter VI of RA 7916.

[90] Article 11, Chapter I, Book I of EO 226.

[91] Article 39(c), Title III, Book I of EO 226, expressly repealed by the 2nd paragraph of §20 of RA 7716.  Consequently, enterprises

registered with the BOI after December 31, 1994 will no longer enjoy the incentives provided under said article starting January 1, 1996.

[92] Article 39(m), Title III, Book I of EO 226.

[93] Article 77(1), Book VI of EO 226.

[94] Article 39(d), Title III, Book I of EO 226, also expressly repealed by the 2nd paragraph of §20 of RA 7716.  Consequently, enterprises

registered with the BOI after December 31, 1994 will no longer enjoy the incentives provided under said article starting January 1, 1996.

[95] Article 39(k), Title III, Book I of EO 226.

[96] 1st paragraph of §12(c) of RA 7227.

[97] §51, Chapter VI of RA 7916.

[98] 2nd paragraph of §12(c) of RA 7227.

[99] §16(c), Article III of RA 7844.

[100] §16(e), Article III of RA 7844.

[101] 2nd paragraph of §23, Chapter III of RA 7916.

[102] Commissioner of Internal Revenue v. General Foods (Phils.), Inc., 401 SCRA 545, 550, April 24, 2003.

[103] Commissioner of Internal Revenue v. Solidbank Corp., 416 SCRA 436, 461, November 25, 2003

[104] Agpalo, Statutory Construction (2nd ed., 1990), p. 217.

[105] BPI Leasing Corp. v. CA, 416 SCRA 4, 14, November 18, 2003.

[106] Paseo Realty & Development Corp. v. CA , GR No. 119286 , October 13, 2004, p. 14.

[107] Surigao Consolidated Mining Co., Inc. v. Collector of Internal Revenue, 119 Phil. 33, 37, December 26, 1963.

[108] Deoferio Jr. and Mamalateo, supra, p. 155.

[109] Agpalo, supra, pp. 82-83.

[110] Deoferio Jr. and Mamalateo, supra, p. 218.

[111] §3(3) of Revenue Memorandum Circular No. (RMC) 74-99.

[112] §§1 and 2 of PD 66.

[113] 2nd paragraph of §2, Chapter I of RA 7916.

[114] Article 2.1, Chapter I of EO 226.

[115] Article 2.3, Chapter I of EO 226.

[116] Article 2.8, Chapter I of EO 226.

[117] §51, Chapter VI of RA 7916.

[118] Tiu v. CA, 361 Phil. 229, 242, January 20, 1999.

[119] 1st paragraph of §2, RA 7227.

[120] §§12 and 15 of RA 7227.

[121] John Hay Peoples Alternative Coalition v. Lim, 414 SCRA 356, 369, October 24, 2003.

[122] 2nd paragraph of §2, RA 7227.

[123] 1st paragraph of §2, Article I of RA 7844.

[124] §§4(c) of Article I , 16, and 17 of RA 7844.

[125] 2nd paragraph of §2, Article I of RA 7844.

[126] §2 of the Tax Code, as amended by RA 8761 effective January 1, 2000; and by RA 9010, the effectivity of which has been

retroacted to January 1, 2001.

[127] American Society of International Law Proceedings, “Indigenous People and the Global Trade Regime,” 96 Asilproc 279, 281,

March 16, 2002.

[128] §20 of Article II of the 1987 Constitution.

[129] 2nd paragraph of §1 and §12 of Article XII of the 1987 Constitution.

[130] Schwab, extract from the Preface of the Global Competitiveness Report 2003-2004, www.weforum.org, last visited January

27, 2005, 9:05am PST.

[131] §236 of the Tax Code.

[132] §17(1) of PD 66 and §56, Chapter VI of RA 7916.

[133] Article 77(1), Book VI of EO 226.

[134] Petitioner’s Memorandum, p. 9; rollo, p. 103.

[135] CA Decision, p. 7; rollo, p. 27; and CTA Decision, p. 5, rollo, p. 35.

[136] Magnolia Dairy Products Corp. v. NLRC, 322 Phil. 508, 517, per Francisco, J.

[137] Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corp., 204 SCRA 377, 383, December 2, 1991,

per Feliciano, J.

[138] Ibid.  See Advertising Associates, Inc. v. Collector of Internal Revenue, 97 Phil. 636, 641, September 30, 1955.

[139] Atlas Consolidated Mining & Development Corp. v. Commissioner of Internal Revenue, 102 SCRA 246, 259, January 27, 1981, per

De Castro, J.

[140] §4.107-1(d) of RR 7-95.

[141] Commissioner of Internal Revenue v. Solidbank Corp., supra, p. 448, per Panganiban, J.

[142] Vitug and Acosta, supra, p. 56.

[143] Id., p. 57.

[144] Spouses Morandarte v. CA, GR No. 123586, August 12, 2004, p. 15.

[145] §3(m) of Rule 131 of the Rules of Court.

[146] §3(ff) of Rule 131 of the Rules of Court.

[147] §113(A) of the Tax Code.

[148] §24, Chapter III of RA 7916, as amended by §4 of RA 8748.

[149] 1st paragraph, §23, Chapter III of RA 7916.

[150] As a matter of principle, it is inadvisable to set aside such a conclusion, because by the very nature of its functions and sans

abuse or improvident exercise of its authority, the Tax Court is “dedicated exclusively to the study and consideration of tax problems

and has necessarily developed an expertise on the subject x x x.” Paseo Realty & Development Corp. v. CA; supra, per Tinga, J., p. 8.

[151] Contex Corp. v. Hon. Commissioner of Internal Revenue , GR No. 151135 , July 2, 2004, p. 11.

[152] This provision has been expressly repealed by the 2nd paragraph of §20 of RA 7716.  See note 94.

[153] Legislative Archives, Committee Report No. 01027, House of Representatives, December 14, 1994, pp. 00132 & 00141.

[154] Commissioner of Customs v. Philippine Phosphate Fertilizer Corp.; supra, pp. 9-10.

FIRST DIVISION 

G.R. No. 108584 December 22, 1994

PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

vs.

PETRONILO ABAPO, accused-appellant.

PADILLA, J.:

This is an appeal from the decision 1 of the court a quo finding herein

accused-appellant Petronilo Abapo guilty of two (2) crimes of rape alleged to

have been committed as follows: 2

In Criminal Case No. 133(90) —

The Undersigned Offended Party accuses PETRONILO ABAPO of the crime of

Rape under Article 335 of the Revised Penal Code, committed as follows:

That sometime in January, 1989, in Digos, Davao del Sur, Philippines and

within the jurisdiction of this Honorable Court, the accused aforenamed,

after covering the mouth of said offended party who was then sleeping with

his hand and after warning her not to shout, otherwise he would kill her, her

mother, and her brother and sisters, did, then and there wilfully, unlawfully,

and feloniously have carnal knowledge of said Offended Party, against her

will and consent to her damage and prejudice.

CONTRARY TO LAW.

xxx xxx xxx

In Criminal Case No. 136(90)

The Undersigned pursuant to a complaint signed by Cherry Lyn M. Navalon,

herein Offended Party, and attached hereto as Annex "A," accuses

PETRONILO ABAPO of the crime of Rape under Article 335 of the Revised

Penal Code, committed as follows:

That sometime in late September and/or early October, 1989, in Digos,

Davao del Sur, Philippines, and within the jurisdiction of this Honorable

Court, the accused aforenamed, by means of force or intimidation exerted

upon the aforenamed offended party, a minor of 11 years of age, did, then,

and there wilfully, unlawfully and feloniously have carnal knowledge of said

Cherry Lyn M. Navalon, against her will and consent to her damage and

prejudice.

CONTRARY TO LAW.

When arraigned, accused pleaded not guilty. A joint trial of the two (2) cases

on the merits ensued, after which a decision was rendered, the dispositive

part of which reads: 3

WHEREFORE, premises considered and in view of the foregoing, this Court

finds the accused Petronilo Abapo guilty of the 2 crimes of rape and hereby

punishes him to suffer two (2) life sentences as follows:

In Criminal Case No. 133(90) an imprisonment of reclusion perpetua or life

sentence and to pay the victim Merlyn Navalon the following amounts:

1) P100,000.00 for moral damages;

2) P100,000.00 for corrective or exemplary damages to serve as warning

and stern lesson to others in the future for the public good;

3) P20,000.00 in the concept of actual or compensatory damages;

4) P30,000.00 as attorney's fees; and

5) P10,000.00 for expenses of litigation.

In Criminal Case No. 136(90) an imprisonment of reclusion perpetua or life

sentence and to pay the victim Cherry Lyn Navalon the following amounts:

1) P100,000.00 for moral damages;

2) P100,000.00 for corrective or exemplary damages to serve as warning

and stern lesson to others in the future for the public good;

3) P20,000.00 in the concept of actual or compensatory damages;

4) P30,000.00 as attorney's fees; and

5) P10,000.00 for expenses of litigation.

In both cases, to pay the costs of suit.

The accused is now before the Court and assigns the following as errors

allegedly committed by the trial court:

ASSIGNMENT OF ERRORS

I. THE HONORABLE COURT ERRED IN NOT HOLDING THAT THE HEREIN TWO

(2) CASES OF RAPE AGAINST THE ACCUSED WERE MERELY FABRICATIONS.

II. THE HONORABLE COURT ERRED IN NOT BELIEVING THAT BERNARDO

NAVALON, JR., THE FATHER OF THE TWO COMPLAINANTS IS NOT A GOOD

FATHER AND HAS THE CAPACITY TO DO THE EVIL DESIGN, WITH NENITA

DONATO (HALF SISTER) AND CESAR NAVORRA (HALF BROTHER) OF

FABRICATING CHARGES AGAINST THE ACCUSED AND THE TWO (2)

COMPLAINANTS COLLABORATED WITH THEM.

III. THE HONORABLE COURT ERRED IN NOT FINDING THAT THE ACCUSED

WAS ILLEGALLY ARRESTED, INVESTIGATED AND LOCKED UP IN JAIL

WITHOUT A WARRANT OF ARREST AND HIS RIGHTS UNDER THE

CIRCUMSTANCES AND UNDER THE CONSTITUTION VIOLATED. HE WAS NOT

INFORMED AND EXPLAINED OF HIS RIGHTS. FORCE WAS USED AGAINST THE

ACCUSED AND YET THE ACCUSED WAS NOT ARMED AND THE ARRESTING

OFFICER WAS ARMED, WORST [sic] THE ARRESTING OFFICER PATM.

GERARDO DIAMANTE AND THE COMPLAINANTS TRIED TO EXTORT MONEY

FROM THE ACCUSED SO THAT THE CASE WOULD BE WITHDRAWN.

IV. THE HONORABLE COURT ERRED IN NOT HOLDING THAT THE GUN,

BULLETS, LEATHER BAG, ETC. ALLEGEDLY USED BY THE ACCUSED IN

THREATENING THE TWO (2) PRIVATE COMPLAINANTS WERE PLANTED AND

WAS PART OF THE FRAME UP. THEY WERE NOT TAKEN FROM THE ACCUSED

BUT IN THE HOUSE OF A STRANGER WHILE THE ACCUSED WAS IN JAIL AND

WORST [sic] THEY WERE TAKEN WITHOUT A SEARCH WARRANT. HENCE

INADMISSIBLE AS EVIDENCE ESPECIALLY THAT THE OFFER OF EXHIBITS

WERE PROPERLY AND SEASONABLY OBJECTED.

V. THE TRIAL COURT ERRED IN NOT FINDING THAT AT THE TIME OF THE

ALLEGED RAPES IN APLAYA AND 4th BONIFACIO ST., DIGOS, DAVAO DEL

SUR, THE TWO PRIVATE COMPLAINANTS WERE NO LONGER IN THOSE TWO

PLACES MAKING THE ALLEGATIONS OF RAPE IMPOSSIBLE.

VI. THE HONORABLE COURT ERRED IN NOT FINDING THAT THE CLAIM OF

RAPE BY MERLYN NAVALON THAT AT THE TIME SHE WAS RAPE [sic] HER

ELDER BROTHER MELCHOR, SISTER ARGELYN, WERE BESIDE HER AND

ANOTHER SISTER CARMELYN JUST NEARBY IS INCREDIBLE AND NOT

BELIEVABLE.

VII. THE HONORABLE COURT ERRED IN NOT HOLDING THAT THE TWO

PRIVATE COMPLAINANTS, MERLYN AND CHERRY LYN LOST THEIR VIRGINITY

AS PER MEDICAL CERTIFICATE BECAUSE BOTH HAD A SEXUAL INTERCOURSE

WITH THEIR ELDEST BROTHER, BERNARDO NAVALON III, WHICH EXPLAINS

THE LOSS OF VIRGINITY AND FREE ENTRY IN THE VAGINA OF THE TWO

PRIVATE COMPLAINANTS.

VIII. THE HONORABLE COURT ERRED IN NOT BELIEVING THAT THE ACCUSED

AND CARMENIA MANLICLIC ARE NOT AMOROUSLY RELATED.

The evidence for the prosecution was summarized by the Solicitor General in

the following manner: 4

Merlyn and Cherry Lyn Navalon are two (2) of the eight (8) children of

Carmenia Manliclic with common-law husband Bernardo Navalon, Jr., with

whom Carmenia lived from 1971 to 1987. Merlyn was born on June 10, 1977

(Exh. "C," Birth Certificate) while Cherry Lyn was born on June 28, 1978

(Exh. "D," Birth Certificate; TSN, Oct. 29, 1990,

pp. 13-14, Carmenia Manliclic). Sometime in 1987, Carmenia left the family

abode in Bob, Magsaysay, Davao del Sur bringing with her the two younger

children, Melchor and Argelyn. Together with appellant, they lived as

husband and wife in Bonifacio 4th Street, Digos and later transferred to

Aplaya, Digos in April 1989 in a house they rented from Magdalena Romero.

Carmenia's other children, namely Bernardo III, Alquin, Carmelyn, Merlyn

and Cherry Lyn joined and lived with their mother at one time or another

(TSN, Oct. 29, 1990, pp. 17-18, Carmenia Manliclic; Sept. 23, 1991, pp. 6-7,

Magdalena Romero; Sept. 25, 1991, pp. 5-6, Merlyn Navalon).

In January, 1989, Merlyn was living with her mother and appellant in

Bonifacio 4th, Digos, Davao del Sur. As appellant was the one who

shouldered the family expenses, the children in return cared for him,

washed his clothes, cleaned the house, and in case of Merlyn and Cherry

Lyn, even plucked appellant's mustache. The house they lived in had only

one bedroom for Carmenia and appellant, while the children slept in the sala

(TSN, Sept. 25, 1991, pp. 6-7, Merlyn Navalon). One night in January, 1989

(near midnight), while Merlyn was sleeping, appellant crawled towards her

and started touching her private parts, her nipples and kissed her face and

removed her panty. When Carmenia moved in her room, appellant hurriedly

went back inside. Merlyn tried to stay awake but unfortunately fell asleep.

She was awakened with appellant already on top of her. She tried to free

herself but was warned by appellant who threatened to kill her and her

younger brother and sisters. A gun was placed beside her. Appellant

succeeded in having intercourse with her (TSN, Sept. 25, 1991, pp. 13-16,

Merlyn Navalon; Sept. 26, 1991, p. 9, Merlyn Navalon).

In the case of Cherry Lyn, sometime in the first week of October, 1989 in

their house in Aplaya, Digos, Davao del Sur, appellant requested her to

pluck his mustache. Appellant further asked Cherry Lyn to kiss him which

she complied with as appellant gets angry if Cherry Lyn fails to obey any

command. Afterwards, appellant started touching her body, her face and

nipple. He also succeeded in having sexual intercourse with Cherry Lyn.

During that time, Cherry Lyn's brothers and sisters were around but was

[sic] ordered by appellant to go to another room and sleep. Carmenia

Manliclic was attending a meeting in the school but she arrived at the house

when Cherry Lyn and appellant were still in a compromising situation. A

quarrel ensued between appellant and Carmenia (TSN, Oct. 9, 1991,

pp. 9-10, 14, Cherry Lyn Navalon).

On October 10, 1989, Cherry Lyn's uncle Cesar Navorra (sic)(her father's

half-brother) came to the beach in Aplaya. Cherry Lyn decided to leave

Aplaya and go with her uncle. She first stayed in her father's house in Bob,

Magsaysay but was later transferred by her aunt, Nenita Donato (her

father's half-sister) and enrolled at Bansalan (TSN, Oct. 9, 1991, p. 5, 17, 23,

Cherry Lyn Navalon). It was only during the first week of March 1990 that

Cherry Lyn was able to tell her aunt about what happened to her and to her

sister Merlyn and requested her aunt to get her two younger sisters who

might be victimized by appellant. She did not tell her mother what really

happened not only because of appellant's threat to kill them but also

because she felt that her mother knew about the rape as she was able to

witness the tail-end of the incident (TSN, Oct. 9, 1991, pp. 9, 12, 15, Cherry

Lyn Navalon; Oct. 11, 1991, p. 5, Nenita Donato).

Nenita Donato brought Cherry Lyn to the police station to complain about

the incident. She was also subjected to a medical examination (TSN, Oct. 9,

1991, p. 12, Cherry Lyn Navalon; Oct. 11, 1991, p. 6, Nenita Donato). Dr.

Asuncion Z. Tajon, Municipal Health Officer of Digos, Davao del Sur, found as

follows: pelvic examination — vulva, no abrasion, no swelling . . . . Vagina

admits middle finger freely (Exh. "A," Medical Certificate dated March 8,

1990; TSN, July 30, 1991, p. 6, Dr. Asuncion Tajon).

Nenita Donato proceeded to Monkayo, Davao to talk to Merlyn about Cherry

Lyn's story. Merlyn was earlier taken by her elder sister Novilla from Aplaya

to Monkayo when Novilla, who was visiting from Tagum, Davao del Norte

where she was studying, found her inside the room with appellant and

suspected an untoward incident happened (TSN, Oct. 11, 1991, p. 8, Nenita

Donato; Sept. 26, 1991, pp. 14-15, Merlyn Navalon). She brought Merlyn to

the health center for examination and Dr. Tajon, who also conducted the

examination, found that "no physical injury noted,

vulva — no sign of inflammation or injury, vagina admits middle finger freely

without pain or resistance" (Exh. "B"), Medical Certificate, March 12, 1990;

TSN, July 30, 1991, p. 7, Dr. Asuncion Tajon).

The defense, on the other hand, presented an entirely different narrative. It

vehemently denied the charges and averred that the two (2) rape cases

were mere fabrications of Bernardo Navalon Jr., Nenita Donato, Cesar

Navorra, Cherry Lyn Navalon and Merlyn Navalon because (1) they were

jealous of the accused whom they suspected to have an illicit relation with

Carmenia Manliclic, and (2) they wanted to take vengeance against the

accused for having financially supported Carmenia Manliclic in her case for

support against Bernardo Navalon, Jr. which resulted in the award of

portions of the Navalon rice land to Carmenia Manliclic and her children.

The defense further alleged that Joan Narvasa, a Navalon relative and a

school teacher of Barayong, Magsaysay, Davao del Sur, conspired with the

Navalons and falsified the school register to evidence that Cherry Lyn and

Merlyn were not in Barayong, Magsaysay, Davao del Sur nor in Bansalan,

Davao del Sur, but rather in Digos, Davao del Sur at the time they were

raped. As testified to by Carmenia Manliclic, Merlyn was taken by Novilla

Navalon and brought to Monkayo in March 1989, while Cherry Lyn was taken

by Cesar Navorra in August 1989. Cherry Lyn herself testified that she was

attending school at Bansalan Central Elementary School, a place very far

from Digos, Davao del Sur, from June 1989 to March 1990.

The defense likewise presented Bernardo Navalon III, the eldest brother of

Cherry Lyn and Merlyn, who admitted having sexual intercourse with the

two (2) private complainants (his sisters). He also claimed that Pat. Gerardo

Diamante, a prosecution witness, was overzealous in filing the case against

the accused for the purpose of extorting money from the accused. Lastly,

the defense averred that the accused was arrested without a warrant of

arrest and was not informed, under the circumstances, of his constitutional

rights.

The principal issue in this appeal is anchored on the credibility of the

witnesses.

It is well-entrenched in our jurisprudence that where the issue is one of

credibility of witnesses, appellate courts give treat weight to the findings of

fact by the trial courts as they are in a better position to examine real

evidence, as well as observe the demeanor of the witnesses. 5

We find the testimonies of Merlyn and Cherry Lyn to be credible. It is an

accepted rule that the credibility of a rape victim is not destroyed by some

inconsistencies in her testimony. In fact, such inconsistencies are to be

expected if a witness is unrehearsed and testifies spontaneously. The fact

also stands out that the results of the medical examination show that the

complainants had previous sexual intercourse, since they were no longer in

a virgin state. We seriously doubt that two (2) young inexperienced girls

who were below twelve (12) years when they were raped, would concoct

such a ghastly story about the physical abuse done to them, if this did not

actually happen.

The appellant contends that the charges against him are mere fabrications

of the complainants, their father and some relatives. He alleges that he is a

frame-up victim. And yet, these allegations cannot outweight and invalidate

the positive identification of the accused-appellant by the complainants.

Further, and no matter how hard the appellant tries to convince this Court

that the complainants' father, along with his relatives, have the capacity to

do evil, we are not convinced that a father would subject his two (2) young

daughters to the humiliation and trauma of a rape trial simply because he

has allegedly lost a case which resulted in an award of some portions of land

to his common-law wife and their children (including complainants herein).

Moreover, no amount of coercion from their father could have prepared the

complainants for the rigors of a rape trial and convince the trial court for

their honesty and integrity, if no rape had been committed against them. As

observed by the trial court:

The denial by the accused is dwarfed by the positive identification by the

victims of the rape (sic) whose declarations were all ringing with earmarks

of sincerity. . . .The idea of vengeance arising from a land conflict would not

inspire any belief, for nobody would invent rape for an alleged loss of a

piece of land in a court decision. Why will two (2) young women, who are

minors, agree to expose their virtues as women and subject themselves with

loss of honor as women for love of a small estate? Besides, one-half of such

land was in fact given to the children by amicable settlement. . . .

We likewise cannot credence to the assertion of the appellant that it was the

brother of the two (2) complainants who abused them resulting in the loss of

their virginity. This we see as an utterly desperate attempt to distract the

Court and focus on some other person who could be suspected of abusing

the two (2) complainants. Merlyn and Cherry Lyn vehemently denied having

sexual intercourse with their brother, Bernardo Navalon III. And even if we

were to assume arguendo that the above imputation were true, the same

would just be the basis of an entirely different criminal case, without any

bearing on the present suit because, here, we speak of two (2) incidents

where the appellant has been positively identified as having sexually abused

Merlyn and Cherry Lyn. It just amazes us to see the power that the appellant

and Carmenia Manliclic (the mother) have over Bernardo Navalon III to have

effectively convinced the latter to confess to such a crime in order to

exculpate and save the skin of the appellant. As regards the contention that

the appellant and Carmenia Manliclic are not paramours, this circumstance,

in the light of the present charges, is trivial and not fatal to the prosecution's

case. Neither does the fact that the brother and sister of Merlyn were beside

her at the time of her rape render the accusation of rape against appellant

incredible and not believable. As earlier stated, the fact of rape and the

supporting medical findings have been clearly established in this case 6 and

we find no reason to doubt their veracity.

We now come to the contention that at the time of the alleged rapes, the

two (2) complainants were no longer in Digos, Davao del Sur, thus making

the allegations of rape incredible. We agree with the observation of the

Solicitor General:

Appellant contends that it was impossible for him to have raped the victims

since at the time the crimes were allegedly committed, both the victims

were no longer residing with their mother either in Bonifacio 4th, Digos or in

Aplaya.

Thus, as regards Cherry Lyn who was allegedly raped on the first week of

October, 1989, she was already studying in Bansalan, Davao del Sur and

living with an aunt. But Cherry Lyn categorically stated that she left her

mother on October 19, 1989, which was corroborated by the testimony of

her aunt. The reliance of appellant on Exhibit "J" or "3" which is Cherry Lyn's

report card is misplaced. Cherry Lyn is a transferee from another school and

her records from one school are simply carried to another and reported in

the report card of the issuing school.

More importantly, Cherry Lyn could no longer remember the exact date

when she was raped by appellant but it was during the time when she was

staying with her mother who was then living together with appellant. That

she had been living with her mother is admitted by Carmenia herself and

Joan Narvasa who testified that Cherry Lyn was unable to finish her studies

in Barayong Elementary School as she was taken by her mother on

November 28, 1988 (TSN, July 30, 1991, pp. 19-20).

With respect to Merlyn, it was alleged that she was brought to Monkayo,

Davao in March, 1989. As the crime was committed in January, 1989, its

commission is not improbable, as claimed by appellant. Carmenia, in a futile

attempt to save her paramour, claimed that Merlyn had not lived with her.

Yet, her testimony is debunked by her statement in a complaint against

Bernardo, Jr. for support claiming that her children, including Merlyn, were

staying with her and in her custody. Such inconsistent claims, arrayed

against the positive statement of Merlyn that she lived with her mother, and

the testimonies of other witnesses, could not be given any credence.

Thus, the discrepancy in the report card of Cherry Lyn 7 has been

satisfactorily explained. As a transferee, her records were simply carried

over to the new school. This fact is further bolstered by the testimony of

Joan Narvasa 8 who affirmed that Merlyn and Cherry Lyn indeed dropped out

of their classes at Barayong Central Elementary School in November 1988 in

order for them to stay with their mother at Digos, Davao del Sur. The lame

attempt of the defense to discredit the testimony of Narvasa (due to an

alleged distant relation to an aunt of the two (2) complainants) cannot be

given credence because the mere relationship to a party does not militate

against the credibility of the witness. 9 As shown by the records of the case

at bench, the evidence provided by Merlyn and Cherry Lyn Navalon is

positive, clear and exhibited no sign of exaggeration or inconsistency

despite the rigorous cross-examination they underwent.

Besides, the defense itself showed inconsistencies in its arguments when,

first, it claimed that the allegations of rape were impossible because Merlyn

and Cherry Lyn were no longer in Digos, Davao del Sur at the time the rapes

were allegedly committed, and then, on the other hand, it claimed that the

allegations of rape on Merlyn were incredible and not believable because at

the time she was allegedly raped, her brother and two (2) sisters were just

nearby. The defense should have taken the time to reconcile the two (2)

conflicting theories or simply should have stuck to one theory and then

supported the same. As it stands, the theory of the facts proferred by the

defense only becomes seriously impaired by such inconsistencies.

Further, the appellant argues that the court a quo erred in not finding that

his rights under the Constitution were violated in view of his illegal arrest

and the lack of a search warrant over the evidence offered against him, and

that the arresting officer and the complainants tried to extort money from

the appellant so that the case against him could be withdrawn.

On the matter of the illegal arrest, it is well-settled that the filing of a

petition for bail should be considered as a waiver of any irregularity

attending the arrest. 10 The appellant cannot likewise attempt to exculpate

himself by alleging that the evidence (i.e., gun, bullets) were planted as part

of the frame-up against him and that, nonetheless, they were taken without

a search warrant. We emphasize that the crimes charged in the present

cases are statutory rapes, that is, having carnal knowledge of a woman

under twelve (12) years of age. All that is necessary to convict the accused

of such charge is the fact of carnal knowledge, which has been more than

adequately proven in this case. All other matters bear little significance to

the case.

Finally, neither are we inclined to consider the allegation of extortion as the

same is self-serving and without basis. The appellant has raised too many

extraneous issues which only serve to convince this Court all the more of his

guilt.

WHEREFORE, in view of all the foregoing, the appealed decision is hereby

AFFIRMED with the clarification that the penalty imposed on appellant is

RECLUSION PERPETUA (not Life Imprisonment) in each of the two (2) cases.

The award for moral damages is reduced from P100,000.00 to P50,000.00

for each rape victim. The award of P100,000.00 for exemplary damages is

deleted, but the award of P20,000.00 for each of the victims as actual

damages stands, while the awards for attorney's fees and expenses of

litigation are reduced from P30,000.00 and P10,000.00 respectively to

P15,000.00 and P5,000.00, respectively for each of the victims.

SO ORDERED.

# Footnotes

1 Penned By Hon. Dominador F. Carillo, Regional Trial Court of Davao del Sur, Branch 19.

2 Rollo, pp. 23-24.

3 Ibid., p. 37.

4 Ibid., pp., 162-167.

5 People v. Rodriguez, 172 SCRA 742 (1989).

6 TSNs, 25 September 1991, pp. 12-16; 9 October 1991, pp. 8-10; 30 July 1991,

pp. 6-10.

7 Exhibits "J" and "K."

8 TSN, 30 July 1991, pp. 19.

9 Primero v. Court of Appeals, 179 SCRA 542 (1989).

10 Harvey vs. Defensor-Santiago, 162 SCRA 840 (1988).

SECOND DIVISION 

G.R. No. 90776 June 3, 1991

PHILIPPINE PETROLEUM CORPORATION, petitioner,

vs.

MUNICIPALITY OF PILILLA, RIZAL, Represented by MAYOR

NICOMEDES F. PATENIA, respondent.

 

PARAS, J.:p

This is a petition for certiorari seeking to annul and set aside: (a) the March

17, 1989 decision * of the Regional Trial Court, Branch 80, Tanay, Rizal in

Civil Case No. 057-T entitled, "Municipality of Pililla, Rizal, represented by

Mayor Nicomedes F. Patenia vs. Philippine Petroleum Corporation", (PPC for

short) upholding the legality of the taxes, fees and charges being imposed in

Pililla under Municipal Tax Ordinance No. 1 and directing the herein

petitioner to pay the amount of said taxes, fees and charges due the

respondent: and (b) the November 2, 1989 resolution of the same court

denying petitioner's motion for reconsideration of the said decision.

The undisputed facts of the case are:

Petitioner, Philippine Petroleum Corporation (PPC for short) is a business

enterprise engaged in the manufacture of lubricated oil basestock which is a

petroleum product, with its refinery plant situated at Malaya, Pililla, Rizal,

conducting its business activities within the territorial jurisdiction of the

Municipality of Pililla, Rizal and is in continuous operation up to the present

(Rollo p. 60). PPC owns and maintains an oil refinery including forty-nine

storage tanks for its petroleum products in Malaya, Pililla, Rizal (Rollo, p. 12).

Under Section 142 of the National Internal Revenue Code of 1939,

manufactured oils and other fuels are subject to specific tax.

On June 28, 1973, Presidential Decree No. 231, otherwise known as the

Local Tax Code was issued by former President Ferdinand E. Marcos

governing the exercise by provinces, cities, municipalities and barrios of

their taxing and other revenue-raising powers. Sections 19 and 19 (a)

thereof, provide among others, that the municipality may impose taxes on

business, except on those for which fixed taxes are provided on

manufacturers, importers or producers of any article of commerce of

whatever kind or nature, including brewers, distillers, rectifiers, repackers,

and compounders of liquors, distilled spirits and/or wines in accordance with

the schedule listed therein.

The Secretary of Finance issued Provincial Circular No. 26-73 dated

December 27, 1973, directed to all provincial, city and municipal treasurers

to refrain from collecting any local tax imposed in old or new tax ordinances

in the business of manufacturing, wholesaling, retailing, or dealing in

petroleum products subject to the specific tax under the National Internal

Revenue Code (Rollo, p. 76).

Likewise, Provincial Circular No. 26 A-73 dated January 9, 1973 was issued

by the Secretary of Finance instructing all City Treasurers to refrain from

collecting any local tax imposed in tax ordinances enacted before or after

the effectivity of the Local Tax Code on July 1, 1973, on the businesses of

manufacturing, wholesaling, retailing, or dealing in, petroleum products

subject to the specific tax under the National Internal Revenue Code (Rollo,

p. 79).

Respondent Municipality of Pililla, Rizal, through Municipal Council

Resolution No. 25, S-1974 enacted Municipal Tax Ordinance No. 1, S-1974

otherwise known as "The Pililla Tax Code of 1974" on June 14, 1974, which

took effect on July 1, 1974 (Rollo, pp. 181-182). Sections 9 and 10 of the said

ordinance imposed a tax on business, except for those for which fixed taxes

are provided in the Local Tax Code on manufacturers, importers, or

producers of any article of commerce of whatever kind or nature, including

brewers, distillers, rectifiers, repackers, and compounders of liquors, distilled

spirits and/or wines in accordance with the schedule found in the Local Tax

Code, as well as mayor's permit, sanitary inspection fee and storage permit

fee for flammable, combustible or explosive substances (Rollo, pp. 183-187),

while Section 139 of the disputed ordinance imposed surcharges and

interests on unpaid taxes, fees or charges (Ibid., p. 193).

On March 30, 1974, Presidential Decree No. 426 was issued amending

certain provisions of P.D. 231 but retaining Sections 19 and 19 (a) with

adjusted rates and 22(b).

On April 13, 1974, P.D. 436 was promulgated increasing the specific tax on

lubricating oils, gasoline, bunker fuel oil, diesel fuel oil and other similar

petroleum products levied under Sections 142, 144 and 145 of the National

Internal Revenue Code, as amended, and granting provinces, cities and

municipalities certain shares in the specific tax on such products in lieu of

local taxes imposed on petroleum products.

The questioned Municipal Tax Ordinance No. 1 was reviewed and approved

by the Provincial Treasurer of Rizal on January 13, 1975 (Rollo, p. 143), but

was not implemented and/or enforced by the Municipality of Pililla because

of its having been suspended up to now in view of Provincial Circular Nos.

26-73 and 26 A-73.

Provincial Circular No. 6-77 dated March 13, 1977 was also issued directing

all city and municipal treasurers to refrain from collecting the so-called

storage fee on flammable or combustible materials imposed under the local

tax ordinance of their respective locality, said fee partaking of the nature of

a strictly revenue measure or service charge.

On June 3, 1977, P.D. 1158 otherwise known as the National Internal

Revenue Code of 1977 was enacted, Section 153 of which specifically

imposes specific tax on refined and manufactured mineral oils and motor

fuels.

Enforcing the provisions of the above-mentioned ordinance, the respondent

filed a complaint on April 4, 1986 docketed as Civil Case No. 057-T against

PPC for the collection of the business tax from 1979 to 1986; storage permit

fees from 1975 to 1986; mayor's permit and sanitary inspection fees from

1975 to 1984. PPC, however, have already paid the last-named fees starting

1985 (Rollo, p. 74).

After PPC filed its answer, a pre-trial conference was held on August 24,

1988 where the parties thru their respective counsel, after coming up with

certain admissions and stipulations agreed to the submission of the case for

decision based on documentary evidence offered with their respective

comments (Rollo, p. 41).

On March 17, 1987, the trial court rendered a decision against the

petitioner, the dispositive part of which reads as follows:

WHEREFORE, premises considered, this Court hereby renders judgment in

favor of the plaintiffs as against the defendants thereby directing the

defendants to 1) pay the plaintiffs the amount of P5,301,385.00

representing the Tax on Business due from the defendants under Sec. 9 (A)

of the Municipal Tax Ordinance of the plaintiffs for the period from 1979 to

1983 inclusive plus such amount of tax that may accrue until final

determination of case; 2) to pay storage permit fee in the amount of

P3,321,730.00 due from the defendants under Sec. 10, par. z (13) (b) (1 C)

of the Municipal Tax Ordinance of the plaintiffs for the period from 1975 to

1986 inclusive plus such amount of fee that may accrue until final

determination of case; 3) to pay Mayor's Permit Fee due from the

defendants under Sec. 10, par. (P) (2) of the Municipal Tax Ordinance of the

plaintiffs from 1975 to 1984 inclusive in the amount of P12,120.00 plus such

amount of fee that may accrue until final determination of the case; and 4)

to pay sanitary inspection fee in the amount of P1,010.00 for the period

from 1975 to 1984 plus such amount that may accrue until final

determination of case and 5) to pay the costs of suit.

SO ORDERED. (Rollo, pp. 49-50)

PPC moved for reconsideration of the decision, but this was denied by the

lower court in a resolution of November 2, 1989, hence, the instant petition.

The Court resolved to give due course to the petition and required both

parties to submit simultaneous memoranda (June 21, 1990 Resolution; Rollo,

p. 305).

PPC assigns the following alleged errors:

1. THE RTC ERRED IN ORDERING THE PAYMENT OF THE BUSINESS TAX

UNDER SECTION 9 (A) OF THE TAX ORDINANCE IN THE LIGHT OF

PROVINCIAL CIRCULARS NOS. 26-73 AND 26 A-73;.

2. THE RTC ERRED IN HOLDING THAT PETITIONER WAS LIABLE FOR THE

PAYMENT OF STORAGE PERMIT FEE UNDER SECTION 10 Z (13) (b) (1-c) OF

THE TAX ORDINANCE CONSIDERING THE ISSUANCE OF PROVINCIAL

CIRCULAR NO. 6-77;

3. THE RTC ERRED IN FAILING TO HOLD THAT RESPONDENTS COMPUTATION

OF TAX LIABILITY HAS ABSOLUTELY NO BASIS;

4. THE RTC ERRED IN ORDERING THE PAYMENT OF MAYOR'S PERMIT AND

SANITARY INSPECTION FEES CONSIDERING THAT THE SAME HAS BEEN

VALIDLY AND LEGALLY WAIVED BY THE MAYOR;

5. THE RTC ERRED IN FAILING TO HOLD THAT THE TAXES AND DUTIES NOT

COLLECTED FROM PETITIONER PRIOR TO THE FIVE (5) YEAR PERIOD FROM

THE FILING OF THIS CASE ON APRIL 4, 1986 HAS ALREADY PRESCRIBED.

The crucial issue in this case is whether or not petitioner PPC whose oil

products are subject to specific tax under the NIRC, is still liable to pay (a)

tax on business and (b) storage fees, considering Provincial Circular No. 6-

77; and mayor's permit and sanitary inspection fee unto the respondent

Municipality of Pililla, Rizal, based on Municipal Ordinance No. 1.

Petitioner PPC contends that: (a) Provincial Circular No. 2673 declared as

contrary to national economic policy the imposition of local taxes on the

manufacture of petroleum products as they are already subject to specific

tax under the National Internal Revenue Code; (b) the above declaration

covers not only old tax ordinances but new ones, as well as those which may

be enacted in the future; (c) both Provincial Circulars (PC) 26-73 and 26 A-73

are still effective, hence, unless and until revoked, any effort on the part of

the respondent to collect the suspended tax on business from the petitioner

would be illegal and unauthorized; and (d) Section 2 of P.D. 436 prohibits

the imposition of local taxes on petroleum products.

PC No. 26-73 and PC No. 26 A-73 suspended the effectivity of local tax

ordinances imposing a tax on business under Section 19 (a) of the Local Tax

Code (P.D. No. 231), with regard to manufacturers, retailers, wholesalers or

dealers in petroleum products subject to the specific tax under the National

Internal Revenue Code NIRC, in view of Section 22 (b) of the Code regarding

non-imposition by municipalities of taxes on articles, subject to specific tax

under the provisions of the NIRC.

There is no question that Pililla's Municipal Tax Ordinance No. 1 imposing

the assailed taxes, fees and charges is valid especially Section 9 (A) which

according to the trial court "was lifted in toto and/or is a literal reproduction

of Section 19 (a) of the Local Tax Code as amended by P.D. No. 426." It

conforms with the mandate of said law.

But P.D. No. 426 amending the Local Tax Code is deemed to have repealed

Provincial Circular Nos. 26-73 and 26 A-73 issued by the Secretary of

Finance when Sections 19 and 19 (a), were carried over into P.D. No. 426

and no exemptions were given to manufacturers, wholesalers, retailers, or

dealers in petroleum products.

Well-settled is the rule that administrative regulations must be in harmony

with the provisions of the law. In case of discrepancy between the basic law

and an implementing rule or regulation, the former prevails (Shell

Philippines, Inc. v. Central Bank of the Philippines, 162 SCRA 628 [1988]). As

aptly held by the court a quo:

Necessarily, there could not be any other logical conclusion than that the

framers of P.D. No. 426 really and actually intended to terminate the

effectivity and/or enforceability of Provincial Circulars Nos. 26-73 and 26 A-

73 inasmuch as clearly these circulars are in contravention with Sec. 19 (a)

of P.D. 426-the amendatory law to P.D. No. 231. That intention to terminate

is very apparent and in fact it is expressed in clear and unequivocal terms in

the effectivity and repealing clause of P.D. 426 . . .

Furthermore, while Section 2 of P.D. 436 prohibits the imposition of local

taxes on petroleum products, said decree did not amend Sections 19 and 19

(a) of P.D. 231 as amended by P.D. 426, wherein the municipality is granted

the right to levy taxes on business of manufacturers, importers, producers of

any article of commerce of whatever kind or nature. A tax on business is

distinct from a tax on the article itself. Thus, if the imposition of tax on

business of manufacturers, etc. in petroleum products contravenes a

declared national policy, it should have been expressly stated in P.D. No.

436.

The exercise by local governments of the power to tax is ordained by the

present Constitution. To allow the continuous effectivity of the prohibition

set forth in PC No. 26-73 (1) would be tantamount to restricting their power

to tax by mere administrative issuances. Under Section 5, Article X of the

1987 Constitution, only guidelines and limitations that may be established

by Congress can define and limit such power of local governments. Thus:

Each local government unit shall have the power to create its own sources

of revenues and to levy taxes, fees, and charges subject to such guidelines

and limitations as the Congress may provide, consistent with the basic

policy of local autonomy . . .

Provincial Circular No. 6-77 enjoining all city and municipal treasurers to

refrain from collecting the so-called storage fee on flammable or

combustible materials imposed in the local tax ordinance of their respective

locality frees petitioner PPC from the payment of storage permit fee.

The storage permit fee being imposed by Pililla's tax ordinance is a fee for

the installation and keeping in storage of any flammable, combustible or

explosive substances. Inasmuch as said storage makes use of tanks owned

not by the municipality of Pililla, but by petitioner PPC, same is obviously not

a charge for any service rendered by the municipality as what is envisioned

in Section 37 of the same Code.

Section 10 (z) (13) of Pililla's Municipal Tax Ordinance No. 1 prescribing a

permit fee is a permit fee allowed under Section 36 of the amended Code.

As to the authority of the mayor to waive payment of the mayor's permit

and sanitary inspection fees, the trial court did not err in holding that "since

the power to tax includes the power to exempt thereof which is essentially a

legislative prerogative, it follows that a municipal mayor who is an executive

officer may not unilaterally withdraw such an expression of a policy thru the

enactment of a tax." The waiver partakes of the nature of an exemption. It is

an ancient rule that exemptions from taxation are construed in strictissimi

juris against the taxpayer and liberally in favor of the taxing authority (Esso

Standard Eastern, Inc. v. Acting Commissioner of Customs, 18 SCRA 488

[1966]). Tax exemptions are looked upon with disfavor (Western Minolco

Corp. v. Commissioner of Internal Revenue, 124 SCRA 121 [1983]). Thus, in

the absence of a clear and express exemption from the payment of said

fees, the waiver cannot be recognized. As already stated, it is the law-

making body, and not an executive like the mayor, who can make an

exemption. Under Section 36 of the Code, a permit fee like the mayor's

permit, shall be required before any individual or juridical entity shall

engage in any business or occupation under the provisions of the Code.

However, since the Local Tax Code does not provide the prescriptive period

for collection of local taxes, Article 1143 of the Civil Code applies. Said law

provides that an action upon an obligation created by law prescribes within

ten (10) years from the time the right of action accrues. The Municipality of

Pililla can therefore enforce the collection of the tax on business of

petitioner PPC due from 1976 to 1986, and NOT the tax that had accrued

prior to 1976.

PREMISES CONSIDERED, with the MODIFICATION that business taxes

accruing PRIOR to 1976 are not to be paid by PPC (because the same have

prescribed) and that storage fees are not also to be paid by PPC (for the

storage tanks are owned by PPC and not by the municipality, and therefore

cannot be a charge for service by the municipality), the assailed DECISION is

hereby AFFIRMED.

SO ORDERED.

Footnotes

* Penned by Judge Felipe Almazan.

EN BANC

[G.R. No. L-9141.  September 25, 1956.]

Testate Estate of OLIMPIO FERNANDEZ, deceased. REPUBLIC OF

THE PHILIPPINES, claimant-Appellee, vs. ANGELINA OASAN VDA DE

FERNANDEZ, PRISCILLA O. FERNANDEZ, and ESTELA O. FERNANDEZ,

Oppositors-Appellants.

 

D E C I S I O N

LABRADOR, J.:

Appeal from a decision of the Court of Tax Appeals sustaining the validity of

a tax amounting to P7,614.60 against the estate of Olimpio Fernandez under

the War Profits Tax Law (Republic Act No. 55).

Olimpio Fernandez and his wife Angelina Oasan had a net worth of P8,600

on December 8, 1941. During the Japanese occupation the spouses acquired

several real properties, and at the time of his death on February 11, 1945 he

had a net worth of P31,489. The Collector of Internal Revenue assessed a

war profits tax on the estate of the deceased at P7,614.60, which his

administratrix refused to pay. The case was brought to the Court of Tax

Appeals which sustained the validity and legality of the assessment. The

administratrix has appealed this decision to this Court.

The most important questions raised by the Appellant are: (a) the

unconstitutionality of the war profits tax law for the reason that it is

retroactive; (b) the inapplicability of said law to the estate of the deceased

Olimpio Fernandez, because the law taxes individuals; and (c) the separate

taxation of the estate of the deceased Olimpio Fernandez from that of his

wife’s, because Olimpio Fernandez died before the law was passed.

Appellant’s contention that the law is invalid or unconstitutional because it

acts retroactively, thus violating the due process of law clause, is not

supported by reason or authority. The tax, insofar as applicable to the estate

of the deceased Olimpio Fernandez, is both a property tax and a tax on

income. It is a property tax in relation to the properties that Fernandez had

in December, 1941; and it is an income tax in relation to the properties

which he purchased during the Japanese occupation. In both cases,

however, the war profits tax may not be considered as unconstitutional.

The doctrine of unconstitutionality raised by Appellant is based on the

prohibition against ex post facto laws. But this prohibition applies only to

criminal or penal matters, and not to laws which concern civil matters or

proceedings generally, or which affect or regulate civil or private rights (Ex

parte Garland, 18 Law Ed., 366; 16 C.J. S., 889-891).

“At an early day it was settled by authoritative decisions, in opposition to

what might seem the more natural and obvious meaning of the term ex post

facto, that in their scope and purpose these provisions were confined to laws

respecting criminal punishments, and had no relation whatever to

retrospective legislation of any other description. And it has, therefore, been

repeatedly held, that retrospective laws, when not of a criminal nature, do

not come in conflict with the national Constitution, unless obnoxious to its

provisions on other grounds than their respective character.” (1 Cooley,

Constitutional Limitations, 544-545.)

We have applied the above principle in the cases of Mekin vs. Wolf, 2 Phil.

74 and Ongsiako vs. Gamboa, 47 Off. Gaz., No. 11, 5613, 5616.

It has also been held that property taxes and benefit assessments on real

estate, retroactively applied, are not open to the objection that they infringe

upon the due process of law clause of the Constitution (Wagner vs.

Baltimore, 239 U. S. 207, 60 L. Ed. 230); that taxes on income are not

subject to the constitutional objection because of their retroactivity. The

universal practice has been to increase taxes on incomes already earned;

yet notwithstanding this retroactive operation, income taxes have not been

successfully assailed as invalid. The uniform ruling of the courts in the

United States has been to reject the contention that the retroactive

application of revenue acts is a denial of the due process guaranteed by the

Fifth Amendment (Welch vs. Henry, 305 U. S. 134, 83 L. Ed. 87).

It has also been held that in order to declare a tax as transgressing the

constitutional limitation, it must be so harsh and oppressive in its retroactive

application (Idem.). But we hold that far from being unjust or harsh and

oppressive our war profits tax is both wise and just. The last Pacific war and

the Japanese occupation of the Islands have wrought divergent effects upon

the different sectors of the population. The quiet and the timid, who were

afraid to go out of their homes or who refused to have any dealings with the

enemy, stopped from exercising their callings or professions, losing their

incomes; and they supported themselves with properties they already

owned, selling these from time to time to raise funds with which to purchase

their daily needs. These were reduced to penury and want. But the bold and

the daring, as well as those who were callous to the criticism of being

collaborators, engaged in trading in all forms or sorts of commodities, from

foodstuffs to war materials, earning fabulous incomes and acquiring

properties with their earnings. Those who were able to retain their

properties found themselves possessed of increased wealth because

inflation set in, the currency dropped in value and properties soared in

prices. It would have been unrealistic for the legislature to have ignored all

these facts and circumstances. After the war it could not, with justice to all

concerned, apportion the expenses of government equally on all the people

irrespective of the vicissitudes of war, equally on those who had their

properties decimated as on those who had become fabulously rich after the

war. Those who were fortunate to increase their wealth during the

troubulous period of the war were made to contribute a portion of their

newly-acquired wealth for the maintenance of the government and defray

its expenses. Those who in turn were reduced to penury or whose incomes

suffered reductions could not be compelled to share in the expenses to the

same extent as those who grew rich. This in effect is what the legislature did

when it enacted the War Profits Tax Law. The law may not be considered

harsh and oppressive because the force of its impact fell on those who had

amassed wealth or increased their wealth during the war, but did not touch

the less fortunate. The policy followed is the same as that which underlies

the Income Tax Law, imposing the burden upon those who have and

relieving those who have not. No one can dare challenge the law as harsh

and oppressive. We declare it to be just and sound and overrule the

objection thereto on the ground of unconstitutionality.

The contention that the deceased Olimpio Fernandez or his estate should

not be responsible because he died in 1945 and was no longer living when

the law was enacted at a later date, in 1946, is absolutely without merit.

Fernandez died immediately before the liberation and the actual cessation

of hostilities. He profited by the war; there is no reason why the incident of

his death should relieve his estate from the tax. On this matter we agree

with the Court of Tax Appeals that the provisions of section 18 of the

Internal Revenue Code have been incorporated in Republic Act No. 55 by

virtue of Section 9 thereof, which provides:

SEC. 9.  Administrative remedies. — All administrative, special and general

provisions of law, including the laws in relation to the assessment,

remission, collection and refund of national internal revenue taxes, not

inconsistent with the provisions of the Act, are hereby extended and made

applicable to all the provisions of this law, and to the tax herein imposed.”

Under section 84 of the National Internal Revenue Code, the term “person”

means an individual, a trust, estate, corporation, or a duly registered

general co-partnership. If the individual is already dead, property or estate

left by him should be subject to the tax in the same manner as if he were

alive.

The last contention is also without merit. The property which Olimpio

Fernandez was possessed of in December, 1941 is presumed to be conjugal

property and so are the properties which were acquired by him during the

war, because at that time he was married. There is no claim or evidence to

support the claim that any of the properties were paraphernal properties of

the wife; so the presumption stands that they were conjugal properties of

the husband and wife. Under these circumstances they cannot be

considered as properties belonging to two individuals, each of which shall be

subject to the tax independently of the other.

For the foregoing considerations, the judgment appealed from is hereby

affirmed, with costs against the Appellants.

EN BANC

[G.R. No. L-9408.  October 31, 1956.]

EMILIO Y. HILADO, Petitioner, vs. THE COLLECTOR OF INTERNAL

REVENUE and THE COURT OF TAX APPEALS, Respondents.

 

D E C I S I O N

BAUTISTA ANGELO, J.:

On March 31, 1952, Petitioner filed his income tax return for 1951 with the

treasurer of Bacolod City wherein he claimed, among other things, the

amount of P12,837.65 as a deductible item from his gross income pursuant

to General Circular No. V-123 issued by the Collector of Internal Revenue.

This circular was issued pursuant to certain rules laid down by the Secretary

of Finance On the basis of said return, an assessment notice demanding the

payment of P9,419 was sent to Petitioner, who paid the tax in monthly

installments, the last payment having been made on January 2, 1953.

Meanwhile, on August 30, 1952, the Secretary of Finance, through the

Collector of Internal Revenue, issued General Circular No. V-139 which not

only revoked and declared void his general Circular No. V- 123 but laid down

the rule that losses of property which occurred during the period of World

War II from fires, storms, shipwreck or other casualty, or from robbery, theft,

or embezzlement are deductible in the year of actual loss or destruction of

said property. As a consequence, the amount of P12,837.65 was disallowed

as a deduction from the gross income of Petitioner for 1951 and the

Collector of Internal Revenue demanded from him the payment of the sum

of P3,546 as deficiency income tax for said year. When the petition for

reconsideration filed by Petitioner was denied, he filed a petition for review

with the Court of Tax Appeals. In due time, this court rendered decision

affirming the assessment made by Respondent Collector of Internal

Revenue. This is an appeal from said decision.

It appears that Petitioner claimed in his 1951 income tax return the

deduction of the sum of P12,837.65 as a loss consisting in a portion of his

war damage claim which had been duly approved by the Philippine War

Damage Commission under the Philippine Rehabilitation Act of 1946 but

which was not paid and never has been paid pursuant to a notice served

upon him by said Commission that said part of his claim will not be paid until

the United States Congress should make further appropriation. He claims

that said amount of P12,837.65 represents a “business asset” within the

meaning of said Act which he is entitled to deduct as a loss in his return for

1951. This claim is untenable.

To begin with, assuming that said amount represents a portion of the 75% of

his war damage claim which was not paid, the same would not be deductible

as a loss in 1951 because, according to Petitioner, the last installment he

received from the War Damage Commission, together with the notice that

no further payment would be made on his claim, was in 1950. In the

circumstance, said amount would at most be a proper deduction from his

1950 gross income. In the second place, said amount cannot be considered

as a “business asset” which can be deducted as a loss in contemplation of

law because its collection is not enforceable as a matter of right, but is

dependent merely upon the generosity and magnanimity of the U. S.

government. Note that, as of the end of 1945, there was absolutely no law

under which Petitioner could claim compensation for the destruction of his

properties during the battle for the liberation of the Philippines. And under

the Philippine Rehabilitation Act of 1946, the payments of claims by the War

Damage Commission merely depended upon its discretion to be exercised in

the manner it may see fit, but the non-payment of which cannot give rise to

any enforceable right, for, under said Act, “All findings of the Commission

concerning the amount of loss or damage sustained, the cause of such loss

or damage, the persons to whom compensation pursuant to this title is

payable, and the value of the property lost or damaged, shall be conclusive

and shall not be reviewable by any court”. (section 113).

It is true that under the authority of section 338 of the National Internal

Revenue Code the Secretary of Finance, in the exercise of his administrative

powers, caused the issuance of General Circular No. V-123 as an

implementation or interpretative regulation of section 30 of the same Code,

under which the amount of P12,837.65 was allowed to be deducted “in the

year the last installment was received with notice that no further payment

would be made until the United States Congress makes further

appropriation therefor”, but such circular was found later to be wrong and

was revoked. Thus, when doubts arose as to the soundness or validity of

such circular, the Secretary of Finance sought the advice of the Secretary of

Justice who, accordingly, gave his opinion the pertinent portion of which

reads as follows:

“Yet it might be argued that war losses were not included as deductions for

the year when they were sustained because the taxpayers had prospects

that losses would be compensated for by the United States Government;

that since only uncompensated losses are deductible, they had to wait until

after the determination by the Philippine War Damage Commission as to the

compensability in part or in whole of their war losses so that they could

exclude from the deductions those compensated for by the said

Commission; and that, of necessity, such determination could be complete

only much later than in the year when the loss was sustained. This

contention falls to the ground when it is considered that the Philippine

Rehabilitation Act which authorized the payment by the United States

Government of war losses suffered by property owners in the Philippines

was passed only on August 30, 1946, long after the losses were sustained. It

cannot be said therefore, that the property owners had any conclusive

assurance during the years said losses were sustained, that the

compensation was to be paid therefor. Whatever assurance they could have

had, could have been based only on some information less reliable and less

conclusive than the passage of the Act itself. Hence, as diligent property

owners, they should adopt the safest alternative by considering such losses

deductible during the year when they were sustained.”

In line with this opinion, the Secretary of Finance, through the Collector of

Internal Revenue, issued General Circular No. V-139 which not only revoked

and declared void his previous Circular No. V — 123 but laid down the rule

that losses of property which occurred during the period of World War II

from fires, storms, shipwreck or other casualty, or from robbery, theft, or

embezzlement are deductible for income tax purposes in the year of actual

destruction of said property. We can hardly argue against this opinion. Since

we have already stated that the amount claimed does not represent a

“business asset” that may be deducted as a loss in 1951, it is clear that the

loss of the corresponding asset or property could only be deducted in the

year it was actually sustained. This is in line with section 30 (d) of the

National Internal Revenue Code which prescribes that losses sustained are

allowable as deduction only within the corresponding taxable year.

Petitioner’s contention that during the last war and as a consequence of

enemy occupation in the Philippines “there was no taxable year” within the

meaning of our internal revenue laws because during that period they were

unenforceable, is without merit. It is well known that our internal revenue

laws are not political in nature and as such were continued in force during

the period of enemy occupation and in effect were actually enforced by the

occupation government. As a matter of fact, income tax returns were filed

during that period and income tax payment were effected and considered

valid and legal. Such tax laws are deemed to be the laws of the occupied

territory and not of the occupying enemy.

“Furthermore, it is a legal maxim, that excepting that of a political nature,

‘Law once established continues until changed by some competent

legislative power. It is not changed merely by change of sovereignty.’

(Joseph H. Beale, Cases on Conflict of Laws, III, Summary section 9, citing

Commonwealth vs. Chapman, 13 Met., 68.) As the same author says, in his

Treatise on the Conflict of Laws (Cambridge, 1916, section 131): ‘There can

be no break or interregnun in law. From the time the law comes into

existence with the first-felt corporateness of a primitive people it must last

until the final disappearance of human society. Once created, it persists

until a change takes place, and when changed it continues in such changed

condition until the next change and so forever. Conquest or colonization is

impotent to bring law to an end; inspite of change of constitution, the law

continues unchanged until the new sovereign by legislative act creates a

change.’“ (Co Kim Chan vs. Valdes Tan Keh and Dizon, 75 Phil., 113, 142-

143.)

It is likewise contended that the power to pass upon the validity of General

Circular No. V-123 is vested exclusively in our courts in view of the principle

of separation of powers and, therefore, the Secretary of Finance acted

without valid authority in revoking it and approving in lieu thereof General

Circular No. V-139. It cannot be denied, however, that the Secretary of

Finance is vested with authority to revoke, repeal or abrogate the acts or

previous rulings of his predecessor in office because the construction of a

statute by those administering it is not binding on their successors if

thereafter the latter become satisfied that a different construction should be

given. [Association of Clerical Employees vs. Brotherhood of Railways &

Steamship Clerks, 85 F. (2d) 152, 109 A.L.R., 345.]

“When the Commissioner determined in 1937 that the Petitioner was not

exempt and never had been, it was his duty to determine, assess and collect

the tax due for all years not barred by the statutes of limitation. The

conclusion reached and announced by his predecessor in 1924 was not

binding upon him. It did not exempt the Petitioner from tax, This same point

was decided in this way in Stanford University Bookstore, 29 B. T. A., 1280;

affd., 83 Fed. (2d) 710.” (Southern Maryland Agricultural Fair Association vs.

Commissioner of Internal Revenue, 40 B. T. A., 549, 554).

With regard to the contention that General Circular No. V-139 cannot be

given retroactive effect because that would affect and obliterate the vested

right acquired by Petitioner under the previous circular, suffice it to say that

General Circular No. V-123, having been issued on a wrong construction of

the law, cannot give rise to a vested right that can be invoked by a

taxpayer. The reason is obvious: a vested right cannot spring from a wrong

interpretation. This is too clear to require elaboration.

“It seems too clear for serious argument that an administrative officer

cannot change a law enacted by Congress. A regulation that is merely an

interpretation of the statute when once determined to have been erroneous

becomes nullity. An erroneous construction of the law by the Treasury

Department or the collector of internal revenue does not preclude or estop

the government from collecting a tax which is legally due.” (Ben Stocker, et

al., 12 B. T. A., 1351.)

“Art. 2254. — No vested or acquired right can arise from acts or omissions

which are against the law or which infringe upon the rights of others.”

(Article 2254, New Civil Code.)

Wherefore, the decision appealed from is affirmed Without pronouncement

as to costs.

 

FIRST DIVISION

 

COMMISSIONER  OF INTERNAL REVENUE,

Petitioner,

                        - versus -

          G.R. No. 188497

          Present:

          CORONA, C.J.,

                        Chairperson,

          LEONARDO-DE

CASTRO,

          BERSAMIN,

          DEL CASTILLO, and

          VILLARAMA, JR., JJ.

PILIPINAS SHELL PETROLEUM

CORPORATION,

                                    Respondent.

          Promulgated:

          April 25, 2012

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

- x

 

DECISION

 

VILLARAMA, JR., J.:

            Petitioner Commissioner of Internal Revenue appeals the Decision[1]

[1] dated March 25, 2009 and Resolution[2][2] dated June 24, 2009 of the

Court of Tax Appeals (CTA) En Banc in CTA EB No. 415.  The CTA dismissed

the petition for review filed by petitioner assailing the CTA First Division’s

Decision[3][3] dated April 25, 2008 and Resolution[4][4] dated July 10, 2008

which ordered petitioner to refund the excise taxes paid by respondent

Pilipinas Shell Petroleum Corporation on petroleum products it sold to

international carriers.

            The facts are not disputed.

            Respondent is engaged in the business of processing, treating and

refining petroleum for the purpose of producing marketable products and

the subsequent sale thereof.[5][5]

            On July 18, 2002, respondent filed with the Large Taxpayers Audit &

Investigation Division II of the Bureau of Internal Revenue (BIR) a formal

claim for refund or tax credit in the total amount of P28,064,925.15,

representing excise taxes it allegedly paid on sales and deliveries of gas and

fuel oils to various international carriers during the period October to

December 2001.  Subsequently, on October 21, 2002, a similar claim for

refund or tax credit was filed by respondent with the BIR covering the period

January to March 2002 in the amount of P41,614,827.99.  Again, on July 3,

2003, respondent filed another formal claim for refund or tax credit in the

amount of P30,652,890.55 covering deliveries from April to June 2002.[6]

[6]  

            Since no action was taken by the petitioner on its claims, respondent

filed petitions for review before the CTA on September 19, 2003 and

December 23, 2003, docketed as CTA Case Nos. 6775 and 6839,

respectively. 

            In its decision on the consolidated cases, the CTA’s First Division ruled

that respondent is entitled to the refund of excise taxes in the reduced

amount of P95,014,283.00.  The CTA First Division relied on a previous

ruling rendered by the CTA En Banc in the case of “Pilipinas Shell Petroleum

Corporation v. Commissioner of Internal Revenue”[7][7] where the CTA also

granted respondent’s claim for refund on the basis of excise tax exemption

for petroleum products sold to international carriers of foreign registry for

their use or consumption outside the Philippines.  Petitioner’s motion for

reconsideration was denied by the CTA First Division.

            Petitioner elevated the case to the CTA En Banc which upheld the

ruling of the First Division.  The CTA pointed out the specific exemption

mentioned under Section 135 of the National Internal Revenue Code of 1997

(NIRC) of petroleum products sold to international carriers such as

respondent’s clients.  It said that this Court’s ruling in Maceda v. Macaraig,

Jr.[8][8] is inapplicable because said case only put to rest the issue of

whether or not the National Power Corporation (NPC) is subject to tax

considering that NPC is a tax-exempt entity mentioned in Sec. 135 (c) of the

NIRC (1997), whereas the present case involves the tax exemption of the

sale of petroleum under Sec. 135 (a) of the same Code.  Further, the CTA

said that the ruling in Philippine Acetylene Co., Inc. v. Commissioner of

Internal Revenue[9][9] likewise finds no application because the party

asking for the refund in said case was the seller-producer based on the

exemption granted under the law to the tax-exempt buyers, NPC and Voice

of America (VOA), whereas in this case it is the article or product which is

exempt from tax and not the international carrier. 

            Petitioner filed a motion for reconsideration which the CTA likewise

denied.

            Hence, this petition anchored on the following grounds:

I

SECTION 148 OF THE NATIONAL INTERNAL REVENUE CODE EXPRESSLY

SUBJECTS THE PETROLEUM PRODUCTS TO AN EXCISE TAX BEFORE THEY

ARE REMOVED FROM THE PLACE OF PRODUCTION.

II

THE ONLY SPECIFIC PROVISION OF THE LAW WHICH GRANTS TAX CREDIT OR

TAX REFUND OF THE EXCISE TAXES PAID REFERS TO THOSE CASES WHERE

GOODS LOCALLY PRODUCED OR MANUFACTURED ARE ACTUALLY EXPORTED

WHICH IS NOT SO IN THIS CASE.

III

THE PRINCIPLES LAID DOWN IN MACEDA VS. MACARAIG, JR. AND PHILIPPINE

ACETYLENE CO. VS. CIR ARE APPLICABLE TO THIS CASE.[10][10]

            The Solicitor General argues that the obvious intent of the law is to

grant excise tax exemption to international carriers and exempt entities as

buyers of petroleum products and not to the manufacturers or producers of

said goods.  Since the excise taxes are collected from manufacturers or

producers before removal of the domestic products from the place of

production, respondent paid the subject excise taxes as manufacturer or

producer of the petroleum products pursuant to Sec. 148 of the NIRC.  Thus,

regardless of who the buyer/purchaser is, the excise tax on petroleum

products attached to the said goods before their sale or delivery to

international carriers, as in fact respondent averred that it paid the excise

tax on its petroleum products when it “withdrew petroleum products from its

place of production for eventual sale and delivery to various international

carriers as well as to other customers.”[11][11]  Sec. 135 (a) and (c)

granting exemption from the payment of excise tax on petroleum products

can only be interpreted to mean that the respondent cannot pass on to

international carriers and exempt agencies the excise taxes it paid as a

manufacturer or producer.

            As to whether respondent has the right to file a claim for refund or tax

credit for the excise taxes it paid for the petroleum products sold to

international carriers, the Solicitor General contends that Sec. 130 (D) is

explicit on the circumstances under which a taxpayer may claim for a refund

of excise taxes paid on manufactured products, which express enumeration

did not include those excise taxes paid on petroleum products which were

eventually sold to international carriers (expressio unius est exclusio

alterius). Further, the Solicitor General asserts that contrary to the

conclusion made by the CTA, the principles laid down by this Court in 

Maceda v. Macaraig, Jr.[12][12] and Philippine Acetylene Co. v.

Commissioner of Internal Revenue[13][13] are applicable to this case. 

Respondent must shoulder the excise taxes it previously paid on petroleum

products which it later sold to international carriers because it cannot pass

on the tax burden to the said international carriers which have been granted

exemption under Sec. 135 (a) of the NIRC.  Considering that respondent

failed to prove an express grant of a right to a tax refund, such claim cannot

be implied; hence, it must be denied.   

            On the other hand, respondent maintains that since petroleum

products sold to qualified international carriers are exempt from excise tax,

no taxes should be imposed on the article, to which goods the tax attaches,

whether in the hands of the said international carriers or the petroleum

manufacturer or producer.  As these excise taxes have been erroneously

paid taxes, they can be recovered under Sec. 229 of the NIRC.  Respondent

contends that contrary to petitioner’s assertion, Sections 204 and 229

authorizes respondent to maintain a suit or proceeding to recover such

erroneously paid taxes on the petroleum products sold to tax-exempt

international carriers.

            As to the jurisprudence cited by the petitioner, respondent argues that

they are not applicable to the case at bar.  It points out that Maceda v.

Macaraig, Jr. is an adjudication on the issue of tax exemption of NPC from

direct and indirect taxes given the passage of various laws relating thereto. 

What was put in issue in said case was NPC’s right to claim for refund of

indirect taxes.  Here, respondent’s claim for refund is not anchored on the

exemption of the buyer from direct and indirect taxes but on the tax

exemption of the goods themselves under Sec. 135.  Respondent further

stressed that in Maceda v. Macaraig, Jr., this Court recognized that if NPC

purchases oil from oil companies, NPC is entitled to claim reimbursement

from the BIR for that part of the purchase price that represents excise taxes

paid by the oil company to the BIR.  Philippine Acetylene Co. v. CIR, on the

other hand, involved sales tax, which is a tax on the transaction, which this

Court held as due from the seller even if such tax cannot be passed on to

the buyers who are tax-exempt entities.  In this case, the excise tax is a tax

on the goods themselves.  While indeed it is the manufacturer who has the

duty to pay the said tax, by specific provision of law, Sec. 135, the goods are

stripped of such tax under the circumstances provided therein.  Philippine

Acetylene Co., Inc. v. CIR was thus not anchored on an exempting provision

of law but merely on the argument that the tax burden cannot be passed on

to someone.  

Respondent further contends that requiring it to shoulder the burden of

excise taxes on petroleum products sold to international carriers would

effectively defeat the principle of international comity upon which the grant

of tax exemption on aviation fuel used in international flights was founded. 

If the excise taxes paid by respondent are not allowed to be refunded or

credited based on the exemption provided in Sec. 135 (a), respondent avers

that the manufacturers or oil companies would then be constrained to shift

the tax burden to international carriers in the form of addition to the selling

price. 

Respondent cites as an analogous case Commissioner of International

Revenue v. Tours Specialists, Inc.[14][14] which involved the inclusion of

hotel room charges remitted by partner foreign tour agents in respondent

TSI’s gross receipts for purposes of computing the 3% contractor’s tax.  TSI

opposed the deficiency assessment invoking, among others, Presidential

Decree No. 31, which exempts foreign tourists from paying hotel room tax. 

This Court upheld the CTA in ruling that while CIR may claim that the 3%

contractor’s tax is imposed upon a different incidence, i.e., the gross

receipts of the tourist agency which he asserts includes the hotel room

charges entrusted to it, the effect would be to impose a tax, and though

different, it nonetheless imposes a tax actually on room charges.  One way

or the other, said the CTA, it would not have the effect of promoting tourism

in the Philippines as that would increase the costs or expenses by the

addition of a hotel room tax in the overall expenses of said tourists.

The instant petition squarely raised the issue of whether respondent as

manufacturer or producer of petroleum products is exempt from the

payment of excise tax on such petroleum products it sold to international

carriers. 

In the previous cases[15][15]  decided by this Court involving excise taxes

on petroleum products sold to international carriers, what was only resolved

is the question of who is the proper party to claim the refund of excise taxes

paid on petroleum products if such tax was either paid by the international

carriers themselves or incorporated into the selling price of the petroleum

products sold to them.  We have ruled in the said cases that the statutory

taxpayer, the local manufacturer of the petroleum products who is directly

liable for the payment of excise tax on the said goods, is the proper party to

seek a tax refund. Thus, a foreign airline company who purchased locally

manufactured petroleum products for use in its international flights, as well

as a foreign oil company who likewise bought petroleum products from local

manufacturers and later sold these to international carriers, have no legal

personality to file a claim for tax refund or credit of excise taxes previously

paid by the local manufacturers even if the latter passed on to the said

buyers the tax burden in the form of additional amount in the price.

Excise taxes, as the term is used in the NIRC, refer to taxes applicable to

certain specified goods or articles manufactured or produced in the

Philippines for domestic sales or consumption or for any other disposition

and to things imported into the Philippines. These taxes are imposed in

addition to the value-added tax (VAT).[16]

As to petroleum products, Sec. 148 provides that excise taxes attach to the

following refined and manufactured mineral oils and motor fuels as soon as

they are in existence as such:

(a)        Lubricating oils and greases;

(b)        Processed gas;

(c)        Waxes and petrolatum;

(d)        Denatured alcohol to be used for motive power;

(e)        Naphtha, regular gasoline and other similar products of distillation;

(f)         Leaded premium gasoline;

(g)        Aviation turbo jet fuel;

(h)        Kerosene;

(i)         Diesel fuel oil, and similar fuel oils having more or less the same

generating power;

(j)         Liquefied petroleum gas;

(k)        Asphalts; and

(l)         Bunker fuel oil and similar fuel oils having more or less the same

generating capacity.  

Beginning January 1, 1999, excise taxes levied on locally manufactured

petroleum products and indigenous petroleum are required to be paid

before their removal from the place of production.[17][17]  However, Sec.

135 provides:

SEC. 135. Petroleum Products Sold to International Carriers and Exempt

Entities or Agencies. – Petroleum products sold to the following are exempt

from excise tax:

(a) International carriers of Philippine or foreign registry on their use or

consumption outside the Philippines: Provided, That the petroleum products

sold to these international carriers shall be stored in a bonded storage tank

and may be disposed of only in accordance with the rules and regulations to

be prescribed by the Secretary of Finance, upon recommendation of the

Commissioner;

(b) Exempt entities or agencies covered by tax treaties, conventions and

other international agreements for their use or consumption: Provided,

however, That the country of said foreign international carrier or exempt

entities or agencies exempts from similar taxes petroleum products sold to

Philippine carriers, entities or agencies; and

(c)  Entities which are by law exempt from direct and indirect taxes.

            Respondent claims it is entitled to a tax refund because those

petroleum products it sold to international carriers are not subject to excise

tax, hence the excise taxes it paid upon withdrawal of those products were

erroneously or illegally collected and should not have been paid in the first

place.  Since the excise tax exemption attached to the petroleum products

themselves, the manufacturer or producer is under no duty to pay the

excise tax thereon.

            We disagree.

            Under Chapter II “Exemption or Conditional Tax-Free Removal of

Certain Goods” of Title VI, Sections 133, 137, 138, 139 and 140 cover

conditional tax-free removal of specified goods or articles, whereas Sections

134 and 135 provide for tax exemptions.  While the exemption found in Sec.

134 makes reference to the nature and quality of the goods manufactured

(domestic denatured alcohol) without regard to the tax status of the buyer

of the said goods, Sec. 135 deals with the tax treatment of a specified

article (petroleum products) in relation to its buyer or consumer. 

Respondent’s failure to make this important distinction apparently led it to

mistakenly assume that the tax exemption under Sec. 135 (a) “attaches to

the goods themselves” such that the excise tax should not have been paid

in the first place.

On July 26, 1996, petitioner Commissioner issued Revenue Regulations 8-

96[18][18] (“Excise Taxation of Petroleum Products”) which provides:

SEC. 4. Time and Manner of Payment of Excise Tax on Petroleum

Products, Non-Metallic Minerals and Indigenous Petroleum –

I.    Petroleum Products

                        x x x x

a)  On locally manufactured petroleum products

      

      The specific tax on petroleum products locally manufactured or produced

in the Philippines shall be paid by the manufacturer, producer, owner or

person having possession of the same, and such tax shall be paid within

fifteen (15) days from date of removal from the place of production.

(Underscoring supplied.)          

Thus, if an airline company purchased jet fuel from an unregistered supplier

who could not present proof of payment of specific tax, the company is

liable to pay the specific tax on the date of purchase.[19][19]  Since the

excise tax must be paid upon withdrawal from the place of production,

respondent cannot anchor its claim for refund on the theory that the excise

taxes due thereon should not have been collected or paid in the first place.

            Sec. 229 of the NIRC allows the recovery of taxes erroneously or

illegally collected.  An “erroneous or illegal tax” is defined as one levied

without statutory authority, or upon property not subject to taxation or by

some officer having no authority to levy the tax, or one which is some other

similar respect is illegal.[20][20]

            Respondent’s locally manufactured petroleum products are clearly

subject to excise tax under Sec. 148.  Hence, its claim for tax refund may

not be predicated on Sec. 229 of the NIRC allowing a refund of erroneous or

excess payment of tax. Respondent’s claim is premised on what it

determined as a tax exemption “attaching to the goods themselves,” which

must be based on a statute granting tax exemption, or “the result of

legislative grace.” Such a claim is to be construed strictissimi juris against

the taxpayer, meaning that the claim cannot be made to rest on vague

inference. Where the rule of strict interpretation against the taxpayer is

applicable as the claim for refund partakes of the nature of an exemption,

the claimant must show that he clearly falls under the exempting statute.

[21]

The exemption from excise tax payment on petroleum products under Sec.

135 (a) is conferred on international carriers who purchased the same for

their use or consumption outside the Philippines.  The only condition set by

law is for these petroleum products to be stored in a bonded storage tank

and may be disposed of only in accordance with the rules and regulations to

be prescribed by the Secretary of Finance, upon recommendation of the

Commissioner.

            On January 22, 2008, or five years after the sale by respondent of the

subject petroleum products, then Secretary of Finance Margarito B. Teves 

issued Revenue Regulations No. 3-2008  “Amending Certain Provisions of

Existing Revenue Regulations on the Granting of Outright Excise Tax

Exemption on Removal of Excisable Articles Intended for Export or

Sale/Delivery to International Carriers or to Tax-Exempt Entities/Agencies

and Prescribing the Provisions for Availing Claims for Product

Replenishment.”   Said issuance recognized the “tax relief to which the

taxpayers are entitled” by availing of  the following remedies: (a) a claim for

excise tax exemption pursuant to Sections 204 and 229 of the NIRC; or (2) a

product replenishment.

SEC. 2. IMPOSITION OF EXCISE TAX ON REMOVAL OF EXCISABLE ARTICLES

FOR EXPORT OR SALE/DELIVERY TO INTERNATIONAL CARRIERS AND OTHER

TAX-EXEMPT ENTITIES/AGENCIES. – Subject to the subsequent filing of a

claim for excise tax credit/refund or product replenishment, all

manufacturers of articles subject to excise tax under Title VI of the NIRC of

1997, as amended, shall pay the excise tax that is otherwise due on every

removal thereof from the place of production that is intended for exportation

or sale/delivery to international carriers or to tax-exempt entities/agencies:

Provided, That in case the said articles are likewise being sold in the

domestic market, the applicable excise tax rate shall be the same as the

excise tax rate imposed on the domestically sold articles.

In the absence of a similar article that is being sold in the domestic market,

the  applicable excise tax shall be computed based on the value appearing

in the manufacturer’s sworn statement converted to Philippine currency, as

may be applicable.

x x x x (Emphasis supplied.)

            In this case, however, the Solicitor General has adopted a position

contrary to existing BIR regulations and rulings recognizing the right of oil

companies to seek a refund of excise taxes paid on petroleum products they

sold to international carriers.  It is argued that there is nothing in Sec. 135

(a) which explicitly grants exemption from the payment of excise tax in

favor of oil companies selling their petroleum products to international

carriers and that the only claim for refund of excise taxes authorized by the

NIRC is the payment of excise tax on exported goods, as explicitly provided

in Sec. 130 (D), Chapter I under the same Title VI:

(D)  Credit for Excise Tax on Goods Actually Exported.  --  When goods

locally produced or manufactured are removed and actually exported

without returning to the Philippines, whether so exported in their original

state or as ingredients or parts of any manufactured goods or products, any

excise  tax paid thereon shall be credited or refunded upon submission of

the proof of actual exportation and upon receipt of the corresponding

foreign exchange payment: Provided, That the excise tax on mineral

products, except coal and coke, imposed under Section 151 shall not be

creditable or refundable even if the mineral products are actually exported.

            According to the Solicitor General, Sec. 135 (a) in relation to the other

provisions on excise tax and from the nature of indirect taxation, may only

be construed as prohibiting the manufacturers-sellers of petroleum products

from passing on the tax to international carriers by incorporating previously

paid excise taxes into the selling price.  In other words, respondent cannot

shift the tax burden to international carriers who are allowed to purchase its

petroleum products without having to pay the added cost of the excise tax.

            We agree with the Solicitor General.

            In Philippine Acetylene Co., Inc. v. Commissioner of Internal

Revenue[22][22] this Court held that petitioner manufacturer who sold its

oxygen and acetylene gases to NPC, a tax-exempt entity, cannot claim

exemption from the payment of sales tax simply because its buyer NPC is

exempt from taxation.  The Court explained that the percentage tax on

sales of merchandise imposed by the Tax Code is due from the

manufacturer and not from the buyer.

            Respondent attempts to distinguish this case from Philippine

Acetylene Co., Inc. on grounds that what was involved in the latter is a tax

on the transaction (sales) and not excise tax which is a tax on the goods

themselves, and that the exemption sought therein was anchored merely on

the tax-exempt status of the buyer and not a specific provision of law

exempting the goods sold from the excise tax.  But as already stated, the

language of Sec. 135 indicates that the tax exemption mentioned therein is

conferred on specified buyers or consumers of the excisable articles or

goods (petroleum products).  Unlike Sec. 134 which explicitly exempted the

article or goods itself  (domestic denatured alcohol) without due regard to

the tax status of the buyer or purchaser, Sec. 135 exempts from excise tax

petroleum products which were sold to international carriers and other tax-

exempt agencies and entities. 

Considering that the excise taxes attaches to petroleum products “as soon

as they are in existence as such,”[23][23]  there can be no outright

exemption from the payment of excise tax on petroleum products sold to

international carriers. The sole basis then of respondent’s claim for refund is

the express grant of excise tax exemption in favor of international carriers

under Sec. 135 (a) for their purchases of locally manufactured petroleum

products.  Pursuant to our ruling in Philippine Acetylene, a tax exemption

being enjoyed by the buyer cannot be the basis of a claim for tax exemption

by the manufacturer or seller of the goods for any tax due to it as the

manufacturer or seller.   The excise tax imposed on petroleum products

under Sec. 148 is the direct liability of the manufacturer who cannot thus

invoke the excise tax exemption granted to its buyers who are international

carriers.

In Maceda v. Macaraig, Jr.,[24][24] the Court specifically mentioned excise

tax as an example of an indirect tax where the tax burden can be shifted to

the buyer:

            On the other hand, “indirect taxes are taxes primarily paid by persons

who can shift the burden upon someone else”. For example, the excise and

ad valorem taxes that the oil companies pay to the Bureau of Internal

Revenue upon removal of petroleum products from its refinery can be

shifted to its buyer, like the NPC, by adding them to the “cash” and/or

“selling price.”

            An excise tax is basically an indirect tax.  Indirect taxes are those that

are demanded, in the first instance, from, or are paid by, one person in the

expectation and intention that he can shift the burden to someone else. 

Stated elsewise, indirect taxes are taxes wherein the liability for the

payment of the tax falls on one person but the burden thereof can be shifted

or passed on to another person, such as when the tax is imposed upon

goods before reaching the consumer who ultimately pays for it.  When the

seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not

the liability to pay it, to the purchaser as part of the price of goods sold or

services rendered.[25][25]

Further, in Maceda v. Macaraig, Jr., the Court ruled that because of the tax

exemptions privileges being enjoyed by NPC under existing laws, the tax

burden may not be shifted to it by the oil companies who shall pay for fuel

oil taxes on oil they supplied to NPC.  Thus:

In view of all the foregoing, the Court rules and declares that the oil

companies which supply bunker fuel oil to NPC have to pay the taxes

imposed upon said bunker fuel oil sold to NPC.  By the very nature of

indirect taxation, the economic burden of such taxation is expected to be

passed on through the channels of commerce to the user or consumer of the

goods sold.  Because, however, the NPC has been exempted from

both direct and indirect taxation, the NPC must be held exempted

from absorbing the economic burden of indirect taxation.  This

means, on the one hand, that the oil companies which wish to sell

to NPC absorb all or part of the economic burden of the taxes

previously paid to BIR, which they could shift to NPC if NPC did not

enjoy exemption from indirect taxes.   This means also, on the other

hand, that the NPC may refuse to pay that part of the “normal” purchase

price of bunker fuel oil which represents all or part of the taxes previously

paid by the oil companies to BIR.  If NPC nonetheless purchases such oil

from the oil companies – because to do so may be more convenient and

ultimately less  costly for NPC than NPC itself importing and hauling and

storing the oil from overseas – NPC is entitled to be reimbursed by the BIR

for that part of the buying price of NPC which verifiably represents the tax

already paid by the oil company-vendor to the BIR.[26][26]  (Emphasis

supplied.)

            In the case of international air carriers, the tax exemption granted

under Sec. 135 (a) is based on “a long-standing international consensus that

fuel used for international air services should be tax-exempt.”  The

provisions of the 1944 Convention of International Civil Aviation or the

“Chicago Convention”,  which form binding international law, requires the

contracting parties not to charge duty on aviation fuel already on board any

aircraft that has arrived in their territory from another contracting state. 

Between individual countries, the exemption of airlines from national taxes

and customs duties on a range of aviation-related goods, including parts,

stores and fuel is a standard element of the network of bilateral “Air Service

Agreements.”[27][27] Later, a Resolution issued by the International Civil

Aviation Organization (ICAO) expanded the provision as to similarly exempt

from taxes all kinds of fuel taken on board for consumption by an aircraft

from a contracting state in the territory of another contracting State

departing for the territory of any other State.[28][28]  Though initially aimed

at establishing uniformity of taxation among parties to the treaty to prevent

double taxation, the tax exemption now generally applies to fuel used in

international travel by both domestic and foreign carriers.

            On April 21, 1978, then President Ferdinand E. Marcos issued

Presidential Decree (P.D.) No. 1359:

PRESIDENTIAL DECREE No. 1359

AMENDING SECTION 134 OF THE NATIONAL INTERNAL REVENUE CODE OF

1977.

WHEREAS, under the present law oil products sold to international carriers

are subject to the specific tax;

WHEREAS, some countries allow the sale of petroleum products to Philippine

Carriers without payment of taxes thereon;

WHEREAS, to foster goodwill and better relationship with foreign countries,

there is a need to grant similar tax exemption in favor of foreign

international carriers;

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines,

by virtue of the powers vested in me by the Constitution, do hereby order

and decree the following:

Section 1. Section 134 of the National Internal Revenue Code of 1977 is

hereby amended to read as follows:

“Sec. 134. Articles subject to specific tax. Specific internal revenue taxes

apply to things manufactured or produced in the Philippines for domestic

sale or consumption and to things imported, but not to anything produced or

manufactured here which shall be removed for exportation and is actually

exported without returning to the Philippines, whether so exported in its

original state or as an ingredient or part of any manufactured article or

product.

“HOWEVER, PETROLEUM PRODUCTS SOLD TO AN INTERNATIONAL CARRIER

FOR ITS USE OR CONSUMPTION OUTSIDE OF THE PHILIPPINES SHALL NOT BE

SUBJECT TO SPECIFIC TAX, PROVIDED, THAT THE COUNTRY OF SAID

CARRIER EXEMPTS FROM TAX PETROLEUM PRODUCTS SOLD TO PHILIPPINE

CARRIERS.

“In case of importations the internal revenue tax shall be in addition to the

customs duties, if any.”

Section 2. This Decree shall take effect immediately.

Contrary to respondent’s assertion that the above amendment to the former

provision of the 1977 Tax Code supports its position that it was not liable for

excise tax on the petroleum products sold to international carriers, we find

that no such inference can be drawn from the words used in the amended

provision or its introductory part.  Founded on the principles of international

comity and reciprocity, P.D. No. 1359 granted exemption from payment of

excise tax but only to foreign international carriers who are allowed to

purchase petroleum products free of specific tax provided the country of

said carrier also grants tax exemption to Philippine carriers.   Both the

earlier amendment in the 1977 Tax Code and the present Sec. 135 of the

1997 NIRC did not exempt the oil companies from the payment of excise tax

on petroleum products manufactured and sold by them to international

carriers.

            Because an excise tax is a tax on the manufacturer and not on the

purchaser, and there being no express grant under the NIRC of exemption

from payment of excise tax to local manufacturers of petroleum products

sold to international carriers, and  absent any provision in the Code

authorizing the refund or crediting of such excise taxes paid, the Court holds

that Sec. 135 (a) should be construed as prohibiting the shifting of the

burden  of the excise tax to the international carriers who buys petroleum

products from the local manufacturers.  Said provision thus merely allows

the international carriers to purchase petroleum products without the excise

tax component as an added cost in the price fixed by the manufacturers or

distributors/sellers.  Consequently, the oil companies which sold such

petroleum products to international carriers are not entitled to a refund of

excise taxes previously paid on the goods.

Time and again, we have held that tax refunds are in the nature of tax

exemptions which result to loss of revenue for the government. Upon the

person claiming an exemption from tax payments rests the burden of

justifying the exemption by words too plain to be mistaken and too

categorical to be misinterpreted,[29][29] it is never presumed[30][30] nor be

allowed solely on the ground of equity.[31][31]  These exemptions,

therefore, must not rest on vague, uncertain or indefinite inference, but

should be granted only by a clear and unequivocal provision of law on the

basis of language too plain to be mistaken. Such exemptions must be

strictly construed against the taxpayer, as taxes are the lifeblood of the

government.[32][32]

WHEREFORE, the petition for review on certiorari is GRANTED.  The

Decision dated March 25, 2009 and Resolution dated June 24, 2009 of the

Court of Tax Appeals En Banc in CTA EB No. 415 are hereby REVERSED and

SET ASIDE.   The claims for tax refund or credit filed by respondent

Pilipinas Shell Petroleum Corporation are DENIED for lack of basis.

No pronouncement as to costs.

SO ORDERED.

 

THIRD DIVISION

COMMISSIONER OF INTERNAL REVENUE,

                          Petitioner,

- versus -

PHILIPPINE AIRLINES, INC.,

                        Respondent.

G.R. No. 180043

Present:

YNARES-SANTIAGO, J.,

      Chairperson,

CARPIO,*

CHICO-NAZARIO,

VELASCO, JR., and

PERALTA, JJ.

Promulgated:

July 14, 2009

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

D E C I S I O N

 

CHICO-NAZARIO, J.:

 

 

            In this Petition for Review on Certiorari, under Rule 45 of the Revised

Rules of Court, petitioner Commissioner of Internal Revenue assails the

Decision[33][1] of the Court of Tax Appeals (CTA) En Banc dated 9 August

2007 in CTA EB No. 221, affirming the Decision[34][2] dated 14 June 2006 of

the CTA First Division in CTA Case No. 6735, which granted the claim of

respondent Philippine Airlines, Inc. (PAL) for the refund of its Overseas

Communications Tax (OCT) for the period April to December 2001. 

 

Petitioner, as the Commissioner of the Bureau of Internal Revenue (BIR), is

responsible for the assessment and collection of all national internal

revenue taxes, fees, and charges, including the 10% Overseas

Communications Tax (OCT), imposed by Section 120 of the National Internal

Revenue Code (NIRC) of 1997, which reads:

 

SEC. 120. Tax on Overseas Dispatch, Message or Conversation Originating

from the Philippines. -

 

(A)  Persons Liable—There shall be collected upon every overseas dispatch,

message or conversation transmitted from the Philippines by telephone,

telegraph, telewriter exchange, wireless and other communication

equipment service, a tax of ten percent (10%) on the amount paid of [the

transaction involving overseas dispatch, message or conversation] such

services.  The tax imposed in this Section shall be payable by the person

paying for the services rendered and shall be paid to the person rendering

the services who is required to collect and pay the tax within twenty (20)

days after the end of each quarter. 

 

 

On the other hand, respondent is a domestic corporation organized under

the corporate laws of the Republic of the Philippines; declared the national

flag carrier of the country; and the grantee under Presidential Decree No.

1590[35][3] of a franchise to establish, operate, and maintain transport

services for the carriage of passengers, mail, and property by air, in and

between any and all points and places throughout the Philippines, and

between the Philippines and other countries.[36][4]

 

For the period January to December 2001, the Philippine Long Distance

Telephone Company (PLDT) collected from respondent the 10% OCT on the

amount paid by the latter for overseas telephone calls it had made through

the former.  In all, PLDT collected from respondent the amount of

P202,471.18 as OCT for 2001, summarized as follows[37][5]:

 

PERIOD                                     AMOUNT

January to March 2001 P 75,332.26

April to June 2001   50,271.43

July to September

2001

43,313.96

October to December

2001

33,553.53

Total P 202,471.18

On 8 April 2003, respondent filed with the BIR an administrative claim for

refund of the P202,471.18 OCT it alleged to have erroneously paid in 2001. 

In a letter[38][6] dated 4 April 2003, addressed to petitioner, Ma. Stella L.

Diaz (Diaz), the Assistant Vice-President for Financial Planning & Analysis of

respondent, explained that the claim for refund of respondent was based on

its franchise, Section 13 of Presidential Decree No. 1590, which granted it

(1) the option to pay either the basic corporate income tax on its annual net

taxable income or the two percent franchise tax on its gross revenues,

whichever was lower; and (2) the exemption from all other taxes, duties,

royalties, registration, license and other fees and charges imposed by any

municipal, city, provincial or national authority or government agency, now

or in the future, except only real property tax.  Also invoking BIR Ruling No.

97-94[39][7] dated 13 April 1994, Diaz maintained that, other than being

liable for basic corporate income tax or the franchise tax, whichever was

lower, respondent was clearly exempted from all other taxes, including OCT,

by virtue of the “in lieu of all taxes” clause in Section 13 of Presidential

Decree No. 1590.

 

Petitioner failed to act on the request for refund of respondent, which

prompted respondent to file on 4 June 2003, with the CTA in Division, a

Petition for Review, docketed as CTA Case No. 6735.  Respondent sought

the refund of the amount P127,138.92, representing OCT, which PLDT

erroneously collected from respondent for the second, third and fourth

quarters of 2001.[40][8]  The claim of respondent for the refund of the OCT

for the first quarter of 2001, amounting to P75,323.26,  had already

prescribed after the passing of more than two years since said amount was

paid.

 

Respondent alleged in its Petition that per its computation, reflected in its

annual income tax return, it incurred a net loss in 2001 resulting in zero

basic corporate income tax liability, which was necessarily lower than the

franchise tax due on its gross revenues.  Respondent argued that in opting

for the basic corporate income tax, regardless of whether or not it actually

paid any amount as tax, it was already entitled to the exemption from all

other taxes granted to it by Section 13 of Presidential Decree No. 1590. [41]

[9]

 

After a hearing on the merits, the CTA First Division rendered a Decision[42]

[10] dated 14 June 2006, the dispositive part of which reads:

 

WHEREFORE, the Petition for Review is hereby GRANTED.  Respondent is

ORDERED to refund to the petitioner the substantiated amount of

P126,243.80 representing the erroneously collected 10% Overseas

Communications Tax for the period April to December 2001.

 

The CTA First Division reasoned that under Section 13 of Presidential Decree

No. 1590, respondent had the option to choose between two alternatives:

the basic corporate income tax and the franchise tax, whichever would

result in a lower amount of tax, and this would be in lieu of all other taxes,

with the exception only of tax on real property.  In the event that

respondent incurred a net loss for the taxable year resulting in zero basic

corporate income tax liability, respondent could not be required to pay the

franchise tax before it could avail itself of the exemption from all other taxes

under Section 13 of Presidential Decree No. 1590.  The possibility that

respondent would incur a net loss for a given taxable period and, thus, have

zero liability for basic corporate income tax, was already anticipated by

Section 13 of Presidential Decree No. 1590, the very same section granting

respondent tax exemption, since it authorized respondent to carry over its

excess net loss as a deduction for the next five taxable years. 

 

However, the CTA First Division held that out of the total amount of

P127,138.92 respondent sought to refund, only the amount of P126,243.80

was supported by either original or photocopied PLDT billing statements,

original office receipts, and original copies of check vouchers of respondent. 

Respondent was also able to prove, through testimonial evidence, that the

OCT collected by PLDT from it was included in the quarterly percentage tax

returns of PLDT for the second, third, and fourth quarters of 2001, which

were submitted to and received by an authorized agent bank of the BIR.[43]

[11]

 

Not satisfied with the foregoing Decision dated 14 June 2006, petitioner filed

a Motion for Reconsideration, which was denied by the CTA First Division in

a Resolution dated 17 October 2006. [44][12]

 

Petitioner filed an appeal with the CTA en banc, docketed as CTA EB No.

221. The latter promulgated its Decision[45][13] on 9 August 2007 denying

petitioner’s appeal.  The CTA En Banc found that Presidential Decree No.

1590 does not provide that only the actual payment of basic corporate

income tax or franchise tax by respondent would entitle it to the tax

exemption provided under Section 13 of the latter’s franchise.  Like the CTA

First Division, the CTA en banc ruled that by providing for net loss carry-

over, Presidential Decree No. 1590 recognized the possibility that

respondent would end up with a net loss in the computation of its taxable

income, which would mean zero liability for basic corporate income tax.  The

CTA En Banc further cited Commissioner of Internal Revenue v. Philippine

Airlines, Inc.[46][14] (PAL case) to support its conclusions.  In the said case,

this Court declared that despite the fact that respondent did not pay any

basic corporate income tax, given its net loss position for the taxable years

concerned, it was still exempted from paying all other taxes, including final

withholding tax on interest income, pursuant to Section 13 of Presidential

Decree No. 1590.  Lastly, the CTA en banc sustained the finding of the CTA

First Division that respondent was only able to establish its claim for OCT

refund in the amount of P126,243.80.

 

The CTA En Banc denied petitioner’s Motion for Reconsideration in a

Resolution dated 11 October 2007.[47][15]

 

Hence, the present Petition for Review where the petitioner raises the

following issues:

 

I

 

THE COURT OF TAX APPEALS EN BANC ERRED IN HOLDING THAT THE

PHRASE “IN LIEU OF ALL OTHER TAXES” IN SECTIONS 13 AND 14 OF

PRESIDENTIAL DECREE NO. 1590 DOES NOT CONTEMPLATE THE

FULFILLMENT OF A CONDITION BEFORE THE EXEMPTION FROM ALL OTHER

TAXES MAY BE APPLIED; AND

 

II

 

TAX REFUNDS ARE IN THE NATURE OF TAX EXEMPTIONS.  AS SUCH, THEY

SHOULD BE CONSTRUED STRICTISSIMI JURIS AGAINST THE PERSON OR

ENTITY CLAIMING THE EXEMPTION.[48][16]

 

 

The present Petition is without merit.

 

Petitioner argues that the PAL case is not applicable to the case at bar, since

the former involves final withholding tax on interest income, while the latter

concerns another type of tax, the OCT.[49][17] 

 

Petitioner’s argument is untenable.

 

Pertinent portions of Section 13 of Presidential Decree No. 1590 are quoted

hereunder:

 

Section 13.  In consideration of the franchise and rights hereby granted, the

grantee shall pay to the Philippine Government during the life of this

franchise, whichever of subsections (a) and (b) hereunder will result in a

lower tax:

 

(a)    The basic corporate income tax based on the grantee’s annual net

taxable income computed in accordance with the provisions of the National

Internal Revenue Code; or

 

(b)   A franchise tax of two per cent (2%) of the gross revenues, derived by

the grantee from all sources, without distinction as to transport or non-

transport operations; provided, that with respect to international air-

transport service, only the gross passenger, mail and freight revenues from

its outgoing flights shall be subject to this tax.

 

The tax paid by grantee under either of the above alternatives shall be in

lieu of all other taxes, duties, royalties, registration, license, and other fees

and charges of any kind, nature, or description imposed, levied, established,

assessed or collected by any municipal, city, provincial, or national authority

or government agency, now or in the future x x x

 

x x x x

 

The grantee, shall, however, pay the tax on its real property in conformity

with existing law.

 

 

The language used in Section 13 of Presidential Decree No. 1590, granting

respondent tax exemption, is clearly all-inclusive.  The basic corporate

income tax or franchise tax paid by respondent shall be “in lieu of all

other taxes, duties, royalties, registration, license, and other fees

and charges of any kind, nature, or description imposed, levied,

established, assessed or collected by any municipal, city,

provincial, or national authority or government agency, now or in

the future x x x,” except only real property tax.  Even a meticulous

examination of Presidential Decree No. 1590 will not reveal any provision

therein limiting the tax exemption of respondent to final withholding tax on

interest income or excluding from said exemption the OCT.

 

Moreover, although the PAL case may involve a different type of tax, certain

pronouncements made by the Court therein are still significant in the instant

case.

 

            In the PAL case, petitioner likewise opposed the claim for refund of

respondent based on the argument that the latter was not exempted from

final withholding tax on interest income, because said tax should be deemed

part of the basic corporate income tax, which respondent had opted to pay. 

This Court was unconvinced by petitioner’s argument, ratiocinating that

“basic corporate income tax,” under Section 13(a) of Presidential Decree No.

1590, relates to the general rate of 35% (reduced to 32% by the year 2000)

imposed on taxable income by Section 27(A) of the NIRC.  Although the

definition of “gross income” is broad enough to include all passive incomes,

the passive incomes already subjected to different rates of final tax to be

withheld at source shall no longer be included in the computation of gross

income, which shall be used in the determination of taxable income.  The

interest income of respondent is already subject to final withholding tax of

20%, and no longer to the basic corporate income tax of 35%.  Having

established that final tax on interest income is not part of the basic

corporate income tax, then the former is considered as among “all other

taxes” from which respondent is exempted under Section 13 of Presidential

Decree No. 1590.

 

It is true that the discussion in the PAL case on “gross income” is immaterial

to the case at bar.  OCT is not even an income tax.  It is a business tax,

which the government imposes on the gross annual sales of operators of

communication equipment sending overseas dispatches, messages or

conversations from the Philippines.  According to Section 120 of the NIRC,

the person paying for the services rendered (respondent, in this case) shall

pay the OCT to the person rendering the service (PLDT); the latter, in turn,

shall remit the amount to the BIR.  If this Court deems that final tax on

interest income – which is also an income tax, but distinct from basic

corporate income tax – is included among “all other taxes” from which

respondent is exempt, then with all the more reason should the Court

consider OCT, which is altogether a different type of tax, as also covered by

the said exemption.

 

Petitioner further avers that respondent cannot avail itself of the benefit of

the “in lieu of all other taxes” proviso in Section 13 of Presidential Decree

No. 1590 when it made no actual payment of either the basic corporate

income tax or the franchise tax. 

 

Petitioner made the same averment in the PAL case, which the Court

rejected for the following reasons:

 

A careful reading of Section 13 rebuts the argument of the CIR that

the “in lieu of all other taxes” proviso is a mere incentive that

applies only when PAL actually pays something.  It is clear that PD

1590 intended to give respondent the option to avail itself of Subsection (a)

or (b) as consideration for its franchise.  Either option excludes the payment

of other taxes and dues imposed or collected by the national or the local

government.  PAL has the option to choose the alternative that results in

lower taxes.  It is not the fact of tax payment that exempts it, but the

exercise of its option.

 

Under Subsection (a), the basis for the tax rate is respondent’s annual net

taxable income, which (as earlier discussed) is computed by subtracting

allowable deductions and exemptions from gross income.  By basing the tax

rate on the annual net taxable income, PD 1590 necessarily recognized the

situation in which taxable income may result in a negative amount and thus

translate into a zero tax liability.

 

x x x x

 

The fallacy of the CIR’s argument is evident from the fact that the

payment of a measly sum of one peso would suffice to exempt PAL

from other taxes, whereas a zero liability arising from its losses

would not.  There is no substantial distinction between a zero tax

and a one-peso tax liability.[50][18] (Emphases ours.)

 

 

In insisting that respondent needs to actually pay a certain amount as basic

corporate income tax or franchise tax, before it can enjoy the tax exemption

granted to it, petitioner places too much reliance on the use of the word

“pay” in the first line of Section 13 of Presidential Decree No. 1590. 

 

It must do well for petitioner to remember that a statute’s clauses and

phrases should not be taken as detached and isolated expressions, but the

whole and every part thereof must be considered in fixing the meaning of

any of its parts.[51][19]  A strict interpretation of the word “pay” in Section

13 of Presidential Decree No. 1590 would effectively render nugatory the

other rights categorically conferred upon the respondent by its franchise. 

 

Section 13 of Presidential Decree No. 1590 clearly gives respondent the

option to “pay” either basic corporate income tax on its net taxable income

or franchise tax on its gross revenues, whichever would result in lower tax. 

The rationale for giving respondent such an option is explained in the PAL

case, to wit:

 

Notably, PAL was owned and operated by the government at the time the

franchise was last amended.  It can reasonably be contemplated that PD

1590 sought to assist the finances of the government corporation in the

form of lower taxes.  When the respondent operates at a loss (as in the

instant case), no taxes are due; in this [sic] instances, it has a lower tax

liability than that provided by Subsection (b).[52][20]

 

 

In the event that respondent incurs a net loss, it shall have zero liability for

basic corporate income tax, the lowest possible tax liability.   There being no

qualification to the exercise of its options under Section 13 of Presidential

Decree No. 1590, then respondent is free to choose basic corporate income

tax, even if it would have zero liability for the same in light of its net loss

position for the taxable year.  Additionally, a ruling by this Court compelling

respondent to pay a franchise tax when it incurs a net loss and is, thus, not

liable for any basic corporate income tax would be contrary to the evident

intent of the law to give respondent options and to make the latter liable for

the least amount of tax.    

 

Moreover, then President Ferdinand E. Marcos, the author of Presidential

Decree No. 1590, was mindful of the possibility that respondent would incur

a net loss for a taxable year, resulting in zero tax liability for basic corporate

income tax, when he included in the franchise of respondent the following

provisions:

 

For the purposes of computing the basic corporate income tax as provided

herein, the grantee is authorized:

 

x x x x

 

(2) To carry over as a deduction from taxable income any net loss incurred

in any year up to five years following the year of such loss.

 

 

In allowing respondent to carry over its net loss for five consecutive years

following the year said loss was incurred, Presidential Decree No. 1590 takes

into account the possibility that respondent shall be in a net loss position for

six years straight, during which it shall have zero basic corporate income tax

liability.  The Court also notes that net loss carry-over may only be used in

the computation of basic corporate income tax.  Hence, if respondent is

required to pay a franchise tax every time it has zero basic corporate

income tax liability due to net loss, then it shall never have the opportunity

to avail itself of the benefit of net loss carry-over.

 

Finally, petitioner contends that according to well-established doctrine, a tax

refund, which is in the nature of a tax exemption, should be construed

strictissimi juris against the taxpayer.[53][21]   However, when the claim for

refund has clear legal basis and is sufficiently supported by evidence, as in

the present case, then the Court shall not hesitate to grant the same. 

 

In its previous discussion, the Court has already established that by merely

exercising its option to pay for basic corporate income tax – even if it had

zero liability for the same due to its net loss position in 2001 – respondent

was already exempted from all other taxes, including the OCT.  Therefore,

respondent is entitled to recover the amount of OCT erroneously collected

from it in 2001.  Also, the CTA, both in Division and en banc, found that

respondent submitted ample evidence to prove its payment of OCT to PLDT

during the second, third, and fourth quarters of 2001, in the total amount of

P126,243.80, which, in turn, was paid by PLDT to the BIR.  Said finding by

the CTA, being factual in nature, is already conclusively binding upon this

Court.  Under our tax system, the CTA acts as a highly specialized body

specifically created for the purpose of reviewing tax cases.  Accordingly, its

findings of fact are generally regarded as final, binding, and conclusive on

this Court, and will not ordinarily be reviewed or disturbed on appeal when

supported by substantial evidence, in the absence of gross error or abuse on

its part.[54][22]

 

WHEREFORE, the instant Petition for Review is DENIED.  The Decision of

the Court of Tax Appeals En Banc dated 9 August 2007 in CTA EB No. 221,

affirming the Decision dated 14 June 2006 of the CTA First Division in CTA

Case No. 6735, which granted the claim of Philippine Airlines, Inc. for a

refund of Overseas Communications Tax erroneously collected from it for

the period April to December 2001, in the amount of P126,243.80, is

AFFIRMED.  No costs.

 

FIRST DIVISION

 

G.R. Nos. L-22805 & L-27858 June 30, 1975

WONDER MECHANICAL ENGINEERING CORPORATION represented by

Mr. LUCIO QUIJANO, President & General Manager, petitioner,

vs.

THE HON. COURT OF TAX APPEALS and THE BUREAU OF INTERNAL

REVENUE BEING REPRESENTED BY THE COMMISSIONER OF

INTERNAL REVENUE, respondents.

 

ESGUERRA, J.:

Two petitions for review of the decisions of the respondent Court of Tax

Appeals in G.R. Nos. L-22805 and L-27858. The first decision (L-22805)

dismissed the appeal of petitioner Wonder Mechanical Engineering

Corporation in C.T.A. Case No. 1036, "for lack of jurisdiction, the same

having been filed beyond the 30 day period prescribed in Section 11 of

Republic Act No. 1125", and confirmed the decision of respondent

Commissioner of Internal Revenue which "assessed against petitioner the

total amount of P69,699.56 as fixed taxes and sales and percentage taxes,

inclusive of the 25% surcharge for the years 1953-54". The second decision

(L-27858) ordered the same petitioner to pay, respondent Commissioner of

Internal Revenue the amount of "P25,080.91 as deficiency sales and

percentage taxes from 1957 to June 30, 1960, inclusive of the 25%

surcharge, plus costs", based on the common principal issue of "whether or

not the manufacture and sale of steel chairs, jeepney parts and other

articles which are not machines for making other products, and job orders

done by petitioner come within the purview of the tax exemption granted it

under Republic Act Nos. 35 and 901."

Petitioner is a corporation which was granted tax exemption privilege under

Republic Act 35 in respect to the "manufacture of machines for making

cigarette paper, pails, lead washers, rivets, nails, candies. chairs, etc.". The

tax exemption expired on May 30, 1951. On September 14, 1953, petitioner

applied with the Secretary of Finance for reinstatement of the exemption

privilege under the provisions of R.A. 901 approved July 7, 1954, the

reinstatement to commence on June 20, 1953, the date Republic Act 901

took effect.

In G.R. No. L-22805, respondent Commissioner of Internal Revenue,

sometime in 1955, caused the investigation of petitioner for the purpose of

ascertaining whether or not it had any tax liability. The findings of Revenue

Examiner Alfonso B. Camillo on September 30, 1955, stated "that during the

years 1953 and 1954 the petitioner was engaged in the business of

manufacturing various articles, namely, auto spare parts, flourescent lamp

shades, rice threshers, post clips, radio screws, washers, electric irons,

kerosene stoves and other articles; that it also engaged in business of

electroplating and in repair of machines; that although it was engaged in

said business, it did not provide itself with the proper privilege tax receipts

as required by Section 182 of the Tax Code and did not pay the sales tax on

its gross sales of articles manufactured by it and the percentage tax due on

the gross receipts of its electroplating and repair business pursuant to

Sections 183, 185, 186 and 191 of the same Code".

Based on the foregoing, respondent Commissioner of Internal Revenue

assessed against petitioner on November 29, 1955, the total amount of

P69,699.56 as fixed taxes and sales and percentage taxes, inclusive of the

25% surcharge, as follows:

Sales and percentage taxes for

1953 and 1954 P55,719.65

25% surcharge 13,929.91

C-14 fixed tax (1953-1954) 20.00

C-4 (27) fixed tax (1954) 10.00

C-4 (37) fixed tax (1953-1954) 20.00

TOTAL P69.699.56

Respondent also suggested the payment of the amount of P3,300.00 as

penalties in extrajudicial settlement of petitioner's violations of Sections

182, 183, 185, 186 and 191 of the Tax Code and of the Bookkeeping

Regulations (p. 25, B.I.R. rec.).

In G.R. No. L-27858, respondent Commissioner of Internal Revenue caused

the investigation of petitioner for the purpose of ascertaining its tax liability

on August 10, 1960, as a result of which on December 7, 1960, Revenue

Examiner Pedro Cabigao reported that "petitioner had manufactured and

sold steel chairs without paying the 30% sales tax imposed by Section

185(c) of the Tax Code; accepted job orders without paying the 3% tax in

gross receipts imposed by Section 191 of the same Code; manufactured and

sold other articles subject to 7% sales tax under Section 186 of the same

Code but not covered by the tax exemption privilege; failed to register with

the Bureau of Internal Revenue books of accounts and sales invoices as

required by the Bookkeeping Regulations; failed to indicate in the sales

invoices the Residence Certificate number of customers who purchased

articles worth P50.00 or over, in violation of the Bookkeeping Regulation;

and failed to produce its books of accounts and business records for

inspection and examination when required to do so by the revenue

examiner in violation of the Bookkeeping Regulations (pp. 17-18 B.I.R. rec.)".

Based on the foregoing, the respondent Commissioner of Internal Revenue

on October 6, 1961, assessed against the petitioner "the payment of

P25,080.91 as deficiency percentage taxes and 25% surcharge for 1957 to

1960 and suggested the payment of P5,020.00 as total compromise penalty

in extrajudicial settlement of the various violations of the Tax Code and

Bookkeeping Regulation (pp. 28-29 B.I.R. rec.).1äwphï1.ñët "

Regarding the compromise penalty suggested by respondent Bureau of

Internal Revenue in both G.R. L-22805 and L-27858, it does not appear that

petitioner accepted the imposition of the compromise amounts. Hence We

find no compelling reasons to alter the decision of respondent Court of Tax

Appeals in L-27858 that —

With respect to the compromise penalty in the total amount of P5,020.00

suggested by respondent to be paid by petitioner, it is now a well settled

doctrine that compromise penalty cannot be imposed or collected without

the agreement or conformity of the tax payer (Collector of Internal Revenue

vs. University of Santo Tomas, et al., G.R. Nos. L-11274 & L-11280,

November 28, 1958; the Collector of Internal Revenue v. Bautista, et al.,

G.R. Nos. L-12250 & 12259, May 27, 1959; the Philippines International Fair,

Inc. v. Collector of Internal Revenue, G.R. Nos. L-12928 & L-12932, March

31, 1962). (Emphasis for emphasis)

Inasmuch as the figures appearing in the Bureau of Internal Revenue's tax

delinquency assessments in both cases (L-22805 and L-27858) are not in

dispute, and the respondent Court of Tax Appeals ruled in its decision in

G.R. No. L-27858 on the lone issue presented in both cases that the tax

assessment of "P25,080.91 as deficiency sales and percentage taxes from

1957 to June 30, 1960" must be paid by petitioner as the sale of other

manufactured items did not come within the purview, of the tax exemption

granted petitioner. We find it no longer necessary to make a definite stand

on the question raised in L-22805 as to the alleged error committed by

respondent Court of Tax Appeals in dismissing the appeal in C.T.A. 1036

(subject matter of L-22805) for lack of jurisdiction, the same having been

filed beyond the 30-day period prescribed in Section 11 of Republic Act

1126. Suffice it to say on that issue that appellants must perfect their appeal

from the decision of the Commissioner of Internal Revenue to the Court of

Tax Appeals within the statutory period of 30 days, otherwise said Court

acquires no jurisdiction.

We turn Our attention on the vital issue of tax exemption claimed by

petitioner as basis for questioning the tax assessments made by respondent

Bureau of Internal Revenue in both cases (G.R. L-22805 and 27858). There is

no doubt that petitioner was given a Certificate of Tax Exemption By the

Secretary of Finance on July 7,1954, as follows:

Be it known that upon application filed by Wonder Mechanical Engineering

Corporation, 1310 M. Hizon, Sta. Cruz, Manila, in respect to the manufacture

of machines for making cigarette paper, pails, lead washers, nails, rivets,

candies, etc., the said industry/industries have been determined to be new

and necessary under the provisions of Republic Act No. 901 (or of Republic

Act No. 35), in view of which this Certificate of Tax Exemption has been

issued entitling the abovenamed firm/person to tax exemption from the

payment of taxes directly payable by it/him in respect to the said

industry/industries until December 31, 1958, and thereafter to a diminishing

exemption until June 20, 1959, as provided in section 1 of Republic Act No.

901, except the exemption from the income tax which will wholly terminate

on June 20, 1955 (B.I.R. rec., page 13). (Emphasis for emphasis)

Republic Act 35, approved on September 30, 1946, grants to persons "who

or which shall engage in a new and necessary industry", for a period of four

years from the date of the organization of such industry, exemption "from

the payment of all internal revenue taxes directly payable by such person".

Republic Act 901, approved on June 20, 1953, which amended Republic Act

35 by extending the period of tax exemption, elaborated on the meaning of

"new and necessary industry" as follows:

Sec. 2. For the purposes of this Act, a "new industry is one not existing or

operating on a commercial scale prior to January first, nineteen hundred and

forty-five. Where several applications for exemption are filed in connection

with the same kind of industry, the Secretary of Finance shall approve them

in the order in which they have been filed until the total output or

production of those already granted exemption for that particular kind of

industry is sufficient to meet local demand or consumption: Provided, That

the limitation shall not apply to products intended for export. (Emphasis for

emphasis)

Sec. 3. For the purposes of this Act, a "necessary" industry is one complying

with the following requirements:

(1) Where the establishment of the industry will contribute to the attainment

of a stable and balanced national economy.

(2) Where the industry will operate on a commercial scale in conformity with

up-to-date practices and will make its products available to the general

public in quantities and at prices which justify its operation with a

reasonable degree of permanency.

(3) Where the imported raw materials represent a value not exceeding sixty

percentum of the manufacturing cost plus reasonable selling price and

administrative expenses: Provided, That a grantee of tax exemption shall

use materials of domestic origin, growth, or manufacture wherever the same

are available or could be made available in reasonable quantity and quality

and at reasonable prices. ... (Emphasis for emphasis) .

From the above-quoted provisions of the law, it is clear that an industry to

be entitled to tax exemption must be "new and necessary" and that the tax

exemption was granted to new and necessary industries as an incentive to

greater and adequate production of products made scarce by the second

world war which wrought havoc on our national economy, a production

"sufficient to meet local demand or consumption"; that will contribute "to

the attainment of a stable and balanced national economy"; an industry that

"will make its products available to the general public in quantities and at

prices which will justify its operation."

Viewed in the light of the foregoing reasons for the State grant of tax

exemption, We are firmly convinced that petitioner was granted tax

exemption in the manufacture and sale "of machines for making cigarette

paper, pails, lead washers, nails, rivets, candies, etc.", as explicitly stated in

the Certificate of Exemption (Annex A of the petition in G.R. No. L-22805),

but certainly not for the manufacture and sale of the articles produced by

those machines.

That such was the intention of the State when it granted tax exemption to

the petitioner in the manufacture of machines for making certain products

could be deduced from the following:

Before the approval of the original grant of tax exemption to Petitioner for

engaging in a new and necessary industry under Republic Act No. 35, the

then Secretary of Finance submitted a memorandum to the Cabinet, dated

March 3, 1949, the pertinent portions of which read as follows:

"... If (petitioner) turns out machines whenever orders therefore are

received. Among its products are a medicine tablet wrapping machine for

Dr. Agustin Liboro, photographs of which are attached, a loud speaker for

the Manila Supply, and a "Lompia wrapping" machine for a certain

Chinese. ...

The manufacture of the above-mentioned machines can be considered a

new and necessary industry for the purpose of Republic Act No. 35. It is

recommended that the benefits of said Act be extended to this corporation

in respect to said industry.

Respectfully submitted:

(SGD.) PIO PEDROSA

Secretary"

The letter of the Executive Secretary to the petitioner dated May 30, 1949,

reads as follows:

"Sirs:

I have the honor to advise you that His Excellency, the President, has today,

upon recommendation of the Honorable, the Secretary of Finance, approved

your application for exemption from the payment of internal revenue taxes

on your business of manufacturing machines for making a number of

products, such as cigarette paper, pails, lead washers, rivets, nails, candies,

chairs, etc., under the provisions of Section 2 of Republic Act No. 35.

Very respectfully,

(SGD.) TEODORO EVANGELISTA

Executive Secretary"

(Emphasis for emphasis)

Aside from the clarity of the State's intention in granting tax exemption to

petitioner in so far as it manufactures machines for making certain products,

as manifested in the acts of its duly authorized representatives in the

Executive branch of the government, it is quite difficult for Us to believe that

the manufacture of steel chairs, jeep parts, and other articles not

constituting machines for making certain products would fall under the

classification of "new and necessary" industries envisioned in Republic Acts

35 and 901 as to entitle the petitioner to tax exemption.

There is no way to dispute the "cardinal rule in taxation that exemptions

therefrom are highly disfavored in law and he who claims tax exemption

must be able to justify his claim or right thereto by the dearest grant of

organic or statute law" as succinctly stated in the decision of the respondent

Court of Tax Appeals in C.T.A. No. 1265 (L-27858).1äwphï1.ñët

Tax exemption must be clearly expressed and cannot be established by

implication. Exemption from a common burden cannot be permitted to exist

upon vague implication. (Asiatic Petroleum Co. vs. Llanes, 49 Phil. 466;

House vs. Posadas, 53 Phil. 338; Collector of Internal Revenue vs. Manila

Jockey Club, Inc., G.R. No. L-8755, March 23, 1956, 98 Phil. 676).

WHEREFORE, the decisions of respondent Court of Tax Appeals in these two

cases are affirmed. Costs against the petitioner in both cases.

EN BANC

G.R. No. 143867            March 25, 2003

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, INC., petitioner,

vs.

CITY OF DAVAO and ADELAIDA B. BARCELONA, in her capacity as

the City Treasurer of Davao, respondents.

R E S O L U T I O N

MENDOZA, J.:

Petitioner seeks a reconsideration of the decision of the Second Division in

this case. Because the decision bears directly on issues involved in other

cases brought by petitioner before other Divisions of the Court, the motion

for reconsideration was referred to the Court en banc for resolution.1 The

parties were heard in oral arguments by the Court en banc on January 21,

2003 and were later granted time to submit their memoranda. Upon the

filing of the last memorandum by the City of Davao on February 10, 2003,

the motion was deemed submitted for resolution.

To provide perspective, it will be helpful to restate the basic facts.

Petitioner PLDT paid a franchise tax equal to three percent (3%) of its gross

receipts. The franchise tax was paid "in lieu of all taxes on this franchise or

earnings thereof" pursuant to R.A. No. 7082 amending its charter, Act. No.

3436. The exemption from "all taxes on this franchise or earnings thereof"

was subsequently withdrawn by R.A. No. 7160 (Local Government Code of

1991), which at the same time gave local government units the power to tax

businesses enjoying a franchise on the basis of income received or earned

by them within their territorial jurisdiction. The Local Government Code

(LGC) took effect on January 1, 1992.

The pertinent provisions of the LGC state:

Sec. 137. Franchise Tax. — Notwithstanding any exemption granted by any

law or other special law, the province may impose a tax on businesses

enjoying a franchise, at a rate not exceeding fifty percent (50%) of one

percent (1%) of the gross annual receipts for the preceding calendar year

based on the incoming receipt, or realized, within its territorial

jurisdiction. . . .

Sec. 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.

Pursuant to these provisions, the City of Davao enacted Ordinance No. 519,

Series of 1992, which in pertinent part provides:

Notwithstanding any exemption granted by any law or other special law,

there is hereby imposed a tax on businesses enjoying a franchise, at a rate

of Seventy-five percent (75%) of one percent (1%) of the gross annual

receipts for the preceding calendar year based on the income or receipts

realized within the territorial jurisdiction of Davao City.

Subsequently, Congress granted in favor of Globe Mackay Cable and Radio

Corp. (Globe)2 and Smart Information Technologies, Inc. (Smart)3 franchises

which contained "in lieu of all taxes" provisos. In 1995, it enacted R.A. No.

7925 (Public Telecommunications Policy of the Philippines), § 23 of which

provides that "Any advantage, favor, privilege, exemption, or immunity

granted under existing franchises, or may hereafter be granted, shall ipso

facto become part of previously granted telecommunications franchises and

shall be accorded immediately and unconditionally to the grantees of such

franchises." The law took effect on March 16, 1995.

In January 1999, when PLDT applied for a mayor’s permit to operate its

Davao Metro Exchange, it was required to pay the local franchise tax for the

first to the fourth quarter of 1999 which then had amounted to

P3,681,985.72. PLDT challenged the power of the city government to collect

the local franchise tax and demanded a refund of what it had paid as local

franchise tax for the year 1997 and for the first to the third quarters of 1998.

For this reason, it filed a petition in the Regional Trial Court of Davao.

However, its petition was dismissed and its claim for exemption under R.A.

No. 7925 was denied. The trial court ruled that the LGC had withdrawn tax

exemptions previously enjoyed by persons and entities and authorized local

government units to impose a tax on businesses enjoying franchises within

their territorial jurisdictions, notwithstanding the grant of tax exemption to

them. Petitioner, therefore, brought this appeal.

In its decision of August 22, 2001, this Court, through its Second Division,

held that R.A. No. 7925, § 23 cannot be so interpreted as granting petitioner

exemption from local taxes because the word "exemption," taking into

consideration the context of the law, does not mean "tax exemption." Hence

this motion for reconsideration.

The question is whether, by virtue of R.A. No. 7925, § 23, PLDT is again

entitled to exemption from the payment of local franchise tax in view of the

grant of tax exemption to Globe and Smart.

Petitioner contends that because their existing franchises contain "in lieu of

all taxes" clauses, the same grant of tax exemption must be deemed to

have become ipso facto part of its previously granted telecommunications

franchise. But the rule is that tax exemptions should be granted only by

clear and unequivocal provision of law "expressed in a language too plain to

be mistaken."4 If, as PLDT contends, the word "exemption" in R.A. No. 7925

means "tax exemption" and assuming for the nonce that the charters of

Globe and of Smart grant tax exemptions, then this runabout way of

granting tax exemption to PLDT is not a direct, "clear and unequivocal" way

of communicating the legislative intent.

But the best refutation of PLDT’s claim that R.A. No. 7925, § 23 grants tax

exemption is the fact that after its enactment on March 16, 1995, Congress

granted several franchises containing both an "equality clause" similar to §

23 and an "in lieu of all taxes" clause. If the equality clause automatically

extends the tax exemption of franchises with "in lieu of all taxes" clauses,

there would be no need in the same statute for the "in lieu of all taxes"

clause in order to extend its tax exemption to other franchises not

containing such clause. For example, the franchise of Island Country

Telecommunications, Inc., granted under R.A. No. 7939 and which took

effect on March 22, 1995, contains the following provisions:

Sec. 8. Equality Clause. — If any subsequent franchise for

telecommunications service is awarded or granted by the Congress of the

Philippines with terms, privileges and conditions more favorable and

beneficial than those contained in this Act, then the same privileges or

advantages shall ipso facto accrue to the herein grantee and be deemed

part of this Act.

Sec. 10. Tax Provisions. — The grantee shall be liable to pay the same taxes

on their real estate, buildings and personal property exclusive of this

franchise, as other persons or telecommunications entities are now or

hereafter may be required by law to pay. In addition hereto, the grantee, its

successors or assigns, shall pay a franchise tax equivalent to three percent

(3%) of all gross receipts transacted under this franchise, and the said

percentage shall be in lieu of all taxes on this franchise or earnings thereof;

Provided, That the grantee shall continue to be liable for income taxes

payable under Title II of the National Internal Revenue Code. The grantee

shall file the return with and pay the taxes due thereon to the Commissioner

of Internal Revenue or his duly authorized representatives in accordance

with the National Revenue Code and the return shall be subject to audit by

the Bureau of Internal Revenue. (Emphasis added)

Similar provisions ("in lieu of all taxes" and equality clauses) are also found

in the franchises of Cruz Telephone Company, Inc.,5 Isla Cellular

Communications, Inc.,6 and Islatel Corporation.7

We shall now turn to the other points raised in the motion for

reconsideration of PLDT.

First. Petitioner contends that the legislative intent to promote the

development of the telecommunications industry is evident in the use of

words as "development," "growth," and "financial viability," and that the

way to achieve this purpose is to grant tax exemption or exclusion to

franchises belonging in this industry. Furthermore, by using the words

"advantage," "favor," "privilege," "exemption," and "immunity" and the

terms "ipso facto," "immediately," and "unconditionally," Congress intended

to automatically extend whatever tax exemption or tax exclusion has been

granted to the holder of a franchise enacted after the LGC to the holder of a

franchise enacted prior thereto, such as PLDT.

The contention is untenable. The thrust of the law is to promote the gradual

deregulation of entry, pricing, and operations of all public

telecommunications entities and thus to level the playing field in the

telecommunications industry. An intent to grant tax exemption cannot even

be discerned from the law. The records of Congress are bereft of any

discussion or even mention of tax exemption. To the contrary, what the

Chairman of the Committee on Transportation, Rep. Jerome V. Paras,

mentioned in his sponsorship of H.B. No. 14028, which became R.A. No.

7925, were "equal access clauses" in interconnection agreements, not tax

exemptions. He said:

There is also a need to promote a level playing field in the

telecommunications industry. New entities must be granted protection

against dominant carriers through the encouragement of equitable access

charges and equal access clauses in interconnection agreements and the

strict policing of predatory pricing by dominant carriers. Equal access should

be granted to all operators connecting into the interexchange network.

There should be no discrimination against any carrier in terms of priorities

and/or quality of service.8

Nor does the term "exemption" in § 23 of R.A. No. 7925 mean tax

exemption. The term refers to exemption from certain regulations and

requirements imposed by the National Telecommunications Commission

(NTC). For instance, R.A. No. 7925, § 17 provides: "The Commission shall

exempt any specific telecommunications service from its rate or tariff

regulations if the service has sufficient competition to ensure fair and

reasonable rates or tariffs." Another exemption granted by the law in line

with its policy of deregulation is the exemption from the requirement of

securing permits from the NTC every time a telecommunications company

imports equipment.9

Second. PLDT says that the policy of the law is to promote healthy

competition in the telecommunications industry.10 According to PLDT, the

LGC did not repeal the "in lieu of all taxes" provision in its franchise but only

excluded from it local taxes, such as the local franchise tax. However, some

franchises, like those of Globe and Smart, which contain "in lieu of all taxes"

provisions were subsequently granted by Congress, with the result that the

holders of franchises granted prior to January 1, 1992, when the LGC took

effect, had to pay local franchise tax in view of the withdrawal of their local

tax exemption. It is argued that it is this disparate situation which R.A. No.

7925, § 23 seeks to rectify.

One can speak of healthy competition only between equals. For this reason,

the law seeks to break up monopoly in the telecommunications industry by

gradually dismantling the barriers to entry and granting to new

telecommunications entities protection against dominant carriers through

equitable access charges and equal access clauses in interconnection

agreements and through the strict policing of predatory pricing by dominant

carriers.11 Interconnection among carriers is made mandatory to prevent a

dominant carrier from delaying the establishment of connection with a new

entrant and to deter the former from imposing excessive access charges.12

That is also the reason there are franchises13 granted by Congress after the

effectivity of R.A. No. 7925 which do not contain the "in lieu of all taxes"

clause, just as there are franchises, also granted after March 16, 1995,

which contain such exemption from other taxes.14 If, by virtue of § 23, the

tax exemption granted under existing franchises or thereafter granted is

deemed applicable to previously granted franchises (i.e., franchises granted

before the effectivity of R.A. No. 7925 on March 16, 1995), then those

franchises granted after March 16, 1995, which do not contain the "in lieu of

all taxes" clause, are not entitled to tax exemption. The "in lieu of all taxes"

provision in the franchises of Globe and Smart, which are relatively new

entrants in the telecommunications industry, cannot thus be deemed

applicable to PLDT, which had virtual monopoly in the telephone service in

the country for a long time,15 without defeating the very policy of leveling

the playing field of which PLDT speaks.

Third. Petitioner argues that the rule of strict construction of tax exemptions

does not apply to this case because the "in lieu of all taxes" provision in its

franchise is more a tax exclusion than a tax exemption. Rather, the

applicable rule should be that tax laws are to be construed most strongly

against the government and in favor of the taxpayer.

This is contrary to the uniform course of decisions16 of this Court which

consider "in lieu of all taxes" provisions as granting tax exemptions. As such,

it is a privilege to which the rule that tax exemptions must be interpreted

strictly against the taxpayer and in favor of the taxing authority applies.

Along with the police power and eminent domain, taxation is one of the

three necessary attributes of sovereignty. Consequently, statutes in

derogation of sovereignty, such as those containing exemption from

taxation, should be strictly construed in favor of the state. A state cannot be

stripped of this most essential power by doubtful words and of this highest

attribute of sovereignty by ambiguous language.17

Indeed, both in their nature and in their effect there is no difference

between tax exemption and tax exclusion. Exemption is an immunity or

privilege; it is freedom from a charge or burden to which others are

subjected.18 Exclusion, on the other hand, is the removal of otherwise

taxable items from the reach of taxation, e.g., exclusions from gross income

and allowable deductions.19 Exclusion is thus also an immunity or privilege

which frees a taxpayer from a charge to which others are subjected.

Consequently, the rule that tax exemption should be applied in strictissimi

juris against the taxpayer and liberally in favor of the government applies

equally to tax exclusions. To construe otherwise the "in lieu of all taxes"

provision invoked is to be inconsistent with the theory that R.A. No. 7925, §

23 grants tax exemption because of a similar grant to Globe and Smart.

Petitioner cites Cagayan Electric Power & Light Co., Inc. v. Commissioner of

Internal Revenue20 in support of its argument that a "tax exemption" is

restored by a subsequent law re-enacting the "tax exemption." It contends

that by virtue of R.A. No. 7925, its tax exemption or exclusion was restored

by the grant of tax exemptions to Globe and Smart. Cagayan Electric Power

& Light Co., Inc., however, is not in point. For there, the re-enactment of the

exemption was made in an amendment to the charter of Cagayan Electric

Power and Light Co.

Indeed, petitioner’s justification for its claim of tax exemption rests on a

strained interpretation of R.A. No. 7925, § 23. For petitioner’s claim for

exemption is not based on an amendment to its charter but on a circuitous

reasoning involving inquiry into the grant of tax exemption to other

telecommunications companies and the lack of such grant to others,21 when

Congress could more clearly and directly have granted tax exemption to all

franchise holders or amend the charter of PLDT to again exempt it from tax

if this had been its purpose.

The fact is that after petitioner’s tax exemption by R.A. No. 7082 had been

withdrawn by the LGC,22 no amendment to re-enact its previous tax

exemption has been made by Congress. Considering that the taxing power

of local government units under R.A. No. 7160 is clear and is ordained by

the Constitution, petitioner has the heavy burden of justifying its claim by a

clear grant of exemption.23

Tax exemptions should be granted only by clear and unequivocal provision

of law on the basis of language too plain to be mistaken.24 They cannot be

extended by mere implication or inference. Thus, it was held in Home

Insurance & Trust Co. v. Tennessee25 that a law giving a corporation all the

"powers, rights reservations, restrictions, and liabilities" of another company

does not give an exemption from taxation which the latter may possess. In

Rochester R. Co. v. Rochester,26 the U.S. Supreme Court, after reviewing

cases involving the effect of the transfer to one company of the powers and

privileges of another in conferring a tax exemption possessed by the latter,

held that a statute authorizing or directing the grant or transfer of the

"privileges" of a corporation which enjoys immunity from taxation or

regulation should not be interpreted as including that immunity. Thus:

We think it is now the rule, notwithstanding earlier decisions and dicta to the

contrary, that a statute authorizing or directing the grant or transfer of the

"privileges" of a corporation which enjoys immunity from taxation or

regulation should not be interpreted as including that immunity. We,

therefore, conclude that the words "the estate, property, rights, privileges,

and franchises" did not embrace within their meaning the immunity from the

burden of paving enjoyed by the Brighton Railroad Company. Nor is there

anything in this, or any other statute, which tends to show that the

legislature used the words with any larger meaning than they would have

standing alone. The meaning is not enlarged, as faintly suggested, by the

expression in the statute that they are to be held by the successor "fully and

entirely, and without change and diminution," — words of unnecessary

emphasis, without which all included in "estate, property, rights, privileges,

and franchises" would pass, and with which nothing more could pass. On the

contrary, it appears, as clearly as it did in the Phoenix Fire Insurance

Company Case, that the legislature intended to use the words "rights,

franchises, and privileges" in the restricted sense. . . .27

Fourth. It is next contended that, in any event, a special law prevails over a

general law and that the franchise of petitioner giving it tax exemption,

being a special law, should prevail over the LGC, giving local governments

taxing power, as the latter is a general law. Petitioner further argues that as

between two laws on the same subject matter which are irreconcilably

inconsistent, that which is passed later prevails as it is the latest expression

of legislative will.

This proposition flies in the face of settled jurisprudence. In City Government

of San Pablo, Laguna v. Reyes,28 this Court held that the phrase "in lieu of all

taxes" found in special franchises should give way to the peremptory

language of § 193 of the LGC specifically providing for the withdrawal of

such exemption privileges. Thus, the rule that a special law must prevail

over the provisions of a later general law does not apply as the legislative

purpose to withdraw tax privileges enjoyed under existing laws or charters is

apparent from the express provisions of §§ 137 and 193 of the LGC.

As to the alleged inconsistency between the LGC and R.A. No. 7925, this

Court has already explained in the decision under reconsideration that no

inconsistency exists and that the rule that the later law is the latest

expression of the legislature does not apply. The matter need not be further

discussed.

In any case, it is contended, the ruling of the Bureau of Local Government

Finance (BLGF) that petitioner’s exemption from local taxes has been

restored is a contemporaneous construction of § 23 and, as such, it is

entitled to great weight.

The ruling of the BLGF has been considered in this case. But unlike the Court

of Tax Appeals, which is a special court created for the purpose of reviewing

tax cases, the BLGF was created merely to provide consultative services and

technical assistance to local governments and the general public on local

taxation and other related matters.29 Thus, the rule that the "Court will not

set aside conclusions rendered by the CTA, which is, by the very nature of

its function, dedicated exclusively to the study and consideration of tax

problems and has necessarily developed an expertise on the subject, unless

there has been an abuse or improvident exercise of authority"30 cannot

apply in the case of BLGF.

WHEREFORE, the motion for reconsideration is DENIED and this denial is

final.

SO ORDERED.

Footnotes

1 Resolution, dated July 9, 2002.

2 R.A. No. 7229, effective March 19, 1992.

3 R.A. No. 7294, effective March 27, 1992.

4 Davao Gulf Lumber Corp. v. Commissioner of Internal Revenue, 293 SCRA 76, 89 (1998).

5 R.A. No. 7961, §§ 7 & 9 (April 20, 1995).

6 R.A. No. 8065, §§ 9 & 17 (June 19, 1995)

7 R.A. No. 8095, §§ 10 & 18 (July 6, 1995)

8 3 Records of Plenary Proceedings, House of Representatives 552 (Dec. 5, 1994). (emphasis added)

9 3 Record of the Senate 827 (January 17, 1995); 4 Record of the Senate 52 (January 24, 1995); See R.A. No. 7925, § 16:

Expansion and financing of network and services, utilizing equipment compatible with or homologous to existing or previously

approved plant and facilities, in order to service additional demand in the same areas where the previously approved network

and services have been installed, shall not require any approval by the Commission.

The upgrading of existing plant and network facilities including the financing thereof, for the purpose of retiring or replacing

obsolete or outmoded equipment with state of the art equipment and technology in order to improve the quality or grade of

service being rendered to the public within the same areas covered by the existing plant and facilities previously approved,

shall likewise not require the approval of the Commission.

10 Motion for Reconsideration, pp. 5-6, 16-17.

11 3 Record of the Senate 810 (Jan. 16, 1995); 3 Records of Plenary Proceedings, House of Representatives 552 (Dec. 5, 1994).

12 4 Record of the Senate 872 (April 20, 1994); id., p. 557.

13 E.g., R.A. No. 8198 (Unicorn Communications Corporation; July 11, 1996); R.A. No. 8675 (Mati Telephone Corporation; June

25, 1998); R.A. No. 8676 (Western Misamis Oriental Telephone Cooperative, Inc.; June 25, 1998); R.A. No. 8677 (Radio

Communications of the Philippines, Inc.; June 25, 1998); R.A. No. 8678 (Sear Telecommunications Inc.; June 25, 1998); R.A. No.

8690 (Santos Telephone Corporation, Inc.; July 2, 1998); R.A. No. 8955 (Polaris Telecommunications, Inc.; Sept. 2, 2000); R.A.

No. 8956 (Odiongan Telephone Corporation; Sept. 2, 2000); R.A. No. 8959 (Palawan Telephone Company, Inc.; Sept. 7, 2000);

R.A. No. 8961 (L.M. United Telephone Company, Inc.; Sept. 7, 2000); R.A. No. 8962 (Iriga Telephone Company, Inc.; Sept. 7,

2000); R.A. No. 8992 (Primeworld Digital Systems, Inc.; Jan. 5, 2001); R.A. No. 9002 (Click Communications, Inc.; Jan. 21, 2001);

R.A. No. 9101 (Tupi Telephone Cooperative, Inc.; April 9, 2001); R.A. No. 9116 (Solid Broadband Corporation; April 15, 2001);

R.A. No. 9117 (Battlex, Inc./Bataan Telephone Exchange; April 15, 2001); R.A. No. 9124 (Zenith Telecommunications Company,

Inc.; April 20, 2001); R.A. No. 9130 (Connectivity Unlimited Resource Enterprise, Inc.; April 24, 2001); and R.A. No. 9133

(Pampanga Telephone Company, Inc.; April 24, 2001).

14 E.g., R.A. No. 7961 (Cruz Telephone Company, Inc.; March 29, 1995); R.A. No. 8004 (Millenia Telecommunications

Corporation; April 27, 1995); R.A. No. 8065 (Isla Cellular Communication, Inc.; June 19, 1995); R.A. No. 8095 (Islatel

Corporation; July 6, 1995); R.A. No. 8153 (Rex Electronics Communications System, Inc.; September 23, 1995).

15 Compare: "Free competition in the industry may also provide the answer to a much-desired improvement in the quality and

delivery of this type of public utility, to improved technology, fast and handy mobile service, and reduced user dissatisfaction.

After all, neither PLDT nor any other public utility has a constitutional right to a monopoly position in view of the Constitutional

proscription that no franchise certificate or authorization shall be exclusive in character or shall last longer that fifty (50) years

(ibid., Section 11; Article XIV, Section 5, 1973 Constitution; Article XIV, Section 8, 1935 Constitution). Additionally, the State is

empowered to decide whether public interest demands that monopolies be regulated or prohibited (1987 Constitution, Article

XII, Section 19)." (PLDT v. National Telecommunications Commission, 190 SCRA 717, 737 (1990)).

16 Province of Tarlac v. Alcantara, 216 SCRA 790 (1992), where real property taxes were held not included in the exemption

granted to all electric franchise holders by the "in lieu of all taxes" provision of P.D. No. 551; Manila Gas Corp. v. Collector of

Internal Revenue, 104 Phil. 727 (1958), where the Court ruled that the rights and privileges which the "in lieu of all taxes"

provision exempts from taxation are those enjoyed by the grantee of the franchise and not by the public in general; Philippine

Telephone and Telegraph Company v. Collector of Internal Revenue, 58 Phil. 639 (1933), where the exemption was not

extended to the income tax on the dividends paid and delivered to stockholders as they ceased to be corporate property and

have already become property of the stockholders.

17 Memphis Gas-Light Co. v. Taxing District, 109 U.S. 398, 27 L.Ed. 976 (1883).

18 Greenfield v. Meer, 77 Phil. 394 (1946).

19 National Internal Revenue Code of 1997, §§ 32(b) and 34.

20 138 SCRA 629 (1985).

21 All along, we simply assume that Globe and Smart enjoy exemption from local taxation.

22 See Manila Electric Company v. Province of Laguna, 306 SCRA 750, 760 (1999), citing City Government of San Pablo v. Reyes,

305 SCRA 353, 362 (1999).

23 Light Rail Transit Authority v. Central Board of Assessment Appeals, 342 SCRA 692 (2000); Commissioner of Customs v. Court

of Tax Appeals, 328 SCRA 822 (2000); Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue, 293 SCRA 76

(1998).

24 Afisco Ins. Corp. v. Court of Appeals, 302 SCRA 1 (1999).

25 161 U.S. 198, 40 L.Ed. 669 (1896).

26 205 U.S. 236, 51 L.Ed. 784 (1907).

27 At 252-253, 51 L.Ed., 791.

28 305 SCRA 353 (1999).

29 Administrative Code, Book IV, Title II, Chapter 4, §33(4).

30 Commissioner of Internal Revenue v. Court of Appeals, 271 SCRA 605, 619 (1997).

SECOND DIVISION

G.R. No. 143867            August 22, 2001

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, INC., petitioner,

vs.

CITY OF DAVAO and ADELAIDA B. BARCELONA, in her capacity as

the City Treasurer of Davao, respondents.

MENDOZA, J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of

Civil Procedure of the resolution, 1 dated June 23, 2000, of the Regional Trial

Court, Branch 13, Davao City, affirming the tax assessment of petitioner and

the denial of its claim for tax refund by the City Treasurer of Davao.

The facts are as follows:

On January 1999, petitioner Philippine Long Distance Telephone Co., Inc.

(PLDT) applied for a Mayor's Permit to operate its Davao Metro Exchange.

Respondent City of Davao withheld action on the application pending

payment by petitioner of the local franchise tax in the amount of

P3,681,985.72 for the first to the fourth quarter of 1999. 2 In a letter dated

May 31, 1999, 3 petitioner protested the assessment of the local franchise

tax and requested a refund of the franchise tax paid by it for the year 1997

and the first to the third quarters of 1998. Petitioner contended that it was

exempt from the payment of franchise tax based on an opinion of the

Bureau of Local Government Finance (BLGF), dated June 2, 1998, which

reads as follows:

PLDT:

Section 12 of RA 7082 provides as follows:

"SECTION 12. The grantee, its successors or assigns shall be liable to pay

the same taxes on their real estate, buildings, and personal property,

exclusive of this franchise, as other persons or corporations are now or

hereafter may be required by law to pay. In addition thereto, the grantee, its

successors or assigns shall pay a franchise tax equivalent to three percent

(3%) of all gross receipts of the telephone or other telecommunications

businesses transacted under this franchise by the grantee, its successors or

assigns, and the said percentage shall be in lieu of all taxes on this franchise

or earnings thereof . . ."

It appears that RA 7082 further amending Act No. 3436 which granted to

PLDT a franchise to install, operate and maintain a telephone system

throughout the Philippine Islands was approved on August 3, 1991. Section

12 of said franchise, likewise, contains the "in lieu of all taxes" proviso.

In this connection, Section 23 of RA 7925, quoted hereunder, which was

approved on March 1, 1995, provides for the equality of treatment in the

telecommunications industry:

"SECTION 23. Equality of Treatment in the Telecommunications Industry. —

Any advantage, favor, privilege, exemption, or immunity granted under

existing franchises, or may hereafter be granted, shall ipso facto become

part of previously granted telecommunications franchise and shall be

accorded immediately and unconditionally to the grantees of such

franchises: Provided, however, That the foregoing shall neither apply to nor

affect provisions of telecommunications franchises concerning territory

covered by the franchise, the life span of the franchise, or the type of

service authorized by the franchise." (Italics supplied.)

On the basis of the aforequoted Section 23 of RA 7925, PLDT as a

telecommunications franchise holder becomes automatically covered by the

tax exemption provisions of RA 7925, which took effect on March 16, 1995.

Accordingly, PLDT shall be exempt from the payment of franchise and

business taxes imposable by LGUs under Sections 137 and 143 (sic),

respectively, of the LGC, upon the effectivity of RA 7925 on March 16, 1995.

However, PLDT shall be liable to pay the franchise and business taxes on its

gross receipts realized from January 1, 1992 up to March 15, 1995, during

which period PLDT was not enjoying the "most favored clause" proviso of RA

7025 (sic).4

In a letter dated September 27, 1999, respondent Adelaida B. Barcelona,

City Treasurer of Davao, denied the protest and claim for tax refund of

petitioner,5 citing the legal opinion of the City Legal Officer of Davao and Art.

10, §1 of Ordinance No. 230, Series of 1991, as amended by Ordinance No.

519, Series of 1992, which provides:

Notwithstanding any exemption granted by any law or other special law,

there is hereby imposed a tax on businesses enjoying a franchise, at a rate

of Seventy-five percent (75%) of one percent (1%) of the gross annual

receipts for the preceding calendar year based on the income or receipts

realized within the territorial jurisdiction of Davao City.6

Petitioner received respondent City Treasurer's order of denial on October 1,

1999. On November 3, 1999, it filed a petition in the Regional Trial Court of

Davao seeking a reversal of respondent City Treasurer's denial of

petitioner's protest and the refund of the franchise tax paid by it for the year

1998 in the amount of P2,580,829.23. The petition was filed pursuant to

§§195 and 196 of the Local Government Code (R.A. No. 7160). No claim for

refund of franchise taxes paid in 1997 was made as the same had already

prescribed under §196 of the LGC, which provides that claims for the refund

of taxes paid under it must be made within two (2) years from the date of

payment of such taxes.7

The trial court denied petitioner's appeal and affirmed the City Treasurer's

decision. It ruled that the LGC withdrew all tax exemptions previously

enjoyed by all persons and authorized local government units to impose a

tax on businesses enjoying a franchise notwithstanding the grant of tax

exemption to them. The trial court likewise denied petitioner's claim for

exemption under R.A. No. 7925 for the following reasons: (1) it is clear from

the wording of §193 of the Local Government Code that Congress did not

intend to exempt any franchise holder from the payment of local franchise

and business taxes; (2) the opinion of the Executive Director of the Bureau

of Local Government Finance to the contrary is not binding on respondents;

and (3) petitioner failed to present any proof that Globe and Smart were

enjoying local franchise and business tax exemptions.

Hence, this petition for review based on the following grounds:

I. THE LOWER COURT ERRED IN APPLYING SECTION 137 OF THE LOCAL

GOVERNMENT CODE, WHICH ALLOWS A CITY TO IMPOSE A FRANCHISE TAX,

AND SECTION 193 THEREOF, WHICH PROVIDES FOR WITHDRAWAL OF TAX

EXEMPTION PRIVILEGES.

II. THE LOWER COURT ERRED IN NOT HOLDING THAT UNDER PETITIONER'S

FRANCHISE, AS IMPLICITLY AMENDED AND EXPANDED BY SECTION 23 OF

REPUBLIC ACT NO. 7925 (PUBLIC TELECOMMUNICATIONS POLICY ACT),

TAKING INTO ACCOUNT THE FRANCHISES OF GLOBE TELECOM, INC. AND

SMART COMMUNICATIONS, INC., WHICH WERE ENACTED SUBSEQUENT TO

THE LOCAL GOVERNMENT CODE, NO FRANCHISE AND BUSINESS TAXES MAY

BE IMPOSED ON PETITIONER BY RESPONDENT CITY.

III. THE LOWER COURT ERRED IN NOT GIVING WEIGHT TO THE RULING OF

THE BUREAU OF LOCAL GOVERNMENT FINANCE THAT PETITIONER IS

EXEMPT FROM THE PAYMENT OF FRANCHISE AND BUSINESS TAXES, AMONG

OTHERS, IMPOSABLE BY LOCAL GOVERNMENT UNITS UNDER THE LOCAL

GOVERNMENT CODE.

First. The LGC, which took effect on January 1, 1992, provides:

SECTION 137. Franchise Tax. — Notwithstanding any exemption granted by

any law or other special law, the province may impose a tax on businesses

enjoying a franchise, at a rate not exceeding fifty percent (50%) of one

percent (1%) of the gross annual receipts for the preceding calendar year

based on the incoming receipt, or realized, within its territorial jurisdiction.

In the case of a newly started business, the tax shall not exceed one-

twentieth (1/20) of one percent (1%) of the capital investment. In the

succeeding calendar year, regardless of when the business started to

operate, the tax shall be based on the gross receipts for the preceding

calendar year, or any fraction thereof, as provided herein.8

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. 6938, non-stock and non-profit hospitals and

educational institutions, are hereby withdrawn upon the effectivity of this

Code.

The trial court held that, under these provisions, all exemptions granted to

all persons, whether natural and juridical, including those which in the future

might be granted, are withdrawn unless the law granting the exemption

expressly states that the exemption also applies to local taxes. We disagree.

Sec. 137 does not state that it covers future exemptions. In Philippine

Airlines, Inc. v. Edu,9 where a provision of the Tax Code enacted on June 27,

1968 (R.A. 5431) withdrew the exemption enjoyed by PAL, it was held that a

subsequent amendment of PAL's franchise, exempting it from all other taxes

except that imposed by its franchise, again entitled PAL to exemption from

the date of the enactment of such amendment. The Tax Code provision

withdrawing the tax exemption was not construed as prohibiting future

grants of exemptions from all taxes.

Indeed, the grant of taxing powers to local government units under the

Constitution and the LGC does not affect the power of Congress to grant

exemptions to certain persons, pursuant to a declared national policy. The

legal effect of the constitutional grant to local governments simply means

that in interpreting statutory provisions on municipal taxing powers, doubts

must be resolved in favor of municipal corporations.10

The question, therefore, is whether, after the withdrawal of its exemption by

virtue of §137 of the LGC, petitioner has again become entitled to exemption

from local franchise tax. Petitioner answers in the affirmative and points to

§23 of R.A. No. 7925, in relation to the franchises of Globe Telecom (Globe)

and Smart Communications, Inc. (Smart), which allegedly grant the latter

exemption from local franchise taxes.

To begin with, tax exemptions are highly disfavored. The reason for this was

explained by this Court in Asiatic Petroleum Co. v. Llanes,11 in which it was

held:

. . . Exemptions from taxation are highly disfavored, so much so that they

may almost be said to be odious to the law. He who claims an exemption

must be able to point to some positive provision of law creating the right. . .

As was said by the Supreme Court of Tennessee in Memphis vs. U. & P. Bank

(91 Tenn., 546, 550), "The right of taxation is inherent in the State. It is a

prerogative essential to the perpetuity of the government; and he who

claims an exemption from the common burden must justify his claim by the

clearest grant of organic or statute law." Other utterances equally or more

emphatic come readily to hand from the highest authority. In Ohio Life Ins.

and Trust Co. vs. Debolt (16 Howard, 416), it was said by Chief Justice

Taney, that the right of taxation will not be held to have been surrendered,

"unless the intention to surrender is manifested by words too plain to be

mistaken." In the case of the Delaware Railroad Tax (18 Wallace, 206, 226),

the Supreme Court of the United States said that the surrender, when

claimed, must be shown by clear, unambiguous language, which will admit

of no reasonable construction consistent with the reservation of the power.

If a doubt arises as to the intent of the legislature, that doubt must be

solved in favor of the State. In Erie Railway Company vs. Commonwealth of

Pennsylvania (21 Wallace, 492, 499), Mr. Justice Hunt, speaking of

exemptions, observed that a State cannot strip itself of the most essential

power of taxation by doubtful words. "It cannot, by ambiguous language, be

deprived of this highest attribute of sovereignty." In Tennessee vs.

Whitworth (117 U.S., 129, 136), it was said: "In all cases of this kind the

question is as to the intent of the legislature, the presumption always being

against any surrender of the taxing power." In Farrington vs. Tennessee and

County of Shelby (95 U.S., 679, 686), Mr. Justice Swayne said: ". . . When

exemption is claimed, it must be shown indubitably to exist. At the outset,

every presumption is against it. A well-founded doubt is fatal to the claim. It

is only when the terms of the concession are too explicit to admit fairly of

any other construction that the proposition can be supported."

The tax exemption must be expressed in the statute in clear language that

leaves no doubt of the intention of the legislature to grant such exemption.

And, even if it is granted, the exemption must be interpreted in strictissimi

juris against the taxpayer and liberally in favor of the taxing authority.12

In the present case, petitioner justifies its claim of tax exemption by strained

inferences. First, it cites R.A. No. 7925, otherwise known as the Public

Telecommunications Policy Act of the Philippines, §23 of which reads:

SECTION 23. Equality of Treatment in the Telecommunications Industry. —

Any advantage, favor, privilege, exemption, or immunity granted under

existing franchises, or may hereafter be granted, shall ipso facto become

part of previously granted telecommunications franchises and shall be

accorded immediately and unconditionally to the grantees of such

franchises: Provided, however, That the foregoing shall neither apply to nor

affect provisions of telecommunications franchises concerning territory

covered by the franchise, the life span of the franchise, or the type of

service authorized by the franchise.

Petitioner then claims that Smart and Globe enjoy exemption from the

payment of the franchise tax by virtue of their legislative franchises per

opinion of the Bureau of Local Government Finance of the Department of

Finance. Finally, it argues that because Smart and Globe are exempt from

the franchise tax, it follows that it must likewise be exempt from the tax

being collected by the City of Davao because the grant of tax exemption to

Smart and Globe ipso facto extended the same exemption to it.

The acceptance of petitioner's theory would result in absurd consequences.

To illustrate: In its franchise, Globe is required to pay a franchise tax of only

one and one-half percentum (1½%) of all gross receipts from its transactions

while Smart is required to pay a tax of three percent (3%) on all gross

receipts from business transacted. Petitioner's theory would require that, to

level the playing field, any "advantage, favor, privilege, exemption, or

immunity" granted to Globe must be extended to all telecommunications

companies, including Smart. If, later, Congress again grants a franchise to

another telecommunications company imposing, say, one percent (1%)

franchise tax, then all other telecommunications franchises will have to be

adjusted to "level the playing field" so to speak. This could not have been

the intent of Congress in enacting §23 of Rep. Act 7925. Petitioner's theory

will leave the Government with the burden of having to keep track of all

granted telecommunications franchises, lest some companies be treated

unequally. It is different if Congress enacts a law specifically granting

uniform advantages, favor, privilege, exemption, or immunity to all

telecommunications entities.

The fact is that the term "exemption" in §23 is too general. A cardinal rule in

statutory construction is that legislative intent must be ascertained from a

consideration of the statute as a whole and not merely of a particular

provision. For, taken in the abstract, a word or phrase might easily convey a

meaning which is different from the one actually intended. A general

provision may actually have a limited application if read together with other

provisions.13 Hence, a consideration of the law itself in its entirety and the

proceedings of both Houses of Congress is in order.14

Art. I of Rep. Act No. 7925 contains the general provisions, stating that the

Act shall be known as the Public Telecommunications Policy Act of the

Philippines, and a definition of terms.15 Art. II provides for its policies and

objectives, which is to foster the improvement and expansion of

telecommunications services in the country through: (1) the construction of

telecommunications infrastructure and interconnection facilities, having in

mind the efficient use of the radio frequency spectrum and extension of

basic services to areas not yet served; (2) fair, just, and reasonable rates

and tariff charges; (3) stable, transparent, and fair administrative processes;

(4) reliance on private enterprise for direct provision of telecommunications

services; (5) dispersal of ownership of telecommunications entities in

compliance with the constitutional mandate to democratize the ownership of

public utilities; (6) encouragement of the establishment of interconnection

with other countries to provide access to international communications

highways and development of a competitive export-oriented domestic

telecommunications manufacturing industry; and (7) development of human

resources skills and capabilities to sustain the growth and development of

telecommunications.16

Art. III provides for its administration. The operational and administrative

functions are delegated to the National Telecommunications Commission

(NTC), while policy-making, research, and negotiations in international

telecommunications matters are left with the Department of Transportation

and Communications.17

Art. IV classifies the categories of telecommunications entities as: Local

Exchange Operator, Inter-Exchange Carrier, International Carrier, Value-

Added Service Provider, Mobile Radio Services, and Radio Paging Services.18

Art. V provides for the use of other services and facilities, such as customer

premises equipment, which may be used within the premises of

telecommunications subscribers subject only to the requirement that it is

type-approved by the NTC, and radio frequency spectrum, the assignment

of which shall be subject to periodic review.19

Art. VI, entitled Franchise, Rates and Revenue Determination, provides for

the requirement to obtain a franchise from Congress and a Certificate of

Public Convenience and Necessity from the NTC before a

telecommunications entity can begin its operations. It also provides for the

NTC's residual power to regulate the rates or tariffs when ruinous

competition results or when a monopoly or a cartel or combination in

restraint of free competition exists and the rates or tariffs are distorted or

unable to function freely and the public is adversely affected. There is also a

provision relating to revenue sharing arrangements between inter-

connecting carriers.20

Art. VII provides for the rights of telecommunications users.21

Art. VIII, entitled Telecommunications Development, where §23 is found,

provides for public ownership of telecommunications entities, privatization

of existing facilities, and the equality of treatment provision.22

Art. IX contains the Final Provisions.23

R.A. No. 7925 is thus a legislative enactment designed to set the national

policy on telecommunications and provide the structures to implement it to

keep up with the technological advances in the industry and the needs of

the public. The thrust of the law is to promote gradually the deregulation of

the entry, pricing, and operations of all public telecommunications entities

and thus promote a level playing field in the telecommunications industry.24

There is nothing in the language of §23 nor in the proceedings of both the

House of Representatives and the Senate in enacting R.A. No. 7925 which

shows that it contemplates the grant of tax exemptions to all

telecommunications entities, including those whose exemptions had been

withdrawn by the LGC.

What this Court said in Asiatic Petroleum Co. v. Llanes25 applies mutatis

mutandis to this case: "When exemption is claimed, it must be shown

indubitably to exist. At the outset, every presumption is against it. A well-

founded doubt is fatal to the claim. It is only when the terms of the

concession are too explicit to admit fairly of any other construction that the

proposition can be supported." In this case, the word "exemption" in §23 of

R.A. No. 7925 could contemplate exemption from certain regulatory or

reporting requirements, bearing in mind the policy of the law. It is

noteworthy that, in holding Smart and Globe exempt from local taxes, the

BLGF did not base its opinion on §23 but on the fact that the franchises

granted to them after the effectivity of the LGC exempted them from the

payment of local franchise and business taxes.

Second. In the case of petitioner, the BLGF opined that §23 of R.A. No. 7925

amended the franchise of petitioner and in effect restored its exemptions

from local taxes. Petitioner contends that courts should not set aside

conclusions reached by the BLGF because its function is precisely the study

of local tax problems and it has necessarily developed an expertise on the

subject.

To be sure, the BLGF is not an administrative agency whose findings on

questions of fact are given weight and deference in the courts. The

authorities cited by petitioner pertain to the Court of Tax Appeals,26 a highly

specialized court which performs judicial functions as it was created for the

review of tax cases.27 In contrast, the BLGF was created merely to provide

consultative services and technical assistance to local governments and the

general public on local taxation, real property assessment, and other related

matters, among others.28 The question raised by petitioner is a legal

question, to wit, the interpretation of §23 of R.A. No. 7925. There is,

therefore, no basis for claiming expertise for the BLGF that administrative

agencies are said to possess in their respective fields.

Petitioner likewise argues that the BLGF enjoys the presumption of

regularity in the performance of its duty. It does enjoy this presumption, but

this has nothing to do with the question in this case. This case does not

concern the regularity of performance of the BLGF in the exercise of its

duties, but the correctness of its interpretation of a provision of law.

In sum, it does not appear that, in approving §23 of R.A. No. 7925, Congress

intended it to operate as a blanket tax exemption to all telecommunications

entities. Applying the rule of strict construction of laws granting tax

exemptions and the rule that doubts should be resolved in favor of

municipal corporations in interpreting statutory provisions on municipal

taxing powers, we hold that §23 of R.A. No. 7925 cannot be considered as

having amended petitioner's franchise so as to entitle it to exemption from

the imposition of local franchise taxes. Consequently, we hold that petitioner

is liable to pay local franchise taxes in the amount of P3,681,985.72 for the

period covering the first to the fourth quarter of 1999 and that it is not

entitled to a refund of taxes paid by it for the period covering the first to the

third quarter of 1998.

WHEREFORE, the petition for review on certiorari is DENIED and the decision

of the Regional Trial Court, Branch 13, Davao City is AFFIRMED.

SO ORDERED.

 

Footnotes

1 Per Judge Isaac G. Robillo, Jr.

2 Respondent's Comment, Annex A; Rollo, pp. 102, 116.

3 Id., Annex B; id., pp. 118-119.

4 Rollo, pp. 57-58, 118; 2nd Indorsement, pp. 1-2.

5 Respondents' Comment, Annex C; Rollo, p. 120.

6 Id.

7 Rollo, p. 73; Petition, p. 3.

8 This applies to cities by virtue of the following provision:

SEC. 151. Scope of Taxing Powers. — Except as otherwise provided in this Code, the city may levy the taxes, fees, and charges

which the province or municipality may impose: Provided, however, That the taxes, fees, and charges levied and collected by

highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of

this Code.

The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more

than fifty percent (50%) except the rates of professional and amusement taxes.

9 164 SCRA 320 (1988).

10 Manila Electric Company v. Province of Laguna, 306 SCRA 750 (1999); City Government of San Pablo, Laguna v. Reyes, 305

SCRA 353 (1999).

11 49 Phil. 466, 471-472 (1926).

12 Commissioner of Internal Revenue v. Court of Appeals, 298 SCRA 83 (1998); Commissioner of Customs v. Philippine Acetylene

Company, 39 SCRA 70 (1971); Commissioner of Internal Revenue v. Guerrero, 21 SCRA 180 (1967).

13 People v. Purisima, 86 SCRA 542 (1978).

14 National Police Commission v. De Guzman, Jr., 229 SCRA 801 (1994).

15 REP. ACT NO. 7925, §§1-3.

16 Id., §4.

17 Id., §§5-6.

18 Id., §§7-13.

19 Id., §§14-15.

20 Id., §§16-19

21 Id., §20.

22 Id., §§21-23

23 Id., §§24-27.

24 RECORD OF THE SENATE, NO. 73, April 20, 1994, p. 871; 3 RECORD OF THE HOUSE OF REPRESENTATIVES, December 5,

1994, p. 552.

25 49 Phil. 466, 472 (1926).

26 Commissioner of Internal Revenue v. Court of Appeals, 271 SCRA 605 (19973 citing Commissioner of Internal Revenue v.

Wander Philippines, Inc., 160 SCRA 573 (1988).

27 Philippine Refining Company v. Court of Appeals, 256 SCRA 667 (1996); See REP. ACT NO. 1125.

28 ADMINISTRATIVE CODE, Title 2, Chapter 4, § 33(4).

EN BANC

 

G.R. No. 117359 July 23, 1998

DAVAO GULF LUMBER CORPORATION, petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS,

respondents.

 

PANGANIBAN, J.:

Because taxes are the lifeblood of the nation, statutes that allow exemptions

are construed strictly against the grantee and liberally in favor of the

government. Otherwise stated, any exemption from the payment of a tax

must be clearly stated in the language of the law; it cannot be merely

implied therefrom.

Statement of the Case

This principium is applied by the Court in resolving this petition for review

under Rule 45 of the Rules of Court, assailing the Decision 1 of Respondent

Court of Appeals 2 in CA-GR SP No. 34581 dated September 26, 1994, which

affirmed the June 21, 1994 Decision 3 of the Court of Tax Appeals 4 in CTA

Case No. 3574. The dispositive portion of the CTA Decision affirmed by

Respondent Court reads:

WHEREFORE, judgment is hereby rendered ordering the respondent to

refund to the petitioner the amount of P2,923.15 representing the partial

refund of specific taxes paid on manufactured oils and fuels. 5

The Antecedent Facts

The facts are undisputed. 6 Petitioner is a licensed forest concessionaire

possessing a Timber License Agreement granted by the Ministry of Natural

Resources (now Department of Environment and Natural Resources). From

July 1, 1980 to January 31, 1982 petitioner purchased, from various oil

companies, refined and manufactured mineral oils as well as motor and

diesel fuels, which it used exclusively for the exploitation and operation of

its forest concession. Said oil companies paid the specific taxes imposed,

under Sections 153 and 156 7 of the 1977 National Internal Revenue Code

(NIRC), on the sale of said products. Being included in the purchase price of

the oil products, the specific taxes paid by the oil companies were

eventually passed on to the user, the petitioner in this case.

On December 13, 1982, petitioner filed before Respondent Commissioner of

Internal Revenue (CIR) a claim for refund in the amount of P120,825.11,

representing 25% of the specific taxes actually paid on the above-

mentioned fuels and oils that were used by petitioner in its operations as

forest concessionaire. The claim was based on Insular Lumber Co. vs. Court

of Tax Appeals 8 and Section 5 of RA 1435 which reads:

Sec. 5. The proceeds of the additional tax on manufactured oils shall accrue

to the road and bridge funds of the political subdivision for whose benefit

the tax is collected: Provided, however, That whenever any oils mentioned

above are used by miners or forest concessionaires in their operations,

twenty-five per centum of the specific tax paid thereon shall be refunded by

the Collector of Internal Revenue upon submission of proof of actual use of

oils and under similar conditions enumerated in subparagraphs one and two

of section one hereof, amending section one hundred forty-two of the

Internal Revenue Code: Provided, further, That no new road shall be

constructed unless the routes or location thereof shall have been approved

by the Commissioner of Public Highways after a determination that such

road can be made part of an integral and articulated route in the Philippine

Highway System, as required in section twenty-six of the Philippine Highway

Act of 1953.

It is an unquestioned fact that petitioner complied with the procedure for

refund, including the submission of proof of the actual use of the

aforementioned oils in its forest concession as required by the above-quoted

law. Petitioner, in support of its claim for refund, submitted to the CIR the

affidavits of its general manager, the president of the Philippine Wood

Products Association, and three disinterested persons, all attesting that the

said manufactured diesel and fuel oils were actually used in the exploitation

and operation of its forest concession.

On January 20, 1983, petitioner filed at the CTA a petition for review

docketed as CTA Case No. 3574. On June 21, 1994, the CTA rendered its

decision finding petitioner entitled to a partial refund of specific taxes the

latter had paid in the reduced amount of P2,923.15. The CTA ruled that the

claim on purchases of lubricating oil (from July 1, 1980 to January 19, 1981)

and on manufactured oils other than lubricating oils (from July 1, 1980 to

January 4, 1981) had prescribed. Disallowed on the ground that they were

not included in the original claim filed before the CIR were the claims for

refund on purchases of manufactured oils from January 1, 1980 to June 30,

1980 and from February 1, 1982 to June 30, 1982. In regard to the other

purchases, the CTA granted the claim, but it computed the refund based on

rates deemed paid under RA 1435, and not on the higher rates actualhy

paid by petitioner under the NIRC.

Insisting that the basis for computing the refund should be the increased

rates prescribed by Sections 153 and 156 of the NIRC, petitioner elevated

the matter to the Court of Appeals. As noted earlier, the Court of Appeals

affirmed the CTA Decision. Hence, this petition for review. 9

Public Respondent's Ruling

In its petition before the Court of Appeals, petitioner raised the following

arguments:

I. The respondent Court of Tax Appeals failed to apply the Supreme Court's

Decision in Insular Lumber Co. v. Court of Tax Appeals which granted the

claim for partial refund of specific taxes paid by the claimant, without

qualification or limitation.

II. The respondent Court of Tax Appeals ignored the increase in rates

imposed by succeeding amendatory laws,under which the petitioner paid

the specific taxes on manufactured and diesel fuels.

III. In its decision, the respondent Court of Tax Appeals ruled contrary to

established tenets of law when it lent itself to interpreting Section 5 of R.A.

1435, when the construction of said law is not necessary.

IV. Sections 1 and 2 of R.A. 1435 are not the operative provisions to be

applied but rather, Sections 153 and 156 of the National Internal Revenue

Code, as amended.

V. To rule that the basis for computation of the refunded taxes should be

Sections 1 and 2 of R.A. 1435 rather than Section 153 and 156 of the

National Internal Revenue Code is unfair, erroneous, arbitrary, inequitable

and oppressive. 10

The Court of Appeals held that the claim for refund should indeed be

computed on the basis of the amounts deemed paid under Sections 1 and 2

of RA 1435. In so ruling, it cited our pronouncement in Commissioner of

Internal Revenue v. Rio Tuba Nickel Mining Corporation 11 and subsequent

Resolution dated June 15, 1992 clarifying the said Decision. Respondent

Court further ruled that the claims for refund which prescribed and those

which were not filed at the administrative level must be excluded.

The Issue

In its Memorandum, petitioner raises one critical issue:

Whether or not petitioner is entitled under Republic Act No. 1435 to the

refund of 25% of the amount of specific taxes it actually paid on various

refined and manufactured mineral oils and other oil products taxed under

Sec. 153 and Sec. 156 of the 1977 (Sec. 142 and Sec. 145 of the 1939)

National Internal Revenue Code. 12

In the main, the question before us pertains only to the computation of the

tax refund. Petitioner argues that the refund should be based on the

increased rates of specific taxes which it actually paid, as prescribed in

Sections 153 and 156 of the NIRC. Public respondent, on the other hand,

contends that it should be based on specific taxes deemed paid under

Sections 1 and 2 of RA 1435.

The Court's Ruling

The petition is not meritorious.

Petitioner Entitled to Refund

Under Sec. 5 of RA 1435

At the outset, it must be stressed that petitioner is entitled to a partial

refund under Section 5 of RA 1435, which was enacted to provide means for

increasing the Highway Special Fund.

The rationale for this grant of partial refund of specific taxes paid on

purchases of manufactured diesel and fuel oils rests on the character of the

Highway Special Fund. The specific taxes collected on gasoline and fuel

accrue to the Fund, which is to be used for the construction and

maintenance of the highway system. But because the gasoline and fuel

purchased by mining and lumber concessionaires are used within their own

compounds and roads, and their vehicles seldom use the national highways,

they do not directly benefit from the Fund and its use. Hence, the tax refund

gives the mining and the logging companies a measure of relief in light of

their peculiar situation. 13 When the Highway Special Fund was abolished in

1985, the reason for the refund likewise ceased to exist. 14 Since petitioner

purchased the subject manufactured diesel and fuel oils from July 1, 1980 to

January 31, 1982 and submitted the required proof that these were actually

used in operating its forest concession, it is entitled to claim the refund

under Section 5 of RA 1435.

Tax Refund Strictly Constrtued

Against the Grantee

Petitioner submits that it is entitled to the refund of 25 percent of the

specific taxes it had actually paid for the petroleum products used in its

operations. In other words, it claims a refund based on the increased rates

under Sections 153 and 156 of the NIRC. 15 Petitioner argues that the

statutory grant of the refund privilege, specifically the phrase "twenty-five

per centum of the specific tax paid thereon shall be refunded by the

Collector of Internal Revenue," is "clear and unambiguous" enough to

require construction or qualification thereof. 16 In addition, it cites our

pronouncement in Insular Lumber vs. Court of Tax Appeals: 17

. . . Sec. 5 [of RA 1435] makes reference to subparagraphs 1 and 2 of

Section 1 only for the purpose of prescribing the procedure for refund. This

express reference cannot be expanded in scope to include the limitation of

the period of refund. If the limitation of the period of refund of specific taxes

paid on oils used in aviation and agriculture is intended to cover similar

taxes paid on oil used by miners and forest concessionaires, there would

have been no need of dealing with oil used by miners and forest concessions

separately and Section 5 would very well have been included in Section 1 of

Republic Act No. 1435, notwithstanding the different rate of exemption.

Petitioner then reasons that "the express mention of Section 1 of RA 1435 in

Section 5 cannot be expanded to include a limitation on the tax rates to be

applied . . . [otherwise,] Section 5 should very well have been included in

Section 1 . . . ." 18

The Court is nor persuaded. The relevant statutory provisions do not clearly

support petitioner's claim for refund. RA 1435 provides:

Sec. 1 Section one hundred and forty-two of the National Internal Revenue

Code, as amended, is further amended to read as follows:

Sec. 142. Specific tax on manufactured oils and other fuels. — On refined

and manufactured mineral oils and motor fuels, there shall be collected the

following taxes:

(a) Kerosene or petroleum, per liter of volume capacity, two and one-half

centavos;

(b) Lubricating oils, per liter of volume capacity, seven centavos;

(c) Naptha, gasoline, and all other similar products of distillation, per liter of

volume capacity, eight centavos; and

(d) On denatured alcohol to be used for motive power, per liter of volume

capacity, one centavo: Provided, That if the denatured alcohol is mixed with

gasoline, the specific tax on which has already been paid, only the alcohol

content shall be subject to the tax herein prescribed. For the purpose of this

subsection, the removal of denatured alcohol of not less than one hundred

eighty degrees proof (ninety per centum absolute alcohol) shall be deemed

to have been removed for motive power, unless shown to the contrary.

Whenever any of the oils mentioned above are, during the five years from

June eighteen, nineteen hundred and fifty two, used in agriculture and

aviation, fifty per centum of the specific tax paid thereon shall be refunded

by the Collector of Internal Revenue upon the submission of the following:

(1) A sworn affidavit of the producer and two disinterested persons proving

that the said oils were actually used in agriculture, or in lieu thereof.

(2) Should the producer belong to any producers' association or federation,

duly registered with the Securities and Exchange Commission, the affidavit

of the president of the association or federation, attesting to the fact that

the oils were actually used in agriculture.

(3) In the case of aviation oils, a sworn certificate satisfactory to the

Collector proving that the said oils were actually used in aviation: Provided,

That no such refunds shall be granted in respect to the oils used in aviation

by citizens and corporations of foreign countries which do not grant

equivalent refunds or exemptions in respect to similar oils used in aviation

by citizens and corporations of the Philippines.

Sec. 2 Section one hundred and forty-five of the National Internal Revenue

Code, as amended, is further amended to read as follows:

Sec. 145. Specific Tax on Diesel fuel oil. — On fuel oil, commercially known

as diesel fuel oil, and on all similar fuel oils, having more or less the same

generating power, there shall be collected, per metric ton, one peso.

xxx xxx xxx

Sec. 5. The proceeds of the additional tax on manufactured oils shall accrue

to the road and bridge funds of the political subdivision for whose benefit

the tax is collected: Provided, however, That whenever any oils mentioned

above are used by miners or forest concessionaires in their operations,

twenty-five per centum of the specific tax paid thereon shall be refunded by

the Collector of Internal Revenue upon submission of proof of actual use of

oils and under similar conditions enumerated in subparagraphs one and two

of section one hereof, amending section one hundred forty-two of the

Internal Revenue Code: Provided, further, That no new road shall be

constructed unless the route or location thereof shall have been approved

by the Commissioner of Public Highways after a determination that such

road can be made part of an integral and articulated route in the Philippine

Highway System, as required in section twenty-six of the Philippine Highway

Act of 1953.

Subsequently the 1977 NIRC, PD 1672 and EO 672 amended the first two

provisions, renumbering them and prescribing higher rates. Accordingly,

petitioner paid specific taxes on petroleum products purchased from July 1,

1980 to January 31, 1982 under the following statutory provisions.

From February 8, 1980 to March 20, 1981, Sections 153 and 156 provided as

follows:

Sec. 153. Specific tax on manufactured oils and other fuels. — On refined

and manufactured mineral oils and motor fuels, there shall be collected the

following taxes which shall attach to the articles hereunder enumerated as

soon as they are in existence as such:

(a) Kerosene, per liter of volume capacity, seven centavos;

(b) Lubricating oils, per liter of volume capacity, eighty centavos;

(c) Naphtha, gasoline and all other similar products of distillation, per liter of

volume capacity, ninety-one centavos: Provided, That on premium and

aviation gasoline, the tax shall be one peso per liter of volume capacity;

(d) On denatured alcohol to be used for motive power, per liter of volume

capacity, one centavo: Provided, That unless otherwise provided for by

special laws, if the denatured alcohol is mixed with gasoline, the specific tax

on which has already been paid, only the alcohol content shall be subject to

the tax herein prescribed. For the purposes of this subsection, the removal

of denatured alcohol of not less than one hundred eighty degrees proof

(ninety per centum absolute alcohol) shall be deemed to have been

removed for motive power, unless shown to the contrary;

(e) Processed gas, per liter of volume capacity, three centavos;

(f) Thinners and solvents, per liter of volume capacity, fifty-seven centavos;

(g) Liquefied petroleum gas, per kilogram, fourteen centavos: Provided, That

liquefied petroleum gas used for motive power shall be taxed at the

equivalent rate as the specific tax on diesel fuel oil;

(h) Asphalts, per kilogram, eight centavos;

(i) Greases, waxes and petrolatum, per kilogram, fifty centavos;

(j) Aviation turbo jet fuel, per liter of volume capacity, fifty-five centavos. (As

amended by Sec. 1, P.D. No. 1672.)

xxx xxx xxx

Sec. 156. Specific tax on diesel fuel oil. — On fuel oil, commercially known

as diesel fuel oil, and on all similar fuel oils, having more or less the same

generating power, per liter of volume capacity, seventeen and one-half

centavos, which tax shall attach to this fuel oil as soon as it is in existence

as such.

Then on March 21, 1981, these provisions were amended by EO 672 to read:

Sec. 153. Specific tax on manufactured oils and other fuels. — On refined

and manufactured mineral oils and motor fuels, there shall be collected the

following taxes which shall attach to the articles hereunder enumerated as

soon as they are in existence as such:

(a) Kerosene, per liter of volume capacity, nine centavos;

(b) Lubricating oils, per liter of volume capacity, eighty centavos;

(c) Naphtha, gasoline and all other similar products of distillation, per liter of

volume capacity, one peso and six centavos: Provided, That on premium

and aviation gasoline, the tax shall be one peso and ten centavos and one

peso, respectively, per liter of volume capacity;

(d) On denatured alcohol to be used for motive power, per liter of volume

capacity, one centavo; Provided, That unless otherwise provided for by

special laws, if the denatured alcohol is mixed with gasoline, the specific tax

on which has already been paid, only the alcohol content shall be subject to

the tax herein prescribed. For the purpose of this subsection, the removal of

denatured alcohol of not less than one hundred eighty degrees proof (ninety

per centum absolute alcohol) shall be deemed to have been removed for

motive power, unless shown to the contrary;

(e) Processed gas, per liter of volume capacity, three centavos;

(f) Thinners and solvents, per liter of volume capacity, sixty-one centavos;

(g) Liquefied petroleum gas, per kilogram, twenty-one centavos: Provided,

That, liquified petroleum gas used for motive power shall be taxed at the

equivalent rate as the specific tax on diesel fuel oil;

(h) Asphalts, per kilogram, twelve centavos;

(i) Greases, waxes and petrolatum, per kilogram, fifty centavos;

(j) Aviation turbo-jet fuel, per liter of volume capacity, sixty-four centavos.

xxx xxx xxx

Sec. 156. Specific tax on diesel fuel oil. — On fuel oil, commercially known

as diesel fuel oil, and all similar fuel oils, having more or less the same

generating power, per liter of volume capacity, twenty-five and one-half

centavos, which tax shall attach to this fuel oil as soon as it is in existence

as such.

A tax cannot be imposed unless it is supported by the clear and express

language of a statute; 19 on the other hand, once the tax is unquestionably

imposed, "[a] claim of exemption from tax payments must be clearly shown

and based on language in the law too plain to be mistaken." 20 Since the

partial refund authorized under Section 5, RA 1435, is in the nature of a tax

exemption, 21 it must be construed strictissimi Juris against the grantee.

Hence, petitioner's claim of refund on the basis of the specific taxes it

actually paid must expressly be granted in a statute stated in a language

too clear to be mistaken.

We have carefully scrutinized RA 1435 and the subsequent pertinent

statutes and found no expression of a legislative will authorizing a refund

based on the higher rates claimed by petitioner. The mere fact that the

privilege of refund was included in Section 5, and not in Section 1, is

insufficient to support petitioner's claim. When the law itself does not

explicitly provide that a refund under RA 1435 may be based on higher rates

which were nonexistent at the time of its enactment, this Court cannot

presume otherwise. A legislative lacuna cannot be filled by judicial fiat. 22

The issue is not really novel. In Commissioner of Internal Revenue vs. Court

of Appeals and Atlas Consolidated Mining and Development

Corporation 23 (the second Atlas case), the CIR contended that the refund

should be based on Sections 1 and 2 of RA 1435, not Sections 153 and 156

of the NIRC of 1977. In categorically ruling that Private Respondent Atlas

Consolidated Mining and Development Corporation was entitled to a refund

based on Sections 1 and 2 of RA 1435, the Court, through Mr. Justice Hilario

G. Davide, Jr., reiterated our pronouncement in Commissioner of Internal

Revenue vs. Rio Tuba Nickel and Mining Corporation:

Our Resolution of 25 March 1992 modifying our 30 September 1991 Decision

in the Rio Tuba case sets forth the controlling doctrine. In that Resolution,

we stated:

Since the private respondent's claim for refund covers specific taxes paid

from 1980 to July 1983 then we find that the private respondent is entitled

to a refund. It should be made clear, however, that Rio Tuba is not entitled

to the whole amount it claims as refund.

The specific taxes on oils which Rio Tuba paid for the aforesaid period were

no longer based on the rates specified by Sections 1 and 2 of R.A. No. 1435

but on the increased rates mandated under Sections 153 and 156 of the

National Internal Revenue Code of 1977. We note however, that the latter

law does not specifically provide for a refund to these mining and lumber

companies of specific taxes paid on manufactured and diesel fuel oils.

In Insular Lumber Co. v. Court of Tax Appeals, (104 SCRA 710 [1981]), the

Court held that the authorized partial refund under Section 5 of R.A. No.

1435 partakes of the nature of a tax exemption and therefore cannot be

allowed unless granted in the most explicit and categorical language. Since

the grant of refund privileges must be strictly construed against the

taxpayer, the basis for the refund shall be the amounts deemed paid under

Sections 1 and 2 of R.A. No. 1435.

ACCORDINGLY, the decision in G.R. Nos. 83583-84 is hereby MODIFIED. The

private respondent's CLAIM for REFUND is GRANTED, computed on the basis

of the amounts deemed paid under Sections 1 and 2 of R.A. No. 1435,

without interest. 24

We rule, therefore, that since Atlas's claims for refund cover specific taxes

paid before 1985, it should be granted the refund based on the rates

specified by Sections 1 and 2 of R.A. No. 1435 and not on the increased

rates under Sections 153 and 156 of the Tax Code of 1977, provided the

claims are not yet barred by prescription. (Emphasis supplied.)

Insular Lumber Co. and First Atlas Case

Not Inconsistent With Rio Tuba

and Second Atlas Case

Petitioner argues that the applicable jurisprudence in this case should be

Commissioner of Internal Revenue vs. Atlas Consolidated and Mining Corp.

(the first Atlas case), an unsigned resolution, and Insular Lumber Co. vs.

Court of Tax Appeals, an en banc decision. 25 Petitioner also asks the Court

to take a "second look" at Rio Tuba and the second Atlas case, both decided

by Divisions, in view of Insular which was decided en banc. Petitioner posits

that "[I]n view of the similarity of the situation of herein petitioner with

Insular Lumber Company (claimant in Insular Lumber) and Rio Tuba Nickel

Mining Corporation (claimant in Rio Tuba), a dilemma has been created as to

whether or not Insular Lumber, which has been decided by the Honorable

Court en banc, or Rio Tuba, which was decided only [by] the Third Division of

the Honorable Court, should

apply." 26

We find no conflict between these two pairs of cases. Neither Insular Lumber

Co. nor the first Atlas case ruled on the issue of whether the refund privilege

under Section 5 should be computed based on the specific tax deemed paid

under Sections 1 and 2 of RA 1435, regardless of what was actually paid

under the increased rates. Rio Tuba and the second Atlas case did.

Insular Lumber Co. decided a claim for refund on specific tax paid on

petroleum products purchased in the year 1963, when the increased rates

under the NIRC of 1977 were nor yet in effect. Thus, the issue now before us

did not exist at the time, since the applicable rates were still those

prescribed under Sections 1 and 2 of RA 1435.

On the other hand, the issue raised in the first Atlas case was whether the

claimant was entitled to the refund under Section 5, notwithstanding its

failure to pay any additional tax under a municipal or city ordinance.

Although Atlas purchased petroleum products in the years, 1976 to 1978

when the rates had already been changed, the Court did not decide or make

any pronouncement on the issue in that case.

Clearly, it is impossible for these two decisions to clash with our

pronouncement in Rio Tuba and second Atlas case, in which we ruled that

the refund granted be computed on the basis of the amounts deemed paid

under Sections 1 and 2 of RA 1435. In this light, we find no basis for

petitioner's invocation of the constitutional proscription that "no doctrine or

principle of law laid down by the Court in a decision rendered en banc or in

division may be modified or reversed except by the Court sitting en banc. 27

Finally, petitioner asserts that "equity and justice demand that the

computation of the tax refunds be based on actual amounts paid under

Sections 153 and 156 of the NIRC." 28 We disagree. According to an eminent

authority on taxation, "there is no tax exemption solely on the, ground of

equity." 29

WHEREFORE, the petition is hereby DENIED and the assailed Decision of the

Court of Appeals is AFFIRMED.

SO ORDERED.

# Footnotes

1 Rollo, pp. 48-54.

2 Thirteenth Division composed of J. Minerva P. Gonzaga Reyes, ponente and chairman; JJ. Eduardo G. Montenegro and Delilah

Vidallon Magtolis, concuring.

3 Rollo, pp. 55-67.

4 Judge Emesto D. Acosca, ponente and presiding judge; Judges Manuel K. Gruba and Ramon O. De Veyra, concuring.

5 CTA Decision, p. 12; rollo, p. 66.

6 See Petitioner's Memorandum, pp. 3-8 and Public Respondent's Memorandum, pp. 2-4; rollo, pp. 145-150 and 115-117,

respecrively. See also Decision of the Court of Appeals, pp. 1-5; rollo, pp. 48-51a.

7 Previously Sections 142 and 145 of the 1939 NIRC which were amended by Sections 1 and 2 of RA 1435 and later

renumbered as Sections 153 and 156 of the 1977 NIRC.

8 104 SCRA 710, May 29, 1981.

9 The case was deemed submitted for resolution on August 15, 1997 upon receipt by this Court of Petitioner's Memorandum.

10 Decision of the Court of Appeals, p. 4.; rollo, p. 51.

11 207 SCRA 549, March 25, 1992, per Gutierrez, J.

12 Memorandum of Petitioner, p. 8; rollo, p. 150.

13 See Commissioner of Internal vs. Atlas Consolididated Mining and Development Corp., et al., GR No. 93631, November 12,

1990.

14 Commissioner of Internal Revenue vs. Rio Tuba Nickel Mining Corporation, supra, pp. 551-552.

15 Petitioner's Memorandum, pp. 12-15; rollo, pp. 154-158.

16 Ibid., pp. 29-30; rollo, pp. 171-172.

17 Supra, pp. 718-719, per de Castro, J.

18 Petitioner's Memorandum, p. 31; rollo, p. 173.

19 Commissioner of Internal Revenue vs. The Court of Appeals, the Court of Tax Appeals and Ateneo De Manila University, G.R.

No. 115349, April 18, 1997, p. 8.

20 Mactan Cebu International Airport Authority vs. Marcos, 261 SCRA 667, 680, September 11, 1996, per Davide, Jr., J. See also

Wonder Mechanical Engineering Corporation vs. Court of Tax Appeals, 64 SCRA 555, 563, June 30, 1975; cited in Vitug,

Compendium of Tax Law and Jurispridence, pp. 28-29, 2nd rev. ed. (1989).

21 Insular Lumber Co. vs. Court of Tax Appeals, supra, p. 719.

22 See Paper Industries Corp. of the Phil. vs. CA, 250 SCRA 434, 455, December 1, 1995.

23 SCRA 321, 325, May 10, 1994.

24 Ibid., pp. 326-327.

25 Ibid., pp. 18-21; rollo, pp. 160-163.

26 Petitioner's Memorandum, p. 17; rollo, p. 159.

27 Par. 3, Sec. 4, Art. VIII, Constitution, cited in Petitioner's Memorandum, pp. 17-18; rollo, pp. 159-160. See also Petitioner's

Memorandum, pp. 32-37; rollo, pp. 174-180.

28 Petitioner's Memorandum, p. 32; rollo, p. 174.

29 Vitug, supra, p. 30.

THIRD DIVISION

G.R. No. 72477 October 16, 1990

NATIONAL POWER CORPORATION, petitioner,

vs.

HON. PRESIDING JUDGE, REGIONAL TRIAL COURT, 10TH JUDICIAL

REGION BRANCH XXV, CAGAYAN DE ORO CITY, PROVINCE OF

MISAMIS ORIENTAL, MUNICIPALITY OF JASAAN, MISAMIS ORIENTAL

AND BARANGAY APLAYA, JASAAN, MISAMIS ORIENTAL, respondents.

 

FERNAN, C.J.:

In this Special Civil Action for Certiorari, petitioner National Power

Corporation (NAPOCOR for brevity) questions the jurisdiction of the Regional

Trial Court of Cagayan de Oro City, Branch XXV to hear Civil Case No. 9901

filed by respondents Province of Misamis Oriental and Municipality of Jasaan

for the collection of real property tax and special education fund tax from

petitioner covering the years 1978 to 1984. The antecedent facts are as

follows:

On October 10, 1984, the Province of Misamis Oriental filed a complaint 1

with the Regional Trial Court of Cagayan de Oro City, Branch XXV against

NAPOCOR for the collection of real property tax and special education fund

tax in the amounts of P11,105,008.10 and P11,104,658.10, respectively,

covering the period 1978 to 1984. Petitioner NAPOCOR then defendant

therein, filed a motion to dismiss 2 dated January 12, 1985 on the grounds

that the court has no jurisdiction over the action or suit and that it is not the

proper forum for the adjudication of the case. In support of this motion

NAPOCOR cited Presidential Decree No. 242 dated July 9, 1973 which

provides that disputes between agencies of the government including

govemment-owned or controlled corporations shall be administratively

settled or adjudicated by the Secretary of Justice.

The court through Judge Pablito C. Pielago issued an order 3 dated January

28, 1985 denying the motion to dismiss. NAPOCOR filed a supplemental

motion to dismiss 4 on February 22, 1985 citing a resolution of the Fiscal

Incentive Review Board, No. 10-85 effective January 11, 1984, restoring the

tax and duty exemption privileges of petitioner.

On March 27, 1985, NAPOCOR filed its answer to the complaint with

counterclaim. Treating the same as a second motion to dismiss and finding

the affirmative defenses therein stated to be unmeritorious, the court a quo

issued an order on June 27, 1985, denying the second motion to dismiss and

requiring both parties to appear before the court for the purpose of

submitting a stipulation of facts.

On July 23, 1985, Barangay Aplaya, Municipality of Jasaan, Misamis Oriental

filed a complaint in intervention 5 contending that non-payment by

NAPOCOR of real property taxes would adversely affect its interest since

under the law, ten percent (10%) of the real property tax collected on

properties within its jurisdiction shall accrue to the general fund of the

barangay. Thereafter, the case was set for trial pursuant to the court's order

dated August 20, 1985. 6

On October 30, 1985, petitioner NAPOCOR filed before this Court the present

special civil action for certiorari 7 setting forth the following issues, to wit:

1) Respondent Court acted without or in excess of jurisdiction and with

grave abuse of discretion when it issued the orders dated January 28, 1985,

June 27, 1985 and August 20, 1985, denying petitioner's motions to have

Civil Case No. 9901 dismissed on the grounds of lack of jurisdiction and/or

improper venue.

2) Petitioner is exempt from payment of real property taxes.

Relied upon by NAPOCOR in assailing the jurisdiction of the lower court

and/or the venue of the action are Sections 2 and 3 of Presidential Decree

No. 242, entitled "PRESCRIBING THE PROCEDURE FOR ADMINISTRATIVE

SETTLEMENT OR ADJUDICATION OF DISPUTES, CLAIMS AND CONTROVERSIES

BETWEEN OR AMONG GOVERNMENT OFFICES, AGENCIES AND

INSTRUMENTALITIES, INCLUDING GOVERNMENT-OWNED OR CONTROLLED

CORPORATIONS, AND FOR OTHER PURPOSES" dated on July 9, 1973.

Sections 2 and 3 of this Decree provide:

Section 2. In all cases involving only questions of law, the same shall be

submitted to and settled or adjudicated by the Secretary of Justice, as

Attorney General and ex officio legal adviser of all government-owned or

controlled corporations and entities, in consonance with section 83 of the

Revised Administrative Code. His ruling or determination of the question in

each case shall be conclusive and binding upon all the parties concerned.

Section 3. Cases involving mixed questions of law and of fact or only factual

issues shall be submitted to and settled or adjudicated by:

(a) The Solicitor General, with respect to disputes or claims or controversies

between or among the departments, bureaus, offices and other agencies of

the National Government;

(b) The Govermnent Corporate Counsel, with respect to disputes or claims or

controversies between or among the government-owned or controlled

corporations or entities being served by the office of the Government

Corporate Counsel and

(c) The Secretary of Justice, with respect to all other disputes or claims or

controversies which do not fall under the categories mentioned in

paragraphs (a) and (b). (Emphasis supplied)

In upholding the lower court's jurisdiction, respondent municipal

corporations, on the other hand, rely on Presidential Decree No. 464,

entitled "THE REAL PROPERTY TAX CODE" enacted on July 1, 1974,

specifically Section 82 thereof which provides:

Section 82. Collection of real property tax through the courts. — The

delinquent real property tax shall constitute a lawful indebtedness of the

taxpayer to the province or city and collection of the tax may be enforced by

civil action in any court of competent jurisdiction. The civil action shall be

filed by the Provincial or City Fiscal within fifteen days after receipt of the

statement of delinquency certified to by the provincial or city treasurer. This

remedy shall be in addition to all other remedies provided by law.

It is indeed desirable and beneficial to the Judiciary's ongoing program of

decongesting court dockets that intra-governmental disputes such as this be

settled administratively. Unfortunately, our consideration of the legal

provisions involved leads us to a different conclusion. In reconciling these

two conflicting provisions of P.D. 242 and P.D. 464 on the matter of

jurisdiction, we are guided by the basic rules on statutory construction.

An examination of these two decrees shows that P.D. 242 is a general law

which deals with administrative settlement or adjudication of disputes,

claims and controversies between or among government offices, agencies

and instrumentalities, including government-owned or controlled

corporations. The coverage is broad and sweeping, encompassing all

disputes, claims and controversies.

P.D. 464 on the other hand, governs the appraisal and assessment of real

property for purposes of taxation by provinces, cities and municipalities, as

wen as the levy, collection and administration of real property tax. It is a

special law which deals specifically with real property taxes.

It is a basic tenet in statutory construction that between a general law and a

special law, the special law prevails. GENERALIA SPECIALIBUS NON

DEROGANT. 8

Where a later special law on a particular subject is repugnant to, or

inconsistent with, a prior general law on the same subject, a partial repeal of

the latter win be implied to the extent of the repugnancy or an exception

grafted upon the general law.

A special law must be intended to constitute an exception to the general law

in the absence of special circumstances forcing a contrary conclusion. 9

The conflict in the provisions on jurisdiction between P.D. 242 and P.D. 464

should be resolved in favor of the latter law, since it is a special law and of

later enactment. P.D. 242 must yield to P.D. 464 on the matter of who or

which tribunal or agency has jurisdiction over the enforcement and

collection of real property taxes. Therefore, respondent court has jurisdiction

to hear and decide Civil Case No. 9901.

On the question of whether or not NAPOCOR is liable to pay real property

taxes and special education fund taxes for the years 1978 to 1984, we rule

in the affirmative.

Presidential Decree No. 1177, entitled "REVISING THE BUDGET PROCESS IN

ORDER TO INSTITUTIONALIZE THE BUDGETARY INNOVATIONS OF THE NEW

SOCIETY" was passed on July 30, 1977. Section 23 thereof provides:

Section 23. Tax and Duty Exemptions. — All units of govemment, including

government-owned or controlled corporations, shall pay income taxes,

customs duties and other taxes and fees as are imposed under revenue

laws; provided, that organizations otherwise exempted by law from the

payment of such taxes/duties may ask for a subsidy from the General Fund

in the exact amount of taxes/duties due; provided, further, that a procedure

shag be established by the Secretary of Finance and the Commissioner of

the Budget, whereby such subsidies shall automatically be considered as

both revenue and expenditure of the General Fund. (Emphasis supplied)

Petitioner alleges that what has been withdrawn is its exemption from taxes,

duties, and fees which are payable to the national government while its

exemption from taxes, duties and fees payable to government branches,

agencies and instrumentalities remains unaffected. Considering that real

property taxes are payable to the local government, NAPOCOR maintains

that it is exempt therefrom.

We find the above argument untenable. It reads into the law a distinction

that is not there. It is contrary to the clear intent of the law to withdraw from

all units of government, including government-owned or controlled

corporations their exemptions from all kinds of taxes. Had it been otherwise,

then the law would have said so. Not having distinguished as to the kinds of

tax exemptions withdrawn, the plain meaning is that all tax exemptions are

covered. There the law does not distinguish, neither must we.

Moreover, Presidential Decree No. 1931 entitled "DIRECTING THE

RATIONALIZATION OF DUTY AND TAX EXEMPTION PRIVILEGES GRANTED TO

GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS AND ALL OTHER

UNITS OF GOVERNMENT" which was passed on June 11, 1984, categorically

states:

WHEREAS, Presidential Decree No. 1177 has already expressly repealed the

grunt of tax privileges to any government-owned or controlled corporation

and all other units of government. (Emphasis supplied )

Thus, any dubiety on NAPOCOR'S liability to pay taxes, duties and fees

should be considered unequivocably resolved by the above provision.

In the case of National Power Corporation vs. The Province of Albay, et. al.,

10 herein petitioner was held liable for real property taxes to the provincial

government of Albay for the period June 11, 1984 to March 10, 1987, when

it claims to have been enjoying tax exemptions under Resolutions Nos. 10-

85, 1-86 and 17-87 of the Fiscal Incentives Review Board (FIRB). It must be

noted that Resolution 10-85 was the same resolution cited by petitioner in

its supplemental motion to dismiss 11 inCivil Case No. 9901. If the attempt

(found ineffective for lack of authority in the above-cited case of NPC vs. The

Province of Albay) to restore petitioner's tax exemptions began only in 1985

with the issuance of FIRB Resolution No. 10-85, it stands to reason that prior

thereto, i.e., from 1977 when P.D. 1177 was promulgated up to 1984,

petitioner did not enjoy any tax privilege as would exempt it from the

payment of the taxes under consideration.

In the same case of NPC vs. The Province of Albay, 12 this Court had occasion

to state:

Actually, the State has no reason to decry the taxation of NAPOCOR's

properties, as and by way of real property taxes. Real property taxes, after

all, form part and parcel of the financing apparatus of the Government in

development and nation-building, particularly in the local government level.

xxx xxx xxx

To all intents and purposes, real property taxes are funds taken by the State

with one hand and given to the other. In no measure can the Government

be said to have lost anything.

The proceeds of the real property tax are divided among the province, city

or municipality where the property subject to the tax is situated and shall be

applied by the respective local government unit for its own use and benefit.

Even the barrio where the property is situated shares in the real property

tax collections. Likewise, the entire proceeds of the additional one per cent

(1%) real property tax levied for the Special Education Fund created under

R.A. 5447, are divided among the province, city and municipalities where

the property is situated.

WHEREFORE, the petition is DISMISSED. Petitioner having been found liable

for the taxes being collected in Civil Case No. 9901, the respondent court is

hereby directed to proceed with deliberate dispatch in hearing the case for

the purpose of determining the exact liability of petitioner. No Costs.

SO ORDERED.

Gutierrez, Jr., Bidin and Cortes, JJ., concur.

Feliciano, J., is on leave.

 

Footnotes

1 Rollo, pp. 18-21.

2 Rollo, pp. 22-24.

3 Rollo, pp. 25-26; 28-30.

4 Rollo, pp. 31-33.

5 Rollo, pp. 65-66.

6 Rollo, pp. 72-73.

7 Rollo, pp. 2-16.

8 Lagman vs. City of Manila, G.R. No. 23305, June 30, 1966, 17 SCRA 579.

9 Baga vs. PNB, 99 Phil. 889, cited in Butuan Sawmill, Inc. vs. City of Butuan, et al., No.

L-21516, April 29, 1966, 16 SCRA 755.

10 G.R. No. 87479, June 4, 1990.

11 Rollo, pp. 31-33.

12 Ibid.

EN BANC

G.R. No. L-18080             April 22, 1963

TAN KIM KEE, petitioner,

vs.

THE COURT OF TAX APPEALS, ET AL., respondents.

REYES, J.B.L., J.:

Appeal from the majority decision of the Court of Tax Appeals affirming the

denial of a claim for refund of the fixed and sales taxes.

The case was submitted before the tax court under a stipulation of facts, as

follows:

1. The petitioner is a producer of copra exporters in Davao City.

2. Petitioner produces copra in two ways, namely, the sun-dried method and

the kiln-dried method.

3. Under the sun-dried method employed by petitioner, the nuts are first

split into halves and are dried under the sun to partly loosen the meat from

the shell. After one or two days of drying in that state, the meat is removed

from the shell with an instrument designed for the purpose. To facilitate

drying and handling, the meat so removed is chopped into small pieces and

the same is dried under the sun for at least three days or until its moisture

content is reduced to a minimum acceptable in the market.

4. The processes involved in copra-making under the kiln-dried method

employed by the petitioner are the same as the sun-dried method described

above except that in the latter method, the nuts are first unhusked before

being split into halves and the meat is dried in a kiln or oven heated with

fuel. Further, the drying process (18-23 hours) under the kiln-dried method

is shorter than the sun-dried method.

5. For the period from August 24, 1956 to December 31, 1956, petitioner's

gross sales of copra produced by him amounted to P17,917.53 on which he

paid to the treasurer of Davao City, on January 10, 1957, the sum of

P1,254.24 as the 7% sales tax imposed by section 186 of the National

Internal Revenue Code as amended by Republic Act No. 1612.

6. Petitioner paid also to the same official on the same date, fixed taxes(c-

14) of P40.00 for the years 1956 and 1957, pursuant to section 182 of the

said code.

7. For the payment of the above-mentioned sales and fixed taxes, BIR

official receipts Nos. C-146545, respectively, were issued to the petitioner.

8. On September 6, 1957, petitioner filed with respondent a claim for the

aforesaid taxes which claim was denied by the latter on November 22, 1957.

9. On February 7, 1958, petitioner filed with respondent a request for

reconsideration of the denial of his claim for refund but said request was

denied on February 13, 1958.

Wherefore, the parties respectfully pray that the foregoing stipulation of

facts be admitted and approved by this Honorable Court, without prejudice

to the parties adducing other evidence to prove their case not covered by

this stipulation of facts. 1äwphï1.ñët

10. Petitioner filed on April 30, 1958 his second request for reconsideration

which was denied on July 1, 1958.

11. On August 12, 1958 petitioner filed with this Honorable Court the

present petition for review which was answered by respondent on

September 26, 1958.

Not stipulated but nevertheless admitted in the pleadings is the additional

fact that the petitioner is a producer of copra out of his coconut plantation in

Sta. Cruz, Davao.

The petitioner ascribes the following errors against the lower court:

I. The Tax Appeals Court erred in holding that the mere drying out process

by which the coconuts produced from petitioner's plantation are converted

into copra (dried coconut), constitutes manufacturing as defined in section

194(x) of the Tax Code.

II. The Tax Appeals Court erred in failing to consider the absurd, illogical and

mischievous results that would necessarily follow from its interpretation of

section 194(x) of said code, contrary to the consistent legislative policy of

encouraging farmers by exempting their products from taxation.

This case involves an interpretation of Section 188(b) of the Tax Code, as

amended by the shortlived revenue statute, Republic Act No. 1612, when

applied to copra making. Said Act took effect on 24 August 1956 until it was

superseded by Republic Act 1856 on 22 June 1957. This section, as it stood

before and during the effectivity of Republic Act No. 1612, and after

subsequent amendment by Republic Act 1856, provides (all emphasis

supplied):

Before effectivity of RA No. 1612

(b) Agricultural products and the ordinary salt when sold, bartered, or

exchanged in this country by the producers or owner of the land where

produced, as well as fish and its by-products when sold, bartered, or

exchanged by the fisherman or fishing operator, whether in their original

state or not.

During the eleven-month effectivity of RA No. 1612

(b) Agricultural products and the ordinary salt in their original form when

sold, bartered, or exchanged by the producer or owner of the land where

produced. The term "agricultural products" as used herein shall not include

cultured fish and other products raised or produced in fishponds, and those

which have undergone the process of manufacturing as defined in section

one hundred ninety-four (x) of this Code.

After repeal of RA No. 1612 by RA No. 1856

(b) Agricultural products and the ordinary salt whether in their original form

or not when sold, bartered, or exchanged in this country by the producer or

owner of the land where produced, as well as all kinds of fish and its by-

products when sold, bartered or exchanged by the fisherman or fishing

operator whether in their original state or not.

The majority of the Tax Court was of the view that before the passage of

Republic Act No. 1612, copra making was not taxable because the law then

exempted agricultural products "whether in their original state or not" but

that it became taxable during the effectivity of the Republic Act No. 1612

because the agricultural products that were exempted under it were those

"in their original form", and said law excluded from the exemption "those

which have undergone the process of manufacturing as defined in section

one hundred ninety-four (x) of this Code", that provides:

(x) "Manufacturer" includes every person (1) who by physical or chemical

process alters the exterior texture or form of inner substance of any raw

material or manufactured or partially manufactured product in such a

manner as to prepare it for a special use or uses to which it could not have

been put in its original condition, or (2) who by any such process alters the

quality of any such raw material or manufactured or partially manufactured

product so as to reduce it to marketable shape or prepare it for any of the

uses of industry, or (3) who by any such process combines any such raw

material or manufactured or partially manufactured products with other

materials or products of the same or of different kinds and in such manner

that the finished products of such process of manufacture can be put to a

special use or uses to which such raw material or manufactured or partially

manufactured products in their original condition could not have been put

and who in addition alters such raw material or manufactured or partially

manufactured products, or combines the same to produce such finished

products for the purpose of their sale or distribution to others and for his

own use or consumption.

The majority of the Tax Court further held that because of the unhusking

and halving of the coconut fruit, removal and cutting into several pieces of

its meat, and dehydrating by sun or kiln, the fruit in its original form

underwent a process of manufacturing, and, therefore, became taxable; but

after the repeal of Republic Act 1612 by Republic Act 1856, the exempt

agricultural products included once more those products "whether in their

original state or not". It decided, therefore, that the taxability of copra

making under Republic Act No. 1612 is in accordance with the legislative

intent to increase revenue by imposing taxes on "greater coverage of

subjects of taxation", as expressed in the explanatory note of the House Bill

5809, the source of Republic Act 1612; and that the said section being an

exempting provision, the same should be construed strictissimi juris against

the party claiming exemption.

Contrary to the above views of the respondents, the petitioner would

consider copra as the agricultural product in its original form and the

coconut fruit merely the crop of the producer and because copra is the only

product that may be produced from coconut lands while the process of

manufacture involved in the conversion of the coconut fruit to copra is a

part of the genuine agricultural labor of the farmer. The petitioner adopted

the dissenting opinion that the enactment of Republic Act 1612 did not

change anything; because the processes that constitute manufacturing

under Section 194 (x)have not been enlarged or extended, and that the

ruling of the respondents would be a radical departure from the time-

honored policy of Congress to give preferential treatment to farmers;

furthermore, the respondents' interpretation would lead to absurd, illogical,

and mischievous results, like the following: coconut planters, abaca planters

and rice farmers would be liable for 7% tax while operators of coconut oil

mills and dessicated coconut factories, rope factories, and rice mill

operators are taxable only at 2% under Section 189 of the Code; likewise,

the coconut planter is not taxable for producing coconuts, but the moment

he unhusks them he is obliged to pay 7% on sales tax. The petitioner insists

that the legislative intent in enacting Republic Act 1612 was to exclude

copra making, as shown in the explanatory note of House Bill 6094, a bill

intended to amend Republic Act 1612, and that this intention to exclude

copra making is also reflected in the speeches and debates delivered in the

floor of Congress in its session on 30 January 1957 (Congressional Records,

Vol. IV, No. 3).

The flaw in petitioner-appellant's argument is that it ignores the legislative

change in the phraseology of the exemption of agricultural products. The

original statute excepted from the tax "Agricultural products xxx whether in

their original state or not", but under the shortlived R.A. No. 1612 it was

altered and reduced to "agricultural products in their original form"

exclusively. The change in scope was further emphasized by the

qualification in the same Act that "agricultural products xxx shall not include

cultured fish . . . and those which have undergone the process of

manufacturing . . . ." Plainly, R.A. No. 1612 was intended to restrict the

exemption and broaden the subject of taxation, in order to increase the

state revenues; and this purpose becomes indubitable when we consider

that ordinary salt and fish were also originally exempt, but the exemption

was not restated in R.A. No. 1612.

If, as contended by the petitioner, there was no intention to limit the

exemption of agricultural products, then it may well be wondered why the

Legislature found it necessary to change at all the terms of the exemption;

and even further, it may be asked why, barely a year later, it was found

proper to restore (by R.A. No. 1856) the primitive terms of the exemption of

agricultural products "whether in their original form or not". It is not to be

presumed that the Legislature, in making such changes, was indulging in

mere semantic exercise. There must have been some purpose in making

them, and the rational explanation is that the coverage of the exemption

was being broadened by R.A. No. 1612, as expressly stated in the original

House Bill No. 5819 that later became said Act; and that the policy change

was later found inadvisable, so that the statute was reworded by R.A. 1856

to corresponded to the original terminology so as to restore the original

exemption..

Stress is laid on the explanatory note to House Bill No. 6094 that it was

"never the intention of Congress to impose such heavy burden upon our

agricultural producers"; but these statements did not go beyond a personal

opinion of the proponents of House Bill No. 6094, since the true source of

Republic Act 1856 (repealing R.A. No. 1612)was not Bill No. 6094, but House

Bill No. 5819.

We find no weight in the argument that under the interpretation given to

Republic Act 1612 the planters and farmers would pay a higher tax than rice

mills and coconut factories. The rule of uniform taxation does not deprive

Congress of the power to classify subjects of taxation, and only demands

uniformity within the particular class.

The legislative intent to increase revenue by widening the coverage of

taxable subjects is evident under Republic Act 1612, and by it the exempt

agricultural products were only those that remain in their original form, and

have not undergone the process of manufacture. This Court has had

occasion to observe that —

By the very nature of the changes made in the original statute, it is clear

that the amendment is intended, not to clarify the doubtful meaning of the

former law, xxx, but to withdraw from the scope of the former exemption

the agricultural products that are no longer in their original form because

they have undergone the process of manufacture." (Philippine Packing

Corporation vs. Collector of Internal Revenue, L-9040, Res. of Jan. 22, 1957).

WHEREFORE, the decision appealed from is affirmed, with costs against

petitioner-appellant.

EN BANC

 

G.R. No. L-28739 and L-28902 March 29, 1972

DAVAO LIGHT and POWER CO., INC., petitioner-appellant,

vs.

THE COMMISSIONER OF CUSTOMS and COURT OF TAX APPEALS,

respondents-appellees.

 

REYES, J.B.L., J.:p

These are appeals from the decision of the Court of Tax Appeals in CTA

Cases Nos. 1337 and 1551, denying the claim of Davao Light & Power Co.,

Inc., for refund of the amount paid by said company as customs duties,

special import taxes, compensating taxes and wharfage fees on the

importations of electrical supplies and materials for installation and use at

its power plant.

The Davao Light & Power Co., Inc., hereafter referred to as Davao Light, is

the grantee of a legislative franchise to install, operate and maintain an

electric light, heat and power plant in the city (then Municipality) of Davao,

for a period of 50 years. On two different occasions in 1962, it imported

electrical supplies, materials and equipment for installation in its power

plant. The importations arrived in the port of Cebu City, on which the

Collector of Customs imposed, and Davao light paid under protest, customs

duties and taxes in the total amount of P9,928.00. As the Collector of

Customs later ruled unfavorably on the protests (Nos. 267, 268, 269 and

278) and denied its claim for refund of the taxes and duties paid on the

imported articles, Davao Light appealed to the Commissioner of Customs.

And when said official sued the action of the Collector, Davao Light went to

the Court of Tax Appeals, maintaining its claim to exemption from the taxes

and duties imposable on the aforementioned motions.

In the Court of Tax Appeals, the parties entered into a stipulation of facts,

the pertinent provisions of which read as follows:

6. — That the petitioner (Davao Light) is a grantee of a legislative franchise

under Philippine Legislature Act No. 3760, ...;

7. — That the petitioner was granted by the Public Service Commission its

Certificate of Public Convenience and Necessity in 1931 and by virtue of said

franchise has established and has been maintaining and operating a power

plant generating electric light, heat and power and distributing the same for

sale within the municipality (now City) of Davao;

8. — That the National Power Corporation was created by virtue of

Commonwealth Act No. 120, and under Section 2, par. (g) it was empowered

and granted authority:

"To construct, operate and maintain power plants, auxiliary plants, dams,

reservoirs, pipes, mains, transmission lines, power stations and substations

and other works, for the purpose of developing hydraulic power from any

river, creek, lake, spring and waterfalls in the Philippines and supplying such

power to the inhabitants thereof; to acquire, construct, install, maintain and

operate and improve gas, oil or steam engines and/or other prime movers,

generators and other machinery in plants and/or auxiliary plants for the

production of electric power; to establish, develop, operate and maintain

and administer power and lighting systems for the use of the Government

and the general public; to sell electric power and to fix the rates and provide

for the collection of the charges for any service rendered: Provided, that the

rates of charges shall not be subject to revision by the Public Service

Commission."

9. — That by virtue of this authority given the National Power Corporation, it

established and constructed a power plant, power stations and transmission

lines in Davao City, for the purpose of generating electric light, heat and

power for the inhabitants of Davao City and its surrounding areas and that it

is presently operating and maintaining said power plant, power station and

transmission lines and selling electric power, heat and light in the City of

Davao;

10. — That Section 17 of (pre-Commonwealth) Act No. 3636 (Standard

Electric Power & Light Franchises Law) provides:

"In the event of any competing individual, association of persons or

corporation receiving either a franchise or permission from the Government

of the Philippine Islands, or from any province, city or municipality thereof,

to conduct a similar business in all or any substantial portion of the territory

covered by this franchise to that of the grantee, in which franchise or

permission there shall be any term or terms more favorable than those

herein granted or tending to place the herein grantee at any disadvantage,

then such term or terms shall ipso facto become a part of the terms hereof

and shall operate equally in favor of the grantee as in the case of said

competing individual asssociation of persons or corporations."

xxx xxx xxx

12 — That under Section 2 of Republic Act No. 358, as amended by Republic

Act No. 937, it is provided that "to facilitate payment of its indebtedness, the

National Power Corporation shall exempt from all taxes, except real property

tax, and from all duties, fees, imposts, charges and restrictions of the

Republic of the Philippines, its provinces, cities and municipalities."

It was therein petitioner's contention that pursuant to Section 17 of Act

3636, the provision of Republic Act 987 granting tax exemption privileges to

the National Power Corporation ipso facto became part of its franchise;

hence, its claim to exemption from taxes and customs duties on the

importations in question.

In its decision of 15 December 1967, the Court of Tax Appeals affirmed the

ruling of the Customs Commissioner, the Court holding that the tax

exemption privileges granted to the National Power Corporation were

intended to benefit only said government corporation and did not extend to

other bodies or entities. Davao Light thus brought the present petition for

review in this Court, raising the same issue of the correctness of the

imposition of taxes and customs duties on its importations of electrical

supplies and materials for use in its electric plant.

Petitioner in this instance reiterates the contention that is legislative

franchise to construct, maintain and operate an electric light, heat and

power system (granted by Act 3760) was specifically made subject to Act

3636, which Act, in its Section 17, provides that any favorable terms granted

to any "competing individual, association of persons or corporation" shall

ipso facto become part of a franchise earlier issued. As the National Power

Corporation (NPC) is actually operating a power plant, power stations and

transmission lines in Davao City and selling electric power, heat and light in

said locality, and said corporation is enjoying exemption from all taxes,

duties, fees, imposts and charges collectible by the government, it is argued

that such tax exemption benefits ipso facto became part of its franchise and

are not available to petitioner.

There is no merit in petitioner's contention. Firstly, the aforecited provision

of Section 17 of Act 3636 makes mention of franchise or permit issued to

"competing" individuals, associations or corporations. In short, by express

provision of law favorable terms contained in a subsequent franchise issued

to an individual, association, etc. shall automatically be considered

incorporated in the franchise or permit earlier issued to another individual,

association, etc. engaged in the same business. The idea is to place both

competing groups or entities on equal footing and not to give one an

advantage over the other. This principle of fair play, which is the basic idea

behind the provision, does not find operation in the present case.

It is undeniable that petitioner's purpose in securing a franchise to establish

and operate an electric plant and power stations was to engage in a

business or profit-making venture. The NPC, on the other hand, was

specifically created to undertake the development of hydraulic power

throughout the country and the production of power from other sources, for

use of the government and the general public. 1 As envisioned by the law

creating it, the activity to be pursued by the NPC can hardly be motivated by

profit or income.

In operating and maintaining a power plant, power stations and transmission

lines in Davao City, as duly authorized in its charter, the NPC can not be

considered as posing competition to petitioner's business. In fact, there is

evidence on record that the NPC does not sell electric lower directly to the

general public; instead, it did sell lower to petitioner for resale to the latter's

customers. 2 In other words, the NPC is even the source of petitioner's

merchandise; it is aiding petitioner in its business operations, not competing

with it.

Nor would the fact that the NPC supplies electric power to the National

Development Company (NDC) plant in Davao justify the claim that the NPC

is a competitor to petitioner's business, because Section 10 of

Commonwealth Act 120 (NPC charter) made it NPC's duty to supply power to

the NDC.

Sec. 10. At any time that the Board certifies that the Corporation is able to

furnish electric power for lighting an other purposes to any office, shop, or

establishment operated and/or owned or controlled by the National

Government or by any city, province, municipality or other political

subdivision of the Commonwealth of the Philippines, the National

Government and the government of said city, province, municipality or other

political subdivision shall be compelled to secure from the Corporation as

soon as practicable such electric power as it may need for lighting and the

operation of its offices, shops or establishments or for any work undertaken

by it.

The provisions of this section shall also apply to firms or business owned or

controlled by the National Government or by the government of any city,

province, municipality or other political subdivisions.

Be that as it may, such an isolated case of sale of electric power to one

government-owned plant would not be enough to classify the NPC as a

"competing" concern to petitioner's enterprise, which must be assumed to

be catering to the general public to which the NPC has no dealing.

Secondly, petitioner can not rely on the provisions of Republic Act 358, as

amended by Republic Act 987 3, to support its claim for tax exemption.

Section 1 of Republic Act 358, approved on 4 June 1949, amended Section 2

(k) of Commonwealth Act 120, which authorized the NPC to "contract

indebtedness and issue bonds subject to the approval of the President of the

Philippines, upon recommendation of the Secretary of Finance" in an

amount not to exceed one hundred seventy million five hundred pesos.

Then in its Section 2, the same law provided:

SEC 2. To facilitate payment of its indebtedness, the National Power

Corporation shall be exempt from all taxes, duties, fees, imposts, charges,

and restrictions of the Republic of the Philippines, its provinces, cities, and

municipalities." (emphasis supplied).

On the same day, 4 June 1949, Republic Act 357 was approved, authorizing

the President of the Philippines to negotiate and contract loans from time to

time from the International Bank for Reconstruction and Development, on

behalf of the NPC, and to guarantee, absolutely and unconditionally, as

primary obligator and not merely as surety, the payment of loans therefore

contracted. 4 The provisions of Section 2 of Republic Act 358 granting tax

exemption to the NPC, taken in the light of the existing legislation affecting

the NPC, notably Republic Act 357, must be construed as intended to benefit

only the NPC, the lawmakers expecting (as so unequivocally expressed in

the law) that by relieving said corporation of tax obligations, the NPC would

be enabled to pay easily its indebtedness or whatever indebtedness it is

certain to incur. In granting such tax exemption, the government actually

waived its right to collect taxes from the NPC in order to facilitate the

liquidation by said corporation of its liabilities, and the consequential release

by the government itself from its obligation (as principal obligor) in the

transactions entered into by the President on behalf of the NPC. Such

condition, peculiar only to the NPC, cannot be said to exist in petitioner's

case; hence, the absolute lack of basis for awarding of equal privileges

(granted to the NPC) to said petitioner.

Similarly, petitioner can not lay claim to the enjoyment of the tax exemption

benefits given to NPC because said corporation happened to be operating a

power plant in the same locality where petitioner has a franchise. The legal

principle on the matter is firmly established and well-observed: exemption

from taxation is never presumed; 5 for tax exemption to be recognized, the

grant must be clear and expressed; it cannot be made to rest on vague

implications. 6 The possession by petitioner of a perzmit to operate an

electric plant in Davao City does not entitle it to the same exemption

privileges enjoyed by another operator without an express provision of the

law to that effect.

FOR THE FOREGOING CONSIDERATIONS, the decision of the Court of Tax

Appeals is hereby affirmed, with costs against the petitioner.

 

Footnotes

1 Section 1, Commonwealth Act 120.

2 Page 135, CTA Record.

3 Section 2 of Republic Act 358 was amended so as to exclude from the exemption taxes due on real properties.

4 Section 3, Republic Act 357.

5 Resins, Inc. vs. Auditor General, L-17888, 29 Oct. 1968, 25 SCRA 754; Asturias Sugar Central, Inc. vs. Commissioner, L-19337,

30 September 1969, 25 SCRA 617; Commissioner vs. Visayan Electric Co., L-22611, 27 May 1968, 23 SCRA 715; Commissioner

of Internal Revenue vs. Guerrero, L-20812, 22 Sept. 1967, 21 SCRA 180, and cases cited therein; Esso Standard Eastern, Inc. vs.

Acting Commissioner, L-21841, 28 Oct. 1966, 18 SCRA 488, and cases cited therein.

6 Borja vs. Collector, L-12134, 30 November 1961, 3 SCRA 590.

EN BANC

G.R. No. L-20960-61            October 31, 1968

COMMlSSIONER OF INTERNAL REVENUE and COMMISSIONER OF

CUSTOMS, petitioners-appellants,

vs.

PHILIPPINE ACE LINES, INC., respondent-appellee.

Office of the Solicitor General Antonio Barredo, Assistant Solicitor General

Felicisimo R. Rosete and Special Attorney Francisco J. Malate, Jr. for

petitioners-appellants.

Dakila F. Castro & Associates for respondent-appellee.

ANGELES, J.:

On appeal by the Government from the decision — rendered jointly in Tax

Cases Nos. 964 & 984 — of the Court of Tax Appeals, reversing the rulings of

the Commissioner of Internal Revenue holding the Philippine Ace Lines, Inc.

liable to pay the aggregate amount of P1,407,724.57 as compensating taxes

on four (4) ocean-going cargo vessels acquired by said company from the

Reparations Commission of the Philippines, and of the Commissioner of

Customs to place the four vessels under customs custody until the

aforementioned amount claimed by the Government was first paid.

The antecedent facts of the case are not in dispute and may be summarized

briefly as follows:

Under date of January 23, 1959, the Reparations Commission agreed to sell

to the Philippine Ace Lines the cargo vessel M/S YAKAL and M/S MOLAVE

which were procured by the former from Japan for the end-use of the latter

under the Philippine- Japanese Reparations Agreement of May 9, 1956, at

the agreed prices of P4,283,241.48 and P4,292,457.48, respectively. Similar

agreements involving two (2) other ocean-going cargo vessels were

subsequently entered into by and between the same parties: one, dated

November 11, 1959, referring to the purchase and sale of M/S TINDALO for

the price of P7,054.177.78 and, the other, concerning the purchase and sale

of M/S NARRA under date of December 14, 1959, for the price of

P3,599,995.44. All these agreements — invariably denominated as "Contract

of Conditional Purchase and Sale of Reparations Goods" — stipulated,

among others, that the Reparations Commission retains title and ownership

of the above-described vessels until they were fully paid for and that the

purchase prices of the vessels were to be paid by Philippine Ace Lines to the

Reparations Commission under deferred payment plans in ten (10) equal

annual installments.

The four (4) vessels referred to were thereafter delivered to Philippine Ace

Lines in Japan; they were taken to the Philippines where they were

registered in the Bureau of Customs in the name of the Reparations

Commission; and thereafter, the vessels were operated and utilized by

Philippine Ace Lines in its shipping business, plying between ports of foreign

countries and the Philippines.

Sometime later, however, the Commissioner of Internal Revenue assessed

against the Philippine Ace lines the amounts of P304,428.00, P256,275.00,

P499,948.10 and P305.073.47 as compensating taxes on the M/S YAKAL,

M/S NARRA, M/S TINDALO and M/S MOLAVE, respectively, and demanded

payment of the said amounts. The Commisioner of Customs, joining the

Commissioner of Internal Revenue, then placed the vessels under customs

custody at the different ports of the Philippines where they were found at

the time, and refused to give due course to the "clearance" of said vessels

as requested by their respective owner and operator — Reparations

Commission and Philippine Ace Lines — unless the compensating taxes

assessed against the latter were first paid to the Commissioner of Internal

Revenue. Philippine Ace Lines protested said actions of the Commissioners

of Internal Revenue and of Customs, alleging that the legal title and

ownership of the vessels operated by it were still vested with the

Reparations Commission which, under Section 14 of the Reparations Act,1

was exempt from payment of all duties, fees and taxes on all reparations

goods obtained by it; but the said officials rejected the protest and ruled

that the compensating taxes should first be paid, per directive to that effect

by the Secretary of Finance. Subsequent protests — calling the attention of

the Commissioner of Internal Revenue and the Commissioner of Customs to

the substantial loss and irreparable injury it has suffered by the tying up of

the four ships in port — also proved futile. Offshoots of the controversy,

Philippine Ace Lines interposed two (2) separate appeals (petitions for

review) from the above rulings or decisions of the Commissioner of Internal

Revenue and the Commissioner of Customs, to the Court of Tax Appeals

where they were docketed as C.T.A. Case No. 964, involving M/S YAKAL and

M/S NARRA, and C.T.A. Case No. 984, concerning M/S TINDALO and M/S

MOLAVE.

While the cases were pending trial, Philippine Ace Lines petitioned the court

a quo to enjoin the collection of the compensating tax assessed against it

and after hearing, writs of preliminary injunction were issued upon the filing

of surety bonds to guarantee payment of the amounts claimed.

In the meantime, Congress enacted Republic Act No. 3079 (effective June

17, 1961) which amended Republic Act No. 1789, otherwise known as the

Reparations Act, and provided as follows:

SEC. 14. Exemption from tax. — All reparations goods obtained by the

Government shall be exempt from the payment of all duties, fees and taxes.

Reparations goods obtained by private parties shall be exempt from the

payment of customs duties, compensating tax, consular fees and the special

import tax.

xxx           xxx           xxx

SEC. 20. This Act shall take effect upon its approval, except that the

amendment contained in section seven hereof relating to the requirements

for procurement orders including the requirement of downpayment by

private applicant end-users shall not apply to procurement orders already

duly issued and verified at the time of the passage of this amendatory Act,

and except further that the amendment contained in section ten relating to

the insurance of the reparations goods by the end-users upon delivery shall

apply also to goods covered by contracts already entered into by the

Commission and the end-user prior to the approval of this amendatory Act

as well as goods already delivered to the end-user, and except further that

the amendments contained in sections eleven and twelve hereof relating to

the terms of the installment payments on capital goods disposed of to

private parties, and the execution of a performance bond before delivery of

reparations goods, shall not apply to contract for the utilization of

reparations goods already entered into by the Commission and the end-

users prior to the approval of this amendatory Act: Provided, That any end-

user may apply the renovation of his utilization contract with the

commission in order to avail of any provision of this amendatory Act which is

more favorable to an applicant end-user than has heretofore been granted

in like manner and to the same extent as an end-user filing his application

after the approval of this amendatory Act, and the Commission may agree

to such renovation on condition that the end-user shall voluntarily assume

all the new obligations provided for in this amendatory Act. [Emphasis

supplied]

Invoking the favorable provisions of the new law Republic Act No. 3079

above quoted Philippine Ace Lines then entered into "Renovated Contract(s)

of Conditional Purchase and Sale of Reparations Goods" with the

Reparations Commission, covering the four (4) cargo vessels. It had

previously acquired from the latter under the Reparations Act. Thereafter,

the said company filed a "Supplement to the Petition for Review" in each of

the above entitled cases before the Court of Tax Appeals, submitting

therewith copies of the said renovated contracts it had entered with the

Reparations Commission regarding the purchase and sale of M/S MOLAVE,

M/S TINDALO, M/S YAKAL and M/S NARRA, with the allegation that "expressly

implementing section 14 of Republic Act No. 3079 in the aforesaid

renovated contracts," the Reparations Commission and the Philippine Ace

Lines have agreed as follows:

NOW THEREFORE, for and in consideration of the premises above stated and

of the payments to be made by the herein Conditional Vendee as stipulated

in Annex "B" hereof which is made an integral part of this contract, the

parties herein agree to execute this renovation of contract of Conditional

Purchase and Sale and the Conditional Vendor hereby transfers and conveys

unto the herein Conditional Vendee the ocean-going vessels above-

described ...; subject further to the pertinent provisions of Republic Act No.

1789 as amended, including particularly the exempting provisions of Section

14 thereof relative to the exemption from payment of compensating tax

which the herein Conditional Vendee, as an implemented machinery, do

hereby, by these presents, implement. ...

In their "Answer to Supplement to Petition for Review" filed with the court

below by counsel for the Commissioner of Internal Revenue and the

Commissioner of Customs, the foregoing allegation was admitted. They

claimed, however, that even if Philippine Ace Lines and the Reparations

Commission have agreed to implement the provisions of Section 14 of

Republic Act No. 1789, as amended by Republic Act No. 3079, in the

"Renovated Contract of Conditional Purchase and Sale of Reparations

Goods" entered into between them, such implementation did not relieve the

Philippine Ace Lines from the payment of the compensating taxes in

question. The parties thereafter submitted the cases for decision upon a

stipulation of facts containing, substantially, the facts as above set forth.

On January 25, 1963, the Court of Tax Appeals rendered a joint decision in

the two cases, reversing the rulings of the Commissioner of Internal

Revenue and the Commissioner of Customs, in the following rationale:

The sole issue presented for our consideration is whether or not petitioner is

liable for the compensating tax on the four ocean-going vessels in question.

Petitioner claims that it is not liable on the grounds that said vessels are still

owned by the Reparations Commission and that, assuming that it was liable

therefor under Section 190 of the National Internal Revenue Code, in

relation to Section 14 of Republic Act 1789 before its amendment, it is now

exempt from said tax by virtue of Section 20 of Republic Act No. 3079 in

relation to Section 14 of Republic Act No. 1789, as amended. On the other

hand, respondent claims that petitioner is liable and that the latter's liability

is not affected by the exemption provision of the new law.

xxx           xxx           xxx

The Government does not deny the fact that petitioner has complied with all

the requirements of law in order that it may avail itself of all the favorable

provisions granted in Republic Act No. 3079. It is, however, contended that

the favorable provisions mentioned in Section 20 of said Act which may be

availed of by an applicant for renovation of his utilization contract with the

Reparations Commission do not include exemption from compensating tax

because such exemption is not expressly stated in the law. In providing that

the favorable provisions of Republic Act No. 3079 shall be available to

applicants for renovation of their utilization contracts, on condition that said

applicants shall voluntarily assume all the new obligations provided in the

new law, the law intends to place persons who acquired reparations goods

before the enactment of the amendatory Act on the same footing as those

who acquire reparations goods after its enactment. This is so because of the

provision that once an application for renovation of a utilization contract has

been approved, the favorable provisions of said Act shall be available to the

applicant "in like manner and to the same extent as an end-user filing his

application after the approval of this amendatory Act." To deny exemption

from compensating tax to one whose utilization contract has been

renovated, while granting the exemption to one who files an application for

acquisition of reparations goods after the approval of the new law, would be

contrary to the express mandate of the law that they both be subject to the

same obligations and they both enjoy the same privileges in like manner

and to the same extent. It would be a manifest distortion of the literal

meaning and purpose of the law.

FOR THE FOREGOING CONSIDERATIONS, the decisions appealed from in

both cases are hereby reversed. Accordingly, the surety bonds filed by

petitioner to guarantee payment of the tax in question are thereby

cancelled. No pronouncement as to costs.

Not satisfied with the foregoing decision of the Court of Tax Appeals, the

Government has interposed the instant appeal therefrom to this Court.

Appellant now charges that the lower court had erred in holding that the

renovation of the contracts of purchase and sale of the vessels involved in

these cases, after the approval of Republic Act No. 3079, entitled Philippine

Ace Lines to the exemption from payment of compensating tax under the

provisions of the said law, notwithstanding the fact that the vessels referred

to were acquired from the Reparations Commission long before the approval

of said amendatory Act which, by the way, did not expressly authorize such

exemption. It is argued that the favorable provisions of Republic Act No.

3079 invoked by Philippine Ace Lines and relied upon by the decision of the

court below cannot include exemption from compensating tax, otherwise,

had Congress intended so, it would have provided for such exemption in

clear and explicit terms; that the tax exemption contained in Section 14 of

the amendatory Act cannot have retroactive application in the absence of

any provision for retroactivity; and that to grant such exemption to end-

users who have acquired reparations goods before the approval of Republic

Act No. 3079 would be prejudicial to the Government.

Appellant's position calls to mind Commissioner of Internal Revenue vs.

Bothelo Shipping Corporation,2 the factual setting of which is on all fours

with the case at bar, and where this Court, speaking through Chief Justice

Roberto Concepcion, disposed of the same charge and contentions in clear

and unequivocal terms, in the following wise:

The inherent weakness of the last ground becomes manifest when we

consider that, if true, there could be no tax exemption of any kind

whatsoever, even if Congress should wish to create one, because every such

exemption implies a waiver of the right to collect what otherwise would be

due to the Government, and, in this sense, is prejudicial thereto. In fact,

however, tax exemptions may and do exist, such as the one prescribed in

section 14 of Republic Act No. 1789, as amended by Republic Act No. 3079,

which, by the way, is "clear and explicit," thus, meeting the first ground of

appellant's contention. It may not be amiss to add that no tax exemption —

like any other legal exemption or exception — is given without any reason

therefor. In much the same way as other statutory commands, its avowed

purpose is some public benefit or interest, which the law-making body

considers sufficient to offset the monetary loss entailed in the grant of the

exemption. Indeed, section 20 of Republic Act No. 3079 exacts a valuable

consideration for the retroactivity of its favorable provision, namely, the

voluntary assumption, by the end-user, who bought reparations goods prior

to June 17, 1961, of "all the new obligations provided for in" said Act.

The argument adduced in support of the third ground is that the view

adopted by the Tax Court would operate to grant exemption to particular

persons, the Buyers therein. It should be noted, however, that there is no

constitutional injunction against granting tax exemptions to particular

persons. In fact, it is not unusual to grant legislative franchises to specific

individuals or entities, conferring tax exemptions thereto. What the

fundamental law forbids is the denial of equal protection such as through

unreasonable discrimination or classification.

Furthermore, Section 14 of the Law on Reparations, as amended, exempts

from the compensating tax, not particular persons but persons belonging to

a particular class. Indeed, appellants do not assail the Constitutionality of

said section 14, insofar as it grants exemptions to end-users who, after the

approval of Republic Act No. 3079, on June 17, 1961, purchased reparations

goods procured by the Commission. From the view point of Constitutional

Law, especially the equal protection clause, there is no difference between

the grant of exemption to said end-users, and the extension of the grant to

those whose contracts of purchase and sale were made before said date,

under Republic Act No. 1789.

It is true that Republic Act No. 3079 does not explicitly declare that those

who purchased reparations goods prior to June 17, 1961, are exempt from

the compensating tax. It does not say so, because they do not really enjoy

such exemption, unless they comply with the proviso in Section 20 of said

Act, by applying for the renovation of their respective utilization contracts,

"in order to avail of any provision of the Amendatory Act which is more

favorable" to the applicant. In other words, it is manifest, from the language

of said section 20, that the same intended to give such buyers the

opportunity to be treated "in like manner and to the same extent as an end-

user filing his application after the approval of this Amendatory Act." Like

the "most favored nation clause" in international agreements, the

aforementioned section 20 thus seeks, not to discriminate or to create an

exemption or exceptions, but to abolish the discrimination, exemption or

exception that would otherwise result, in favor of the end-user who bought

after June 17, 1961 and against one who bought prior thereto. Indeed, it is

difficult to find substantial justification for the distinction between the one

and the other. ...

We find no cogent reason to modify, much less depart from the conclusion

reached in Bothelo, as expressed in the above-quoted opinion of the Court

there, and the same should resolve the identical problem now brought

before Us in this proceeding.

WHEREFORE, the decision of the Court of Tax Appeals appealed from in

these cases is affirmed; no pronouncement as to costs.

 

Footnotes

1 Sec. 14, R.A. 1789. Exemption from tax.- All reparations goods obtained by the Government shall be exempt from the

payment of all duties, fees and taxes. Reparations goods obtained by private parties shall be exempt only from the payment of

customs duties, consular fees and special import tax.

2 L-21633, June 29, 1967.

FIRST DIVISION

G.R. No. 137377            December 18, 2001

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

MARUBENI CORPORATION, respondent.

PUNO, J.:

In this petition for review, the Commissioner of Internal Revenue assails the

decision dated January 15, 1999 of the Court of Appeals in CA-G.R. SP No.

42518 which affirmed the decision dated July 29, 1996 of the Court of Tax

Appeals in CTA Case No. 4109. The tax court ordered the Commissioner of

Internal Revenue to desist from collecting the 1985 deficiency income,

branch profit remittance and contractor's taxes from Marubeni Corporation

after finding the latter to have properly availed of the tax amnesty under

Executive Orders Nos. 41 and 64, as amended.

Respondent Marubeni Corporation is a foreign corporation organized and

existing under the laws of Japan. It is engaged in general import and export

trading, financing and the construction business. It is duly registered to

engage in such business in the Philippines and maintains a branch office in

Manila.

Sometime in November 1985, petitioner Commissioner of Internal Revenue

issued a letter of authority to examine the books of accounts of the Manila

branch office of respondent corporation for the fiscal year ending March

1985. In the course of the examination, petitioner found respondent to have

undeclared income from two (2) contracts in the Philippines, both of which

were completed in 1984. One of the contracts was with the National

Development Company (NDC) in connection with the construction and

installation of a wharf/port complex at the Leyte Industrial Development

Estate in the municipality of Isabel, province of Leyte. The other contract

was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the

construction of an ammonia storage complex also at the Leyte Industrial

Development Estate.

On March 1, 1986, petitioner's revenue examiners recommended an

assessment for deficiency income, branch profit remittance, contractor's

and commercial broker's taxes. Respondent questioned this assessment in a

letter dated June 5, 1986.

On August 27, 1986, respondent corporation received a letter dated August

15, 1986 from petitioner assessing respondent several deficiency taxes. The

assessed deficiency internal revenue taxes, inclusive of surcharge and

interest, were as follows:

I. DEFICIENCY INCOME TAX

     FY ended March 31, 1985

Undeclared gross income (Philphos and NDC

construction projects) P967,269,811.14

Less: Cost and expenses (50%) 483,634,905.57

Net undeclared income 483,634,905.57

Income tax due thereon 169,272,217.00

Add

: 50% surcharge 84,636,108.50

20% int. p.a.fr. 7-15-85 to 8-15-86 36,675,646.90

TOTAL AMOUNT DUE P290,583,972.40

II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX

     FY ended March 31, 1985

Undeclared gross income from Philphos and

NDC construction projects P483,634,905.57

Less: Income tax thereon 169,272,217.00

Amount subject to Tax 314,362,688.57

Tax due thereon 47,154,403.00

Add

: 50% surcharge 23,577,201.50

20% int. p.a.fr. 4-26-85 to 8-15-86 12,305,360.66

TOTAL AMOUNT DUE P83,036,965.16

III. DEFICIENCY CONTRACTOR'S TAX

     FY ended March 31, 1985

Undeclared gross receipts/gross income

from Philphos and NDC construction

projects P967,269,811.14

Contractor's tax due thereon (4%) 38,690,792.00

Add

:

50% surcharge for non-

declaration 19,345,396.00

20% surcharge for late payment 9,672,698.00

Sub-total 67,708,886.00

Add

: 20% int. p.a.fr. 4-21-85 to 8-15-86 17,854,739.46

TOTAL AMOUNT DUE P85,563,625.46

IV. DEFICIENCY COMMERCIAL BROKER'S TAX

     FY ended March 31, 1985

Undeclared share from commission income

(denominated as "subsidy from Home

Office") P24,683,114.50

Tax due thereon 1,628,569.00

Add

:

50% surcharge for non-

declaration 814,284.50

20% surcharge for late payment     407,142.25

Sub-total 2,849,995.75

Add

: 20% int. p.a.fr. 4-21-85 to 8-15-86     751,539.98

TOTAL AMOUNT DUE      P3,600,535.68

The 50% surcharge was imposed for your client's failure to report for tax

purposes the aforesaid taxable revenues while the 25% surcharge was

imposed because of your client's failure to pay on time the above deficiency

percentage taxes.

xxx           xxx           xxx"1

Petitioner found that the NDC and Philphos contracts were made on a "turn-

key" basis and that the gross income from the two projects amounted to

P967,269,811.14. Each contract was for a piece of work and since the

projects called for the construction and installation of facilities in the

Philippines, the entire income therefrom constituted income from Philippine

sources, hence, subject to internal revenue taxes. The assessment letter

further stated that the same was petitioner's final decision and that if

respondent disagreed with it, respondent may file an appeal with the Court

of Tax Appeals within thirty (30) days from receipt of the assessment.

On September 26, 1986, respondent filed two (2) petitions for review with

the Court of Tax Appeals. The first petition, CTA Case No. 4109, questioned

the deficiency income, branch profit remittance and contractor's tax

assessments in petitioner's assessment letter. The second, CTA Case No.

4110, questioned the deficiency commercial broker's assessment in the

same letter.

Earlier, on August 2, 1986, Executive Order (E.O.) No. 412 declaring a one-

time amnesty covering unpaid income taxes for the years 1981 to 1985 was

issued. Under this E.O., a taxpayer who wished to avail of the income tax

amnesty should, on or before October 31, 1986: (a) file a sworn statement

declaring his net worth as of December 31, 1985; (b) file a certified true

copy of his statement declaring his net worth as of December 31, 1980 on

record with the Bureau of Internal Revenue (BIR), or if no such record exists,

file a statement of said net worth subject to verification by the BIR; and (c)

file a return and pay a tax equivalent to ten per cent (10%) of the increase

in net worth from December 31, 1980 to December 31, 1985.

In accordance with the terms of E.O. No. 41, respondent filed its tax

amnesty return dated October 30, 1986 and attached thereto its sworn

statement of assets and liabilities and net worth as of Fiscal Year (FY) 1981

and FY 1986. The return was received by the BIR on November 3, 1986 and

respondent paid the amount of P2,891,273.00 equivalent to ten percent

(10%) of its net worth increase between 1981 and 1986.

The period of the amnesty in E.O. No. 41 was later extended from October

31, 1986 to December 5, 1986 by E.O. No. 54 dated November 4, 1986.

On November 17, 1986, the scope and coverage of E.O. No. 41 was

expanded by Executive Order (E.O.) No. 64. In addition to the income tax

amnesty granted by E.O. No. 41 for the years 1981 to 1985, E.O. No. 64 3

included estate and donor's taxes under Title III and the tax on business

under Chapter II, Title V of the National Internal Revenue Code, also

covering the years 1981 to 1985. E.O. No. 64 further provided that the

immunities and privileges under E.O. No. 41 were extended to the foregoing

tax liabilities, and the period within which the taxpayer could avail of the

amnesty was extended to December 15, 1986. Those taxpayers who already

filed their amnesty return under E.O. No. 41, as amended, could avail

themselves of the benefits, immunities and privileges under the new E.O. by

filing an amended return and paying an additional 5% on the increase in net

worth to cover business, estate and donor's tax liabilities.

The period of amnesty under E.O. No. 64 was extended to January 31, 1987

by E.O No. 95 dated December 17, 1986.

On December 15, 1986, respondent filed a supplemental tax amnesty return

under the benefit of E.O. No. 64 and paid a further amount of P1,445,637.00

to the BIR equivalent to five percent (5%) of the increase of its net worth

between 1981 and 1986.

On July 29, 1996, almost ten (10) years after filing of the case, the Court of

Tax Appeals rendered a decision in CTA Case No. 4109. The tax court found

that respondent had properly availed of the tax amnesty under E.O. Nos. 41

and 64 and declared the deficiency taxes subject of said case as deemed

cancelled and withdrawn. The Court of Tax Appeals disposed of as follows:

"WHEREFORE, the respondent Commissioner of Internal Revenue is hereby

ORDERED to DESIST from collecting the 1985 deficiency taxes it had

assessed against petitioner and the same are deemed considered [sic]

CANCELLED and WITHDRAWN by reason of the proper availment by

petitioner of the amnesty under Executive Order No. 41, as amended."4

Petitioner challenged the decision of the tax court by filing CA-G.R. SP No.

42518 with the Court of Appeals.

On January 15, 1999, the Court of Appeals dismissed the petition and

affirmed the decision of the Court of Tax Appeals. Hence, this recourse.

Before us, petitioner raises the following issues:

"(1) Whether or not the Court of Appeals erred in affirming the Decision of

the Court of Tax Appeals which ruled that herein respondent's deficiency tax

liabilities were extinguished upon respondent's availment of tax amnesty

under Executive Orders Nos. 41 and 64.

(2) Whether or not respondent is liable to pay the income, branch profit

remittance, and contractor's taxes assessed by petitioner."5

The main controversy in this case lies in the interpretation of the exception

to the amnesty coverage of E.O. Nos. 41 and 64. There are three (3) types of

taxes involved herein — income tax, branch profit remittance tax and

contractor's tax. These taxes are covered by the amnesties granted by E.O.

Nos. 41 and 64. Petitioner claims, however, that respondent is disqualified

from availing of the said amnesties because the latter falls under the

exception in Section 4 (b) of E.O. No. 41.

Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the

amnesty granted thereunder, viz:

"Sec. 4. Exceptions. — The following taxpayers may not avail themselves of

the amnesty herein granted:

a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;

b) Those with income tax cases already filed in Court as of the effectivity

hereof;

c) Those with criminal cases involving violations of the income tax law

already filed in court as of the effectivity hereof;

d) Those that have withholding tax liabilities under the National Internal

Revenue Code, as amended, insofar as the said liabilities are concerned;

e) Those with tax cases pending investigation by the Bureau of Internal

Revenue as of the effectivity hereof as a result of information furnished

under Section 316 of the National Internal Revenue Code, as amended;

f) Those with pending cases involving unexplained or unlawfully acquired

wealth before the Sandiganbayan;

g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions

and Transactions) and Chapter Four (Malversation of Public Funds and

Property) of the Revised Penal Code, as amended."

Petitioner argues that at the time respondent filed for income tax amnesty

on October 30, 1986, CTA Case No. 4109 had already been filed and was

pending; before the Court of Tax Appeals. Respondent therefore fell under

the exception in Section 4 (b) of E.O. No. 41.

Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very

clear and unambiguous. It excepts from income tax amnesty those

taxpayers "with income tax cases already filed in court as of the effectivity

hereof." The point of reference is the date of effectivity of E.O. No. 41. The

filing of income tax cases in court must have been made before and as of

the date of effectivity of E.O. No. 41. Thus, for a taxpayer not to be

disqualified under Section 4 (b) there must have been no income tax cases

filed in court against him when E.O. No. 41 took effect. This is regardless of

when the taxpayer filed for income tax amnesty, provided of course he files

it on or before the deadline for filing.

E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning

the 1985 deficiency income, branch profit remittance and contractor's tax

assessments was filed by respondent with the Court of Tax Appeals on

September 26, 1986. When E.O. No. 41 became effective on August 22,

1986, CTA Case No. 4109 had not yet been filed in court. Respondent

corporation did not fall under the said exception in Section 4 (b), hence,

respondent was not disqualified from availing of the amnesty for income tax

under E.O. No. 41.

The same ruling also applies to the deficiency branch profit remittance tax

assessment. A branch profit remittance tax is defined and imposed in

Section 24 (b) (2) (ii), Title II, Chapter III of the National Internal Revenue

Code.6 In the tax code, this tax falls under Title II on Income Tax. It is a tax

on income. Respondent therefore did not fall under the exception in Section

4 (b) when it filed for amnesty of its deficiency branch profit remittance tax

assessment.

The difficulty herein is with respect to the contractor's tax assessment and

respondent's availment of the amnesty under E.O. No. 64. E.O. No. 64

expanded the coverage of E.O. No. 41 by including estate and donor's taxes

and tax on business. Estate and donor's taxes fall under Title III of the Tax

Code while business taxes fall under Chapter II, Title V of the same. The

contractor's tax is provided in Section 205, Chapter II, Title V of the Tax

Code; it is defined and imposed under the title on business taxes, and is

therefore a tax on business.7

When E.O. No. 64 took effect on November 17, 1986, it did not provide for

exceptions to the coverage of the amnesty for business, estate and donor's

taxes. Instead, Section 8 of E.O. No. 64 provided that:

"Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not

contrary to or inconsistent with this amendatory Executive Order shall

remain in full force and effect."

By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not

contrary to or inconsistent with the amendatory act were reenacted in E.O.

No. 64. Thus, Section 4 of E.O. No. 41 on the exceptions to amnesty

coverage also applied to E.O. No. 64. With respect to Section 4 (b) in

particular, this provision excepts from tax amnesty coverage a taxpayer who

has "income tax cases already filed in court as of the effectivity hereof." As

to what Executive Order the exception refers to, respondent argues that

because of the words "income" and "hereof," they refer to Executive Order

No. 41.8

In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot

be construed to refer to E.O. No. 41 and its date of effectivity. The general

rule is that an amendatory act operates prospectively.9 While an

amendment is generally construed as becoming a part of the original act as

if it had always been contained therein,10 it may not be given a retroactive

effect unless it is so provided expressly or by necessary implication and no

vested right or obligations of contract are thereby impaired.11

There is nothing in E.O. No. 64 that provides that it should retroact to the

date of effectivity of E.O. No. 41, the original issuance. Neither is it

necessarily implied from E.O. No. 64 that it or any of its provisions should

apply retroactively. Executive Order No. 64 is a substantive amendment of

E.O. No. 41. It does not merely change provisions in E.O. No. 41. It

supplements the original act by adding other taxes not covered in the first.12

It has been held that where a statute amending a tax law is silent as to

whether it operates retroactively, the amendment will not be given a

retroactive effect so as to subject to tax past transactions not subject to tax

under the original act.13 In an amendatory act, every case of doubt must be

resolved against its retroactive effect.14

Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is

a general pardon or intentional overlooking by the State of its authority to

impose penalties on persons otherwise guilty of evasion or violation of a

revenue or tax law.15 It partakes of an absolute forgiveness or 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.16 A tax amnesty, much

like a tax exemption, is never favored nor presumed in law.17 If granted, 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.18

For the right of taxation is inherent in government. The State cannot strip

itself of the most essential power of taxation by doubtful words. He who

claims an exemption (or an amnesty) from the common burden must justify

his claim by the clearest grant of organic or state law. It cannot be allowed

to exist upon a vague implication. If a doubt arises as to the intent of the

legislature, that doubt must be resolved in favor of the state.19

In the instant case, the vagueness in Section 4 (b) brought about by E.O. No.

64 should therefore be construed strictly against the taxpayer. The term

"income tax cases" should be read as to refer to estate and donor's taxes

and taxes on business while the word "hereof," to E.O. No. 64. Since

Executive Order No. 64 took effect on November 17, 1986, consequently,

insofar as the taxes in E.O. No. 64 are concerned, the date of effectivity

referred to in Section 4 (b) of E.O. No. 41 should be November 17, 1986.

Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No.

64 took effect on November 17, 1986, CTA Case No. 4109 was already filed

and pending in court. By the time respondent filed its supplementary tax

amnesty return on December 15, 1986, respondent already fell under the

exception in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified from

availing of the business tax amnesty granted therein.

It is respondent's other argument that assuming it did not validly avail of the

amnesty under the two Executive Orders, it is still not liable for the

deficiency contractor's tax because the income from the projects came from

the "Offshore Portion" of the contracts. The two contracts were divided into

two parts, i.e., the Onshore Portion and the Offshore Portion. All materials

and equipment in the contract under the "Offshore Portion" were

manufactured and completed in Japan, not in the Philippines, and are

therefore not subject to Philippine taxes.

Before going into respondent's arguments, it is necessary to discuss the

background of the two contracts, examine their pertinent provisions and

implementation.

The NDC and Philphos are two government corporations. In 1980, the NDC,

as the corporate investment arm of the Philippine Government, established

the Philphos to engage in the large-scale manufacture of phosphatic

fertilizer for the local and foreign markets.20 The Philphos plant complex

which was envisioned to be the largest phosphatic fertilizer operation in

Asia, and among the largest in the world, covered an area of 180 hectares

within the 435-hectare Leyte Industrial Development Estate in the

municipality of Isabel, province of Leyte.

In 1982, the NDC opened for public bidding a project to construct and install

a modern, reliable, efficient and integrated wharf/port complex at the Leyte

Industrial Development Estate. The wharf/port complex was intended to be

one of the major facilities for the industrial plants at the Leyte Industrial

Development Estate. It was to be specifically adapted to the site for the

handling of phosphate rock, bagged or bulk fertilizer products, liquid

materials and other products of Philphos, the Philippine Associated Smelting

and Refining Corporation (Pasar),21 and other industrial plants within the

Estate. The bidding was participated in by Marubeni Head Office in Japan.

Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and

respondent entered into an agreement entitled "Turn-Key Contract for Leyte

Industrial Estate Port Development Project Between National Development

Company and Marubeni Corporation."22 The Port Development Project would

consist of a wharf, berths, causeways, mechanical and liquids unloading and

loading systems, fuel oil depot, utilities systems, storage and service

buildings, offsite facilities, harbor service vessels, navigational aid system,

fire-fighting system, area lighting, mobile equipment, spare parts and other

related facilities.23 The scope of the works under the contract covered turn-

key supply, which included grants of licenses and the transfer of technology

and know-how,24 and:

". . . the design and engineering, supply and delivery, construction, erection

and installation, supervision, direction and control of testing and

commissioning of the Wharf-Port Complex as set forth in Annex I of this

Contract, as well as the coordination of tie-ins at boundaries and schedule of

the use of a part or the whole of the Wharf/Port Complex through the Owner,

with the design and construction of other facilities around the site. The

scope of works shall also include any activity, work and supply necessary

for, incidental to or appropriate under present international industrial port

practice, for the timely and successful implementation of the object of this

Contract, whether or not expressly referred to in the abovementioned Annex

I."25

The contract price for the wharf/port complex was ¥12,790,389,000.00 and

P44,327,940.00. In the contract, the price in Japanese currency was broken

down into two portions: (1) the Japanese Yen Portion I; (2) the Japanese Yen

Portion II, while the price in Philippine currency was referred to as the

Philippine Pesos Portion. The Japanese Yen Portions I and II were financed in

two (2) ways: (a) by yen credit loan provided by the Overseas Economic

Cooperation Fund (OECF); and (b) by supplier's credit in favor of Marubeni

from the Export-Import Bank of Japan. The OECF is a Fund under the Ministry

of Finance of Japan extended by the Japanese government as assistance to

foreign governments to promote economic development.26 The OECF

extended to the Philippine Government a loan of ¥7,560,000,000.00 for the

Leyte Industrial Estate Port Development Project and authorized the NDC to

implement the same.27 The other type of financing is an indirect type where

the supplier, i.e., Marubeni, obtained a loan from the Export-Import Bank of

Japan to advance payment to its sub-contractors.28

Under the financing schemes, the Japanese Yen Portions I and II and the

Philippine Pesos Portion were further broken down and subdivided according

to the materials, equipment and services rendered on the project. The price

breakdown and the corresponding materials, equipment and services were

contained in a list attached as Annex III to the contract.29

A few months after execution of the NDC contract, Philphos opened for

public bidding a project to construct and install two ammonia storage tanks

in Isabel. Like the NDC contract, it was Marubeni Head Office in Japan that

participated in and won the bidding. Thus, on May 2, 1982, Philphos and

respondent corporation entered into an agreement entitled "Turn-Key

Contract for Ammonia Storage Complex Between Philippine Phosphate

Fertilizer Corporation and Marubeni Corporation."30 The object of the

contract was to establish and place in operating condition a modern,

reliable, efficient and integrated ammonia storage complex adapted to the

site for the receipt and storage of liquid anhydrous ammonia31 and for the

delivery of ammonia to an integrated fertilizer plant adjacent to the storage

complex and to vessels at the dock.32 The storage complex was to consist of

ammonia storage tanks, refrigeration system, ship unloading system,

transfer pumps, ammonia heating system, fire-fighting system, area

lighting, spare parts, and other related facilities.33 The scope of the works

required for the completion of the ammonia storage complex covered the

supply, including grants of licenses and transfer of technology and know-

how,34 and:

". . . the design and engineering, supply and delivery, construction, erection

and installation, supervision, direction and control of testing and

commissioning of the Ammonia Storage Complex as set forth in Annex I of

this Contract, as well as the coordination of tie-ins at boundaries and

schedule of the use of a part or the whole of the Ammonia Storage Complex

through the Owner with the design and construction of other facilities at and

around the Site. The scope of works shall also include any activity, work and

supply necessary for, incidental to or appropriate under present

international industrial practice, for the timely and successful

implementation of the object of this Contract, whether or not expressly

referred to in the abovementioned Annex I."35

The contract price for the project was ¥3,255,751,000.00 and

P17,406,000.00. Like the NDC contract, the price was divided into three

portions. The price in Japanese currency was broken down into the Japanese

Yen Portion I and Japanese Yen Portion II while the price in Philippine

currency was classified as the Philippine Pesos Portion. Both Japanese Yen

Portions I and II were financed by supplier's credit from the Export-Import

Bank of Japan. The price stated in the three portions were further broken

down into the corresponding materials, equipment and services required for

the project and their individual prices. Like the NDC contract, the breakdown

in the Philphos contract is contained in a list attached to the latter as Annex

III.36

The division of the price into Japanese Yen Portions I and II and the

Philippine Pesos Portion under the two contracts corresponds to the two

parts into which the contracts were classified — the Foreign Offshore Portion

and the Philippine Onshore Portion. In both contracts, the Japanese Yen

Portion I corresponds to the Foreign Offshore Portion.37 Japanese Yen Portion

II and the Philippine Pesos Portion correspond to the Philippine Onshore

Portion.38

Under the Philippine Onshore Portion, respondent does not deny its liability

for the contractor's tax on the income from the two projects. In fact

respondent claims, which petitioner has not denied, that the income it

derived from the Onshore Portion of the two projects had been declared for

tax purposes and the taxes thereon already paid to the Philippine

government.39 It is with regard to the gross receipts from the Foreign

Offshore Portion of the two contracts that the liabilities involved in the

assessments subject of this case arose. Petitioner argues that since the two

agreements are turn-key,40 they call for the supply of both materials and

services to the client, they are contracts for a piece of work and are

indivisible. The situs of the two projects is in the Philippines, and the

materials provided and services rendered were all done and completed

within the territorial jurisdiction of the Philippines.41 Accordingly,

respondent's entire receipts from the contracts, including its receipts from

the Offshore Portion, constitute income from Philippine sources. The total

gross receipts covering both labor and materials should be subjected to

contractor's tax in accordance with the ruling in Commissioner of Internal

Revenue v. Engineering Equipment & Supply Co.42

A contractor's tax is imposed in the National Internal Revenue Code (NIRC)

as follows:

"Sec. 205. Contractors, proprietors or operators of dockyards, and others. —

A contractor's tax of four percent of the gross receipts is hereby imposed on

proprietors or operators of the following business establishments and/or

persons engaged in the business of selling or rendering the following

services for a fee or compensation:

(a) General engineering, general building and specialty contractors, as

defined in Republic Act No. 4566;

xxx           xxx           xxx

(q) Other independent contractors. The term "independent contractors"

includes persons (juridical or natural) not enumerated above (but not

including individuals subject to the occupation tax under the Local Tax

Code) whose activity consists essentially of the sale of all kinds of services

for a fee regardless of whether or not the performance of the service calls

for the exercise or use of the physical or mental faculties of such contractors

or their employees. It does not include regional or area headquarters

established in the Philippines by multinational corporations, including their

alien executives, and which headquarters do not earn or derive income from

the Philippines and which act as supervisory, communications and

coordinating centers for their affiliates, subsidiaries or branches in the Asia-

Pacific Region.

xxx           xxx           xxx43

Under the afore-quoted provision, an independent contractor is a person

whose activity consists essentially of the sale of all kinds of services for a

fee, regardless of whether or not the performance of the service calls for the

exercise or use of the physical or mental faculties of such contractors or

their employees. The word "contractor" refers to a person who, in the

pursuit of independent business, undertakes to do a specific job or piece of

work for other persons, using his own means and methods without

submitting himself to control as to the petty details.44

A contractor's tax is a tax imposed upon the privilege of engaging in

business.45 It is generally in the nature of an excise tax on the exercise of a

privilege of selling services or labor rather than a sale on products;46 and is

directly collectible from the person exercising the privilege.47 Being an

excise tax, it can be levied by the taxing authority only when the acts,

privileges or business are done or performed within the jurisdiction of said

authority.48 Like property taxes, it cannot be imposed on an occupation or

privilege outside the taxing district.49

In the case at bar, it is undisputed that respondent was an independent

contractor under the terms of the two subject contracts. Respondent,

however, argues that the work therein were not all performed in the

Philippines because some of them were completed in Japan in accordance

with the provisions of the contracts.

An examination of Annex III to the two contracts reveals that the materials

and equipment to be made and the works and services to be performed by

respondent are indeed classified into two. The first part, entitled

"Breakdown of Japanese Yen Portion I" provides:

"Japanese Yen Portion I of the Contract Price has been subdivided according

to discrete portions of materials and equipment which will be shipped to

Leyte as units and lots. This subdivision of price is to be used by owner to

verify invoice for Progress Payments under Article 19.2.1 of the Contract.

The agreed subdivision of Japanese Yen Portion I is as follows:

xxx           xxx           xxx50

The subdivision of Japanese Yen Portion I covers materials and equipment

while Japanese Yen Portion II and the Philippine Pesos Portion enumerate

other materials and equipment and the construction and installation work on

the project. In other words, the supplies for the project are listed under

Portion I while labor and other supplies are listed under Portion II and the

Philippine Pesos Portion. Mr. Takeshi Hojo, then General Manager of the

Industrial Plant Section II of the Industrial Plant Department of Marubeni

Corporation in Japan who supervised the implementation of the two projects,

testified that all the machines and equipment listed under Japanese Yen

Portion I in Annex III were manufactured in Japan.51 The machines and

equipment were designed, engineered and fabricated by Japanese firms

sub-contracted by Marubeni from the list of sub-contractors in the technical

appendices to each contract.52 Marubeni sub-contracted a majority of the

equipment and supplies to Kawasaki Steel Corporation which did the design,

fabrication, engineering and manufacture thereof;53 Yashima & Co. Ltd.

which manufactured the mobile equipment; Bridgestone which provided the

rubber fenders of the mobile equipment;54 and B.S. Japan for the supply of

radio equipment.55 The engineering and design works made by Kawasaki

Steel Corporation included the lay-out of the plant facility and calculation of

the design in accordance with the specifications given by respondent.56 All

sub-contractors and manufacturers are Japanese corporations and are based

in Japan and all engineering and design works were performed in that

country.57

The materials and equipment under Portion I of the NDC Port Project is

primarily composed of two (2) sets of ship unloader and loader; several

boats and mobile equipment.58 The ship unloader unloads bags or bulk

products from the ship to the port while the ship loader loads products from

the port to the ship. The unloader and loader are big steel structures on top

of each is a large crane and a compartment for operation of the crane. Two

sets of these equipment were completely manufactured in Japan according

to the specifications of the project. After manufacture, they were rolled on to

a barge and transported to Isabel, Leyte.59 Upon reaching Isabel, the

unloader and loader were rolled off the barge and pulled to the pier to the

spot where they were installed.60 Their installation simply consisted of

bolting them onto the pier.61

Like the ship unloader and loader, the three tugboats and a line boat were

completely manufactured in Japan. The boats sailed to Isabel on their own

power. The mobile equipment, consisting of three to four sets of tractors,

cranes and dozers, trailers and forklifts, were also manufactured and

completed in Japan. They were loaded on to a shipping vessel and unloaded

at the Isabel Port. These pieces of equipment were all on wheels and self-

propelled. Once unloaded at the port, they were ready to be driven and

perform what they were designed to do.62

In addition to the foregoing, there are other items listed in Japanese Yen

Portion I in Annex III to the NDC contract. These other items consist of

supplies and materials for five (5) berths, two (2) roads, a causeway, a

warehouse, a transit shed, an administration building and a security

building. Most of the materials consist of steel sheets, steel pipes, channels

and beams and other steel structures, navigational and communication as

well as electrical equipment.63

In connection with the Philphos contract, the major pieces of equipment

supplied by respondent were the ammonia storage tanks and refrigeration

units.64 The steel plates for the tank were manufactured and cut in Japan

according to drawings and specifications and then shipped to Isabel. Once

there, respondent's employees put the steel plates together to form the

storage tank. As to the refrigeration units, they were completed and

assembled in Japan and thereafter shipped to Isabel. The units were simply

installed there. 65 Annex III to the Philphos contract lists down under the

Japanese Yen Portion I the materials for the ammonia storage tank,

incidental equipment, piping facilities, electrical and instrumental apparatus,

foundation material and spare parts.

All the materials and equipment transported to the Philippines were

inspected and tested in Japan prior to shipment in accordance with the

terms of the contracts.66 The inspection was made by representatives of

respondent corporation, of NDC and Philphos. NDC, in fact, contracted the

services of a private consultancy firm to verify the correctness of the tests

on the machines and equipment67 while Philphos sent a representative to

Japan to inspect the storage equipment.68

The sub-contractors of the materials and equipment under Japanese Yen

Portion I were all paid by respondent in Japan. In his deposition upon oral

examination, Kenjiro Yamakawa, formerly the Assistant General Manager

and Manager of the Steel Plant Marketing Department, Engineering &

Construction Division, Kawasaki Steel Corporation, testified that the

equipment and supplies for the two projects provided by Kawasaki under

Japanese Yen Portion I were paid by Marubeni in Japan. Receipts for such

payments were duly issued by Kawasaki in Japanese and English.69 Yashima

& Co. Ltd. and B.S. Japan were likewise paid by Marubeni in Japan.70

Between Marubeni and the two Philippine corporations, payments for all

materials and equipment under Japanese Yen Portion I were made to

Marubeni by NDC and Philphos also in Japan. The NDC, through the

Philippine National Bank, established letters of credit in favor of respondent

through the Bank of Tokyo. The letters of credit were financed by letters of

commitment issued by the OECF with the Bank of Tokyo. The Bank of Tokyo,

upon respondent's submission of pertinent documents, released the amount

in the letters of credit in favor of respondent and credited the amount

therein to respondent's account within the same bank.71

Clearly, the service of "design and engineering, supply and delivery,

construction, erection and installation, supervision, direction and control of

testing and commissioning, coordination. . . "72 of the two projects involved

two taxing jurisdictions. These acts occurred in two countries — Japan and

the Philippines. While the construction and installation work were completed

within the Philippines, the evidence is clear that some pieces of equipment

and supplies were completely designed and engineered in Japan. The two

sets of ship unloader and loader, the boats and mobile equipment for the

NDC project and the ammonia storage tanks and refrigeration units were

made and completed in Japan. They were already finished products when

shipped to the Philippines. The other construction supplies listed under the

Offshore Portion such as the steel sheets, pipes and structures, electrical

and instrumental apparatus, these were not finished products when shipped

to the Philippines. They, however, were likewise fabricated and

manufactured by the sub-contractors in Japan. All services for the design,

fabrication, engineering and manufacture of the materials and equipment

under Japanese Yen Portion I were made and completed in Japan. These

services were rendered outside the taxing jurisdiction of the Philippines and

are therefore not subject to contractor's tax.

Contrary to petitioner's claim, the case of Commissioner of Internal Revenue

v. Engineering Equipment & Supply Co73 is not in point. In that case, the

Court found that Engineering Equipment, although an independent

contractor, was not engaged in the manufacture of air conditioning units in

the Philippines. Engineering Equipment designed, supplied and installed

centralized air-conditioning systems for clients who contracted its services.

Engineering, however, did not manufacture all the materials for the air-

conditioning system. It imported some items for the system it designed and

installed.74 The issues in that case dealt with services performed within the

local taxing jurisdiction. There was no foreign element involved in the supply

of materials and services.

With the foregoing discussion, it is unnecessary to discuss the other issues

raised by the parties.

IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No.

42518 is affirmed.

SO ORDERED.

 

Footnotes

1 Assessment Letter of the Commissioner of Internal Revenue, Rollo, pp. 73-74; also marked as Exhibit "C" Pet and Exhibit "2"

Resp, Folder No. 11, BIR Records, pp. 2072-2076.

2 Entitled "Declaring a One-Time Tax Amnesty Covering Unpaid Income Taxes for the Years 1981 to 1985."

3 Entitled "Declaring a One-Time Tax Amnesty Covering Income Taxes, Estate and Donor's Taxes Under Title III, And The Tax on

Business Under Chapter II, Title V, of the National Internal Revenue Code, As Amended, For the Years 1981-1985."

4 CTA Decision, Annex "B" to Petition, Rollo, p. 45.

5 Petition, p. 6; Rollo, p. 15.

6 1984 and 1986 NIRC.

7 Title V, 1984 and 1986 NIRC. Business taxes were replaced in 1988 by the Value-Added Tax under Executive Order No. 273.

8 Comment, pp. 14-15; Rollo, pp. 99-100.

9 Agpalo, Statutory Construction, p. 395 [1998]; Sutherland, Statutory Construction, vol. 1A (5th ed.) Sec. 22.36, p. 304 [1992-

1994].

10 People v. Garcia, 85 Phil. 651, 655 [1951]; Sutherland, supra, Sec. 22.35.

11 Buyco v. Philippine National Bank, 112 Phil. 588, 592 [1961]; Pacia v. Kapisanan ng mga Manggagawa sa MRR Co., 99 Phil.

45, 48 [1956]; Agpalo, supra, pp. 370, 395 [1998].

12 A supplementary act is an amendatory act that supplies a deficiency, adds to, completes or extends that which is already in

existence without changing or modifying the original — Sutherland, supra, Secs. 22.24 and 22.01.

13 Collector of Internal Revenue v. La Tondeña, Inc., 115 Phil. 841, 846-847 [1962].

14 Montilla v. Agustinian Corp., 24 Phil. 220, 222 [1913]; Agpalo, supra, at 370, 395.

15 Republic v. Intermediate Appellate Court, 196 SCRA 335, 340 [1991] citing Commissioner of Internal Revenue v. Botelho

Corporation & Shipping Co., Inc., 20 SCRA 487 [1967].

16 Ibid.

17 Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152, 171-172 [1999]; People v. Castañeda, 165 SCRA 327,

341 [1988].

18 People v. Castañeda, supra, at 341; E. Rodriguez Inc. v. Collector of Internal Revenue, 28 SCRA 1119, 1127-1128 [1969];

Commissioner of Internal Revenue v. A.D. Guerrero, 21 SCRA 180, 183-185 [1967]; Asiatic Petroleum v. Llanes, 49 Phil. 466,

471 [1926].

19 Asiatic Petroleum v. Llanes, supra, at 471-472.

20 Exh. "AA," Project Background, Philippine Phosphatic Fertilizer Corporation, Folder No. 5, CTA Case No. 4109.

21 Pasar is a copper smelter plant whose sulfuric acid by-product is used in manufacturing fertilizers — Exhibit "AA-1" Pet, Folder

No. 5, CTA Case No. 4109

22 Exhibit "J" Pet, "Wharf/Port Complex," Turn-Key Contract for Leyte Industrial Estate Port Project Between the National

Development Company [sic] and Marubeni Corporation (hereinafter to be referred to as the "NDC Contract"), Folder No. 2, CTA

Case No. 4109 and CTA Case No. 4110.

23 Exhibit "J" Pet, NDC Contract, Article 1, supra.

24 Exhibit "J" Pet, NDC Contract, Article 2.1, supra.

25 "Scope of Work," Exhibit "J" Pet, NDC Contract, Article 2.2, supra.

26 Exhibit "JJJ" Pet, Exchange of Notes dated June 9, 1981 by and between the Japanese and Philippine Governments, Folder No.

8, CTA Case No. 4109 and CTA Case No. 4110.

27 Exhibit "JJJ-1" Pet, "Loan Agreement for the Leyte Industrial Estate Port Development Project," Folder No. 8, CTA Case No.

4109 and CTA Case No. 4110.

28 Takeshi Hojo, TSN of March 23, 1990, pp. 17-20.

29 Exhibit "J-2" Pet, Breakdown of Japanese Yen Portions I & II and Philippine Pesos Portion of Contract Price, Annex III to NDC

Contract, Folder No. 2, CTA Case No. 4109 and CTA Case No. 4110.

30 Exhibit "I" Pet, Folder No. 4, CTA Case No. 4109 and CTA Case No. 4110.

31 Ammonia is one of the raw materials for fertilizer production — Hojo, TSN of March 21, 1990, pp. 20-21.

32 Exhibit "I" Pet, Article 2.1, Turn-key Contract for Ammonia Storage Complex Between Philippine Phosphate Fertilizer

Corporation and Marubeni Corporation," (hereinafter referred to as Philphos Contract), supra.

33 Exhibit "I" Pet, Article I, "Ammonia Storage Complex," Philphos Contract, supra.

34 Exhibit "I" Pet, Article 2.1, Philphos Contract, supra.

35 "Scope of Work," Exhibit "I" Pet," Article 2.2, Philphos Contract, supra.

36 Exhibit "I-2 Pet," Breakdown of Japanese Yen Portions I & II and Philippine Pesos Portion of Contract Price, Annex III to Philphos

Contract, Folder No. 4, CTA Case No. 4109 and CTA Case No. 4110.

37 Hojo, TSN of March 22, 1990, pp. 6-7.

38 Id.

39 Footnote No. 2, Comment, p.16; Rollo, p. 19.

40 A "turn-key job" is defined as a job or contract in which the contractor agrees to complete the work of building and

installation to the point of readiness for operation or occupancy — Webster's Third New International Dictionary of the English

Language, Unabridged [1993].

41 Exhibit "4" Resp, Memorandum of Head Revenue Examiner to the Commissioner of Internal Revenue, BIR Records, Folder No.

11, CTA Case No. 4109 and CTA Case No. 4110; Exhibit "2" Resp, Letter Assessment of Commissioner Tan, Rollo, pp. 73-77.

42 64 SCRA 590 [1975].

43 1984 NIRC; Sec. 170, 1986 NIRC. The contractor's tax was replaced in 1988 by the Value-Added Tax pursuant to Executive

Order No. 273.

44 Commissioner of Internal Revenue v. Engineering Equipment & Supply Co., 64 SCRA 590, 597-598 [1975].

45 Section 205 in relation to Section 188, 1984 NIRC; Aranas, National Internal Revenue Code, vol. 2, p. 134 [1983].

46 Commissioner of Internal Revenue v. Court of Tax Appeals and Avecilla Building Corp., 134 SCRA 49, 54 [1985];Celestino &

Co. v. Collector, 99 Phil. 841, 843 [1956]; E. Gonzales and C. Gonzales, National Internal Revenue Code, p. 527 [1984].

47 Gonzales and Gonzales, National Internal Revenue Code, p. 456 [1986].

48 Iloilo Bottlers, Inc. v. City of Iloilo, 164 SCRA 607, 615 [1988]; Commissioner of Internal Revenue v. British Overseas Airways

Corp., 149 SCRA 395, 410 [1987].

49 Gulf Refining Co. v. City of Knoxville, 136 Tenn 23, 188 SW 798, 799 [1916]; Robinson v. City of Norfolk, 108 Va. 14, 60 SE

762, 763-764, 15 LRA (N.S.) 294 [1908] — a license tax for revenue cannot be imposed by a city upon a circus exhibiting

beyond its territorial limits; see also Cooley, The Law of Taxation, vol. 4, Secs. 1675, 1683; Cooley, vol. 1, Secs. 46, 94-95

[1924].

50 Exhibit "J-2" Pet, Annex III to NDC Contract, supra; Exhibit "I-2" Pet, Annex III to Philphos Contract, supra.

51 Hojo, TSN of March 22, 1990, pp. 11, 15.

52 Exhibits "J-8-a" to "J-8-d" Pet ,Vendor's List, Chapter 1.14, Leyte Industrial Estate Port Development Project, Technical

Appendices to the Contract, pp. 1-127 to 1-131, Folder No. 2, CTA Case No. 4109; Exhibits "I-13-a" to "I-13-i" Pet, Vendor's List

for Main Items, Chapter II, Technical Appendices for Leyte Fertilizer Project, Ammonia Storage Complex, pp. II-5.7-1 to II-5.7-9,

Folder No. 1, CTA Case No. 4109.

53 Hojo, TSN of March 22, 1990, p. 34; Kenjiro Yamakawa, TSN of Deposition Upon Oral Examination, January 31, 1992, p. 6;

Exhibit "OO" Pet, Plant Supply Contract between Marubeni and Kawasaki Steel Corporation for NDC Project, Folder No. 6, CTA

Case No. 4109; Exhibit "BBB-1" Pet, Plant Supply Contract between Marubeni and Kawasaki Steel Corporation for Philphos

Project, Folder No. 7, CTA Case No. 4109. Both contracts allow Marubeni to procure materials and equipment from an approved

list of sub-contractors without need of further approval from the owner — Article 8.4, Philphos contract; Article 8.4, NDC

contract, supra.

54 Hojo, TSN of March 22, 1990, p. 34.

55 Exhibit "AAA-1" to "AAA-1-b" Pet, Folder No. 7, CTA Case No. 4109.

56 Hojo, TSN of March 21, 1990, p. 32.

57 Hojo, TSN of March 21, 1990, pp. 33-34.

58 Exhibit "J-2" Pet, Annex III to NDC Contract, pp. 356-363, supra.

59 Exhibit "FF" Pet, Photograph of ship unloader and loader on a barge, Folder No. 5, CTA Case No. 4109.

60 Hojo, TSN of March 22, 1990, pp. 11-12; Exhibit "FF-1" Pet, Photograph of roll off works for ship unloader, Folder No. 5, CTA

Case No. 4109.

61 Hojo, TSN of March 22, 1990, pp. 11-12; TSN of March 23, 1990, pp. 39-40.

62 Hojo, TSN of March 23, 1990, pp. 38-39; Exhibits "II" and "JJ" Pet, Photographs of mobile equipment, Folder No. 5, supra.

63 Annex III to NDC Contract pp. 357-363, Exhibit "J-2" Pet, Folder No. 2, CTA Case No. 4109 and CTA Case No. 4110.

64 Hojo, TSN of March 23, 1990, pp. 42-43.

65 Hojo, TSN of March 23, 1990, pp. 42-43.

66 Exhibit "J" Pet, Article 11, pp. 45-47, NDC Contract, supra; Exhibit "I" Pet, Article 11.5, pp. 43-44, Philphos Contract, supra.

67 Exhibit "KK" Pet, NDC Board Resolution appointing Pacific Consultants, Int'l., Folder No. 3, CTA Case No. 4109.

68 Exhibit "LL" Pet, letter of Philphos VP appointing a representative to inspect storage equipment, Folder No. 5, CTA Case No.

4109.

69 Exhibits "VV," "VV-1" to "VV-50-a" Pet, Folder No. 7, CTA Case No. 4109; Exhibits "CCC-1" to "CCC-27-a" Pet, Folder No. 6, CTA

Case No. 4109.

70 Hisatsugu Yoshida, TSN of September 20, 1991, pp. 15-33; Exhibits "VV" Pet, "ZZ," "ZZ-2-d," "AAA" Pet, Folder No. 6, CTA

Case No. 4109.

71 Yoshida, TSN of Deposition Upon Oral Interrogatories, January 27, 1993, pp. 11-12; Exhibits "JJJ-3" to "JJJ-17-c" Pet, Folder No.

10, CTA Case No. 4109.

72 "Scope of Work," Exhibit "J" Pet, Article 2.1, NDC Contract; Exhibit "I" Pet, Article 2.1 Philphos Contract.

73 64 SCRA 590 [1975].

74 Such as refrigeration compressors in complete set, heat exchangers or coils — Id., at 598.

FIRST DIVISION

G.R. No. 78133 October 18, 1988

MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,

vs.

THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX

APPEALS, respondents.

GANCAYCO, J.:

The distinction between co-ownership and an unregistered partnership or

joint venture for income tax purposes is the issue in this petition.

On June 22, 1965, petitioners bought two (2) parcels of land from Santiago

Bernardino, et al. and on May 28, 1966, they bought another three (3)

parcels of land from Juan Roque. The first two parcels of land were sold by

petitioners in 1968 toMarenir Development Corporation, while the three

parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson

on March 19,1970. Petitioners realized a net profit in the sale made in 1968

in the amount of P165,224.70, while they realized a net profit of P60,000.00

in the sale made in 1970. The corresponding capital gains taxes were paid

by petitioners in 1973 and 1974 by availing of the tax amnesties granted in

the said years.

However, in a letter dated March 31, 1979 of then Acting BIR Commissioner

Efren I. Plana, petitioners were assessed and required to pay a total amount

of P107,101.70 as alleged deficiency corporate income taxes for the years

1968 and 1970.

Petitioners protested the said assessment in a letter of June 26, 1979

asserting that they had availed of tax amnesties way back in 1974.

In a reply of August 22, 1979, respondent Commissioner informed

petitioners that in the years 1968 and 1970, petitioners as co-owners in the

real estate transactions formed an unregistered partnership or joint venture

taxable as a corporation under Section 20(b) and its income was subject to

the taxes prescribed under Section 24, both of the National Internal

Revenue Code 1 that the unregistered partnership was subject to corporate

income tax as distinguished from profits derived from the partnership by

them which is subject to individual income tax; and that the availment of tax

amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners

of their individual income tax liabilities but did not relieve them from the tax

liability of the unregistered partnership. Hence, the petitioners were

required to pay the deficiency income tax assessed.

Petitioners filed a petition for review with the respondent Court of Tax

Appeals docketed as CTA Case No. 3045. In due course, the respondent

court by a majority decision of March 30, 1987, 2 affirmed the decision and

action taken by respondent commissioner with costs against petitioners.

It ruled that on the basis of the principle enunciated in Evangelista 3 an

unregistered partnership was in fact formed by petitioners which like a

corporation was subject to corporate income tax distinct from that imposed

on the partners.

In a separate dissenting opinion, Associate Judge Constante Roaquin stated

that considering the circumstances of this case, although there might in fact

be a co-ownership between the petitioners, there was no adequate basis for

the conclusion that they thereby formed an unregistered partnership which

made "hem liable for corporate income tax under the Tax Code.

Hence, this petition wherein petitioners invoke as basis thereof the following

alleged errors of the respondent court:

A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE

RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED

AN UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX,

AND THAT THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO

RESTS UPON THE PETITIONERS.

B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE

TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS

IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD WARRANT

THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.

C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA

CASE AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA

CASE.

D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS

FROM PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH

AMNESTY. (pp. 12-13, Rollo.)

The petition is meritorious.

The basis of the subject decision of the respondent court is the ruling of this

Court in Evangelista. 4

In the said case, petitioners borrowed a sum of money from their father

which together with their own personal funds they used in buying several

real properties. They appointed their brother to manage their properties

with full power to lease, collect, rent, issue receipts, etc. They had the real

properties rented or leased to various tenants for several years and they

gained net profits from the rental income. Thus, the Collector of Internal

Revenue demanded the payment of income tax on a corporation, among

others, from them.

In resolving the issue, this Court held as follows:

The issue in this case is whether petitioners are subject to the tax on

corporations provided for in section 24 of Commonwealth Act No. 466,

otherwise known as the National Internal Revenue Code, as well as to the

residence tax for corporations and the real estate dealers' fixed tax. With

respect to the tax on corporations, the issue hinges on the meaning of the

terms corporation and partnership as used in sections 24 and 84 of said

Code, the pertinent parts of which read:

Sec. 24. Rate of the tax on corporations.—There shall be levied, assessed,

collected, and paid annually upon the total net income received in the

preceding taxable year from all sources by every corporation organized in,

or existing under the laws of the Philippines, no matter how created or

organized but not including duly registered general co-partnerships

(companies collectives), a tax upon such income equal to the sum of the

following: ...

Sec. 84(b). The term "corporation" includes partnerships, no matter how

created or organized, joint-stock companies, joint accounts (cuentas en

participation), associations or insurance companies, but does not include

duly registered general co-partnerships (companies colectivas).

Article 1767 of the Civil Code of the Philippines provides:

By the contract of partnership two or more persons bind themselves to

contribute money, property, or industry to a common fund, with the

intention of dividing the profits among themselves.

Pursuant to this article, the essential elements of a partnership are two,

namely: (a) an agreement to contribute money, property or industry to a

common fund; and (b) intent to divide the profits among the contracting

parties. The first element is undoubtedly present in the case at bar, for,

admittedly, petitioners have agreed to, and did, contribute money and

property to a common fund. Hence, the issue narrows down to their intent in

acting as they did. Upon consideration of all the facts and circumstances

surrounding the case, we are fully satisfied that their purpose was to engage

in real estate transactions for monetary gain and then divide the same

among themselves, because:

1. Said common fund was not something they found already in existence. It

was not a property inherited by them pro indiviso. They created it purposely.

What is more they jointly borrowed a substantial portion thereof in order to

establish said common fund.

2. They invested the same, not merely in one transaction, but in a series of

transactions. On February 2, 1943, they bought a lot for P100,000.00. On

April 3, 1944, they purchased 21 lots for P18,000.00. This was soon

followed, on April 23, 1944, by the acquisition of another real estate for

P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for

P237,234.14. The number of lots (24) acquired and transcations undertaken,

as well as the brief interregnum between each, particularly the last three

purchases, is strongly indicative of a pattern or common design that was not

limited to the conservation and preservation of the aforementioned common

fund or even of the property acquired by petitioners in February, 1943. In

other words, one cannot but perceive a character of habituality peculiar to

business transactions engaged in for purposes of gain.

3. The aforesaid lots were not devoted to residential purposes or to other

personal uses, of petitioners herein. The properties were leased separately

to several persons, who, from 1945 to 1948 inclusive, paid the total sum of

P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for

petitioners do not even suggest that there has been any change in the

utilization thereof.

4. Since August, 1945, the properties have been under the management of

one person, namely, Simeon Evangelists, with full power to lease, to collect

rents, to issue receipts, to bring suits, to sign letters and contracts, and to

indorse and deposit notes and checks. Thus, the affairs relative to said

properties have been handled as if the same belonged to a corporation or

business enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to

be exact, over fifteen (15) years, since the first property was acquired, and

over twelve (12) years, since Simeon Evangelists became the manager.

6. Petitioners have not testified or introduced any evidence, either on their

purpose in creating the set up already adverted to, or on the causes for its

continued existence. They did not even try to offer an explanation therefor.

Although, taken singly, they might not suffice to establish the intent

necessary to constitute a partnership, the collective effect of these

circumstances is such as to leave no room for doubt on the existence of said

intent in petitioners herein. Only one or two of the aforementioned

circumstances were present in the cases cited by petitioners herein, and,

hence, those cases are not in point. 5

In the present case, there is no evidence that petitioners entered into an

agreement to contribute money, property or industry to a common fund,

and that they intended to divide the profits among themselves. Respondent

commissioner and/ or his representative just assumed these conditions to be

present on the basis of the fact that petitioners purchased certain parcels of

land and became co-owners thereof.

In Evangelists, there was a series of transactions where petitioners

purchased twenty-four (24) lots showing that the purpose was not limited to

the conservation or preservation of the common fund or even the properties

acquired by them. The character of habituality peculiar to business

transactions engaged in for the purpose of gain was present.

In the instant case, petitioners bought two (2) parcels of land in 1965. They

did not sell the same nor make any improvements thereon. In 1966, they

bought another three (3) parcels of land from one seller. It was only 1968

when they sold the two (2) parcels of land after which they did not make

any additional or new purchase. The remaining three (3) parcels were sold

by them in 1970. The transactions were isolated. The character of

habituality peculiar to business transactions for the purpose of gain was not

present.

In Evangelista, the properties were leased out to tenants for several years.

The business was under the management of one of the partners. Such

condition existed for over fifteen (15) years. None of the circumstances are

present in the case at bar. The co-ownership started only in 1965 and ended

in 1970.

Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista

he said:

I wish however to make the following observation Article 1769 of the new

Civil Code lays down the rule for determining when a transaction should be

deemed a partnership or a co-ownership. Said article paragraphs 2 and 3,

provides;

(2) Co-ownership or co-possession does not itself establish a partnership,

whether such co-owners or co-possessors do or do not share any profits

made by the use of the property;

(3) The sharing of gross returns does not of itself establish a partnership,

whether or not the persons sharing them have a joint or common right or

interest in any property from which the returns are derived;

From the above it appears that the fact that those who agree to form a co-

ownership share or do not share any profits made by the use of the property

held in common does not convert their venture into a partnership. Or the

sharing of the gross returns does not of itself establish a partnership

whether or not the persons sharing therein have a joint or common right or

interest in the property. This only means that, aside from the circumstance

of profit, the presence of other elements constituting partnership is

necessary, such as the clear intent to form a partnership, the existence of a

juridical personality different from that of the individual partners, and the

freedom to transfer or assign any interest in the property by one with the

consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I,

1953 ed., pp. 635-636)

It is evident that an isolated transaction whereby two or more persons

contribute funds to buy certain real estate for profit in the absence of other

circumstances showing a contrary intention cannot be considered a

partnership.

Persons who contribute property or funds for a common enterprise and

agree to share the gross returns of that enterprise in proportion to their

contribution, but who severally retain the title to their respective

contribution, are not thereby rendered partners. They have no common

stock or capital, and no community of interest as principal proprietors in the

business itself which the proceeds derived. (Elements of the Law of

Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)

A joint purchase of land, by two, does not constitute a co-partnership in

respect thereto; nor does an agreement to share the profits and losses on

the sale of land create a partnership; the parties are only tenants in

common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)

Where plaintiff, his brother, and another agreed to become owners of a

single tract of realty, holding as tenants in common, and to divide the profits

of disposing of it, the brother and the other not being entitled to share in

plaintiffs commission, no partnership existed as between the three parties,

whatever their relation may have been as to third parties. (Magee vs. Magee

123 N.E. 673, 233 Mass. 341.)

In order to constitute a partnership inter sese there must be: (a) An intent to

form the same; (b) generally participating in both profits and losses; (c) and

such a community of interest, as far as third persons are concerned as

enables each party to make contract, manage the business, and dispose of

the whole property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III

470.)

The common ownership of property does not itself create a partnership

between the owners, though they may use it for the purpose of making

gains; and they may, without becoming partners, agree among themselves

as to the management, and use of such property and the application of the

proceeds therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6

The sharing of returns does not in itself establish a partnership whether or

not the persons sharing therein have a joint or common right or interest in

the property. There must be a clear intent to form a partnership, the

existence of a juridical personality different from the individual partners, and

the freedom of each party to transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership between the

petitioners. There is no adequate basis to support the proposition that they

thereby formed an unregistered partnership. The two isolated transactions

whereby they purchased properties and sold the same a few years

thereafter did not thereby make them partners. They shared in the gross

profits as co- owners and paid their capital gains taxes on their net profits

and availed of the tax amnesty thereby. Under the circumstances, they

cannot be considered to have formed an unregistered partnership which is

thereby liable for corporate income tax, as the respondent commissioner

proposes.

And even assuming for the sake of argument that such unregistered

partnership appears to have been formed, since there is no such existing

unregistered partnership with a distinct personality nor with assets that can

be held liable for said deficiency corporate income tax, then petitioners can

be held individually liable as partners for this unpaid obligation of the

partnership p. 7 However, as petitioners have availed of the benefits of tax

amnesty as individual taxpayers in these transactions, they are thereby

relieved of any further tax liability arising therefrom.

WHEREFROM, the petition is hereby GRANTED and the decision of the

respondent Court of Tax Appeals of March 30, 1987 is hereby REVERSED

and SET ASIDE and another decision is hereby rendered relieving petitioners

of the corporate income tax liability in this case, without pronouncement as

to costs.

SO ORDERED.

 

Footnotes

1 Annex C of the Petition, citing Evangelista v. Collector, G.R. No. 9996, Oct. 15,1957,102 Phil. 140.

2 Penned by Presiding Judge Amante Filler, concurred in by Associate Judge Alex Z. Reyes, Associate Judge Roaquin dissented

in a separate opinion.

3 Supra.

4 Supra.

5 Supra, pp. 144-146; italics supplied.

6 Supra, pp. 150-151; italics supplied.

7 Article 1816. All partners, including industrial ones, shall be liable pro rata with all their property and after all the partnership

assets have been exhausted, for the contracts which may be entered into in the name and for the account of the partnership,

under its signature and by a person authorized to act for the partnership. However, any partner may enter into a separate

obligation to perform a partnership contract. (Civil Code of the Philippines)

See also Articles 1817 and 1818, Supra.

THIRD DIVISION

G.R. No. L-46881 September 15, 1988

PEOPLE OF THE PHILIPPINES, petitioner,

vs.

HON. MARIANO CASTAÑEDA JR., Judge of the Court of First Instance

of Pampanga, Branch III, VICENTE LEE TENG, PRISCILLA CASTILLO

VDA. DE CURA and FRANCISCO VALENCIA, respondents.

 

FELICIANO, J.:

In this Petition for certiorari and mandamus, the People seek the annulment

of the Orders of respondent Judge quashing criminal informations against

the accused upon the grounds that: (a) accused Francisco Valencia was

entitled to tax amnesty under Presidential Decree No. 370; and (b) that the

dismissal of the criminal cases against accused Valencia inured to the

benefit of his co-accused Vicente Lee Teng and Priscilla Castillo de Cura, and

denying the People's Motion for Reconsideration of said Orders.

Sometime in 1971, two (2) informants submitted sworn information under

Republic Act No. 2338 (entitled "An Act to Provide for Reward to Informers of

Violations of the Internal Revenue and Customs Laws," effective June 19,

1959) to the Bureau of Internal Revenue ("BIR"), concerning alleged

violations of provisions of the Internal Revenue Code committed by the

private respondents, The record of this case includes an affidavit executed

on 27 December 1971 by Mr. William Chan, one of the said informers,

describing the details of alleged violations of the tax code. 1 After

conducting an investigation, the BIR applied for and obtained search

warrants from Executive Judge Malcolm Sarmiento. Following investigation

and examination by the BIR of the materials and documents yielded by

service of such search warrants, criminal informations were filed in court

against the private respondents.

In July 1973, State Prosecutor Estanislao L. Granados Department of Justice,

filed with the Court of First Instance of Pampanga an information docketed

as Criminal Case No. 439 for violation of Sec. 170 (2) of the National Internal

Revenue Code, as amended, against Francisco Valencia, Apolonio G. Erespe

y Comia and Priscilla Castillo de Cura, committed as follows:

That on or about the 19th day of January, 1972, in the premises of Valencia

Distillery located at del Pilar Street, San Fernando, Pampanga, Philippines,

and within the jurisdiction of the abovenamed Court, the accused

FRANCISCO VALENCIA, APOLONIO ERESPE Y COMIA and PRISCILLA QUIAZON

OR "QUIAPO" alias "MARY JO," conspiring and confederating with one

another, did then and there willfully, unlawfully, and feloniously have in their

possession, custody and control, false and counterfeit or fake internal

revenue labels consisting of five (5) sheets containing ten (10) labels each

purporting to be regular labels of the Tanduay Distillery, Inc. bearing Serial

Nos. 2571891 to 2571901 to 2571910, 2571911 to 2571920, 05381 to

05390 and 05391 to 05400.

CONTRARY to the provisions of Section 170, paragraph 2 of the National

Internal Revenue Code, as amended. 2

On the same date, another criminal information docketed as Criminal Case

No. 440 was filed by the same State Prosecutor in the same court for

violation of Section 174 (3) of the National Internal Revenue Code, as

amended against the same persons, charging them as follows:

That on or about the 19th day of January 1972 in the premises of Valencia

Distillery located at del Pilar Street, San Fernando, Pampanga, Philippines

and within the jurisdiction of this Honorable Court, the accused FRANCISCO

VALENCIA, APOLONIO G. ERESPE y COMIA and PRISCILLA QUIAZON or

QUIANO alias MARY JO, conspiring and confederating together, did then and

there wilfully, unlawfully and feloniously, have in their possession, custody

and control, locally manufactured articles subject to specific tax, the tax on

which has not been paid in accordance with law, THIRTY THREE (33) boxes

of 24 bottles each of alleged Anejo Rum, 375 cc., NINE (9) BOXES of alleged

Tanduay Rum of TWELVE (12) BOTTLES each, 750 cc., TWENTY (20) BOXES

of alleged Ginebra San Miguel Gin of TWENTY FOUR (24) BOTTLES each, 375

cc., THREE (3) BOXES OF TWENTY FOUR (24) BOTTLES each, 375 cc., of

Ginebra San Miguel Gin, ONE (1) GALLON bottle of wine improver, NINE lbs.

net with actual contents of 1/5 of the bottle, ONE (1) SMALL BOTTLE, 1 Ib,

net, of Rum Jamaica, half-full, ONE (1) BOTTLE, 1 Ib. net of the wine

improvers (full), TWELVE (12) BOTTLES of alleged Tanduay Rum, 750 cc.,

pale, FOUR (4) BOTTLES of Ginebra San Miguel (alleged) 350 cc. and TWO

(2) BOTTLES of Tanduay Rum, 375 cc. the total specific tax due on which is

P160.01.

CONTRARY to Section 174 of the National Internal Revenue Code, as

amended. 3

As a result of further investigation of the sworn complaints filed by the

informers with the BIR, on 14 March 1974, six (6) more criminal informations

docketed as Criminal Cases Nos., 538-543 were filed in the Pampanga Court

of First Instance against Vicente Lee Teng alias "Vicente Lee," alias "Lee

Teng," and Francisco Valencia. These informations charged the two (2) with

violations of Section 178, in relation to Sections 182 (A) (1) (3c) and 208 of

the National Internal Revenue Code, as amended based on their failure to

pay annual privilege taxes for each of the six (6) years from 1966 to 1972.

The six (6) informations uniformly charged the accused as follows:

The undersigned State Prosecutor accuses VICENTE LEE TENG alias VICENTE

LEE alias LEE TENG, and FRANCISCO VALENCIA of the crime of Violation of

Sec. 178 in relation with Sec. 182 (A) (1) 3c and Sec. 208 of the National

Internal Revenue Code as amended, committed as follows:

That on or about the 19th of January 1972, [also during the years 1967,

1968, 1969, 1970 and 1971] in the premises of Valencia Distillery located at

del Pilar Street, San Fernando, Pampanga, Philippines and within the

jurisdiction of this Honorable Court, the above-named accused, conspiring

and confederating together and mutually helping one another, did then and

there willfully, unlawfully and feloniously distill, rectify, repair compound or

manufacture alcoholic products subject to specific tax without having paid

the privilege tax therefor. CONTRARY TO LAW. 4

On 22 April 1974, after arraignment, accused Valencia filed a Motion to

Quash Criminal Cases Nos. 538-543 inclusive, upon the grounds that the six

(6) informations had been filed without conducting the necessary

preliminary investigation and that he was entitled to the benefits of the tax

amnesty provided by P.D. No. 370. The State Prosecutor opposed the Motion

to Quash arguing that the necessary preliminary investigation in the six (6)

criminal cases had in fact been conducted and that in any case, failure to

hold the preliminary investigation was not a ground for a motion to quash.

The State Prosecutor further argued that the accused Valencia was not

entitled to avail himself of the benefits of P.D. No. 370 since his tax cases

were the subject of valid information submitted under R.A. No. 2338 as of 31

December 1973.

The respondent Judge granted the Motion to Quash and issued an Order,

dated 15 July 1974, dismissing not only Criminal Cases Nos. 538-543 but

also Criminal Cases Nos. 439 and 440 insofar as accused Francisco Valencia

was concerned. A Motion for Reconsideration by the People was similarly

denied by respondent Judge.

On 14 December 1975, the remaining accused Vicente Lee Teng and

Priscilla Castillo de Cura, having been arraigned, filed Motions to Quash

Criminal Cases Nos. 538-543 and 439 and 440, upon the common ground

that the dismissal of said cases insofar as accused Francisco Valencia was

concerned, inured to their benefit. The People opposed the Motions to Quash

upon the ground that the accused were not entitled to the benefits of the

tax amnesty under P.D. No. 370 and that, assuming the dismissal of said

criminal cases was valid insofar as accused Valencia was concerned, the

resulting immunity from criminal prosecution was personal to accused

Valencia.

The respondent Judge granted the Motions to Quash by Vicente Lee Teng

and Priscilla Castillo de Cura, and denied the People's Motion for

Reconsideration.

There are two (2) preliminary issues which need to be addressed before

dealing with the questions of substantive law posed by this case. The first

preliminary issue-whether or not the People of the Philippines are guilty of

laches-was raised by private respondents in their Answer. 5 The respondent

Judge denied the People's Motion for Reconsideration of his Order granting

Francisco Valencia's Motion to Quash the eight (8) criminal cases, on 18

November 1974. Vicente Lee Teng and Priscilla Castillo de Cura filed their

respective Motions to Quash on 14 December 1975; respondent Judge

granted their Motions to Quash on 31 March 1976. The People filed a Motion

for Reconsideration which was denied on 17 February 1977. Approximately

seven (7) months later, on 12 September 1977, the present Petition for

certiorari and mandamus was filed by the People. Initially, the Court

resolved to dismiss this Petition in a Resolution dated 5 July 1978. The

People, however, filed a Motion for Reconsideration of that Order and the

Court, in its Resolution of 1 October 1979, set aside its Resolution of

dismissal and considered this case as submitted for decision.

Ordinarily, perhaps, a Petition for certiorari brought seven (7) months after

rendition of the last order sought to be set aside might be regarded as

barred by laches. In the case at bar, however, the Court believes that the

equitable principle of laches should not be applied to bar this Petition for

certiorari and Mandamus. The effect of such application would not be the

avoidance of an inequitable situation (the very raison d'etre of the laches

principle), but rather the perpetuation of the state of facts brought about by

the orders of the respondent Judge, a state of facts which, as will be seen

later, is marked by a gross disregard of the legal rights of the People. The

Court, in other words, is compelled to take into account both the importance

of the substantive issues raised in this case and the nature of the result

brought about by the respondent Judge's orders. Moreover, on a more

practical level, the dismissal of the cases was resisted vigorously by the

prosecution which filed both oppositions to the Motion to Dismiss and

Motions for Reconsideration of the Orders granting the Motions to Quash.

The private respondents, in other words, were under no illusion as to the

position taken and urged by the People in this Case. We hold that, in the

circumstances of this case, the Petition for certiorari and mandamus is not

barred by laches.

The second preliminary issue was also raised by private respondents in their

Answer, that is, whether or not the defense of double jeopardy became

available to them with the dismissal by respondent Judge of the eight (8)

criminal cases. This defense need not detain us for long for it is clearly

premature in the present certiorari proceeding. In the certiorari petition at

bar, the validity and legal effect of the orders of dismissal issued by the

respondent Judge of the eight (8) criminal cases are precisely in issue.

Should the Court uphold these dismissal orders as valid and effective and

should a second prosecution be brought against the accused respondents,

that second prosecution may be defended against with the plea of double

jeopardy. If, upon the other hand, the Court finds the dismissal orders to be

invalid and of no legal effect, the legal consequence would follow that the

first jeopardy commenced by the eight (8) informations against the accused

has not yet been terminated and accordingly a plea of second jeopardy

must be rejected both here and in the continuation of the criminal

proceedings against the respondents-accused.

We turn, therefore, to the first substantive issue that needs to be resolved:

whether or not the accused Valencia, Lee Teng and de Cura are entitled to

the benefits available under P.D. No. 370.

The scope of application of the tax amnesty declared by P.D. No. 370 is

marked out in the following broad terms:

1. A tax amnesty is hereby granted to any person, natural or juridical, who

for any reason whatsoever failed to avail of Presidential Decree No. 23 and

Presidential Decree No. 157; or, in so availing of the said Presidential

Decrees failed to include all that were required to be declared therein if he

now voluntarily discloses under this decree all his previously untaxed

income and/or wealth such as earnings, receipts, gifts, bequests or any

other acquisitions from any source whatsoever which are or were previously

taxable under the National Internal Revenue Code, realized here or abroad

by condoning all internal revenue taxes including the increments or

penalties on account of non-payment as well as all civil, criminal or

administrative liabilities, under the National Internal Revenue Code, the

Revised Penal Code, the Anti-Graft and Corrupt Practices Act, the Revised

Administrative Code, the Civil Service Laws and Regulations, laws and

regulations on Immigration and Deportation, or any other applicable law or

proclamation, as it is hereby condoned, provided a tax of fifteen (15%) per

centum on such previously untaxed income and/or wealth is imposed

subject to the following conditions:

a. Such previously untaxed income and/or wealth must have been earned or

realized prior to 1973, except the following:

b. Capital gains transactions where the taxpayer has availed of Presidential

Decree No. 16, as amended, but has not complied with the conditions

thereof;

c. Tax liabilities with or without assessments, on withholding tax at source

provided under Sections 53 and 54 of the National Internal Revenue Code,

as amended;

d. Tax liabilities with assessment notices issued as of December 31, 1 973;

e. Tax cases which are the subject of a valid information under Republic Act

No. 2338 as of December 31, 1973; and

f. Property transferred by reason of death or by donation during the year

1972.

xxx xxx xxx

The first point that should be made in respect of P.D. No. 370 is that

compliance with all the requirements of availment of tax amnesty under P.D.

No. 370 would have the effect of condoning not just income tax liabilities but

also "all internal revenue taxes including the increments or penalties on

account of non-payment as well as all civil, criminal or administrative

liabilities, under the Internal Revenue Code, the Revised Penal Code, the

Anti-Graft and Corrupt Practices Act, the Revised Administrative Code, the

Civil Service Laws and Regulations, laws and regulations on Immigration and

Deportation, or any other applicable law or proclamation." Thus, entitlement

to benefits of P.D. No. 370 would have the effect of condoning or

extinguishing the liabilities consequent upon possession of false and

counterfeit internal revenue labels; the manufacture of alcoholic products

subject to specific tax without having paid the annual privilege tax therefor,

and the possession, custody and control of locally manufactured articles

subject to specific tax on which the taxes had not been paid in accordance

with law, in other words, the criminal liabilities sought to be imposed upon

the accused respondents by the several informations quoted above.

It should be underscored, secondly, that to be entitled to the extinction of

liability provided by P.D. No. 370, the claimant must have voluntarily

disclosed his previously untaxed income or wealth and paid the required

fifteen percent (15%) tax on such previously untaxed income or wealth

imposed by P.D. No.370. 6 Where the disclosure of such previously untaxed

income or wealth was not voluntary but rather the accompaniment or result

of tax cases or tax assessments already pending as of 31 December 1973,

the claimant is not entitled to the benefits of P.D. No. 370. Section 1 (a) (4)

of P.D. No. 370, expressly excluded from the coverage of P.D. No. 370: "tax

cases which are the subject of a valid information under R.A. No. 2338 as of

December 31, 1973." 7 In the instant case, the violations of the National

Internal Revenue Code with which the respondent accused were charged,

had already been discovered by the BIR when P.D. No. 370 took effect on 9

January 1974, by reason of the sworn information or affidavit-complaints

filed by informers with the BIR under Republic Act No. 2338 prior to 31

December 1973.

It is necessary to note that the "valid information under Republic Act No.

2338" referred to in Section 1 (a) (4) of P.D. No. 370, refers not to a criminal

information filed in court by a fiscal or special prosecutor, but rather to the

sworn information or complaint filed by an informer with the BIR under R.A.

No. 2338 in the hope of earning an informer's reward. The sworn information

or complaint filed with the BIR under R.A. No. 2338 may be considered

"valid" where the following conditions are complied with:

(1) that the information was submitted by a person other than an internal

revenue or customs official or employee or other public official, or a relative

of such official or employee within the sixth degree of consanguinity;

(2) that the information must be definite and sworn to and must state the

facts constituting the grounds for such information; and

(3) that such information was not yet in the possession of the BIR or the

Bureau of Customs and does not refer to "a case already pending or

previously investigated or examined by the Commissioner of Internal

Revenue or the Commissioner of Customs, or any of their deputies, agents

or examiners, as the case may be, or the Secretary of Finance or any of his

deputies or agents. 8

In the instant case, not one but two (2) "informations' or affidavit-complaints

concerning private respondents' operations said to be in violation of certain

provisions of the National Internal Revenue Code, had been filed with the

BIR as of 31 December 1973. In fact, those two (2) affidavit-complaints had

matured into two (2) criminal informations in court -Criminal Cases Nos. 439

and 440 against the respondent accused, by 31 December 1973. The six (6)

informations docketed as Criminal Cases Nos. 538-543, while filed in court

only on 14 March 1974, had been based upon the sworn information

previously submitted as of 31 December 1973 to the BIR.

It follows that, even assuming respondent accused Francisco Valencia was

otherwise entitled to the benefits of P.D. No. 370, none of the informations

filed against him could have been condoned under the express provisions of

the tax amnesty statute.

Accused Valencia argued that the People were estopped from questioning

his entitlement to the benefits of the tax amnesty, considering that agents

of the BIR had already accepted his application for tax amnesty and his

payment of the required fifteen percent (15%) special tax.

This contention does not persuade. At the time he paid the special fifteen

percent (15%) tax under P.D. No. 370, accused Francisco Valencia had in

fact already been subjected by the BIR to extensive investigation such that

the criminal charges against him could not be condoned under the

provisions of the amnesty statute. Further, acceptance by the BIR agents of

accused Valencia's application for tax amnesty and payment of the fifteen

percent (15%) special tax was no more than a ministerial duty on the part of

such agents. Accused Valencia does not pretend that the BIR had actually

ruled that he was entitled to the benefits of the tax amnesty statute. In any

case, even assuming, though only arguendo, that the BIR had so ruled,

there is the long familiar rule that "erroneous application and enforcement

of the law by public officers do not block, subsequent correct application of

the statute and that the government is never estopped by mistake or error

on the part of its agent." 9 which finds application in the case at bar. Still

further, a tax amnesty, much like to 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. 10 Valencia's payment of the special

fifteen percent (15%) tax must be regarded as legally ineffective.

We turn to the second substantive issue which is whether or not the

dismissal by the respondent court of the criminal informations against

accused Valencia, inured to the benefit of Valencia's co-accused. Because of

the conclusion reached above, that is, that accused Francisco Valencia was

not legally entitled to the benefits of P.D. No. 370 and that the dismissal of

the criminal information as against him was serious error on the part of the

respondent Judge, it may not be strictly necessary to deal with this second

issue. There was in fact nothing that could have inured to the benefit of

Valencia's co-accused. It seems appropriate to stress, nonetheless, that co-

accused and co-respondents Lee Teng and Priscilla Castillo de Cura, in order

to enjoy the benefits of the tax amnesty statute here involved, must show

that they have individually complied with and come within the terms of that

statute. 11 The fact that conspiracy had been alleged in each of the criminal

informations here involved certainly could not result in an automatic

exemption of Lee Teng and Priscilla Castillo de Cura from compliance with

the requirements of the tax amnesty statute. In the second place, assuming,

for present purposes only, that accused Francisco Valencia was (and he was

not) legally entitled to the benefits of P.D. No. 370 the defense of amnesty

which (hypothetically) became available to Valencia was personal to him.

Once more, the allegation of conspiracy made in the several criminal

informations here involved, did not have the effect of making a defense

available to one co-conspirator automatically available to the other co-

conspirators. The defense of the tax amnesty under P.D. No. 370 is, like

insanity, a personal defense; for that defense relates to the circumstances of

a particular accused and not to the character of the acts charged in the

criminal information. The statute makes the defense of extinguishment of

liability available only under very specific circumstances and on the basis of

reciprocity, as it were: the claimant must disclose his previously untaxed

income or wealth (which then may be effectively subjected to future

taxation) and surrender to the Government fifteen percent (15%) of such

income or wealth; then, and only then, would the claimant's liability be

extinguished. Lee Teng and Pricilla Castillo de Cura never pretended that

they had complied with the requirements of PD No. 370, including that of

reciprocity.

We conclude that the respondent Judge's error in respect of the first and

second substantive issues considered above is so gross and palpable as to

amount to arbitrary and capricious action and to grave abuse of discretion.

Those orders effectively prevented the People from prosecuting and

presenting evidence against the accused-respondents; they denied the

People its day in court. It is well-settled that:

[a] purely capricious dismissal of an information as herein involved,

moreover, deprives the State of fair opportunity to prosecute and convict. It

denies the prosecution its day in court. Accordingly, it is a dismissal without

due process and, therefore, null and void. A dismissal invalid for lack of a

fundamental requisite, such as due process, will not constitute a proper

basis for the claim of double jeopardy. 12

WHEREFORE, the Orders of respondent Judge dated 15 July 1974, 18

November 1974, 31 March 1976 and 17 February 1977 are hereby SET

ASIDE. Respondent Judge no longer being with the Judiciary, the branch of

the Regional Trial Court of Pampanga seized of Criminal Cases Nos. 439 and

440, and 538-543 inclusive, against the surviving respondent accused, 13 is

hereby ORDERED to proceed with the trial of these criminal cases. Costs

against private respondents.

SO ORDERED.

 

Footnotes

1 Rollo, pp. 34-36; Annex "J" of Petition.

2 Rollo, p. 16; Annex "A" of Petition.

3 Rollo, p. 18,1 Annex "B" of Petition.

4 Rollo, pp. 20-31, Annexes "C," "D," "E," "F," "G", and "H" of Petition.

5 Rollo, p. 51.

6 Victor Nepomuceno, et al. v. Hon. Juan B. Montecillo, etc., et al., 118 SCRA 254 (1982).

7 The less than precise drafting of Section 1 (a) (1) to (4) of P.D. No. 370 is, fortunately, clarified by the implementing Rules of

P.D. No. 370. Section 4 of Revenue Regulations No. 2- 74, dated 14 January 1974, entitled "Presidential Decree No. 370

enlarging the coverage of the tax amnesty on previously untaxed income and/or wealth subject to certain conditions' (70

Official Gazette, p. 1472 [25 February 1974]), provides as follows:

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

(1) Capital gains transactions where the taxpayer has availed of Presidential Decree No. 16, as amended, but has not complied

with the conditions thereof,

(2) Tax liabilities with or without assessments, on withholding tax at source provided under Sections 53 and 54 of the National

Internal Revenue Code, as amended;

(3) Tax liabilities with assessment notices issued as of December 31, 1973;

(4) Tax cases which are the subject of a valid information under Republic Act No. 2338 as of December 31, 1973; and

(5) Property transferred by reason of death or by donation during the year 1972." (emphasis supplied)

8 Section 1, R.A. No. 2338.

9 E. Rodriguez, Inc. v. Collector of Internal Revenue, 28 SCRA 11 1 9 (1969); Tan Guan v. Court of Tax Appeals, 19 SCRA 903

(1967); Visayan Cebu Terminal Co., Inc. v. Commissioner of Internal Revenue, 13 SCRA 357 (1965); Floro v. Philippine National

Bank, 5 SCRA 906 (1962); The Collector of Internal Revenue v. Ellen Wood McGrath, et al., 111 Phil. 222 (1961); Gutierrez, et al.

v. Court of Tax Appeals, 101 Phil. 713 (1957); and Atlas Consolidated Mining and Dev. Corp. v. Commissioner of Internal

Revenue, 102 SCRA 246 (1981).

10 E. Rodriguez, Inc. v. The Collector of Internal Revenue, 28 SCRA 1119 (1969); Commissioner of Internal Revenue v. A.D.

Guerrero, 21 SCRA 180 (1967).

11 See, in this connection, Barrioquinto et al. v. Fernandez, et al., 82 Phil. 642 (1949); Cf People v. Guillermo, 86 Phil. 395

(1960); and People v. Pasilan 122 Phil. 46 (1965); 14 SCRA 694.

Since the Government itself is bound by the terms and restrictions embodied in an amnesty statute Macaga-an v. People, 152

SCRA 430 [1987]), the claimant of amnesty must be similarly held bound by those terms.

12 People v. Balisacan 17 SCRA 1119 (1966); Serino v. Zosa, 40 SCRA 433 (1971); and People v. Surtida, 43 SCRA 29 (1972).

13 The case against Lee Teng became moot and academic by reason of his death on 14 January 1978.

FIRST DIVISION 

G.R. No. L-69344 April 26, 1991

REPUBLIC OF THE PHILIPPINES, petitioner,

vs.

INTERMEDIATE APPELLATE COURT and SPOUSES ANTONIO and

CLARA PASTOR, respondents.

 

GRIÑO-AQUINO, J.:p

The legal issue presented in this petition for review is whether or not the tax

amnesty payments made by the private respondents on October 23, 1973

bar an action for recovery of deficiency income taxes under P.D.'s Nos. 23,

213 and 370.

On April 15, 1980, the Republic of the Philippines, through the Bureau of

Internal Revenue, commenced an action in the Court of First Instance (now

Regional Trial Court) of Manila, Branch XVI, to collect from the spouses

Antonio Pastor and Clara Reyes-Pastor deficiency income taxes for the years

1955 to 1959 in the amount of P17,117.08 with a 5% surcharge and 1%

monthly interest, and costs.

The Pastors filed a motion to dismiss the complaint, but the motion was

denied. On August 2, 1975, they filed an answer admitting there was an

assessment against them of P17,117.08 for income tax deficiency but

denying liability therefor. They contended that they had availed of the tax

amnesty under P.D.'s Nos. 23, 213 and 370 and had paid the corresponding

amnesty taxes amounting to P10,400 or 10% of their reported untaxed

income under P.D. 23, P2,951.20 or 20% of the reported untaxed income

under P.D. 213, and a final payment on October 26, 1973 under P.D. 370

evidenced by the Government's Official Receipt No. 1052388. Consequently,

the Government is in estoppel to demand and compel further payment of

income taxes by them.

The parties agreed that there were no issues of fact to be litigated, hence,

the case was submitted for decision upon the pleadings and memoranda on

the lone legal question of: whether or not the payment of deficiency income

tax under the tax amnesty, P.D. 23, and its acceptance by the Government

operated to divest the Government of the right to further recover from the

taxpayer, even if there was an existing assessment against the latter at the

time he paid the amnesty tax.

It is not disputed that as a result of an investigation made by the Bureau of

Internal Revenue in 1963, it was found that the private respondents owed

the Government P1,283,621.63 as income taxes for the years 1955 to 1959,

inclusive of the 50% surcharge and 1% monthly interest. The defendants

protested against the assessment. A reinvestigation was conducted

resulting in the drastic reduction of the assessment to only P17,117.08.

It appears that on April 27, 1978, the private respondents offered to pay the

Bureau of Internal Revenue the sum of P5,000 by way of compromise

settlement of their income tax deficiency for the questioned years, but

Assistant Commissioner Bernardo Carpio, in a letter addressed to the Pastor

spouses, rejected the offer stating that there was no legal or factual

justification for accepting it. The Government filed the action against the

spouses in 1980, ten (10) years after the assessment of the income tax

deficiency was made.

On a motion for judgment on the pleadings filed by the Government, which

the spouses did not oppose, the trial court rendered a decision on February

28, 1980, holding that the defendants spouses had settled their income tax

deficiency for the years 1955 to 1959, not under P.D. 23 or P.D. 370, but

under P.D. 213, as shown in the Amnesty Income Tax Returns' Summary

Statement and the tax Payment Acceptance Order for P2,951.20 with its

corresponding official receipt, which returns also contain the very

assessment for the questioned years. By accepting the payment of the

amnesty income taxes, the Government, therefore, waived its right to

further recover deficiency incomes taxes "from the defendants under the

existing assessment against them because:

1. the defendants' amnesty income tax returns' Summary Statement

included therein the deficiency assessment for the years 1955 to 1959;

2. tax amnesty payment was made by the defendants under Presidential

Decree No. 213, hence, it had the effect of remission of the income tax

deficiency for the years 1955 to 1959;

3. P.D. No. 23 as well as P.D. No. 213 do not make any exceptions nor

impose any conditions for their application, hence, Revenue Regulation No.

7-73 which excludes certain taxpayers from the coverage of P.D. No. 213 is

null and void, and

4. the acceptance of tax amnesty payment by the plaintiff-appellant bars

the recovery of deficiency taxes. (pp. 3-4, IAC Decision, pp. 031-032, Rollo.)

The Government appealed to the Intermediate Appellant Court (AC G.R. CV

No. 68371 entitled, "Republic of the Philippines vs. Antonio Pastor, et al."),

alleging that the private respondents were not qualified to avail of the tax

amnesty under P.D. 213 for the benefits of that decree are available only to

persons who had no pending assessment for unpaid taxes, as provided in

Revenue Regulations Nos. 8-72 and 7-73. Since the Pastors did in fact have

a pending assessment against them, they were precluded from availing of

the amnesty granted in P.D.'s Nos. 23 and 213. The Government further

argued that "tax exemptions should be interpreted strictissimi juris against

the taxpayer."

The respondent spouses, on the other hand, alleged that P.D. 213 contains

no exemptions from its coverage and that, under Letter of Instruction LOI

129 dated September 18, 1973, the immunities granted by P.D. 213 include:

II-Immunities Granted.

Upon payment of the amounts specified in the Decree, the following shall be

observed:

2. The taxpayer shall not be subject to any investigation, whether civil,

criminal or administrative, insofar as his declarations in the income tax

returns are concerned nor shall the same be used as evidence against, or to

the prejudice of the declarant in any proceeding before any court of law or

body, whether judicial, quasi-judicial or administrative, in which he is a

defendant or respondent, and he shall be exempt from any liability arising

from or incident to his failure to file his income tax return and to pay the tax

due thereon, as well as to any liability for any other tax that may be due as

a result of business transactions from which such income, now voluntarily

declared may have been derived.

There is nothing in the LOI which can be construed as authority for the

Bureau of Internal Revenue to introduce exceptions and/or conditions to the

coverage of the law.

On November 23, 1984, the Intermediate Appellate Court (now Court of

Appeals) rendered a decision dismissing the Government's appeal and

holding that the payment of deficiency income taxes by the Pastors under

PD. No. 213, and the acceptance thereof by the Government, operated to

divest the latter of its right to further recover deficiency income taxes from

the private respondents pursuant to the existing deficiency tax assessment

against them. The appellate court held that if Revenue Regulation No. 7-73

did provide an exception to the coverage of P.D. 213, such provision was

null and void for being contrary to, or restrictive of, the clear mandate of

P.D. No. 213 which the regulation should implement. Said revenue

regulation may not prevail over the provisions of the decree, for it would

then be an act of administrative legislation, not mere implementation, by

the Bureau of Internal Revenue.

On February 4, 1986, the Republic of the Philippines, through the Solicitor

General, filed this petition for review of the decision dated November 23,

1984 of the Intermediate Appellate Court affirming the dismissal, by the

Court of First Instance of Manila, of the Government's complaint against the

respondent spouses.

The petition is devoid of merit.

Even assuming that the deficiency tax assessment of P17,117.08 against

the Pastor spouses were correct, since the latter have already paid almost

the equivalent amount to the Government by way of amnesty taxes under

P.D. No. 213, and were granted not merely an exemption, but an amnesty,

for their past tax failings, the Government is estopped from collecting the

difference between the deficiency tax assessment and the amount already

paid by them as amnesty tax.

A tax amnesty, being a general pardon or intentional overlooking by the

State of its authority to impose penalties on persons otherwise guilty of

evasion or violation of a revenue or tax law, partakes of an absolute

forgiveness or waiver by the Government of its right to collect what

otherwise would be due it, and in this sense, prejudicial thereto, particularly

to give tax evaders, who wish to relent and are willing to reform a chance to

do so and thereby become a part of the new society with a clean slate

(Commission of Internal Revenue vs. Botelho Corp. and Shipping Co., Inc.,

20 SCRA 487).

The finding of the appellate court that the deficiency income taxes were

paid by the Pastors, and accepted by the Government, under P.D. 213,

granting amnesty to persons who are required by law to file income tax

returns but who failed to do so, is entitled to the highest respect and may

not be disturbed except under exceptional circumstances which have

already become familiar (Rule 45, Sec. 4, Rules of Court; e.g., where: (1) the

conclusion is a finding grounded entirely on speculation, surmise and

conjecture; (2) the inference made is manifestly mistaken; (3) there is grave

abuse of discretion; (4) the judgment is based on misapprehension of facts;

(5) the Court of Appeals went beyond the issues of the case and its findings

are contrary to the admissions of both the appellant and the appellee; (6)

the findings of fact of the Court of Appeals are contrary to those of the trial

court; (7) said findings of fact are conclusions without citation of specific

evidence in which they are based; (8) the facts set forth in the petition as

well as in the petitioner's main and reply briefs are not disputed by the

respondents; and (9) when the finding of fact of the Court of Appeals is

premised on the absense of evidence and is contradicted by the evidence on

record (Thelma Fernan vs. CA, et al., 181 SCRA 546, citing Tolentino vs. de

Jesus, 56 SCRA 67; People vs. Traya, 147 SCRA 381), none of which is

present in this case.

The rule is that in case of doubt, tax statutes are to be construed strictly

against the Government and liberally in favor of the taxpayer, for taxes,

being burdens, are not to be presumed beyond what the applicable statute

(in this case P.D. 213) expressly and clearly declares (Commission of

Internal Revenue vs. La Tondena, Inc. and CTA, 5 SCRA 665, citing Manila

Railroad Company vs. Collector of Customs, 52 Phil, 950).

WHEREFORE, the petition for review is denied. No costs.

THIRD DIVISION

 

G.R. No. 108358 January 20, 1995

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

THE HON. COURT OF APPEALS, R.O.H. AUTO PRODUCTS

PHILIPPINES, INC. and THE HON. COURT OF TAX APPEALS,

respondents.

 

VITUG, J.:

On 22 August 1986, during the period when the President of the Republic

still wielded legislative powers, Executive Order No. 41 was promulgated

declaring a one-time tax amnesty on unpaid income taxes, later amended to

include estate and donor's taxes and taxes on business, for the taxable

years 1981 to 1985.

Availing itself of the amnesty, respondent R.O.H. Auto Products Philippines,

Inc., filed, in October 1986 and November 1986, its Tax Amnesty Return No.

34-F-00146-41 and Supplemental Tax Amnesty Return No. 34-F-00146-64-B,

respectively, and paid the corresponding amnesty taxes due.

Prior to this availment, petitioner Commissioner of Internal Revenue, in a

communication received by private respondent on 13 August 1986,

assessed the latter deficiency income and business taxes for its fiscal years

ended 30 September 1981 and 30 September 1982 in an aggregate amount

of P1,410,157.71. The taxpayer wrote back to state that since it had been

able to avail itself of the tax amnesty, the deficiency tax notice should

forthwith be cancelled and withdrawn. The request was denied by the

Commissioner, in his letter of 22 November 1988, on the ground that

Revenue Memorandum Order No. 4-87, dated 09 February 1987,

implementing Executive Order No. 41, had construed the amnesty coverage

to include only assessments issued by the Bureau of Internal Revenue after

the promulgation of the executive order on 22 August 1986 and not to

assessments theretofore made. The invoked provisions of the memorandum

order read:

TO: All Internal Revenue Officers and Others Concerned:

1.0. To give effect and substance to the immunity provisions of the tax

amnesty under Executive Order No. 41, as expanded by Executive Order No.

64, the following instructions are hereby issued:

xxx xxx xxx

1.02. A certification by the Tax Amnesty Implementation Officer of the fact

of availment of the said tax amnesty shall be a sufficient basis for:

xxx xxx xxx

1.02.3. In appropriate cases, the cancellation/withdrawal of assessment

notices and letters of demand issued after August 21, 1986 for the collection

of income, business, estate or donor's taxes due during the same taxable

years. 1 (Emphasis supplied)

Private respondent appealed the Commissioner's denial to the Court of Tax

Appeals. Ruling for the taxpayer, the tax court said:

Respondent (herein petitioner Commissioner) failed to present any case or

law which proves that an assessment can withstand or negate the force and

effects of a tax amnesty. This burden of proof on the petitioner (herein

respondent taxpayer) was created by the clear and express terms of the

executive order's intention — qualified availers of the amnesty may pay an

amnesty tax in lieu of said unpaid taxes which are forgiven (Section 2,

Section 5, Executive Order No. 41, as amended). More specifically, the plain

provisions in the statute granting tax amnesty for unpaid taxes for the

period January 1, 1981 to December 31, 1985 shifted the burden of proof on

respondent to show how the issuance of an assessment before the date of

the promulgation of the executive order could have a reasonable relation

with the objective periods of the amnesty, so as to make petitioner still

answerable for a tax liability which, through the statute, should have been

erased with the proper availment of the amnesty.

Additionally, the exceptions enumerated in Section 4 of Executive Order No.

41, as amended, do not indicate any reference to an assessment or pending

investigation aside from one arising from information furnished by an

informer. . . . Thus, we deem that the rule in Revenue Memorandum Order

No. 4-87 promulgating that only assessments issued after August 21, 1986

shall be abated by the amnesty is beyond the contemplation of Executive

Order No. 41, as amended. 2

On appeal by the Commissioner to the Court of Appeals, the decision of the

tax court was affirmed. The appellate court further observed:

In the instant case, examining carefully the words used in Executive Order

No. 41, as amended, we find nothing which justifies petitioner

Commissioner's ground for denying respondent taxpayer's claim to the

benefits of the amnesty law. Section 4 of the subject law enumerates, in no

uncertain terms, taxpayers who may not avail of the amnesty granted,. . . .

Admittedly, respondent taxpayer does not fall under any of the . . .

exceptions. The added exception urged by petitioner Commissioner based

on Revenue Memorandum Order No. 4-87, further restricting the scope of

the amnesty clearly amounts to an act of administrative legislation quite

contrary to the mandate of the law which the regulation ought to

implement.

xxx xxx xxx

Lastly, by its very nature, a tax amnesty, being a general pardon or

intentional overlooking by the State of its authority to impose penalties on

persons otherwise guilty of evasion or violation of a revenue or tax law,

partakes of an absolute forgiveness or waiver by the Government of its right

to collect what otherwise would be due it, and in this sense, prejudicial

thereto, particularly to give tax evaders, who wish to relent and are willing

to reform a chance to do so and thereby become a part of the new society

with a clean slate. (Republic vs. Intermediate Appellate Court. 196 SCRA

335, 340 [1991] citing Commissioner of Internal Revenue vs. Botelho

Shipping Corp., 20 SCRA 487) To follow [the restrictive application of

Revenue Memorandum Order No. 4-87 pressed by petitioner Commissioner

would be to work against the raison d'etre of E.O. 41, as amended, i.e., to

raise government revenues by encouraging taxpayers to declare their

untaxed income and pay the tax due thereon. (E.O. 41, first paragraph)] 3

In this petition for review, the Commissioner raises these related issues:

1. WHETHER OR NOT REVENUE MEMORANDUM ORDER NO. 4-87,

PROMULGATED TO IMPLEMENT E.O. NO. 41, IS VALID;

2. WHETHER OR NOT SAID DEFICIENCY ASSESSMENTS IN QUESTION WERE

EXTINGUISHED BY REASON OR PRIVATE RESPONDENT'S AVAILMENT OF

EXECUTIVE ORDER NO. 41 AS AMENDED BY EXECUTIVE ORDER NO. 64;

3. WHETHER OR NOT PRIVATE RESPONDENT HAS OVERCOME THE

PRESUMPTION OF VALIDITY OF ASSESSMENTS. 4

The authority of the Minister of Finance (now the Secretary of Finance), in

conjunction with the Commissioner of Internal Revenue, to promulgate all

needful rules and regulations for the effective enforcement of internal

revenue laws cannot be controverted. Neither can it be disputed that such

rules and regulations, as well as administrative opinions and rulings,

ordinarily should deserve weight and respect by the courts. Much more

fundamental than either of the above, however, is that all such issuances

must not override, but must remain consistent and in harmony with, the law

they seek to apply and implement. Administrative rules and regulations are

intended to carry out, neither to supplant nor to modify, the law.

The real and only issue is whether or not the position taken by the

Commissioner coincides with the meaning and intent of executive Order No.

41.

We agree with both the court of Appeals and court of Tax Appeals that

Executive Order No. 41 is quite explicit and requires hardly anything beyond

a simple application of its provisions. It reads:

Sec. 1. Scope of Amnesty. — A one-time tax amnesty covering unpaid

income taxes for the years 1981 to 1985 is hereby declared.

Sec. 2. Conditions of the Amnesty. — A taxpayer who wishes to avail himself

of the tax amnesty shall, on or before October 31, 1986;

a) file a sworn statement declaring his net worth as of December 31, 1985;

b) file a certified true copy of his statement declaring his net worth as of

December 31, 1980 on record with the Bureau of Internal Revenue, or if no

such record exists, file a statement of said net worth therewith, subject to

verification by the Bureau of Internal Revenue;

c) file a return and pay a tax equivalent to ten per cent (10%) of the

increase in net worth from December 31, 1980 to December 31, 1985:

Provided, That in no case shall the tax be less than P5,000.00 for individuals

and P10,000.00 for judicial persons.

Sec. 3. Computation of Net Worth. — In computing the net worths referred

to in Section 2 hereof, the following rules shall govern:

a) Non-cash assets shall be valued at acquisition cost.

b) Foreign currencies shall be valued at the rates of exchange prevailing as

of the date of the net worth statement.

Sec. 4. Exceptions. — The following taxpayers may not avail themselves of

the amnesty herein granted:

a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;

b) Those with income tax cases already filed in Court as of the effectivity

hereof;

c) Those with criminal cases involving violations of the income tax already

filed in court as of the effectivity filed in court as of the effectivity hereof;

d) Those that have withholding tax liabilities under the National Internal

Revenue Code, as amended, insofar as the said liabilities are concerned;

e) Those with tax cases pending investigation by the Bureau of Internal

Revenue as of the effectivity hereof as a result of information furnished

under Section 316 of the National Internal Revenue Code, as amended;

f) Those with pending cases involving unexplained or unlawfully acquired

wealth before the Sandiganbayan;

g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions

and Transactions) and Chapter Four (Malversation of Public Funds and

Property) of the Revised Penal Code, as amended.

xxx xxx xxx

Sec. 9. The Minister of finance, upon the recommendation of the

Commissioner of Internal Revenue, shall promulgate the necessary rules

and regulations to implement this Executive Order.

xxx xxx xxx

Sec. 11. This Executive Order shall take effect immediately.

DONE in the City of Manila, this 22nd day of August in the year of Our Lord,

nineteen hundred and eighty-six.

The period of the amnesty was later extended to 05 December 1986 from

31 October 1986 by Executive Order No. 54, dated 04 November 1986, and,

its coverage expanded, under Executive Order No. 64, dated 17 November

1986, to include estate and honors taxes and taxes on business.

If, as the Commissioner argues, Executive Order No. 41 had not been

intended to include 1981-1985 tax liabilities already assessed

(administratively) prior to 22 August 1986, the law could have simply so

provided in its exclusionary clauses. It did not. The conclusion is

unavoidable, and it is that the executive order has been designed to be in

the nature of a general grant of tax amnesty subject only to the cases

specifically excepted by it.

It might not be amiss to recall that the taxable periods covered by the

amnesty include the years immediately preceding the 1986 revolution

during which time there had been persistent calls, all too vivid to be easily

forgotten, for civil disobedience, most particularly in the payment of taxes,

to the martial law regime. It should be understandable then that those who

ultimately took over the reigns of government following the successful

revolution would promptly provide for abroad, and not a confined, tax

amnesty.

Relative to the two other issued raised by the Commissioner, we need only

quote from Executive Order No. 41 itself; thus:

Sec. 6. Immunities and Privileges. — Upon full compliance with the

conditions of the tax amnesty and the rules and regulations issued pursuant

to this Executive order, the taxpayer shall enjoy the following immunities

and privileges:

a) The taxpayer shall be relieved of any income tax liability on any untaxed

income from January 1, 1981 to December 31, 1985, including increments

thereto and penalties on account of the non-payment of the said tax. Civil,

criminal or administrative liability arising from the non-payment of the said

tax, which are actionable under the National Internal Revenue Code, as

amended, are likewise deemed extinguished.

b) The taxpayer's tax amnesty declaration shall not be admissible in

evidence in all proceedings before judicial, quasi-judicial or administrative

bodies, in which he is a defendant or respondent, and the same shall not be

examined, inquired or looked into by any person, government official,

bureau or office.

c) The books of account and other records of the taxpayer for the period

from January 1, 1981 to December 31, 1985 shall not be examined for

income tax purposes: Provided, That the Commissioner of Internal Revenue

may authorize in writing the examination of the said books of accounts and

other records to verify the validity or correctness of a claim for grant of any

tax refund, tax credit (other than refund on credit of withheld taxes on

wages), tax incentives, and/or exemptions under existing laws.

There is no pretension that the tax amnesty returns and due payments

made by the taxpayer did not conform with the conditions expressed in the

amnesty order.

WHEREFORE, the decision of the court of Appeals, sustaining that of the

court of Tax Appeals, is hereby AFFIRMED in toto. No costs.

SO ORDERED.

Feliciano, Bidin, Romero and Melo, JJ., concur.

 

Footnotes

1 Rollo, p. 29.

2 Rollo, pp. 28-29.

3 Rollo, pp. 30-31, 33.

4 Rollo, p. 12.

EN BANC

G.R. No. L-3538             May 28, 1952

JUAN LUNA SUBDIVISION, INC., plaintiff-appellee,

vs.

M. SARMIENTO, ET AL., defendants-appellants.

Gibbs, Gibbs, Chuidian and Quasha for appellee.

City Fiscal Eugenio Angeles and Assistant Fiscal Cornelio S. Ruperto for

appellant.

La O and Feria for defendant Philippine Trust Co.

TUASON, J.:

This is an appeal by the City Treasure of the City of Manila from the

following judgment handed down in the above-entitled cause:

POR TODAS CONSIDERACIONES, el Jugado dicta sentencia ordenado: que el

demandado Tesorero de la Ciudad de Manila pague a la demandante la

cantidad de P2,210.52 sin intereses; que la demandada Philippine Trust

Companypague a la demandante la suma de P105 sin intereses.

The Philippine Trust Company did not appeal.

The facts of the case, in so far as they are not in controversy, are these: The

plaintiff was a corporation duly organized and existing under the laws of the

Philippines with principal office in Manila. On December 29, 1941 it issued to

the City Treasurer of Manila, and the City Treasurer accepted checks No.

628334 for P2,210.52 drawn upon the Philippine Trust Company with which

it had a credit balance of P4,940.17 on its account. This check was to be

applied to plaintiff's land tax for the second semester of 1941 the exact

amount of which was yet undetermine and so it was entered in the ledger,

Exhibit "F", as deposit by the taxpayer. On February 20, 1942, presumably

after the exact amount had been verified, which was P341.60, the balance

of P1,868.92, covered by voucher No. 1487 of the City Treasure's office, was

noted in the ledger as a credit to the Juan Luna Subdivision, Inc.

Further than this, the records of the City Treasurer's office do not show what

was done with the check. But the books of the Philippine Trust Company do

reveal that it was deposited with the Philippine National Bank, the City

Treasurer's sole depository, on December 29, 1941, and that it was

presented by that Bank to the Philippine Trust Company on May 1, 1944 and

was cashed by the drawee. Manuel F. Garcia, Assistant Treasurer of the

Philippine Trust Company, testified that soon after his bank was authorized

in March, 1942, to reopen for business (it had been closed by order of the

Japanese military authorities,) it received from the Philippine National Bank

a bundle of checks, including appellees check No. 628334, drawn upon the

Philippine Trust Company before the Japanese occupation and held in

abeyance by the Philippine National Bank pending resumption of operation

by the Philippine Trust Company; that these checks, including the appellee's

check, were accepted and the amounts thereof debited against the

respective drawer's accounts; that with respect to check No. 628334, the

operation was effected on May 1, 1944.

The City refused after liberation to refund the plaintiff's deposit or apply it to

such future taxes as might be found due, while the Philippine Trust

Company was unwilling to reverse its debit entry against the Juan Luna

Subdivision, Inc. It was upon this predicament that the Juan Luna

Subdivision, Inc. brought this suit against the City Treasurer and the

Philippine Trust Company as defendants in the alternative. The purpose of

the action is determine which of the two defendants is liable for plaintiff's

check. There is a separate cause of action which concerns the plaintiff and

the City Treasurer alone.

On the main cause of action the burden of the City Treasurer's defense is

that his office was not benefited why the check. He denies that the said

check was cashed "or rather there was no proof that it was." It is pointed out

that Mr. Gibbs, testifying in open court, admitted that he had never received

nor could he have received the cancelled checks;" that "the courts finding

that sum P2,210.52 was in fact and in truth added to the actual cash of the

Treasurer of the City of Manila is based on conjectures and surprises without

any support of pertinent and competent proof;" that "special ledger sheet of

the City Treasurer . . . simply showed that some accounting transaction in

the book value was done or accomplished but these accounting processes

did not show that actual payment had been made (by the Philippine National

Bank) to the City Treasurer, and that the City Treasurer had in effect

received said amount represented by said checks;" that "the burden of

proving that the check in question was in fact paid rest on the defendant

Philippine Trust Company." It is further argued that "there is a lot of

difference between the book value and the cash value of this check," that

the acceptance by the City Treasurer and the issuance of the Official Receipt

No. 755402 on December 29, 1941 in favor of Juan Luna Subdivision, Inc. did

not simultaneously and automatically place in the hands of the City

Treasurer the cash value represented by the said checks in the amount of

P2,210.52".

That the plaintiff's check was deposited by the City Treasurer with the

Philippine National Bank, and the latter was paid the cash equivalent thereof

by the Philippine Trust Company, admits of no doubt. The entries in the

books of the latter bank are not in the least impugned. Whether the City

Treasurer was paid that amount by the Philippine National Bank or given

credit for it, the City Treasurer would neither admit nor deny. He said:

A. Not that I am not willing (to admit); I am willing, but I am not the right

party to admit that the check was actually collected by the City of Manila

from the Philippine Trust Company, The Philippine Trust Company never

submitted any financial statement. To my knowledge, the City Treasurer of

Manila has never been informed by the Philippine Trust Company or by the

Philippine National Bank, which is the depository of the City of Manila, that

same check was collected by the City Manila from the Philippine National

Bank; by that I am not trying to say that the check was not actually

collected by the City.

x x x           x x x           x x x

Q. This particular check in question pertains to the revenue account of the

City of Manila, is that right?

A. Yes, sir.

Q. Ordinarily it would be deposited with the Philippine National Bank, is that

right?

A. That is right.

Q. And the Philippine National Bank has not rendered you any account of its

collections?

A. I would not say that; they probably gave us statement, but as we have

lost our records pertaining to the occupation and the pre-war years, I could

not make a categorial statement.

From the fact that the Philippine National Bank was open throughout the

Japanese occupation and the other facts heretofore admitted or not denied,

it is to be presumed that the Philippine National Bank credited the City

Treasurer with the amount of the check in question, and that the City

Treasurer, taking ordinary care of his concerns, withdrew that amount. This

is in accordance with the presumption that things happened according to

the ordinary course of business and habits. The burden is on the City

Treasurer, not on the plaintiff, to rebut these presumptions.

But the point is not material at all as far as the plaintiff is concerned. What

became of the check or where the money went is a matter between the City

Treasurer and the Philippine National Bank. The drawer of the check had

funds on deposit to meet it; the City Treasurer accepted it and deposited it

with the Philippine National Bank, and the Philippine National Bank,

collected the equivalent amount from the drawee Bank. In the light of these

circumstances, the City Treasurer became the Philippine National Bank's

creditor and the Juan Luna Subdivision, Inc. was released from liability on its

checks. If the City Treasurer did not collect his credit from the Philippine

National Bank or otherwise make use of it, he alone was to blame and

should suffer the consequences of his neglect. That the City Treasurer held

the check merely in trust for plaintiff does not alter the situation as far as his

branch of the case goes.

The amount to be refunded to the plaintiff is the subject of another

disagreement between the Juan Luna Subdivision, Inc. and the City

Treasurer. This is the ground of other cause of action heretofore referred to.

The plaintiff claims the whole amount of the check contending that taxes for

the last semester of 1941 have been remitted by Commonwealth Act No.

703.

Section 1 of this Act, which was approved on November 1, 1945, provides:

All land taxes and penalties due and payable for the years nineteen hundred

and forty-two nineteen hundred and forty-three nineteen hundred and forty-

four and fifty per cent of the tax due for nineteen hundred and forty-five, are

hereby remitted. The land taxes and penalties due and payable for the

second semester of the year nineteen hundred and forty-one shall also be

remitted the if the remaining fifty per cent corresponding to the year

nineteen hundred and forty-five shall been paid on or before December

thirty-first, nineteen hundred and forty-five.

Does this provision cover taxes paid before its enactment as the plaintiff

maintains and the court below held, or does it refer, as the City Treasurer

believes, only to taxes which were still unpaid?

There is no ambiguity in the language of the law. It says "taxes and

penalties due and payable," the literal meaning of which taxes owned or

owing. (See Webster's New International Dictionary) Note that the provision

speaks of penalties, and note that penalties accrue only when taxes are not

paid on time. The word "remit" underlined by the appellant does not help its

theory, for to remit to desist or refrain from exacting, inflicting, or enforcing

something as well as to restore what has already been taken. (Webster's

New International Dictionary.)

We do not see that literal interpretation of Commonwealth Act No. 703 runs

counter and does violence to its spirit and intention , nor do we think that

such interpretation would be "constitutionally bad" in that "it would unduly

discriminate against taxpayers who had paid in favor of delinquent

taxpayers."

The remission of taxes due and payable to the exclusion of taxes already

collected does not constitute unfair discrimination. Each set of taxes is a

class by itself, and the law would be open to attack as class legislation only

if all taxpayers belonging to one class were not treated alike. They are not.

As to the justice of the measure, the confinement of the condonation to

deliquent taxes was not without good reason. The property owners who had

paid their taxes before liberation and those who had not were not on the

same footing on the need of material relief. It is true that the ravages and

devastations wrought by was operations had rendered the bulk of the

people destitute or impoverished and that it was this situation which

prompted the passage of Commonwealth Act No. 703. But it is also true that

the taxpayers who had been in arrears in their obligation would have to

satisfy their liability with genuine currency, while the taxes paid during the

occupation had been satisfied in Japanese military notes, many of them at a

time when those notes were well-nigh worthless. To refund those taxes with

the restored currency, even if the Government could afford to do so, would

be unduly to enrich many of the payers at a greater expense to the people

at large. What is more, the process of refunding would entail a tremendous

amount of work and difficulties, what with the destruction of tax records and

the great number of claimants who would take advantage of such grace.

It is said that the plaintiff's check was in the nature of deposit, held trust by

the City Treasurer, and that for this reason, plaintiff's taxes are to be

regarded as still due and payable. This argument is well taken but only to

the extent of P1,868.92. The amount of P341.60 as early as February 20,

1942, had been applied to the second half of plaintiff's 1941 tax and

become part of the general funds of the city treasury. From that date that

tax was legally and actually paid and settled.

The appealed judgment should, therefore, be modified so that the defendant

City Treasurer shall refund to the plaintiff the sum of P1,868.92 instead

P2,210.52, without costs. It is so ordered.

EN BANC

G.R. No. L-14878          December 26, 1963

SURIGAO CONSOLIDATED MINING CO., INC., petitioner,

vs.

COLLECTOR OF INTERNAL REVENUE and COURT OF APPEALS,

respondents.

Leido, Angeles and Valladolid for petitioner.

Office of the Solicitor General for respondents.

REGALA, J.:

This is a petition to review the decision of the Court of Tax Appeals in Manila

Civil Case No. 4770 dismissing for lack of merit the action of the Surigao

Consolidated Mining Company for the refund of the total amount of

P17,051.14 allegedly representing overpayment of ad valorem tax for the

fourth quarter of 1941.

The record shows that before the outbreak of World War II, the Surigao

Consolidated Mining Company (called SURIGAO CONSOLIDATED, for short), a

domestic corporation which then had its principal office in the City of Iloilo,

was operating its mining concessions in Mainit, Surigao. Pursuant to section

246 of the Internal Revenue Code, which prescribes the time and manner of

payment of royalties or ad valorem taxes, it filed a bond and had been

regularly filing its returns for minerals removed from its mines during each

calendar quarter and paying ad valorem tax thereon within 20 days after the

close of every quarter. In each case, computation of the ad valorem tax was

based on the market value of the minerals set forth in the returns, subject to

adjustment upon the receipt of the smelter showing the actual market value

of the minerals to the United States.

Due to the interruption, of the communications outbreak of the war, the

principal office of Surigao Consolidated lost contact with its mines and never

received the production reports for the fourth quarter of 1941. In order to

avoid incurring any tax penalty, said company, on January 19, 1942,

deposited a check amount of P27,000.00 payable to and "indorsed in favor

of the City Treasurer (of Iloilo) in payment of the ad valorem taxes

(approximate adjustment to be made when circumstances allow it) for the

fourth quarter of 1941."

After the termination of the war, Commonwealth Act No. 722 was enacted,

which provided for the filing of returns for minerals removed during the last

quarter of 1941 up to December 31, 1945 and the payment of ad valorem

tax on said minerals to February 28, 1946.

Availing of the provisions of the aforementioned Act, the Surigao

Consolidated, on December 28, 1945, ad valorem tax returns for the fourth

quarter declaring as its tax liability the amount of P43,486.54. Applying the

amount of P27,000.00 previously deposited with the City Treasurer of Iloilo,

the returns indicated an unpaid balance of P16,486.54 as the " tax subject

to revision."

However, on February 26, 1946, the Surigao Consolidated filed an amended

ad valorem tax returns under which amendment it declared a reduced ad

valorem tax in the amount of P37,189.00. And crediting itself with the

amount of P27,000.00 previously deposited with the City Treasurer of Iloilo,

it paid the remaining balance of P10,189.00.

On September 24, 1946, the Surigao Consolidated again filed a statement of

adjustment allegedly containing figures and data of the complete smelter

returns for minerals shipped to the United States. In the accompanying

letter, a request was made, this time not only for the reduction of tax, but

for the refund of the amount of P18,107.87. On October 19, 1946, another

statement of adjustment was filed reducing the claim for refund to

P17,158.01. Finally, on March 15, 1947, a third statement of adjustment was

submitted further reducing the claim for refund to the amount of P

17,051.14.

As the Collector of Internal Revenue denied the request for the refund of the

said P17,051.14 on the ground that the money already paid as ad valorem

tax was legally due to the Government, the Surigao Consolidated instituted

with the Court of First Instance of Manila civil action for its recovery.

However, upon the enactment of Republic Act No. 1125 creating the Court

of Tax Appeals, the case was remanded to the latter court for proper

disposition.

After hearing, the Court of Tax Appeals, on July 16, 1958, finding that the

amount sought to be refunded been lawfully collected, rendered its decision

denying the claim for refund. The Surigao Consolidated in due time filed a

motion for new trial on the ground that the decision was "not justified by the

overwhelming weight of evidence" and that it was contrary to law. The tax

court, however, denied the motion. Hence, this petition for review.

The question to be resolved is whether or not Surigao Consolidated,

petitioner herein, is entitled to the refund of ad valorem tax in the total

amount of P17,051.14, itemized as follows:

1

.

Ad valorem tax on minerals removed from the

mines but allegedly lost in transit on account of

war

P1,191.46

2

.

Ad valorem tax on minerals extracted from the

mines but allegedly looted during the Japanese

occupation

15,609.73

3 Alleged overpayment of ad valorem tax on 249.95

. minerals shipped to the United States

P17,051.14

The first, item in petitioner's claim for refund in the amount of P1,191.46

represents the amount of ad valorem tax paid on minerals removed from

the mines but alleged to have been lost in transit on account of the war. The

refund is sought under section 1 (d) of Republic Act No. 81, which provides

as follows:

SECTION 1. Any provision of existing law to the contrary notwithstanding:

(d) All unpaid royalties, ad valorem or specific taxes on all minerals mined

from mining claims or concessions existing and in force on January first,

nineteen hundred and forty-two, and which minerals were lost by reason of

the war or circumstances arising therefrom, are hereby condoned: Provided,

That if said minerals had been or shall be recovered by the miner or

producer, such royalties, ad valorem or specific taxes on the same shall be

immediately due and demandable.

Petitioner argues that since the law condones the taxes due from taxpayers

who failed to pay their taxes, it would be unfair to deny this benefit to those

taxpayers who had been prompt in paying theirs. The argument merits

careful consideration. At first it would seem to be sound and logical. But the

aforequoted section clearly refers to the condonation of unpaid taxes only.

The condonation of a tax liability is equivalent and is in the nature of a tax

exemption. Being so, it should be sustained only when expressed in explicit

terms, and it can not be extended beyond the plain meaning of those terms.

It is the universal rule that he who claims an exemption from his share of

the common burden of taxation must justify his claim by showing that the

Legislature intended to exempt him by words too plain to be mistaken.

(Statutory Construction by Francisco, citing Government of P. I. v. Monte de

Piedad, 25 Phil. 42.)

The application of a statute creating an exemption for taxation to taxes

already assessed depends upon whether it is retrospective in its operation.

Such a statute has no retrospective operation, unless by the terms thereof it

clearly appears to be the intention of the legislature that the exemption

shall relate back to taxes which have already become fixed, as a statute

which releases a person or corporation from a burden common to the whole

community should be strictly (Louisville Water Co. v. Hamilton, 81 Ky.

517, ... cited 6 American and English Ann. Cases, p. 438).

Petitioner having failed to point to Us any portion of the law that explicitly

provides for a refund of those taxpayers who had paid their taxes on the

items and under circumstances mentioned in the abovequoted provision,

We are constrained to hold that the benefits of said provision does not

extend to it.

Even assuming arguendo that the provisions of Republic Act No. 81

authorizes the refund of taxes already paid by petitioner, the latter would

not still be entitled to the refund sought for under the first item. It is to be

noted that petitioner's evidence of the alleged loss in transit as observed by

the Court of Tax Appeals, merely of testimony of witnesses who did not have

personal knowledge of the circumstances which gave rise to the loss. Such

evidence cannot, of course be considered sufficient to establish that the

minerals were in fact lost. Judge Luciano of the Court of Tax Appeals during

the trial, would be to create a dangerous precendent.

Under the second item, petitioner seeks to recover the amount of

P15,609.73 representing the ad valorem tax paid on minerals extracted

from its mines but alleged to have been looted during the enemy

occupation. In connection with the alleged looting of the minerals, the Tax

Court has this to say:

We are again confronted with the case where plaintiff has, to our mind,

failed to present adequate evidence to prove such loss. The evidence, if at

all, is merely limited to the general and uncorroborated statements of

plaintiff's officers that the same were lost in the mines. These testimonies

cannot be taken on their full face value, especially because they had no

direct supervision over the handling of such minerals at the time of the

alleged loss. Much less had these officers have personal knowledge of the

loss. Under the circumstances, we can not make the finding that the

minerals were in fact lost.

Going over the record, We find no reason to disturb the above findings of

the Court of Tax Appeals, there being no showing that they are not

substantiated by the evidence. With this observation, it would be useless

ceremony to delve into the issue of whether ad valorem tax should be or

should not be paid on minerals extracted from the mines but not removed

therefrom.

One more item in petitioner's claim is the alleged overpayment of ad

valorem tax in the amount of P249.95 on the minerals shipped to the United

States. It is that an ad valorem tax in the amount of P20,387.81 was

originally paid on the minerals shipped to the United States with a gross

value of P410,299.49; that the smelter returns from the United States show

that the actual market value of the minerals shipped to the States was

P416,895.28; and that after deducting all allowable deductions amounting in

all to P1,828,34, the true and correct amount of ad valorem tax on said

minerals was P20,137.86. Petitioner, therefore, claims difference between

the amount of P20,387.81 and P20,137.86 is an overpayment.

It is not disputed that, as indicated above, the amount of ad valorem tax on

the minerals shipped to the United States is subject to adjustment upon the

receipt of the smelter returns showing their actual market value Petitioner

contends that the statements of adjustment alleged to contain the figures

and data set forth in the smelter returns are adequate evidence of the

actual market value of the minerals shipped to the United States.

The best evidence of the actual market value minerals shipped to the United

States are the smelter returns themselves. These returns are admittedly

petitioner's possession, but for unknown reasons, petitioner failed to

produce them during the trial. As there is no credible and satisfactory

explanation for the non-production of said returns, there arises the

presumption that if produced they would be adverse to petitioner. Under the

circumstances, the Court of Tax Appeals cannot be said to have committed

error, much less abused its discretion, in refusing to give any probative

value statements of adjustment.

It is a settled doctrine that in a suit for the recovery of the payment of taxes

or any portion thereof as having been illegally or erroneously collected, the

burden is upon the taxpayer to establish the facts which show the illegality

of the tax or that the determination thereof is erroneous. In this case,

petitioner failed to show that the amount of taxes sought to be refunded

have been erroneously collected.

Conformably to the above, We are of the opinion that the Court of Tax

Appeals did not commit any error in denying petitioner's claim.

WHEREFORE, the decision appealed from is hereby affirmed. Costs against

petitioner.

FIRST DIVISION

G.R. No. 147188             September 14, 2004

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-

administrators Lorna Kapunan and Mario Luza Bautista, respondents.

D E C I S I O N

DAVIDE, JR., C.J.:

This Court is called upon to determine in this case whether the tax planning

scheme adopted by a corporation constitutes tax evasion that would justify

an assessment of deficiency income tax.

The petitioner seeks the reversal of the Decision1 of the Court of Appeals of

31 January 2001 in CA-G.R. SP No. 57799 affirming the 3 January 2000

Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5328,3 which

held that the respondent Estate of Benigno P. Toda, Jr. is not liable for the

deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount

of P79,099,999.22 for the year 1989, and ordered the cancellation and

setting aside of the assessment issued by Commissioner of Internal Revenue

Liwayway Vinzons-Chato on 9 January 1995.

The case at bar stemmed from a Notice of Assessment sent to CIC by the

Commissioner of Internal Revenue for deficiency income tax arising from an

alleged simulated sale of a 16-storey commercial building known as Cibeles

Building, situated on two parcels of land on Ayala Avenue, Makati City.

On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner

of 99.991% of its issued and outstanding capital stock, to sell the Cibeles

Building and the two parcels of land on which the building stands for an

amount of not less than P90 million.4

On 30 August 1989, Toda purportedly sold the property for P100 million to

Rafael A. Altonaga, who, in turn, sold the same property on the same day to

Royal Match Inc. (RMI) for P200 million. These two transactions were

evidenced by Deeds of Absolute Sale notarized on the same day by the

same notary public.5

For the sale of the property to RMI, Altonaga paid capital gains tax in the

amount of P10 million.6

On 16 April 1990, CIC filed its corporate annual income tax return7 for the

year 1989, declaring, among other things, its gain from the sale of real

property in the amount of P75,728.021. After crediting withholding taxes of

P254,497.00, it paid P26,341,2078 for its net taxable income of P75,987,725.

On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T.

Choa for P12.5 million, as evidenced by a Deed of Sale of Shares of Stocks.9

Three and a half years later, or on 16 January 1994, Toda died.

On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment

notice10 and demand letter to the CIC for deficiency income tax for the year

1989 in the amount of P79,099,999.22.

The new CIC asked for a reconsideration, asserting that the assessment

should be directed against the old CIC, and not against the new CIC, which is

owned by an entirely different set of stockholders; moreover, Toda had

undertaken to hold the buyer of his stockholdings and the CIC free from all

tax liabilities for the fiscal years 1987-1989.11

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

special co-administrators Lorna Kapunan and Mario Luza Bautista, received

a Notice of Assessment12 dated 9 January 1995 from the Commissioner of

Internal Revenue for deficiency income tax for the year 1989 in the amount

of P79,099,999.22, computed as follows:

Income Tax – 1989

Net Income per return P75,987,725.00

Add: Additional gain on sale of real property taxable under ordinary corporate income

but were substituted with individual capital gains(P200M – 100M)

100,000,000.00

Total Net Taxable Income per investigation P175,987,725.00

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

Less: Payment already made

1. Per return P26,595,704.00

2. Thru Capital Gains Tax made

    by R.A. Altonaga 10,000,000.00 36,595,704.00

P 24,999,999.75

Add: 50% Surcharge 12,499,999.88

25% Surcharge 6,249,999.94

Total P 43,749,999.57

Add: Interest 20% from

4/16/90-4/30/94 (.808) 35,349,999.65

TOTAL AMT. DUE & COLLECTIBLE

P 79,099,999.22

==============

The Estate thereafter filed a letter of protest.13

In the letter dated 19 October 1995,14 the Commissioner dismissed the

protest, stating that a fraudulent scheme was deliberately perpetuated by

the CIC wholly owned and controlled by Toda by covering up the additional

gain of P100 million, which resulted in the change in the income structure of

the proceeds of the sale of the two parcels of land and the building thereon

to an individual capital gains, thus evading the higher corporate income tax

rate of 35%.

On 15 February 1996, the Estate filed a petition for review15 with the CTA

alleging that the Commissioner erred in holding the Estate liable for income

tax deficiency; that the inference of fraud of the sale of the properties is

unreasonable and unsupported; and that the right of the Commissioner to

assess CIC had already prescribed.

In his Answer16 and Amended Answer,17 the Commissioner argued that the

two transactions actually constituted a single sale of the property by CIC to

RMI, and that Altonaga was neither the buyer of the property from CIC nor

the seller of the same property to RMI. The additional gain of P100 million

(the difference between the second simulated sale for P200 million and the

first simulated sale for P100 million) realized by CIC was taxed at the rate of

only 5% purportedly as capital gains tax of Altonaga, instead of at the rate

of 35% as corporate income tax of CIC. The income tax return filed by CIC

for 1989 with intent to evade payment of the tax was thus false or

fraudulent. Since such falsity or fraud was discovered by the BIR only on 8

March 1991, the assessment issued on 9 January 1995 was well within the

prescriptive period prescribed by Section 223 (a) of the National Internal

Revenue Code of 1986, which provides that tax may be assessed within ten

years from the discovery of the falsity or fraud. With the sale being tainted

with fraud, the separate corporate personality of CIC should be disregarded.

Toda, being the registered owner of the 99.991% shares of stock of CIC and

the beneficial owner of the remaining 0.009% shares registered in the name

of the individual directors of CIC, should be held liable for the deficiency

income tax, especially because the gains realized from the sale were

withdrawn by him as cash advances or paid to him as cash dividends. Since

he is already dead, his estate shall answer for his liability.

In its decision18 of 3 January 2000, the CTA held that the Commissioner

failed to prove that CIC committed fraud to deprive the government of the

taxes due it. It ruled that even assuming that a pre-conceived scheme was

adopted by CIC, the same constituted mere tax avoidance, and not tax

evasion. There being no proof of fraudulent transaction, the applicable

period for the BIR to assess CIC is that prescribed in Section 203 of the NIRC

of 1986, which is three years after the last day prescribed by law for the

filing of the return. Thus, the government’s right to assess CIC prescribed on

15 April 1993. The assessment issued on 9 January 1995 was, therefore, no

longer valid. The CTA also ruled that the mere ownership by Toda of

99.991% of the capital stock of CIC was not in itself sufficient ground for

piercing the separate corporate personality of CIC. Hence, the CTA declared

that the Estate is not liable for deficiency income tax of P79,099,999.22 and,

accordingly, cancelled and set aside the assessment issued by the

Commissioner on 9 January 1995.

In its motion for reconsideration,19 the Commissioner insisted that the sale of

the property owned by CIC was the result of the connivance between Toda

and Altonaga. She further alleged that the latter was a representative,

dummy, and a close business associate of the former, having held his office

in a property owned by CIC and derived his salary from a foreign corporation

(Aerobin, Inc.) duly owned by Toda for representation services rendered. The

CTA denied20 the motion for reconsideration, prompting the Commissioner to

file a petition for review21 with the Court of Appeals.

In its challenged Decision of 31 January 2001, the Court of Appeals affirmed

the decision of the CTA, reasoning that the CTA, being more advantageously

situated and having the necessary expertise in matters of taxation, is

"better situated to determine the correctness, propriety, and legality of the

income tax assessments assailed by the Toda Estate."22

Unsatisfied with the decision of the Court of Appeals, the Commissioner filed

the present petition invoking the following grounds:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT

COMMITTED NO FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF

THE PROPERTIES OF CIBELES INSURANCE CORPORATION.

II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE

CORPORATE PERSONALITY OF CIBELES INSURANCE CORPORATION.

III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF

PETITIONER TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR

THE YEAR 1989 HAD PRESCRIBED.

The Commissioner reiterates her arguments in her previous pleadings and

insists that the sale by CIC of the Cibeles property was in connivance with its

dummy Rafael Altonaga, who was financially incapable of purchasing it. She

further points out that the documents themselves prove the fact of fraud in

that (1) the two sales were done simultaneously on the same date, 30

August 1989; (2) the Deed of Absolute Sale between Altonaga and RMI was

notarized ahead of the alleged sale between CIC and Altonaga, with the

former registered in the Notarial Register of Jocelyn H. Arreza Pabelana as

Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92,

Page 20, Book I, Series of 1989, of the same Notary Public; (3) as early as 4

May 1989, CIC received P40 million from RMI, and not from Altonaga. The

said amount was debited by RMI in its trial balance as of 30 June 1989 as

investment in Cibeles Building. The substantial portion of P40 million was

withdrawn by Toda through the declaration of cash dividends to all its

stockholders.

For its part, respondent Estate asserts that the Commissioner failed to

present the income tax return of Altonaga to prove that the latter is

financially incapable of purchasing the Cibeles property.

To resolve the grounds raised by the Commissioner, the following questions

are pertinent:

1. Is this a case of tax evasion or tax avoidance?

2. Has the period for assessment of deficiency income tax for the year 1989

prescribed? and

3. Can respondent Estate be held liable for the deficiency income tax of CIC

for the year 1989, if any?

We shall discuss these questions in seriatim.

Is this a case of tax evasion or tax avoidance?

Tax avoidance and tax evasion are the two most common ways used by

taxpayers in escaping from taxation. Tax avoidance is the tax saving device

within the means sanctioned by law. This method should be used by the

taxpayer in good faith and at arms length. Tax evasion, on the other hand, is

a scheme used outside of those lawful means and when availed of, it usually

subjects the taxpayer to further or additional civil or criminal liabilities.23

Tax evasion connotes the integration of three factors: (1) the end to be

achieved, i.e., the payment of less than that known by the taxpayer to be

legally due, or the non-payment of tax when it is shown that a tax is due; (2)

an accompanying state of mind which is described as being "evil," in "bad

faith," "willfull," or "deliberate and not accidental"; and (3) a course of action

or failure of action which is unlawful.24

All these factors are present in the instant case. It is significant to note that

as early as 4 May 1989, prior to the purported sale of the Cibeles property

by CIC to Altonaga on 30 August 1989, CIC received P40 million from RMI,25

and not from Altonaga. That P40 million was debited by RMI and reflected in

its trial balance26 as "other inv. – Cibeles Bldg." Also, as of 31 July 1989,

another P40 million was debited and reflected in RMI’s trial balance as

"other inv. – Cibeles Bldg." This would show that the real buyer of the

properties was RMI, and not the intermediary Altonaga.lavvphi1.net

The investigation conducted by the BIR disclosed that Altonaga was a close

business associate and one of the many trusted corporate executives of

Toda. This information was revealed by Mr. Boy Prieto, the assistant

accountant of CIC and an old timer in the company.27 But Mr. Prieto did not

testify on this matter, hence, that information remains to be hearsay and is

thus inadmissible in evidence. It was not verified either, since the letter-

request for investigation of Altonaga was unserved,28 Altonaga having left

for the United States of America in January 1990. Nevertheless, that

Altonaga was a mere conduit finds support in the admission of respondent

Estate that the sale to him was part of the tax planning scheme of CIC. That

admission is borne by the records. In its Memorandum, respondent Estate

declared:

Petitioner, however, claims there was a "change of structure" of the

proceeds of sale. Admitted one hundred percent. But isn’t this precisely the

definition of tax planning? Change the structure of the funds and pay a

lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free

transfers of property for stock, changing the structure of the property and

the tax to be paid. As long as it is done legally, changing the structure of a

transaction to achieve a lower tax is not against the law. It is absolutely

allowed.

Tax planning is by definition to reduce, if not eliminate altogether, a tax.

Surely petitioner [sic] cannot be faulted for wanting to reduce the tax

from 35% to 5%.29 [Underscoring supplied].

The scheme resorted to by CIC in making it appear that there were two sales

of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga

to RMI cannot be considered a legitimate tax planning. Such scheme is

tainted with fraud.

Fraud in its general sense, "is deemed to comprise anything calculated to

deceive, including all acts, omissions, and concealment involving a breach of

legal or equitable duty, trust or confidence justly reposed, resulting in the

damage to another, or by which an undue and unconscionable advantage is

taken of another."30

Here, it is obvious that the objective of the sale to Altonaga was to reduce

the amount of tax to be paid especially that the transfer from him to RMI

would then subject the income to only 5% individual capital gains tax, and

not the 35% corporate income tax. Altonaga’s sole purpose of acquiring and

transferring title of the subject properties on the same day was to create a

tax shelter. Altonaga never controlled the property and did not enjoy the

normal benefits and burdens of ownership. The sale to him was merely a tax

ploy, a sham, and without business purpose and economic substance.

Doubtless, the execution of the two sales was calculated to mislead the BIR

with the end in view of reducing the consequent income tax

liability.lavvphi1.net

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which

was prompted more on the mitigation of tax liabilities than for legitimate

business purposes constitutes one of tax evasion.31

Generally, a sale or exchange of assets will have an income tax incidence

only when it is consummated.32 The incidence of taxation depends upon the

substance of a transaction. The tax consequences arising from gains from a

sale of property are not finally to be determined solely by the means

employed to transfer legal title. Rather, the transaction must be viewed as a

whole, and each step from the commencement of negotiations to the

consummation of the sale is relevant. A sale by one person cannot be

transformed for tax purposes into a sale by another by using the latter as a

conduit through which to pass title. To permit the true nature of the

transaction to be disguised by mere formalisms, which exist solely to alter

tax liabilities, would seriously impair the effective administration of the tax

policies of Congress.33

To allow a taxpayer to deny tax liability on the ground that the sale was

made through another and distinct entity when it is proved that the latter

was merely a conduit is to sanction a circumvention of our tax laws. Hence,

the sale to Altonaga should be disregarded for income tax purposes.34 The

two sale transactions should be treated as a single direct sale by CIC to RMI.

Accordingly, the tax liability of CIC is governed by then Section 24 of the

NIRC of 1986, as amended (now 27 (A) of the Tax Reform Act of 1997),

which stated as follows:

Sec. 24. Rates of tax on corporations. – (a) Tax on domestic corporations.- A

tax is hereby imposed upon the taxable net income received during each

taxable year from all sources by every corporation organized in, or existing

under the laws of the Philippines, and partnerships, no matter how created

or organized but not including general professional partnerships, in

accordance with the following:

Twenty-five percent upon the amount by which the taxable net income does

not exceed one hundred thousand pesos; and

Thirty-five percent upon the amount by which the taxable net income

exceeds one hundred thousand pesos.

CIC is therefore liable to pay a 35% corporate tax for its taxable net income

in 1989. The 5% individual capital gains tax provided for in Section 34 (h) of

the NIRC of 198635 (now 6% under Section 24 (D) (1) of the Tax Reform Act

of 1997) is inapplicable. Hence, the assessment for the deficiency income

tax issued by the BIR must be upheld.

Has the period of assessment prescribed?

No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act

of 1997) read:

Sec. 269. Exceptions as to period of limitation of assessment and collection

of taxes.-(a) In the case of a false or fraudulent return with intent to evade

tax or of failure to file a return, the tax may be assessed, or a proceeding in

court after the collection of such tax may be begun without assessment, at

any time within ten years after the discovery of the falsity, fraud or

omission: Provided, That in a fraud assessment which has become final and

executory, the fact of fraud shall be judicially taken cognizance of in the civil

or criminal action for collection thereof… .

Put differently, in cases of (1) fraudulent returns; (2) false returns with intent

to evade tax; and (3) failure to file a return, the period within which to

assess tax is ten years from discovery of the fraud, falsification or omission,

as the case may be.

It is true that in a query dated 24 August 1989, Altonaga, through his

counsel, asked the Opinion of the BIR on the tax consequence of the two

sale transactions.36 Thus, the BIR was amply informed of the transactions

even prior to the execution of the necessary documents to effect the

transfer. Subsequently, the two sales were openly made with the execution

of public documents and the declaration of taxes for 1989. However, these

circumstances do not negate the existence of fraud. As earlier discussed

those two transactions were tainted with fraud. And even assuming

arguendo that there was no fraud, we find that the income tax return filed

by CIC for the year 1989 was false. It did not reflect the true or actual

amount gained from the sale of the Cibeles property. Obviously, such was

done with intent to evade or reduce tax liability.

As stated above, the prescriptive period to assess the correct taxes in case

of false returns is ten years from the discovery of the falsity. The false return

was filed on 15 April 1990, and the falsity thereof was claimed to have been

discovered only on 8 March 1991.37 The assessment for the 1989 deficiency

income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the

correct assessment for deficiency income tax was well within the

prescriptive period.

Is respondent Estate liable for the 1989 deficiency income tax of Cibeles

Insurance Corporation?

A corporation has a juridical personality distinct and separate from the

persons owning or composing it. Thus, the owners or stockholders of a

corporation may not generally be made to answer for the liabilities of a

corporation and vice versa. There are, however, certain instances in which

personal liability may arise. It has been held in a number of cases that

personal liability of a corporate director, trustee, or officer along, albeit not

necessarily, with the corporation may validly attach when:

1. He assents to the (a) patently unlawful act of the corporation, (b) bad

faith or gross negligence in directing its affairs, or (c) conflict of interest,

resulting in damages to the corporation, its stockholders, or other persons;

2. He consents to the issuance of watered down stocks or, having

knowledge thereof, does not forthwith file with the corporate secretary his

written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the

corporation; or

4. He is made, by specific provision of law, to personally answer for his

corporate action.38

It is worth noting that when the late Toda sold his shares of stock to Le Hun

T. Choa, he knowingly and voluntarily held himself personally liable for all

the tax liabilities of CIC and the buyer for the years 1987, 1988, and 1989.

Paragraph g of the Deed of Sale of Shares of Stocks specifically provides:

g. Except for transactions occurring in the ordinary course of business,

Cibeles has no liabilities or obligations, contingent or otherwise, for taxes,

sums of money or insurance claims other than those reported in its audited

financial statement as of December 31, 1989, attached hereto as "Annex B"

and made a part hereof. The business of Cibeles has at all times been

conducted in full compliance with all applicable laws, rules and regulations.

SELLER undertakes and agrees to hold the BUYER and Cibeles free

from any and all income tax liabilities of Cibeles for the fiscal years

1987, 1988 and 1989.39 [Underscoring Supplied].

When the late Toda undertook and agreed "to hold the BUYER and Cibeles

free from any all income tax liabilities of Cibeles for the fiscal years 1987,

1988, and 1989," he thereby voluntarily held himself personally liable

therefor. Respondent estate cannot, therefore, deny liability for CIC’s

deficiency income tax for the year 1989 by invoking the separate corporate

personality of CIC, since its obligation arose from Toda’s contractual

undertaking, as contained in the Deed of Sale of Shares of Stock.

WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED.

The decision of the Court of Appeals of 31 January 2001 in CA-G.R. SP No.

57799 is REVERSED and SET ASIDE, and another one is hereby rendered

ordering respondent Estate of Benigno P. Toda Jr. to pay P79,099,999.22 as

deficiency income tax of Cibeles Insurance Corporation for the year 1989,

plus legal interest from 1 May 1994 until the amount is fully paid.

Costs against respondent. SO ORDERED.

Footnotes

1 Rollo, 22-31. Per Associate Justice Rodrigo V. Cosico, with Associate Justices Ramon A. Barcelona and Alicia J. Santos

concurring.

2 Id., 32-41; CTA Records, 524-533. Per Presiding Judge Ernesto D. Acosta, with Associate Judges Ramon O. De Veyra and

Amancio Q. Saga concurring.

3 Entitled "The Estate of Benigno P. Toda, Jr., represented by Special Co-Administrators Lorna Patajo-Kapunan and Mario Luza

Bautista versus Commissioner of Internal Revenue."

4 CA Rollo, 73.

5 CA Rollo, 74-78; 88-92.

6 Exh. "E," CTA Records, 306.

7 Exh. "L," CTA Records, 340.

8 Exh. "M," "M-1," "N" and "N-1," CTA Records, 316-317.

9 Exh. "P," CTA Records, 357-365.

10 BIR Records, 448-449.

11 Id., 446-447.

12 Id., 474-475.

13 Exh. "H," CTA Records, 314-315.

14 Exh. "G," CTA Records, 311-312.

15 CTA Records, 1-15.

16 CTA Records, 104-111.

17 Id., 121-128.

18 CTA Records 535-540.

19 Id., 534, 539.

20 Id., 550; CA Rollo, 32.

21 CA Rollo, 7-20.

22 Rollo, 30.

23 Jose C. Vitug and Ernesto D. Acosta, Tax Law and Jurisprudence 44 (2nd ed., 2000) (hereafter Vitug).

24 De Leon, Fundamentals of Taxation 53 (1988 ed.), citing Batter, Fraud under Federal Tax Law 15 (1953 ed.).

25 Exh. "3," CTA Records, 476.

26 Exh. "6," CTA Records, 470.

27 Exh. "1," CTA Records, 461.

28 CTA Records, 466.

29 Respondent’s Memorandum, 4-5; Rollo, 78-79.

30 Commissioner of Internal Revenue v. Court of Appeals, 327 Phil. 1, 33 (1996).

31 See Commissioner of Internal Revenue v. Norton Harrison Co., 120 Phil. 684, 691 (1964); Commissioner of Internal Revenue

v. Rufino, G.R. No. L-33665-68, 27 February 1987, 148 SCRA 42.

32 Vitug, 138.

33 Commissioner v. Court Holding Co., 324 U.S. 334 (1945) .

34 See Gregory v. Helvering, 293 U.S. 465 (1935); Frank Lyon Co. v. United States, 435 U.S. 561 (1978); Commissioner of

Internal Revenue v. Court of Appeals, 361 Phil. 103, 126 (1999) citing Asmussen v. CIR, 36 B.T.A. (F) 878; See also Neff v. U.S.,

301 F2d 330; Cohen v. U.S., 192 F Supp 216; Herman v. Comm., 283 F2d 227; Kessner v. Comm., 248 F2d 943; Comm. V. Pope,

239 F2d 881; U.S. v. Fewel, 255 F2d 396.

35 Sec. 34. Capital gains and loses.

. . .

(h) The provisions of paragraph (b) of this section to the contrary notwithstanding, sales, exchanges or other dispositions of real

property classified as capital assets, including pacto-de-retro sales and other forms of conditional sale, by individuals, including

estates and trusts, shall be taxed at the rate of 5% based on the gross selling price or the fair market value prevailing at the

time of sale, whichever is higher.

36 Exh. "A," CTA Records, 296.

37 Exh. "2," CTA Records, 464.

38 Atrium Management Corporation v. Court of Appeals, G.R. Nos. 109491 and 121794, 28 February 2001, 353 SCRA 23, 31,

citing FCY Construction Group Inc. v. Court of Appeals, G.R. No. 123358, 1 February 2000, 324 SCRA 270.

39 CTA Records, 200-201.

THIRD DIVISION

G.R. No. L-69259 January 26, 1988

DELPHER TRADES CORPORATION, and DELPHIN PACHECO,

petitioners,

vs.

INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES,

INC., respondents.

 

GUTIERREZ, JR., J.:

The petitioners question the decision of the Intermediate Appellate Court

which sustained the private respondent's contention that the deed of

exchange whereby Delfin Pacheco and Pelagia Pacheco conveyed a parcel

of land to Delpher Trades Corporation in exchange for 2,500 shares of stock

was actually a deed of sale which violated a right of first refusal under a

lease contract.

Briefly, the facts of the case are summarized as follows:

In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of

27,169 square meters of real estate Identified as Lot. No. 1095, Malinta

Estate, in the Municipality of Polo (now Valenzuela), Province of Bulacan

(now Metro Manila) which is covered by Transfer Certificate of Title No. T-

4240 of the Bulacan land registry.

On April 3, 1974, the said co-owners leased to Construction Components

International Inc. the same property and providing that during the existence

or after the term of this lease the lessor should he decide to sell the

property leased shall first offer the same to the lessee and the letter has the

priority to buy under similar conditions (Exhibits A to A-5)

On August 3, 1974, lessee Construction Components International, Inc.

assigned its rights and obligations under the contract of lease in favor of

Hydro Pipes Philippines, Inc. with the signed conformity and consent of

lessors Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-6 inclusive)

The contract of lease, as well as the assignment of lease were annotated at

he back of the title, as per stipulation of the parties (Exhs. A to D-3

inclusive)

On January 3, 1976, a deed of exchange was executed between lessors

Delfin and Pelagia Pacheco and defendant Delpher Trades Corporation

whereby the former conveyed to the latter the leased property (TCT No.T-

4240) together with another parcel of land also located in Malinta Estate,

Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of stock of

defendant corporation with a total value of P1,500,000.00 (Exhs. C to C-5,

inclusive) (pp. 44-45, Rollo)

On the ground that it was not given the first option to buy the leased

property pursuant to the proviso in the lease agreement, respondent Hydro

Pipes Philippines, Inc., filed an amended complaint for reconveyance of Lot.

No. 1095 in its favor under conditions similar to those whereby Delpher

Trades Corporation acquired the property from Pelagia Pacheco and Delphin

Pacheco.

After trial, the Court of First Instance of Bulacan ruled in favor of the

plaintiff. The dispositive portion of the decision reads:

ACCORDINGLY, the judgment is hereby rendered declaring the valid

existence of the plaintiffs preferential right to acquire the subject property

(right of first refusal) and ordering the defendants and all persons deriving

rights therefrom to convey the said property to plaintiff who may offer to

acquire the same at the rate of P14.00 per square meter, more or less, for

Lot 1095 whose area is 27,169 square meters only. Without pronouncement

as to attorney's fees and costs. (Appendix I; Rec., pp. 246- 247). (Appellant's

Brief, pp. 1-2; p. 134, Rollo)

The lower court's decision was affirmed on appeal by the Intermediate

Appellate Court.

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

to review the appellate court's decision.

We initially denied the petition but upon motion for reconsideration, we set

aside the resolution denying the petition and gave it due course.

The petitioners allege that:

The denial of the petition will work great injustice to the petitioners, in that:

1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will

acquire from petitioners a parcel of industrial land consisting of 27,169

square meters or 2.7 hectares (located right after the Valenzuela, Bulacan

exit of the toll expressway) for only P14/sq. meter, or a total of P380,366,

although the prevailing value thereof is approximately P300/sq. meter or

P8.1 Million;

2. Private respondent is allowed to exercise its right of first refusal even if

there is no "sale" or transfer of actual ownership interests by petitioners to

third parties; and

3. Assuming arguendo that there has been a transfer of actual ownership

interests, private respondent will acquire the land not under "similar

conditions" by which it was transferred to petitioner Delpher Trades

Corporation, as provided in the same contractual provision invoked by

private respondent. (pp. 251-252, Rollo)

The resolution of the case hinges on whether or not the "Deed of Exchange"

of the properties executed by the Pachecos on the one hand and the

Delpher Trades Corporation on the other was meant to be a contract of sale

which, in effect, prejudiced the private respondent's right of first refusal over

the leased property included in the "deed of exchange."

Eduardo Neria, a certified public accountant and son-in-law of the late

Pelagia Pacheco testified that Delpher Trades Corporation is a family

corporation; that the corporation was organized by the children of the two

spouses (spouses Pelagia Pacheco and Benjamin Hernandez and spouses

Delfin Pacheco and Pilar Angeles) who owned in common the parcel of land

leased to Hydro Pipes Philippines in order to perpetuate their control over

the property through the corporation and to avoid taxes; that in order to

accomplish this end, two pieces of real estate, including Lot No. 1095 which

had been leased to Hydro Pipes Philippines, were transferred to the

corporation; that the leased property was transferred to the corporation by

virtue of a deed of exchange of property; that in exchange for these

properties, Pelagia and Delfin acquired 2,500 unissued no par value shares

of stock which are equivalent to a 55% majority in the corporation because

the other owners only owned 2,000 shares; and that at the time of

incorporation, he knew all about the contract of lease of Lot. No. 1095 to

Hydro Pipes Philippines. In the petitioners' motion for reconsideration, they

refer to this scheme as "estate planning." (p. 252, Rollo)

Under this factual backdrop, the petitioners contend that there was actually

no transfer of ownership of the subject parcel of land since the Pachecos

remained in control of the property. Thus, the petitioners allege:

"Considering that the beneficial ownership and control of petitioner

corporation remained in the hands of the original co-owners, there was no

transfer of actual ownership interests over the land when the same was

transferred to petitioner corporation in exchange for the latter's shares of

stock. The transfer of ownership, if anything, was merely in form but not in

substance. In reality, petitioner corporation is a mere alter ego or conduit of

the Pacheco co-owners; hence the corporation and the co-owners should be

deemed to be the same, there being in substance and in effect an Identity of

interest." (p. 254, Rollo)

The petitioners maintain that the Pachecos did not sell the property. They

argue that there was no sale and that they exchanged the land for shares of

stocks in their own corporation. "Hence, such transfer is not within the

letter, or even spirit of the contract. There is a sale when ownership is

transferred for a price certain in money or its equivalent (Art. 1468, Civil

Code) while there is a barter or exchange when one thing is given in

consideration of another thing (Art. 1638, Civil Code)." (pp. 254-255, Rollo)

On the other hand, the private respondent argues that Delpher Trades

Corporation is a corporate entity separate and distinct from the Pachecos.

Thus, it contends that it cannot be said that Delpher Trades Corporation is

the Pacheco's same alter ego or conduit; that petitioner Delfin Pacheco,

having treated Delpher Trades Corporation as such a separate and distinct

corporate entity, is not a party who may allege that this separate corporate

existence should be disregarded. It maintains that there was actual transfer

of ownership interests over the leased property when the same was

transferred to Delpher Trades Corporation in exchange for the latter's shares

of stock.

We rule for the petitioners.

After incorporation, one becomes a stockholder of a corporation by

subscription or by purchasing stock directly from the corporation or from

individual owners thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649,

citing Bole v. Fulton [1912], 233 Pa., 609). In the case at bar, in exchange

for their properties, the Pachecos acquired 2,500 original unissued no par

value shares of stocks of the Delpher Trades Corporation. Consequently, the

Pachecos became stockholders of the corporation by subscription "The

essence of the stock subscription is an agreement to take and pay for

original unissued shares of a corporation, formed or to be formed." (Rohrlich

243, cited in Agbayani, Commentaries and Jurisprudence on the Commercial

Laws of the Philippines, Vol. III, 1980 Edition, p. 430) It is significant that the

Pachecos took no par value shares in exchange for their properties.

A no-par value share does not purport to represent any stated proportionate

interest in the capital stock measured by value, but only an aliquot part of

the whole number of such shares of the issuing corporation. The holder of

no-par shares may see from the certificate itself that he is only an aliquot

sharer in the assets of the corporation. But this character of proportionate

interest is not hidden beneath a false appearance of a given sum in money,

as in the case of par value shares. The capital stock of a corporation issuing

only no-par value shares is not set forth by a stated amount of money, but

instead is expressed to be divided into a stated number of shares, such as,

1,000 shares. This indicates that a shareholder of 100 such shares is an

aliquot sharer in the assets of the corporation, no matter what value they

may have, to the extent of 100/1,000 or 1/10. Thus, by removing the par

value of shares, the attention of persons interested in the financial condition

of a corporation is focused upon the value of assets and the amount of its

debts. (Agbayani, Commentaries and Jurisprudence on the Commercial Laws

of the Philippines, Vol. III, 1980 Edition, p. 107).

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

the real estate. Land valued at P300.00 a square meter was turned over to

the family's corporation for only P14.00 a square meter.

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

stock, the Pachecos have control of the corporation. Their equity capital is

55% as against 45% of the other stockholders, who also belong to the same

family group.

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

Pachecos. What they really did was to invest their properties and change the

nature of their ownership from unincorporated to incorporated form by

organizing Delpher Trades Corporation to take control of their properties and

at the same time save on inheritance taxes.

As explained by Eduardo Neria:

xxx xxx xxx

ATTY. LINSANGAN:

Q Mr. Neria, from the point of view of taxation, is there any benefit to the

spouses Hernandez and Pacheco in connection with their execution of a

deed of exchange on the properties for no par value shares of the defendant

corporation?

A Yes, sir.

COURT:

Q What do you mean by "point of view"?

A To take advantage for both spouses and corporation in entering in the

deed of exchange.

ATTY. LINSANGAN:

Q (What do you mean by "point of view"?) What are these benefits to the

spouses of this deed of exchange?

A Continuous control of the property, tax exemption benefits, and other

inherent benefits in a corporation.

Q What are these advantages to the said spouses from the point of view of

taxation in entering in the deed of exchange?

A Having fulfilled the conditions in the income tax law, providing for tax free

exchange of property, they were able to execute the deed of exchange free

from income tax and acquire a corporation.

Q What provision in the income tax law are you referring to?

A I refer to Section 35 of the National Internal Revenue Code under par. C-

sub-par. (2) Exceptions regarding the provision which I quote: "No gain or

loss shall also be recognized if a person exchanges his property for stock in

a corporation of which as a result of such exchange said person alone or

together with others not exceeding four persons gains control of said

corporation."

Q Did you explain to the spouses this benefit at the time you executed the

deed of exchange?

A Yes, sir

Q You also, testified during the last hearing that the decision to have no par

value share in the defendant corporation was for the purpose of flexibility.

Can you explain flexibility in connection with the ownership of the property

in question?

A There is flexibility in using no par value shares as the value is determined

by the board of directors in increasing capitalization. The board can fix the

value of the shares equivalent to the capital requirements of the

corporation.

Q Now also from the point of taxation, is there any flexibility in the holding

by the corporation of the property in question?

A Yes, since a corporation does not die it can continue to hold on to the

property indefinitely for a period of at least 50 years. On the other hand, if

the property is held by the spouse the property will be tied up in succession

proceedings and the consequential payments of estate and inheritance

taxes when an owner dies.

Q Now what advantage is this continuity in relation to ownership by a

particular person of certain properties in respect to taxation?

A The property is not subjected to taxes on succession as the corporation

does not die.

Q So the benefit you are talking about are inheritance taxes?

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

The records do not point to anything wrong or objectionable about this

"estate planning" scheme resorted to by the Pachecos. "The legal right of a

taxpayer to decrease the amount of what otherwise could be his taxes or

altogether avoid them, by means which the law permits, cannot be

doubted." (Liddell & Co., Inc. v. The collector of Internal Revenue, 2 SCRA

632 citing Gregory v. Helvering, 293 U.S. 465, 7 L. ed. 596).

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

Trades Corporation cannot be considered a contract of sale. There was no

transfer of actual ownership interests by the Pachecos to a third party. The

Pacheco family merely changed their ownership from one form to another.

The ownership remained in the same hands. Hence, the private respondent

has no basis for its claim of a light of first refusal under the lease contract.

WHEREFORE, the instant petition is hereby GRANTED, The questioned

decision and resolution of the then Intermediate Appellate Court are

REVERSED and SET ASIDE. The amended complaint in Civil Case No. 885-V-

79 of the then Court of First Instance of Bulacan is DISMISSED. No costs.

SO ORDERED.

EN BANC

G.R. No. L-13203             January 28, 1961

YUTIVO SONS HARDWARE COMPANY, petitioner,

vs.

COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE,

respondents.

GUTIERREZ DAVID, J.:

This is a petition for review of a decision of the Court of Tax Appeals

ordering petitioner to pay to respondent Collector of Internal Revenue the

sum of P1,266,176.73 as sales tax deficiency for the third quarter of 1947 to

the fourth quarter of 1950; inclusive, plus 75% surcharge thereon,

equivalent to P349,632.54, or a sum total of P2,215,809.27, plus costs of the

suit.

From the stipulation of facts and the evidence adduced by both parties, it

appears that petitioner Yutivo Sons Hardware Co. (hereafter referred to as

Yutivo) is a domestic corporation, organized under the laws of the

Philippines, with principal office at 404 Dasmariñas St., Manila. Incorporated

in 1916, it was engaged, prior to the last world war, in the importation and

sale of hardware supplies and equipment. After the liberation, it resumed its

business and until June of 1946 bought a number of cars and trucks from

General Motors Overseas Corporation (hereafter referred to as GM for short),

an American corporation licensed to do business in the Philippines. As

importer, GM paid sales tax prescribed by sections 184, 185 and 186 of the

Tax Code on the basis of its selling price to Yutivo. Said tax being collected

only once on original sales, Yutivo paid no further sales tax on its sales to

the public.

On June 13, 1946, the Southern Motors, Inc. (hereafter referred to as SM)

was organized to engage in the business of selling cars, trucks and spare

parts. Its original authorized capital stock was P1,000,000 divided into

10,000 shares with a par value of P100 each.

At the time of its incorporation 2,500 shares worth P250,000 appear to have

been subscribed into equal proportions by Yu Khe Thai, Yu Khe Siong, Hu

Kho Jin, Yu Eng Poh, and Washington Sycip. The first three named

subscribers are brothers, being sons of Yu Tiong Yee, one of Yutivo's

founders. The latter two are respectively sons of Yu Tiong Sin and Albino

Sycip, who are among the founders of Yutivo.

After the incorporation of SM and until the withdrawal of GM from the

Philippines in the middle of 1947, the cars and tracks purchased by Yutivo

from GM were sold by Yutivo to SM which, in turn, sold them to the public in

the Visayas and Mindanao.

When GM decided to withdraw from the Philippines in the middle of 1947,

the U.S. manufacturer of GM cars and trucks appointed Yutivo as importer

for the Visayas and Mindanao, and Yutivo continued its previous

arrangement of selling exclusively to SM. In the same way that GM used to

pay sales taxes based on its sales to Yutivo, the latter, as importer, paid

sales tax prescribed on the basis of its selling price to SM, and since such

sales tax, as already stated, is collected only once on original sales, SM paid

no sales tax on its sales to the public.

On November 7, 1950, after several months of investigation by revenue

officers started in July, 1948, the Collector of Internal Revenue made an

assessment upon Yutivo and demanded from the latter P1,804,769.85 as

deficiency sales tax plus surcharge covering the period from the third

quarter of 1947 to the fourth quarter of 1949; or from July 1, 1947 to

December 31, 1949, claiming that the taxable sales were the retail sales by

SM to the public and not the sales at wholesale made by, Yutivo to the latter

inasmuch as SM and Yutivo were one and the same corporation, the former

being the subsidiary of the latter.

The assessment was disputed by the petitioner, and a reinvestigation of the

case having been made by the agents of the Bureau of Internal Revenue,

the respondent Collector in his letter dated November 15, 1952

countermanded his demand for sales tax deficiency on the ground that

"after several investigations conducted into the matter no sufficient

evidence could be gathered to sustain the assessment of this Office based

on the theory that Southern Motors is a mere instrumentality or subsidiary

of Yutivo." The withdrawal was subject, however, to the general power of

review by the now defunct Board of Tax Appeals. The Secretary of Finance

to whom the papers relative to the case were endorsed, apparently not

agreeing with the withdrawal of the assessment, returned them to the

respondent Collector for reinvestigation.

After another investigation, the respondent Collector, in a letter to petitioner

dated December 16, 1954, redetermined that the aforementioned tax

assessment was lawfully due the government and in addition assessed

deficiency sales tax due from petitioner for the four quarters of 1950; the

respondents' last demand was in the total sum of P2,215,809.27 detailed as

follows:

Deficiency Sales

Tax

75%

Surcharge

Total Amount

Due

Assessment (First) of P1,031,296.60 P773,473.45 P1,804,769.05

November 7, 1950 for

deficiency sales Tax for the

period from 3rd Qrtr 1947 to

4th Qrtr 1949 inclusive

Additional Assessment for

period from 1st to 4th Qrtr

1950, inclusive 234,880.13 176,160.09 411,040.22

Total amount demanded per

letter of December 16, 1954 P1,266,176.73 P949,632.54 P2,215,809.27

This second assessment was contested by the petitioner Yutivo before the

Court of Tax Appeals, alleging that there is no valid ground to disregard the

corporate personality of SM and to hold that it is an adjunct of petitioner

Yutivo; (2) that assuming the separate personality of SM may be

disregarded, the sales tax already paid by Yutivo should first be deducted

from the selling price of SM in computing the sales tax due on each vehicle;

and (3) that the surcharge has been erroneously imposed by respondent.

Finding against Yutivo and sustaining the respondent Collector's theory that

there was no legitimate or bona fide purpose in the organization of SM —

the apparent objective of its organization being to evade the payment of

taxes — and that it was owned (or the majority of the stocks thereof are

owned) and controlled by Yutivo and is a mere subsidiary, branch, adjunct,

conduit, instrumentality or alter ego of the latter, the Court of Tax Appeals

— with Judge Roman Umali not taking part — disregarded its separate

corporate existence and on April 27, 1957, rendered the decision now

complained of. Of the two Judges who signed the decision, one voted for the

modification of the computation of the sales tax as determined by the

respondent Collector in his decision so as to give allowance for the reduction

of the tax already paid (resulting in the reduction of the assessment to

P820,509.91 exclusive of surcharges), while the other voted for affirmance.

The dispositive part of the decision, however, affirmed the assessment

made by the Collector. Reconsideration of this decision having been denied,

Yutivo brought the case to this Court thru the present petition for review.

It is an elementary and fundamental principle of corporation law that a

corporation is an entity separate and distinct from its stockholders and from

other corporation petitions to which it may be connected. However, "when

the notion of legal entity is used to defeat public convenience, justify wrong,

protect fraud, or defend crime," the law will regard the corporation as an

association of persons, or in the case of two corporations merge them into

one. (Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 496, citing I Fletcher Cyclopedia

of Corporation, Perm Ed., pp. 135 136; United States vs. Milwaukee

Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn, J.) Another rule is

that, when the corporation is the "mere alter ego or business conduit of a

person, it may be disregarded." (Koppel [Phil.], Inc. vs. Yatco, supra.)

After going over the voluminous record of the present case, we are inclined

to rule that the Court of Tax Appeals was not justified in finding that SM was

organized for no other purpose than to defraud the Government of its lawful

revenues. In the first place, this corporation was organized in June, 1946

when it could not have caused Yutivo any tax savings. From that date up to

June 30, 1947, or a period of more than one year, GM was the importer of

the cars and trucks sold to Yutivo, which, in turn resold them to SM. During

that period, it is not disputed that GM as importer, was the one solely liable

for sales taxes. Neither Yutivo or SM was subject to the sales taxes on their

sales of cars and trucks. The sales tax liability of Yutivo did not arise until

July 1, 1947 when it became the importer and simply continued its practice

of selling to SM. The decision, therefore, of the Tax Court that SM was

organized purposely as a tax evasion device runs counter to the fact that

there was no tax to evade.

Making the observation from a newspaper clipping (Exh. "T") that "as early

as 1945 it was known that GM was preparing to leave the Philippines and

terminate its business of importing vehicles," the court below speculated

that Yutivo anticipated the withdrawal of GM from business in the Philippines

in June, 1947. This observation, which was made only in the resolution on

the motion for reconsideration, however, finds no basis in the record. On the

other hand, GM had been an importer of cars in the Philippines even before

the war and had but recently resumed its operation in the Philippines in

1946 under an ambitious plan to expand its operation by establishing an

assembly plant here, so that it could not have been expected to make so

drastic a turnabout of not merely abandoning the assembly plant project but

also totally ceasing to do business as an importer. Moreover, the newspaper

clipping, Exh. "T", was published on March 24, 1947, and clipping, merely

reported a rumored plan that GM would abandon the assembly plant project

in the Philippines. There was no mention of the cessation of business by GM

which must not be confused with the abandonment of the assembly plant

project. Even as respect the assembly plant, the newspaper clipping was

quite explicit in saying that the Acting Manager refused to confirm that

rumor as late as March 24, 1947, almost a year after SM was organized.

At this juncture, it should be stated that the intention to minimize taxes,

when used in the context of fraud, must be proved to exist by clear and

convincing evidence amounting to more than mere preponderance, and

cannot be justified by a mere speculation. This is because fraud is never

lightly to be presumed. (Vitelli & Sons vs. U.S 250 U.S. 355; Duffin vs. Lucas,

55 F (2d) 786; Budd vs. Commr., 43 F (2d) 509; Maryland Casualty Co. vs.

Palmette Coal Co., 40 F (2d) 374; Schoonfield Bros., Inc. vs. Commr., 38 BTA

943; Charles Heiss vs. Commr 36 BTA 833; Kerbaugh vs. Commr 74 F (2d)

749; Maddas vs. Commr., 114 F. (2d) 548; Moore vs. Commr., 37 BTA 378;

National City Bank of New York vs. Commr., 98 (2d) 93; Richard vs. Commr.,

15 BTA 316; Rea Gane vs. Commr., 19 BTA 518). (See also Balter, Fraud

Under Federal Law, pp. 301-302, citing numerous authorities: Arroyo vs.

Granada, et al., 18 Phil. 484.) Fraud is never imputed and the courts never

sustain findings of fraud upon circumstances which, at the most, create only

suspicion. (Haygood Lumber & Mining Co. vs. Commr., 178 F (2d) 769;

Dalone vs. Commr., 100 F (2d) 507).

In the second place, SM was organized and it operated, under circumstance

that belied any intention to evade sales taxes. "Tax evasion" is a term that

connotes fraud thru the use of pretenses and forbidden devices to lessen or

defeat taxes. The transactions between Yutivo and SM, however, have

always been in the open, embodied in private and public documents,

constantly subject to inspection by the tax authorities. As a matter of fact,

after Yutivo became the importer of GM cars and trucks for Visayas and

Mindanao, it merely continued the method of distribution that it had initiated

long before GM withdrew from the Philippines.

On the other hand, if tax saving was the only justification for the

organization of SM, such justification certainly ceased with the passage of

Republic Act No. 594 on February 16, 1951, governing payment of advance

sales tax by the importer based on the landed cost of the imported article,

increased by mark-ups of 25%, 50%, and 100%, depending on whether the

imported article is taxed under sections 186, 185 and 184, respectively, of

the Tax Code. Under Republic Act No. 594, the amount at which the article is

sold is immaterial to the amount of the sales tax. And yet after the passage

of that Act, SM continued to exist up to the present and operates as it did

many years past in the promotion and pursuit of the business purposes for

which it was organized.

In the third place, sections 184 to 186 of the said Code provides that the

sales tax shall be collected "once only on every original sale, barter,

exchange . . , to be paid by the manufacturer, producer or importer." The

use of the word "original" and the express provision that the tax was

collectible "once only" evidently has made the provisions susceptible of

different interpretations. In this connection, it should be stated that a

taxpayer has the legal right to decrease the amount of what otherwise

would be his taxes or altogether avoid them by means which the law

permits. (U.S. vs. Isham 17 Wall. 496, 506; Gregory vs. Helvering 293 U.S.

465, 469; Commr. vs. Tower, 327 U.S. 280; Lawton vs. Commr 194 F (2d)

380). Any legal means by the taxpayer to reduce taxes are all right Benry

vs. Commr. 25 T. Cl. 78). A man may, therefore, perform an act that he

honestly believes to be sufficient to exempt him from taxes. He does not

incur fraud thereby even if the act is thereafter found to be insufficient. Thus

in the case of Court Holding Co. vs. Commr. 2 T. Cl. 531, it was held that

though an incorrect position in law had been taken by the corporation there

was no suppression of the facts, and a fraud penalty was not justified.

The evidence for the Collector, in our opinion, falls short of the standard of

clear and convincing proof of fraud. As a matter of fact, the respondent

Collector himself showed a great deal of doubt or hesitancy as to the

existence of fraud. He even doubted the validity of his first assessment

dated November 7, 1959. It must be remembered that the fraud which

respondent Collector imputed to Yutivo must be related to its filing of sales

tax returns of less taxes than were legally due. The allegation of fraud,

however, cannot be sustained without the showing that Yutivo, in filing said

returns, did so fully knowing that the taxes called for therein called for

therein were less than what were legally due. Considering that respondent

Collector himself with the aid of his legal staff, and after some two years of

investigation and duty of investigation and study concluded in 1952 that

Yutivo's sales tax returns were correct — only to reverse himself after

another two years — it would seem harsh and unfair for him to say in 1954

that Yutivo fully knew in October 1947 that its sales tax returns were

inaccurate.

On this point, one other consideration would show that the intent to save

taxes could not have existed in the minds of the organizers of SM. The sales

tax imposed, in theory and in practice, is passed on to the vendee, and is

usually billed separately as such in the sales invoice. As pointed out by

petitioner Yutivo, had not SM handled the retail, the additional tax that

would have been payable by it, could have been easily passed off to the

consumer, especially since the period covered by the assessment was a

"seller's market" due to the post-war scarcity up to late 1948, and the

imposition of controls in the late 1949.

It is true that the arrastre charges constitute expenses of Yutivo and its non-

inclusion in the selling price by Yutivo cost the Government P4.00 per

vehicle, but said non-inclusion was explained to have been due to an

inadvertent accounting omission, and could hardly be considered as proof of

willful channelling and fraudulent evasion of sales tax. Mere understatement

of tax in itself does not prove fraud. (James Nicholson, 32 BTA 377, affirmed

90 F. (2) 978, cited in Merten's Sec. 55.11 p. 21) The amount involved,

moreover, is extremely small inducement for Yutivo to go thru all the trouble

of organizing SM. Besides, the non-inclusion of these small arrastre charges

in the sales tax returns of Yutivo is clearly shown in the records of Yutivo,

which is uncharacteristic of fraud (See Insular Lumber Co. vs. Collector, G.R.

No. L-719, April 28, 1956.)

We are, however, inclined to agree with the court below that SM was

actually owned and controlled by petitioner as to make it a mere subsidiary

or branch of the latter created for the purpose of selling the vehicles at retail

and maintaining stores for spare parts as well as service repair shops. It is

not disputed that the petitioner, which is engaged principally in hardware

supplies and equipment, is completely controlled by the Yutivo, Young or Yu

family. The founders of the corporation are closely related to each other

either by blood or affinity, and most of its stockholders are members of the

Yu (Yutivo or Young) family. It is, likewise, admitted that SM was organized

by the leading stockholders of Yutivo headed by Yu Khe Thai. At the time of

its incorporation 2,500 shares worth P250,000.00 appear to have been

subscribed in five equal proportions by Yu Khe Thai, Yu Khe Siong, Yu Khe

Jin, Yu Eng Poh and Washington Sycip. The first three named subscribers are

brothers, being the sons of Yu Tien Yee, one of Yutivo's founders. Yu Eng Poh

and Washington Sycip are respectively sons of Yu Tiong Sing and Alberto

Sycip who are co-founders of Yutivo. According to the Articles of

Incorporation of the said subscriptions, the amount of P62,500 was paid by

the aforenamed subscribers, but actually the said sum was advanced by

Yutivo. The additional subscriptions to the capital stock of SM and

subsequent transfers thereof were paid by Yutivo itself. The payments were

made, however, without any transfer of funds from Yutivo to SM. Yutivo

simply charged the accounts of the subscribers for the amount allegedly

advanced by Yutivo in payment of the shares. Whether a charge was to be

made against the accounts of the subscribers or said subscribers were to

subscribe shares appears to constitute a unilateral act on the part of Yutivo,

there being no showing that the former initiated the subscription.

The transactions were made solely by and between SM and Yutivo. In effect,

it was Yutivo who undertook the subscription of shares, employing the

persons named or "charged" with corresponding account as nominal

stockholders. Of course, Yu Khe Thai, Yu Khe Jin, Yu Khe Siong and Yu Eng

Poh were manifestly aware of these subscriptions, but considering that they

were the principal officers and constituted the majority of the Board of

Directors of both Yutivo and SM, their subscriptions could readily or easily be

that of Yutivo's Moreover, these persons were related to death other as

brothers or first cousins. There was every reason for them to agree in order

to protect their common interest in Yutivo and SM.

The issued capital stock of SM was increased by additional subscriptions

made by various person's but except Ng Sam Bak and David Sycip,

"payments" thereof were effected by merely debiting 'or charging the

accounts of said stockholders and crediting the corresponding amounts in

favor of SM, without actually transferring cash from Yutivo. Again, in this

instance, the "payments" were Yutivo, by effected by the mere unilateral act

of Yutivo a accounts of the virtue of its control over the individual persons

charged, would necessarily exercise preferential rights and control directly

or indirectly, over the shares, it being the party which really undertook to

pay or underwrite payment thereof.

The shareholders in SM are mere nominal stockholders holding the shares

for and in behalf of Yutivo, so even conceding that the original subscribers

were stockholders bona fide Yutivo was at all times in control of the majority

of the stock of SM and that the latter was a mere subsidiary of the former.

True, petitioner and other recorded stockholders transferred their

shareholdings, but the transfers were made to their immediate relatives,

either to their respective spouses and children or sometimes brothers or

sisters. Yutivo's shares in SM were transferred to immediate relatives of

persons who constituted its controlling stockholders, directors and officers.

Despite these purported changes in stock ownership in both corporations,

the Board of Directors and officers of both corporations remained

unchanged and Messrs. Yu Khe Thai, Yu Khe Siong Hu Khe Jin and Yu Eng

Poll (all of the Yu or Young family) continued to constitute the majority in

both boards. All these, as observed by the Court of Tax Appeals, merely

serve to corroborate the fact that there was a common ownership and

interest in the two corporations.

SM is under the management and control of Yutivo by virtue of a

management contract entered into between the two parties. In fact, the

controlling majority of the Board of Directors of Yutivo is also the controlling

majority of the Board of Directors of SM. At the same time the principal

officers of both corporations are identical. In addition both corporations have

a common comptroller in the person of Simeon Sy, who is a brother-in-law of

Yutivo's president, Yu Khe Thai. There is therefore no doubt that by virtue of

such control, the business, financial and management policies of both

corporations could be directed towards common ends.

Another aspect relative to Yutivo's control over SM operations relates to its

cash transactions. All cash assets of SM were handled by Yutivo and all cash

transactions of SM were actually maintained thru Yutivo. Any and all receipts

of cash by SM including its branches were transmitted or transferred

immediately and directly to Yutivo in Manila upon receipt thereof. Likewise,

all expenses, purchases or other obligations incurred by SM are referred to

Yutivo which in turn prepares the corresponding disbursement vouchers and

payments in relation there, the payment being made out of the cash

deposits of SM with Yutivo, if any, or in the absence thereof which occurs

generally, a corresponding charge is made against the account of SM in

Yutivo's books. The payments for and charges against SM are made by

Yutivo as a matter of course and without need of any further request, the

latter would advance all such cash requirements for the benefit of SM. Any

and all payments and cash vouchers are made on Yutivo stationery and

made under authority of Yutivo's corporate officers, without any copy

thereof being furnished to SM. All detailed records such as cash

disbursements, such as expenses, purchases, etc. for the account of SM, are

kept by Yutivo and SM merely keeps a summary record thereof on the basis

of information received from Yutivo.

All the above plainly show that cash or funds of SM, including those of its

branches which are directly remitted to Yutivo, are placed in the custody

and control of Yutivo, resources and subject to withdrawal only by Yutivo.

SM's being under Yutivo's control, the former's operations and existence

became dependent upon the latter.

Consideration of various other circumstances, especially when taken

together, indicates that Yutivo treated SM merely as its department or

adjunct. For one thing, the accounting system maintained by Yutivo shows

that it maintained a high degree of control over SM accounts. All

transactions between Yutivo and SM are recorded and effected by mere

debit or credit entries against the reciprocal account maintained in their

respective books of accounts and indicate the dependency of SM as branch

upon Yutivo.

Apart from the accounting system, other facts corroborate or independently

show that SM is a branch or department of Yutivo. Even the branches of SM

in Bacolod, Iloilo, Cebu, and Davao treat Yutivo — Manila as their "Head

Office" or "Home Office" as shown by their letters of remittances or other

correspondences. These correspondences were actually received by Yutivo

and the reference to Yutivo as the head or home office is obvious from the

fact that all cash collections of the SM's branches are remitted directly to

Yutivo. Added to this fact, is that SM may freely use forms or stationery of

Yutivo

The fact that SM is a mere department or adjunct of Yutivo is made more

patent by the fact that arrastre conveying, and charges paid for the

"operation of receiving, loading or unloading" of imported cars and trucks on

piers and wharves, were charged against SM. Overtime charges for the

unloading of cars and trucks as requested by Yutivo and incurred as part of

its acquisition cost thereof, were likewise charged against and treated as

expenses of SM. If Yutivo were the importer, these arrastre and overtime

charges were Yutivo's expenses in importing goods and not SM's. But since

those charges were made against SM, it plainly appears that Yutivo had sole

authority to allocate its expenses even as against SM in the sense that the

latter is a mere adjunct, branch or department of the former.

Proceeding to another aspect of the relation of the parties, the management

fees due from SM to Yutivo were taken up as expenses of SM and credited to

the account of Yutivo. If it were to be assumed that the two organizations

are separate juridical entities, the corresponding receipts or receivables

should have been treated as income on the part of Yutivo. But such

management fees were recorded as "Reserve for Bonus" and were therefore

a liability reserve and not an income account. This reserve for bonus were

subsequently distributed directly to and credited in favor of the employees

and directors of Yutivo, thereby clearly showing that the management fees

were paid directly to Yutivo officers and employees.

Briefly stated, Yutivo financed principally, if not wholly, the business of SM

and actually extended all the credit to the latter not only in the form of

starting capital but also in the form of credits extended for the cars and

vehicles allegedly sold by Yutivo to SM as well as advances or loans for the

expenses of the latter when the capital had been exhausted. Thus, the

increases in the capital stock were made in advances or "Guarantee"

payments by Yutivo and credited in favor of SM. The funds of SM were all

merged in the cash fund of Yutivo. At all times Yutivo thru officers and

directors common to it and SM, exercised full control over the cash funds,

policies, expenditures and obligations of the latter.

Southern Motors being but a mere instrumentality, or adjunct of Yutivo, the

Court of Tax Appeals correctly disregarded the technical defense of separate

corporate entity in order to arrive at the true tax liability of Yutivo.

Petitioner contends that the respondent Collector had lost his right or

authority to issue the disputed assessment by reason of prescription. The

contention, in our opinion, cannot be sustained. It will be noted that the first

assessment was made on November 7, 1950 for deficiency sales tax from

1947 to 1949. The corresponding returns filed by petitioner covering the

said period was made at the earliest on October 1, as regards the third

quarter of 1947, so that it cannot be claimed that the assessment was not

made within the five-year period prescribed in section 331 of the Tax Code

invoked by petitioner. The assessment, it is admitted, was withdrawn by the

Collector on insufficiency of evidence, but November 15, 1952 due to

insufficiency of evidence, but the withdrawal was made subject to the

approval of the Secretary of Finance and the Board of Tax Appeals, pursuant

to the provisions of section 9 of Executive Order No. 401-A, series of 1951.

The decision of the previous assessment of November 7, Collector

countermanding the as 1950 was forwarded to the Board of Tax Appeals

through the Secretary of Finance but that official, apparently disagreeing

with the decision, sent it back for re-investigation. Consequently, the

assessment of November 7, 1950 cannot be considered to have been finally

withdrawn. That the assessment was subsequently reiterated in the decision

of respondent Collector on December 16, 1954 did not alter the fact that it

was made seasonably. In this connection, it would appear that a warrant of

distraint and levy had been issued on March 28, 1951 in relation with this

case and by virtue thereof the properties of Yutivo were placed under

constructive distraint. Said warrant and constructive distraint have not been

lifted up to the present, which shows that the assessment of November 7,

1950 has always been valid and subsisting.

Anent the deficiency sale tax for 1950, considering that the assessment

thereof was made on December 16, 1954, the same was assessed well

within the prescribed five-year period.

Petitioner argues that the original assessment of November 7, 1950 did not

extend the prescriptive period on assessment. The argument is untenable,

for, as already seen, the assessment was never finally withdrawn, since it

was not approved by the Secretary of Finance or of the Board of Tax

Appeals. The authority of the Secretary to act upon the assessment cannot

be questioned, for he is expressly granted such authority under section 9 of

Executive Order No. 401-And under section 79 (c) of the Revised

Administrative Code, he has "direct control, direction and supervision over

all bureaus and offices under his jurisdiction and may, any provision of

existing law to the contrary not withstanding, repeal or modify the decision

of the chief of said Bureaus or offices when advisable in public interest."

It should here also be stated that the assessment in question was

consistently protested by petitioner, making several requests for

reinvestigation thereof. Under the circumstances, petitioner may be

considered to have waived the defense of prescription.

"Estoppel has been employed to prevent the application of the statute of

limitations against the government in certain instances in which the

taxpayer has taken some affirmative action to prevent the collection of the

tax within the statutory period. It is generally held that a taxpayer is

estopped to repudiate waivers of the statute of limitations upon which the

government relied. The cases frequently involve dissolved corporations. If

no waiver has been given, the cases usually show come conduct directed to

a postponement of collection, such, for example, as some variety of request

to apply an overassessment. The taxpayer has 'benefited' and 'is not in a

position to contest' his tax liability. A definite representation of implied

authority may be involved, and in many cases the taxpayer has received the

'benefit' of being saved from the inconvenience, if not hardship of

immediate collection. "

Conceivably even in these cases a fully informed Commissioner may err to

the sorrow of the revenues, but generally speaking, the cases present a

strong combination of equities against the taxpayer, and few will seriously

quarrel with their application of the doctrine of estoppel." (Mertens Law of

Federal Income Taxation, Vol. 10-A, pp. 159-160.)

It is also claimed that section 9 of Executive Order No. 401-A, series of 1951

— es involving an original assessment of more than P5,000 — refers only to

compromises and refunds of taxes, but not to total withdrawal of the

assessment. The contention is without merit. A careful examination of the

provisions of both sections 8 and 9 of Executive Order No. 401-A, series of

1951, reveals the procedure prescribed therein is intended as a check or

control upon the powers of the Collector of Internal Revenue in respect to

assessment and refunds of taxes. If it be conceded that a decision of the

Collector of Internal Revenue on partial remission of taxes is subject to

review by the Secretary of Finance and the Board of Tax Appeals, then with

more reason should the power of the Collector to withdraw totally an

assessment be subject to such review.

We find merit, however, in petitioner's contention that the Court of Tax

Appeals erred in the imposition of the 5% fraud surcharge. As already shown

in the early part of this decision, no element of fraud is present.

Pursuant to Section 183 of the National Internal Revenue Code the 50%

surcharge should be added to the deficiency sales tax "in case a false or

fraudulent return is willfully made." Although the sales made by SM are in

substance by Yutivo this does not necessarily establish fraud nor the willful

filing of a false or fraudulent return.

The case of Court Holding Co. v. Commissioner of Internal Revenue (August

9, 1943, 2 TC 531, 541-549) is in point. The petitioner Court Holding Co. was

a corporation consisting of only two stockholders, to wit: Minnie Miller and

her husband Louis Miller. The only assets of third husband and wife

corporation consisted of an apartment building which had been acquired for

a very low price at a judicial sale. Louis Miller, the husband, who directed

the company's business, verbally agreed to sell this property to Abe C. Fine

and Margaret Fine, husband and wife, for the sum of $54,000.00, payable in

various installments. He received $1,000.00 as down payment. The sale of

this property for the price mentioned would have netted the corporation a

handsome profit on which a large corporate income tax would have to be

paid. On the afternoon of February 23, 1940, when the Millers and the Fines

got together for the execution of the document of sale, the Millers

announced that their attorney had called their attention to the large

corporate tax which would have to be paid if the sale was made by the

corporation itself. So instead of proceeding with the sale as planned, the

Millers approved a resolution to declare a dividend to themselves "payable

in the assets of the corporation, in complete liquidation and surrender of all

the outstanding corporate stock." The building, which as above stated was

the only property of the corporation, was then transferred to Mr. and Mrs.

Miller who in turn sold it to Mr. and Mrs. Fine for exactly the same price and

under the same terms as had been previously agreed upon between the

corporation and the Fines.

The return filed by the Court Holding Co. with the respondent Commissioner

of Internal Revenue reported no taxable gain as having been received from

the sale of its assets. The Millers, of course, reported a long term capital

gain on the exchange of their corporate stock with the corporate property.

The Commissioner of Internal Revenue contended that the liquidating

dividend to stockholders had no purpose other than that of tax avoidance

and that, therefore, the sale by the Millers to the Fines of the corporation's

property was in substance a sale by the corporation itself, for which the

corporation is subject to the taxable profit thereon. In requiring the

corporation to pay the taxable profit on account of the sale, the

Commissioner of Internal Revenue, imposed a surcharge of 25% for

delinquency, plus an additional surcharge as fraud penalties.

The U. S. Court of Tax Appeals held that the sale by the Millers was for no

other purpose than to avoid the tax and was, in substance, a sale by the

Court Holding Co., and that, therefore, the said corporation should be liable

for the assessed taxable profit thereon. The Court of Tax Appeals also

sustained the Commissioner of Internal Revenue on the delinquency penalty

of 25%. However, the Court of Tax Appeals disapproved the fraud penalties,

holding that an attempt to avoid a tax does not necessarily establish fraud;

that it is a settled principle that a taxpayer may diminish his tax liability by

means which the law permits; that if the petitioner, the Court Holding Co.,

was of the opinion that the method by which it attempted to effect the sale

in question was legally sufficient to avoid the imposition of a tax upon it, its

adoption of that methods not subject to censure; and that in taking a

position with respect to a question of law, the substance of which was

disclosed by the statement indorsed on it return, it may not be said that that

position was taken fraudulently. We quote in full the pertinent portion of the

decision of the Court of Tax Appeals: .

". . . The respondent's answer alleges that the petitioner's failure to report

as income the taxable profit on the real estate sale was fraudulent and with

intent to evade the tax. The petitioner filed a reply denying fraud and

averring that the loss reported on its return was correct to the best of its

knowledge and belief. We think the respondent has not sustained the

burden of proving a fraudulent intent. We have concluded that the sale of

the petitioner's property was in substance a sale by the petitioner, and that

the liquidating dividend to stockholders had no purpose other than that of

tax avoidance. But the attempt to avoid tax does not necessarily establish

fraud. It is a settled principle that a taxpayer may diminish his liability by

any means which the law permits. United States v. Isham, 17 Wall. 496;

Gregory v. Helvering, supra; Chrisholm v. Commissioner, 79 Fed. (2d) 14. If

the petitioner here was of the opinion that the method by which it

attempted to effect the sale in question was legally sufficient to avoid the

imposition of tax upon it, its adoption of that method is not subject to

censure. Petitioner took a position with respect to a question of law, the

substance of which was disclosed by the statement endorsed on its return.

We can not say, under the record before us, that that position was taken

fraudulently. The determination of the fraud penalties is reversed."

When GM was the importer and Yutivo, the wholesaler, of the cars and

trucks, the sales tax was paid only once and on the original sales by the

former and neither the latter nor SM paid taxes on their subsequent sales.

Yutivo might have, therefore, honestly believed that the payment by it, as

importer, of the sales tax was enough as in the case of GM Consequently, in

filing its return on the basis of its sales to SM and not on those by the latter

to the public, it cannot be said that Yutivo deliberately made a false return

for the purpose of defrauding the government of its revenues which will

justify the imposition of the surcharge penalty.

We likewise find meritorious the contention that the Tax Court erred in

computing the alleged deficiency sales tax on the selling price of SM without

previously deducting therefrom the sales tax due thereon. The sales tax

provisions (sees. 184.186, Tax Code) impose a tax on original sales

measured by "gross selling price" or "gross value in money". These terms,

as interpreted by the respondent Collector, do not include the amount of the

sales tax, if invoiced separately. Thus, General Circular No. 431 of the

Bureau of Internal Revenue dated July 29, 1939, which implements sections

184.186 of the Tax Code provides: "

. . .'Gross selling price' or gross value in money' of the articles sold,

bartered, exchanged, transferred as the term is used in the aforecited

sections (sections 184, 185 and 186) of the National Internal Revenue Code,

is the total amount of money or its equivalent which the purchaser pays to

the vendor to receive or get the goods. However, if a manufacturer,

producer, or importer, in fixing the gross selling price of an article sold by

him has included an amount intended to cover the sales tax in the gross

selling price of the articles, the sales tax shall be based on the gross selling

price less the amount intended to cover the tax, if the same is billed to the

purchaser as a separate item.

General Circular No. 440 of the same Bureau reads:

Amount intended to cover the tax must be billed as a separate em so as not

to pay a tax on the tax. — On sales made after he third quarter of 1939, the

amount intended to cover the sales tax must be billed to the purchaser as

separate items in the, invoices in order that the reduction thereof from the

gross ailing price may be allowed in the computation of the merchants'

percentage tax on the sales. Unless billed to the purchaser as a separate

item in the invoice, the amounts intended to cover the sales tax shall be

considered as part of the gross selling price of the articles sold, and

deductions thereof will not be allowed, (Cited in Dalupan, Nat. Int. Rev.

Code, Annotated, Vol. II, pp. 52-53.)

Yutivo complied with the above circulars on its sales to SM, and as

separately billed, the sales taxes did not form part of the "gross selling

price" as the measure of the tax. Since Yutivo had previously billed the sales

tax separately in its sales invoices to SM General Circulars Nos. 431 and 440

should be deemed to have been complied. Respondent Collector's method

of computation, as opined by Judge Nable in the decision complained of —

. . . is unfair, because . . .(it is) practically imposing tax on a tax already

paid. Besides, the adoption of the procedure would in certain cases elevate

the bracket under which the tax is based. The late payment is already

penalized, thru the imposition of surcharges, by adopting the theory of the

Collector, we will be creating an additional penalty not contemplated by

law."

If the taxes based on the sales of SM are computed in accordance with Gen.

Circulars Nos. 431 and 440 the total deficiency sales taxes, exclusive of the

25% and 50% surcharges for late payment and for fraud, would amount only

to P820,549.91 as shown in the following computation:

Rates

of

Sales

Tax

Gross Sales of

Vehicles Exclusive

of Sales Tax

Sales Taxes Due

and Computed

under Gen. Cir

Nos. 431 & 400

Total Gross Selling

Price Charged to

the Public

5 % P11,912,219.57 P595,610.98 P12,507,83055

7% 909,559.50 63,669.16 973,228.66

10% 2,618,695.28 261,869.53 2,880,564.81

15% 3,602,397.65 540,359.65 4,142,757.30

20% 267,150.50 53,430.10 320,580.60

30% 837,146.97 251,114.09 1,088,291.06

50% 74,244.30 37,122.16 111,366.46

75%           8,000.00           6,000.00         14,000.00

TOTAL P20,220,413.77 P1,809,205.67 P22,038,619.44

 

Less Taxes Paid by

Yutivo 988,655.76

Deficiency Tax still

due P820,549.91

This is the exact amount which, according to Presiding Judge Nable of the

Court of Tax Appeals, Yutivo would pay, exclusive of the surcharges.

Petitioner finally contends that the Court of Tax Appeals erred or acted in

excess of its jurisdiction in promulgating judgment for the affirmance of the

decision of respondent Collector by less than the statutory requirement of at

least two votes of its judges. Anent this contention, section 2 of Republic Act

No. 1125, creating the Court of Tax Appeals, provides that "Any two judges

of the Court of Tax Appeals shall constitute a quorum, and the concurrence

of two judges shall be necessary to promulgate decision thereof. . . . " It is

on record that the present case was heard by two judges of the lower court.

And while Judge Nable expressed his opinion on the issue of whether or not

the amount of the sales tax should be excluded from the gross selling price

in computing the deficiency sales tax due from the petitioner, the opinion,

apparently, is merely an expression of his general or "private sentiment" on

the particular issue, for he concurred the dispositive part of the decision. At

any rate, assuming that there is no valid decision for lack of concurrence of

two judges, the case was submitted for decision of the court below on March

28, 1957 and under section 13 of Republic Act 1125, cases brought before

said court hall be decided within 30 days after submission thereof. "If no

decision is rendered by the Court within thirty days from the date a case is

submitted for decision, the party adversely affected by said ruling, order or

decision, may file with said Court a notice of his intention to appeal to the

Supreme Court, and if no decision has as yet been rendered by the Court,

the aggrieved party may file directly with the Supreme Court an appeal from

said ruling, order or decision, notwithstanding the foregoing provisions of

this section." The case having been brought before us on appeal, the

question raised by petitioner as become purely academic.

IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals under

review is hereby modified in that petitioner shall be ordered to pay to

respondent the sum of P820,549.91, plus 25% surcharge thereon for late

payment.

So ordered without costs.

FIRST DIVISION

G.R. No. 119176      March 19, 2002

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

LINCOLN PHILIPPINE LIFE INSURANCE COMPANY, INC. (now

JARDINE-CMA LIFE INSURANCE COMPANY, INC.) and THE COURT OF

APPEALS, respondents.

KAPUNAN, J.:

This is a petition for review on certiorari filed by the Commission on Internal

Revenue of the decision of the Court of Appeals dated November 18, 1994 in

C.A. G.R. SP No. 31224 which reversed in part the decision of the Court of

Tax Appeals in C.T.A. Case No. 4583.

The facts of the case are undisputed.

Private respondent Lincoln Philippine Life Insurance Co., Inc., (now Jardine-

CMA Life Insurance Company, Inc.) is a domestic corporation registered with

the Securities and Exchange Commission and engaged in life insurance

business. In the years prior to 1984, private respondent issued a special kind

of life insurance policy known as the "Junior Estate Builder Policy," the

distinguishing feature of which is a clause providing for an automatic

increase in the amount of life insurance coverage upon attainment of a

certain age by the insured without the need of issuing a new policy. The

clause was to take effect in the year 1984. Documentary stamp taxes due

on the policy were paid by petitioner only on the initial sum assured.

In 1984, private respondent also issued 50,000 shares of stock dividends

with a par value of P100.00 per share or a total par value of P5,000,000.00.

The actual value of said shares, represented by its book value, was

P19,307,500.00. Documentary stamp taxes were paid based only on the par

value of P5,000,000.00 and not on the book value.1âwphi1.nêt

Subsequently, petitioner issued deficiency documentary stamps tax

assessment for the year 1984 in the amounts of (a) P464,898.75,

corresponding to the amount of automatic increase of the sum assured on

the policy issued by respondent, and (b) P78,991.25 corresponding to the

book value in excess of the par value of the stock dividends. The

computation of the deficiency documentary stamp taxes is as follows:

On Policies Issued:

Total policy issued during the year P1,360,054,000.00

Documentary stamp tax due thereon

(P1,360,054,000.00 divided by P200.00

multiplied by P0.35)P 2,380,094.50

Less: Payment P 1,915,495.75

Deficiency P 464,598.75

Add: Compromise Penalty 300.00

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

TOTAL AMOUNT DUE & COLLECTIBLE P 464,898.75

Private respondent questioned the deficiency assessments and sought their

cancellation in a petition filed in the Court of Tax Appeals, docketed as CTA

Case No. 4583.

On March 30, 1993, the Court of Tax Appeals found no valid basis for the

deficiency tax assessment on the stock dividends, as well as on the

insurance policy. The dispositive portion of the CTA’s decision reads:

WHEREFORE, the deficiency documentary stamp tax assessments in the

amount of P464,898.76 and P78,991.25 or a total of P543,890.01 are hereby

cancelled for lack of merit. Respondent Commissioner of Internal Revenue is

ordered to desist from collecting said deficiency documentary stamp taxes

for the same are considered withdrawn.

SO ORDERED.1

Petitioner appealed the CTA’s decision to the Court of Appeals. On

November 18, 1994, the Court of Appeals promulgated a decision affirming

the CTA’s decision insofar as it nullified the deficiency assessment on the

insurance policy, but reversing the same with regard to the deficiency

assessment on the stock dividends. The CTA ruled that the correct basis of

the documentary stamp tax due on the stock dividends is the actual value or

book value represented by the shares. The dispositive portion of the Court of

Appeals’ decision states:

IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby

REVERSED with respect to the deficiency tax assessment on the stock

dividends, but AFFIRMED with regards to the assessment on the Insurance

Policies. Consequently, private respondent is ordered to pay the petitioner

herein the sum of P78,991.25, representing documentary stamp tax on the

stock dividends it issued. No costs pronouncement.

SO ORDERED.2

A motion for reconsideration of the decision having been denied,3 both the

Commissioner of Internal Revenue and private respondent appealed to this

Court, docketed as G.R. No. 118043 and G.R. No. 119176, respectively. In

G.R. No. 118043, private respondent appealed the decision of the Court of

Appeals insofar as it upheld the validity of the deficiency tax assessment on

the stock dividends. The Commissioner of Internal Revenue, on his part, filed

the present petition questioning that portion of the Court of Appeals’

decision which invalidated the deficiency assessment on the insurance

policy, attributing the following errors:

THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE

IS A SINGLE AGREEMENT EMBODIED IN THE POLICY AND THAT THE

AUTOMATIC INCREASE CLAUSE IS NOT A SEPARATE AGREEMENT, CONTRARY

TO SECTION 49 OF THE INSURANCE CODE AND SECTION 183 OF THE

REVENUE CODE THAT A RIDER, A CLAUSE IS PART OF THE POLICY.

THE HONORABLE COURT OF APPEALS ERRED IN NOT COMPUTING THE

AMOUNT OF TAX ON THE TOTAL VALUE OF THE INSURANCE ASSURED IN THE

POLICY INCLUDING THE ADDITIONAL INCREASE ASSURED BY THE

AUTOMATIC INCREASE CLAUSE DESPITE ITS RULING THAT THE ORIGINAL

POLICY AND THE AUTOMATIC CLAUSE CONSTITUTED ONLY A SINGULAR

TRANSACTION.4

Section 173 of the National Internal Revenue Code on documentary stamp

taxes provides:

Sec. 173. Stamp taxes upon documents, instruments and papers. -

Upon documents, instruments, loan agreements, and papers, and upon

acceptances, assignments, sales, and transfers of the obligation, right or

property incident thereto, there shall be levied, collected and paid for, and

in respect of the transaction so had or accomplished, the corresponding

documentary stamp taxes prescribed in the following section of this Title, by

the person making, signing, issuing, accepting, or transferring the same

wherever the document is made, signed, issued, accepted, or transferred

when the obligation or right arises from Philippine sources or the property is

situated in the Philippines, and at the same time such act is done or

transaction had: Provided, That whenever one party to the taxable

document enjoys exemption from the tax herein imposed, the other party

thereto who is not exempt shall be the one directly liable for the tax. (As

amended by PD No. 1994) The basis for the value of documentary stamp

taxes to be paid on the insurance policy is Section 183 of the National

Internal Revenue Code which states in part:

The basis for the value of documentary stamp taxes to be paid on the

insurance policy is Section 183 of the National Internal Revenue Code which

states in part:

Sec. 183. Stamp tax on life insurance policies. - On all policies of

insurance or other instruments by whatever name the same may be called,

whereby any insurance shall be made or renewed upon any life or lives,

there shall be collected a documentary stamp tax of thirty (now 50c)

centavos on each Two hundred pesos per fractional part thereof, of the

amount insured by any such policy.

Petitioner claims that the "automatic increase clause" in the subject

insurance policy is separate and distinct from the main agreement and

involves another transaction; and that, while no new policy was issued, the

original policy was essentially re-issued when the additional obligation was

assumed upon the effectivity of this "automatic increase clause" in 1984;

hence, a deficiency assessment based on the additional insurance not

covered in the main policy is in order.

The Court of Appeals sustained the CTA’s ruling that there was only one

transaction involved in the issuance of the insurance policy and that the

"automatic increase clause" is an integral part of that policy.

The petition is impressed with merit.

Section 49, Title VI of the Insurance Code defines an insurance policy as the

written instrument in which a contract of insurance is set forth.5 Section 50

of the same Code provides that the policy, which is required to be in printed

form, may contain any word, phrase, clause, mark, sign, symbol, signature,

number, or word necessary to complete the contract of insurance.6 It is thus

clear that any rider, clause, warranty or endorsement pasted or attached to

the policy is considered part of such policy or contract of insurance.

The subject insurance policy at the time it was issued contained an

"automatic increase clause." Although the clause was to take effect only in

1984, it was written into the policy at the time of its issuance. The

distinctive feature of the "junior estate builder policy" called the "automatic

increase clause" already formed part and parcel of the insurance contract,

hence, there was no need for an execution of a separate agreement for the

increase in the coverage that took effect in 1984 when the assured reached

a certain age.

It is clear from Section 173 that the payment of documentary stamp taxes is

done at the time the act is done or transaction had and the tax base for the

computation of documentary stamp taxes on life insurance policies under

Section 183 is the amount fixed in policy, unless the interest of a person

insured is susceptible of exact pecuniary measurement.7 What then is the

amount fixed in the policy? Logically, we believe that the amount fixed in

the policy is the figure written on its face and whatever increases will take

effect in the future by reason of the "automatic increase clause" embodied

in the policy without the need of another contract.

Here, although the automatic increase in the amount of life insurance

coverage was to take effect later on, the date of its effectivity, as well as the

amount of the increase, was already definite at the time of the issuance of

the policy. Thus, the amount insured by the policy at the time of its issuance

necessarily included the additional sum covered by the automatic increase

clause because it was already determinable at the time the transaction was

entered into and formed part of the policy.

The "automatic increase clause" in the policy is in the nature of a conditional

obligation under Article 1181,8 by which the increase of the insurance

coverage shall depend upon the happening of the event which constitutes

the obligation. In the instant case, the additional insurance that took effect

in 1984 was an obligation subject to a suspensive obligation,9 but still a part

of the insurance sold to which private respondent was liable for the payment

of the documentary stamp tax.

The deficiency of documentary stamp tax imposed on private respondent is

definitely not on the amount of the original insurance coverage, but on the

increase of the amount insured upon the effectivity of the "Junior Estate

Builder Policy."

Finally, it should be emphasized that while tax avoidance schemes and

arrangements are not prohibited,10 tax laws cannot be circumvented in order

to evade the payment of just taxes. In the case at bar, to claim that the

increase in the amount insured (by virtue of the automatic increase clause

incorporated into the policy at the time of issuance) should not be included

in the computation of the documentary stamp taxes due on the policy would

be a clear evasion of the law requiring that the tax be computed on the

basis of the amount insured by the policy.

WHEREFORE, the petition is hereby given DUE COURSE. The decision of

the Court of Appeals is SET ASIDE insofar as it affirmed the decision of the

Court of Tax Appeals nullifying the deficiency stamp tax assessment

petitioner imposed on private respondent in the amount of P464,898.75

corresponding to the increase in 1984 of the sum under the policy issued by

respondent.1âwphi1.nêt

SO ORDERED.

 

Footnotes

1 Court of Appeals (CA) Rollo. p. 16, Annex "B."

2 Rollo, p. 47.

3 CA Rollo, p. 218.

4 Rollo, p. 19.

5 SEC. 49. The written instrument in which a contract of insurance is set forth, is called a policy of insurance.

6 SEC. 50. The policy shall be in printed form which may contain blank spaces; and any word, phrase, clause, mark, sign,

symbol, signature, number, or word necessary to complete the contract of insurance shall be written on the blank spaces

provided therein.

Any rider, clause, warranty or endorsement purporting to be part of the contract of insurance and which is pasted or attached

to said policy is not binding on the insured, unless the descriptive title or name of the rider, clause, warranty, or endorsement is

also mentioned and written on the blank spaces provided in the policy.

Unless applied for by the insured or owner, any rider, clause, warranty or endorsement issued after the original policy shall be

countersigned by the insured or owner, which counter-signature shall be taken as his agreement to the contents of such rider,

clause, warranty or endorsement.

Group insurance and group annuity policies, however, may be typewritten and need not be in printed form.

7 Sec. 183. Insurance Code of the Phils. – Unless the interest of a person insured is capable of exact pecuniary measurement,

the measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy.

8 Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired,

shall depend upon the happening of the event which constitutes the condition.

9 Article 18 of the Civil Code provides that "on matters which are governed by the Code of Commerce and special laws, their

deficiency shall be supplied by the provision of this Code."

10 Delpher Trades Corporation vs. Intermediate Appellate Court, 157 SCRA 349 (1988).

EN BANC

G.R. No. 156            September 27, 1946

MILTON GREENFIELD, plaintiff-appellant,

vs.

BIBIANO L. MEER, defendant-appellee.

FERIA, J.:

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

which dismisses the complaint of the plaintiff and appellant containing two

causes of action; one to recover the sum of P9,008.14 paid as income tax for

the year 1939 by plaintiff to defendant under protest, by reason of

defendant having disallowed a deduction of P67,307.80 alleged by plaintiff

to be losses in his trade or business; and the other to reclaim, in the event

the first cause of action is dismissed, the sum of P475 collected by

defendant from plaintiff illegally according to the latter, because the former

has erroneously computed the tax on personal and additional exemptions.

The following are the pertinent facts stipulated and submitted by the parties

to the lower court:

2. That since the year 1933 up to the present time, the plaintiff has been

continuously engaged in the embroidery business located at 385 Cristobal,

City of Manila and carried on under his name;

3. That in 1935 the plaintiff began engaging in buying and selling mining

stocks and securities for his own exclusive account and not for the account

of others . . .;

4. That Exhibit A attached to the complaint and made a part hereof

represents plaintiff's purchases and sales of each class of stock and security

as well as the profits and losses resulting on each class during the year

1939;

5. That the plaintiff has not been a dealer in securities as defined in section

84 (t) of Commonwealth Act No. 466; that he has no established place of

business for the purchase and sale of mining stocks and securities; and that

he was never a member of any stock exchange;

6. That the plaintiff filed an income tax return for the calendar year 1939

showing that he made a net profit amounting to P52,449.29 on embroidery

business and P17,850 on dividends from various corporations; and that from

the purchase and sales of mining stocks and securities he made a profit of

P10,741.30 and incurred losses in the amount of P78,049.10, thereby

sustaining a net loss of P67,307.80, which income tax return is hereto

attached and marked Exhibit B;

7. That in said income tax return for 1939, the plaintiff declared the results

of his stock transactions under Schedule B (Income from Business);but the

defendant ruled that they should be declared in the income tax return,

Exhibit B, under Schedule D (Gains and Losses from Sales or Exchanges of

Capital Assets, real or personal);

8. That in said income tax return, said plaintiff claims his deduction of

P67,307.80 representing the net loss sustained by him in mining stocks

securities during the year 1939; and that the defendant disallowed said item

of deduction on the ground that said losses were sustained by the plaintiff

from the sale of mining stocks and securities which are capital assets, and

that the loss arising from the sale of the same should be allowed only to the

extent of the gains from such sales, which gains were already taken into

consideration in the computation of the alleged net loss of P67,307.80;

9. That the defendant assessed plaintiff's income tax return for the year

1939 at P13,771.06 as shown in the following computation appearing in the

audit sheet of the defendant hereto attached and marked Exhibit C;

Net income as per return of plaintiff for 1939 P70,299.29

Add: Net Loss on sale of mining stocks and securities

disallowed in audit   67,307.80

Total net income as per office audit

P137,607.09

========

=

Amount of tax on net income as per office audit P13,821.06

Less: Tax on exemptions:

Personal exemption P2,500.00

Additional exemption 1,000.00

Total P3,500.00

Tax on exemption         50.00

Net amount of tax due

P13,771.06

========

=

10. That the defendant computed the graduated rate of income tax due on

the entire net income as per office audit, without first deducting therefrom

the amount of personal and additional exemptions to which the plaintiff is

entitled, allowing said plaintiff a deduction from the assessed tax the

amount of P50 corresponding to the exemption of P3,500;

11. That the plaintiff, objecting and excepting to all the ruling of the

defendant above mentioned and in assessing plaintiff with P13,771.06,

claimed from the defendant the refund of P9,008.14 or in the alternative

case P475, which claim of plaintiff was overruled by the defendant;

The questions raised by appellant in his four (4) assignments of error may

be reduced into the following: (1) Whether the losses sustained by the

plaintiff from the buying and selling of mining securities during the year

1939 are losses incurred in trade and business, deductible under section 30

(d) (1)(A) of Commonwealth Act No. 466 from his gains in his embroidery

business and other income; or whether they are capital losses from sales of

capital assets which shall be allowed only to the extent of the gains from

such sales under section 34 of the same Commonwealth Act No. 466. And

(2) whether, under the present law, the personal and additional exemptions

granted by section 23 of the same Act, should be considered as a credit

against or be deducted from the net income, or whether it is the tax on such

exemptions that should be deducted from the tax on the total net income.

1. As to the first question, it is agreed in the above-quoted stipulation of

facts that the plaintiff was not a dealer in securities or share of stock as

defined in section 84 (t) of Commonwealth Act No. 466. The question for

determination is whether appellant, though not a dealer in mining securities,

may be considered as engaged in the business of buying and selling them

under section 30 (d), (1) (A) of said Act No. 466.

It is evident that, taking into consideration the nature of mining securities,

which may be bought or sold either as a business or for speculation

purposes only, the National Assembly of the Philippines has deemed it

necessary to define or determine beforehand in section 84 (t) of

Commonwealth Act No. 466 who may be considered as persons engaged in

the trade or business of buying and selling securities within the meaning of

the phrase "incurred in trade or business" used in section 30 (d) (1) (A) of

the same Act, in order to avoid any question or doubt as to deductibility of

all losses incurred by a merchant in securities from his net income from

whatever source. The definition of dealer or merchant in securities given in

said section 84 (t) includes persons, natural or juridical, who are engaged in

the purchase and sale of securities whether for his their own account or for

others, provided they have a place of business and are regularly engaged

therein. There was formerly some doubt or question as to whether a person

engaged in buying or selling securities for his own account might be

considered as engaged in that trade or business, and several cases involving

such question had been submitted to the United States Federal Courts for

ruling, and to the Income Tax Units of the United States Bureau of Internal

Revenue for opinion. But with the inclusive definition of the term "dealer" or

merchant of securities given in section 84 (t) of Act No. 466, such doubt can

no longer arise.

Said section 84 (t) reads as follows:

(t) The term "dealer in securities" means a merchant of stocks or securities,

whether an individual, partnership, or corporation, with an established place

of business, regularly engaged in the purchase of securities and their resale

of customers; that is, one who as a merchant buys securities and sells them

to customers with a view to the gains and profits that may be derived

therefrom.

Appellant assumes, however, that the above-quoted definition does not

cover or include all persons engaged in the trade or business of buying and

selling securities within the meaning of said section 30 (d) (1) (A). He

contends that, although he is not a dealer in mining securities, he may be

considered as having been engaged in the trade or business of buying and

selling securities. And in support of his contention appellant quotes Opinion

No. 1818 of the Income Tax Unit of the United States Bureau of Internal

Revenue(I.T. No. 1818, C.B. II, pp. 39-41), in which opinion the following was

said:

The taxpayer is not a member of any stock exchange, has no place of

business, and does not make purchase and sales of securities for customers.

Much of his trading is done on margin. He devotes the greater part of the

time in his broker's office keeping in touch with the market. He has no other

trade or business, his income consisting entirely of interest bonds, dividends

on stocks, and profits from the sale or disposition of securities.

Advice is requested (1) whether this taxpayer is entitled to the benefit of

section 204 of the Revenue Act of 1921, with reference to a net loss

incurred in 1921, from the sale of stocks; (2) whether he is entitled to the

benefit of section 206 of the Revenue Act of 1921, with regard to gains

derived in 1922 from the sale of two blocks of stock held more than two

years.

1. Section 204 (a) provides in part:

That as used in this section the term "net loss" means only net losses

resulting from the operation of any trade or business regularly carried on by

the taxpayer . . .

The question is, than, whether the taxpayer was regularly engaged in the

trade or business of buying and selling securities.

The interpretation placed upon the term "business or trade" by the courts

and the department may be indicated by a few illustrative decisions. In two

early cases (In re Marson [1871], Fed. Cas. No. 9142, and In re Woodward

[1876], Fed. Cas. No. 18001) it was held that a speculator in stocks was not

a "merchant or tradesman" within the meaning of the Bankruptcy Act of

1867. It was said in the former case:

"The only business he was engaged in was what is called speculating in

stocks, that is, buying and selling them, with a view to his own profit, to be

made by the excess of the selling price over the buying price . . . The fact

that the bankrupt was engaged in no other business can not have the effect

to make him a merchant or a tradesman, because he carried on the

business he did carry on in the way which he carried it on."

That is, although his business was buying and selling, since this business

was simply with a view to his own profit and not for others, has was not a

merchant or tradesman. Compare In re Surety Guarantee & Trust Co.

([1902], 121 Fed., 73) and In re H.R. Leighton & Co. ([1906], 147 Fed., 311).

With this background, the Department, in Treasury Decisions 1989, 2005,

2090, and 2135 (not published in Bulletin service), held that the provision of

paragraph B of the 1913 Act, allowing as a deduction for the purpose of the

normal tax "losses actually sustained during the year, incurred in trade . . .",

did not include losses from isolated transactions; for instance, in stocks and

bonds. In Mente vs. Eisner ([1920], 266 Fed., 161) (certiorari denied, 254

U.S., 635), these rulings were upheld in a case in which a manufacturer of

bagging was denied deductions for losses in buying and selling cotton on

the cotton exchange for his individual account, not connected with his

manufacturing business. (Cf. Black vs. Bolen [1920], 268 Fed., 427.)

Likewise, in L.O. 601 (not published in Bulletin service), it was held that

"losses sustained by a person in buying and selling securities in his own

account, he not being a licensed stock and bond broker buying and selling

for others as well as for himself, are not deductible as losses in trade within

the meaning of paragraph B of the Act of October 3, 1913." The basis of

these opinions is thus seen to be (1) that dealing in securities on one's own

account is not technically a "trade"; (2) that isolated transactions in

securities, not connected with the tax payer's regular business do not

constitute a "trade."

In the Act of September 8, 1916, the wording of the 1913 Act was slightly

changed (section 5 [a], fourth) to permit a deduction of "losses actually

sustained during the year, incurred in his business or trade . . ." Under this

more liberal provision, it has been uniformly held that where a taxpayer

devoted all his time, or the major portion of it, to buying and selling

securities on his own account, this occupation was his "business"; and

therefore he was permitted to deduct losses sustained in such dealings as

being "incurred in his business." A. R. R. 404 (C.B. 4, p. 157); semble L.

O.601. These rulings are inferentially supported by the definitions of trade or

business to comprehend "all his activities for gain, profit, or livelihood,

entered into with sufficient frequency, or occupying such portion of his time

or attention as to constitute a vocation," contained in article 8 of

Regulations 41, relative to the war excess-profits tax (approved in Woods vs.

Lewellyn [1921], 289 Fed., 498). . .

It is submitted that these decisions are a sound interpretation of the

accepted definition of business: "Business is a very comprehensive term and

embraces everything about which a person can be employed." Black's Law

Dictionary, 158, citing People vs. Commissioners of Taxes (23 New York,

242, 244). "That which occupies the time, attention and labor of men for the

purpose of a livelihood or profit." Bouvier's Law Dictionary, Vol. 1, p. 273.

Fling vs. Stone Tracy Co. (1910), 220 U. S., 107 at 171; 31 Sup Ct., 342; 55

Law. ed., 389; Ann. Cas. 1912-B, 1312; cited with approval in Von Baumbach

vs. Sargent Land Company (1916), 242 U. S., 503, at 515. If they are sound,

the facts of the instant case require a ruling that the taxpayer was regularly

engaged in the business of buying and selling securities on his own account

and was, therefore, entitled to the benefit of the provisions of section

204(a). (I. T. No. 1818; C. B. II-2, pp. 39-41.)

But, assuming arguendo that the above-quoted opinion may be applied to

the present case, it is evident that the appellant can not be considered as

having been engaged in the business of buying and selling securities within

the meaning of section 30 (d) (1) (A) of Act No. 466 According to said

opinion, in order that he may so be considered, it is necessary that he must

devote all his time or at least a major portion thereof to said business and

that the latter must be regularly carried on by him.

In the stipulation of facts presented in this case it is agreed that "since the

year 1933 up to the present time, the plaintiff has been continuously

engaged in the embroidery business," and that "in 1935, the plaintiff began

engaging in buying and selling mining stocks and securities for his own

exclusive account." There is nothing therein to show that plaintiff and

appellant has regularly devoted all his time or the major portion thereof to

the business of buying and selling mining securities for his own account. On

the contrary, it having been stipulated that he has been continuously

engaged in the embroidery business during the same time, it necessarily

follows that he has not and could not have devoted regularly all his time or a

major portion thereof to the buying and selling of mining securities.

Furthermore, from Exhibit A attached to the complaint and made a part of

said stipulation of facts, which represents plaintiff's purchases and sales of

each class of stocks and securities as well as the profits and losses resulting

therefrom during the year 1939, it appears that he made purchases and

sales of securities only on several days of some months and nothing on

others. As shown in said exhibit, during the month of January, 1939,

appellant purchased shares of stock of different mining corporations on

January 2, 3, 4, 6, 13, 19, 20, 25, 30, and sold some of them on January 4,

10, 13 and 31. During February he made purchases on the dates 1, 8, 13,

14, 25, and 27; and sales on 6, 9, 10, 16, 22, and 30, and sold some on

March 9 only. During April he made two purchases on April 3 and 5, and one

sale on April 4. During May he purchased mining shares of stock on May 9,

10, 13, 19, 24, and 25; and sold some of them on May 9, 10, 12, 13, and 31.

During June appellant made purchases on 1, 3, 5, 8, 13, 15, and 17, and

sales on 22, 23, 24, and 28. During July, purchases on 1, 3, 6, 19; and sales

on July 24, 25, 26, and 27. During August he purchased shares of stock on

some mining corporations on 5,7, 16, and 18 and sold shares of one mining

corporation on August 10 only. During September appellant did not

purchase or sell any securities. During October he sold securities only on the

12th of said month, and he made no purchase at all. And during November

and December he did not purchase or sell any.

Appellant contends that as from Exhibit A it appears that the mining

securities were inventoried in order to arrive at his profits and losses, they

cannot be considered as capital assets, because, according to section 34,

the term capital assets does not include property which would properly be

included in the inventory. But it is to be observed that the law refers not to

property merely included, but to that which would be properly included in

the inventory. Section 148 of the Income Tax Regulations No. 2 of February

10, 1940 (39 Off. Gaz., 325), provides that "the securities (to be) inventoried

as here provided may include only those held for purposes of resale and not

for investment," and that "the taxpayers who buy and sell or hold securities

for investment or speculation, . . . are not dealers insecurities within the

meaning of this rule." And the General Counsel of the Federal Bureau of

Internal Revenue, after quoting Article 105 of United States Regulations 74

from which said section 148 of our Income Tax Regulations was taken, said

that a person not a dealer in securities is precluded from the use of

inventories in computing his net income."(C. B. X-2, p. 128, G. C. M., 9656.)

The lower court has not therefore erred in dismissing appellant's first cause

of action, on the ground that the losses sustained by appellant from the

buying and selling of mining securities are not losses incurred in business or

trade but are capital losses from sales of capital assets, as contended by

appellee.

2. With regard to the second point, the lower court held that, as the new law

does not provide that the personal exemptions shall be allowed in the

nature of a deduction from the net income, as prescribed in the old law, and

there is a distinction between exemption and deduction, the tax due on said

exemptions must be deducted from the tax due on the whole net income,

instead of deducting the total amount of the exemptions from the net

income.

The argument of the appellee in support of the lower court's decision is that

the omission in section 23 of Act No. 466 of the phrase "in the nature of a

deduction" found in section 7 of the old law, shows that it was the intention

of the National Assembly to adopt the innovation proposed by the Tax

Commission which prepared the draft of the new law, an innovation based

on what is known as the "Wisconsin Plan" now in operation in several

American states. Under said plan, the cumulative amount of the tax is fixed

on any given amount of net income without regard to the status of the

taxpayer, and then this amount is reduced by the tax credit fixed in the law

according to the status of the taxpayer and the number of his dependents

as follows: for single individuals, there is allowed a tax credit of P10; for

married persons or heads of family, P30; and for each dependent below 21

years of age, P10.

Section 7 of the old law provided: "For the purpose of the normal tax only,

there shall be allowed as an exemption in the nature of a deduction from the

amount of the net income . . ."; while section 23 of the new law provides:

"For the purpose of the tax provided for in this Title there shall be allowed

the following exemptions." Now, the question to be determined or answered

is: Does this change in the phraseology of the law show the intention of the

National Assembly to change the theory or policy of the old law so as to

deduct now the tax on the personal and additional exemptions from the tax

fixed on the amount of the net income, instead of deducting the amount of

personal and additional exemptions from that of the net income, before

determining the tax due on the latter?

It is a well-settled rule of statutory construction that where a statue has

been enacted which is susceptible of several interpretations there is no

better means for ascertaining the will and intention of the legislature than

that which is afforded by the history of the statue. Taking into consideration

the history of section 23 of the Commonwealth Act No. 466, the answer to

the above-propounded question must obviously be in the negative. Section

22 of the bill entitled "An Act to revise, amend and codify the Internal

Revenue Laws of the Philippines," prepared by the Tax Commission and

submitted to the National Assembly of the Philippines, in substitution of

section 7 of the old Income Tax Law, reads as follows:

SEC. 22. Amount of tax credit allowable to individuals.—There shall be

allowed as a credit in the nature of a deduction from the amount of the tax

payable by each citizen or resident of the Philippines under section 20:

(a) Tax credit of single individuals.—The sum of P10 if the person making

the return is a single person or a married person legally separated from his

or her spouse.

(b) Tax credit of a married person or head of family.—The sum of P30 if the

person making the return is a married man with a wife not legally separated

from him, or a married woman with a husband not legally separated from

her, or the head of the family; Provided, That from the tax due on the

aggregate income of both husband and wife when not legally separated only

one tax credit of P30 shall be deducted. For the purpose of this section, the

term "head of a family" includes an unmarried man or a woman with one or

both parents, or one or more brothers or sisters, or one or more legitimate,

recognized natural or adopted children dependent upon him or her for their

chief support where such brothers, sisters, or children are less than twenty-

one years of age.

(c) Additional tax credit for dependents.—The sum of P10 for each

legitimate, recognized natural, or adopted child wholly dependent upon the

taxpayer, if such dependents are under twenty-one years of age, or

incapable of self-support because mentally or physically defective. The

additional tax credit under this paragraph shall be allowed only if the person

making the return is the head of the family.

But the National Assembly, instead of adopting or incorporating said

proposed section 22 in the National Internal Revenue Code, C. A. No. 466,

copied substantially in section 23 of the latter provision of section 7 of the

old law relating to personal and additional exemptions, with the only

modification that the amount of personal exemption of single individuals has

been reduced from two thousand to one thousand pesos, and that of

married persons or heads of family from four thousand to two thousand five

hundred pesos.

If it were the intention of the National Assembly to adopt the "Wisconsin

plan" proposed by the tax Commission, it would have adopted literally, or at

least substantially, the provisions of said section 22 as section 23 of

Commonwealth Act No. 466, instead of substantially incorporating section 7

of the old Income Tax Law as section 23 of the new, except the first

paragraph thereof which reads: "For the purpose of the normal tax only,

there shall be allowed as an exemption in the nature of a deduction from the

amount of the net income." This was changed in said section 23, which

provides: "For the purpose of the tax provided for in this Title, there shall be

allowed the following exemptions:" From the fact that the National Assembly

discarded completely section 22 of the bill drafted in accordance with the

"Wisconsin Plan" and submitted by the Tax Commission, it is to be

presumed that the National Assembly of the Philippines did not intend to

introduce any substantial change in the old law in so far as the effect of

personal and additional exemptions on the income tax is concerned.

The mere fact that the phrase "in the nature of a deduction" found in section

7 of the old law was omitted in section 23 of the new or National Internal

Revenue Code did not and could not effect any change in the law. It is

evident that said phrase was added or inserted in said section 7 only out of

extreme caution, because, even without it, the exemption would have to be

deducted from the gross income in order to determine the net income

subject to tax. Had the provision in the old law been drafted in exactly the

same term as that of said section 23, the same construction should have

been adopted. Because "Exception is an immunity or privilege; it is freedom

from a charge or burden to which others are subjected." (Florar vs. Sherifan,

137 Ind., 28; 36 N. E., 365, 369.) If the amounts of personal and additional

exemptions fixed in section 23 are exempt from taxation, they should not be

included as part of the net income, which is taxable. There is nothing in said

section 23 to justify the contention that the tax on personal exemptions

(which are exempt from taxation) should first be fixed, and then deducted

from the tax on the net income.

The change of phraseology alone does not lead to the conclusion that it was

the intention of the lawmaker to amend or change the constructions of the

old law as contended by the appellee. For it is a well-established rule,

recognized by the Supreme Court of Ohio in the case of Conger vs. Barker's

Adm'r (11 Ohio St., 1); "that in the revision of statutes, neither an alteration

in phraseology nor the omission or addition of words in the latter statute,

shall be held, necessarily, to alter the construction of the former act. And

the court is only warranted in holding the construction of a statute, when

revised, to be changed, where the intent of the legislature to make such

change is clear, or the language used in the new act plainly requires such

change of construction. It should be remembered that condensation is a

necessity in the work of compilation or codification. Very frequently words

which do not materially affect the sense will be omitted from the statutes as

incorporated in the code, or that same general idea will be expressed in

briefer phrases. No design of altering the law itself could rightly be

predicated upon such modifications of the language." (Emphasis ours.) (See

Black on the construction and Interpretation of the Laws, Second Edition, pp.

594, 595.)

Our Income Tax Law is patterned after the United States Revenue or Income

Tax Laws. the United States Revenue Laws of 1916, 1918, 1921, 1924,

1926, 1928 and 1932 considered the personal and additional exemptions as

credits against the net income for the purpose of the normal tax; and

subsequently, the United States Revenue Acts of 1934, 1936 and 1938

amended the former acts by making said exemptions as credits against the

net income for the purpose of both the normal tax and surtax. Section 7 of

our old Income Tax Law, instead of providing that the personal and

additional exemptions shall be allowed as a credit against the net income,

as in the United States Revenue Acts, prescribed that the amounts specified

therein shall be allowed as an exemption in a nature of deduction from the

amount of the net income. Which has exactly the same effect as the

provision regarding personal and additional exemptions in the said United

States Revenue Acts. For, as it was explained in the Ways and Means

Committee Report No. 764, 73d Congress, 2d Session, pages 6, 23:

To carry out the policy of retaining practically the same tax burden on

ordinary income, it is necessary in connection with the proposed plan to

allow the personal exemption and credits for dependents as an offset

against surtax as well as normal tax. The personal exemption and credits for

defendants would appear to be in lieu of deductions for necessary living

expenses. They may well apply to both taxes as do all other ordinary

deductions.

And Paul and Mertens, Law of Federal Taxation, Vol. 3, p. 509, state

regarding the change in the United States Revenue Act of 1934: "The

practical effect of this statutory change is to convert the personal exemption

and credit for dependents into deductions . . ." (Emphasis ours.)

The lower court, therefore, erred in not declaring that personal and

additional exemptions claimed by appellant should be credited against or

deducted from the net income, and consequently in not sentencing appellee

to refund to appellant the sum of P475.

In view of all the foregoing, the decision of the lower court is affirmed in so

far as it dismisses appellant's first cause of action, and is reversed in so far

as it dismissed his second cause of action. Appellee is sentenced to refund

to appellant the sum of P475 claimed in the second cause of action of the

complaint. Without pronouncement as to costs. So ordered.

EN BANC

G.R. No. L-17962             April 30, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.

BLAS GONZALES, defendant-appellant.

Office of the Solicitor General for plaintiff-appellee.

Cesar C. Cruz for defendant-appellant.

REGALA, J.:

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

under Civil Case No. 42912 the dispositive portion of which provided:

IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the

plaintiff and against the defendant, ordering said defendant to pay plaintiff

the sums of P106,226.75 and P37,849.58 as deficiency income taxes for the

years 1946 and 1947, respectively, (each inclusive of the 50% surcharge)

plus the 50% surcharge and 1% monthly interest on the aforesaid amount

from June 15, 1957 until the whole amount is fully paid, and costs of this

suit.

The records of this case disclose that since 1946, the defendant-appellant,

Blas Gonzales, has been a private concessionaire in the U.S. Military Base at

Clark Field, Angeles City: He was engaged in the manufacture of furniture

and, per agreement with base authorities, supplied them with his

manufactured articles.

On March 1, 1947 and March 1, 1948, the appellant filed his income tax

returns for the years 1946 and 1947, respectively, with the then Municipal

Treasurer of Angeles, Pampanga. In the return for 1946, he declared a net

income of P9,352.84 and income tax liability of P111.17 while for the year

1947, he declared as net income the amount of P16,829.10 and a tax

liability therefor in the sum of P1,395.95. In the above two returns, he

declared the sums of P80,459.75 and P1,707,355.57 as his total sales for the

said two years, respectively, or an aggregate sales of P1,787,848.32 for

both years.

Upon investigation, however, the Bureau of Internal Revenue discovered

that for the years 1946 and 1947, the appellant had been paid a total of

P2,199,920.50 for furniture delivered by him to the base authorities. The

appellant do not deny the above amount which, for the record, was

furnished by the Purchasing Officer of the Clark Field Air Base on the Bureau

of Internal Revenue's representation.

Compared against the sales figure provided by the base authorities,

therefore, the amount of P1,787,848.32 declared by the appellant as his

total sales for the two tax years in question was short or underdeclared by

some P412,072.18. Accordingly, the appellee considered this last mentioned

amount as unreported item of income of the appellant for 1946. Further

investigation into the appellant's 1946 profit and loss statement disclosed

"local sales," that is, sales to persons other than the United States Army, in

the amount of P124,510.43. As a result, the appellee likewise considered the

said amount as unreported income for the said year. The full amount of

P124,510.43 was considered as taxable income because the appellant could

not produce the books of account on the same upon which any deduction

could be based.

Adding up the above two items considered as unreported income the

appellee assessed the appellant the total sum of P340,179.84, broken down

as follows:

Net income as per return

P9,352.84

Add: Sales, US Army

P492,531.93

         Local Sales

124,510.43

536,582.61

Net income as per investigation

545,935.45

Less: Personal & additional exemptions

4,500.00

Net taxable income

P541,435.45

Tax due thereon

P226,897.73

Less: Tax already assessed

111.17

Deficiency tax due

P226,786.56

50% surcharge

113,393.28

TOTAL AMOUNT DUE & COLLECTIBLE

P340,179.84

==========

On November 14, 1953, the Bureau of Internal Revenue sent a letter of

demand to the appellant for the above amount as deficiency income tax, the

sum of P300.00 as compromise for his failure to keep the required journal

and ledger, and finally, the sum of P153.75 as additional residence tax, all

for the year 1946.

On March 31, 1954, on request of the appellant, the Bureau of Internal

Revenue reinvestigated the case. At the end of this new inquest, however,

the appellee, thru, the then Collector of Internal Revenue, insisted on the

payment of the original assessment of P340,179.84. It suggested, though,

that if the appellant disagreed with the said finding he could submit the

same for study, review and decision by the Conference Staff of the Bureau

of Internal Revenue. In due time, the above assessment was heard before

the said body which, subsequently, recommended a reduction of the same

to P249,289.26, as deficiency income tax for the year 1946. After the

recommendation was approved by the Bureau, the corresponding

assessment notice for the sum of P249,289.26 as deficiency income tax and

50% surcharge for the year 1946 and 1% monthly interest and penalty

incident to delinquency was forthwith issued to the appellant.

On May 21, 1957, the above assessment was further revised by segregating

the appellant's tax liability for the two years in question. Pursuant to a

memorandum of the BIR Regional Director of San Fernando, Pampanga,

another demand was made upon the appellant for the payment of

P106,226.75 and P37,849.58 as income taxes due from him for the years

1946 and 1947, respectively, or a total of P144,076.33.

When the appellant failed to pay the above demand, the appellee instituted

the present suit on April 7, 1960. The appellant filed his answer on July 7,

1960 and amended it on July 19, 1960.

Prior to the trial of the case, the appellant filed with the court below a

motion to dismiss grounded on prescription and lack of jurisdiction. The

same was, however, denied by the lower court as unmeritorious. Moreover,

for failure of the appellant or his counsel to appear at the scheduled

hearing, the defendant-appellant was declared in default. The motion for

reconsideration of this last order declaring the appellant in default for failure

to appear was also denied by the trial court for lack of merit.

On November 7, 1960, after the appellee had presented its documentary

evidence against the appellant, the lower court rendered the decision under

appeal.

The appellant ascribes several errors to the decision of the court a quo, the

more fundamental of which is the claim that as a concessionaire in an

American Air Base, he is not subject to Philippine tax laws pursuant to the

United States-Philippine Military Bases Agreement. In support of the claim,

the following provision of the above Bases Agreement is invoked:

ARTICLE XVIII.—Sales and Services within the Bases

1. It is mutually agreed that the United States shall have the right to

establish on bases, free of all license; fees; sales excise or other taxes or

imposts; Government agencies including concessions, such as sales

commissaries and post exchanges, messes and social clubs, for the

exclusive use of the United States military forces and authorized civilian

personnel and their families. The merchandise or services sold or dispensed

by such agencies shall be free of all taxes, duties and inspection by the

Philippine authorities. Administrative measures shall be taken by the

appropriate authorities of the United States to prevent the sale of goods

which are sold under the provisions of this Article to persons not entitled to

buy goods at such agencies, and, generally, to prevent abuse of the

privileges granted under this Article. There shall be cooperation between

such authorities and the Philippines to this end.

2. Except as may be provided in any other agreements, no persons shall

habitually render any professional services in a base except to or for the

United States or to or for the persons mentioned in the preceding

paragraph. No business shall be established in a base, it being understood

that the Government agencies mentioned in the preceding paragraph shall

not be regarded as businesses for the purpose of this Article.

The contention is clearly unmeritorious.

The above provision of the Military Bases Agreement has already been

interpreted by this Court in at least two cases, namely: Canlas v. Republic,

G.R. No. 1,11035, May 31, 1958 and Naguiat v. J. A. Araneta, G.R. No. L-

11594, December 22, 1958. In the latter case this Court said:

The provision relied upon by the appellant plainly contemplates limiting the

exemption from the licenses, fees and taxes enumerated therein to the right

to establish Government agencies, including concessions, and to the

merchandise or services sold or dispensed by such agencies. The income

tax, which is certainly not on the right to establish agencies or on the

merchandise or services sold or dispensed thereby, but on the owner or

operator of such agencies, is logically excluded. The payment by the latter

of the income tax is perfectly content with and would not frustrate the

obvious objective of the agreement, namely, to enable the members of the

United States Military Forces and authorized civilian personnel and their

families to procure merchandise or services within the bases at reduced

prices. This construction is unmistakably borne out by the fact that, in

dealing particularly with the matter of income tax, the Military Bases

Agreement provides as follows:

INTERNAL REVENUE TAX EXEMPTION

1. No member of the United States armed forces, except Filipino citizens,

serving in the Philippines in connection with the bases and residing in the

Philippines by reason only of such services, or his dependents, shall be liable

to pay income tax in the Philippines except in respect of income derived

from Philippine sources.

It is urged for the applicant that no opposition has been registered against

his petition on the issues above-discussed. Absence of opposition, however,

does not preclude the scanning of the whole record by the appellate court,

with a view to preventing the conferment of citizenship to persons not fully

qualified therefor (Lee Ng Len vs. Republic, G.R. No. L-20151, March 31,

1965). The applicant's complaint of unfairness could have some weight if the

objections on appeal had been on points not previously passed upon. But

the deficiencies here in question are not new but well-known, having been

ruled upon repeatedly by this Court, and we see no excuse for failing to take

them into account.1äwphï1.ñët

2. No national of the United State serving or employed in the Philippines in

connection with the maintenance, operation or defense of the bases and

residing in the Philippines by reason only of such employment, or his

spouse, and minor children and dependent parents of either spouses, shall

be liable to pay income tax in the Philippines except in respect of income

derived from Philippine source or sources than the United States source.

3. No persons referred to in paragraphs 1 and 2 of this article shall be liable

to pay the Government or local authorities of the Philippines any poll or

residence tax, or any import or export duty, or any other tax on personal

property imported for his own use; provided that privately ovned vehicles

shall be subject to the payment of the following only, when certified as

being used for military purposes by appropriate United States authorities,

the normal license plate and registration fees.

4. No national of the United States, or corporation organized under the laws

of the United States, resident in the United States, shall be liable to pay

income tax in the Philippines in respect to any profits derived under a

contract made in the United States in connection with the construction,

maintenance, operation and defense of the bases, or any tax in the nature

of a license in respect of any service or work for the United States in

connection with the construction, maintenance, operation and defense of

the bases.

None of the above-quoted covenants shields a concessionaire, like the

appellant, from the payment of the income tax. For one thing, even the

exemption in favor of members of the United States Armed Forces and

nationals of the United States does not include income derived from

Philippine sources.

The appellant cannot seek refuge in the use of "excise" or "other taxes or

imposts" in paragraph 1 of Article XVIII of the Military Bases Agreement,

because, as already stated, said terms are employed with specific

application to the right to establish agencies and concessions within the

bases and to the merchandise or services sold or dispensed by such

agencies or concessions.

The same conclusion was reached in the case of Canlas v. Republic, supra.

The appellant maintains, however, that the rulings in the above two cases

are inapplicable to the suit at bar because the said cases involved the

income of public utility operators in the Air Base who were not

"concessionaires" like him.

The above contention is as unmeritorious as it is untrue. In the case of

Araneta v. Manila Pencil Company Ins., G.R. No. L-8182, June 29, 1957, this

Court already ruled that operators of freight and bus services are within the

meaning of the word "concession" appearing in the Military Bases

agreement. Thus, in the Canlas case above, We said:

There is no dispute as to the fact that defendant Manila Pencil Company, as

successor-in-interest of the Philippine Consolidated Freight Lines, Inc., was

engaged in and duly licensed by the U.S. Military authorities to operate a

freight and bus service within the Clark Field Air Base, a military reservation

established in conformity with the agreement concluded between the

Government of the Philippines and the United States on March 14, 1947 (43

O.G. No. 3, p. 1020). And as such grantee of a franchise, which this Court

was held to be embraced within the meaning of the word "concession"

appearing in the treaty and was declared exempted from the payment of

the contractor's tax (Araneta v. Manila Pencil Company, G.R. No. L-10507,

May 30, 1958) ... .

It is very clear, therefore, that the rulings of this Court in the two cases

above cited are applicable to this appeal under consideration.

The other point raised by the appellant on this appeal pertains to the refusal

of the trial court to reconsider its order declaring him in default for the

failure of his counsel to appear at the scheduled trial despite due notice. He

complains that when the trial proceeded in his absence, he was denied his

day in court. In the premises, his counsel insists that this absence then was

for a good and reasonable cause.

Suffice it to say in regard to the above that the matter complained of is

beyond this Court to disturb. The matter of adjournments, postponements,

continuances and reconsideration of orders of default lies within the

discretion of courts and will not be interfered with either by mandamus or

appeal (Samson v. Naval, 41 Phil. 838) unless a showing of grave abuse can

be made against said courts. Moreover, where the absence of a party from

the trial was due to his own fault, he should not be heard to complain that

he was deprived of his day in court. (Sandejas v. Robles, 81 Phil. 421; Siojo

v. Tecson, 88 Phil. 531)

The-counsel's excuse for his absence at the trial was alleged "lack of

transportation facilities in his place of residence at Gagalangin, Tondo,

Manila, on that morning of August 8, when torrential rain poured down in his

locality." The lower court did not deem this as a sufficiently valid

explanation because it observed that despite such torrential rain, the

counsel for the plaintiff-appellee, a lady attorney who was then a resident of

a usually inundated area of Sampaloc, Manila, somehow made it to the

court. Under these circumstances, the trial court's ruling can hardly be

considered as an abuse of his discretion.

Finally, the appellant disputes the lower court's finding of fraud against him

in this incident. He argues that the facts invoked by the lower court do not

sufficiently establish the same.

As rightly argued by the Solicitor General's office, since fraud is a state of

mind, it need not be proved by direct evidence but may be inferred from the

circumstances of the case. The failure of the appellant to declare for

taxation purposes his true and actual income derived from his furniture

business at the Clark Field Air Base for two consecutive years is an

indication of his fraudulent intent to cheat the Government of its due taxes.

The substantial undeclaration of income in the income tax returns of the

appellant for four consecutive years, coupled with his intentional

overstatement of deductions made the imposition of the fraud penalty

proper. (Eugenio Perez v. Court of Tax Appeals and Collector of Internal

Revenue, G. R. No. L-10507, May 30, 1958.)

IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered affirming in

full the decision here appealed from, with costs against the defendant-

appellant. So ordered.

FIRST DIVISION

[G.R. No. 119761.  August 29, 1996]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. HON. COURT

OF APPEALS, HON. COURT OF TAX APPEALS and FORTUNE TOBACCO

CORPORATION, respondents.

D E C I S I O N

VITUG, J.:

The Commissioner of Internal Revenue ("CIR") disputes the decision, dated

31 March 1995, of respondent Court of Appeals[i][1] affirming the 10th

August 1994 decision and the 11th October 1994 resolution of the Court of

Tax Appeals[ii][2] ("CTA") in C.T.A. Case No. 5015, entitled "Fortune Tobacco

Corporation vs. Liwayway Vinzons-Chato in her capacity as Commissioner of

Internal Revenue."

The facts, by and large, are not in dispute.

Fortune Tobacco Corporation ("Fortune Tobacco") is engaged in the

manufacture of different brands of cigarettes.

On various dates, the Philippine Patent Office issued to the corporation

separate certificates of trademark registration over "Champion," "Hope,"

and "More" cigarettes.  In a letter, dated 06 January 1987, of then

Commissioner of Internal Revenue Bienvenido A. Tan, Jr., to Deputy Minister

Ramon Diaz of the Presidential Commission on Good Government, "the

initial position of the Commission was to classify 'Champion,' 'Hope,' and

'More' as foreign brands since they were listed in the World Tobacco

Directory as belonging to foreign companies.  However, Fortune Tobacco

changed the names of 'Hope' to Hope Luxury' and 'More' to 'Premium More,'

thereby removing the said brands from the foreign brand category.  Proof

was also submitted to the Bureau (of Internal Revenue ['BIR']) that

'Champion' was an original Fortune Tobacco Corporation register and

therefore a local brand."[iii][3] Ad Valorem taxes were imposed on these

brands,[iv][4] at the following rates:

 

"BRAND           AD VALOREM TAX RATE      

            E.O. 22

06-23-86

07-01-86         and E.O. 273

07-25-87

01-01-88         RA 6956

06-18-90

07-05-90        

 

Hope Luxury M. 100's

Sec. 142, (c), (2)                      40%    45%   

Hope Luxury M. King

Sec. 142, (c), (2)                      40%    45%   

More Premium M. 100's

Sec. 142, (c), (2)                      40%    45%   

More Premium International

Sec. 142, (c), (2)                      40%    45%   

Champion Int'l. M. 100's

Sec. 142, (c), (2)                      40%    45%   

Champion M. 100's

Sec. 142, (c), (2)                      40%    45%   

Champion M. King

Sec. 142, (c), last par.             15%    20%   

Champion Lights

Sec. 142, (c), last par.             15%    20%"[v][5]

A bill, which later became Republic Act ("RA") No. 7654, [vi][6] was enacted,

on 10 June 1993, by the legislature and signed into law, on 14 June 1993, by

the President of the Philippines.  The new law became effective on 03 July

1993.  It amended Section 142(c)(1) of the National Internal Revenue Code

("NIRC") to read; as follows:

"SEC. 142.  Cigars and Cigarettes. -

"x x x                           x x x                            x x x.

"(c)       Cigarettes packed by machine. - There shall be levied, assessed and

collected on cigarettes packed by machine a tax at the rates prescribed

below based on the constructive manufacturer's wholesale price or the

actual manufacturer's wholesale price, whichever is higher:

"(1)       On locally manufactured cigarettes which are currently classified

and taxed at fifty-five percent (55%) or the exportation of which is not

authorized by contract or otherwise, fifty-five (55%) provided that the

minimum tax shall not be less than Five Pesos (P5.00) per pack.

"(2).      On other locally manufactured cigarettes, forty-five percent (45%)

provided that the minimum tax shall not be less than Three Pesos (P3.00)

per pack.

"x x x   x x x    x x x.

"When the registered manufacturer's wholesale price or the actual

manufacturer's wholesale price whichever is higher of existing brands of

cigarettes, including the amounts intended to cover the taxes, of cigarettes

packed in twenties does not exceed Four Pesos and eighty centavos (P4.80)

per pack, the rate shall be twenty percent (20%)."[vii][7] (Italics supplied.)

About a month after the enactment and two (2) days before the effectivity

of RA 7654, Revenue Memorandum Circular No. 37-93 ("RMC 37-93"), was

issued by the BIR the full text of which expressed:

"REPUBLIKA NG PILIPINAS

KAGAWARAN NG PANANALAPI

KAWANIHAN NG RENTAS INTERNAS

July 1, 1993

REVENUE MEMORANDUM CIRCULAR NO. 37-93

SUBJECT : Reclassification of Cigarettes Subject to Excise Tax

TO       : All Internal Revenue Officers and Others Concerned.

"In view of the issues raised on whether 'HOPE,' 'MORE' and 'CHAMPION'

cigarettes which are locally manufactured are appropriately considered as

locally manufactured cigarettes bearing a foreign brand, this Office is

compelled to review the previous rulings on the matter.

"Section 142(c)(1) National Internal Revenue Code, as amended by R.A. No.

6956, provides:

"'On locally manufactured cigarettes bearing a foreign brand, fifty-five

percent (55%) Provided, That this rate shall apply regardless of whether or

not the right to use or title to the foreign brand was sold or transferred by its

owner to the local manufacturer.  Whenever it has to be determined

whether or not a cigarette bears a foreign brand, the listing of brands

manufactured in foreign countries appearing in the current World Tobacco

Directory shall govern."

"Under the foregoing, the test for imposition of the 55% ad valorem tax on

cigarettes is that the locally manufactured cigarettes bear a foreign brand

regardless of whether or not the right to use or title to the foreign brand was

sold or transferred by its owner to the local manufacturer.  The brand must

be originally owned by a foreign manufacturer or producer.  If ownership of

the cigarette brand is, however, not definitely determinable, 'x x x the listing

of brands manufactured in foreign countries appearing in the current World

Tobacco Directory shall govern.  x x x'

"'HOPE' is listed in the World Tobacco Directory as being manufactured by

(a) Japan Tobacco, Japan and (b) Fortune Tobacco, Philippines.  'MORE' is

listed in the said directory as being manufactured by: (a) Fills de Julia Reig,

Andorra; (b) Rothmans, Australia; (c) RJR-Macdonald, Canada; (d) Rettig-

Strenberg, Finland; (e) Karellas, Greece; (f) R.J. Reynolds, Malaysia; (g)

Rothmans, New Zealand; (h) Fortune Tobacco, Philippines; (i) R.J. Reynolds,

Puerto Rico; (j) R.J. Reynolds, Spain; (k) Tabacalera, Spain; (l) R.J. Reynolds,

Switzerland; and (m) R.J. Reynolds, USA.  'Champion' is registered in the said

directory as being manufactured by (a) Commonwealth Bangladesh; (b)

Sudan, Brazil; (c) Japan Tobacco, Japan; (d) Fortune Tobacco, Philippines; (e)

Haggar, Sudan; and (f) Tabac Reunies, Switzerland.

"Since there is no showing who among the above-listed manufacturers of

the cigarettes bearing the said brands are the real owner/s thereof, then it

follows that the same shall be considered foreign brand for purposes of

determining the ad valorem tax pursuant to Section 142 of the National

Internal Revenue Code.  As held in BIR Ruling No. 410-88, dated August 24,

1988, 'in cases where it cannot be established or there is dearth of evidence

as to whether a brand is foreign or not, resort to the World Tobacco

Directory should be made.'

"In view of the foregoing, the aforesaid brands of cigarettes, viz:  'HOPE,'

'MORE' and 'CHAMPION' being manufactured by Fortune Tobacco

Corporation are hereby considered locally manufactured cigarettes bearing

a foreign brand subject to the 55% ad valorem tax on cigarettes.

"Any ruling inconsistent herewith is revoked or modified accordingly.

(SGD) LIWAYWAY VINZONS-CHATO

Commissioner"

On 02 July 1993, at about 17:50 hours, BIR Deputy Commissioner Victor A.

Deoferio, Jr., sent via telefax a copy of RMC 37-93 to Fortune Tobacco but it

was addressed to no one in particular.  On 15 July 1993, Fortune Tobacco

received, by ordinary mail, a certified xerox copy of RMC 37-93.

In a letter, dated 19 July 1993, addressed to the appellate division of the

BIR, Fortune Tobacco, requested for a review, reconsideration and recall of

RMC 37-93.  The request  was denied on 29 July 1993.  The following day, or

on 30 July 1993, the CIR assessed Fortune Tobacco for ad valorem tax

deficiency amounting to P9,598,334.00.

On 03 August 1993, Fortune Tobacco filed a petition for review with the CTA.

[viii][8]

On 10 August 1994, the CTA upheld the position of Fortune Tobacco and

adjudged:

"WHEREFORE, Revenue Memorandum Circular No. 37-93 reclassifying the

brands of cigarettes, viz: `HOPE,' `MORE' and `CHAMPION' being

manufactured by Fortune Tobacco Corporation as locally manufactured

cigarettes bearing a foreign brand subject to the 55% ad valorem tax on

cigarettes is found to be defective, invalid and unenforceable, such that

when R.A. No. 7654 took effect on July 3, 1993, the brands in question were

not CURRENTLY CLASSIFIED AND TAXED at 55% pursuant to Section 1142(c)

(1) of the Tax Code, as amended by R.A. No. 7654 and were therefore still

classified as other locally manufactured cigarettes and taxed at 45% or 20%

as the case may be.

"Accordingly, the deficiency ad valorem tax assessment issued on petitioner

Fortune Tobacco Corporation in the amount of P9,598,334.00, exclusive of

surcharge and interest, is hereby canceled for lack of legal basis.

"Respondent Commissioner of Internal Revenue is hereby enjoined from

collecting the deficiency tax assessment made and issued on petitioner in

relation to the implementation of RMC No. 37-93.

"SO ORDERED." [ix][9]

In its resolution, dated 11 October 1994, the CTA dismissed for lack of merit

the motion for reconsideration.

The CIR forthwith filed a petition for review with the Court of Appeals,

questioning the CTA's 10th August 1994 decision and 11th October 1994

resolution.  On 31 March 1993, the appellate court's Special Thirteenth

Division affirmed in all respects the assailed decision and resolution.

In the instant petition, the Solicitor General argues:  That -

"I.         RMC 37-93 IS A RULING OR OPINION OF THE COMMISSIONER OF

INTERNAL REVENUE INTERPRETING THE PROVISIONS OF THE TAX CODE.

"II.        BEING AN INTERPRETATIVE RULING OR OPINION, THE PUBLICATION

OF RMC 37-93, FILING OF COPIES THEREOF WITH THE UP LAW CENTER AND

PRIOR HEARING ARE NOT NECESSARY TO ITS VALIDITY, EFFECTIVITY AND

ENFORCEABILITY.

"III.       PRIVATE RESPONDENT IS DEEMED TO HAVE BEEN NOTIFIED OR RMC

37-93 ON JULY 2, 1993.

“IV.      RMC 37-93 IS NOT DISCRIMINATORY SINCE IT APPLIES TO ALL

LOCALLY MANUFACTURED CIGARETTES SIMILARLY SITUATED AS 'HOPE,'

'MORE' AND 'CHAMPION' CIGARETTES.

"V.       PETITIONER WAS NOT LEGALLY PROSCRIBED FROM RECLASSIFYING

‘HOPE,’ ‘MORE’ AND ‘CHAMPION’ CIGARETTES BEFORE THE EFFECTIVITY OF

R.A. NO. 7654.

“VI.      SINCE RMC 37-93 IS AN INTERPRETATIVE RULE, THE INQUIRY IS NOT

INTO ITS VALIDITY, EFFECTIVITY OR ENFORCEABILITY BUT INTO ITS

CORRECTNESS OR PROPRIETY; RMC 37-93 IS CORRECT." [x][10]

In fine, petitioner opines that RMC 37-93 is merely an interpretative ruling of

the BIR which can thus become effective without any prior need for notice

and hearing, nor publication, and that its issuance is not discriminatory

since it would apply under similar circumstances to all locally manufactured

cigarettes.

The Court must sustain both the appellate court and the tax court.

Petitioner stresses on the wide and ample authority of the BIR in the

issuance of rulings for the effective implementation of the provisions of the

National Internal Revenue Code.  Let it be made clear that such authority of

the Commissioner is not here doubted.  Like any other government agency,

however, the CIR may not disregard legal requirements or applicable

principles in the exercise of its quasi-legislative powers.

Let us first distinguish between two kinds of administrative issuances - a

legislative rule and an interpretative rule.

In Misamis Oriental Association of Coco Traders, Inc., vs. Department of

Finance Secretary, [xi][11] the Court expressed:

"x x x a legislative rule is in the nature of subordinate legislation, designed

to implement a primary legislation by providing the details thereof.  In the

same way that laws must have the benefit of public hearing, it is generally

required that before a legislative rule is adopted there must be hearing.  In

this connection, the Administrative Code of 1987 provides:

"Public Participation. - If not otherwise required by law, an agency shall, as

far as practicable, publish or circulate notices of proposed rules and afford

interested parties the opportunity to submit their views prior to the adoption

of any rule.

"(2)       In the fixing of rates, no rule or final order shall be valid unless the

proposed rates shall have been published in a newspaper of general

circulation at least two (2) weeks before the first hearing thereon.

"(3)       In case of opposition, the rules on contested cases shall be

observed.

"In addition such rule must be published.  On the other hand, interpretative

rules are designed to provide guidelines to the law which the administrative

agency is in charge of enforcing." [xii][12]

It should be understandable that when an administrative rule is merely

interpretative in nature, its applicability needs nothing further than its bare

issuance for it gives no real consequence more than what the law itself has

already prescribed.  When, upon the other hand, the administrative rule

goes beyond merely providing for the means that can facilitate or render

least cumbersome the implementation of the law but substantially adds to

or increases the burden of those governed, it behooves the agency to

accord at least to those directly affected a chance to be heard, and

thereafter to be duly informed, before that new issuance is given the force

and effect of law.

A reading of RMC 37-93, particularly considering the circumstances under

which it has been issued, convinces us that the circular cannot be viewed

simply as a corrective measure (revoking in the process the previous

holdings of past Commissioners) or merely as construing Section 142(c)(1)

of the NIRC, as amended, but has, in fact and most importantly, been made

in order to place "Hope Luxury," "Premium More" and "Champion" within the

classification of locally manufactured cigarettes bearing foreign brands and

to thereby have them covered by RA 7654.  Specifically, the new law would

have its amendatory provisions applied to locally manufactured cigarettes

which at the time of its effectivity were not so classified as bearing foreign

brands.  Prior to the issuance of the questioned circular, "Hope Luxury,"

"Premium More," and "Champion" cigarettes were in the category of locally

manufactured cigarettes not bearing foreign brand subject to 45% ad

valorem tax.  Hence, without RMC 37-93, the enactment of RA 7654, would

have had no new tax rate consequence on private respondent's products.  

Evidently, in order to place "Hope Luxury," "Premium More," and

"Champion" cigarettes within the scope of the amendatory law and subject

them to an increased  tax rate, the now disputed RMC 37-93 had to be

issued.  In so doing, the BIR not simply interpreted the law; verily, it

legislated under its quasi-legislative authority.  The due observance of the

requirements of notice, of hearing, and of publication should not have been

then ignored.

Indeed, the BIR itself, in its RMC 10-86, has observed and provided:

"RMC NO. 10-86

Effectivity of Internal Revenue Rules and Regulations

"It has been observed that one of the problem areas bearing on compliance

with Internal Revenue Tax rules and regulations is lack or insufficiency of

due notice to the tax paying public.  Unless there is due notice, due

compliance therewith may not be reasonably expected.  And most

importantly, their strict enforcement could possibly suffer from legal

infirmity in the light of the constitutional provision on `due process of law'

and the essence of the Civil Code provision concerning effectivity of laws,

whereby due notice is a basic requirement (Sec. 1, Art. IV, Constitution; Art.

2, New Civil Code).

"In order that there shall be a just enforcement of rules and regulations, in

conformity with the basic element of due process, the following procedures

are hereby prescribed for the drafting, issuance and implementation of the

said Revenue Tax Issuances:

"(1).  This Circular shall apply only to (a) Revenue Regulations; (b) Revenue

Audit Memorandum Orders; and (c) Revenue Memorandum Circulars and

Revenue Memorandum Orders bearing on internal revenue tax rules and

regulations.

"(2).  Except when the law otherwise expressly provides, the aforesaid

internal revenue tax issuances shall not begin to be operative until after due

notice thereof may be fairly presumed.

"Due notice of the said issuances may be fairly presumed only after the

following procedures have been taken:

"xxx                       xxx                       xxx

"(5).  Strict compliance with the foregoing procedures is enjoined." [xiii][13]

Nothing on record could tell us that it was either impossible or impracticable

for the BIR to observe and comply with the above requirements before

giving effect to its questioned circular.

Not insignificantly, RMC 37-93 might have likewise infringed on uniformity of

taxation.

Article VI, Section 28, paragraph 1, of the 1987 Constitution mandates

taxation to be uniform and equitable.  Uniformity requires that all subjects

or objects of taxation, similarly situated, are to be treated alike or put on

equal footing both in privileges and liabilities.[xiv][14] Thus, all taxable

articles or kinds of property of the same class must be taxed at the same

rate[xv][15] and the tax must operate with the same force and effect in

every place where the subject may be found.

Apparently, RMC 37-93 would only apply to "Hope Luxury," Premium More"

and "Champion" cigarettes and, unless petitioner would be willing to

concede to the submission of private respondent that the circular should, as

in fact my esteemed colleague Mr. Justice Bellosillo so expresses in his

separate opinion, be considered adjudicatory in nature and thus violative of

due process following the Ang Tibay[xvi][16] doctrine,  the measure suffers

from lack of uniformity of taxation.  In its decision, the CTA has keenly noted

that other cigarettes bearing foreign brands have not been similarly

included within the scope of the circular, such as -

"1. Locally manufactured by ALHAMBRA INDUSTRIES, INC.

(a)  `PALM TREE' is listed as manufactured by office of Monopoly, Korea

(Exhibit `R')

"2. Locally manufactured by LA SUERTE CIGAR and CIGARETTE COMPANY

(a)  `GOLDEN KEY' is listed being manufactured by United Tobacco, Pakistan

(Exhibit `S')

(b)  `CANNON' is listed as being manufactured  by Alpha Tobacco,

Bangladesh (Exhibit `T')

"3.  Locally manufactured by LA PERLA INDUSTRIES, INC.

(a)  `WHITE HORSE' is listed as being manufactured by Rothman's, Malaysia

(Exhibit `U')

(b)  `RIGHT' is listed as being manufactured by SVENSKA, Tobaks, Sweden

(Exhibit `V-1')

"4.  Locally manufactured by MIGHTY CORPORATION

(a)  'WHITE HORSE' is listed as being manufactured by Rothman's, Malaysia

(Exhibit 'U-1')

"5.  Locally manufactured by STERLING TOBACCO CORPORATION

(a)  ‘UNION' is listed as being manufactured by Sumatra Tobacco, Indonesia

and Brown and Williamson, USA (Exhibit 'U-3')

(b)  ‘WINNER' is listed as being manufactured by Alpha Tobacco,

Bangladesh; Nanyang, Hongkong; Joo Lan, Malaysia; Pakistan Tobacco Co.,

Pakistan; Premier Tobacco, Pakistan and Haggar, Sudan (Exhibit 'U-4')." [xvii]

[17]

The court quoted at length from the transcript of the hearing conducted on

10 August 1993 by the Committee on Ways and Means of the House of

Representatives; viz:

"THE CHAIRMAN.  So you have specific information on Fortune Tobacco

alone.  You don't have specific information on other tobacco manufacturers. 

Now, there are other brands which are similarly situated.  They are locally

manufactured bearing foreign brands.  And may I enumerate to you all

these brands, which are also listed in the World Tobacco Directory x x x. 

Why were these brands not reclassified at 55 if your want to give a level

playing field to foreign manufacturers?

"MS. CHATO.  Mr. Chairman, in fact, we have already prepared a Revenue

Memorandum Circular that was supposed to come after RMC No. 37-93

which have really named specifically the list of locally manufactured

cigarettes bearing a  foreign brand for excise tax purposes and includes all

these brands that you mentioned at 55 percent except that at that time,

when we had to come up with this, we were forced to study the brands of

Hope, More and Champion because we were given documents that would

indicate the that these brands were actually being claimed or patented in

other countries because we went by Revenue Memorandum Circular 1488

and we wanted to give some rationality to how it came about but we

couldn't find the rationale there.  And we really found based on our own

interpretation that the only test that is given by that existing law would be

registration in the World Tobacco Directory.  So we came out with this

proposed revenue memorandum circular which we forwarded to the

Secretary of Finance except that at that point in time, we went by the

Republic Act 7654 in Section 1 which amended Section 142, C-1, it said, that

on locally manufactured cigarettes which are currently classified and taxed

at 55 percent.  So we were saying that when this law took effect in July 3

and if we are going to come up with this revenue circular thereafter, then I

think our action would really be subject to question but we feel that . . .

Memorandum Circular Number 37-93 would really cover even similarly

situated brands.  And in fact, it was really because of the study, the short

time that we were given to study the matter that we could not include all

the rest of the other brands that would have been really classified as foreign

brand if we went by the law itself.  I am sure that by the reading of the law,

you would without that ruling by Commissioner Tan they would really have

been included in the definition or in the classification of foregoing brands. 

These brands that you referred to or just read to us and in fact just for your

information, we really came out with a proposed revenue memorandum

circular for those brands.  (Italics supplied)

"Exhibit 'FF-2-C', pp. V-5 TO V-6, VI-1 to VI-3).

"x x x   x x x    x x x.

"MS. CHATO. x x x But I do agree with you now that it cannot and in fact that

is why I felt that we . . . I wanted to come up with a more extensive

coverage and precisely why I asked that revenue memorandum circular that

would cover all those similarly situated would be prepared but because of

the lack of time and I came out with a study of RA 7654, it would not have

been possible to really come up with the reclassification or the proper

classification of all brands that are listed there. x x x' (italics supplied)

(Exhibit 'FF-2d', page IX-1)

"x x x   x x x    x x x.

"HON. DIAZ.  But did you not consider that there are similarly situated?

"MS. CHATO.  That is precisely why, Sir, after we have come up with this

Revenue Memorandum Circular No. 37-93, the other brands came about the

would have also clarified RMC 37-93 by I was saying really because of the

fact that I was just recently appointed and the lack of time, the period that

was allotted to us to come up with the right actions on the matter, we were

really caught by the July 3 deadline.  But in fact, We have already prepared

a revenue memorandum circular clarifying with the other . . . does not yet,

would have been a list of locally manufactured cigarettes bearing a foreign

brand for excise tax purposes which would include all the other brands that

were mentioned by the Honorable Chairman.  (Italics supplied) (Exhibit 'FF-

2-d,' par. IX-4)."18

All taken, the Court is convinced that the hastily promulgated RMC 37-93

has fallen short of a valid and effective administrative issuance.

WHEREFORE, the decision of the Court of Appeals, sustaining that of the

Court of Tax Appeals, is AFFIRMED.  No costs.

SO ORDERED.

[1][1]       Rollo, pp. 45-66.  Penned by Associate Justice Erlinda P. Uy with Presiding Justice Ernesto D. Acosta and Associate

Justices Juanito C. Castañeda, Jr., Lovell R. Bautista, Caesar A. Casanova and Olga  Palanca-Enriquez concurring.

[2][2]       Id. at 68-71.

[3][3]       Id. at 117-133. Penned by Associate Justice Caesar A. Casanova with Presiding Justice Ernesto D. Acosta and Lovell

R. Bautista concurring.

[4][4]       Id. at 153-156.

[5][5]       Joint Stipulation of Facts and Issues, records (CTA Case No. 6839), p. 206.

[6][6]       Rollo, p. 119.

[7][7]       CTA Case No. 6554, November 28, 2006, rollo, pp. 125-126.

[8][8]       G.R. No. 88291, June 8, 1993, 223 SCRA 217.

[9][9]       No. L-19707, August 17, 1967, 20 SCRA 1056.

[10][10]   Rollo, pp. 17-18.

[11][11]   Id. at 274.

[12][12]   Supra note 8.

[13][13]   Supra note 9.

[14][14]   G.R. No. 66416, March 21, 1990, 183 SCRA 402.

[15][15]   Silkair (Sigapore) Pte. Ltd. v. Commissioner of Internal Revenue, G.R. No. 166482, January 25, 2012; Exxonmobil

Petroleum and Chemical Holdings, Inc.-Philippine Branch v. Commissioner of Internal Revenue, G.R. No. 180909, January 19,

2011, 640 SCRA 203; Silkair (Singapore) Pte. Ltd. v. Commissioner of Internal Revenue, G.R. No. 184398, February 25, 2010,

613 SCRA 639; Silkair (Singapore) Pte. Ltd. v. Commissioner of Internal Revenue, G.R. Nos. 171383 & 172379, November 14,

2008, 571 SCRA 141; and Silkair (Singapore), Pte. Ltd. v. Commissioner of Internal Revenue, G.R. No. 173594, February 6,

2008, 544 SCRA 100.

[16][16]   Sec. 129, NIRC (1997).

[17][17]   Sec. 130, par. (2).

[18][18]   REVENUE REGULATIONS IMPLEMENTING REPUBLIC ACT NO. 8184, AN ACT RESTRUCTURING THE EXCISE TAX ON

PETROLEUM PRODUCTS, AMENDING FOR THIS PURPOSE PERTINENT SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS

AMENDED.

[19][19]   Sec. 5, id.

[20][20]   BLACK’S LAW DICTIONARY, Fifth Edition, p. 486.

[21][21]   Commissioner of Internal Revenue v. Mirant Pagbilao Corporation, G.R. No. 172129, September 12, 2008, 565 SCRA

154, 165, citing Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G.R. Nos. 167274-75, July 21, 2008, 559

SCRA 160, 183 and Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue, G.R. No.

159490, February 18, 2008, 546 SCRA 150, 163.

[22][22]   Supra note 9.

[23][23]   Sec. 148, par. 1.

[24][24]   G.R. No. 88291, May 31, 1991, 197 SCRA 771, 791, cited in Silkair (Singapore) Pte. Ltd. v. Commissioner of Internal

Revenue, G.R. Nos. 171383 & 172379, November 14, 2008, supra note 15, at 155-156.

[25][25]   Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G.R. No. 140230, December 15,

2005, 478 SCRA 61, 72, citing Commissioner of Internal Revenue v. Tours Specialists Inc., supra note 14, at 413.

[26][26]   Supra note 8, at 256.

[27][27]   Antony Seely, “Taxing Aviation Fuel” House of Commons Library, accessed at www.parliament.uk/briefing

-papers/SN00523.pdf , citing “Indirect Taxes on International Aviation,” by Michael Keen & John Strand, Fiscal Studies, Vol. 28

No. 1 2007 (pp. 6-7) and HM Treasury/Dept for Transport, Aviation and the Environment: Using Economic Instruments, March

2003 (p. 10).

[28][28]             “Prohibition Against Taxes On International Airlines”, prepared by The International Air Transport Association

(IATA), globalwarming.house.gov/files/LTTR/ACES/IntlAirTransport...

 

[29][29]   Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, G.R. No. 166786, May 3, 2006, 489 SCRA

147, 155, citing Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, supra note 25, at 74 and

Commissioner of Internal Revenue v. Mitsubishi Metal Corporation, G.R. Nos. 54908 & 80041, January 22, 1990, 181 SCRA 214,

224.

[30][30]   Province of Abra v. Hernando, No. L-49336, August 31, 1981, 107 SCRA 104, 109, citing early cases.

[31][31]   Commissioner of Internal Revenue v. Court of Appeals, G.R. Nos. 122161 & 120991, February 1, 1999, 302 SCRA

442, 453, citing Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue, G.R. No. 117359, July 23, 1998, 293

SCRA 76, 91.

[32][32]   Silkair(Singapore) PTE. Ltd. v. Commissioner of Internal Revenue, G.R. No. 184398, February 25, 2010, supra note

15, at 659, citing Commissioner of Internal Revenue v. Solidbank Corporation, G.R. No. 148191, November 25, 2003, 416 SCRA

436, 461.

*          Associate Justice Antonio T. Carpio was designated to sit as additional member, replacing Associate Justice Antonio

Eduardo B. Nachura per raffle dated 22 June 2009.

[33][1]     Penned by Associate Justice Erlinda P. Uy with Presiding Justice Ernesto D. Acosta and  Associate Justices Juanito

Castañeda, Jr., Lovell R. Bautista, Caesar A. Casanova and Olga Palanca-Enriquez, concurring; rollo, pp. 39-50.

[34][2]     Penned by Associate Justice Caesar A. Casanova; records, pp. 201-210.

[35][3]     An Act Granting a New Franchise to Philippine Airlines, Inc. to Establish, Operate, and Maintain Air-Transport Services

in the Philippines and Other Countries.

[36][4]     Section 1 of Presidential Decree No. 1590.

[37][5]     Records, p. 202.

[38][6]     Id. at 27.

[39][7]     Id. at 34-35.

[40][8]     In BIR Ruling No. 97-94, then CIR Liwayway Vinzons-Chato ruled that the “in lieu of all taxes” clause in  Section 13 of

Presidential Decree No. 1590 exempted PAL from all taxes, including documentary stamp tax.  In accordance with Section 173

of the NIRC, the Philippine National Bank, the Landbank and other banks in whose favor the promissory notes and other

documents are executed by PAL, shall be liable for the payment of the documentary stamp tax. (Records, p. 26.) 

[41][9]     Records. p. 205.

[42][10]   Id. at 201-210.

[43][11]   Id. at 208-210.

[44][12]   Rollo, p. 53.

[45][13]   Id. at 42-50.

[46][14]   G.R. No. 160528, 9 October 2006, 504 SCRA 90.

[47][15]   Id. at 51.

[48][16]   Rollo, pp. 28-29.

[49][17]   Id. at 8.

[50][18]   Id. at 100-101.

[51][19]   Sanciangco v. Roño, G.R. No. L-68709, 19 July 1985, 137 SCRA 671, 676; Commissioner of Customs v. Esso Standard

Eastern, Inc., 160 Phil. 805, 812 (1975).

[52][20]   Supra note 14 at 101.

[53][21]   Far East Bank & Trust Company v.  Commissioner of Internal Revenue, G.R. No. 149589, 15 September 2006, 502

SCRA 87, 91; Insular Lumber Co. v. Court of Tax Appeals, 192 Phil. 221, 231 (1981); Commissioner of Internal Revenue v. Rio

Tuba Nickel Mining Corp., G.R. Nos. 83583-84, 25 March 1992, 207 SCRA 549, 552-553.

[54][22]   Benguet Corporation v. Commissioner of Internal Revenue, G.R. No. 141212, 22 June 2006, 492 SCRA 133, 142.

[i][1] Through Associate Justices Justo P. Torres, Jr. (ponente), Corona Ibay-Somera and Conrado M. Vasquez, Jr. (members).

[ii][2] Penned by Presiding Judge Ernesto D. Acosta and concurred in by Associate Judges  Ramon O. De Veyra and Manuel K.

Gruba.

[iii][3] Underscoring supplied.  Rollo, pp. 55-56.

[iv][4] Since the institution of Executive Order No. 22 on 23 June 1986.

[v][5] Rollo, p. 56

[vi][6] An Act Revising The Excise Tax Base, Allocating a Portion Of The Incremental Revenue Collected For The Emergency

Employment Program For Certain Workers Amending For The Purpose Section 142 Of The National Internal Revenue Code, As

Amended, And For Other Purposes.

[vii][7] Official Gazette, Vol. 89., No. 32, 09 August 1993, p. 4476.

[viii][8] The petition was subsequently amended on 12 August 1993.

[ix][9] Rollo, pp. 115-116.

[x][10] Rollo, pp. 21-22.

[xi][11] 238 SCRA 63.

[xii][12] Italics supplied. At p. 69.

[xiii][13] Rollo, pp. 65-66.

[xiv][14] See Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371.

[xv][15] City of Baguio vs. De Leon, 25 SCRA 938.

[xvi][16] Ang Tibay vs. Court of Industrial Relations, 69 Phil. 635.

[xvii][17] Rollo, pp. 97-98.

18 Rollo, pp. 98-100.

 

 

 

 

 

EN BANC

G.R. No. L-2678          December 29, 1949

ANTONIO C. ARAGON, petitioner-appellant,

vs.

MARCOS JORGE, Provincial Treasurer of Zambales,

respondent-appellee.

 

OZAETA, J.:

This is an appeal from a judgment of the Court of First Instance

of Zambales denying appellant's petition for mandamus to

compel the respondent provincial treasurer to issue final bills of

sale covering numerous parcels of land situated in the

municipalities of Santa Cruz and Candelaria, Zambales, which

the petitioner alleged to have purchased at auction sales made

by the respective municipal treasurers of said municipalities for

tax delinquencies and which had not been redeemed by the

owners within one year.

The provincial treasurer, supported by an opinion of the

provincial fiscal, held the sales void for irregularities and

refused to issue the final bills of sale, but in his answer he

alleged that he had offered to refund the purchase price but

that the petitioner thru his counsel refused to accept it.

The trial court sustained the opinion of the fiscal and the

provincial treasurer.

The real properties located in the municipality of Santa Cruz

were advertised for sale "at public auction to be held at the

main entrance of the municipal building of said municipality

from March 24, 1947, at 10 a.m. until all sold, to satisfy all

taxes and penalties due thereon and the cost of the sale,

pursuant to the provisions of section 35 of Commonwealth Act

No. 470, subject to the conditions provided in section 36 of said

Act." The sale did not take place on the date above fixed but on

May 12, 13, 14, and 15, 1947, without a new advertisement

and without a new notice to the owners concerned. On the

dates last mentioned 253 parcels with an aggregate assessed

value of P67, 150 were sold for only P1,471.

The real properties located in the municipality of Candelaria

were originally advertised for sale "at public auction to be held

at the main entrance of the municipal building of said

municipality from May 5, 1947, at 10 A. M. until sold, to satisfy

all taxes and penalties due thereon and the cost of sale,

pursuant to the provisions of section 35 of Commonwealth Act

No. 470, subject to the conditions provided in section 36 of said

Act." Likewise the sale did not take place on the date above

fixed but on June 12, 1947, without a new advertisement and

without a new notice to the owners concerned. On said date 71

lots with an aggregate assessed value of P32,250 were sold for

only P820.19.

It was not the petitioner who bid at both auction sales but one

Pedro Porras; and it was not the latter who paid the purchase

price but Public Defender Moises Ma. Buhain, who caused the

official receipts to be issued in the name of the herein

petitioner Antonio c. Aragon. The latter is a Manila resident who

had no house and no interest any kind in Zambales. Public

defender Buhain was the one who appeared in the trial court as

counsel and attorney-in-fact of the petitioner. The trial court

intimated that the petitioner was a dummy of the public

defender, who as a public official was prohibited by section 579

of the revised Administrative Code "from purchasing, directly or

indirectly, from the Government, any property sold by the

Government for the nonpayment of any public tax. Any such

purchase by a public official or employee shall be void."

While there is ground for suspension that said provision of the

revised Administrative Code may have been violated, in the

absence of categorical finding by the trial court on that point

we must decide this case on the alleged nullity of sale for lack

of notice. Notice of such sale to the delinquent taxpayers and

landowners in particular and to the public in general is an

essential and indispensable requirement of the law, the

nonfulfilment of which vitiates and nullifies the sale. (Section

35, Commonwealth Act No. 470, known as the Assessment Law;

Cabrera vs. Provincial Treasurer of Tayabas, 42 O. G. 1492.) 1

The sale should have been made on a fixed date as originally

advertised, or if that was not practicable and if it was desired to

postpone the sale indefinitely "to give a chance to the

taxpayers to pay their delinquent taxes," as was done in this

case, new notices to the taxpayers and to the public should

have been made.

The sales in question being void for lack of due notice, the

respondent provincial treasurer cannot be compelled to issue

the final bills of sale demanded by the petitioner.

The judgment is affirmed, with costs against the appellants.

Footnotes

1 75 Phil., 780.

FIRST DIVISION

 

G.R. No. 105360 May 25, 1993

PEDRO P. PECSON, petitioner,

vs.

THE HON. COURT OF APPEALS, ERLINDA TAN, JUAN

NUGUID, MAMERTO G. NEPOMUCENO, ANSELMO O.

REGIS and REGISTER OF DEEDS OF QUEZON CITY,

respondents.

 

QUIASON, J.:

This is an appeal by certiorari under Rule 45 of the Revised

Rules of Court from the decision of the Court of Appeals (8th

Division) in CA-G.R. CV No. 23910, entitled "Pedro Pecson v.

Erlinda Tan, et al." The said decision affirmed in toto the

decision of the Regional Trial Court, Quezon City, dismissing the

complaint in Civil Case No. Q-41471.

In Civil Case No. Q-41471, petitioner filed a complaint to annul

the sale at a public auction conducted by respondent, Anselmo

O. Regis, (City Treasurer of Quezon City) of petitioner's

property for non-payment of real estate taxes, alleging that the

sale was made without prior notice to him. The complaint

further alleged that petitioner was not notified of his right to

redeem the property, that the title to the property was

transferred by respondent Register of Deeds of Quezon City to

respondent Mamerto G. Nepomuceno (the buyer at the public

auction) and that the latter sold the property to respondents

Erlinda Tan and Juan Nuguid.

The major issue before the trial court was whether the sale of

the property by respondent Regis was valid, which in turn

depended on whether petitioner was duly notified of the public

auction. In its decision, the trial court upheld the validity of the

public auction, saying that the notices of the auction sale

published in a newspaper of general circulation were notices in

rem; that the fact that the notices to the petitioner were sent to

"No. 79 Paquita Street, Sampaloc, Manila" instead of "No. 1009

Paquita St., Sampaloc, Manila," which petitioner claimed to be

the proper address to send the notices to him, was

inconsequential; and that petitioner failed to pay the real estate

taxes on the property.

In an Order dated February 8, 1989, the trial court amended its

decision by adding the statement:

The 4-door edifice of the plaintiff on the subject lot is, however,

another thing which is not a subject of the instant litigation.

On a motion for reconsideration by respondents Tan and

Nuguid, the trial court in its order dated June 16, 1989,

reiterated its previous ruling that the 4-door building

constructed by petitioner on the lot in controversy was not

covered by the tax sale but awarded said respondents the

amount of P10,000.00 as attorney's fees.

Failing to get any relief from the Court of Appeals, petitioner

went to this Court wherein he reiterates the issue of the validity

of the public auction of his property for non-payment of taxes

on the ground that the notices to him were sent to the wrong

postal address.

The records show that petitioner was the registered owner of a

parcel of land in Quezon City consisting of 256 sq. meters and

covered by TCT No. 79912 of the Registry of Deeds of Quezon

City.

For non-payment of realty taxes, petitioner's property was sold

at public auction on November 12, 1980 by respondent Regis.

Notices of sale were sent to petitioner at "No. 79 Paquita

Street, Sampaloc, Manila," and were published in the Times

Journal on October 6, 13, and 30, 1980.

A final notice to exercise the right of redemption dated

September 14, 1981 was sent to petitioner at "No. 79 Paquita

Street, Sampaloc, Manila."

There being no redemption made after one-year from the date

of the auction sale, a Final Bill of Sale was executed on April 19,

1982 by respondent Regis in favor of respondent Nepomuceno.

In an order dated July 12, 1982, the Regional Trial Court,

Quezon City, consolidated title in favor of respondent

Nepomuceno and directed the Register of Deeds of Quezon City

to cancel TCT No. 79912 and issue a new one in lieu thereof, in

the name of respondent Nepomuceno.

On February 3, 1983, respondent Register of Deeds canceled

TCT No. 79912 in the name of petitioner and issued TCT No.

302292 in the name of respondent Nepomuceno.

On October 25, 1983, respondent Nepomuceno executed a

Deed of Absolute Sale on the subject property in favor of

respondents Tan and Nuguid for P103,000.00.

On December 8, 1983, the Register of Deeds of Quezon City

cancelled Nepomuceno's title to the property and issued TCT

No. 308506 in the names of respondents Tan and Nuguid.

In a Rule 45 appeal, as in this case, this Court can only pass

upon questions of law. The issues raised by the petition involve

only questions of fact. These are:

(1) Were the notices required under Section 73 of the Real

Property Tax Code properly sent to the delinquent taxpayer?

(Petition, pp. 4-12; Rollo, pp. 5-13)

(2) Were respondents Erlinda Tan and Juan Nuguid buyers in

good faith? (Petition, pp. 13-14; Rollo, pp. 14-15)

(3) Were the requirements of posting and announcement of the

sale under the Real Property Tax Code complied with? (Petition,

pp. 12-13; Rollo, pp. 13-14)

Petitioner argues that respondent Regis sent the notices to him

at "No. 79 Paquita St., Sampaloc, Manila" which was not his

address. He claims that his correct Manila address is "No. 1009

Paquita St., Sampaloc" and his correct Quezon City address is

"No. 79, Kamias Road, Quezon City." He admits that on the

dates the notices were mailed, he was no longer residing in

Manila but in Quezon City.

The governing law in this case is P.D. No. 464, known as the

Real Property Tax Code. Section 73 thereof, with the epigraph

"Advertisement of sale of real property at public auction," in

pertinent part, provides:

xxx xxx xxx

Copy of notices shall forthwith be sent either by registered mail

or by messenger, or through the barrio captain, to the

delinquent taxpayer, at the address as shown in the tax rolls or

property tax record cards of the municipality or city where the

property is located, or at his residence, if known to said

treasurer or barrio captain. Provided, however, that a return of

the proof of service under oath shall be filed by the person

making the service with the provincial or city treasurer

concerned.

Under the said provisions of the law, notices of the sale of the

public auction may be sent to the delinquent taxpayer, either

(i) at the address as shown in the tax rolls or property tax

record cards of the municipality or city where the property is

located or (ii) at his residence, if known to such treasurer or

barrio captain.

Petitioner does not claim that the notices issued from 1980 to

1983 should have been sent to him at his residence in "No. 79

Kamias Road, Quezon City," his residence since 1965 and

where the property in litigation is located. What he claims is

that the notices should have been sent to him at his address at

"No. 1009 Paquita St., Sampaloc" even if he was no longer

residing there because letters sent to him at the said address

were forwarded to him by the occupants of his former house.

As found by the Court of Appeals, what appeared in the records

of the Office of the City Treasurer of Quezon City as the address

of petitioner was "1009 Paquita, Manila," and below the number

1009 was the number "79". From this entry, one can deduce

that the taxpayer had transferred his residence to "No. 79

Paquita, Sampaloc, Manila" from "No. 1009 Paquita, Sampaloc,

Manila". In the register for the tax years starting from 1982

(Exh. S; also Exh. 3), the address of petitioner was recorded as

"79 Paquita, Mla." The Court of Appeals advanced the theory

that the number "79" was furnished by petitioner himself,

basing its conclusion on the address given by petitioner in his

complaint, which was "No. 79 Kamias Road, Quezon City."

The Court of Appeals concluded that the employees in charge

of sending notices in the Treasurer's Office were not

blameworthy in relying on the available tax records.

Petitioner's contention that he would have received the notices

had they been sent to "No. 1009 Paquita, Sampaloc, Manila,"

because the occupants thereof forwarded the letters addressed

to him to his Quezon City residence, loses force when one

considers that the Court of First Instance of Quezon City sent

him a notice, in connection with the proceedings for the

consolidation of title, at "No. 1009 Paquita St., Sampaloc,

Manila," which remained "unclaimed".

For this misfortune that befell petitioner, he has nobody to

blame but himself. As a property owner and a school teacher at

that, he should know that if an owner fails to pay the real

estate taxes on property, the said property shall be sold at

public auction to recover the delinquent taxes. When

petitioner's property was sold at a public auction in December

1980, the tax delinquency must have accumulated for several

years. It was only on July 12, 1982 that the order for

consolidation of title in the name of respondent Nepomuceno

was issued and it was only on December 8, 1983 that the title

over the property was transferred to respondents Tan and

Nuguid. All throughout these years, petitioner never displayed

an interest in paying the real estate taxes on the property.

Worse, he introduced improvements thereon without reporting

the same for tax purposes. Had he reported the improvements

he had introduced on the property, the Office of the Treasurer

of Quezon City could have been informed of petitioner's new

address in Quezon City.

Petitioner also questions the evidence presented by respondent

Regis regarding his compliance with the requirements of the

Real Property Tax Code on the posting and announcement of

notices of the sale. (Petition, pp. 9-13; Rollo, pp. 10-14) In this

regard, said respondent presented the certificates-affidavits of

eight employees under the supervision of the Market

Superintendent and two employees of the City Treasurer's

Office. Like the issue of whether respondents Tan and Nuguid

were buyers in good faith, the issue on the compliance with the

posting of the notices and announcement of the sale, is a

question of fact which this Court will not inquire into and review

the evidence relied upon by the lower courts to support their

findings (Banaag v. Bartolome, 204 SCRA 924 [1991]; Ching Sui

Yong v. Intermediate Appellate Court, 191 SCRA 187 [1990]).

WHEREFORE, the petition is DENIED and the decision of the

Court of Appeals appealed from is AFFIRMED.

SECOND DIVISION

G.R. No. 118900             February 27, 2003

JARDINE DAVIES INSURANCE BROKERS, INC., petitioner,

vs.

HON. ERNA ALIPOSA, in her capacity as Presiding Judge

of Branch 150 of the Makati Regional Trial Court, CITY

(previously Municipality) OF MAKATI and ROLANDO M.

CARLOS, in his capacity as Acting Treasurer of Makati,

respondents.

D E C I S I O N

CALLEJO, SR., J.:

Pursuant to Republic Act No. 7160, otherwise known as the

Local Government Code of 1991, the then Sangguniang Bayan

of Makati enacted Municipal Ordinance No. 92-072, otherwise

known as the Makati Revenue Code, which provides, inter alia,

for the schedule of real estate, business and franchise taxes in

the Municipality of Makati at rates higher than those in the

Metro Manila Revenue Code.

On May 10, 1993, the Philippine Racing Club, Inc. ("PRCI" for

brevity), a taxpayer of Makati, appealed to the Department of

Justice ("DOJ" for brevity) for the nullification of said ordinance,

alleging that it was approved without previous public hearings,

in violation of the Local Government Code and Article 276 of its

Implementing Rules, and that some of the ordinance’s

provisions were unconstitutional:

(2) "The ‘in-lieu-of-all-taxes’ clause of the franchise of the

Philippine Racing Club, Inc. exempts it from payment of the real

property tax, annual business tax and other new taxes imposed

by the ordinance here in question. To withdraw the exemption

would impair the obligation of contract in violation of its

constitutional right as franchise holder.

(3) "The imposition of the franchise tax is not within the scope

of the taxing powers of the Municipality of Makati (Sections

134, 137 and 142 of Republic Act No. 7160 and Articles 223,

226 and 231 of Rule XXX of the Implementing Rules and

Regulations of the Local Government Code of 1991). and

(4) "The Municipality of Makati already shares 5 of the 25%

franchise tax provided for in Section 8 of the franchise of the

Philippine Racing Club, Inc. To allow the said municipality to

impose another franchise tax and to base the tax on the gross

annual receipts, as it does in the ordinance, would certainly be

unjust, excessive, oppressive or confiscatory (Section 130 of

Republic Act No. 7160 and Article 219 of Rule XXX of the

Implementing Rules and Regulations).1

Although required by the DOJ to comment on the appeal,

respondent Makati failed to do so.

On July 5, 1993, the DOJ came out with a resolution2 declaring

"null and void and without legal effect" the said ordinance for

having been enacted in contravention of Section 187 of the

Local Government Code of 1991 and its implementing rules and

regulations.3

On August 19, 1993, respondent Makati sought a

reconsideration of the ruling of the DOJ. Pending resolution of

its motion, said respondent filed a petition ad cautelam4 with

the Regional Trial Court (RTC) of Makati, entitled Hon. Jejomar

C. Binay and the Municipality of Makati, Petitioners, v. Hon.

Franklin M. Drilon, Department of Justice and Philippine Racing

Club, Inc., Respondents, and docketed as Case No. 93-2844.

The case was raffled to Branch 148 of the Makati RTC.

Respondent Makati alleged, inter alia, that public hearings were

conducted before the approval of the ordinance and hence the

ordinance was valid. It prayed that after due proceedings

judgment be rendered in its favor, thus:

WHEREFORE, petitioners respectfully pray that this Honorable

Court promulgate judgment:

(a) declaring null and void the DOJ Decision dated July 5, 1993;

and

(b) allowing the full implementation of Makati Municipal

Ordinance No. 92-072.

Petitioners pray for such further or other reliefs as this

Honorable Court may deem just and equitable.5

In the meantime, respondent Makati continued to implement

the ordinance. Petitioner Jardine Davies Insurance Brokers, Inc.,

a duly-organized corporation with principal place of business at

No. 222 Sen. Gil J. Puyat Avenue, Makati, Metro Manila, was

assessed and billed by Makati the amount of P63,822.47 for

taxes, fees and charges under the ordinance for the second

quarter of 1993. It was again billed by respondent Makati the

same amount for the third quarter of 1993 and the same

amount for the fourth quarter of 1993. Petitioner did not protest

the assessment for its quarterly business taxes for the second,

third and fourth quarters of 1993 based on said ordinance

effective April 1, 1993. Petitioner, in fact, paid the said amounts

on April 26, 1993 (for the second quarter), July 12, 1993 (for the

third quarter) and October 19, 1993 (for the fourth quarter),

respectively, without any protest. Respondent Makati issued

the corresponding receipts in favor of petitioner.6

On January 30, 1994, petitioner wrote the municipal treasurer

of Makati requesting that respondent Makati compute its

business tax liabilities in accordance with the Metro Manila

Revenue Code and not under the ordinance considering that

said ordinance was already declared by the DOJ null and void.

Petitioner likewise requested that respondent Makati credit the

overpayment in the total amount of P27,854.91 for the second

to fourth quarters of 1993 against its 1994 liabilities for 1994,

or in the alternative, for Makati to refund the said amount to

petitioner.

In a Letter7 dated February 4, 1994, respondent Makati,

through Maximo L. Paulino Jr., Acting Chief of its Municipal

License Division, denied the request of petitioner for tax

credit/refund. Respondent Makati insisted that the questioned

ordinance code was valid and enforceable pending the final

outcome of its petition ad cautelam with the Regional Trial

Court of Makati.

In the meantime, on October 26, 1993, the RTC rendered

judgment in Case No. 93-2844 granting the petition of Makati

and declaring the ordinance valid. On November 9, 1993, the

DOJ issued a memorandum to the Chief State Counsel directing

the latter to refrain from accepting any appeal or to act on

pending appeals on the validity/constitutionality of the

ordinance until the same shall have been finally resolved by

courts of competent jurisdiction.

When informed of the denial by respondent Makati of its letter-

request, petitioner filed a complaint on March 7, 1994 with the

RTC of Makati against respondents Makati and its Acting

Municipal Treasurer. The case was raffled to Branch 150 of said

court. Petitioner alleged in its complaint that in view of the

resolution of the DOJ declaring the Makati Revenue Code "null

and void and without legal effect," the provisions of the Metro

Manila Revenue Code continued to remain in full force and

effect; however, petitioner was assessed and billed by

respondent Makati for taxes, fees and charges for second, third

and fourth quarters for 1993 beginning on April 4, 1993 up to

October 14, 1994 at rates fixed in the ordinance despite the

nullity thereof. Petitioner prayed that after due proceedings

judgment be rendered as follows:

1. Declaring as NULL AND VOID Municipal Ordinance No. 92-

072, (Makati Revenue Code) of the Municipality of Makati and

ordering Defendants to refund or issue as tax credit in favor of

Plaintiff the sum of P27,854.91 plus interest.

2. Assuming without admitting that the Municipal Ordinance No.

92-072 (Makati Revenue Code) is valid, declaring that the rates

imposed by said ordinance accrue only on July 1, 1993 and

ordering Defendants to refund or issue as tax credit in favor of

Plaintiff the sum of P9,284.97.8

On May 18, 1994, respondents Makati and its Acting Municipal

Treasurer filed a motion to dismiss9 the complaint on the

ground of prematurity. They argued that petitioner’s cause of

action was predicated on the appealed resolution of the DOJ,

and unless and until nullified by final judgment of a competent

court, the ordinance remained in full force and effect.

On May 26, 1994, petitioner opposed the motion to dismiss of

respondents, contending that its complaint was not predicated

solely on the invalidity and unconstitutionality of the ordinance

but also on its claim that the ordinance took effect only in July

1, 1993 but Makati applied the ordinance effective April 1,

1993. Petitioner further averred that under Section 166 of the

Local Government Code, new taxes, fees or charges or charges

provided for in the ordinance shall accrue on the first day of the

quarter following the effectivity of the new ordinance. Hence,

assuming that the tax ordinance was valid, the same should

have been enforced only from the "first (1st) day of the quarter

following next the effectivity of the ordinance imposing such

new levies or rates" as provided for in Section 166 of the Local

Government Code.

On August 29, 1994, the RTC issued an order granting the

motion to dismiss of respondent and ordering the dismissal of

the complaint. The trial court ruled that plaintiff’s cause of

action, if any, had prescribed. Citing Sections 187 and 195 of

the Local Government Code of 1991, the trial court ratiocinated

that petitioner failed to file an opposition or protest to the

written notice of assessment of Makati for taxes, fees and

charges at rates provided for in the ordinance within 60 days

from the notice of said assessment as required by Section 195

of the Local Government Code. Hence, petitioner was barred

from demanding a refund of its payment or that it be credited

for said amounts.

Petitioner received a copy of said order on October 7, 1994. On

October 13, 1994, petitioner filed with the trial court a motion

for reconsideration10 of the order of dismissal, arguing that the

trial court erred in applying Section 195 of the Local

Government Code of 1991 as its complaint did not involve an

assessment for deficiency taxes but one for refund/tax credit.

Petitioner further claimed that it was never served with any

notice of assessment from respondents and hence there was no

need for petitioner to protest. Petitioner argued that what was

applicable was Section 196 of the Local Government Code in

conjunction with Article 286 of its Implementing Rules and

Regulations, both of which simply require the filing of a written

claim for refund or tax credit within two years from the date of

payment.

On December 28, 1994, the trial court issued an order11

denying the motion for reconsideration of petitioner, a copy of

which was served on petitioner on February 13, 1995. The trial

court declared that Section 195 of the Local Government Code

covers all kinds of assessments and not merely deficiency

assessments for taxes, fees or charges. The trial court further

ruled that the issue of the validity and constitutionality of the

ordinance was still pending resolution by Branch 148 of the RTC

in Civil Case No. 93-2844 and until declared null and void,

otherwise by final judgment, the ordinance remained valid.

Petitioner filed on February 20, 1995 a petition for review on

certiorari under Rule 45 of the Rules of Court, contending that:

RESPONDENT JUDGE ERRED IN HOLDING THAT THE INSTANT

CASE IS NOT A CLAIM FOR REFUND UNDER SECTION 196 OF

THE LGC IN RELATION TO ARTICLE 286 OF ITS IMPLEMENTING

RULES, BUT A DEFICIENCY ASSESSMENT THAT HAS TO BE

PROTESTED UNDER SECTION 195 OF THE SAME CODE.

RESPONDENT JUDGE ERRED IN DISMISSING THE CASE ON THE

GROUND OF PENDENCY OF ANOTHER ACTION CONTESTING THE

LEGALITY OR CONSTITUTIONALITY OF THE MAKATI REVENUE

CODE IS STILL BEING DETERMINED IN BRANCH 148 OF THE

REGIONAL TRIAL COURT OF MAKATI.12

Anent the first assignment of errors, petitioner avers that its

action in the RTC was one for a refund of its overpayments

governed by Article 196 of the Local Government Code

implemented by Article 286 of the Implementing Rules and

Regulations of the Code and not one involving an assessment

for deficiency taxes governed by Section 195 of the said Code.

Petitioner contends that it was not mandated to first file a

protest with respondents before instituting its action for a

refund of its overpayments or for it to be credited for said

overpayments. For its part, respondent Makati avers that

petitioner was proscribed from filing its complaint with the RTC

and for a refund of its alleged overpayment, petitioner having

paid without any protest the taxes due to respondent Makati

under the ordinance. It is further asserted by respondent

Makati that until declared null and void by a competent court,

the ordinance was valid and should be enforced.

The petition has no merit.

The Court agrees with petitioner that as a general precept, a

taxpayer may file a complaint assailing the validity of the

ordinance and praying for a refund of its perceived

overpayments without first filing a protest to the payment of

taxes due under the ordinance. This was our ruling in Ty v.

Judge Trampe:13

. . . Hence, if a taxpayer disputes the reasonableness of an

increase in a real estate tax assessment, he is required to "first

pay the tax" under protest. Otherwise, the city or municipal

treasurer will not act on his protest. In the case at bench,

however, the petitioners are questioning the very authority and

power of the assessor, acting solely and independently, to

impose the assessment and of the treasurer to collect the tax.

These are not questions merely of amounts of the increase in

the tax but attacks on the very validity of any increase.

In this case, petitioner, relying on the resolution of the

Secretary of Justice in The Philippine Racing Club, Inc. v.

Municipality of Makati case, posited in its complaint that the

ordinance which was the basis of respondent Makati for the

collection of taxes from petitioner was null and void. However,

the Court agrees with the contention of respondents that

petitioner was proscribed from filing its complaint with the RTC

of Makati for the reason that petitioner failed to appeal to the

Secretary of Justice within 30 days from the effectivity date of

the ordinance as mandated by Section 187 of the Local

Government Code which reads:

Sec. 187-Procedure for Approval and Effectivity of Tax

Ordinances and Revenue Measures; Mandatory Public

Hearings.- The procedure for approval of local tax ordinances

and revenue measures shall be in accordance with the

provisions of this Code: Provided, That public hearings shall be

conducted for the purpose prior to the enactment thereof:

Provided further, That any question on the constitutionality or

legality of tax ordinances or revenue measures may be raised

on appeal within thirty (30) days from the effectivity thereof to

the Secretary of Justice who shall render a decision within sixty

(60) days from the date of receipt of the appeal: Provided,

however, That such appeal shall not have the effect of

suspending the effectivity of the ordinance and the accrual and

payment of the tax, fee, or charge levied therein: Provided,

finally, That within thirty (30) days after receipt of the decision

or the lapse of the sixty-day period without the Secretary of

Justice acting upon the appeal, the aggrieved party may file

appropriate proceedings with a court of competent jurisdiction.

In Reyes v. Court of Appeals,14 we ruled that failure of a taxpayer to

interpose the requisite appeal to the Secretary of Justice is fatal

to its complaint for a refund:

Clearly, the law requires that the dissatisfied taxpayer who

questions the validity or legality of a tax ordinance must file his

appeal to the Secretary of Justice, within 30 days from

effectivity thereof. In case the Secretary decides the appeal, a

period also of 30 days is allowed for an aggrieved party to go to

court. But if the Secretary does not act thereon, after the lapse

of 60 days, a party could already proceed to seek relief in court.

These three separate periods are clearly given for compliance

as a prerequisite before seeking redress in a competent court.

Such statutory periods are set to prevent delays as well as

enhance the orderly and speedy discharge of judicial functions.

For this reason the courts construe these provisions of statutes

as mandatory.

A municipal tax ordinance empowers a local government unit to

impose taxes. The power to tax is the most effective instrument

to raise needed revenues to finance and support the myriad

activities of local government units for the delivery of basic

services essential to the promotion of the general welfare and

enhancement of peace, progress, and prosperity of the people.

Consequently, any delay in implementing tax measures would

be to the detriment of the public. It is for this reason that

protests over tax ordinances are required to be done within

certain time frames. In the instant case, it is our view that the

failure of petitioners to appeal to the Secretary of Justice within

30 days as required by Sec. 187 of R.A. 7160 is fatal to their

cause.

Moreover, petitioner even paid without any protest the

amounts of taxes assessed by respondents Makati and Acting

Treasurer as provided for in the ordinance. Evidently, the

complaint of petitioner with the Regional Trial Court was merely

an afterthought.

In view of our foregoing disquisitions, the Court no longer

deems it necessary to resolve other issues posed by petitioner.

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED.

The order of the Regional Trial Court dismissing the complaint

of petitioner is AFFIRMED.

SO ORDERED.

Footnotes

1 Original Records, pp. 16- 17.

2 Id. at 15.

3 SECTION 187. Procedure for Approval and Effectivity of Tax

Ordinances and Revenue Measures; Mandatory Public Hearings.

¾The procedure for approval of local tax ordinances and

revenue measures shall be in accordance with the provisions of

this code: Provided, That public hearings shall be conducted for

the purpose prior to the enactment thereof: Provided, further,

That any question on the constitutionality or legality of tax

ordinances or revenue measures may be raised on appeal

within thirty (30) days from the effectivity thereof to the

Secretary of Justice who shall render a decision within sixty (60)

days from the date of receipt of the appeal: Provided, however,

That such appeal shall not have the effect of suspending the

effectivity of the ordinance and the accrual and payment of the

tax, fee, or charge levied therein: Provided, finally, That within

thirty (30) days after receipt of the decision or the lapse of the

sixty-day period without the Secretary of Justice acting upon

the appeal, the aggrieved party may file appropriate

proceedings with a court of competent jurisdiction.

4 Vide note 1, pp. 33-45.

5 Original Records, p. 43.

6 Id. at 9-14.

7 Id. at 21-22.

8 Id. at 6-7.

9 Id. at 30-32.

10 Id. at 61.

11 Original Records, pp. 75-76.

12 Rollo, p. 6.

13 250 SCRA 500 (1995).

14 320 SCRA 486 (1999).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EN BANC

G.R. No. L-12182            March 27, 1918

VIUDA E HIJOS DE PEDRO P. ROXAS, plaintiffs-appellees,

vs.

JAMES J. RAFFERTY, Collector of Internal Revenue, ex

officio city assessor and collector of Manila, defendant-

appellant.

MALCOLM, J.:

This appeal presents the question of whether or not taxes can

be collected on the Roxas Building in the city of Manila for the

year 1915.

FACTS.

Plaintiffs own a parcel of land located on the Escolta in the city

of Manila. In the latter part of 1913, the improvements of this

land were demolished, and the construction of a reinforced

concrete building was begun. No taxes on the improvements

were levied or paid for the year 1914. Accepting the findings of

fact by the trial court, the Roxas building in December, 1914,

when the city assessor and collector attempted to assess it for

taxation, still lacked the pavement of the entrances, the floors

of some of the stores the dividing partitions between the

stores, the dividing partitions between the greater part of the

rooms in the upper stories, sanitary installation, the elevators,

electrical installation, the roof of the building, the concrete

covering and towers of the elevator shaft, and the doors and

windows of many rooms. It was finished in all respects on

February 15, 1915.

The city assessor and collector of Manila, under the date of

December 1, 1914, sent plaintiffs notice, received by them on

December 25, 1914, requiring them to declare the new

improvements for assessments for the year 1915. Prior to this,

in November, the city assessor and collector had the building

inspected and had assessed the new improvements for taxation

for 1915 at P300,000. On January 15, 1915, plaintiffs were

notified of this assessment. Plaintiffs paid the amount of the

taxes, which amounted to P3,000, under protest on June 30,

1915. Suit was begun in the Court of First Instance of Manila to

recover this sum with interest at the legal rate from the date of

payment. The court, the Honorable Simplicio del Rosario, found

with plaintiffs without express finding as to costs. Defendant,

by the city attorney of Manila, appealed, making five

assignments of error which we combine for purposes of

convenience into three issues.

LEGAL ISSUES.

1. Jurisdiction. — The first assignment of error, concerning the

jurisdiction of the lower court, presents a question of primary

importance for obviously if the lower court had no right to take

cognizance of this case, we should not burden ourselves with

the consideration of its merits. This question appellee

emphasizes, is argued for the first time on appeal. In the trial

court, defendant appeared, demurred, and answered without

assailing jurisdiction. However, as jurisdiction is the power of a

court to act at all, we should even now resolve the question.

Objection for want of jurisdiction may be raised for the first

time on appeal.

The local law, as elsewhere, provides an administrative

procedure for the assessment of realty. An assessor to fix the

value of the property in the first instance, and a board of tax

appeals to review the action of the assessor in the second

instance are constituted. Proceedings before this board are

quasi-judicial in nature. To it the citizen must apply for relief

against excessive and irregular taxation. Here must be

aggrieved party go for the correction of errors in assessments.

Administrative remedies must be exhausted before resort can

be had to the courts. It is a condition precedent to the exercise

of the taxpayer's right of action in a court of justice that

previous and timely effort shall have been made on his part to

have the board of tax appeals correct an alleged error while the

matter was yet in their hands and under their control. Even

when the courts assume jurisdiction, they will not presume to

interfere with the intelligent exercise of the judgement of men

specially trained in appraising property. (See Stanley vs.

Supervisors of Albany [1887], 121 U. S., 535)

This is hardly our case. We do not have before us merely a

dispute as to an excessive or unequal assessment. The

assessment is claimed to be wholly void. The contention is that

the assessor has attempted to levy a tax upon property, which

is by law exempt, and that in this attempt the assessor has

violated the provisions of law which exist for the protection of

the taxpayer. Not the correctness of the assessment, but the

legality of the assessment is involved. The rule of taxation is

that where there tax is illegal, the taxpayer may bring an action

directly in the courts to recover back the tax. (Roman Catholic

Church vs. Cooley on Taxation, 3rd ed., p. 1382, and Stanley

vs. Supervisors of Albany, supra.) This court has taken

cognizance of questions concerning assessments of and

improvements on reality in a number of cases. (See Fernandez

vs. Shearer [1911], 19 Phil., 75; Ayala de Roxas vs. City of

Manila [1914], 27 Phil., 336; Young Men's Christians Association

of Manila vs. Collector of Internal Revenue [1916], 33 Phil. Rep.,

217.)

The distinction is between a void and an erroneous tax. The

first identifies the existing situation and gives jurisdiction to the

courts.

The situation in its simplest terms may be described as follows:

The citizens is forced to pay the alleged tax. As will hereafter

appear, he had no appropriate opportunity to present his

grievance to the board of tax appeals. He did all that was

required by protesting at the time of paying the tax. The citizen

can therefore in turn be permitted to bring suit to recover the

amount which he claims was unlawfully collected. Appeal to the

board of tax appeals is not a necessary prerequisite. Nor is the

decision of the assessor as to the right to tax property of such a

judicial or discretionary character as to be free from collateral

attack. When the state (here the city of Manila) makes the

assessment, and when the citizen stand on reasonably equal

terms. The power of the state and the remedy of the citizen are

and should be reciprocal. It is for the courts to arbitrate the

controversy between the state and the citizen.

The Court of First Instance of the city of Manila had jurisdiction

over this suit and the Supreme Court of the Philippine Islands

now possesses similar appellate jurisdiction.

2. Legality of assessment. — The second, third, and fourth

assignment of error concern the point of when an improvement

can be said to be completed within the meaning of the Manila

Charter. We feel it unnecessary to decide this question for even

more basic in aspect is the point raised by the fifth assignment

of error concerning the legality of the assessment, particularly

as relating to notification. The exact situation can be more

vividly pictured by quoting the provisions of the law and then

applying these provisions to the facts.

The Manila Charter provides: "It shall be the duty of each

person who at any time acquires real estate in the city,, and of

any person who constructs or adds to any improvement on real

estate owned by him within the city, to prepare and present to

the city assessor and collector, within a period of sixty days

next succeeding the completion of such acquisition,

construction or addition, a sworn declaration setting forth the

value of the real estate acquired or the improvement

constructed or addition made by him and containing a

description of such property sufficient to enable the city

assessor and collector readily to identify the same. . . ."

(Section 2484, Administrative Code of 1917.) Plaintiffs were

under obligation too present a declaration of their

improvements within sixty days succeeding completion, i. e. on

or before April 15, 1915. Under an attempted assessment in

November and December, 1914, the plaintiffs had and could

have had no opportunity to comply with the law.

The Charter continues: "The city assessor and collector shall,

during the first fifteen days of December of each year, add to

his list of taxable real estate in the city the value of the

improvements placed upon such property during the preceding

year, and any property which is taxable and which has

therefore escaped taxation. . . ." (Sec. 2487, Administrative

Code of 1917.) Between December 1 and December 15, 1915,

the city assessor and collector was under the obligation and

adding the improvements on the Roxas property to the

assessment list. Between December 1 and December 15, 1914,

the city assessor and collector could not prematurely and by

anticipation perform this duty on improvements not yet

completed. There may be doubt as to the exact meaning which

should be given to the words "during the preceding year." The

common sense construction would be that the phrase includes

December of the previous year and the current year to

December. The city assessor and collector perforce could not in

1914 levy a tax on incomplete improvements made during the

current year, when the statute only authorized him to make

such levy upon completed improvements made during the

year.

The Charter continues: "He (the city assessor and collector)

shall give notice by publication for ten days prior to December

first in two newspapers of general circulation published in the

city, one printed in English and one in Spanish, that he will be

present in his office for that purpose on said days, and he shall

further notify in writing each person the amount of whose tax

will be changed by such action or such proposed change, by

delivering or mailing such notification to such person or his

authorized agent at the last known address of such owner or

agent in the Philippine Islands some time in the month of

November." (Sec. 2487, Administrative Code of 1917.) And

finally the Charter provides that, "No court shall entertain any

suit assailing the validity of a tax assessed under this article

until the taxpayer shall have paid, under protest, the taxes

assessed against him, nor shall any court declare any tax

invalid by reason of irregularities or informalities in the

proceedings of the officer in charged with the assessment or

collection of taxes, or of failure to perform their duties within

the times herein specified for their performance, unless such

irregularities, informalities, or failures shall have impaired the

substantial rights of the taxpayer; nor shall any court declare

any tax assessed under the provisions of article invalid except

upon condition that the taxpayer shall pay the just amount of

his tax as determined by the court in the pending proceeding."

(Sec. 2504, Administrative Code of 1917.) It is a general rule

that those provisions of a statute relating to the assessment of

taxes, which are intended for the security of the citizen, or to

insure the equality of taxation, or certainty as to the nature and

amount of each person's tax, are mandatory; but those

designed merely for the information or direction of officers or to

secure methodical and systematic modes of proceedings are

merely directory. In the language of the United States Supreme

Court, "When the regulations prescribed are intended for the

protection of the citizen and to prevent a sacrifice of his

property, and by a disregard of which his right might be, and

generally would be, injuriously affected, they are not directory

but mandatory." (French vs. Edwards [1871], 13 Wall., 506.)

Sometimes statutes requiring the assessor to notify the

taxpayer have been held merely directory. But in the majority

of jurisdictions this requirement is held to be mandatory, so

that the assessor cannot make a valid assessment unless he

has given proper notice. (37 Cyc., pp. 988, 991, citing cases.)

Applied to our facts, the assessor should have notified the

plaintiffs during November, 1915. His attempted notification on

December 25, 1914, was not given during the time fixed by

statute and was no more than a reminder to plaintiffs to

present a sworn declaration of the value of the new

improvements on their property. In this instance there was no

such substantial compliance with the law as amounts to due

process of law.

There was no legal assessment of the Roxas Building for the

year 1915.

3. Interest. — To narrow our discussion and to avoid

misunderstanding, let us set down a few principles which every

one knows. The United States of America, a State of the Islands

cannot be sued without their consent. Whether interest could

bee adjudged to a taxpayer against any of these entities, is

beside the our question. But what is of moment is that the city

of Manila is not sovereign but is a public corporation with

certain delegated powers, including that of suing and being

sued.

Turning to the American authorities, which are controlling, we

find the following: The basic case is Erskine vs. Van Arsdale

([1872], 15 Wall., 68-75). Suit as brought against a collecting

officer to recover back certain taxes claimed to be exempt

under a Federal statute. Interest was added to the judgment for

the plaintiff. The United States Supreme Court, through the

Chief Justice, said that "Where an illegal tax has been collected,

the citizen who has paid it, and has been obliged to bring suit

against the collector, is, we think, entitled too interest in the

event of recovery, from time of the illegal exaction." This case

should not be confused with others which hold that the United

States cannot be subjected to the payment of interest unless

there be an authorized engagement to pay it, or a statute

permitting its recovery. (Angarica vs. Bayard [1888] 127 U. S.,

251; United States vs. State of North Carolina [1890], 136 U. S.,

211; National Home for Disabled Volunteer Soldiers vs. Parrish

[1912], 229 U. S., 494.) The distinction appears to be between

suits to recover moneys illegally exacted as taxes and paid

under protest, brought against collectors, although the

judgment is not to be paid by the collector but directly from the

Treasury, and suits against the United States. A late decision of

the United States Supreme Court (National Home for Disabled

Volunteer Soldiers vs. Parrish, supra), which reviews the

previous cases, held that the National Home for Disabled

Volunteer Soldiers was not exempt from the payment of

interest on a judgment for the recovery of taxes. The court said

that the exemption in favor of the United States "has never as

yet been applied to subordinate governmental agencies."

Some States hold that a municipal corporation is not liable for

interest unless so required by special contract or by statute. In

other States, however, it is held that notwithstanding a

municipal corporation has delegated to it certain powers of

government, it is to be regarded as a private person with

respect to its contracts, which are to be considered in the

manner and with a like effect as those of natural persons. (See

15 R. C. L., 18.) Even where the stricter rule is observed, as

Illinois, it is nevertheless settled that a municipal corporation

which wrongfully exacts money and holds the same without just

claim or right is liable for the interest thereon. (City of Chicago

vs. N. W. Mutual Ins. Co. [1905], 218 Ill., 40. See also In re

O'Berry [1904], 179 N. Y., 285.) Laches on the part of the

plaintiff would, of course, defeat the right to recover interest.

(Redfield vs. Ystefera Iron Co. [1884], 110 U. S., 174.)

The city of Manila, a public corporation, even in the absence of

statute, is liable to pay interest at the legal rate, from the date

of exaction, in the amount of taxes illegally collected.

CONCLUSION.

In conclusion, as an authority which is on all fours with the

prominent issues before us, we invite attention to the decision

of a United States Circuit Court, in Powder River Cattle Co. vs.

Board of Commissioners of Custer County ([1891], 45 Fed.,

232). The Revised Statutes of Montana provided that the

assessor shall demand of each taxpayer in the district a list of

his personal property and on his refusing to give it, the

assessor shall list his property on information and belief. The

assessor listed the property of the defendant without

demanding a list from the taxpayer. The court held that the

taxpayer may recover the illegal taxes paid under compulsion

and is not required to apply to the board of equalization for an

abatement. The court, finally adjudged legal interest on the

sum illegally exacted from the date collection was made.

We think the court below took the correct view of the case, and,

while resolving the appeal on somewhat different grounds,

believe that the judgment should stand. Accordingly, the

judgment is affirmed, without special finding as to costs. So

ordered.

FIRST DIVISION

[G.R. No. 137621.  February 6, 2002]

HAGONOY MARKET VENDOR ASSOCIATION, petitioner, vs.

MUNICIPALITY OF HAGONOY, BULACAN, respondent.

D E C I S I O N

PUNO, J.:

Laws are of two (2) kinds: substantive and procedural. 

Substantive laws, insofar as their provisions are unambiguous,

are rigorously applied to resolve legal issues on the merits.  In

contrast, courts generally frown upon an uncompromising

application of procedural laws so as not to subvert substantial

justice.  Nonetheless, it is not totally uncommon for courts to

decide cases based on a rigid application of the so-called

technical rules of procedure as these rules exist for the orderly

administration of justice.  Interestingly, the case at bar

singularly illustrates both instances, i.e., when procedural rules

are unbendingly applied and when their rigid application may

be relaxed.

This is a petition for review of the Resolution[xviii][1] of the

Court of Appeals, dated February 15, 1999, dismissing the

appeal of petitioner Hagonoy Market Vendor Association from

the Resolutions of the Secretary of Justice for being formally

deficient. 

The facts: On October 1, 1996, the Sangguniang Bayan of

Hagonoy, Bulacan, enacted an ordinance, Kautusan Blg. 28,

[xviii][2] which increased the stall rentals of the market

vendors in Hagonoy.  Article 3 provided that it shall take effect

upon approval.  The subject ordinance was posted from

November 4-25, 1996.[xviii][3]

In the last week of November, 1997, the petitioner’s members

were personally given copies of the approved Ordinance and

were informed that it shall be enforced in January, 1998.  On

December 8, 1997, the petitioner’s President filed an appeal

with the Secretary of Justice assailing the constitutionality of

the tax ordinance. Petitioner claimed it was unaware of the

posting of the ordinance.

Respondent opposed the appeal.  It contended that the

ordinance took effect on October 6, 1996 and that the

ordinance, as approved, was posted as required by law.  Hence,

it was pointed out that petitioner’s appeal, made over a year

later, was already time-barred.

The Secretary of Justice dismissed the appeal on the ground

that it was filed out of time, i.e., beyond thirty (30) days from

the effectivity of the Ordinance on October 1, 1996, as

prescribed under Section 187 of the 1991 Local Government

Code.  Citing the case of Tañada vs. Tuvera,[xviii][4] the

Secretary of Justice held that the date of effectivity of the

subject ordinance retroacted to the date of its approval in

October 1996, after the required publication or posting has

been complied with, pursuant to Section 3 of said ordinance.

[xviii][5]

After its motion for reconsideration was denied, petitioner

appealed to the Court of Appeals.  Petitioner did not assail

the finding of the Secretary of Justice that their appeal

was filed beyond the reglementary period.  Instead, it

urged that the Secretary of Justice should have overlooked this

“mere technicality” and ruled on its petition on the merits. 

Unfortunately, its petition for review was dismissed by the

Court of Appeals for being formally deficient as it was not

accompanied by certified true copies of the assailed

Resolutions of the Secretary of Justice.[xviii][6]

Undaunted, the petitioner moved for reconsideration but it was

denied.[xviii][7]

Hence, this appeal, where petitioner contends that:

I

THE HONORABLE COURT OF APPEALS, WITH DUE RESPECT,

ERRED IN ITS STRICT, RIGID AND TECHNICAL ADHERENCE TO

SECTION 6, RULE 43 OF THE 1997 RULES OF COURT AND THIS,

IN EFFECT, FRUSTRATED THE VALID LEGAL ISSUES RAISED BY

THE PETITIONER THAT ORDINANCE (KAUTUSAN) NO. 28 WAS

NOT VALIDLY ENACTED, IS CONTRARY TO LAW AND IS

UNCONSTITUTIONAL, TANTAMOUNT TO AN ILLEGAL EXACTION

IF ENFORCED RETROACTIVELY FROM THE DATE OF ITS

APPROVAL ON OCTOBER 1, 1996.

II

THE HONORABLE COURT OF APPEALS, WITH DUE RESPECT,

ERRED IN DENYING THE MOTION FOR RECONSIDERATION

NOTWITHSTANDING PETITIONER’S EXPLANATION THAT ITS

FAILURE TO SECURE THE CERTIFIED TRUE COPIES OF THE

RESOLUTIONS OF THE DEPARTMENT OF JUSTICE WAS DUE TO

THE INTERVENTION OF AN ACT OF GOD – TYPHOON “LOLENG,”

AND THAT THE ACTUAL COPIES RECEIVED BY THE PETITIONER

MAY BE CONSIDERED AS SUBSTANTIAL COMPLIANCE WITH THE

RULES.

III

PETITIONER WILL SUFFER IRREPARABLE DAMAGE IF

ORDINANCE/KAUTUSAN NO. 28 BE NOT DECLARED NULL AND

VOID AND IS ALLOWED TO BE ENFORCED RETROACTIVELY

FROM OCTOBER 1, 1996, CONTRARY TO THE GENERAL RULE,

ARTICLE 4 OF THE CIVIL CODE, THAT NO LAW SHALL HAVE

RETROACTIVE EFFECT.

The first and second assigned errors impugn the dismissal by

the Court of Appeals of its petition for review for petitioner’s

failure to attach certified true copies of the assailed Resolutions

of the Secretary of Justice. The petitioner insists that it had

good reasons for its failure to comply with the rule and the

Court of Appeals erred in refusing to accept its explanation. 

We agree.

In its Motion for Reconsideration before the Court of Appeals,

[xviii][8] the petitioner satisfactorily explained the

circumstances relative to its failure to attach to its appeal

certified true copies of the assailed Resolutions of the Secretary

of Justice, thus:

“x x x  (D)uring the preparation of the petition on October 21,

1998, it was raining very hard due to (t)yphoon “Loleng.” 

When the petition was completed, copy was served on the

Department of Justice at about (sic) past 4:00 p.m. of October

21, 1998, with (the) instruction to have the Resolutions of the

Department of Justice be stamped as “certified true copies. 

However, due to bad weather, the person in charge (at

the Department of Justice) was no longer available to

certify to (sic) the Resolutions.

“The following day, October 22, 1998, was declared a

non-working holiday because of (t)yphoon “Loleng.” 

Thus, petitioner was again unable to have the Resolutions of

the Department of Justice stamped “certified true copies.”  In

the morning of October 23, 1998, due to time constraint(s),

herein counsel served a copy by personal service on 

(r)espondent’s lawyer at (sic) Malolos, Bulacan, despite the

flooded roads and heavy rains.  However, as the herein counsel

went back to Manila, (official business in) government offices

were suspended in the afternoon and the personnel of the

Department of Justice tasked with issuing or stamping “certified

true copies” of their Resolutions were no longer available.

“To avoid being time-barred in the filing of the (p)etition, the

same was filed with the Court of Appeals “as is.”

We find that the Court of Appeals erred in dismissing

petitioner’s appeal on the ground that it was formally

deficient.  It is clear from the records that the petitioner

exerted due diligence to get the copies of its appealed

Resolutions certified by the Department of Justice, but failed to

do so on account of typhoon “Loleng.”  Under the

circumstances, respondent appellate court should have

tempered its strict application of procedural rules in view of the

fortuitous event considering that litigation is not a game of

technicalities.[xviii][9]

Nonetheless, we hold that the petition should be dismissed as

the appeal of the petitioner with the Secretary of Justice

is already time-barred.  The applicable law is Section 187 of

the 1991 Local Government Code which provides:

“SEC. 187. Procedure for Approval and Effectivity of Tax

Ordinances and Revenue Measures; Mandatory Public

Hearings.  -  The procedure for the approval of local tax

ordinances and revenue measures shall be in accordance with

the provisions of this Code:  Provided, That public hearings shall

be conducted for the purpose prior to the enactment thereof:

Provided, further, That any question on the

constitutionality or legality of tax ordinances or revenue

measures may be raised on appeal within thirty (30)

days from the effectivity thereof to the Secretary of

Justice who shall render a decision within sixty (60) days from

the receipt of the appeal: Provided, however, That such

appeal shall not have the effect of suspending the

effectivity of the ordinance and accrual and payment of

the tax, fee or charge levied therein:  Provided, finally,

That within thirty (30) days after receipt of the decision

or the lapse of the sixty-day period without the

Secretary of Justice acting upon the appeal, the

aggrieved party may file appropriate proceedings.

The aforecited law requires that an appeal of a tax

ordinance or revenue measure should be made to the

Secretary of Justice within thirty (30) days from effectivity

of the ordinance and even during its pendency, the

effectivity of the assailed ordinance shall not be

suspended.  In the case at bar, Municipal Ordinance No. 28

took effect in October 1996.  Petitioner filed its appeal only

in December 1997, more than a year after the effectivity

of the ordinance in 1996.  Clearly, the Secretary of

Justice correctly dismissed it for being time-barred.  At

this point, it is apropos to state that the timeframe fixed by law

for parties to avail of their legal remedies before competent

courts is not a “mere technicality” that can be easily brushed

aside.  The periods stated in Section 187 of the Local

Government Code are mandatory.[xviii][10] Ordinance No.

28 is a revenue measure adopted by the municipality of

Hagonoy to fix and collect public market stall rentals.  Being its

lifeblood, collection of revenues by the government is of

paramount importance.  The funds for the operation of its

agencies and provision of basic services to its inhabitants are

largely derived from its revenues and collections.  Thus, it is

essential that the validity of revenue measures is not left

uncertain for a considerable length of time.[xviii][11]

Hence, the law provided a time limit for an aggrieved party to

assail the legality of revenue measures and tax ordinances.

In a last ditch effort to justify its failure to file a timely appeal

with the Secretary of Justice, the petitioner contends that its

period to appeal should be counted not from the time the

ordinance took effect in 1996 but from the time its members

were personally given copies of the approved ordinance in

November 1997.  It insists that it was unaware of the approval

and effectivity of the subject ordinance in 1996 on two (2)

grounds: first, no public hearing was conducted prior to the

passage of the ordinance and, second, the approved ordinance

was not posted.

We do not agree.

Petitioner’s bold assertion that there was no public

hearing conducted prior to the passage of  Kautusan  Blg. 28 

is belied by its own evidence.  In petitioner’s two (2)

communications with the Secretary of Justice,[xviii][12] it

enumerated the various objections raised by its members

before the passage of the ordinance in several meetings called

by the Sanggunian for the purpose.  These show beyond doubt

that petitioner was aware of the proposed increase and in fact

participated in the public hearings therefor.  The respondent

municipality likewise submitted the Minutes and Report of the

public hearings conducted by the Sangguniang Bayan’s

Committee on Appropriations and Market on February 6, July 15

and August 19, all in 1996, for the proposed increase in the

stall rentals.[xviii][13]

Petitioner cannot gripe that there was practically no public

hearing conducted as its objections to the proposed measure

were not considered by the Sangguniang Bayan. To be sure,

public hearings are conducted by legislative bodies to allow

interested parties to ventilate their views on a proposed law or

ordinance.   These views, however, are not binding on the

legislative body and it is not compelled by law to adopt the

same.  Sanggunian members are elected by the people to

make laws that will promote the general interest of their

constituents.  They are mandated to use their discretion and

best judgment in serving the people.  Parties who participate in

public hearings to give their opinions on a proposed ordinance

should not expect that their views would be patronized by their

lawmakers. 

On the issue of publication or posting, Section 188 of the

Local Government Code provides:

“Section 188.  Publication of Tax Ordinance and Revenue

Measures.  Within ten (10) days after their approval, certified

true copies of all provincial, city, and municipal tax ordinances

or revenue measures shall be published in full for three (3)

consecutive days in a newspaper of local circulation; Provided,

however, That in provinces, cities and municipalities where

there are no newspapers of local circulation, the same

may be posted in at least two (2) conspicuous and

publicly accessible places.”  (emphasis supplied)

The records is bereft of any evidence to prove petitioner’s

negative allegation that the subject ordinance was not posted

as required by law.  In contrast, the respondent

Sangguniang Bayan of the Municipality of Hagonoy,

Bulacan, presented evidence which clearly shows that

the procedure for the enactment of the assailed

ordinance was complied with.  Municipal Ordinance No. 28

was enacted by the Sangguniang Bayan of Hagonoy on October

1, 1996.  Then Acting Municipal Mayor  Maria Garcia Santos

approved the Ordinance on October 7, 1996.  After its approval,

copies of the Ordinance were given to the Municipal Treasurer

on the same day.   On November 9, 1996, the Ordinance

was approved by the Sangguniang Panlalawigan.  The

Ordinance was posted during the period from November

4 - 25, 1996 in three (3) public places, viz:  in front of the

municipal building, at the bulletin board of the Sta. Ana Parish

Church and on the front door of the Office of the Market Master

in the public market.[xviii][14] Posting was validly made in

lieu of publication as there was no newspaper of local

circulation in the municipality of Hagonoy.  This fact was

known to and admitted by petitioner. Thus, petitioner’s

ambiguous and unsupported claim that it was only “sometime

in November 1997” that the Provincial Board approved

Municipal Ordinance No. 28 and so the posting could not have

been made in November 1996[xviii][15] was sufficiently

disproved by the positive evidence of respondent municipality. 

Given the foregoing circumstances, petitioner cannot validly

claim lack of knowledge of the approved ordinance. The filing of

its appeal a year after the effectivity of the subject ordinance is

fatal to its cause.

Finally, even on the substantive points raised, the petition must

fail.  Section 6c.04 of the 1993 Municipal Revenue Code and

Section 191 of the Local Government Code limiting the

percentage of increase that can be imposed apply to tax rates,

not rentals.  Neither can it be said that the rates were not

uniformly imposed or that the public markets included in the

Ordinance were unreasonably determined or classified.  To be

sure, the Ordinance covered the three (3)  concrete public

markets:  the two-storey Bagong Palengke, the burnt but

reconstructed Lumang Palengke and the more recent Lumang

Palengke with wet market.  However, the Palengkeng Bagong

Munisipyo or Gabaldon was excluded from the increase in

rentals as it is only a makeshift, dilapidated place, with no

doors or protection for security, intended for transient peddlers

who used to sell their goods along the sidewalk.[xviii][16]

IN VIEW WHEREOF, the petition is DISMISSED for lack of

merit.  No pronouncement as to costs.

SO ORDERED.

FIRST DIVISION

G.R. No. 150947            July 15, 2003

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

MICHEL J. LHUILLIER PAWNSHOP, INC., respondent.

DAVIDE, JR., C.J.:

Are pawnshops included in the term lending investors for the

purpose of imposing the 5% percentage tax under then Section

116 of the National Internal Revenue Code (NIRC) of 1977, as

amended by Executive Order No. 273?

Petitioner Commissioner of Internal Revenue (CIR) filed the

instant petition for review to set aside the decision1 of 20

November 2001 of the Court of Appeals in CA G.R. SP No.

62463, which affirmed the decision of 13 December 2000 of the

Court of Tax Appeals (CTA) in CTA Case No. 5690 cancelling the

assessment issued against respondent Michel J. Lhuillier

Pawnshop, Inc. (hereafter Lhuillier) in the amount of

P3,360,335.11 as deficiency percentage tax for 1994, inclusive

of interest and surcharges.

The facts are as follows:

On 11 March 1991, CIR Jose U. Ong issued Revenue

Memorandum Order (RMO) No. 15-91 imposing a 5% lending

investor’s tax on pawnshops; thus:

A restudy of P.D. [No.] 114 shows that the principal activity of

pawnshops is lending money at interest and incidentally

accepting a "pawn" of personal property delivered by the

pawner to the pawnee as security for the loan.(Sec. 3, Ibid).

Clearly, this makes pawnshop business akin to lending

investor’s business activity which is broad enough to

encompass the business of lending money at interest by any

person whether natural or juridical. Such being the case,

pawnshops shall be subject to the 5% lending investor’s tax

based on their gross income pursuant to Section 116 of the Tax

Code, as amended.

This RMO was clarified by Revenue Memorandum Circular

(RMC) No. 43-91 on 27 May 1991, which reads:

1. RM[O] 15-91 dated March 11, 1991.

This Circular subjects to the 5% lending investor’s tax the gross

income of pawnshops pursuant to Section 116 of the Tax Code,

and it thus revokes BIR Ruling No[]. 6-90, and VAT Ruling Nos.

22-90 and 67-90. In order to have a uniform cut-off date, avoid

unfairness on the part of tax- payers if they are required to pay

the tax on past transactions, and so as to give meaning to the

express provisions of Section 246 of the Tax Code, pawnshop

owners or operators shall become liable to the lending

investor’s tax on their gross income beginning January 1, 1991.

Since the deadline for the filing of percentage tax return (BIR

Form No. 2529A-0) and the payment of the tax on lending

investors covering the first calendar quarter of 1991 has

already lapsed, taxpayers are given up to June 30, 1991 within

which to pay the said tax without penalty. If the tax is paid after

June 30, 1991, the corresponding penalties shall be assessed

and computed from April 21, 1991.

Since pawnshops are considered as lending investors effective

January 1, 1991, they also become subject to documentary

stamp taxes prescribed in Title VII of the Tax Code. BIR Ruling

No. 325-88 dated July 13, 1988 is hereby revoked.

On 11 September 1997, pursuant to these issuances, the

Bureau of Internal Revenue (BIR) issued Assessment Notice No.

81-PT-13-94-97-9-118 against Lhuillier demanding payment of

deficiency percentage tax in the sum of P3,360,335.11 for 1994

inclusive of interest and surcharges.

On 3 October 1997, Lhuillier filed an administrative protest with

the Office of the Revenue Regional Director contending that (1)

neither the Tax Code nor the VAT Law expressly imposes 5%

percentage tax on the gross income of pawnshops; (2)

pawnshops are different from lending investors, which are

subject to the 5% percentage tax under the specific provision of

the Tax Code; (3) RMO No. 15-91 is not implementing any

provision of the Internal Revenue laws but is a new and

additional tax measure on pawnshops, which only Congress

could enact; (4) RMO No. 15-91 impliedly amends the Tax Code

and is therefore taxation by implication, which is proscribed by

law; and (5) RMO No. 15-91 is a "class legislation" because it

singles out pawnshops among other lending and financial

operations.

On 12 October 1998, Deputy BIR Commissioner Romeo S.

Panganiban issued Warrant of Distraint and/or Levy No. 81-043-

98 against Lhuillier’s property for the enforcement and

payment of the assessed percentage tax.

Its protest having been unacted upon, Lhuillier, in a letter dated

3 March 1998, elevated the matter to the CIR. Still, the protest

was not acted upon by the CIR. Thus, on 11 November 1998,

Lhuillier filed a "Notice and Memorandum on Appeal" with the

Court of Tax Appeals invoking Section 228 of Republic Act No.

8424, otherwise known as the Tax Reform Act of 1997, which

provides:

Section 228. Protesting of Assessment. …

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

the one hundred eighty (180)-day period; otherwise, the

decision shall become final, executory and demandable.

The case was docketed as CTA Case No. 5690.

On 19 November 1998, the CIR filed with the CTA a motion to

dismiss Lhuillier’s petition on the ground that it did not state a

cause of action, as there was no action yet on the protest.

Lhuillier opposed the motion to dismiss and moved for the

issuance of a writ of preliminary injunction praying that the BIR

be enjoined from enforcing the warrant of distraint and levy.

For Lhuillier’s failure to appear on the scheduled date of

hearing, the CTA denied the motion for the issuance of a writ of

preliminary injunction. However, on Lhuillier’s motion for

reconsideration, said denial was set aside and a hearing on the

motion for the issuance of a writ of preliminary injunction was

set.

On 30 June 1999, after due hearing, the CTA denied the CIR’s

motion to dismiss and granted Lhuillier’s motion for the

issuance of a writ of preliminary injunction.

On 13 December 2000, the CTA rendered a decision declaring

(1) RMO No. 15-91 and RMC No. 43-91 null and void insofar as

they classify pawnshops as lending investors subject to 5%

percentage tax; and (2) Assessment Notice No. 81-PT-13-94-97-

9-118 as cancelled, withdrawn, and with no force and effect.2

Dissatisfied, the CIR filed a petition for review with the Court of

Appeals praying that the aforesaid decision be reversed and set

aside and another one be rendered ordering Lhuillier to pay the

5% lending investor’s tax for 1994 with interests and

surcharges.

Upon due consideration of the issues presented by the parties

in their respective memoranda, the Court of Appeals affirmed

the CTA decision on 20 November 2001.

The CIR is now before this Court via this petition for review on

certiorari, alleging that the Court of Appeals erred in holding

that pawnshops are not subject to the 5% lending investor’s

tax. He invokes then Section 116 of the Tax Code, which

imposed a 5% percentage tax on lending investors. He argues

that the legal definition of lending investors provided in Section

157 (u) of the Tax Code is broad enough to include pawnshop

operators. Section 3 of Presidential Decree No. 114 states that

the principal business activity of a pawnshop is lending money;

thus, a pawnshop easily falls under the legal definition of

lending investors. RMO No. 15-91 and RMC No. 43-91, which

subject pawnshops to the 5% lending investor’s tax based on

their gross income, are valid. Being mere interpretations of the

NIRC, they need not be published. Lastly, the CIR invokes the

case of Commissioner of Internal Revenue vs. Agencia Exquisite

of Bohol, Inc.,3 where the Court of Appeals’ Special Fourteenth

Division ruled that a pawnshop is subject to the 5% lending

investor’s tax.4

Lhuillier, on the other hand, maintains that before and after the

amendment of the Tax Code by E.O. No. 273, which took effect

on 1 January 1988, pawnshops and lending investors were

subjected to different tax treatments. Pawnshops were required

to pay an annual fixed tax of only P1,000, while lending

investors were subject to a 5% percentage tax on their gross

income in addition to their fixed annual taxes. Accordingly,

during the period from April 1982 up to December 1990, the

CIR consistently ruled that a pawnshop is not a lending investor

and should not therefore be required to pay percentage tax on

its gross income.

Lhuillier likewise asserts that RMO No. 15-91 and RMC No. 43-

91 are not implementing rules but are new and additional tax

measures, which only Congress is empowered to enact.

Besides, they are invalid because they have never been

published in the Official Gazette or any newspaper of general

circulation.

Lhuillier further points out that pawnshops are strictly regulated

by the Central Bank pursuant to P.D. No. 114, otherwise known

as The Pawnshop Regulation Act. On the other hand, there is no

special law governing lending investors. Due to the wide

differences between the two, pawnshops had never been

considered as lending investors for tax purposes. In fact, in

1994, Congress passed House Bill No. 11197,5 which attempted

to amend Section 116 of the NIRC, as amended, to include

owners of pawnshops as among those subject to percentage

tax. However, the Senate Bill and the subsequent Bicameral

Committee version, which eventually became the E-VAT Law,

did not incorporate such proposed amendment.

Lastly, Lhuillier argues that following the maxim in statutory

construction "expressio unius est exclusio alterius," it was not

the intention of the Legislature to impose percentage taxes on

pawnshops because if it were so, pawnshops would have been

included as among the businesses subject to the said tax.

Inasmuch as revenue laws impose special burdens upon

taxpayers, the enforcement of such laws should not be

extended by implication beyond the clear import of the

language used.

We are therefore called upon to resolve the issue of whether

pawnshops are subject to the 5% lending investor’s tax.

Corollary to this issue are the following questions: (1) Are RMO

No. 15-91 and RMC No. 43-91 valid? (2) Were they issued to

implement Section 116 of the NIRC of 1977, as amended? (3)

Are pawnshops considered "lending investors" for the purpose

of the imposition of the lending investor’s tax? (4) Is publication

necessary for the validity of RMO No. 15-91 and RMC No. 43-91.

RMO No. 15-91 and RMC No. 43-91 were issued in accordance

with the power of the CIR to make rulings and opinions in

connection with the implementation of internal revenue laws,

which was bestowed by then Section 245 of the NIRC of 1977,

as amended by E.O. No. 273.6 Such power of the CIR cannot be

controverted. However, the CIR cannot, in the exercise of such

power, issue administrative rulings or circulars not consistent

with the law sought to be applied. Indeed, administrative

issuances must not override, supplant or modify the law, but

must remain consistent with the law they intend to carry out.

Only Congress can repeal or amend the law.7

The CIR argues that both issuances are mere rules and

regulations implementing then Section 116 of the NIRC, as

amended, which provided:

SEC. 116. Percentage tax on dealers in securities; lending

investors. - Dealers in securities and lending investors shall pay

a tax equivalent to six (6) per centum of their gross income.

Lending investors shall pay a tax equivalent to five (5%)

percent of their gross income.

It is clear from the aforequoted provision that pawnshops are

not specifically included. Thus, the question is whether

pawnshops are considered lending investors for the purpose of

imposing percentage tax.

We rule in the negative.

Incidentally, we observe that both parties, as well as the Court

of Tax Appeals and the Court of Appeals, refer to the National

Internal Revenue Code as the Tax Code. They did not specify

whether the provisions they cited were taken from the NIRC of

1977, as amended, or the NIRC of 1986, as amended. For

clarity, it must be pointed out that the NIRC of 1977 as

renumbered and rearranged by E.O. No. 273 is a later law than

the NIRC of 1986, as amended by P.D. Nos. 1991, 1994, 2006

and 2031. The citation of the specific Code is important for us

to determine the intent of the law.

Under Section 157(u) of the NIRC of 1986, as amended, the

term lending investor includes "all persons who make a practice

of lending money for themselves or others at interest." A

pawnshop, on the other hand, is defined under Section 3 of P.D.

No. 114 as "a person or entity engaged in the business of

lending money on personal property delivered as security for

loans and shall be synonymous, and may be used

interchangeably, with pawnbroker or pawn brokerage."

While it is true that pawnshops are engaged in the business of

lending money, they are not considered "lending investors" for

the purpose of imposing the 5% percentage taxes for the

following reasons:

First. Under Section 192, paragraph 3, sub-paragraphs (dd) and

(ff), of the NIRC of 1977, prior to its amendment by E.O. No.

273, as well as Section 161, paragraph 2, sub-paragraphs (dd)

and (ff), of the NIRC of 1986, pawnshops and lending investors

were subjected to different tax treatments; thus:

(3) Other Fixed Taxes. – The following fixed taxes shall be

collected as follows, the amount stated being for the whole

year, when not otherwise specified:

….

(dd) Lending investors –

1. In chartered cities and first class municipalities, one

thousand pesos;

2. In second and third class municipalities, five hundred pesos;

3. In fourth and fifth class municipalities and municipal districts,

two hundred fifty pesos: Provided, That lending investors who

do business as such in more than one province shall pay a tax

of one thousand pesos.

….

(ff) Pawnshops, one thousand pesos (underscoring ours)

Second. Congress never intended pawnshops to be treated in

the same way as lending investors. Section 116 of the NIRC of

1977, as renumbered and rearranged by E.O. No. 273, was

basically lifted from Section 1758 of the NIRC of 1986, which

treated both tax subjects differently. Section 175 of the latter

Code read as follows:

Sec. 175. Percentage tax on dealers in securities, lending

investors. -- Dealers in securities shall pay a tax equivalent to

six (6%) percent of their gross income. Lending investors shall

pay a tax equivalent to five (5%) percent of their gross income.

(As amended by P.D. No. 1739, P.D. No. 1959 and P.D. No.

1994).

We note that the definition of lending investors found in Section

157 (u) of the NIRC of 1986 is not found in the NIRC of 1977, as

amended by E.O. No. 273, where Section 116 invoked by the

CIR is found. However, as emphasized earlier, both the NIRC of

1986 and the NIRC of 1977 dealt with pawnshops and lending

investors differently. Verily then, it was the intent of Congress

to deal with both subjects differently. Hence, we must likewise

interpret the statute to conform with such legislative intent.

Third. Section 116 of the NIRC of 1977, as amended by E.O. No.

273, subjects to percentage tax dealers in securities and

lending investors only. There is no mention of pawnshops.

Under the maxim expressio unius est exclusio alterius, the

mention of one thing implies the exclusion of another thing not

mentioned. Thus, if a statute enumerates the things upon

which it is to operate, everything else must necessarily and by

implication be excluded from its operation and effect.9 This

rule, as a guide to probable legislative intent, is based upon the

rules of logic and natural workings of the human mind.10

Fourth. The BIR had ruled several times prior to the issuance of

RMO No. 15-91 and RMC 43-91 that pawnshops were not

subject to the 5% percentage tax imposed by Section 116 of

the NIRC of 1977, as amended by E.O. No. 273. This was even

admitted by the CIR in RMO No. 15-91 itself. Considering that

Section 116 of the NIRC of 1977, as amended, was practically

lifted from Section 175 of the NIRC of 1986, as amended, and

there being no change in the law, the interpretation thereof

should not have been altered.

It may not be amiss to state that, as pointed out by the

respondent, pawnshops was sought to be included as among

those subject to 5% percentage tax by House Bill No. 11197 in

1994. Section 13 thereof reads:

Section 13. Section 116 of the National Internal Revenue Code,

as amended, is hereby further amended to read as follows:

"SEC. 116. Percentage tax on dealers in securities; lending

investors; OWNERS OF PAWNSHOPS; FOREIGN CURRENCY

DEALERS AND/OR MONEY CHANGERS. – Dealers in securities

shall pay a tax equivalent to Six (6%) per centum of their gross

income. Lending investors, OWNERS OF PAWNSHOPS AND

FOREIGN CURRENCY DEALERS AND/OR MONEY CHANGERS shall

pay a tax equivalent to Five (5%) percent of their gross

income."

If pawnshops were covered within the term lending investor,

there would have been no need to introduce such amendment

to include owners of pawnshops. At any rate, such proposed

amendment was not adopted. Instead, the approved bill which

became R.A. No. 771611 repealed Section 116 of NIRC of 1977,

as amended, which was the basis of RMO No. 15-91 and RMC

No. 43-91; thus:

SEC. 20. Repealing Clauses. -- The provisions of any special law

relative to the rate of franchise taxes are hereby expressly

repealed. Sections 113, 114 and 116 of the National Internal

Revenue Code are hereby repealed.

Section 21 of the same law provides that the law shall take

effect fifteen (15) days after its complete publication in the

Official Gazette or in at least two (2) national newspapers of

general circulation whichever comes earlier. R.A. No. 7716 was

published in the Official Gazette on 1 August 199412; in the

Journal and Malaya newspapers, on 12 May 1994; and in the

Manila Bulletin, on 5 June 1994. Thus, R.A. No. 7716 is deemed

effective on 27 May 1994.

Since Section 116 of the NIRC of 1977, which breathed life on

the questioned administrative issuances, had already been

repealed, RMO 15-91 and RMC 43-91, which depended upon it,

are deemed automatically repealed. Hence, even granting that

pawnshops are included within the term lending investors, the

assessment from 27 May 1994 onward would have no leg to

stand on.

Adding to the invalidity of the RMC No. 43-91 and RMO No. 15-

91 is the absence of publication. While the rule-making

authority of the CIR is not doubted, like any other government

agency, the CIR may not disregard legal requirements or

applicable principles in the exercise of quasi-legislative powers.

Let us first distinguish between two kinds of administrative

issuances: the legislative rule and the interpretative rule. A

legislative rule is in the nature of subordinate legislation,

designed to implement a primary legislation by providing the

details thereof. An interpretative rule, on the other hand, is

designed to provide guidelines to the law which the

administrative agency is in charge of enforcing.13

In Misamis Oriental Association of Coco Traders, Inc. vs.

Department of Finance Secretary,14 this Tribunal ruled:

… In the same way that laws must have the benefit of public

hearing, it is generally required that before a legislative rule is

adopted there must be hearing. In this connection, the

Administrative Code of 1987 provides:

Public Participation. - If not otherwise required by law, an

agency shall, as far as practicable, publish or circulate notices

of proposed rules and afford interested parties the opportunity

to submit their views prior to the adoption of any rule.

(2) In the fixing of rates, no rule or final order shall be valid

unless the proposed rates shall have been published in a

newspaper of general circulation at least two weeks before the

first hearing thereon.

(3) In case of opposition, the rules on contested cases shall be

observed.

In addition, such rule must be published.

When an administrative rule is merely interpretative in nature,

its applicability needs nothing further than its bare issuance, for

it gives no real consequence more than what the law itself has

already prescribed. When, on the other hand, the

administrative rule goes beyond merely providing for the

means that can facilitate or render least cumbersome the

implementation of the law but substantially increases the

burden of those governed, it behooves the agency to accord at

least to those directly affected a chance to be heard, and

thereafter to be duly informed, before that new issuance is

given the force and effect of law.15

RMO No. 15-91 and RMC No. 43-91 cannot be viewed simply as

implementing rules or corrective measures revoking in the

process the previous rulings of past Commissioners.

Specifically, they would have been amendatory provisions

applicable to pawnshops. Without these disputed CIR issuances,

pawnshops would not be liable to pay the 5% percentage tax,

considering that they were not specifically included in Section

116 of the NIRC of 1977, as amended. In so doing, the CIR did

not simply interpret the law. The due observance of the

requirements of notice, hearing, and publication should not

have been ignored.

There is no need for us to discuss the ruling in CA-G.R. SP No.

59282 entitled Commissioner of Internal Revenue v. Agencia

Exquisite of Bohol Inc., which upheld the validity of RMO No. 15-

91 and RMC No. 43-91. Suffice it to say that the judgment in

that case cannot be binding upon the Supreme Court because it

is only a decision of the Court of Appeals. The Supreme Court,

by tradition and in our system of judicial administration, has the

last word on what the law is; it is the final arbiter of any

justifiable controversy. There is only one Supreme Court from

whose decisions all other courts should take their bearings.16

In view of the foregoing, RMO No. 15-91 and RMC No. 43-91 are

hereby declared null and void. Consequently, Lhuillier is not

liable to pay the 5% lending investor’s tax.

WHEREFORE, the petition is hereby DISMISSED for lack of

merit. The decision of the Court of Appeals of 20 November

2001 in CA-G.R. SP No. 62463 is AFFIRMED.

SO ORDERED.

 

Footnotes

1 Rollo, 18-24. Per Associate Justice Edgardo P. Cruz, with then

Presiding Justice (now Supreme Court Associate Justice) Alicia

Austria-Martinez and Associate Justice Hilarion L. Aquino

concurring.

2 Rollo, 25-33. Per Associate Judge Ramon O. de Veyra, with

Presiding Judge Ernesto D. Acosta and Associate Judge Amancio

Q. Saga concurring.

3 CA-G.R. SP No. 59282, 23 March 2001.

4 Rollo, 35-44.

5 Entitled An Act Restructuring the Value-Added Tax (VAT)

System to Widen its Tax Base and Enhance its Administration,

Amending for These Purposes Sections … 116 of Title V … of

the National Internal Revenue Code, as Amended.

6 Now Sections 244 and 245 of R.A. No. 8424, otherwise known

as the Tax Reform Act of 1997.

7 Commissioner of Internal Revenue v. Court of Appeals, G.R.

No. 108358, 20 January 1995, 240 SCRA 368, 372; Romulo,

Mabanta, Buenaventura, Sayoc & De los Angeles v. Home

Development Mutual Fund, G.R. No. 131082, 19 June 2000; 333

SCRA 777, 786.

8 Formerly Section 209 of the NIRC of 1977, as amended by P.D.

No. 1739 of 17 September 1980, which read:

Section 209. – Percentage tax on dealers in securities, lending

investors. – Dealers in securities and lending investors shall pay

a tax equivalent to five per centum on their gross income.

9 Vera v. Fernandez, L-31364, 30 March 1979; 89 SCRA 199,

203.

10 Republic v. Estenzo, L-35376, 11 September 1980; 99 SCRA

651, 656.

11 Entitled An Act Restructuring the Value-added Tax (VAT)

System, Widening Its Tax Base and Enhancing Its

Administration, and for These Purposes Amending and

Repealing the Relevant Provisions of the National Internal

Revenue Code, as amended, and for Other Purposes.

12 90 O.G. 31, 4489.

13 Misamis Oriental Association of Coco Traders, Inc. v.

Department of Finance Secretary, G.R. No. 108524, 10

November 1994, 238 SCRA 63, 69.

14 Supra.

15 Commissioner of Internal Revenue v. Court of Appeals, 329

Phil. 987, 1007 [1996].

16 GSIS v. Court of Appeals, 334 Phil. 163, 175 [1997], citing

Ang Ping v. RTC of Manila, Br. 40, G.R. No. L-75860, 17

September 1987, 154 SCRA 77 and Tugade v. Court of Appeals,

G.R. L-47772, 31 August 1978, 85 SCRA 226.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THIRD DIVISION

 

G.R. No. 103915 October 23, 1995

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

TELEFUNKEN SEMICONDUCTOR PHILIPPINES, INC.,

COURT OF TAX APPEALS, AND THE COURT OF APPEALS,

respondents.

 

ROMERO, J.:

This is a petition for review on certiorari of the decision 1 of the

Court of Appeals affirming the decision of the Court of Tax

Appeals which ordered petitioner to grant a tax credit to private

respondent Telefunken Semiconductors Philippines, Inc.

(TELEFUNKEN) in the amount of P2,482,042.35 representing

contractor's tax allegedly paid erroneously for the period

October 1979 to September 1981.

The undisputed facts, as found by respondent Court of Tax

Appeals (CTA), are as follows:

Private respondent Telefunken is a domestic corporation

registered with the Board of Investments (BOI) as an export

producer on a preferred pioneer status under Republic Act No.

6135.

From October 1979 to September 1981, Telefunken produced

semi-conductor devices amounting to P92,843,774.00 which

were entirely sold to foreign markets.

It filed percentage tax returns on the said exportation declaring

a total of P2,482,042.35 as contractor's tax, which was paid

and verified to have been received by the government.

Telefunken wrote a letter to the Appellate Division of the

Bureau of Internal Revenue (BIR) dated January 19, 1982

stating that the payment of contractor's tax of P2,482,042.35

was erroneous and requested its refund or tax credit thereof.

Telefunken contended that under the provisions of Section 7 of

Republic Act No. 6135 in relation to Section 8 (a) of Republic

Act No. 5186 (The Investment Act), it was exempted from the

payment of all national internal revenue taxes for the period in

question, except for income tax.

The sole issue raised by petitioner is whether or not

Telefunken, a corporation registered under Republic Act No.

6135 as a pioneer export producer, was exempted from

payment of the 3% contractor's tax from October 1979 to

September 1981.

The controlling statute is Section 205 (16) of the 1977 National

Internal Revenue Code (NLRC), which states:

Sec. 205. Contractors, proprietors or operators of dockyards

and others. A contractor's tax of three percentum of gross

receipts is hereby imposed on the following:

xxx xxx xxx

(16) Business agents and other independent contractors

including private detective or watchman agencies, except gross

receipts of a pioneer enterprise registered with the Board of

Investments under Republic Act 5186. (As amended by P.D. No.

1457 , June 11, 1978)

Petitioner argues that the law speaks of firms registered under

Republic Act No. 5186 and thus, the privilege of tax exemption

cannot be made to apply to firms registered under Republic Act

No. 6135. Specifically, he states that Telefunken is not covered

by the Tax Code exemption because "exemption from

contractor's tax is extended to pioneer enterprises registered

with the Board of Investments under Republic Act No. 5186 in

relation to Section 205 of the Tax Code."

Firms, such as Telefunken, registered under Section 7 of

Republic Act No. 6135 were entitled to a tax exemption, except

income tax, only on a graduated basis. This graduated scale is

set out in section 8 (a) of Republic Act No. 5186:

Sec. 8. Incentives to a Pioneer Enterprise. In addition to the

incentives provided in the preceding section, pioneer

enterprises shall be granted the following incentive benefits:

(a) Tax Exemption — Exemption from all taxes under the

National Internal Revenue Code, except income tax, from the

date the area of investment is included in the Investment

Priorities Plan , to the following extent:

(1) One hundred per cent (100%) for the first five years;

(2) Seventy-five per cent (75%) for the sixth through the eighth

year;

(3) Fifty per cent (50%) for the ninth and tenth years;

(4) Twenty per cent (20%) for the eleventh and twelfth years;

and

(5) Ten per cent (10%) for the thirteenth through the fifteenth

year.

Provided, That the above schedule shall apply only to

enterprises registered in areas included for the first time in the

sixth or subsequent Investment Priorities Plan or therein carried

over from the previous Investment Priorities Plan. Provided,

however, That in areas previously declared preferred and/or

carried over the sixth or subsequent Investment Priorities Plan

and wherein enterprises have already registered, the

exemption herein provided shall be as follows:

(1) One hundred per cent up to December 31, 1972;

(2) Seventy-five percent up to December 31, 1975;

(3) Fifty per cent up to December 31, 1977;

(4) Twenty per cent up to December 31, 1979;

(5) Ten per cent up to December 31, 1981.

Provided, further, That subject to the approval of the National

Economic and Development Authority, the Board may extend

the duration of the tax exemption provided in any bracket for

pioneer projects whose total costs would exceed one hundred

million pesos (P100,000,000.00), subject to the condition that

in no case shall the total period of exemption herein exceed

twenty (20) years. (As amended by Presidential Decree No. 92

of January 6, 1973)

Petitioner contends that for Telefunken to gualify for total

exemption, aside from its reqistration under Republic Act No.

6135, it must also be registered with the BOI under Republic

Act No. 5186.

We find petitioner's contentions to be devoid of merit.

Section 7 of Republic Act No. 6135 (the law under which

Telefunken is registered) provides that registered export

producers in a pioneer status are entitled to the incentives

provided insection 8 (a) of Republic Act No. 5186.

It states:

Sec. 7. Incentives to registered export producers — Registered

export producers. — Registered export producers unless they

already enjoy the same privileges under other laws shall be

entitled to the incentives set forth in parahraphs (h), (i) and (j)

of Section 7 of Republic Act Numbered Fifty-one hundred

eigthy-six, known as the Investment Incentives Act; and

registered export producers that are pioneer enterprises shall

be entitled also to the incentives set forth in paragraphs (a), (b)

and (c) of Section 8 of the said Act. In addition to the said

incentives, and in lieu of other incentives provided in Section 7

and in Section 9 of that Act, registered export producer shall be

entitled to benefits and incentives as enumerated hereunder:

xxx xxx xxx

(Emphasis supplied)

We find no ambiguity in the law. When construed together, the

above-quoted provisions yield no other conclusion but that

gross receipts of a pioneer enterprise registered with the Board

of Investments, such as Telefunken, are exempt from the

contractor's tax. This is in accordance with the policy of the

government, as declared in Section 2 of Republic Act No. 6135:

. . . to actively encourage, promote, and diversify exports of

services and of manufacturers utilizing domestic raw materials

to the fullest extent possible, and to develop new markets for

Philippine products, in order to attain a rising level of

production and employment, increase foreign exchange

earnings, hasten the economic development of the nation, and

ensure that the benefits of development accrue to the Filipino

people.

There is no difference between the gross receipts of pioneer

enterprises registered with the Board of Investments under

Republic Act No. 6135 and the gross receipts of registered

pioneer enterprises under Republic Act No. 5186. In fact,

petitioner himself had ruled in this vein on February 4, 1974 in

the case of Asian Transmission Corporation. 2

Petitioner, in that case, said:

This refers to your letters dated November 29 and December

19, 1973 requesting a ruling as to whether your contractors

namely, C.E. Construction Corporation and Marsteel

Corporation are exempt from the payment of the 3%

contractor's tax prescribed under Section 191(16) of the Tax

Code. It appears that your application for registration as export

producer under Republic Act No. 6135 has been approved by

the Board of Investments on January 8, 1974 on a pioneer

status.

In reply, I have the honor to inform you that under the last

paragraph of Section 191(16) of the Tax Code, gross receipts . .

. from a pioneer industry registered with the Board of

Investments under the provisions of Republic Act Numbered

Five Thousand One Hundred and eighty-six', are exempt from

the contractor's tax. It is clear that the intention of the law is to

relieve the pioneer industry from ultimately shouldering the

contractor's tax which could be passed on to it legally by its

contractor.

Pursuant to Section 7 of Republic Act No. 6135, that corporation

as a registered export producer on a pioneer status is entitled

to the same tax incentives granted to a pioneer industry set

forth in section 8(a) of republic Act No. 5186. Under this latter

provision, a pioneer industry is exempt from all taxes under the

National Internal Revenue Code, except income tax. In other

words, both a registered export producer on a pioneer status

under Republic Act No. 6135 and a pioneer industry under

Republic Act No. 5186 are entitled to the same tax exemption

benefits under the Tax Code. Such being the case, like the

latter, the former should not also shoulder the contractor's tax

which could be passed on it legally by its contractor.

In view thereof, the gross receipts derived by C.E. Construction

Corporation and Marsteel Corporation from the construction of

your transmission plant in Canlubang, Laguna, are exempt from

the 3% contractor's tax. (Emphasis supplied)

Petitioner now maintains that this 1974 ruling has been

abrogated with the passage of the 1977 Tax Code, Section

205(16) which expressly mentions only pioneer enterprises

registered with the Board of Investments under Republic Act

No. 5186 as exempt from the contractor's tax, with no

reference being made regarding pioneer enterprises registered

under Republic Act No. 6135.

When petitioner made his 1974 ruling, he based the same on

Section 191(16) of the Tax Code which states:

Sec. 191. Contractors, proprietors or operators of dockyards,

and others. — A contractor's tax of three per centum of the

gross receipts is hereby imposed on the following:

xxx xxx xxx

(16) Business agents and other independent contractors except

persons, associations and corporations under contract for

embroidery and apparel for export, as well as their agents and

contractors and except gross receipts of or from a pioneer

industry registered with the Board of Investments under the

provisions of Republic Act Numbered Five Thousand one

hundred and eighty-six. (Emphasis supplied)

A comparison of the above with the previously quoted Section

205(16) of the 1977 Tax Code reveals that both provisions

specifically mention pioneer industries registered with the

Board of Investments under Republic Act

No. 5186 as exempt from payment of the contractor's tax. In

fact, the wording of the relevant part at both provisions are the

same. Clearly, Telefunken falls under the category of "pioneer

industries" contemplated under Section 205(16) and should be

entitled to the exemption provided for.

Lastly, under Sec. 246 of the National Internal Revenue Code,

rulings of the BIR may not be given retroactive effect, if the

same is prejudicial to the taxpayer. 3

WHEREFORE, the decision of the Court of Appeals is hereby

AFFIRMED. No costs.

SO ORDERED.

Footnotes

1 CA-G.R. SP No. 22910, Luis A. Javellana, J., ponente, Serafin

V.C. Guingona and Cancio C. Garcia, JJ., concurring; Rollo, p. 23.

2 Rollo, p. 28-30.

3 Sec. 246. Non-retroactivity of rulings. — Any revocation,

modification or reversal of any of the rules and regulations

promulgated in accordance with the preceding section or any of

the rulings or circulars promulgated by the Commissioner shall

not be given retroactive application if the revocation,

modification, or reversal will be prejudicial to the taxpayers

except in the following cases: (a) where the taxpayer

deliberately misstates or omits material facts from his return 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.

 

 

 

 

 

 

SECOND DIVISION

                                                       

COMMISSIONER OF                G.R. Nos.  134587 & 134588

INTERNAL REVENUE,                             

                Petitioner,                         Present:

 

                                                PUNO, J.,

                      Chairman,

       -  versus  -                                AUSTRIA-MARTINEZ,

                                                CALLEJO, SR.,

                                                TINGA,  and

CHICO-NAZARIO, JJ.

BENGUET CORPORATION,                 

                Respondent.    

Promulgated:

       

                                                July 8, 2005

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

 

D E C I S I O N

 

TINGA, J.:

 

This is a petition for the review of a consolidated Decision of

the Former Fourteenth Division of the Court of Appeals[1]

ordering the Commissioner of Internal Revenue to award tax

credits to Benguet Corporation in the amount corresponding to

the input value added taxes that the latter had incurred in

relation to its sale of gold to the Central Bank during the period

of 01 August 1989 to 31 July 1991.

 

Petitioner is the Commissioner of Internal Revenue

(“petitioner”) acting in his official capacity as head of the

Bureau of Internal Revenue (BIR), an attached agency of the

Department of Finance,[2] with the authority, inter alia, to

determine claims for refunds or tax credits as provided by law.

[3]

 

Respondent Benguet Corporation (“respondent”) is a domestic

corporation organized and existing by virtue of Philippine laws,

engaged in the exploration, development and operation of

mineral resources, and the sale or marketing thereof to various

entities.[4]  Respondent is a value added tax (VAT) registered

enterprise.[5] 

 The transactions in question occurred during the period

between 1988 and 1991. Under Sec. 99 of the National Internal

Revenue Code (NIRC),[6] as amended by Executive Order (E.O.)

No. 273 s. 1987, then in effect, any person who, in the course

of trade or business, sells, barters or exchanges goods, renders

services, or engages in similar transactions and any person who

imports goods is liable for output VAT at rates of either 10% or

0% (“zero-rated”) depending on the classification of the

transaction under Sec. 100 of the NIRC.  Persons registered

under the VAT system[7] are allowed to recognize input VAT, or

the VAT due from or paid by it in the course of its trade or

business on importation of goods or local purchases of goods or

service, including lease or use of properties, from a VAT-

registered person.[8] 

 

In January of 1988, respondent applied for and was granted by

the BIR zero-rated status on its sale of gold to Central Bank.[9]

On 28 August 1988, Deputy Commissioner of Internal Revenue

Eufracio D. Santos issued VAT Ruling No. 3788-88, which

declared that “[t]he sale of gold to Central Bank is considered

as export sale subject to zero-rate pursuant to Section 100[[10]]

of the Tax Code, as amended by Executive Order No. 273.”  The

BIR came out with at least six (6) other issuances[11] reiterating

the zero-rating of sale of gold to the Central Bank, the latest of

which is VAT Ruling No. 036-90 dated 14 February 1990.[12] 

 

Relying on its zero-rated status and the above issuances,

respondent sold gold to the Central Bank during the period of 1

August 1989 to 31 July 1991 and entered into transactions that

resulted in input VAT incurred in relation to the subject sales of

gold.  It then filed applications for tax refunds/credits

corresponding to input VAT for the amounts[13] of

P46,177,861.12,[14]

P19,218,738.44,[15] and P84,909,247.96.[16]  Respondent’s

applications were either unacted upon or expressly disallowed

by petitioner.[17]  In addition, petitioner issued a deficiency

assessment against respondent when, after applying

respondent’s creditable input VAT costs against the retroactive

10% VAT levy, there resulted a balance of excess output VAT.

[18] 

 

The express disallowance of respondent’s application for

refunds/credits and the issuance of deficiency assessments

against it were based on a BIR ruling-BIR VAT Ruling No. 008-92

dated 23 January 1992-that was issued subsequent to the

consummation of the subject sales of gold to the Central Bank

which provides that sales of gold to the Central Bank shall not

be considered as export sales and thus, shall be subject to 10%

VAT.  In addition, BIR VAT Ruling No. 008-92 withdrew,

modified, and superseded all inconsistent BIR issuances.  The

relevant portions of the ruling provides, thus:

 

1.  In general, for purposes of the term “export sales” only

direct export sales and foreign currency denominated sales,

shall be qualified for zero-rating.

 

          . . . .

 

4.  Local sales of goods, which by fiction of law are considered

export sales (e.g., the Export Duty Law considers sales of gold

to the Central Bank of the Philippines, as export sale).  This

transaction shall not be considered as export sale for VAT

purposes.

 

. . . .

 

[A]ll Orders and Memoranda issued by this Office inconsistent

herewith are considered withdrawn, modified or superseded.”

(Emphasis supplied)

 

        The BIR also issued VAT Ruling No. 059-92 dated 28 April

1992 and Revenue Memorandum Order No. 22-92 which

decreed that the revocation of VAT Ruling No. 3788-88 by VAT

Ruling No. 008-92 would not unduly prejudice mining

companies and, thus, could be applied retroactively.[19]  

 

Respondent filed three separate petitions for review with the

Court of Tax Appeals (CTA), docketed as CTA Case No. 4945,

CTA Case No. 4627, and the consolidated cases of CTA Case

Nos. 4686 and 4829.  

In the three cases, respondent argued that a retroactive

application of BIR VAT Ruling No. 008-92 would violate Sec. 246

of the NIRC, which mandates the non-retroactivity of rulings or

circulars issued by the Commissioner of Internal Revenue that

would operate to prejudice the taxpayer.  Respondent then

discussed in detail the manner and extent by which it was

prejudiced by this retroactive application.[20]  Petitioner on the

other hand, maintained that BIR VAT Ruling No. 008-92 is,

firstly, not void and entitled to great respect, having been

issued by the body charged with the duty of administering the

VAT law, and secondly, it may validly be given retroactive

effect since it was not prejudicial to respondent. 

 

In three separate decisions,[21] the CTA dismissed respondent’s

respective petitions.  It held, with Presiding Judge Ernesto D.

Acosta dissenting, that no prejudice had befallen respondent by

virtue of the retroactive application of BIR VAT Ruling No. 008-

92, and that, consequently, the application did not violate Sec.

246 of the NIRC.[22]  

 

The CTA decisions were appealed by respondent to the Court of

Appeals.  The cases were docketed therein as CA-G.R. SP Nos.

37205, 38958, and 39435, and thereafter consolidated.  The

Court of Appeals, after evaluating the arguments of the parties,

rendered the questioned Decision reversing the Court of Tax

Appeals insofar as the latter had ruled that BIR VAT Ruling No.

008-92 did not prejudice the respondent and that the same

could be given retroactive effect. 

 

In its Decision, the appellate court held that respondent

suffered financial damage equivalent to the sum of the

disapproved claims. It stated that had respondent known that

such sales were subject to 10% VAT, which rate was not the

prevailing rate at the time of the transactions, respondent

would have passed on the cost of the input taxes to the Central

Bank.   It also ruled that the remedies which the CTA supposed

would eliminate any resultant prejudice to respondent were not

sufficient palliatives as the monetary values provided in the

supposed remedies do not approximate the monetary values of

the tax credits that respondent lost after the implementation of

the VAT ruling in question.     It   cited

 

Manila Mining Corporation v. Commissioner of Internal

Revenue,[23] in which the Court of Appeals held[24] that BIR VAT

Ruling No. 008-92 cannot be given retroactive effect.  Lastly,

the Court of Appeals observed that R.A. 7716, the “The New

Expanded VAT Law,” reveals the intent of the lawmakers with

regard to the treatment of sale of gold to the Central Bank

since the amended version therein of Sec. 100 of the NIRC

expressly provides that the sale of gold to the Bangko Sentral

ng Pilipinas is an export sale subject to 0% VAT rate.  The

appellate court thus allowed respondent’s claims, decreeing in

its dispositive portion, viz:

 

WHEREFORE, the appealed decision is hereby REVERSED.  The

respondent Commissioner of Internal Revenue is ordered to

award the following tax credits to petitioner.

1)     In CA-G.R. SP No. 37209 – P49,611,914.00

2)     in CA-G.R. SP No. 38958 - P19,218,738.44

3)     in CA-G.R. SP No. 39435 - P84,909,247.96[25]

 

Dissatisfied with the above ruling, petitioner filed the instant

Petition for Review questioning the determination of the Court

of Appeals that the retroactive application of the subject

issuance was prejudicial to respondent and could not be

applied retroactively. 

 

Apart from the central issue on the validity of the retroactive

application of VAT Ruling No. 008-92, the question of the

validity of the issuance itself has been touched upon in the

pleadings, including a reference made by respondent to a Court

of Appeals Decision holding that the VAT Ruling had no legal

basis.[26]  For its part, as the party that raised this issue,

petitioner spiritedly defends the validity of the issuance.[27] 

Effectively, however, the question is a non-issue and delving

into it would be a needless exercise for, as respondent

emphatically pointed out in its Comment, “unlike petitioner’s

formulation of the issues, the only real issue in this case is

whether VAT Ruling No. 008-92 which revoked previous rulings

of the petitioner which respondent heavily relied upon . . . may

be legally applied retroactively to respondent.”[28]  This Court

need not invalidate the BIR issuances, which have the force and

effect of law, unless the issue of validity is so crucially at the

heart of the controversy that the Court cannot resolve the case

without having to strike down the issuances.   Clearly, whether

the subject VAT ruling may validly be given retrospective effect

is the lis mota in the case.  Put in another but specific fashion,

the sole issue to be addressed is whether respondent’s sale of

gold to the Central Bank during the period when such was

classified by BIR issuances as zero-rated could be taxed validly

at a 10% rate after the consummation of the transactions

involved. 

 

In a long line of cases,[29] this Court has affirmed that the

rulings, circular, rules and regulations promulgated by the

Commissioner of Internal Revenue would have no retroactive

application if to so apply them would be prejudicial to the

taxpayers.  In fact, both petitioner[30] and respondent[31] agree

that the retroactive application of VAT Ruling No. 008-92 is

valid only if such application would not be prejudicial to the

respondent– pursuant to the explicit mandate under Sec. 246 of

the NIRC, thus:

 

Sec. 246.  Non-retroactivity of rulings.- Any revocation,

modification or reversal of any of the rules and regulations

promulgated in accordance with the preceding Section or any

of the rulings or circulars promulgated by the Commissioner

shall not be given retroactive application if the revocation,

modification or reversal will be prejudicial to the taxpayers

except in the following cases:  (a) where the taxpayer

deliberately misstates or omits material facts from his return on

any document required of him by the Bureau of Internal

Revenue; (b) where the facts subsequently gathered by the

Bureau of Internal Revenue are materially different form the

facts on which the ruling is based; or (c) where the taxpayer

acted in bad faith.  (Emphasis supplied)

 

 

In that regard, petitioner submits that respondent would not be

prejudiced by a retroactive application; respondent maintains

the contrary.  Consequently, the determination of the issue of

retroactivity hinges on whether respondent would suffer

prejudice from the retroactive application of VAT Ruling No.

008-92.  

 

We agree with the Court of Appeals and the respondent.

 

To begin with, the determination of whether respondent had

suffered prejudice is a factual issue.  It is an established rule

that in the exercise of its power of review, the Supreme Court is

not a trier of facts.  Moreover, in the exercise of the Supreme

Court’s power of review, the findings of facts of the Court of

Appeals are conclusive and binding on the Supreme Court.[32]

An exception to this rule is when the findings of fact a quo are

conflicting,[33] as is in this case.

 

VAT is a percentage tax imposed at every stage of the

distribution process on the sale, barter, exchange or lease of

goods or properties and rendition of services in the course of

trade or business, or the importation of goods.[34]  It is an

indirect tax, which may be shifted to the buyer, transferee, or

lessee of the goods, properties, or services.[35] However, the

party directly liable for the payment of the tax is the seller.[36] 

 

In transactions taxed at a 10% rate, when at the end of any

given taxable quarter the output VAT exceeds the input VAT,

the excess shall be paid to the government; when the input

VAT exceeds the output VAT, the excess would be carried over

to VAT liabilities for the succeeding quarter or quarters.[37]  On

the other hand, transactions which are taxed at zero-rate do

not result in any output tax.  Input VAT attributable to zero-

rated sales could be refunded or credited against other internal

revenue taxes at the option of the taxpayer.[38]  

  

To illustrate, in a zero-rated transaction, when a VAT-registered

person (“taxpayer”) purchases materials from his supplier at

P80.00, P7.30[39] of which was passed on to him by his supplier

as the latter’s 10% output VAT, the taxpayer is allowed to

recover P7.30 from the BIR, in addition to other input VAT he

had incurred in relation to the zero-rated transaction, through

tax credits or refunds.  When the taxpayer sells his finished

product in a zero-rated transaction, say, for P110.00, he is not

required to pay any output VAT thereon.  In the case of a

transaction subject to 10% VAT, the taxpayer is allowed to

recover both the input VAT of P7.30 which he paid to his

supplier and his output VAT of P2.70 (10% the P30.00 value he

has added to the P80.00 material) by passing on both costs to

the buyer.   Thus, the buyer pays the total 10% VAT cost, in this

case P10.00 on the product. 

 

In both situations, the taxpayer has the option not to carry any

VAT cost because in the zero-rated transaction, the taxpayer is

allowed to recover input tax from the BIR without need to pay

output tax, while in 10% rated VAT, the taxpayer is allowed to

pass on both input and output VAT to the buyer.  Thus, there is

an elemental similarity between the two types of VAT ratings in

that the taxpayer has the option not to take on any VAT

payment for his transactions by simply exercising his right to

pass on the VAT costs in the manner discussed above. 

 

Proceeding from the foregoing, there appears to be no upfront

economic difference in changing the sale of gold to the Central

Bank from a 0% to 10% VAT rate provided that respondent

would be allowed the choice to pass on its VAT costs to the

Central Bank.   In the instant case, the retroactive application of

VAT Ruling No. 008-92 unilaterally forfeited or withdrew this

option of respondent.  The adverse effect is that respondent

became the unexpected and unwilling debtor to the BIR of the

amount equivalent to the total VAT cost of its product, a liability

it previously could have recovered from the BIR in a zero-rated

scenario or at least passed on to the Central Bank had it known

it would have been taxed at a 10% rate.   Thus, it is clear that

respondent suffered economic prejudice when its

consummated sales of gold to the Central Bank were taken out

of the zero-rated category. The change in the VAT rating of

respondent’s transactions with the Central Bank resulted in the

twin loss of its exemption from payment of output VAT and its

opportunity to recover input VAT, and at the same time

subjected it to the 10% VAT sans the option to pass on this cost

to the Central Bank, with the total prejudice in money terms

being equivalent to the 10% VAT levied on its sales of gold to

the Central Bank.  

Petitioner had made its position hopelessly untenable by

arguing that “the deficiency 10% that may be assessable will

only be equal to 1/11th of the amount billed to the [Central

Bank] rather than 10% thereof.  In short, [respondent] may only

be charged based on the tax amount actually and technically

passed on to the [Central Bank] as part of the invoiced

price.”[40]  To the Court, the aforequoted statement is a clear

recognition that respondent would suffer prejudice in the

“amount actually and technically passed on to the [Central

Bank] as part of the invoiced price.”  In determining the

prejudice suffered by respondent, it matters little how the

amount charged against respondent is computed,[41] the point

is that the amount (equal to 1/11th of the amount billed to the

Central Bank) was charged against respondent, resulting in

damage to the latter.  

 

Petitioner posits that the retroactive application of BIR VAT

Ruling No. 008-92 is stripped of any prejudicial effect when

viewed in relation to several available options to recoup

whatever liabilities respondent may have incurred, i.e.,

respondent’s input VAT may still be used (1) to offset its output

VAT on the sales of gold to the Central Bank or on its output

VAT on other sales subject to 10% VAT, and (2) as deductions

on its income tax under Sec. 29 of the Tax Code.[42]

 

On petitioner’s first suggested recoupment modality,

respondent counters that its other sales subject to 10% VAT are

so minimal that this mode is of little value.  Indeed, what use

would a credit be where there is nothing to set it off against? 

Moreover, respondent points out that after having been

imposed with 10% VAT sans the opportunity to pass on the

same to the Central Bank, it was issued a deficiency tax

assessment because its input VAT tax credits were not enough

to offset the retroactive 10% output VAT. The prejudice then

experienced by respondent lies in the fact that the tax

refunds/credits that it expected to receive had effectively

disappeared by virtue of its newfound output VAT liability

against which petitioner had offset the expected refund/credit.

Additionally, the prejudice to respondent would not simply

disappear, as petitioner claims, when a liability (which liability

was not there to begin with) is imposed concurrently with an

opportunity to reduce, not totally eradicate, the newfound

liability. In sum, contrary to petitioner’s suggestion,

respondent’s net income still decreased corresponding to the

amount it expected as its refunds/credits and the deficiency

assessments against it, which when summed up would be the

total cost of the 10% retroactive VAT levied on respondent.

 

Respondent claims to have incurred further prejudice.  In

computing its income taxes for the relevant years, the input

VAT cost that respondent had paid to its suppliers was not

treated by respondent as part of its cost of goods sold, which is

deductible from gross income for income tax purposes, but as

an asset which could be refunded or applied as payment for

other internal revenue taxes.  In fact, Revenue Regulation No.

5-87 (VAT Implementing Guidelines), requires input VAT to be

recorded not as part of the cost of materials or inventory

purchased but as a separate entry called “input taxes,” which

may then be applied against output VAT, other internal revenue

taxes, or refunded as the case may be.[43]  In being denied the

opportunity to deduct the input VAT from its gross income,

respondent’s net income was overstated by the amount of its

input VAT.  This overstatement was assessed tax at the 32%

corporate income tax rate, resulting in respondent’s

overpayment of income taxes in the corresponding amount. 

Thus, respondent not only lost its right to refund/ credit its

input VAT and became liable for deficiency VAT, it also overpaid

its income tax in the amount of 32% of its input VAT.

 

This leads us to the second recourse that petitioner has

suggested to offset any resulting prejudice to respondent as a

consequence of giving retroactive effect to BIR VAT Ruling No.

008-92.  Petitioner submits that granting that respondent has

no other sale subject to 10% VAT against which its input taxes

may be used in payment, then respondent is constituted as the

final entity against which the costs of the tax passes-on shall

legally stop; hence, the input taxes may be converted as costs

available as deduction for income tax purposes.[44] 

 

Even assuming that the right to recover respondent’s excess

payment of income tax has not yet prescribed, this relief would

only address respondent’s overpayment of income tax but not

the other burdens discussed above.  Verily, this remedy is not a

feasible option for respondent because the very reason why it

was issued a deficiency tax assessment is that its input VAT

was not enough to offset its retroactive output VAT.  Indeed,

the burden of having to go through an unnecessary and

cumbersome refund process is prejudice enough.  Moreover,

there is in fact nothing left to claim as a deduction from income

taxes.  

 

From the foregoing it is clear that petitioner’s suggested

options by which prejudice would be eliminated from a

retroactive application of VAT Ruling No. 008-92 are either

simply inadequate or grossly unrealistic.

 

At the time when the subject transactions were consummated,

the prevailing BIR regulations relied upon by respondent

ordained that gold sales to the Central Bank were zero-rated. 

The BIR interpreted Sec. 100 of the NIRC in relation to Sec. 2 of

E.O. No. 581 s. 1980 which prescribed that gold sold to the

Central Bank shall be considered export and therefore shall be

subject to the export and premium duties.  In coming out with

this interpretation, the BIR also considered Sec. 169 of Central

Bank Circular No. 960 which states that all sales   of     gold    

to    the    Central    Bank    are    considered

constructive exports.[45]  Respondent should not be faulted for

relying on the BIR’s interpretation of the said laws and

regulations.[46]  While it is true, as petitioner alleges, that

government is not estopped from collecting taxes which remain

unpaid on account of the errors or mistakes of its agents and/or

officials and there could be no vested right arising from an

erroneous interpretation of law, these principles must give way

to exceptions based on and in keeping with the interest of

justice and fairplay, as has been done in the instant matter. 

For, it is primordial that every person must, in the exercise of

his rights and in the performance of his duties, act with justice,

give everyone his due, and observe honesty and good faith.[47] 

 

The case of ABS-CBN Broadcasting Corporation v. Court of Tax

Appeals[48] involved a similar factual milieu.  There the

Commissioner of Internal Revenue issued Memorandum

Circular No. 4-71 revoking an earlier circular for being

“erroneous for lack of legal basis.” When the prior circular was

still in effect, petitioner therein relied on it and consummated

its transactions on the basis thereof.  We held, thus:

 

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

from foreign corporations because it had already remitted all

film rentals and no longer had any control over them when the

new Circular was issued. . . .  

 

. . . .

 

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

the [g]overnment is never estopped from collecting taxes

because of mistakes or errors on the part of its agents.  But,

like other principles of law, this also admits of exceptions in the

interest of justice and fairplay. . . .In fact, in the United States, .

. . it has been held that the Commissioner [of Internal Revenue]

is precluded from adopting a position inconsistent with one

previously taken where injustice would result therefrom or

where there has been a misrepresentation to the taxpayer.[49]

 

Respondent, in this case, has similarly been put on the

receiving end of a grossly unfair deal.  Before respondent was

entitled to tax refunds or credits based on petitioner’s own

issuances. Then suddenly, it found itself instead being made to

pay deficiency taxes with petitioner’s retroactive change in the

VAT categorization of respondent’s transactions with the

Central Bank.  This is the sort of unjust treatment of a taxpayer

which the law in Sec. 246 of the NIRC abhors and forbids.

 

        WHEREFORE, the petition is DENIED for lack of merit.  The

Decision of the Court of Appeals is AFFIRMED.  No

pronouncement as to costs.

        SO ORDERED.

 

[1]Resolving CA-G.R. SP Nos. 37205, 38958, and 39435,

promulgated on 10 July 1998; penned by Justice Buenaventura

J. Guerrero, concurred in by Justice Portia Aliño-Hormachuelos

and Justice Renato C. Dacudao of the Former Fourteenth

Division. Rollo in G.R. No. 134588, pp. 38-52. N.B.: The two

docket numbers assigned to this single petition were the result

of petitioner’s filing of two motions for extension of time to file

petition for review on certiorari, the first, for CA-G.R. No. 38598

by Assistant Solicitor General Azucena Balanon-Corpuz and

Associate Solicitor Sarah Jane T. Fernandez docketed herein as

G.R. No. 134587, the second for CA-GR No. 37205 by Assistant

Solicitor General Ramon G. del Rosario and Solicitor Ma.

Theresa G. San Juan, docketed as G.R. No. 134588.  There is

only one petition, however, since the subject cases of the two

motions for extension of time were consolidated at the level of

the Court of Appeals and subject of the assailed Decision.

[2]See E.O. 292 s. 1987, Book IV Title II, Chapter 4, Sec. 16.

[3]Rollo in G.R. No. 134588, pp. 7-8.

[4]Id. at 190.

[5]With VAT Registration No. 311-9-000027 issued on 1 January

1988, id. at 39.

[6]P.D. No. 1158, s. 1977, prior to its amendment by R.A. No.

7716 (1994) and the enactment of R.A. No. 8284 (1997).

[7]Sec. 107 of the NIRC, as amended by E.O. No. 273 s. 1987.

[8]Sec. 104 of the NIRC, as amended by E.O. No. 273 s. 1987.

[9]Rollo in G.R. No. 134588, p. 39.

[10]Section 100.  . . . . [T]he following sales by VAT-registered

persons shall be subject to 0%: (1) export sales; and (2) sales

to persons or entities whose exemption under special laws or

international agreements to which the Philippines is a signatory

effectively subjects such sales to zero rate.

“Export sales” means the sale and shipment or exportation of

goods in the Philippines to a foreign country, irrespective of any

shipping arrangement that may be agreed upon which may

influence or determine the transfer of ownership of the goods

so exported, or foreign currency denominated sales. . . .

[11]Memorandum Circular No. 59-88 dated 14 December 1988;

VAT Ruling No. 074-88 dated 24 March 1988; VAT Ruling No.

075-88 dated 29 March 1988; VAT Ruling No. 379-88 dated 28

August 1988; and VAT Ruling No. 239-89 dated 20 September

1989. Per respondent’s Comment, Rollo in G.R. No. 134588, pp.

192-193.

[12]Rollo in G.R. No. 134588, p. 192.

[13]Other amounts not related to the instant petition are no

longer discussed.

[14]For the periods of 1 February 1991 to 30 April 1991 and 1

May 1991 to 31 July 1991, subjects of CTA Case No. 4945, and,

on appeal, of CA-G.R. SP No. 37209.

[15]For the periods of 1 August 1989 to 31 October 1989 and 1

November 1989 to 31 January 1990, subject of CTA Case No.

4627, and, on appeal, of CA-G.R. SP No. 38958. 

[16]For the periods of 1 February 1991 to 30 April 1991; 1 May

1991 to 31 July 1991; 1 February 1990 to 30 April 1990; 1 May

1990 to 31 July 1990; 1 August 1990 to 31 October 1990; 1

November 1991 to 31 January 1991 subjects of CTA Case No.

4686 and CTA Case No. 4829, consolidated on appeal of CA-

G.R. SP No. 39435.

[17]Rollo in G.R. No. 134588, pp. 39-44.

[18]Totaling P555,486,073.38 for the period of 1988 to 1991,

per respondent’s Comment, Rollo, p. 194.  Although it is

uncertain whether the deficiency assessments specified therein

correspond to the particular transactions subject of the present

petition.

[19]Rollo in G.R. No. 134588, p. 195. Petitioner relies heavily on

VAT Ruling No. 059-92 which contains a discourse on why the

retroactive application of VAT Ruling No. 3788-88 is not

prejudicial to mining companies. 

[20]CA Decision, Rollo in G.R. No. 134588, pp. 44-45.

[21]The Decision in CTA Case No. 4945, promulgated on 26

January 1995, was penned by Associate Judge Ramon O. De

Vera, concurred in by Associate Judge Manuel K. Gruba with

Dissenting and Concurring Opinion by Presiding Judge Ernesto

D. Acosta. The Decision in CTA Case No. 4627, promulgated on

23 June 1995, was penned by Associate Judge Ramon O. De

Vera and concurred in by Associate Judge Manuel K. Gruba and

Presiding Judge Ernesto D. Acosta. (N.B.: The issue in this case

was on substantiation of tax credits.  Consequently, this case

was not decided on the issue of retroactive application of VAT

Ruling No. 008-92.) The Decision in the consolidated cases of

CTA Case Nos. 4686 and 4829, promulgated on 27 September

1992, was penned by Associate Judge Ramon O. De Vera,

concurred in by Associate Judge Manuel K. Gruba with

Dissenting Opinion by Presiding Judge Ernesto D. Acosta.

[22]Other matters unrelated to the matter subject of the

petition are no longer discussed.

[23]CA-G.R. SP No. 38287. 

[24]Promulgated by the Special Fifth Division composed of

Justice Pedro Ramirez, Justice Maximo Asuncion, and ponente

Justice Eduardo Montenegro.

[25]Rollo in G.R. No. 134588, p. 52.

[26]Respondent’s Memorandum, Rollo in G.R. No. 134587, p.

41.

[27]Rollo in G.R. No. 134588, pp. 18-25.

[28]Id. at 199.

[29]Commissioner of Internal Revenue v. Court of Appeals, et

al., G.R. No. 117982, 06 February 1997, 267 SCRA 557, 564,

citing Commissioner of Internal Revenue v. Telefunken

Semiconductor Philippines, Inc., G.R. No. 103915, 23 October

1995, 249 SCRA 401; Bank of America v. Court of Appeals, G.R.

No. 103092, 21 July 1994, 234 SCRA 302; Commissioner of

Internal Revenue v. CTA, G.R. No. L-44007, 20 March 1991, 195

SCRA 444; Commissioner of Internal Revenue v. Mega General

Merchandising Corp., G.R. No. 69136, 30 September 1988, 166

SCRA 166; Commissioner of Internal Revenue v. Burroughs,

G.R. No. 66653, 19 June 1986, 142 SCRA 324; ABS-CBN v. CTA,

G.R. No. 52306, 12 October 1981, 108 SCRA 142.

[30]Rollo in G.R. No. 134588, p. 21.

[31]Id. at 197.

[32]The Philippine American Life and General Insurance Co. v.

Gramaje, G.R. No. 156963, 11 November 2004 citing Pestaño v.

Sumayang, G.R. No. 139875, 04 December 2000, 346 SCRA

870, 879.

[33]Ibid.

[34]H. DE LEON, THE LAW ON TRANSFER AND BUSINESS TAXATION

(2000 ed.), p. 135.

[35]Sec. 4.99-2, Revenue Regulation No. 7-95 (1995).

[36]Supra note 34 at 143.

[37]Sec. 112 (B) of the NIRC, as amended.

[38]Sec. 112 (B) of the NIRC, as amended.

[39]Rounded off to the first decimal for purposes of simplicity.

[40]Rollo, p. 29.

[41]Whether it is at 10% of invoice price for instances when

VAT is billed separately in the invoice or 1/11 of the invoice

price for instances when the VAT is not billed by the seller

separately in the invoice, in which case the invoice price is

deemed to have included the VAT. 

[42]Rollo in G.R. No. 134588, p. 26.

[43]Thus, per the illustration in Revenue Regulation No. 5-87,

where “A” sold on account to “B” 100 pieces of merchandise

“X” for P1,000.00 plus VAT of P100.00, B should record in his

subsidiary purchase book the purchases in the amount of

P1,000.00 and input taxes amounting to P100.00.  The journal

entry should be:

            Dr.       Purchase                                 P1,000.00

Input Taxes                             P   100.00

                        Cr.       Accounts payable        P1,100.00       

            [44]Rollo in G.R. No. 134588, p. 28.

[45]Circular No. 960 dated January 30, 1984.

“Sec. 169. Privilege of export oriented firms. Gold producers

shall qualify as export-oriented firms even if their entire output

is sold to the Central Bank.

“CIRCULAR No. 1301 Series of 1991 dated August 7, 1991

With reference to Section 169 of Central Bank Circular No. 960

dated October 21, 1983, it is hereby stated, for clarification

purposes, that all sales of gold to the Central Bank are

considered constructive exports.”

Section 107(c), C.B. Circular No. 1318 dated January 3, 1992

“All gold sold to Central Bank by primary and secondary gold

producers and small scale miners are considered constructive

when appropriate.”

[46]In his dissenting opinion in CTA Cases Nos. 4686 & 4829,

Presiding Judge (now Justice) Ernesto D. Acosta elucidated on

the rationale underlying the CB Circulars, thus:

The policy of the Central Bank is to conserve this metal (gold)

through purchase at competitive prices, giving incentives to

producers and its prudent use through regulations (Section

162, CB Circular No. 960).  Towards this end, certain gold

producers are required to sell their entire production of gold to

the Central Bank (Section 171, CB Circular No. 960) and no

person shall export or bring out, or attempt to export or bring

out of the Philippines, gold and/or gold-bearing materials, in

any shape, form and quantity without prior approval from the

CB Export Department. (Section 107, CB Circular No. 1318).  It

is also in line with aforementioned policy that gold producers

are given incentives such as considering their sales to CB as

exports.

[47]Article 19, Civil Code.

[48]195 Phil. 33 (1981).

[49]Id. at 41, 43-44.