G.R. No. L-29059 December 15, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.CEBU PORTLAND CEMENT COMPANY and COURT OF TAX APPEALS, respondents.

CRUZ, J.:

By virtue of a decision of the Court of Tax Appeals rendered on June 21, 1961, as modified on appeal by the Supreme Court on February 27, 1965, the Commissioner of Internal Revenue was ordered to refund to the Cebu Portland Cement Company the amount of P 359,408.98, representing overpayments of ad valorem taxes on cement produced and sold by it after October 1957. 1

On March 28, 1968, following denial of motions for reconsideration filed by both the petitioner and the private respondent, the latter moved for a writ of execution to enforce the said judgment . 2

The motion was opposed by the petitioner on the ground that the private respondent had an outstanding sales tax liability to which the judgment debt had already been credited. In fact, it was stressed, there was still a balance owing on the sales taxes in the amount of P 4,789,279.85 plus 28% surcharge. 3

On April 22, 1968, the Court of Tax Appeals * granted the motion, holding that the alleged sales tax liability of the private respondent was still being questioned and therefore could not be set-off against the refund. 4

In his petition to review the said resolution, the Commissioner of Internal Revenue claims that the refund should be charged against the tax deficiency of the private respondent on the sales of cement under Section 186 of the Tax Code. His position is that cement is a manufactured and not a mineral product and therefore not exempt from sales taxes. He adds that enforcement of the said tax deficiency was properly effected through his power of distraint of personal property under Sections 316 and 318 5 of the said Code and, moreover, the collection of any national internal revenue tax may not be enjoined under Section 305, 6 subject only to the exception prescribed in Rep. Act No. 1125. 7 This is not applicable to the instant case. The petitioner also denies that the sales tax assessments have already prescribed because the prescriptive period should be counted from the filing of the sales tax returns, which had not yet been done by the private respondent.

For its part, the private respondent disclaims liability for the sales taxes, on the ground that cement is not a manufactured product but a mineral product. 8 As such, it was exempted from sales taxes under Section 188 of the Tax Code after the effectivity of Rep. Act No. 1299 on June 16, 1955, in accordance with Cebu Portland Cement Co. v. Collector of Internal Revenue, 9 decided in 1968. Here Justice Eugenio Angeles declared that "before the effectivity of Rep. Act No. 1299, amending Section 246 of the National Internal Revenue Code, cement was taxable as a manufactured product under Section 186, in connection with Section 194(4) of the said Code," thereby implying that it was not considered a manufactured product afterwards. Also, the alleged sales tax deficiency could not as yet be enforced against it because the tax assessment was not yet final, the same being still under protest and still to be definitely resolved on the merits. Besides, the assessment had already prescribed, not having been made within the reglementary five-year period from the filing of the tax returns. 10

Our ruling is that the sales tax was properly imposed upon the private respondent for the reason that cement has always been considered a manufactured product and not a mineral product. This matter was extensively discussed and categorically resolved in Commissioner of Internal Revenue v. Republic Cement Corporation, 11 decided on August 10, 1983, where Justice Efren L. Plana, after an exhaustive review of the pertinent cases, declared for a unanimous Court:

From all the foregoing cases, it is clear that cement qua cement was never considered as a mineral product within the meaning of Section 246 of the Tax Code, notwithstanding that at least 80% of its components are minerals, for the simple reason that cement is the product of a manufacturing process and is no longer the mineral product contemplated in the Tax Code (i.e.; minerals subjected to simple treatments) for the purpose of imposing the ad valorem tax.

What has apparently encouraged the herein respondents to maintain their present posture is the case of Cebu Portland Cement Co. v. Collector of Internal Revenue, L-20563, Oct. 29, 1968 (28 SCRA 789) penned by Justice Eugenio Angeles. For some portions of that decision give the impression that Republic Act No. 1299,

which amended Section 246, reclassified cement as a mineral product that was not subject to sales tax. ...

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After a careful study of the foregoing, we conclude that reliance on the decision penned by Justice Angeles is misplaced. The said decision is no authority for the proposition that after the enactment of Republic Act No. 1299 in 1955 (defining mineral product as things with at least 80% mineral content), cement became a 'mineral product," as distinguished from a "manufactured product," and therefore ceased to be subject to sales tax. It was not necessary for the Court to so rule. It was enough for the Court to say in effect that even assuming Republic Act No. 1299 had reclassified cement was a mineral product, the reclassification could not be given retrospective application (so as to justify the refund of sales taxes paid before Republic Act 1299 was adopted) because laws operate prospectively only, unless the legislative intent to the contrary is manifest, which was not so in the case of Republic Act 1266. [The situation would have been different if the Court instead had ruled in favor of refund, in which case it would have been absolutely necessary (1) to make an unconditional ruling that Republic Act 1299 re-classified cement as a mineral product (not subject to sales tax), and (2) to declare the law retroactive, as a basis for granting refund of sales tax paid before Republic Act 1299.]

In any event, we overrule the CEPOC decision of October 29, 1968 (G.R. No. L-20563) insofar as its pronouncements or any implication therefrom conflict with the instant decision.

The above views were reiterated in the resolution 12 denying reconsideration of the said decision, thus:

The nature of cement as a "manufactured product" (rather than a "mineral product") is well-settled. The issue has repeatedly presented itself as a threshold question for determining the basis for computing the ad valorem mining tax to be paid by cement Companies. No pronouncement was made in these cases that as a "manufactured product" cement is subject to sales tax because this was not at issue.

The decision sought to be reconsidered here referred to the legislative history of Republic Act No. 1299 which introduced a definition of the terms "mineral" and "mineral products" in Sec. 246 of the Tax Code. Given the legislative intent, the holding in the CEPOC case (G.R. No. L-20563) that cement was subject to sales tax prior to the effectivity f Republic Act No. 1299 cannot be construed to mean that, after the law took effect, cement� ceased to be so subject to the tax. To erase any and all misconceptions that may have been spawned by reliance on the case of Cebu Portland Cement Co. v. Collector of Internal Revenue, L-20563, October 29, 1968 (28 SCRA 789) penned by Justice Eugenio Angeles, the Court has expressly overruled it insofar as it may conflict with the decision of August 10, 1983, now subject of these motions for reconsideration.

On the question of prescription, the private respondent claims that the five-year reglementary period for the assessment of its tax liability started from the time it filed its gross sales returns on June 30, 1962. Hence, the assessment for sales taxes made on January 16, 1968 and March 4, 1968, were already out of time. We disagree. This contention must fail for what CEPOC filed was not the sales returns required in Section 183(n) but the ad valorem tax returns required under Section 245 of the Tax Code. As Justice Irene R. Cortes emphasized in the aforestated resolution:

In order to avail itself of the benefits of the five-year prescription period under Section 331 of the Tax Code, the taxpayer should have filed the required return for the tax involved, that is, a sales tax return. (Butuan Sawmill, Inc. v. CTA, et al., G.R. No. L-21516, April 29, 1966, 16 SCRA 277). Thus CEPOC should have filed sales tax returns of its gross sales for the subject periods. Both parties admit that returns were made for the ad valorem mining tax. CEPOC argues that said returns contain the information necessary for the assessment of the sales tax. The Commissioner does not consider such returns as compliance with the requirement for the filing of tax returns so as to start the running of the five-year prescriptive period.

We agree with the Commissioner. It has been held in Butuan Sawmill Inc. v. CTA, supra, that the filing of an income tax return cannot be considered as substantial compliance with the requirement of filing sales tax returns, in the same way that an income tax return cannot be considered as a return for compensating tax for the purpose of computing the period of prescription under Sec. 331. (Citing Bisaya Land Transportation Co., Inc. v. Collector of Internal Revenue, G.R. Nos. L-12100 and L-11812, May 29, 1959). There being no sales tax returns filed by CEPOC, the statute of stations in Sec. 331 did not begin to run against the government. The assessment made by the Commissioner in 1968 on CEPOC's cement sales during the period from July 1, 1959 to

December 31, 1960 is not barred by the five-year prescriptive period. Absent a return or when the return is false or fraudulent, the applicable period is ten (10) days from the discovery of the fraud, falsity or omission. The question in this case is: When was CEPOC's omission to file tha return deemed discovered by the government, so as to start the running of said period? 13

The argument that the assessment cannot as yet be enforced because it is still being contested loses sight of the urgency of the need to collect taxes as "the lifeblood of the government." If the payment of taxes could be postponed by simply questioning their validity, the machinery of the state would grind to a halt and all government functions would be paralyzed. That is the reason why, save for the exception already noted, the Tax Code provides:

Sec. 291. Injunction not available to restrain collection of tax. — No court shall have authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by this Code.

It goes without saying that this injunction is available not only when the assessment is already being questioned in a court of justice but more so if, as in the instant case, the challenge to the assessment is still-and only-on the administrative level. There is all the more reason to apply the rule here because it appears that even after crediting of the refund against the tax deficiency, a balance of more than P 4 million is still due from the private respondent.

To require the petitioner to actually refund to the private respondent the amount of the judgment debt, which he will later have the right to distrain for payment of its sales tax liability is in our view an Idle ritual. We hold that the respondent Court of Tax Appeals erred in ordering such a charade.

WHEREFORE, the petition is GRANTED. The resolution dated April 22, 1968, in CTA Case No. 786 is SET ASIDE, without any pronouncement as to costs.

SO ORDERED.

Teehankee, C.J., Narvasa, Paras and Gancayco, JJ., concur

G.R. Nos. 89898-99 October 1, 1990

MUNICIPALITY OF MAKATI, petitioner, vs.THE HONORABLE COURT OF APPEALS, HON. SALVADOR P. DE GUZMAN, JR., as Judge RTC of Makati, Branch CXLII ADMIRAL FINANCE CREDITORS CONSORTIUM, INC., and SHERIFF SILVINO R. PASTRANA, respondents.

Defante & Elegado for petitioner.

Roberto B. Lugue for private respondent Admiral Finance Creditors' Consortium, Inc.

R E S O L U T I O N

 CORTÉS, J.:

The present petition for review is an off-shoot of expropriation proceedings initiated by petitioner Municipality of Makati against private respondent Admiral Finance Creditors Consortium, Inc., Home Building System & Realty Corporation and one Arceli P. Jo, involving a parcel of land and improvements thereon located at Mayapis St., San Antonio Village, Makati and registered in the name of Arceli P. Jo under TCT No. S-5499.

It appears that the action for eminent domain was filed on May 20, 1986, docketed as Civil Case No. 13699. Attached to petitioner's complaint was a certification that a bank account (Account No. S/A 265-537154-3) had been opened with the PNB Buendia Branch under petitioner's name containing the sum of P417,510.00, made pursuant to the provisions of Pres. Decree No. 42. After due hearing where the parties presented their respective appraisal reports regarding the value of the property, respondent RTC judge rendered a decision on June 4, 1987, fixing the appraised value of the property at P5,291,666.00, and ordering petitioner to pay this amount minus the advanced payment of P338,160.00 which was earlier released to private respondent.

After this decision became final and executory, private respondent moved for the issuance of a writ of execution. This motion was granted by respondent RTC judge. After issuance of the writ of execution, a Notice of Garnishment dated January 14, 1988 was served by respondent sheriff Silvino R. Pastrana upon the manager of the PNB Buendia Branch. However, respondent sheriff was informed that a "hold code" was placed on the account of petitioner. As a result of this, private respondent filed a motion dated January 27, 1988 praying that an order be issued directing the bank to deliver to respondent sheriff the amount equivalent to the unpaid balance due under the RTC decision dated June 4, 1987.

Petitioner filed a motion to lift the garnishment, on the ground that the manner of payment of the expropriation amount should be done in installments which the respondent RTC judge failed to state in his decision. Private respondent filed its opposition to the motion.

Pending resolution of the above motions, petitioner filed on July 20, 1988 a "Manifestation" informing the court that private respondent was no longer the true and lawful owner of the subject property because a new title over the property had been registered in the name of Philippine Savings Bank, Inc. (PSB) Respondent RTC judge issued an order requiring PSB to make available the documents pertaining to its transactions over the subject property, and the PNB Buendia Branch to reveal the amount in petitioner's account which was garnished by respondent sheriff. In compliance with this order, PSB filed a manifestation informing the court that it had consolidated its ownership over the property as mortgagee/purchaser at an extrajudicial foreclosure sale held on April 20, 1987. After several conferences, PSB and private respondent entered into a compromise agreement whereby they agreed to divide between themselves the compensation due from the expropriation proceedings.

Respondent trial judge subsequently issued an order dated September 8, 1988 which: (1) approved the compromise agreement; (2) ordered PNB Buendia Branch to immediately release to PSB the sum of P4,953,506.45 which corresponds to the balance of the appraised value of the subject property under the RTC decision dated June 4, 1987, from the garnished account of petitioner; and, (3) ordered PSB and private respondent to execute the necessary deed of conveyance over the subject property in favor of petitioner. Petitioner's motion to lift the garnishment was denied.

Petitioner filed a motion for reconsideration, which was duly opposed by private respondent. On the other hand,

for failure of the manager of the PNB Buendia Branch to comply with the order dated September 8, 1988, private respondent filed two succeeding motions to require the bank manager to show cause why he should not be held in contempt of court. During the hearings conducted for the above motions, the general manager of the PNB Buendia Branch, a Mr. Antonio Bautista, informed the court that he was still waiting for proper authorization from the PNB head office enabling him to make a disbursement for the amount so ordered. For its part, petitioner contended that its funds at the PNB Buendia Branch could neither be garnished nor levied upon execution, for to do so would result in the disbursement of public funds without the proper appropriation required under the law, citing the case of Republic of the Philippines v. Palacio [G.R. No. L-20322, May 29, 1968, 23 SCRA 899].

Respondent trial judge issued an order dated December 21, 1988 denying petitioner's motion for reconsideration on the ground that the doctrine enunciated in Republic v. Palacio did not apply to the case because petitioner's PNB Account No. S/A 265-537154-3 was an account specifically opened for the expropriation proceedings of the subject property pursuant to Pres. Decree No. 42. Respondent RTC judge likewise declared Mr. Antonio Bautista guilty of contempt of court for his inexcusable refusal to obey the order dated September 8, 1988, and thus ordered his arrest and detention until his compliance with the said order.

Petitioner and the bank manager of PNB Buendia Branch then filed separate petitions for certiorari with the Court of Appeals, which were eventually consolidated. In a decision promulgated on June 28, 1989, the Court of Appeals dismissed both petitions for lack of merit, sustained the jurisdiction of respondent RTC judge over the funds contained in petitioner's PNB Account No. 265-537154-3, and affirmed his authority to levy on such funds.

Its motion for reconsideration having been denied by the Court of Appeals, petitioner now files the present petition for review with prayer for preliminary injunction.

On November 20, 1989, the Court resolved to issue a temporary restraining order enjoining respondent RTC judge, respondent sheriff, and their representatives, from enforcing and/or carrying out the RTC order dated December 21, 1988 and the writ of garnishment issued pursuant thereto. Private respondent then filed its comment to the petition, while petitioner filed its reply.

Petitioner not only reiterates the arguments adduced in its petition before the Court of Appeals, but also alleges for the first time that it has actually two accounts with the PNB Buendia Branch, to wit:

xxx xxx xxx

(1) Account No. S/A 265-537154-3 — exclusively for the expropriation of the subject property, with an outstanding balance of P99,743.94.

(2) Account No. S/A 263-530850-7 — for statutory obligations and other purposes of the municipal government, with a balance of P170,098,421.72, as of July 12, 1989.

xxx xxx xxx

[Petition, pp. 6-7; Rollo, pp. 11-12.]

Because the petitioner has belatedly alleged only in this Court the existence of two bank accounts, it may fairly be asked whether the second account was opened only for the purpose of undermining the legal basis of the assailed orders of respondent RTC judge and the decision of the Court of Appeals, and strengthening its reliance on the doctrine that public funds are exempted from garnishment or execution as enunciated in Republic v. Palacio [supra.] At any rate, the Court will give petitioner the benefit of the doubt, and proceed to resolve the principal issues presented based on the factual circumstances thus alleged by petitioner.

Admitting that its PNB Account No. S/A 265-537154-3 was specifically opened for expropriation proceedings it had initiated over the subject property, petitioner poses no objection to the garnishment or the levy under execution of the funds deposited therein amounting to P99,743.94. However, it is petitioner's main contention that inasmuch as the assailed orders of respondent RTC judge involved the net amount of P4,965,506.45, the

funds garnished by respondent sheriff in excess of P99,743.94, which are public funds earmarked for the municipal government's other statutory obligations, are exempted from execution without the proper appropriation required under the law.

There is merit in this contention. The funds deposited in the second PNB Account No. S/A 263-530850-7 are public funds of the municipal government. In this jurisdiction, well-settled is the rule that public funds are not subject to levy and execution, unless otherwise provided for by statute [Republic v. Palacio, supra.; The Commissioner of Public Highways v. San Diego, G.R. No. L-30098, February 18, 1970, 31 SCRA 616]. More particularly, the properties of a municipality, whether real or personal, which are necessary for public use cannot be attached and sold at execution sale to satisfy a money judgment against the municipality. Municipal revenues derived from taxes, licenses and market fees, and which are intended primarily and exclusively for the purpose of financing the governmental activities and functions of the municipality, are exempt from execution [See Viuda De Tan Toco v. The Municipal Council of Iloilo, 49 Phil. 52 (1926): The Municipality of Paoay, Ilocos Norte v. Manaois, 86 Phil. 629 (1950); Municipality of San Miguel, Bulacan v. Fernandez, G.R. No. 61744, June 25, 1984, 130 SCRA 56]. The foregoing rule finds application in the case at bar. Absent a showing that the municipal council of Makati has passed an ordinance appropriating from its public funds an amount corresponding to the balance due under the RTC decision dated June 4, 1987, less the sum of P99,743.94 deposited in Account No. S/A 265-537154-3, no levy under execution may be validly effected on the public funds of petitioner deposited in Account No. S/A 263-530850-7.

Nevertheless, this is not to say that private respondent and PSB are left with no legal recourse. Where a municipality fails or refuses, without justifiable reason, to effect payment of a final money judgment rendered against it, the claimant may avail of the remedy of mandamus in order to compel the enactment and approval of the necessary appropriation ordinance, and the corresponding disbursement of municipal funds therefor [See Viuda De Tan Toco v. The Municipal Council of Iloilo, supra; Baldivia v. Lota, 107 Phil. 1099 (1960); Yuviengco v. Gonzales, 108 Phil. 247 (1960)].

In the case at bar, the validity of the RTC decision dated June 4, 1987 is not disputed by petitioner. No appeal was taken therefrom. For three years now, petitioner has enjoyed possession and use of the subject property notwithstanding its inexcusable failure to comply with its legal obligation to pay just compensation. Petitioner has benefited from its possession of the property since the same has been the site of Makati West High School since the school year 1986-1987. This Court will not condone petitioner's blatant refusal to settle its legal obligation arising from expropriation proceedings it had in fact initiated. It cannot be over-emphasized that, within the context of the State's inherent power of eminent domain,

. . . [j]ust compensation means not only the correct determination of the amount to be paid to the owner of the land but also the payment of the land within a reasonable time from its taking. Without prompt payment, compensation cannot be considered "just" for the property owner is made to suffer the consequence of being immediately deprived of his land while being made to wait for a decade or more before actually receiving the amount necessary to cope with his loss [Cosculluela v. The Honorable Court of Appeals, G.R. No. 77765, August 15, 1988, 164 SCRA 393, 400. See also Provincial Government of Sorsogon v. Vda. de Villaroya, G.R. No. 64037, August 27, 1987, 153 SCRA 291].

The State's power of eminent domain should be exercised within the bounds of fair play and justice. In the case at bar, considering that valuable property has been taken, the compensation to be paid fixed and the municipality is in full possession and utilizing the property for public purpose, for three (3) years, the Court finds that the municipality has had more than reasonable time to pay full compensation.

WHEREFORE, the Court Resolved to ORDER petitioner Municipality of Makati to immediately pay Philippine Savings Bank, Inc. and private respondent the amount of P4,953,506.45. Petitioner is hereby required to submit to this Court a report of its compliance with the foregoing order within a non-extendible period of SIXTY (60) DAYS from the date of receipt of this resolution.

The order of respondent RTC judge dated December 21, 1988, which was rendered in Civil Case No. 13699, is SET ASIDE and the temporary restraining order issued by the Court on November 20, 1989 is MADE PERMANENT.

SO ORDERED.

Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.G.R. No. L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

CRUZ, J.:

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.

The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The corollary issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal Revenue was made on time and in accordance with law.

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in engineering, construction and other allied activities, received a letter from the petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959. 1 On January 18, 1965, Algue flied a letter of protest or request for reconsideration, which letter was stamp received on the same day in the office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the pending protest. 3 A search of the protest in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was not taking any action on the protest and it was only then that he accepted the warrant of distraint and levy earlier sought to be served. 5 Sixteen days later, on April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. 6

The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal may be made within thirty days after receipt of the decision or ruling challenged. 7 It is true that as a rule the warrant of distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a request for reconsideration," 9 being "tantamount to an outright denial thereof and makes the said request deemed rejected." 10 But there is a special circumstance in the case at bar that prevents application of this accepted doctrine.

The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed its letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued; indeed, such protest could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant was premature and could therefore not be served.

As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and was based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed, the reglementary period which started on the date the assessment was received, viz., January 14, 1965. The period started running again only on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the said protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary period had been consumed.

Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the private respondent for actual services

rendered. The payment was in the form of promotional fees. These were collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development Company.

Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be personal holding company income 12 but later conformed to the decision of the respondent court rejecting this assertion. 13 In fact, as the said court found, the amount was earned through the joint efforts of the persons among whom it was distributed It has been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the promotion of the said persons, this new corporation purchased the PSEDC properties. 15 For this sale, Algue received as agent a commission of P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to the aforenamed individuals. 16

There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid the corresponding taxes thereon. 17 The Court of Tax Appeals also found, after examining the evidence, that no distribution of dividends was involved. 18

The petitioner claims that these payments are fictitious because most of the payees are members of the same family in control of Algue. It is argued that no indication was made as to how such payments were made, whether by check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction.

We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but periodically and in different amounts as each payee's need arose. 19 It should be remembered that this was a family corporation where strict business procedures were not applied and immediate issuance of receipts was not required. Even so, at the end of the year, when the books were to be closed, each payee made an accounting of all of the fees received by him or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was understandable, however, in view of the close relationship among the persons in the family corporation.

We agree with the respondent court that the amount of the promotional fees was not excessive. The total commission paid by the Philippine Sugar Estate Development Co. to the private respondent was P125,000.00. 21

After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering that it was the payees who did practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. This finding of the respondent court is in accord with the following provision of the Tax Code:

SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as deductions —

(a) Expenses:

(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; ... 22

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and its practical application may be further stated and illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on stock. This is likely to occur in the case of a corporation having few stockholders, Practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond or bear a close relationship to the stockholdings of the officers of employees, it would seem likely that the salaries are not paid wholly for services rendered, but the excessive payments are a distribution of earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.

SO ORDERED.

Teehankee, C.J., Narvasa, Gancayco and Griño-Aquino, JJ., concur.

G.R. No. 122480             April 12, 2000

BPI-FAMILY SAVINGS BANK, Inc., petitioner, vs.COURT OF APPEALS, COURT OF TAX APPEALS and the COMMISSIONER OF INTERNAL REVENUE, respondents. PANGANIBAN, J.:

If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same standard against itself in refunding excess payments. When it is undisputed that a taxpayer is entitled to a refund, the State should not invoke technicalities to keep money not belonging to it. No one, not even the State, should enrich oneself at the expense of another.

The Case

Before us is a Petition for Review assailing the March 31, 1995 Decision of the Court of Appeals 1 (CA) in CA-GR SP No. 34240, which affirmed the December 24, 1993 Decision2 of the Court of Tax Appeals (CTA). The CA disposed as follows:

WHEREFORE, foregoing premises considered, the petition is hereby DISMISSED for lack of merit.3

On the other hand, the dispositive portion of the CTA Decision affirmed by the CA reads as follows:

WHEREFORE, in [view of] all the foregoing, Petitioner's claim for refund is hereby DENIED and this Petition for Review is DISMISSED for lack of merit.4

Also assailed is the November 8, 1995 CA Resolution5 denying reconsideration.

The Facts

The facts of this case were summarized by the CA in this wise:

This case involves a claim for tax refund in the amount of P112,491.00 representing petitioner's tax withheld for the year 1989.

In its Corporate Annual Income Tax Return for the year 1989, the following items are reflected:

Income P1,017,931,831.00

Deductions P1,026,218,791.00

Net Income (Loss) (P8,286,960.00)

Taxable Income (Loss) (P8,286,960.00)

Less:

1988 Tax Credit P185,001.00

1989 Tax Credit P112,491.00

TOTAL AMOUNT P297,492.00

REFUNDABLE

It appears from the foregoing 1989 Income Tax Return that petitioner had a total refundable amount of

P297,492 inclusive of the P112,491.00 being claimed as tax refund in the present case. However, petitioner declared in the same 1989 Income Tax Return that the said total refundable amount of P297,492.00 will be applied as tax credit to the succeeding taxable year.

On October 11, 1990, petitioner filed a written claim for refund in the amount of P112,491.00 with the respondent Commissioner of Internal Revenue alleging that it did not apply the 1989 refundable amount of P297,492.00 (including P112,491.00) to its 1990 Annual Income Tax Return or other tax liabilities due to the alleged business losses it incurred for the same year.

Without waiting for respondent Commissioner of Internal Revenue to act on the claim for refund, petitioner filed a petition for review with respondent Court of Tax Appeals, seeking the refund of the amount of P112,491.00.

The respondent Court of Tax Appeals dismissed petitioner's petition on the ground that petitioner failed to present as evidence its corporate Annual Income Tax Return for 1990 to establish the fact that petitioner had not yet credited the amount of P297,492.00 (inclusive of the amount P112,491.00 which is the subject of the present controversy) to its 1990 income tax liability.

Petitioner filed a motion for reconsideration, however, the same was denied by respondent court in its Resolution dated May 6, 1994.6

As earlier noted, the CA affirmed the CTA. Hence, this Petition.7

Ruling of the Court of Appeals

In affirming the CTA, the Court of Appeals ruled as follows:

It is incumbent upon the petitioner to show proof that it has not credited to its 1990 Annual income Tax Return, the amount of P297,492.00 (including P112,491.00), so as to refute its previous declaration in the 1989 Income Tax Return that the said amount will be applied as a tax credit in the succeeding year of 1990. Having failed to submit such requirement, there is no basis to grant the claim for refund. . . .

Tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. In other words, the burden of proof rests upon the taxpayer to establish by sufficient and competent evidence its entitlement to the claim for refund.8

Issue

In their Memorandum, respondents identify the issue in this wise:

The sole issue to be resolved is whether or not petitioner is entitled to the refund of P112,491.90, representing excess creditable withholding tax paid for the taxable year 1989.9

The Court's Ruling

The Petition is meritorious.

Main Issue:

Petitioner Entitled to Refund

It is undisputed that petitioner had excess withholding taxes for the year 1989 and was thus entitled to a refund amounting to P112,491. Pursuant to Section 69 10 of the 1986 Tax Code which states that a corporation entitled to a refund may opt either (1) to obtain such refund or (2) to credit said amount for the succeeding taxable year, petitioner indicated in its 1989 Income Tax Return that it would apply the said amount as a tax credit for the

succeeding taxable year, 1990. Subsequently, petitioner informed the Bureau of Internal Revenue (BIR) that it would claim the amount as a tax refund, instead of applying it as a tax credit. When no action from the BIR was forthcoming, petitioner filed its claim with the Court of Tax Appeals.

The CTA and the CA, however, denied the claim for tax refund. Since petitioner declared in its 1989 Income Tax Return that it would apply the excess withholding tax as a tax credit for the following year, the Tax Court held that petitioner was presumed to have done so. The CTA and the CA ruled that petitioner failed to overcome this presumption because it did not present its 1990 Return, which would have shown that the amount in dispute was not applied as a tax credit. Hence, the CA concluded that petitioner was not entitled to a tax refund.

We disagree with the Court of Appeals. As a rule, the factual findings of the appellate court are binding on this Court. This rule, however, does not apply where, inter alia, the judgment is premised on a misapprehension of facts, or when the appellate court failed to notice certain relevant facts which if considered would justify a different conclusion. 11 This case is one such exception.

In the first place, petitioner presented evidence to prove its claim that it did not apply the amount as a tax credit. During the trial before the CTA, Ms. Yolanda Esmundo, the manager of petitioner's accounting department, testified to this fact. It likewise presented its claim for refund and a certification issued by Mr. Gil Lopez, petitioner's vice-president, stating that the amount of P112,491 "has not been and/or will not be automatically credited/offset against any succeeding quarters' income tax liabilities for the rest of the calendar year ending December 31, 1990." Also presented were the quarterly returns for the first two quarters of 1990.

The Bureau of Internal Revenue, for its part, failed to controvert petitioner's claim. In fact, it presented no evidence at all. Because it ought to know the tax records of all taxpayers, the CIR could have easily disproved petitioner's claim. To repeat, it did not do so.

More important, a copy of the Final Adjustment Return for 1990 was attached to petitioner's Motion for Reconsideration filed before the CTA. 12 A final adjustment return shows whether a corporation incurred a loss or gained a profit during the taxable year. In this case, that Return clearly showed that petitioner incurred P52,480,173 as net loss in 1990. Clearly, it could not have applied the amount in dispute as a tax credit.

Again, the BIR did not controvert the veracity of the said return. It did not even file an opposition to petitioner's Motion and the 1990 Final Adjustment Return attached thereto. In denying the Motion for Reconsideration, however, the CTA ignored the said Return. In the same vein, the CA did not pass upon that significant document.

True, strict procedural rules generally frown upon the submission of the Return after the trial.1âwphi1 The law creating the Court of Tax Appeals, however, specifically provides that proceedings before it "shall not be governed strictly by the technical rules of evidence." 13 The paramount consideration remains the ascertainment of truth. Verily, the quest for orderly presentation of issues is not an absolute. It should not bar courts from considering undisputed facts to arrive at a just determination of a controversy.

In the present case, the Return attached to the Motion for Reconsideration clearly showed that petitioner suffered a net loss in 1990. Contrary to the holding of the CA and the CTA, petitioner could not have applied the amount as a tax credit. In failing to consider the said Return, as well as the other documentary evidence presented during the trial, the appellate court committed a reversible error.

It should be stressed that the rationale of the rules of procedure is to secure a just determination of every action. They are tools designed to facilitate the attainment of justice. 14 But there can be no just determination of the present action if we ignore, on grounds of strict technicality, the Return submitted before the CTA and even before this Court. 15 To repeat, the undisputed fact is that petitioner suffered a net loss in 1990; accordingly, it incurred no tax liability to which the tax credit could be applied. Consequently, there is no reason for the BIR and this Court to withhold the tax refund which rightfully belongs to the petitioner.

Public respondents maintain that what was attached to petitioner's Motion for Reconsideration was not the final adjustment Return, but petitioner's first two quarterly returns for 1990. 16 This allegation is wrong. An examination of the records shows that the 1990 Final Adjustment Return was attached to the Motion for Reconsideration. On the other hand, the two quarterly returns for 1990 mentioned by respondent were in fact

attached to the Petition for Review filed before the CTA. Indeed, to rebut respondents' specific contention, petitioner submitted before us its Surrejoinder, to which was attached the Motion for Reconsideration and Exhibit "A" thereof, the Final Adjustment Return for 1990. 17

CTA Case No. 4897

Petitioner also calls the attention of this Court, as it had done before the CTA, to a Decision rendered by the Tax Court in CTA Case No. 4897, involving its claim for refund for the year 1990. In that case, the Tax Court held that "petitioner suffered a net loss for the taxable year 1990 . . . ." 18 Respondent, however, urges this Court not to take judicial notice of the said case. 19

As a rule, "courts are not authorized to take judicial notice of the contents of the records of other cases, even when such cases have been tried or are pending in the same court, and notwithstanding the fact that both cases may have been heard or are actually pending before the same judge." 20

Be that as it may, Section 2, Rule 129 provides that courts may take judicial notice of matters ought to be known to judges because of their judicial functions. In this case, the Court notes that a copy of the Decision in CTA Case No. 4897 was attached to the Petition for Review filed before this Court. Significantly, respondents do not claim at all that the said Decision was fraudulent or nonexistent. Indeed, they do not even dispute the contents of the said Decision, claiming merely that the Court cannot take judicial notice thereof.

To our mind, respondents' reasoning underscores the weakness of their case. For if they had really believed that petitioner is not entitled to a tax refund, they could have easily proved that it did not suffer any loss in 1990. Indeed, it is noteworthy that respondents opted not to assail the fact appearing therein — that petitioner suffered a net loss in 1990 — in the same way that it refused to controvert the same fact established by petitioner's other documentary exhibits.

In any event, the Decision in CTA Case No. 4897 is not the sole basis of petitioner's case. It is merely one more bit of information showing the stark truth: petitioner did not use its 1989 refund to pay its taxes for 1990.

Finally, respondents argue that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the claimant. Under the facts of this case, we hold that petitioner has established its claim. Petitioner may have failed to strictly comply with the rules of procedure; it may have even been negligent. These circumstances, however, should not compel the Court to disregard this cold, undisputed fact: that petitioner suffered a net loss in 1990, and that it could not have applied the amount claimed as tax credits.

Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms, however exalted, should not be misused by the government to keep money not belonging to it and thereby enrich itself at the expense of its law-abiding citizens. If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same standard against itself in refunding excess payments of such taxes. Indeed, the State must lead by its own example of honor, dignity and uprightness.

WHEREFORE, the Petition is hereby GRANTED and the assailed Decision and Resolution of the Court of Appeals REVERSED and SET ASIDE. The Commissioner of Internal Revenue is ordered to refund to petitioner the amount of P112,491 as excess creditable taxes paid in 1989. No costs.1âwphi1.nêt

SO ORDERED.

Melo, Purisima and Gonzaga-Reyes, JJ., concur.Vitug, J., abroad on official business.

G.R. No. L-68252 May 26, 1995

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.TOKYO SHIPPING CO. LTD., represented by SORIAMONT STEAMSHIP AGENCIES INC., and COURT OF TAX APPEALS, respondents.

 

PUNO, J.:

For resolution is whether or not private respondent Tokyo Shipping Co. Ltd., is entitled to a refund or tax credit for amounts representing pre-payment of income and common carrier's taxes under the National Internal Revenue Code, section 24 (b) (2), as amended. 1

Private respondent is a foreign corporation represented in the Philippines by Soriamont Steamship Agencies, Incorporated. It owns and operates tramper vessel M/V Gardenia. In December 1980, NASUTRA 2 chartered M/V Gardenia to load 16,500 metric tons of raw sugar in the Philippines. 3 On December 23, 1980, Mr. Edilberto Lising, the operations supervisor of Soriamont Agency, 4 paid the required income and common carrier's taxes in the respective sums of FIFTY-NINE THOUSAND FIVE HUNDRED TWENTY-THREE PESOS and SEVENTY-FIVE CENTAVOS (P59,523.75) and FORTY-SEVEN THOUSAND SIX HUNDRED NINETEEN PESOS (P47,619.00), or a total of ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS (P107,142.75) based on the expected gross receipts of the vessel. 5 Upon arriving, however, at Guimaras Port of Iloilo, the vessel found no sugar for loading. On January 10, 1981, NASUTRA and private respondent's agent mutually agreed to have the vessel sail for Japan without any cargo.

Claiming the pre-payment of income and common carrier's taxes as erroneous since no receipt was realized from the charter agreement, private respondent instituted a claim for tax credit or refund of the sum ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS (P107,142.75) before petitioner Commissioner of Internal Revenue on March 23, 1981. Petitioner failed to act promptly on the claim, hence, on May 14, 1981, private respondent filed a petition for review 6

before public respondent Court of Tax Appeals.

Petitioner contested the petition. As special and affirmative defenses, it alleged the following: that taxes are presumed to have been collected in accordance with law; that in an action for refund, the burden of proof is upon the taxpayer to show that taxes are erroneously or illegally collected, and the taxpayer's failure to sustain said burden is fatal to the action for refund; and that claims for refund are construed strictly against tax claimants. 7

After trial, respondent tax court decided in favor of the private respondent. It held:

It has been shown in this case that 1) the petitioner has complied with the mentioned statutory requirement by having filed a written claim for refund within the two-year period from date of payment; 2) the respondent has not issued any deficiency assessment nor disputed the correctness of the tax returns and the corresponding amounts of prepaid income and percentage taxes; and 3) the chartered vessel sailed out of the Philippine port with absolutely no cargo laden on board as cleared and certified by the Customs authorities; nonetheless 4) respondent's apparent bit of reluctance in validating the legal merit of the claim, by and large, is tacked upon the "examiner who is investigating petitioner's claim for refund which is the subject matter of this case has not yet submitted his report. Whether or not respondent will present his evidence will depend on the said report of the examiner." (Respondent's Manifestation and Motion dated September 7, 1982). Be that as it may the case was submitted for decision by respondent on the basis of the pleadings and records and by petitioner on the evidence presented by counsel sans the respective memorandum.

An examination of the records satisfies us that the case presents no dispute as to relatively simple material facts. The circumstances obtaining amply justify petitioner's righteous indignation to a more expeditious action. Respondent has offered no reason nor made effort to submit any controverting documents to bash that patina of

legitimacy over the claim. But as might well be, towards the end of some two and a half years of seeming impotent anguish over the pendency, the respondent Commissioner of Internal Revenue would furnish the satisfaction of ultimate solution by manifesting that "it is now his turn to present evidence, however, the Appellate Division of the BIR has already recommended the approval of petitioner's claim for refund subject matter of this petition. The examiner who examined this case has also recommended the refund of petitioner's claim. Without prejudice to withdrawing this case after the final approval of petitioner's claim, the Court ordered the resetting to September 7, 1983." (Minutes of June 9, 1983 Session of the Court) We need not fashion any further issue into an apparently settled legal situation as far be it from a comedy of errors it would be too much of a stretch to hold and deny the refund of the amount of prepaid income and common carrier's taxes for which petitioner could no longer be made accountable.

On August 3, 1984, respondent court denied petitioner's motion for reconsideration, hence, this petition for review on certiorari.

Petitioner now contends: (1) private respondent has the burden of proof to support its claim of refund; (2) it failed to prove that it did not realize any receipt from its charter agreement; and (3) it suppressed evidence when it did not present its charter agreement.

We find no merit in the petition.

There is no dispute about the applicable law. It is section 24 (b) (2) of the National Internal Revenue Code which at that time provides as follows:

A corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income derived in the preceding taxable year from all sources within the Philippines: Provided, however, That international carriers shall pay a tax of two and one-half per cent (2 1/2%) on their gross Philippine billings: "Gross Philippine Billings" include gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or mail, provided the cargo or mail originates from the Philippines. The gross revenue realized from the said cargo or mail include the gross freight charge up to final destination. Gross revenue from chartered flights originating from the Philippines shall likewise form part of "Gross Philippine Billings" regardless of the place or payment of the passage documents . . . . .

Pursuant to this provision, a resident foreign corporation engaged in the transport of cargo is liable for taxes depending on the amount of income it derives from sources within the Philippines. Thus, before such a tax liability can be enforced the taxpayer must be shown to have earned income sourced from the Philippines.

We agree with petitioner that a claim for refund is in the nature of a claim for exemption 8 and should be construed in strictissimi juris against the taxpayer. 9 Likewise, there can be no disagreement with petitioner's stance that private respondent has the burden of proof to establish the factual basis of its claim for tax refund.

The pivotal issue involves a question of fact — whether or not the private respondent was able to prove that it derived no receipts from its charter agreement, and hence is entitled to a refund of the taxes it pre-paid to the government.

The respondent court held that sufficient evidence has been adduced by the private respondent proving that it derived no receipt from its charter agreement with NASUTRA. This finding of fact rests on a rational basis, and hence must be sustained. Exhibits "E", "F," and "G" positively show that the tramper vessel M/V "Gardenia" arrived in Iloilo on January 10, 1981 but found no raw sugar to load and returned to Japan without any cargo laden on board. Exhibit "E" is the Clearance Vessel to a Foreign Port issued by the District Collector of Customs, Port of Iloilo while Exhibit "F" is the Certification by the Officer-in-Charge, Export Division of the Bureau of Customs Iloilo. The correctness of the contents of these documents regularly issued by officials of the Bureau of Customs cannot be doubted as indeed, they have not been contested by the petitioner. The records also reveal that in the course of the proceedings in the court a quo, petitioner hedged and hawed when its turn came to present evidence. At one point, its counsel manifested that the BIR examiner and the appellate division of the BIR have both recommended the approval of private respondent's claim for refund. The same counsel even represented that the government would withdraw its opposition to the petition after final approval of

private respondents' claim. The case dragged on but petitioner never withdrew its opposition to the petition even if it did not present evidence at all. The insincerity of petitioner's stance drew the sharp rebuke of respondent court in its Decision and for good reason. Taxpayers owe honesty to government just as government owes fairness to taxpayers.

In its last effort to retain the money erroneously prepaid by the private respondent, petitioner contends that private respondent suppressed evidence when it did not present its charter agreement with NASUTRA. The contention cannot succeed. It presupposes without any basis that the charter agreement is prejudicial evidence against the private respondent. 10 Allegedly, it will show that private respondent earned a charter fee with or without transporting its supposed cargo from Iloilo to Japan. The allegation simply remained an allegation and no court of justice will regard it as truth. Moreover, the charter agreement could have been presented by petitioner itself thru the proper use of a subpoena duces tecum. It never did either because of neglect or because it knew it would be of no help to bolster its position. 11 For whatever reason, the petitioner cannot take to task the private respondent for not presenting what it mistakenly calls "suppressed evidence."

We cannot but bewail the unyielding stance taken by the government in refusing to refund the sum of ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY TWO PESOS AND SEVENTY FIVE CENTAVOS (P107,142.75) erroneously prepaid by private respondent. The tax was paid way back in 1980 and despite the clear showing that it was erroneously paid, the government succeeded in delaying its refund for fifteen (15) years. After fifteen (15) long years and the expenses of litigation, the money that will be finally refunded to the private respondent is just worth a damaged nickel. This is not, however, the kind of success the government, especially the BIR, needs to increase its collection of taxes. Fair deal is expected by our taxpayers from the BIR and the duty demands that BIR should refund without any unreasonable delay what it has erroneously collected. Our ruling in Roxas v. Court of Tax Appeals 12 is apropos to recall:

The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously.

IN VIEW HEREOF, the assailed decision of respondent Court of Tax Appeals, dated September 15, 1983, is AFFIRMED in toto. No costs.

SO ORDERED.

Narvasa, C.J., Regalado and Mendoza, JJ., concur.

G.R. No. L-54908 January 22, 1990

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS, respondents.

G.R. No. 80041 January 22, 1990

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS, respondents.

Gadioma Law Offices for respondents.

 

REGALADO, J.:

These cases, involving the same issue being contested by the same parties and having originated from the same factual antecedents generating the claims for tax credit of private respondents, the same were consolidated by resolution of this Court dated May 31, 1989 and are jointly decided herein.

The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development Corporation (hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation (Mitsubishi, for brevity), a Japanese corporation licensed to engage in business in the Philippines, for purposes of the projected expansion of the productive capacity of the former's mines in Toledo, Cebu. Under said contract, Mitsubishi agreed to extend a loan to Atlas 'in the amount of $20,000,000.00, United States currency, for the installation of a new concentrator for copper production. Atlas, in turn undertook to sell to Mitsubishi all the copper concentrates produced from said machine for a period of fifteen (15) years. It was contemplated that $9,000,000.00 of said loan was to be used for the purchase of the concentrator machinery from Japan. 1

Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for short) obviously for purposes of its obligation under said contract. Its loan application was approved on May 26, 1970 in the sum of ¥4,320,000,000.00, at about the same time as the approval of its loan for ¥2,880,000,000.00 from a consortium of Japanese banks. The total amount of both loans is equivalent to $20,000,000.00 in United States currency at the then prevailing exchange rate. The records in the Bureau of Internal Revenue show that the approval of the loan by Eximbank to Mitsubishi was subject to the condition that Mitsubishi would use the amount as a loan to Atlas and as a consideration for importing copper concentrates from Atlas, and that Mitsubishi had to pay back the total amount of loan by September 30, 1981. 2

Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in the amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the National Internal Revenue Code, as amended by Presidential Decree No. 131, and duly remitted to the Government. 3

On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of P1,971,595.01 be applied against their existing and future tax liabilities. Parenthetically, it was later noted by respondent Court of Tax Appeals in its decision that on August 27, 1976, Mitsubishi executed a waiver and disclaimer of its interest in the claim for tax credit in favor ofAtlas. 4

The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents filed a petition for review with respondent court, docketed therein as CTA Case No. 2801. 5 The petition was grounded on the claim that Mitsubishi was a mere agent of Eximbank, which is a financing institution owned, controlled and financed by the Japanese Government. Such governmental status of Eximbank, if it may be so called, is the basis for private repondents' claim for exemption from paying the tax on the interest payments on the loan as

earlier stated. It was further claimed that the interest payments on the loan from the consortium of Japanese banks were likewise exempt because said loan supposedly came from or were financed by Eximbank. The provision of the National Internal Revenue Code relied upon is Section 29 (b) (7) (A), 6 which excludes from gross income:

(A) Income received from their investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on their deposits in banks in the Philippines by (1) foreign governments, (2) financing institutions owned, controlled, or enjoying refinancing from them, and (3) international or regional financing institutions established by governments.

Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 6, 1977 but was later reset upon manifestation of petitioner that the claim for tax credit of the alleged erroneous payment was still being reviewed by the Appellate Division of the Bureau of Internal Revenue. The records show that on November 16, 1976, the said division recommended to petitioner the approval of private respondent's claim. However, before action could be taken thereon, respondent court scheduled the case for hearing on September 30, 1977, during which trial private respondents presented their evidence while petitioner submitted his case on the basis of the records of the Bureau of Internal Revenue and the pleadings. 7

On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax credit in favor of Atlas in the amount of P1,971,595.01. Interestingly, the tax court held that petitioner admitted the material averments of private respondents when he supposedly prayed "for judgment on the pleadings without off-spring proof as to the truth of his allegations." 8 Furthermore, the court declared that all papers and documents pertaining to the loan of ¥4,320,000,000.00 obtained by Mitsubishi from Eximbank show that this was the same amount given to Atlas. It also observed that the money for the loans from the consortium of private Japanese banks in the sum of ¥2,880,000,000.00 "originated" from Eximbank. From these, respondent court concluded that the ultimate creditor of Atlas was Eximbank with Mitsubishi acting as a mere "arranger or conduit through which the loans flowed from the creditor Export-Import Bank of Japan to the debtor Atlas Consolidated Mining & Development Corporation." 9

A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an appeal to this Court, docketed herein as G.R. No. 54908.

While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on the amount of P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and 1978 was withheld and remitted to the Government. Atlas again filed a claim for tax credit with the petitioner, repeating the same basis for exemption.

On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals docketed as CTA Case No. 3015. Petitioner filed his answer thereto on August 14, 1979, and, in a letter to private respondents dated November 12, 1979, denied said claim for tax credit for lack of factual or legal basis. 10

On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court rendered judgment ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for reconsideration, filed on March 10, 1981, was denied by respondent court in a resolution dated September 7, 1987. A notice of appeal was filed on September 22, 1987 by petitioner with respondent court and a petition for review was filed with this Court on December 19, 1987. Said later case is now before us as G.R. No. 80041 and is consolidated with G.R. No. 54908.

The principal issue in both petitions is whether or not the interest income from the loans extended to Atlas by Mitsubishi is excludible from gross income taxation pursuant to Section 29 b) (7) (A) of the tax code and, therefore, exempt from withholding tax. Apropos thereto, the focal question is whether or not Mitsubishi is a mere conduit of Eximbank which will then be considered as the creditor whose investments in the Philippines on loans are exempt from taxes under the code.

Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that petitioner should be deemed to have admitted the allegations of the private respondents when it submitted the case on the basis of the pleadings and records of the bureau. There is nothing to indicate such admission on the part of petitioner nor can we accept respondent court's pronouncement that petitioner did not offer to prove the truth of its allegations.

The records of the Bureau of Internal Revenue relevant to the case were duly submitted and admitted as petitioner's supporting evidence. Additionally, a hearing was conducted, with presentation of evidence, and the findings of respondent court were based not only on the pleadings but on the evidence adduced by the parties. There could, therefore, not have been a judgment on the pleadings, with the theorized admissions imputed to petitioner, as mistakenly held by respondent court.

Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled to the highest respect and can only be disturbed on appeal if they are not supported by substantial evidence or if there is a showing of gross error or abuse on the part of the tax court. 11 Thus, ordinarily, we could give due consideration to the holding of respondent court that Mitsubishi is a mere agent of Eximbank. Compelling circumstances obtaining and proven in these cases, however, warrant a departure from said general rule since we are convinced that there is a misapprehension of facts on the part of the tax court to the extent that its conclusions are speculative in nature.

The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the contract of loan and Atlas as the seller of the copper concentrates. From the categorical language used in the document, one prestation was in consideration of the other. The specific terms and the reciprocal nature of their obligations make it implausible, if not vacuous to give credit to the cavalier assertion that Mitsubishi was a mere agent in said transaction.

Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi stated in its loan application with the former was that the amount being procured would be used as a loan to and in consideration for importing copper concentrates from Atlas. 12 Such an innocuous statement of purpose could not have been intended for, nor could it legally constitute, a contract of agency. If that had been the purpose as respondent court believes, said corporations would have specifically so stated, especially considering their experience and expertise in financial transactions, not to speak of the amount involved and its purchasing value in 1970.

A thorough analysis of the factual and legal ambience of these cases impels us to give weight to the following arguments of petitioner:

The nature of the above contract shows that the same is not just a simple contract of loan. It is not a mere creditor-debtor relationship. It is more of a reciprocal obligation between ATLAS and MITSUBISHI where the latter shall provide the funds in the installation of a new concentrator at the former's Toledo mines in Cebu, while ATLAS in consideration of which, shall sell to MITSUBISHI, for a term of 15 years, the entire copper concentrate that will be produced by the installed concentrator.

Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the specified term was the consideration of the granting of the amount of $20 million to ATLAS. MITSUBISHI, in order to fulfill its part of the contract, had to obtain funds. Hence, it had to secure a loan or loans from other sources. And from what sources, it is immaterial as far as ATLAS in concerned. In this case, MITSUBISHI obtained the $20 million from the EXIMBANK, of Japan and the consortium of Japanese banks financed through the EXIMBANK, of Japan.

When MITSUBISHI therefore secured such loans, it was in its own independent capacity as a private entity and not as a conduit of the consortium of Japanese banks or the EXIMBANK of Japan. While the loans were secured by MITSUBISHI primarily "as a loan to and in consideration for importing copper concentrates from ATLAS," the fact remains that it was a loan by EXIMBANK of Japan to MITSUBISHI and not to ATLAS.

Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct and separate contract from that entered into by MITSUBISHI and ATLAS. Surely, in the latter contract, it is not EXIMBANK, that was intended to be benefited. It is MITSUBISHI which stood to profit. Besides, the Loan and Sales Contract cannot be any clearer. The only signatories to the same were MITSUBISHI and ATLAS. Nowhere in the contract can it be inferred that MITSUBISHI acted for and in behalf of EXIMBANK, of Japan nor of any entity, private or public, for that matter.

Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule that when a contract of

loan is completed, the money ceases to be the property of the former owner and becomes the sole property of the obligor (Tolentino and Manio vs. Gonzales Sy, 50 Phil. 558).

In the case at bar, when MITSUBISHI obtained the loan of $20 million from EXIMBANK, of Japan, said amount ceased to be the property of the bank and became the property of MITSUBISHI.

The conclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is the sole creditor of ATLAS, the former being the owner of the $20 million upon completion of its loan contract with EXIMBANK of Japan.

The interest income of the loan paid by ATLAS to MITSUBISHI is therefore entirely different from the interest income paid by MITSUBISHI to EXIMBANK, of Japan. What was the subject of the 15% withholding tax is not the interest income paid by MITSUBISHI to EXIMBANK, but the interest income earned by MITSUBISHI from the loan to ATLAS. . . . 13

To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in itself, does not appear to be suppletory or collateral to another contract and is, therefore, not to be distorted by other considerations aliunde. The application for the loan was approved on May 20, 1970, or more than a month after the contract between Mitsubishi and Atlas was entered into on April 17, 1970. It is true that under the contract of loan with Eximbank, Mitsubishi agreed to use the amount as a loan to and in consideration for importing copper concentrates from Atlas, but all that this proves is the justification for the loan as represented by Mitsubishi, a standard banking practice for evaluating the prospects of due repayment. There is nothing wrong with such stipulation as the parties in a contract are free to agree on such lawful terms and conditions as they see fit. Limiting the disbursement of the amount borrowed to a certain person or to a certain purpose is not unusual, especially in the case of Eximbank which, aside from protecting its financial exposure, must see to it that the same are in line with the provisions and objectives of its charter.

Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it from making loans except to Japanese individuals and corporations. We are not impressed. Not only is there a failure to establish such submission by adequate evidence but it posits the unfair and unexplained imputation that, for reasons subject only of surmise, said financing institution would deliberately circumvent its own charter to accommodate an alien borrower through a manipulated subterfuge, but with it as a principal and the real obligee.

The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank, assuming the truth thereof, is too tenuous and conjectural to support the proposition that Mitsubishi is a mere conduit. Furthermore, the remittance of the interest payments may also be logically viewed as an arrangement in paying Mitsubishi's obligation to Eximbank. Whatever arrangement was agreed upon by Eximbank and Mitsubishi as to the manner or procedure for the payment of the latter's obligation is their own concern. It should also be noted that Eximbank's loan to Mitsubishi imposes interest at the rate of 75% per annum, while Mitsubishis contract with Atlas merely states that the "interest on the amount of the loan shall be the actual cost beginning from and including other dates of releases against loan." 14

It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed, which onus petitioners have failed to discharge. Significantly, private respondents are not even among the entities which, under Section 29 (b) (7) (A) of the tax code, are entitled to exemption and which should indispensably be the party in interest in this case.

Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad, pragmatic analysis" alone without substantial supportive evidence, lest governmental operations suffer due to diminution of much needed funds. Nor can we close this discussion without taking cognizance of petitioner's warning, of pervasive relevance at this time, that while international comity is invoked in this case on the nebulous representation that the funds involved in the loans are those of a foreign government, scrupulous care must be taken to avoid opening the floodgates to the violation of our tax laws. Otherwise, the mere expedient of having a Philippine corporation enter into a contract for loans or other domestic securities with private foreign entities, which in turn will negotiate independently with their governments, could be availed of to take advantage of the tax exemption law under discussion.

WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015, dated April 18, 1980 and January 15, 1981, respectively, are hereby REVERSED and SET ASIDE.

G.R. No. 112024 January 28, 1999

PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OF APPEALS, respondent.

 

QUISUMBING, J.:

This petition for review assails the Resolution 1 of the Court of Appeals dated September 22, 1993 affirming the Decision 2 and a Resolution 3 of the Court Of Tax Appeals which denied the claims of the petitioner for tax refund and tax credits, and disposing as follows:

IN VIEW OF ALL, THE FOREGOING, the instant petition for review, is DENIED due course. The Decision of the Court of Tax Appeals dated May 20, 1993 and its resolution dated July 20, 1993, are hereby AFFIRMED in toto.

SO ORDERED. 4

The Court of Tax Appeals earlier ruled as follows:

WHEREFORE, Petitioner's claim for refund/tax credits of overpaid income tax for 1985 in the amount of P5,299,749.95 is hereby denied for having been filed beyond the reglementary period. The 1986 claim for refund amounting to P234,077.69 is likewise denied since petitioner has opted and in all likelihood automatically credited the same to the succeeding year. The petition for review is dismissed for lack of merit.

SO ORDERED. 5

The facts on record show the antecedent circumstances pertinent to this case.

Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized under Philippine laws, filed its quarterly income tax returns for the first and second quarters of 1985, reported profits, and paid the total income tax of P5,016,954.00. The taxes due were settled by applying PBCom's tax credit memos and accordingly, the Bureau of Internal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00 and P1,615,253.00, respectively.

Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the year-ended December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax payable for the year.

But during these two years, PBCom earned rental income from leased properties. The lessees withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986.

On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985.

Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.

Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA). The petition was docketed as CTA Case No. 4309 entitled: "Philippine Bank of Communications vs. Commissioner of Internal Revenue."

The losses petitioner incurred as per the summary of petitioner's claims for refund and tax credit for 1985 and 1986, filed before the Court of Tax Appeals, are as follows:

1985 1986

——— ———

Net Income (Loss) (P25,317,288.00) (P14,129,602.00)

Tax Due NIL NIL

Quarterly tax.

Payments Made 5,016,954.00 —

Tax Withheld at Source 282,795.50 234,077.69

———————— ———————

Excess Tax Payments P5,299,749.50* P234,077.69

=============== =============

* CTA's decision reflects PBCom's 1985 tax claim as P5,299,749.95. A forty five centavo difference was noted.

On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed beyond the two-year reglementary period provided for by law. The petitioner's claim for refund in 1986 amounting to P234,077.69 was likewise denied on the assumption that it was automatically credited by PBCom against its tax payment in the succeeding year.

On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTA's decision but the same was denied due course for lack of merit. 6

Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with the Court of Appeals. However on September 22, 1993, the Court of Appeals affirmed in toto the CTA's resolution dated July 20, 1993. Hence this petition now before us.

The issues raised by the petitioner are:

I. Whether taxpayer PBCom — which relied in good faith on the formal assurances of BIR in RMC No. 7-85 and did not immediately file with the CTA a petition for review asking for the refund/tax credit of its 1985-86 excess quarterly income tax payments — can be prejudiced by the subsequent BIR rejection, applied retroactivity, of its assurances in RMC No. 7-85 that the prescriptive period for the refund/tax credit of excess quarterly income tax payments is not two years but ten (10). 7

II. Whether the Court of Appeals seriously erred in affirming the CTA decision which denied PBCom's claim for the refund of P234,077.69 income tax overpaid in 1986 on the mere speculation, without proof, that there were taxes due in 1987 and that PBCom availed of tax-crediting that year. 8

Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the plea for tax refund or tax credits on the ground of prescription, despite petitioner's reliance on RMC No. 7-85, changing the prescriptive period of two years to ten years?

Petitioner argues that its claims for refund and tax credits are not yet barred by prescription relying on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The circular states that

overpaid income taxes are not covered by the two-year prescriptive period under the tax Code and that taxpayers may claim refund or tax credits for the excess quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil Code. The pertinent portions of the circular reads:

REVENUE MEMORANDUM CIRCULAR NO. 7-85

SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS CORPORATE INCOME TAX RESULTING FROM THE FILING OF THE FINAL ADJUSTMENT RETURN.

TO: All Internal Revenue Officers and Others Concerned.

Sec. 85 And 86 Of the National Internal Revenue Code provide:

xxx xxx xxx

The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos. 10-77 which provide;

xxx xxx xxx

It has been observed, however, that because of the excess tax payments, corporations file claims for recovery of overpaid income tax with the Court of Tax Appeals within the two-year period from the date of payment, in accordance with sections 292 and 295 of the National Internal Revenue Code. It is obvious that the filing of the case in court is to preserve the judicial right of the corporation to claim the refund or tax credit.

It should he noted, however, that this is not a case of erroneously or illegally paid tax under the provisions of Sections 292 and 295 of the Tax Code.

In the above provision of the Regulations the corporation may request for the refund of the overpaid income tax or claim for automatic tax credit. To insure prompt action on corporate annual income tax returns showing refundable amounts arising from overpaid quarterly income taxes, this Office has promulgated Revenue Memorandum Order No. 32-76 dated June 11, 1976, containing the procedure in processing said returns. Under these procedures, the returns are merely pre-audited which consist mainly of checking mathematical accuracy of the figures of the return. After which, the refund or tax credit is granted, and, this procedure was adopted to facilitate immediate action on cases like this.

In this regard, therefore, there is no need to file petitions for review in the Court of Tax Appeals in order to preserve the right to claim refund or tax credit the two year period. As already stated, actions hereon by the Bureau are immediate after only a cursory pre-audit of the income tax returns. Moreover, a taxpayer may recover from the Bureau of Internal Revenue excess income tax paid under the provisions of Section 86 of the Tax Code within 10 years from the date of payment considering that it is an obligation created by law (Article 1144 of the Civil Code). 9 (Emphasis supplied.)

Petitioner argues that the government is barred from asserting a position contrary to its declared circular if it would result to injustice to taxpayers. Citing ABS CBN Broadcasting Corporation vs. Court of Tax Appeals 10

petitioner claims that rulings or circulars promulgated by the Commissioner of Internal Revenue have no retroactive effect if it would be prejudicial to taxpayers, In ABS-CBN case, the Court held that the government 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.

Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for this rules as follows:

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;

c). where the taxpayer acted in bad faith.

Respondent Commissioner of Internal Revenue, through Solicitor General, argues that the two-year prescriptive period for filing tax cases in court concerning income tax payments of Corporations is reckoned from the date of filing the Final Adjusted Income Tax Return, which is generally done on April 15 following the close of the calendar year. As precedents, respondent Commissioner cited cases which adhered to this principle, to wit ACCRA Investments Corp. vs. Court of Appeals, et al., 11 and Commissioner of Internal Revenue vs. TMX Sales, Inc., et al.. 12 Respondent Commissioner also states that since the Final Adjusted Income Tax Return of the petitioner for the taxable year 1985 was supposed to be filed on April 15, 1986, the latter had only until April 15, 1988 to seek relief from the court. Further, respondent Commissioner stresses that when the petitioner filed the case before the CTA on November 18, 1988, the same was filed beyond the time fixed by law, and such failure is fatal to petitioner's cause of action.

After a careful study of the records and applicable jurisprudence on the matter, we find that, contrary to the petitioner's contention, the relaxation of revenue regulations by RMC 7-85 is not warranted as it disregards the two-year prescriptive period set by law.

Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal. 13 Due process of law under the Constitution does not require judicial proceedings in tax cases. This must necessarily be so because it is upon taxation that the government chiefly relies to obtain the means to carry on its operations and it is of utmost importance that the modes adopted to enforce the collection of taxes levied should be summary and interfered with as little as possible. 14

From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law because the BIR being an administrative body enforced to collect taxes, its functions should not be unduly delayed or hampered by incidental matters.

Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides for the prescriptive period for filing a court proceeding for the recovery of tax erroneously or illegally collected, viz.:

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

In any case, no such suit or proceedings shall begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment ; Provided however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. (Emphasis supplied)

The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal Revenue, within two (2) years after payment of tax, before any suit in CTA is commenced. The two-year prescriptive period provided, should be computed from the time of filing the Adjustment Return and final payment of the tax for the year.

In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co., 15 this Court explained the application of Sec. 230 of 1977 NIRC, as follows:

Clearly, the prescriptive period of two years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished. In the present case, this date is April 16, 1984, and two years from this date would be April 16, 1986. . . . As we have earlier said in the TMX Sales case, Sections 68. 16 69, 17 and 70 18 on Quarterly Corporate Income Tax Payment and Section 321 should be considered in conjunction with it 19

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress.

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be erroneous. 20 Thus, courts will not countenance administrative issuances that override, instead of remaining consistent and in harmony with the law they seek to apply and implement. 21

In the case of People vs. Lim, 22 it was held that rules and regulations issued by administrative officials to implement a law cannot go beyond the terms and provisions of the latter.

Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only inconsistent with but is contrary to the provisions and spirit of Act. No 4003 as amended, because whereas the prohibition prescribed in said Fisheries Act was for any single period of time not exceeding five years duration, FAO No 37-1 fixed no period, that is to say, it establishes an absolute ban for all time. This discrepancy between Act No. 4003 and FAO No. 37-1 was probably due to an oversight on the part of Secretary of Agriculture and Natural Resources. Of course, in case of discrepancy, the basic Act prevails, for the reason that the regulation or rule issued to implement a law cannot go beyond the terms and provisions of the latter. . . . In this connection, the attention of the technical men in the offices of Department Heads who draft rules and regulation is called to the importance and necessity of closely following the terms and provisions of the law which they intended to implement, this to avoid any possible misunderstanding or confusion as in the present case. 23

Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its officials or agents. 24 As pointed out by the respondent courts, the nullification of RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative interpretation which is not in harmony with Sec. 230 of 1977 NIRC. for being contrary to the express provision of a statute. Hence, his interpretation could not be given weight for to do so would, in effect, amend the statute.

It is likewise argued that the Commissioner of Internal Revenue, after promulgating RMC No. 7-85, is estopped by the principle of non-retroactively of BIR rulings. Again We do not agree. The Memorandum Circular, stating that a taxpayer may recover the excess income tax paid within 10 years from date of payment because this is an obligation created by law, was issued by the Acting Commissioner of Internal Revenue. On the other hand, the decision, stating that the taxpayer should still file a claim for a refund or tax credit and corresponding petition fro review within the two-year prescription period, and that the lengthening of the period of limitation on refund from two to ten years would be adverse to public policy and run counter to the positive mandate of Sec. 230, NIRC, - was the ruling and judicial interpretation of the Court of Tax Appeals. Estoppel has no application in the case at bar because it was not the Commissioner of Internal Revenue who denied petitioner's claim of refund or tax credit. Rather, it was the Court of Tax Appeals who denied (albeit correctly) the claim and in effect, ruled that the RMC No. 7-85 issued by the Commissioner of Internal Revenue is an administrative interpretation which is out of harmony with or contrary to the express provision of a statute (specifically Sec. 230, NIRC), hence, cannot be given weight for to do so would in effect amend the statute. 25

Art. 8 of the Civil Code 26 recognizes judicial decisions, applying or interpreting statutes as part of the legal system of the country. But administrative decisions do not enjoy that level of recognition. A memorandum-circular of a bureau head could not operate to vest a taxpayer with shield against judicial action. For there are no vested rights to speak of respecting a wrong construction of the law by the administrative officials and such wrong interpretation could not place the Government in estoppel to correct or overrule the same. 27 Moreover,

the non-retroactivity of rulings by the Commissioner of Internal Revenue is not applicable in this case because the nullity of RMC No. 7-85 was declared by respondent courts and not by the Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held by this Court, a claim for refund is in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer. 28

On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming CTA's decision denying its claim for refund of P234,077.69 (tax overpaid in 1986), based on mere speculation, without proof, that PBCom availed of the automatic tax credit in 1987.

Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides that any excess of the total quarterly payments over the actual income tax computed in the adjustment or final corporate income tax return, shall either (a) be refunded to the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable year.

The corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention, whether to request for a refund or claim for an automatic tax credit for the succeeding taxable year. To ease the administration of tax collection, these remedies are in the alternative, and the choice of one precludes the other.

As stated by respondent Court of Appeals:

Finally, as to the claimed refund of income tax over-paid in 1986 — the Court of Tax Appeals, after examining the adjusted final corporate annual income tax return for taxable year 1986, found out that petitioner opted to apply for automatic tax credit. This was the basis used (vis-avis the fact that the 1987 annual corporate tax return was not offered by the petitioner as evidence) by the CTA in concluding that petitioner had indeed availed of and applied the automatic tax credit to the succeeding year, hence it can no longer ask for refund, as to [ sic] the two remedies of refund and tax credit are alternative. 30

That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977 NIRC, as specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which we must respect. Moreover, the 1987 annual corporate tax return of the petitioner was not offered as evidence to contovert said fact. Thus, we are bound by the findings of fact by respondent courts, there being no showing of gross error or abuse on their part to disturb our reliance thereon. 31

WHEREFORE, the, petition is hereby DENIED, The decision of the Court of Appeals appealed from is AFFIRMED, with COSTS against the petitioner.1âwphi1.nêt

SO ORDERED.

Bellosillo, Puno, Mendoza, and Buena, JJ., concur.

G.R. No. L-59431 July 25, 1984

ANTERO M. SISON, JR., petitioner, vs.RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA, Deputy Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau of Internal Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and CESAR E. A. VIRATA, Minister of Finance, respondents.

Antero Sison for petitioner and for his own behalf.

The Solicitor General for respondents.

 

FERNANDO, C.J.:

The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1 on the validity of Section I of Batas Pambansa Blg. 135 depends upon a showing of its constitutional infirmity. The assailed provision further amends Section 21 of the National Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a) taxable compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual partner in the net profits of taxable partnership, (f) adjusted gross income. 2 Petitioner 3 as taxpayer alleges that by virtue thereof, "he would be unduly discriminated against by the imposition of higher rates of tax upon his income arising from the exercise of his profession vis-a-vis those which are imposed upon fixed income or salaried individual taxpayers. 4 He characterizes the above sction as arbitrary amounting to class legislation, oppressive and capricious in character 5 For petitioner, therefore, there is a transgression of both the equal protection and due process clauses 6 of the Constitution as well as of the rule requiring uniformity in taxation. 7

The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10 days from notice. Such an answer, after two extensions were granted the Office of the Solicitor General, was filed on May 28, 1982. 8 The facts as alleged were admitted but not the allegations which to their mind are "mere arguments, opinions or conclusions on the part of the petitioner, the truth [for them] being those stated [in their] Special and Affirmative Defenses." 9 The answer then affirmed: "Batas Pambansa Big. 135 is a valid exercise of the State's power to tax. The authorities and cases cited while correctly quoted or paraghraph do not support petitioner's stand." 10 The prayer is for the dismissal of the petition for lack of merit.

This Court finds such a plea more than justified. The petition must be dismissed.

1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so clearly set forth by retired Chief Justice Makalintal thus: "The areas which used to be left to private enterprise and initiative and which the government was called upon to enter optionally, and only 'because it was better equipped to administer for the public welfare than is any private individual or group of individuals,' continue to lose their well-defined boundaries and to be absorbed within activities that the government must undertake in its sovereign capacity if it is to meet the increasing social challenges of the times." 11 Hence the need for more revenues. The power to tax, an inherent prerogative, has to be availed of to assure the performance of vital state functions. It is the source of the bulk of public funds. To praphrase a recent decision, taxes being the lifeblood of the government, their prompt and certain availability is of the essence. 12

2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the strongest of all the powers of of government." 13 It is, of course, to be admitted that for all its plenitude 'the power to tax is not unconfined. There are restrictions. The Constitution sets forth such limits . Adversely affecting as it does properly rights, both the due process and equal protection clauses inay properly be invoked, all petitioner does,

to invalidate in appropriate cases a revenue measure. if it were otherwise, there would -be truth to the 1803 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." 14 In a separate opinion in Graves v. New York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized it as "a flourish of rhetoric [attributable to] the intellectual fashion of the times following] a free use of absolutes." 16 This is merely to emphasize that it is riot and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The power to tax is not the power to destroy while this Court sits." 17 So it is in the Philippines.

3. This Court then is left with no choice. The Constitution as the fundamental law overrides any legislative or executive, act that runs counter to it. In any case therefore where it can be demonstrated that the challenged statutory provision — as petitioner here alleges — fails to abide by its command, then this Court must so declare and adjudge it null. The injury thus is centered on the question of whether the imposition of a higher tax rate on taxable net income derived from business or profession than on compensation is constitutionally infirm.

4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as here. does not suffice. There must be a factual foundation of such unconstitutional taint. Considering that petitioner here would condemn such a provision as void or its face, he has not made out a case. This is merely to adhere to the authoritative doctrine that were the due process and equal protection clauses are invoked, considering that they arc not fixed rules but rather broad standards, there is a need for of such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail. 18

5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown to amount to the confiscation of property. That would be a clear abuse of power. It then becomes the duty of this Court to say that such an arbitrary act amounted to the exercise of an authority not conferred. That properly calls for the application of the Holmes dictum. It has also been held that where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process grounds. 19

6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this constitutional mandate whether the assailed act is in the exercise of the lice power or the power of eminent domain is to demonstrated that the governmental act assailed, far from being inspired by the attainment of the common weal was prompted by the spirit of hostility, or at the very least, discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different, both in the privileges conferred and the liabilities imposed. Favoritism and undue preference cannot be allowed. For the principle is that equal protection and security shall be given to every person under circumtances which if not Identical are analogous. If law be looked upon in terms of burden or charges, those that fall within a class should be treated in the same fashion, whatever restrictions cast on some in the group equally binding on the rest." 20 That same formulation applies as well to taxation measures. The equal protection clause is, of course, inspired by the noble concept of approximating the Ideal of the laws benefits being available to all and the affairs of men being governed by that serene and impartial uniformity, which is of the very essence of the Idea of law. There is, however, wisdom, as well as realism in these words of Justice Frankfurter: "The equality at which the 'equal protection' clause aims is not a disembodied equality. The Fourteenth Amendment enjoins 'the equal protection of the laws,' and laws are not abstract propositions. They do not relate to abstract units A, B and C, but are expressions of policy arising out of specific difficulties, address to the attainment of specific ends by the use of specific remedies. The Constitution does not require things which are different in fact or opinion to be treated in law as though they were the same." 21 Hence the constant reiteration of the view that classification if rational in character is allowable. As a matter of fact, in a leading case of Lutz V. Araneta, 22 this Court, through Justice J.B.L. Reyes, went so far as to hold "at any rate, it is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that 'inequalities which result from a singling out of one particular class for taxation, or exemption infringe no constitutional limitation.'" 23

7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The rule of taxation shag be uniform and equitable." 24 This requirement is met according to Justice Laurel in Philippine Trust Company v. Yatco, 25 decided in 1940, when the tax "operates with the same force and effect in every place where the subject may be found. " 26 He likewise added: "The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly attainable." 27 The problem of classification did not present

itself in that case. It did not arise until nine years later, when the Supreme Court held: "Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation, ... . 28

As clarified by Justice Tuason, where "the differentiation" complained of "conforms to the practical dictates of justice and equity" it "is not discriminatory within the meaning of this clause and is therefore uniform." 29 There is quite a similarity then to the standard of equal protection for all that is required is that the tax "applies equally to all persons, firms and corporations placed in similar situation." 30

8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the distinction between a tax rate and a tax base. There is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the same time reducing the applicable tax rate. Taxpayers may be classified into different categories. To repeat, it. is enough that the classification must rest upon substantial distinctions that make real differences. In the case of the gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of classification is the susceptibility of the income to the application of generalized rules removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of them. Taxpayers who are recipients of compensation income are set apart as a class. As there is practically no overhead expense, these taxpayers are e not entitled to make deductions for income tax purposes because they are in the same situation more or less. On the other hand, in the case of professionals in the practice of their calling and businessmen, there is no uniformity in the costs or expenses necessary to produce their income. It would not be just then to disregard the disparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the basis of gross income. There is ample justification then for the Batasang Pambansa to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income.

9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of factual foundation to show the arbitrary character of the assailed provision; 31 (2) the force of controlling doctrines on due process, equal protection, and uniformity in taxation and (3) the reasonableness of the distinction between compensation and taxable net income of professionals and businessman certainly not a suspect classification,

WHEREFORE, the petition is dismissed. Costs against petitioner.

Makasiar, Concepcion, Jr., Guerero, Melencio-Herrera, Escolin, Relova, Gutierrez, Jr., De la Fuente and Cuevas, JJ., concur.

Teehankee, J., concurs in the result.

Plana, J., took no part.

G.R. Nos. L-49839-46 April 26, 1991

JOSE B. L. REYES and EDMUNDO A. REYES, petitioners, vs.PEDRO ALMANZOR, VICENTE ABAD SANTOS, JOSE ROÑO, in their capacities as appointed and Acting Members of the CENTRAL BOARD OF ASSESSMENT APPEALS; TERESITA H. NOBLEJAS, ROMULO M. DEL ROSARIO, RAUL C. FLORES, in their capacities as appointed and Acting Members of the BOARD OF ASSESSMENT APPEALS of Manila; and NICOLAS CATIIL in his capacity as City Assessor of Manila, respondents.

Barcelona, Perlas, Joven & Academia Law Offices for petitioners.

 

PARAS, J.:p

This is a petition for review on certiorari to reverse the June 10, 1977 decision of the Central Board of Assessment Appeals 1 in CBAA Cases Nos. 72-79 entitled "J.B.L. Reyes, Edmundo Reyes, et al. v. Board of Assessment Appeals of Manila and City Assessor of Manila" which affirmed the March 29, 1976 decision of the Board of Tax Assessment Appeals 2 in BTAA Cases Nos. 614, 614-A-J, 615, 615-A, B, E, "Jose Reyes, et al. v. City Assessor of Manila" and "Edmundo Reyes and Milagros Reyes v. City Assessor of Manila" upholding the classification and assessments made by the City Assessor of Manila.

The facts of the case are as follows:

Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of land situated in Tondo and Sta. Cruz Districts, City of Manila, which are leased and entirely occupied as dwelling sites by tenants. Said tenants were paying monthly rentals not exceeding three hundred pesos (P300.00) in July, 1971. On July 14, 1971, the National Legislature enacted Republic Act No. 6359 prohibiting for one year from its effectivity, an increase in monthly rentals of dwelling units or of lands on which another's dwelling is located, where such rentals do not exceed three hundred pesos (P300.00) a month but allowing an increase in rent by not more than 10% thereafter. The said Act also suspended paragraph (1) of Article 1673 of the Civil Code for two years from its effectivity thereby disallowing the ejectment of lessees upon the expiration of the usual legal period of lease. On October 12, 1972, Presidential Decree No. 20 amended R.A. No. 6359 by making absolute the prohibition to increase monthly rentals below P300.00 and by indefinitely suspending the aforementioned provision of the Civil Code, excepting leases with a definite period. Consequently, the Reyeses, petitioners herein, were precluded from raising the rentals and from ejecting the tenants. In 1973, respondent City Assessor of Manila re-classified and reassessed the value of the subject properties based on the schedule of market values duly reviewed by the Secretary of Finance. The revision, as expected, entailed an increase in the corresponding tax rates prompting petitioners to file a Memorandum of Disagreement with the Board of Tax Assessment Appeals. They averred that the reassessments made were "excessive, unwarranted, inequitable, confiscatory and unconstitutional" considering that the taxes imposed upon them greatly exceeded the annual income derived from their properties. They argued that the income approach should have been used in determining the land values instead of the comparable sales approach which the City Assessor adopted (Rollo, pp. 9-10-A). The Board of Tax Assessment Appeals, however, considered the assessments valid, holding thus:

WHEREFORE, and considering that the appellants have failed to submit concrete evidence which could overcome the presumptive regularity of the classification and assessments appear to be in accordance with the base schedule of market values and of the base schedule of building unit values, as approved by the Secretary of Finance, the cases should be, as they are hereby, upheld.

SO ORDERED. (Decision of the Board of Tax Assessment Appeals, Rollo, p. 22).

The Reyeses appealed to the Central Board of Assessment Appeals. They submitted, among others, the summary of the yearly rentals to show the income derived from the properties. Respondent City Assessor, on

the other hand, submitted three (3) deeds of sale showing the different market values of the real property situated in the same vicinity where the subject properties of petitioners are located. To better appreciate the locational and physical features of the land, the Board of Hearing Commissioners conducted an ocular inspection with the presence of two representatives of the City Assessor prior to the healing of the case. Neither the owners nor their authorized representatives were present during the said ocular inspection despite proper notices served them. It was found that certain parcels of land were below street level and were affected by the tides (Rollo, pp. 24-25).

On June 10, 1977, the Central Board of Assessment Appeals rendered its decision, the dispositive portion of which reads:

WHEREFORE, the appealed decision insofar as the valuation and assessment of the lots covered by Tax Declaration Nos. (5835) PD-5847, (5839), (5831) PD-5844 and PD-3824 is affirmed.

For the lots covered by Tax Declaration Nos. (1430) PD-1432, PD-1509, 146 and (1) PD-266, the appealed Decision is modified by allowing a 20% reduction in their respective market values and applying therein the assessment level of 30% to arrive at the corresponding assessed value.

SO ORDERED. (Decision of the Central Board of Assessment Appeals, Rollo, p. 27)

Petitioner's subsequent motion for reconsideration was denied, hence, this petition.

The Reyeses assigned the following error:

THE HONORABLE BOARD ERRED IN ADOPTING THE "COMPARABLE SALES APPROACH" METHOD IN FIXING THE ASSESSED VALUE OF APPELLANTS' PROPERTIES.

The petition is impressed with merit.

The crux of the controversy is in the method used in tax assessment of the properties in question. Petitioners maintain that the "Income Approach" method would have been more realistic for in disregarding the effect of the restrictions imposed by P.D. 20 on the market value of the properties affected, respondent Assessor of the City of Manila unlawfully and unjustifiably set increased new assessed values at levels so high and successive that the resulting annual real estate taxes would admittedly exceed the sum total of the yearly rentals paid or payable by the dweller tenants under P.D. 20. Hence, petitioners protested against the levels of the values assigned to their properties as revised and increased on the ground that they were arbitrarily excessive, unwarranted, inequitable, confiscatory and unconstitutional (Rollo, p. 10-A).

On the other hand, while respondent Board of Tax Assessment Appeals admits in its decision that the income approach is used in determining land values in some vicinities, it maintains that when income is affected by some sort of price control, the same is rejected in the consideration and study of land values as in the case of properties affected by the Rent Control Law for they do not project the true market value in the open market (Rollo, p. 21). Thus, respondents opted instead for the "Comparable Sales Approach" on the ground that the value estimate of the properties predicated upon prices paid in actual, market transactions would be a uniform and a more credible standards to use especially in case of mass appraisal of properties ( Ibid.). Otherwise stated, public respondents would have this Court completely ignore the effects of the restrictions of P.D. No. 20 on the market value of properties within its coverage. In any event, it is unquestionable that both the "Comparable Sales Approach" and the "Income Approach" are generally acceptable methods of appraisal for taxation purposes (The Law on Transfer and Business Taxation by Hector S. De Leon, 1988 Edition). However, it is conceded that the propriety of one as against the other would of course depend on several factors. Hence, as early as 1923 in the case of Army & Navy Club, Manila v. Wenceslao Trinidad, G.R. No. 19297 (44 Phil. 383), it has been stressed that the assessors, in finding the value of the property, have to consider all the circumstances and elements of value and must exercise a prudent discretion in reaching conclusions.

Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule of taxation must not only be uniform, but must also be equitable and progressive.

Uniformity has been defined as that principle by which all taxable articles or kinds of property of the same class shall be taxed at the same rate (Churchill v. Concepcion, 34 Phil. 969 [1916]).

Notably in the 1935 Constitution, there was no mention of the equitable or progressive aspects of taxation required in the 1973 Charter (Fernando "The Constitution of the Philippines", p. 221, Second Edition). Thus, the need to examine closely and determine the specific mandate of the Constitution.

Taxation is said to be equitable when its burden falls on those better able to pay. Taxation is progressive when its rate goes up depending on the resources of the person affected (Ibid.).

The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the powers of government. But for all its plenitude the power to tax is not unconfined as there are restrictions. Adversely effecting as it does property rights, both the due process and equal protection clauses of the Constitution may properly be invoked to invalidate in appropriate cases a revenue measure. If it were otherwise, there would be truth to the 1903 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." The web or unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmes pen, thus: "The power to tax is not the power to destroy while this Court sits. So it is in the Philippines " (Sison, Jr. v. Ancheta, 130 SCRA 655 [1984]; Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 439 [1985]).

In the same vein, the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown to amount to confiscation of property. That would be a clear abuse of power (Sison v. Ancheta, supra).

The taxing power has the authority to make a reasonable and natural classification for purposes of taxation but the government's act must not be prompted by a spirit of hostility, or at the very least discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different both in the privileges conferred and the liabilities imposed (Ibid., p. 662).

Finally under the Real Property Tax Code (P.D. 464 as amended), it is declared that the first Fundamental Principle to guide the appraisal and assessment of real property for taxation purposes is that the property must be "appraised at its current and fair market value."

By no strength of the imagination can the market value of properties covered by P.D. No. 20 be equated with the market value of properties not so covered. The former has naturally a much lesser market value in view of the rental restrictions.

Ironically, in the case at bar, not even the factors determinant of the assessed value of subject properties under the "comparable sales approach" were presented by the public respondents, namely: (1) that the sale must represent a bonafide arm's length transaction between a willing seller and a willing buyer and (2) the property must be comparable property (Rollo, p. 27). Nothing can justify or support their view as it is of judicial notice that for properties covered by P.D. 20 especially during the time in question, there were hardly any willing buyers. As a general rule, there were no takers so that there can be no reasonable basis for the conclusion that these properties were comparable with other residential properties not burdened by P.D. 20. Neither can the given circumstances be nonchalantly dismissed by public respondents as imposed under distressed conditions clearly implying that the same were merely temporary in character. At this point in time, the falsity of such premises cannot be more convincingly demonstrated by the fact that the law has existed for around twenty (20) years with no end to it in sight.

Verily, taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxations, which is the promotion of the common good, may be achieved (Commissioner of Internal Revenue v. Algue Inc., et al., 158 SCRA 9 [1988]). Consequently, it stands to reason that petitioners who are burdened by the government by its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20) under the principle of social justice should not now be penalized by the same government by the imposition of excessive taxes petitioners can ill afford and eventually result in the forfeiture of their properties.

By the public respondents' own computation the assessment by income approach would amount to only P10.00 per sq. meter at the time in question.

PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the assailed decisions of public respondents are REVERSED and SET ASIDE; and (e) the respondent Board of Assessment Appeals of Manila and the City Assessor of Manila are ordered to make a new assessment by the income approach method to guarantee a fairer and more realistic basis of computation (Rollo, p. 71).

SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Feliciano, Gancayco, Padilla, Bidin, Sarmiento, Griño-Aquino, Medialdea, Regalado and Davide, Jr., JJ., concur

G.R. No. 78780               July 23, 1987

DAVID G. NITAFAN, WENCESLAO M. POLO, and MAXIMO A. SAVELLANO, JR., petitioners, vs.COMMISSIONER OF INTERNAL REVENUE and THE FINANCIAL OFFICER, SUPREME COURT OF THE PHILIPPINES, respondents.

R E S O L U T I O N

MELENCIO-HERRERA, J.:

Petitioners, the duly appointed and qualified Judges presiding over Branches 52, 19 and 53, respectively, of the Regional Trial Court, National Capital Judicial Region, all with stations in Manila, seek to prohibit and/or perpetually enjoin respondents, the Commissioner of Internal Revenue and the Financial Officer of the Supreme Court, from making any deduction of withholding taxes from their salaries.

In a nutshell, they submit that "any tax withheld from their emoluments or compensation as judicial officers constitutes a decrease or diminution of their salaries, contrary to the provision of Section 10, Article VIII of the 1987 Constitution mandating that "(d)uring their continuance in office, their salary shall not be decreased," even as it is anathema to the Ideal of an independent judiciary envisioned in and by said Constitution."

It may be pointed out that, early on, the Court had dealt with the matter administratively in response to representations that the Court direct its Finance Officer to discontinue the withholding of taxes from salaries of members of the Bench. Thus, on June 4, 1987, the Court en banc had reaffirmed the Chief Justice's directive as follows:

RE: Question of exemption from income taxation. — The Court REAFFIRMED the Chief Justice's previous and standing directive to the Fiscal Management and Budget Office of this Court to continue with the deduction of the withholding taxes from the salaries of the Justices of the Supreme Court as well as from the salaries of all other members of the judiciary.

That should have resolved the question. However, with the filing of this petition, the Court has deemed it best to settle the legal issue raised through this judicial pronouncement. As will be shown hereinafter, the clear intent of the Constitutional Commission was to delete the proposed express grant of exemption from payment of income tax to members of the Judiciary, so as to "give substance to equality among the three branches of Government" in the words of Commissioner Rigos. In the course of the deliberations, it was further expressly made clear, specially with regard to Commissioner Joaquin F. Bernas' accepted amendment to the amendment of Commissioner Rigos, that the salaries of members of the Judiciary would be subject to the general income tax applied to all taxpayers.

This intent was somehow and inadvertently not clearly set forth in the final text of the Constitution as approved and ratified in February, 1987 (infra, pp. 7-8). Although the intent may have been obscured by the failure to include in the General Provisions a proscription against exemption of any public officer or employee, including constitutional officers, from payment of income tax, the Court since then has authorized the continuation of the deduction of the withholding tax from the salaries of the members of the Supreme Court, as well as from the salaries of all other members of the Judiciary. The Court hereby makes of record that it had then discarded the ruling in Perfecto vs. Meer and Endencia vs. David, infra, that declared the salaries of members of the Judiciary exempt from payment of the income tax and considered such payment as a diminution of their salaries during their continuance in office. The Court hereby reiterates that the salaries of Justices and Judges are properly subject to a general income tax law applicable to all income earners and that the payment of such income tax by Justices and Judges does not fall within the constitutional protection against decrease of their salaries during their continuance in office.

A comparison of the Constitutional provisions involved is called for. The 1935 Constitution provided:

... (The members of the Supreme Court and all judges of inferior courts) shall receive such compensation as may be fixed by law, which shall not be diminished during their continuance in office ... 1 (Emphasis supplied).

Under the 1973 Constitution, the same provision read:

The salary of the Chief Justice and of the Associate Justices of the Supreme court, and of judges of inferior courts shall be fixed by law, which shall not be decreased during their continuance in office. ... 2 (Emphasis ours).

And in respect of income tax exemption, another provision in the same 1973 Constitution specifically stipulated:

No salary or any form of emolument of any public officer or employee, including constitutional officers, shall be exempt from payment of income tax. 3

The provision in the 1987 Constitution, which petitioners rely on, reads:

The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of judges of lower courts shall be fixed by law. During their continuance in office, their salary shall not be decreased. 4 (Emphasis supplied).

The 1987 Constitution does not contain a provision similar to Section 6, Article XV of the 1973 Constitution, for which reason, petitioners claim that the intent of the framers is to revert to the original concept of "non-diminution "of salaries of judicial officers.

The deliberations of the 1986 Constitutional Commission relevant to Section 10, Article VIII, negate such contention.

The draft proposal of Section 10, Article VIII, of the 1987 Constitution read:

Section 13. The salary of the Chief Justice and the Associate Justices of the Supreme Court and of judges of the lower courts shall be fixed by law. During their continuance in office, their salary shall not be diminished nor subjected to income tax. Until the National Assembly shall provide otherwise, the Chief Justice shall receive an annual salary of _____________ and each Associate Justice ______________ pesos. 5 (Emphasis ours)

During the debates on the draft Article (Committee Report No. 18), two Commissioners presented their objections to the provision on tax exemption, thus:

MS. AQUINO. Finally, on the matter of exemption from tax of the salary of justices, does this not violate the principle of the uniformity of taxation and the principle of equal protection of the law? After all, tax is levied not on the salary but on the combined income, such that when the judge receives a salary and it is comingled with the other income, we tax the income, not the salary. Why do we have to give special privileges to the salary of justices?

MR. CONCEPCION. It is the independence of the judiciary. We prohibit the increase or decrease of their salary during their term. This is an indirect way of decreasing their salary and affecting the independence of the judges.

MS. AQUINO. I appreciate that to be in the nature of a clause to respect tenure, but the special privilege on taxation might, in effect, be a violation of the principle of uniformity in taxation and the equal protection clause. 6

x x x           x x x          x x x

MR. OPLE. x x x

Of course, we share deeply the concern expressed by the sponsor, Commissioner Roberto Concepcion, for whom we have the highest respect, to surround the Supreme Court and the judicial system as a whole with the

whole armor of defense against the executive and legislative invasion of their independence. But in so doing, some of the citizens outside, especially the humble government employees, might say that in trying to erect a bastion of justice, we might end up with the fortress of privileges, an island of extra territoriality under the Republic of the Philippines, because a good number of powers and rights accorded to the Judiciary here may not be enjoyed in the remotest degree by other employees of the government.

An example is the exception from income tax, which is a kind of economic immunity, which is, of course, denied to the entire executive department and the legislative. 7

And during the period of amendments on the draft Article, on July 14, 1986, Commissioner Cirilo A. Rigos proposed that the term "diminished" be changed to "decreased" and that the words "nor subjected to income tax" be deleted so as to "give substance to equality among the three branches in the government.

Commissioner Florenz D. Regalado, on behalf of the Committee on the Judiciary, defended the original draft and referred to the ruling of this Court in Perfecto vs. Meer 8 that "the independence of the judges is of far greater importance than any revenue that could come from taxing their salaries." Commissioner Rigos then moved that the matter be put to a vote. Commissioner Joaquin G. Bernas stood up "in support of an amendment to the amendment with the request for a modification of the amendment," as follows:

FR. BERNAS. Yes. I am going to propose an amendment to the amendment saying that it is not enough to drop the phrase "shall not be subjected to income tax," because if that is all that the Gentleman will do, then he will just fall back on the decision in Perfecto vs. Meer and in Dencia vs. David [should be Endencia and Jugo vs. David, etc., 93 Phil. 696[ which excludes them from income tax, but rather I would propose that the statement will read: "During their continuance in office, their salary shall not be diminished BUT MAY BE SUBJECT TO GENERAL INCOME TAX."IN support of this position, I would say that the argument seems to be that the justice and judges should not be subjected to income tax because they already gave up the income from their practice. That is true also of Cabinet members and all other employees. And I know right now, for instance, there are many people who have accepted employment in the government involving a reduction of income and yet are still subject to income tax. So, they are not the only citizens whose income is reduced by accepting service in government.

Commissioner Rigos accepted the proposed amendment to the amendment. Commissioner Rustico F. de los Reyes, Jr. then moved for a suspension of the session. Upon resumption, Commissioner Bernas announced:

During the suspension, we came to an understanding with the original proponent, Commissioner Rigos, that his amendment on page 6,. line 4 would read: "During their continuance in office, their salary shall not be DECREASED."But this is on the understanding that there will be a provision in the Constitution similar to Section 6 of Article XV, the General Provisions of the 1973 Constitution, which says:

No salary or any form of emolument of any public officer or employee, including constitutional officers, shall be exempt from payment of income tax.

So, we put a period (.) after "DECREASED" on the understanding that the salary of justices is subject to tax.

When queried about the specific Article in the General Provisions on non-exemption from tax of salaries of public officers, Commissioner Bernas replied:

FR BERNAS. Yes, I do not know if such an article will be found in the General Provisions. But at any rate, when we put a period (.) after "DECREASED," it is on the understanding that the doctrine in Perfecto vs. Meer and Dencia vs. David will not apply anymore.

The amendment to the original draft, as discussed and understood, was finally approved without objection.

THE PRESIDING OFFICER (Mr. Bengzon). The understanding, therefore, is that there will be a provision under the Article on General Provisions. Could Commissioner Rosario Braid kindly take note that the salaries of officials of the government including constitutional officers shall not be exempt from income tax? The amendment proposed herein and accepted by the Committee now reads as follows: "During their continuance in

office, their salary shall not be DECREASED"; and the phrase "nor subjected to income tax" is deleted.9

The debates, interpellations and opinions expressed regarding the constitutional provision in question until it was finally approved by the Commission disclosed that the true intent of the framers of the 1987 Constitution, in adopting it, was to make the salaries of members of the Judiciary taxable. The ascertainment of that intent is but in keeping with the fundamental principle of constitutional construction that the intent of the framers of the organic law and of the people adopting it should be given effect.10 The primary task in constitutional construction is to ascertain and thereafter assure the realization of the purpose of the framers and of the people in the adoption of the Constitution.11 it may also be safely assumed that the people in ratifying the Constitution were guided mainly by the explanation offered by the framers.121avvphi1

Besides, construing Section 10, Articles VIII, of the 1987 Constitution, which, for clarity, is again reproduced hereunder:

The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of judges of lower courts shall be fixed by law. During their continuance in office, their salary shall not be decreased. (Emphasis supplied).

it is plain that the Constitution authorizes Congress to pass a law fixing another rate of compensation of Justices and Judges but such rate must be higher than that which they are receiving at the time of enactment, or if lower, it would be applicable only to those appointed after its approval. It would be a strained construction to read into the provision an exemption from taxation in the light of the discussion in the Constitutional Commission.

With the foregoing interpretation, and as stated heretofore, the ruling that "the imposition of income tax upon the salary of judges is a dimunition thereof, and so violates the Constitution" in Perfecto vs. Meer,13 as affirmed in Endencia vs. David 14 must be declared discarded. The framers of the fundamental law, as the alter ego of the people, have expressed in clear and unmistakable terms the meaning and import of Section 10, Article VIII, of the 1987 Constitution that they have adopted

Stated otherwise, we accord due respect to the intent of the people, through the discussions and deliberations of their representatives, in the spirit that all citizens should bear their aliquot part of the cost of maintaining the government and should share the burden of general income taxation equitably.

WHEREFORE, the instant petition for Prohibition is hereby dismissed.

Teehankee, C.J., Fernan, Narvasa, Gutierrez, Jr., Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.Yap, J., is on leave.

PAL v. Sec of Finance GR No. 115852; 30 October 1995

F A C T S: The Value-Added Tax [VAT] is levied on the sale, barter or exchange of goods and properties as well as on the sale or exchange of services. It is equivalent to 10% of the gross selling price or gross value in money of goods or properties sold, bartered or exchanged or of the gross receipts from the sale or exchange of services. Republic Act No. 7716 seeks to widen the tax base of the existing VAT system and enhance its administration by amending the National Internal Revenue Code.

These are various suits for certiorari and prohibition challenging the constitutionality of RA 7716:

In the case at bar, PAL attacks the formal validity of Republic Act No. 7716. PAL contends that it violates Art. VI, Section 26[1] which provides that "Every bill passed by Congress shall embrace only one subject which shall be expressed in the title thereof." It is contended that neither H. No. 11197 nor S. No. 1630 provided for removal of exemption of PAL transactions from the payment of the VAT and that this was made only in the Conference Committee bill which became Republic Act No. 7716 without reflecting this fact in its title.

The title of Republic Act No. 7716 is:

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.

Furthermore, section 103 of RA 7716 states the following:Section 103. Exempt Transactions.-  The following shall be exempt from the value-added tax:

[q] Transactions which are exempt under special laws, except those granted under Presidential Decree Nos. 66, 529, 972, 1491, 1590.

The effect of the amendment is to remove the exemption granted to PAL, as far as the VAT is concerned.

Philippine Airlines [PAL] claims that its franchise under P.D. No. 1590 which makes it liable for a franchise tax of only 2% of gross revenues "in lieu of all the 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," cannot be amended by Rep. Act No. 7716 as to make it [PAL] liable for a 10% value-added tax on revenues, because Sec. 24 of P.D. No. 1590 provides that PAL's franchise can only be amended, modified or repealed by a special law specifically for that purpose.

I S S U E: Whether or not this amendment of Section 103 of the NIRC is fairly embraced in the title of Republic Act No. 7716, although no mention is made therein of P. D. No. 1590

H E L D: The court ruled in in the affirmative. The title states that the purpose of the statute is to expand the VAT system, and one way of doing this is to widen its base by withdrawing some of the exemptions granted before. To insist that P. D. No. 1590 be mentioned in the title of the law, in addition to Section 103 of the NIRC, in which it is specifically referred to, would be to insist that the title of a bill should be a complete index of its content.

The constitutional requirement that every bill passed by Congress shall embrace only one subject which shall be expressed in its title is intended to prevent surprise upon the members of Congress and to inform the people of pending legislation so that, if they wish to, they can be heard regarding it. If, in the case at bar, petitioner did not know before that its exemption had been withdrawn, it is not because of any defect in the title but perhaps for the same reason other statutes, although published, pass unnoticed until some event somehow calls attention to

their existence.

Republic Act No. 7716 expressly amends PAL's franchise [P. D. No. 1590] by specifically excepting from the grant of exemptions from the VAT PAL's exemption under P. D. No. 1590. This is within the power of Congress to do under Art. XII, Section 11 of the Constitution, which provides that the grant of a franchise for the operation of a public utility is subject to amendment, alteration or repeal by Congress when the common good so requires.

ARTURO M. TOLENTINO, petitioner, vs. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, respondents. G.R. No. 115455 August 25, 1994

FACTS: Herein various petitioners seek to declare RA 7166 as unconstitutional as it seeks to widen the tax base of the existing VAT system and enhance its administration by amending the National Internal Revenue Code. The value-added tax (VAT) is levied on the sale, barter or exchange of goods and properties as well as on the sale or exchange of services. It is equivalent to 10% of the gross selling price or gross value in money of goods or properties sold, bartered or exchanged or of the gross receipts from the sale or exchange of services.CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies transactions as covered or exempt without reasonable basis and (3) violates the rule that taxes should be uniform and equitable and that Congress shall "evolve a progressive system of taxation."

With respect to the first contention, it is claimed that the application of the tax to existing contracts of the sale of real property by installment or on deferred payment basis would result in substantial increases in the monthly amortizations to be paid because of the 10% VAT. The additional amount, it is pointed out, is something that the buyer did not anticipate at the time he entered into the contract.

It is next pointed out that while Section 4 of R.A. No. 7716 exempts such transactions as the sale of agricultural products, food items, petroleum, and medical and veterinary services, it grants no exemption on the sale of real property which is equally essential. The sale of real property for socialized and low-cost housing is exempted from the tax, but CREBA claims that real estate transactions of "the less poor," i.e., the middle class, who are equally homeless, should likewise be exempted.

Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI, Section 28(1) which provides that "The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation."

ISSUE: Whether or not RA 7166 violates the principle of progressive system of taxation.

HELD: No, there is no justification for passing upon the claims that the law also violates the rule that taxation must be progressive and that it denies petitioners' right to due process and that equal protection of the laws. The reason for this different treatment has been cogently stated by an eminent authority on constitutional law thus: "When freedom of the mind is imperiled by law, it is freedom that commands a momentum of respect; when property is imperiled it is the lawmakers' judgment that commands respect. This dual standard may not precisely reverse the presumption of constitutionality in civil liberties cases, but obviously it does set up a hierarchy of values within the due process clause."

Petitioners contend that as a result of the uniform 10% VAT, the tax on consumption goods of those who are in the higher-income bracket, which before were taxed at a rate higher than 10%, has been reduced, while basic commodities, which before were taxed at rates ranging from 3% to 5%, are now taxed at a higher rate.Just as vigorously as it is asserted that the law is regressive, the opposite claim is pressed by respondents that in fact it distributes the tax burden to as many goods and services as possible particularly to those which are within the reach of higher-income groups, even as the law exempts basic goods and services. It is thus equitable. The goods and properties subject to the VAT are those used or consumed by higher-income groups. These include real properties held primarily for sale to customers or held for lease in the ordinary course of business, the right or privilege to use industrial, commercial or scientific equipment, hotels, restaurants and similar places, tourist buses, and the like. On the other hand, small business establishments, with annual gross sales of less than P500,000, are exempted. This, according to respondents, removes from the coverage of the law some 30,000 business establishments. On the other hand, an occasional paper of the Center for Research and Communication cities a NEDA study that the VAT has minimal impact on inflation and income distribution and that while additional expenditure for the lowest income class is only P301 or 1.49% a year, that for a family earning P500,000 a year or more is P8,340 or 2.2%.

Lacking empirical data on which to base any conclusion regarding these arguments, any discussion whether the VAT is regressive in the sense that it will hit the "poor" and middle-income group in society harder than it will the "rich," is largely an academic exercise. On the other hand, the CUP's contention that Congress' withdrawal of exemption of producers cooperatives, marketing cooperatives, and service cooperatives, while maintaining that granted to electric cooperatives, not only goes against the constitutional policy to promote cooperatives as instruments of social justice (Art. XII, § 15) but also denies such cooperatives the equal protection of the law is actually a policy argument. The legislature is not required to adhere to a policy of "all or none" in choosing the subject of taxation. 44

Nor is the contention of the Chamber of Real Estate and Builders Association (CREBA), petitioner in G.R. 115754, that the VAT will reduce the mark up of its members by as much as 85% to 90% any more concrete. It is a mere allegation. On the other hand, the claim of the Philippine Press Institute, petitioner in G.R. No. 115544, that the VAT will drive some of its members out of circulation because their profits from advertisements will not be enough to pay for their tax liability, while purporting to be based on the financial statements of the newspapers in question, still falls short of the establishment of facts by evidence so necessary for adjudicating the question whether the tax is oppressive and confiscatory.

Indeed, regressivity is not a negative standard for courts to enforce. What Congress is required by the Constitution to do is to "evolve a progressive system of taxation." This is a directive to Congress, just like the directive to it to give priority to the enactment of laws for the enhancement of human dignity and the reduction of social, economic and political inequalities (Art. XIII, § 1), or for the promotion of the right to "quality education" (Art. XIV, § 1). These provisions are put in the Constitution as moral incentives to legislation, not as judicially enforceable rights

ABAKADA GURO v. EXECUTIVE SECRETARY G.R. No. 168056, 168207, 168461, 168463 and 168730,1 September 2005, En Banc (Austria-Martinez, J)

The equal protection clause does not require the universal application of the laws on all persons or things without distinction. This might in fact sometimes result in unequal protection. What the clause requires is equality among equals as determined according to a valid classification. .. Taxes are the lifeblood of the government. It is just an enema, a first-aid measure to resuscitate an economy in distress. The Court is neither blind nor is it turning a deaf ear on the plight of the masses. But it does not have the panacea for the malady that the law seeks to remedy. The Court cannot strike down a law as unconstitutional simply because of its yokes.Mounting budget deficit, revenue generation, inadequate fiscal allocation for education, increased emoluments for health workers, and wider coverage for full value-added tax benefits ... these are the reasons why Republic Act No. 9337 (R.A. No. 9337) was enacted. Reasons, the wisdom of which, the Court even with its extensive constitutional power of review, cannot probe. The petitioners in these cases, however, question not only the wisdom of the law, but also perceived constitutional infirmities in its passage.

R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and 3705, and Senate Bill No. 1950. Because of the conflicting provisions of the proposed bills the Senate agreed to the request of the House of Representatives for a committee conference. The Conference Committee on the Disagreeing Provisions of House Bill recommended the approval of its report, which the Senate and the House of the Representatives did.

On May 24, 2005, the President signed into law the consolidated House and Senate versions as Republic Act 9337. Before the law was to take effect on July 1, 2005, the Court issued a temporary restraining order enjoining government from implementing the law in response to a slew of petitions for certiorari and prohibition questioning the constitutionality of the new law.

ISSUES:PROCEDURAL ISSUE

1. Whether R.A. No. 9337 violates the following provisions of the Constitution: a. Article VI, Section 24, and b. Article VI, Section 26(2)

SUBSTANTIVE ISSUES1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the following provisions of the Constitution:a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)

2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate Article VI, Section 28(1), and Article III, Section 1 of the Constitution:

HELD: Petitions DISMISSED.

There being no constitutional impediment to the full enforcement and implementation of R.A. No. 9337, the temporary restraining order issued by the Court on July 1, 2005 is LIFTED upon finality of herein decision.Procedural Issues

A.R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive Origination of Revenue Bills

B.In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705 that initiated the move for amending provisions of the NIRC dealing mainly with the value- added tax. Upon transmittal of said House bills to the Senate, the Senate came out with Senate Bill No. 1950 proposing amendments not only to NIRC provisions on the value-added tax but also amendments to NIRC provisions on other kinds of taxes. Is the introduction by the Senate of provisions not dealing directly with the value- added tax, which is the only kind of tax being amended in the House bills, still within the purview of the constitutional provision authorizing the Senate to propose or concur with amendments to a revenue bill that originated from the House?

Since there is no question that the revenue bill exclusively originated in the House of Representatives, the Senate was acting within its constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No. 1950 amending corporate income taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24 of the Constitution does not contain any prohibition or limitation on the extent of the amendments that may be introduced by the Senate to the House revenue bill.

Notably therefore, the main purpose of the bills emanating from the House of Representatives is to bring in sizeable revenues for the government to supplement our country’s serious financial problems, and improve tax administration and control of the leakages in revenues from income taxes and value-added taxes. As these house bills were transmitted to the Senate, the latter, approaching the measures from the point of national perspective, can introduce amendments within the purposes of those bills.

The Senate can propose amendments and in fact, the amendments made on provisions in the tax on income of corporations are germane to the purpose of the house bills which is to raise revenues for the government. The sections introduced by the Senate are germane to the subject matter and purposes of the house bills, which is to supplement our country’s fiscal deficit, among others. Thus, the Senate acted within its power to propose those amendments.

B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the “No-Amendment Rule”

The “no-amendment rule” refers only to the procedure to be followed by each house of Congress with regard to bills initiated in each of said respective houses, before said bill is transmitted to the other house for its concurrence or amendment. Verily, to construe said provision in a way as to proscribe any further changes to a bill after one house has voted on it would lead to absurdity as this would mean that the other house of Congress would be deprived of its constitutional power to amend or introduce changes to said bill. Thus, Art. VI, Sec. 26 (2) of the Constitution cannot be taken to mean that the introduction by the Bicameral Conference Committee of amendments and modifications to disagreeing provisions in bills that have been acted upon by both houses of Congress is prohibited.

Petitioners allege that the Bicameral Conference Committee exceeded its authority by: (1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No. 9337; (2) Deleting entirely the no pass-on provisions found in both the House and Senate bills; (3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited against the output tax; and (4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in addition to the value-added tax.

It should be borne in mind that the power of internal regulation and discipline are intrinsic in any legislative

body. Thus, Article VI, Section 16 (3) of the Constitution provides that “each House may determine the rules of its proceedings.” Pursuant to this inherent constitutional power to promulgate and implement its own rules of procedure, the respective rules of each house, the Rule XIV, sec 88 & 889 of the House of the Representatives and Rule XII sec 35 of the Rules of the Senate, provided for the creation of a Bicameral Conference Committee.The creation of such conference committee was apparently in response to a problem, not addressed by any constitutional provision, where the two houses of Congress find themselves in disagreement over changes or amendments introduced by the other house in a legislative bill. In the present petitions, the issue is not whether provisions of the rules of both houses creating the bicameral conference committee are unconstitutional, but whether the bicameral conference committee has strictly complied with the rules of both houses, thereby remaining within the jurisdiction conferred upon it by Congress.

In the case of Fariñas vs. The Executive Secretary, the Court En Banc, unanimously reiterated and emphasized its adherence to the “enrolled bill doctrine,” thus, declining therein petitioners’ plea for the Court to go behind the enrolled copy of the bill. Akin to the Fariñas case, the present petitions also raise an issue regarding the actions taken by the conference committee on matters regarding Congress’ compliance with its own internal rules. One of the most basic and inherent power of the legislature is the power to formulate rules for its proceedings and the discipline of its members. Congress is the best judge of how it should conduct its own business expeditiously and in the most orderly manner. It is also the sole concern of Congress to instill discipline among the members of its conference committee if it believes that said members violated any of its rules of proceedings. Even the expanded jurisdiction of this Court cannot apply to questions regarding only the internal operation of Congress, thus, the Court is wont to deny a review of the internal proceedings of a co-equal branch of government.

Moreover, in the case of Tolentino vs. Secretary of Finance, the Court already made the pronouncement that “if a change is desired in the practice of the Bicameral Conference Committee it must be sought in Congress since this question is not covered by any constitutional provision but is only an internal rule of each house.” To date, Congress has not seen it fit to make such changes adverted to by the Court. It seems, therefore, that Congress finds the practices of the bicameral conference committee to be very useful for purposes of prompt and efficient legislative action.

In the present case, the changes introduced by the Bicameral Conference Committee on disagreeing provisions were meant only to reconcile and harmonize the disagreeing provisions for it did not inject any idea or intent that is wholly foreign to the subject embraced by the original provisions. The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT wanted by the Senate is retained until such time that certain conditions arise when the 12% VAT wanted by the House shall be imposed, appears to be a compromise to try to bridge the difference in the rate of VAT proposed by the two houses of Congress. Nevertheless, such compromise is still totally within the subject of what rate of VAT should be imposed on taxpayers.The no pass-on provision was deleted altogether. The reason for deleting the no pass-on provision was just to keep the VAT law or the VAT bill simple and that no sector should be a beneficiary of legislative grace, neither should any sector be discriminated on.

With regard to the amount of input tax to be credited against output tax, the Bicameral Conference Committee came to a compromise on the percentage rate of the limitation or cap on such input tax credit, but again, the change introduced by the Bicameral Conference Committee was totally within the intent of both houses to put a cap on input tax that may be credited against the output tax.

As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in Senate Bill No. 1950, since said provisions were among those referred to it, the conference committee had to act on the same and it basically adopted the version of the Senate. Thus, all the changes or modifications made by the Bicameral ConferenceCommittee were germane to subjects of the provisions referred to it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion amounting to lack or excess of jurisdiction committed by the Bicameral Conference Committee.

Substantial IssuesI. A. Uniformity and Equitability of Taxation

Article VI, Section 28(1) of the Constitution reads: “The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.”

Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the

same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere with all people at all times. The tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and services.

It must be stressed that 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. R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10% (or 12%) does not apply to sales of goods or services with gross annual sales or receipts not exceeding P1, 500, 000.00. Also, basic marine and agricultural food products in their original state are still not subject to tax, thus ensuring the prices at the grassroots level remain accessible.

Lastly, petitioners contend that the limitation on the creditable input tax is anything but regressive. It is the smaller business with higher input tax-output tax ratio that will suffer the consequences. Progressive taxation is built on the principle of the taxpayer’s ability to pay. Taxation is progressive when its rate goes up depending on the resources of the person affected.

The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the consumer or business for every goods bought or services enjoyed is the same regardless of income. In other words, the VAT paid eats the same portion of an income, whether big or small.

Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What it simply provides is that Congress shall "evolve a progressive system of taxation." The constitutional provision has been interpreted to mean simply that ‘direct taxes are . . . to be preferred [and] as much as possible, indirect taxes should be minimized.’ Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax system.

I. B. No Undue Delegation of Legislative PowerThe principle of separation of powers ordains that each of the three great branches of government has exclusive cognizance of and is supreme in matters falling within its own constitutionally allocated sphere. A logical corollary to the doctrine of separation of powers is the principle of non-delegation of powers, potestas delegata non delegari potest.

In the present case, the challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and 6 which reads as follows: “That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1⁄2%).

The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of facts upon which enforcement and administration of the increase rate under the law is contingent. The legislature has made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or condition. It leaves the entire operation or non-operation of the 12% rate upon factual matters outside of the control of the executive.

No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the word shall is used in the common proviso. The use of the word shall connote a mandatory order. Its use in a statute denotes an imperative obligation and is inconsistent with the idea of discretion. Where the law is clear and unambiguous, it must be taken to mean exactly what it says, and courts have no choice but to see to it that the mandate is obeyed.

Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the conditions specified by Congress. This is a duty, which cannot be evaded by the President. Inasmuch as the law specifically uses the word shall, the exercise of discretion by the President does not come into play. It is a clear directive to impose the 12% VAT rate when the specified conditions are present. The time of taking into effect of the 12% VAT rate is based on the happening of a certain specified contingency, or upon the ascertainment of certain facts or conditions by a person or body other than the legislature itself.

When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that as head of the Department of Finance he is the assistant and agent of the Chief Executive. In the present case, the Secretary of Finance, in making his recommendation to the President on the existence of either of the two conditions, the Secretary of Finance is not acting as the alter ego of the President or even her subordinate. In such instance, he is not subject to the power of control and direction of the President. He is acting as the agent of the legislative department, to determine and declare the event upon which its expressed will is to take effect. The Secretary of Finance becomes the means or tool by which legislative policy is determined and implemented, considering that he possesses all the facilities to gather data and information and has a much broader perspective to properly evaluate them. His function is to gather and collate statistical data and other pertinent information and verify if any of the two conditions laid out by Congress is present. His personality in such instance is in reality but a projection of that of Congress. Thus, being the agent of Congress and not of the President, the President cannot alter or modify or nullify, or set aside the findings of the Secretary of Finance and to substitute the judgment of the former for that of the latter.Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact, namely, whether by December 31, 2005, the value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (24/5%) or the national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (11⁄2%). If either of these two instances has occurred, the Secretary of Finance, by legislative mandate, must submit such information to the President. Then the 12% VAT rate must be imposed by the President effective January 1, 2006. There is no undue delegation of legislative power but only of the discretion as to the execution of a law. This is constitutionally permissible. Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority; in our complex economy that is frequently the only way in which the legislative process can go forward.

II.A. Due Process and Equal Protection ClausesThe doctrine is that where the due process and equal protection clauses are invoked, considering that they are not fixed rules but rather broad standards, there is a need for proof of such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail.

Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the amount of input tax that may be credited against the output tax. It states, in part: “[P]rovided, that the input tax inclusive of the input VAT carried over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of the output VAT: ...”

Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due from or paid by a VAT-registered person on the importation of goods or local purchase of good and services, including lease or use of property, in the course of trade or business, from a VAT-registered person, and Output Tax is the value-added tax due on the sale or lease of taxable goods or properties or services by any person registered or required to register under the law.

Petitioners claim that the contested sections impose limitations on the amount of input tax that may be claimed. In effect, a portion of the input tax that has already been paid cannot now be credited against the output tax. This argument is not absolute. It assumes that the input tax exceeds 70% of the output tax, and therefore, the input tax in excess of 70% remains uncredited. However, to the extent that the input tax is less than 70% of the output tax, then 100% of such input tax is still creditable.

The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners exaggeratedly contend. Their analysis of the effect of the 70 per cent limitation is incomplete and one-sided. It ends at the net effect that there will be unapplied/unutilized inputs VAT for a given quarter. It does not proceed further to the fact that such unapplied/unutilized input tax may be credited in the subsequent periods as allowed by the carry-over provision of Section 110(B) or that it may later on be refunded through a tax credit certificate under Section 112(B).

Therefore, petitioners’ argument must be rejected. The equal protection clause under the Constitution means that “no person or class of persons shall be deprived of the same protection of laws which is enjoyed by other persons or other classes in the same place and in like circumstances.”

The power of the State to make reasonable and natural classifications for the purposes of taxation has long been established. Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or the

amounts to be raised, the methods of assessment, valuation and collection, the State’s power is entitled to presumption of validity. As a rule, the judiciary will not interfere with such power absent a clear showing of unreasonableness, discrimination, or arbitrariness.

The equal protection clause does not require the universal application of the laws on all persons or things without distinction. This might in fact sometimes result in unequal protection. What the clause requires is equality among equals as determined according to a valid classification. By classification is meant the grouping of persons or things similar to each other in certain particulars and different from all others in these same particulars.

It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a first-aid measure to resuscitate an economy in distress. The Court is neither blind nor is it turning a deaf ear on the plight of the masses. But it does not have the panacea for the malady that the law seeks to remedy. As in other cases, the Court cannot strike down a law as unconstitutional simply because of its yokes.

G.R. Nos. L-21633-34             June 29, 1967

COMMISSIONER OF INTERNAL REVENUE and COMMISSIONER OF CUSTOMS, petitioners, vs.BOTELHO SHIPPING CORPORATION and GENERAL SHIPPING CO., INC., respondents.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete and F. Malate, Jr. for petitioners.Claudio Teehankee and Leocadio de Asis for respondents.

CONCEPCION, C.J.:

Appeal by the Government from a decision of the Court of Tax Appeals, reversing of the decisions of the Commissioner of Internal Revenue and the Commissioner of Customs, in Cases No. 956 and 957 of said Court, holding Botelho Shipping Corporation and General Shipping Co., Inc. — hereinafter referred to collectively as the Buyers — liable for the payment of the sum of P483,433.00 and P494,824.00, respectively, as compensating taxes on the vessels "M/S Maria Rosello" and "M/S General Lim."

On August 30, 1960, the Reparations Commission of the Philippines — hereinafter referred to as the Commission — and Botelho Shipping Corporation — hereinafter referred to as Botelho — entered into a "Contract of Conditional Purchase and Sale of Reparations Goods," whereby the former agreed to sell to Botelho for P6,798,888.88 the vessel "M/S Maria Rosello," procured by the Commission from Japan, pursuant to the provisions of the Philippine-Japanese Reparations Agreement of May 9, 1956. On September 19, 1960, the Commission signed a similar contract with General Shipping Co., Inc. — hereinafter referred to as General Shipping — for the sale thereto of "M/S General Lim" at the price of P6,951,666.66. Both agreements, couched in identical terms, except as to price, stipulated that:

a) The Reparations Commission "retains title to and ownership of the above described vessel until it is fully paid for." (Exh. "A", p. 2, both cases)

b) The stipulated purchase price of the M/S MARIA ROSELLO was to be paid by Botelho to the Commission under a deferred payment plan in 10 equal yearly installments of P717,333.49, bearing 3% interest per annum, beginning August 31, 1962 and August 31 of every year thereafter until the year 1972, while the purchase price of the M/S GENERAL LIM was to be paid by General Shipping to the Commission under a deferred payment plan in 10 equal yearly installments of P723,132.68, bearing 3% interest per annum beginning September 30 of every year until the year 1972. (Exhs. 9, p. 4 and A-2, both cases) (See Respondents' brief, p. 4.)

Delivered in Japan to its respective buyers, acting on behalf of the Commission, the vessels, upon their departure from Tokyo, on the maiden trip thereof to the Philippines, were issued, by the Philippine Vice-Consul in said city, provisional certificates of Philippine registry in the name of the Commission, so that the vessels could proceed to the Philippines and secure therein the respective final registration document.

Upon arrival at the port of Manila, the Buyer filed the corresponding applications for registration of the vessels, but, the Bureau of Customs placed the same under custody and refused to give due course to said applications, unless the aforementioned sums of P483,433 and P494,824 be paid as compensating tax. As the Commissioner of Customs refused to reconsider the stand taken by his office, the Buyers simultaneously filed with the Court of Tax Appeals their respective petitions for review, against the Commissioner of Customs and the Commissioner of Internal Revenue — hereinafter referred to collectively as Appellants — with urgent motion for suspension of the collection of said tax. After a joint hearing on this motion, the same was, on October 31, 1960, granted by the Tax Court, upon the sum of a P500,000.00 bond by each one of the Buyers.

On June 17, 1961, while these cases were pending trial in said Court, Republic Act No. 3079 amended Republic

Act No. 1789 — the Original Reparations Act, under which the aforementioned contracts with the Buyers had been executed — by exempting buyers of reparations goods acquired from the Commission, from liability for the compensating tax. Moreover, section 20 of Republic Act No. 3079, provides:

x x x This Act shall take effect upon its approval, except that the amendment contained in Section seven hereof relating to the requirements of procurement orders including the requirement of down payment by private applicant end-users shall not apply to procurement orders already duty 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 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 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 contracts 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 for 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.

Invoking the provisions of this section 20, the Buyers applied, therefore, for the renovation of their utilizations contracts with the Commission, which granted the application, and, then, filed with the Tax Court, their supplemental petitions for review. Subsequently, the parties submitted Stipulations of Fact and, after a joint trial, at which they introduced additional evidence, said Court rendered the appealed decision, reversing the decisions herein Appellants, and declared said Buyers exempt from the compensating tax sought to be assessed against the vessels aforementioned. Hence, these appeals by the Government G.R. No. L-21633 refers to the case as regards "M/S Maria Rosello," whereas "M/S General Lim" is the subject-matter of G.R. No. L-21634.

It seems clear that, under Republic Act No. 1789 — pursuant to which the contracts of Conditional Purchase and Sale in question had been executed — the vessels "M/S Maria Rosello" and "M/S General Lim" were subject to compensating tax. Indeed, Section 14 of said Act provides that "reparations goods obtained by private parties shall be exempt only from the payment of customs duties, consular fees and the special import tax." Although this Section was amended by R.A. No. 3079, to include the compensating tax" among the exemptions enumerated therein, such amendment took place, not only after the contracts involved in these appeals had been perfected and partly consummated, but, also, after the corresponding compensating tax had become due and payment thereof demanded by Appellants herein. It is, moreover, obvious that said additional exemption should not and cannot be given retroactive operation, in the absence of a manifest intent of Congress to do this effect. The issue in the cases at bar hinges on whether or not such intent is clear.

Appellants maintain the negative, upon the ground that a tax exemption must be clear and explicit; that there is no express provision for the retroactivity of the exemption, established by Republic Act No. 3079, from the compensating tax; that the favorable provisions, which are referred to in section 20 thereof, cannot include the exemption from compensating tax; and, that Congress could not have intended any retroactive exemption, considering that the result thereof would be prejudicial to the Government.

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 entitled in the grant of the exemption. Indeed, section 20 of Republic Act No. 3079 exacts a valuable consideration for the retroactivity of its favorable provisions, 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 herein. 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.1äwphï1.ñët

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 viewpoint 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 mere 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 this 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 exception, 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 a substantial justification for the distinction between the one and the other. As correctly held by the Tax Court in Philippine Ace Lines, Inc. v. Commissioner of Internal Revenue (C.T.A. Nos. 964 and 984, January 25, 1963), and reiterated in the cases under consideration:

x x x In providing that the favorable provision 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 alter 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 new law, that they both be subject to the same privileges in like manner and to the same extent. It would be manifest distortion of the literal meaning and purpose of the new law.

Wherefore, the appealed decision of the Court of Tax Appeals is hereby affirmed in toto, without any pronouncement as to costs. It is so ordered.

Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.Dizon, J., took no part.

G.R. No. 109289 October 3, 1994

RUFINO R. TAN, petitioner, vs.RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 109446 October 3, 1994

CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, JR., petitioners, vs.RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in his capacity as COMMISSIONER OF INTERNAL REVENUE, respondents.

Rufino R. Tan for and in his own behalf.

Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.

 

VITUG, J.:

These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code and, inG.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public respondents pursuant to said law.

Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory legislation.

In G.R. No. 109289, it is asserted that the enactment of Republic ActNo. 7496 violates the following provisions of the Constitution:

Article VI, Section 26(1) — Every bill passed by the Congress shall embrace only one subject which shall be expressed in the title thereof.

Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.

Article III, Section 1 — No person shall be deprived of . . . property without due process of law, nor shall any person be denied the equal protection of the laws.

In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public respondents have exceeded their rule-making authority in applying SNIT to general professional partnerships.

The Solicitor General espouses the position taken by public respondents.

The Court has given due course to both petitions. The parties, in compliance with the Court's directive, have filed their respective memoranda.

G.R. No. 109289

Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a misnomer or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employedand Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).

The full text of the title actually reads:

An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and Professionals Engaged In The Practice of Their Profession, Amending Sections 21 and 29 of the National Internal Revenue Code, as Amended.

The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code, as now amended, provide:

Sec. 21. Tax on citizens or residents. —

xxx xxx xxx

(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in the Practice of Profession. — A tax is hereby imposed upon the taxable net income as determined in Section 27 received during each taxable year from all sources, other than income covered by paragraphs (b), (c), (d) and (e) of this section by every individual whethera citizen of the Philippines or an alien residing in the Philippines who is self-employed or practices his profession herein, determined in accordance with the following schedule:

Not over P10,000 3%

Over P10,000 P300 + 9%but not over P30,000 of excess over P10,000

Over P30,000 P2,100 + 15%but not over P120,00 of excess over P30,000

Over P120,000 P15,600 + 20%but not over P350,000 of excess over P120,000

Over P350,000 P61,600 + 30%of excess over P350,000

Sec. 29. Deductions from gross income. — In computing taxable income subject to tax under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as deductions the items specified in paragraphs (a) to (i) of this section: Provided, however, That in computing taxable income subject to tax under Section 21 (f) in the case of individuals engaged in business or practice of profession, only the following direct costs shall be allowed as deductions:

(a) Raw materials, supplies and direct labor;

(b) Salaries of employees directly engaged in activities in the course of or pursuant to the business or practice of their profession;

(c) Telecommunications, electricity, fuel, light and water;

(d) Business rentals;

(e) Depreciation;

(f) Contributions made to the Government and accredited relief organizations for the rehabilitation of calamity stricken areas declared by the President; and

(g) Interest paid or accrued within a taxable year on loans contracted from accredited financial institutions which must be proven to have been incurred in connection with the conduct of a taxpayer's profession, trade or business.

For individuals whose cost of goods sold and direct costs are difficult to determine, a maximum of forty per cent (40%) of their gross receipts shall be allowed as deductions to answer for business or professional expenses as the case may be.

On the basis of the above language of the law, it would be difficult to accept petitioner's view that the amendatory law should be considered as having now adopted a gross income, instead of as having still retained the net income, taxation scheme. The allowance for deductible items, it is true, may have significantly been reduced by the questioned law in comparison with that which has prevailed prior to the amendment; limiting, however, allowable deductions from gross income is neither discordant with, nor opposed to, the net income tax concept. The fact of the matter is still that various deductions, which are by no means inconsequential, continue to be well provided under the new law.

Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation intended to unite the members of the legislature who favor any one of unrelated subjects in support of the whole act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly apprise the people, through such publications of its proceedings as are usually made, of the subjects of legislation. 1 The above objectives of the fundamental law appear to us to have been sufficiently met. Anything else would be to require a virtual compendium of the law which could not have been the intendment of the constitutional mandate.

Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation "shall be uniform and equitable" in that the law would now attempt to tax single proprietorships and professionals differently from the manner it imposes the tax on corporations and partnerships. The contention clearly forgets, however, that such a system of income taxation has long been the prevailing rule even prior to Republic Act No. 7496.

Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4) the classification applies equally well to all those belonging to the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).

What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly shift the income tax system towards the schedular approach 2 in the income taxation of individual taxpayers and to maintain, by and large, the present global treatment 3 on taxable corporations. We certainly do not view this classification to be arbitrary and inappropriate.

Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he believes to be an imbalance between the tax liabilities of those covered by the amendatory law and those who are not. With the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative judgment. Of course, where a tax measure becomes so unconscionable and unjust as to amount to confiscation of property, courts will not hesitate to strike it down, for, despite all its plenitude, the power to tax cannot override constitutional proscriptions. This stage, however, has not been demonstrated to have been reached within any appreciable distance in this controversy before us.

Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being violative of due process must perforce fail. The due process clause may correctly be invoked only when there is a clear contravention of inherent or constitutional limitations in the exercise of the tax power. No such transgression is so evident to us.

G.R. No. 109446

The several propositions advanced by petitioners revolve around the question of whether or not public respondents have exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry out Republic Act No. 7496.

The questioned regulation reads:

Sec. 6. General Professional Partnership — The general professional partnership (GPP) and the partners comprising the GPP are covered by R. A. No. 7496. Thus, in determining the net profit of the partnership, only the direct costs mentioned in said law are to be deducted from partnership income. Also, the expenses paid or incurred by partners in their individual capacities in the practice of their profession which are not reimbursed or paid by the partnership but are not considered as direct cost, are not deductible from his gross income.

The real objection of petitioners is focused on the administrative interpretation of public respondents that would apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent deliberations in Congress during its enactment of Republic Act No. 7496, also quoted by the Honorable Hernando B. Perez, minority floor leader of the House of Representatives, in the latter's privilege speech by way of commenting on the questioned implementing regulation of public respondents following the effectivity of the law, thusly:

MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression of this bill. Do we speak here of individuals who are earning, I mean, who earn through business enterprises and therefore, should file an income tax return?

MR. PEREZ. That is correct, Mr. Speaker. This does not apply to corporations. It applies only to individuals.

(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).

Other deliberations support this position, to wit:

MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from Batangas say that this bill is intended to increase collections as far as individuals are concerned and to make collection of taxes equitable?

MR. PEREZ. That is correct, Mr. Speaker.

(Id. at 6:40 P.M.; Emphasis ours).

In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of the SNITS, it is categorically stated, thus:

This bill, Mr. President, is not applicable to business corporations or to partnerships; it is only with respect to individuals and professionals. (Emphasis ours)

The Court, first of all, should like to correct the apparent misconception that general professional partnerships are subject to the payment of income tax or that there is a difference in the tax treatment between individuals engaged in business or in the practice of their respective professions and partners in general professional partnerships. The fact of the matter is that a general professional partnership, unlike an ordinary business partnership (which is treated as a corporation for income tax purposes and so subject to the corporate income tax), is not itself an income taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. Section 23 of the Tax Code, which has not been amended at all by Republic Act 7496, is explicit:

Sec. 23. Tax liability of members of general professional partnerships. — (a) Persons exercising a common profession in general partnership shall be liable for income tax only in their individual capacity, and the share in the net profits of the general professional partnership to which any taxable partner would be entitled whether distributed or otherwise, shall be returned for taxation and the tax paid in accordance with the provisions of this Title.

(b) In determining his distributive share in the net income of the partnership, each partner —

(1) Shall take into account separately his distributive share of the partnership's income, gain, loss, deduction, or credit to the extent provided by the pertinent provisions of this Code, and

(2) Shall be deemed to have elected the itemized deductions, unless he declares his distributive share of the gross income undiminished by his share of the deductions.

There is, then and now, no distinction in income tax liability between a person who practices his profession alone or individually and one who does it through partnership (whether registered or not) with others in the exercise of a common profession. Indeed, outside of the gross compensation income tax and the final tax on passive investment income, under the present income tax system all individuals deriving income from any source whatsoever are treated in almost invariably the same manner and under a common set of rules.

We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No. 7496 as an entirely independent, not merely as an amendatory, piece of legislation. The view can easily become myopic, however, when the law is understood, as it should be, as only forming part of, and subject to, the whole income tax concept and precepts long obtaining under the National Internal Revenue Code. To elaborate a little, the phrase "income taxpayers" is an all embracing term used in the Tax Code, and it practically covers all persons who derive taxable income. The law, in levying the tax, adopts the most comprehensive tax situs of nationality and residence of the taxpayer (that renders citizens, regardless of residence, and resident aliens subject to income tax liability on their income from all sources) and of the generally accepted and internationally recognized income taxable base (that can subject non-resident aliens and foreign corporations to income tax on their income from Philippine sources). In the process, the Code classifies taxpayers into four main groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable Trusts (irrevocable both as to corpus and as to income).

Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily, partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as "taxable partnerships") which, for purposes of the above categorization, are by law assimilated to be within the context of, and so legally contemplated as, corporations. Except for few variances, such as in the application of the "constructive receipt rule" in the derivation of income, the income tax approach is alike to both juridical persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the discussions in Congress during its deliberations on Republic Act 7496, aforequoted, to cover corporations and partnerships which are independently subject to the payment of income tax.

"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered as independent taxable entities for income tax purposes. A general professional partnership is such an example. 4

Here, the partners themselves, not the partnership (although it is still obligated to file an income tax return [mainly for administration and data]), are liable for the payment of income tax in their individual capacity computed on their respective and distributive shares of profits. In the determination of the tax liability, a partner does so as an individual, and there is no choice on the matter. In fine, under the Tax Code on income taxation, the general professional partnership is deemed to be no more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of such income to, respectively, each of the individual partners.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as now so modified by Republic ActNo. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on their non-compensation income. There is no evident intention of the law, either before or after the amendatory legislation, to place in an unequal footing or in significant variance the income tax treatment of professionals who practice their respective professions individually and of those who do it through a general professional partnership.

WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.

SO ORDERED.

Narvasa, C.J., Cruz, Feliciano, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno, Kapunan and Mendoza, JJ., concur.

Padilla and Bidin, JJ., are on leave

G.R. No. 88291 June 8, 1993

ERNESTO M. MACEDA, petitioner, vs.HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office of the President, HON. VICENTE JAYME, ETC., ET AL., respondents.

Angara, Abello, Concepcion & Cruz for respondent Pilipinas Shell Petroleum Corporation.

Siguion Reyna, Montecillo & Ongsiako for Caltex.

 

NOCON, J.:

Just like lightning which does strike the same place twice in some instances, this matter of indirect tax exemption of the private respondent National Power Corporation (NPC) is brought to this Court a second time. Unfazed by the Decision We promulgated on May 31, 1991 1 petitioner Ernesto Maceda asks this Court to reconsider said Decision. Lest We be criticized for denying due process to the petitioner. We have decided to take a second look at the issues. In the process, a hearing was held on July 9, 1992 where all parties presented their respective arguments. Etched in this Court's mind are the paradoxical claims by both petitioner and private respondents that their respective positions are for the benefit of the Filipino people.

I

A Chronological review of the relevant NPC laws, specially with respect to its tax exemption provisions, at the risk of being repetitious is, therefore, in order.

On November 3, 1936, Commonwealth Act No. 120 was enacted creating the National Power Corporation, a public corporation, mainly to develop hydraulic power from all water sources in the Philippines. 2 The sum of P250,000.00 was appropriated out of the funds in the Philippine Treasury for the purpose of organizing the NPC and conducting its preliminary work. 3 The main source of funds for the NPC was the flotation of bonds in the capital markets 4 and these bonds

. . . issued under the authority of this Act shall be exempt from the payment of all taxes by the Commonwealth of the Philippines, or by any authority, branch, division or political subdivision thereof and subject to the provisions of the Act of Congress, approved March 24, 1934, otherwise known as the Tydings McDuffle Law, which facts shall be stated upon the face of said bonds. . . . . 5

On June 24, 1938, C.A. No. 344 was enacted increasing to P550,000.00 the funds needed for the initial operations of the NPC and reiterating the provision of the flotation of bonds as soon as the first construction of any hydraulic power project was to be decided by the NPC Board. 6 The provision on tax exemption in relation to the issuance of the NPC bonds was neither amended nor deleted.

On September 30, 1939, C.A. No. 495 was enacted removing the provision on the payment of the bond's principal and interest in "gold coins" but adding that payment could be made in United States dollars. 7 The provision on tax exemption in relation to the issuance of the NPC bonds was neither amended nor deleted.

On June 4, 1949, Republic Act No. 357 was enacted authorizing the President of the Philippines to guarantee, absolutely and unconditionally, as primary obligor, the payment of any and all NPC loans. 8 He was also authorized to contract on behalf of the NPC with the International Bank for Reconstruction and Development (IBRD) for NPC loans for the accomplishment of NPC's corporate objectives 9 and for the reconstruction and development of the economy of the country. 10 It was expressly stated that:

Any such loan or loans shall be exempt from taxes, duties, fees, imposts, charges, contributions and restrictions

of the Republic of the Philippines, its provinces, cities and municipalities. 11

On the same date, R.A. No. 358 was enacted expressly authorizing the NPC, for the first time, to incur other types of indebtedness, aside from indebtedness incurred by flotation of bonds. 12 As to the pertinent tax exemption provision, the law stated as follows:

To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from all taxes, duties, fees, imposts, charges, and restrictions of the Republic of the Philippines, its provinces, cities and municipalities. 13

On July 10, 1952, R.A. No. 813 was enacted amending R.A. No. 357 in that, aside from the IBRD, the President of the Philippines was authorized to negotiate, contract and guarantee loans with the Export-Import Bank of of Washigton, D.C., U.S.A., or any other international financial institution. 14 The tax provision for repayment of these loans, as stated in R.A. No. 357, was not amended.

On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's tax exemption for real estate taxes. As enacted, the law states as follows:

To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from all taxes, except real property tax, and from all duties, fees, imposts, charges, and restrictions of the Republic of the Philippines, its provinces, cities, and municipalities. 15

On September 8, 1955, R.A. No. 1397 was enacted directing that the NPC projects to be funded by the increased indebtedness 16 should bear the National Economic Council's stamp of approval. The tax exemption provision related to the payment of this total indebtedness was not amended nor deleted.

On June 13, 1958, R.A. No. 2055 was enacted increasing the total amount of foreign loans NPC was authorized to incur to US$100,000,000.00 from the US$50,000,000.00 ceiling in R.A. No. 357. 17 The tax provision related to the repayment of these loans was not amended nor deleted.

On June 13, 1958, R.A. No. 2058 was enacting fixing the corporate life of NPC to December 31, 2000. 18 All laws or provisions of laws and executive orders contrary to said R.A. No. 2058 were expressly repealed. 19

On June 18, 1960, R.A. No 2641 was enacted converting the NPC from a public corporation into a stock corporation with an authorized capital stock of P100,000,000.00 divided into 1,000.000 shares having a par value of P100.00 each, with said capital stock wholly subscribed to by the Government. 20 No tax exemption was incorporated in said Act.

On June 17, 1961, R.A. No. 3043 was enacted increasing the above-mentioned authorized capital stock to P250,000,000.00 with the increase to be wholly subscribed by the Government. 21 No tax provision was incorporated in said Act.

On June 17, 1967, R.A. No 4897 was enacted. NPC's capital stock was increased again to P300,000,000.00, the increase to be wholly subscribed by the Government. No tax provision was incorporated in said Act. 22

On September 10, 1971, R.A. No. 6395 was enacted revising the charter of the NPC, C.A. No. 120, as amended. Declared as primary objectives of the nation were:

Declaration of Policy. — Congress hereby declares that (1) the comprehensive development, utilization and conservation of Philippine water resources for all beneficial uses, including power generation, and (2) the total electrification of the Philippines through the development of power from all sources to meet the needs of industrial development and dispersal and the needs of rural electrification are primary objectives of the nation which shall be pursued coordinately and supported by all instrumentalities and agencies of the government, including the financial institutions. 23

Section 4 of C.A. No. 120, was renumbered as Section 8, and divided into sections 8 (a) (Authority to incur Domestic Indebtedness) and Section 8 (b) (Authority to Incur Foreign Loans).

As to the issuance of bonds by the NPC, Paragraph No. 3 of Section 8(a), states as follows:

The bonds issued under the authority of this subsection shall be exempt from the payment of all taxes by the Republic of the Philippines, or by any authority, branch, division or political subdivision thereof which facts shall be stated upon the face of said bonds. . . . 24

As to the foreign loans the NPC was authorized to contract, Paragraph No. 5, Section 8(b), states as follows:

The loans, credits and indebtedness contracted under this subsection and the payment of the principal, interest and other charges thereon, as well as the importation of machinery, equipment, materials and supplies by the Corporation, paid from the proceeds of any loan, credit or indebtedeness incurred under this Act, shall also be exempt from all taxes, fees, imposts, other charges and restrictions, including import restrictions, by the Republic of the Philippines, or any of its agencies and political subdivisions. 25

A new section was added to the charter, now known as Section 13, R.A. No. 6395, which declares the non-profit character and tax exemptions of NPC as follows:

The Corporation shall be non-profit and shall devote all its returns from its capital investment, as well as excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section one of this Act, the Corporation is hereby declared exempt:

(a) From the payment of all taxes, duties, fees, imposts, charges costs and service fees in any court or administrative proceedings in which it may be a party, restrictions and duties to the Republic of the Philippines, its provinces, cities, and municipalities and other government agencies and instrumentalities;

(b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other government agencies and instrumentalities;

(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of foreign goods required for its operations and projects; and

(d) From all taxes, duties, fees, imposts and all other charges its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum products used by the Corporation in the generation, transmission, utilization, and sale of electric power. 26

On November 7, 1972, Presidential Decree No. 40 was issued declaring that the electrification of the entire country was one of the primary concerns of the country. And in connection with this, it was specifically stated that:

The setting up of transmission line grids and the construction of associated generation facilities in Luzon, Mindanao and major islands of the country, including the Visayas, shall be the responsibility of the National Power Corporation (NPC) as the authorized implementing agency of the State. 27

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It is the ultimate objective of the State for the NPC to own and operate as a single integrated system all generating facilities supplying electric power to the entire area embraced by any grid set up by the NPC. 28

On January 22, 1974, P.D. No. 380 was issued giving extra powers to the NPC to enable it to fulfill its role under aforesaid P.D. No. 40. Its authorized capital stock was raised to P2,000,000,000.00, 29 its total domestic indebtedness was pegged at a maximum of P3,000,000,000.00 at any one time, 30 and the NPC was authorized to borrow a total of US$1,000,000,000.00 31 in foreign loans.

The relevant tax exemption provision for these foreign loans states as follows:

The loans, credits and indebtedness contracted under this subsection and the payment of the principal, interest

and other charges thereon, as well as the importation of machinery, equipment, materials, supplies and services, by the Corporation, paid from the proceeds of any loan, credit or indebtedness incurred under this Act, shall also be exempt from all direct and indirect taxes, fees, imposts, other charges and restrictions, including import restrictions previously and presently imposed, and to be imposed by the Republic of the Philippines, or any of its agencies and political subdivisions. 32 (Emphasis supplied)

Section 13(a) and 13(d) of R.A. No 6395 were amended to read as follows:

(a) From the payment of all taxes, duties, fees, imposts, charges and restrictions to the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities including the taxes, duties, fees, imposts and other charges provided for under the Tariff and Customs Code of the Philippines, Republic Act Numbered Nineteen Hundred Thirty-Seven, as amended, and as further amended by Presidential Decree No. 34 dated October 27, 1972, and Presidential Decree No. 69, dated November 24, 1972, and costs and service fees in any court or administrative proceedings in which it may be a party;

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(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum products used by the Corporation in the generation, transmission, utilization and sale of electric power. 33 (Emphasis supplied)

On February 26, 1970, P.D. No. 395 was issued removing certain restrictions in the NPC's sale of electricity to its different customers. 34 No tax exemption provision was amended, deleted or added.

On July 31, 1975, P.D. No. 758 was issued directing that P200,000,000.00 would be appropriated annually to cover the unpaid subscription of the Government in the NPC authorized capital stock, which amount would be taken from taxes accruing to the General Funds of the Government, proceeds from loans, issuance of bonds, treasury bills or notes to be issued by the Secretary of Finance for this particular purpose. 35

On May 27, 1976 P.D. No. 938 was issued

(I)n view of the accelerated expansion programs for generation and transmission facilities which includes nuclear power generation, the present capitalization of National Power Corporation (NPC) and the ceilings for domestic and foreign borrowings are deemed insufficient; 36

xxx xxx xxx

(I)n the application of the tax exemption provisions of the Revised Charter, the non-profit character of NPC has not been fully utilized because of restrictive interpretation of the taxing agencies of the government on said provisions; 37

xxx xxx xxx

(I)n order to effect the accelerated expansion program and attain the declared objective of total electrification of the country, further amendments of certain sections of Republic Act No. 6395, as amended by Presidential Decrees Nos. 380, 395 and 758, have become imperative; 38

Thus NPC's capital stock was raised to P8,000,000,000.00, 39 the total domestic indebtedness ceiling was increased to P12,000,000,000.00, 40 the total foreign loan ceiling was raised to US$4,000,000,000.00 41 and Section 13 of R.A. No. 6395, was amended to read as follows:

The Corporation shall be non-profit and shall devote all its returns from its capital investment as well as excess revenues from its operation, for expansion. To enable the Corporation to pay to its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section one of this Act, the Corporation, including its subsidiaries, is hereby declared exempt from the payment of all forms of taxes, duties, fees, imposts as well as costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any

court or administrative proceedings. 42

II

On the other hand, the pertinent tax laws involved in this controversy are P.D. Nos. 882, 1177, 1931 and Executive Order No. 93 (S'86).

On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of NPC with regard to imports as follows:

WHEREAS, importations by certain government agencies, including government-owned or controlled corporation, are exempt from the payment of customs duties and compensating tax; and

WHEREAS, in order to reduce foreign exchange spending and to protect domestic industries, it is necessary to restrict and regulate such tax-free importations.

NOW THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by the Constitution, and do hereby decree and order the following:

Sec. 1. All importations of any government agency, including government-owned or controlled corporations which are exempt from the payment of customs duties and internal revenue taxes, shall be subject to the prior approval of an Inter-Agency Committee which shall insure compliance with the following conditions:

(a) That no such article of local manufacture are available in sufficient quantity and comparable quality at reasonable prices;

(b) That the articles to be imported are directly and actually needed and will be used exclusively by the grantee of the exemption for its operations and projects or in the conduct of its functions; and

(c) The shipping documents covering the importation are in the name of the grantee to whom the goods shall be delivered directly by customs authorities.

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Sec. 3. The Committee shall have the power to regulate and control the tax-free importation of government agencies in accordance with the conditions set forth in Section 1 hereof and the regulations to be promulgated to implement the provisions of this Decree. Provided, however, That any government agency or government-owned or controlled corporation, or any local manufacturer or business firm adversely affected by any decision or ruling of the Inter-Agency Committee may file an appeal with the Office of the President within ten days from the date of notice thereof. . . . .

xxx xxx xxx

Sec. 6. . . . . Section 13 of Republic Act No. 6395; . . .. and all similar provisions of all general and special laws and decrees are hereby amended accordingly.

xxx xxx xxx

On July 30, 1977, P.D. 1177 was issued as it was

. . . declared the policy of the State to formulate and implement a National Budget that is an instrument of national development, reflective of national objectives, strategies and plans. The budget shall be supportive of and consistent with the socio-economic development plan and shall be oriented towards the achievement of explicit objectives and expected results, to ensure that funds are utilized and operations are conducted effectively, economically and efficiently. The national budget shall be formulated within a context of a regionalized government structure and of the totality of revenues and other receipts, expenditures and

borrowings of all levels of government-owned or controlled corporations. The budget shall likewise be prepared within the context of the national long-term plan and of a long-term budget program. 43

In line with such policy, the law decreed that

All units of government, including government-owned or controlled corporations, shall pay income taxes, customs duties and other taxes and fees are imposed under revenues laws: provided, that organizations otherwise exempted by law from the payment of such taxes/duties may ask for a subsidy from the General Fund in the exact amount of taxes/duties due: provided, further, that a procedure shall be established by the Secretary of Finance and the Commissioner of the Budget, whereby such subsidies shall automatically be considered as both revenue and expenditure of the General Fund. 44

The law also declared that —

[A]ll laws, decrees, executive orders, rules and regulations or parts thereof which are inconsistent with the provisions of the Decree are hereby repealed and/or modified accordingly. 45

On July 11, 1984, most likely due to the economic morass the Government found itself in after the Aquino assassination, P.D. No. 1931 was issued to reiterate that:

WHEREAS, Presidential Decree No. 1177 has already expressly repealed the grant of tax privileges to any government-owned or controlled corporation and all other units of government; 46

and since there was a

. . . need for government-owned or controlled corporations and all other units of government enjoying tax privileges to share in the requirements of development, fiscal or otherwise, by paying the duties, taxes and other charges due from them. 47

it was decreed that:

Sec. 1. The provisions of special on general law to the contrary notwithstanding, all exemptions from the payment of duties, taxes, fees, imposts and other charges heretofore granted in favor of government-owned or controlled corporations including their subsidiaries, are hereby withdrawn.

Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the recommendation of the Fiscal Incentives Review Board created under Presidential Decree No. 776, is hereby empowered to restore, partially or totally, the exemptions withdrawn by Section 1 above, any applicable tax and duty, taking into account, among others, any or all of the following:

1) The effect on the relative price levels;

2) The relative contribution of the corporation to the revenue generation effort;

3) The nature of the activity in which the corporation is engaged in; or

4) In general the greater national interest to be served.

xxx xxx xxx

Sec. 5. The provisions of Presidential Decree No. 1177 as well as all other laws, decrees, executive orders, administrative orders, rules, regulations or parts thereof which are inconsistent with this Decree are hereby repealed, amended or modified accordingly.

On December 17, 1986, E.O. No. 93 (S'86) was issued with a view to correct presidential restoration or grant of tax exemption to other government and private entities without benefit of review by the Fiscal Incentives

Review Board, to wit:

WHEREAS, Presidential Decree Nos. 1931 and 1955 issued on June 11, 1984 and October 14, 1984, respectively, withdrew the tax and duty exemption privileges, including the preferential tax treatment, of government and private entities with certain exceptions, in order that the requirements of national economic development, in terms of fiscals and other resources, may be met more adequately;

xxx xxx xxx

WHEREAS, in addition to those tax and duty exemption privileges were restored by the Fiscal Incentives Review Board (FIRB), a number of affected entities, government and private, had their tax and duty exemption privileges restored or granted by Presidential action without benefit or review by the Fiscal Incentives Review Board (FIRB);

xxx xxx xxx

Since it was decided that:

[A]ssistance to government and private entities may be better provided where necessary by explicit subsidy and budgetary support rather than tax and duty exemption privileges if only to improve the fiscal monitoring aspects of government operations.

It was thus ordered that:

Sec. 1. The Provisions of any general or special law to the contrary notwithstanding, all tax and duty incentives granted to government and private entities are hereby withdrawn, except:

a) those covered by the non-impairment clause of the Constitution;

b) those conferred by effective internation agreement to which the Government of the Republic of the Philippines is a signatory;

c) those enjoyed by enterprises registered with:

(i) the Board of Investment pursuant to Presidential Decree No. 1789, as amended;

(ii) the Export Processing Zone Authority, pursuant to Presidential Decree No. 66 as amended;

(iii) the Philippine Veterans Investment Development Corporation Industrial Authority pursuant to Presidential Decree No. 538, was amended.

d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of Instructions No. 1416;

e) those conferred under the four basic codes namely:

(i) the Tariff and Customs Code, as amended;

(ii) the National Internal Revenue Code, as amended;

(iii) the Local Tax Code, as amended;

(iv) the Real Property Tax Code, as amended;

f) those approved by the President upon the recommendation of the Fiscal Incentives Review Board.

Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No. 776, as amended, is hereby authorized to:

a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part;

b) revise the scope and coverage of tax and/or duty exemption that may be restored;

c) impose conditions for the restoration of tax and/or duty exemption;

d) prescribe the date of period of effectivity of the restoration of tax and/or duty exemption;

e) formulate and submit to the President for approval, a complete system for the grant of subsidies to deserving beneficiaries, in lieu of or in combination with the restoration of tax and duty exemptions or preferential treatment in taxation, indicating the source of funding therefor, eligible beneficiaries and the terms and conditions for the grant thereof taking into consideration the international commitment of the Philippines and the necessary precautions such that the grant of subsidies does not become the basis for countervailing action.

Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives Review Board shall take into account any or all of the following considerations:

a) the effect on relative price levels;

b) relative contribution of the beneficiary to the revenue generation effort;

c) nature of the activity the beneficiary is engaged; and

d) in general, the greater national interest to be served.

xxx xxx xxx

Sec. 5. All laws, orders, issuances, rules and regulations or parts thereof inconsistent with this Executive Order are hereby repealed or modified accordingly.

E.O. No. 93 (S'86) was decreed to be effective 48 upon the promulgation of the rules and regulations, to be issued by the Ministry of Finance. 49 Said rules and regulations were promulgated and published in the Official Gazette on February 23, 1987. These became effective on the 15th day after promulgation 50 in the Official Gasetter, 51 which 15th day was March 10, 1987.

III

Now to some definitions. We refer to the very simplistic approach that all would-be lawyers, learn in their TAXATION I course, which fro convenient reference, is as follows:

Classifications or kinds of Taxes:

According to Persons who pay or who bear the burden:

a. Direct Tax — the where the person supposed to pay the tax really pays it. WITHOUT transferring the burden to someone else.

Examples: Individual income tax, corporate income tax, transfer taxes (estate tax, donor's tax), residence tax, immigration tax

b. Indirect Tax — that where the tax is imposed upon goods BEFORE reaching the consumer who ultimately pays for it, not as a tax, but as a part of the purchase price.

Examples: the internal revenue indirect taxes (specific tax, percentage taxes, (VAT) and the tariff and customs indirect taxes (import duties, special import tax and other dues) 52

IV

To simply matter, the issues raised by petitioner in his motion for reconsideration can be reduced to the following:

(1) What kind of tax exemption privileges did NPC have?

(2) For what periods in time were these privileges being enjoyed?

(3) If there are taxes to be paid, who shall pay for these taxes?

V

Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC as the phrase "all forms of taxes etc.," in its section 10, amending Section 13, R.A. No. 6395, as amended by P.D. No. 380, does not expressly include "indirect taxes."

His point is not well-taken.

A chronological review of the NPC laws will show that it has been the lawmaker's intention that the NPC was to be completely tax exempt from all forms of taxes — direct and indirect.

NPC's tax exemptions at first applied to the bonds it was authorized to float to finance its operations upon its creation by virtue of C.A. No. 120.

When the NPC was authorized to contract with the IBRD for foreign financing, any loans obtained were to be completely tax exempt.

After the NPC was authorized to borrow from other sources of funds — aside issuance of bonds — it was again specifically exempted from all types of taxes "to facilitate payment of its indebtedness." Even when the ceilings for domestic and foreign borrowings were periodically increased, the tax exemption privileges of the NPC were maintained.

NPC's tax exemption from real estate taxes was, however, specifically withdrawn by Rep. Act No. 987, as above stated. The exemption was, however, restored by R.A. No. 6395.

Section 13, R.A. No. 6395, was very comprehensive in its enumeration of the tax exemptions allowed NPC. Its section 13(d) is the starting point of this bone of contention among the parties. For easy reference, it is reproduced as follows:

[T]he Corporation is hereby declared exempt:

xxx xxx xxx

(d) From all taxes, duties, fees, imposts and all other charges imposed by the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum products used by the Corporation in the generation, transmission, utilization, and sale of electric power.

P.D. No. 380 added phrase "directly or indirectly" to said Section 13(d), which now reads as follows:

xxx xxx xxx

(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by the Republic of

the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum products used by the Corporation in the generation, transmission, utilization and sale of electric power. (Emphasis supplied)

Then came P.D. No. 938 which amended Sec. 13(a), (b), (c) and (d) into one very simple paragraph as follows:

The Corporation shall be non-profit and shall devote all its returns from its capital investment as well as excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section one of this Act, the Corporation, including its subsidiaries, is hereby declared exempt from the payment of ALL FORMS OF taxes, duties, fees, imposts as well as costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative proceedings. (Emphasis supplied)

Petitioner reminds Us that:

[I]t must be borne in mind that Presidential Decree Nos. 380 and 938 were issued by one man, acting as such the Executive and Legislative. 53

xxx xxx xxx

[S]ince both presidential decrees were made by the same person, it would have been very easy for him to retain the same or similar language used in P.D. No. 380 P.D. No. 938 if his intention were to preserve the indirect tax exemption of NPC. 54

Actually, P.D. No. 938 attests to the ingenuousness of then President Marcos no matter what his fault were. It should be noted that section 13, R.A. No. 6395, provided for tax exemptions for the following items:

13(a) : court or administrative proceedings;

13(b) : income, franchise, realty taxes;

13(c) : import of foreign goods required for its operations and projects;

13(d) : petroleum products used in generation of electric power.

P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into the phrase "ALL FORMS OF TAXES, ETC.,", included 13(a) under the "as well as" clause and added PNOC subsidiaries as qualified for tax exemptions.

This is the only conclusion one can arrive at if he has read all the NPC laws in the order of enactment or issuance as narrated above in part I hereof. President Marcos must have considered all the NPC statutes from C.A. No. 120 up to its latest amendments, P.D. No. 380, P.D. No. 395 and P.D. No. 759, AND came up 55 with a very simple Section 13, R.A. No. 6395, as amended by P.D. No. 938.

One common theme in all these laws is that the NPC must be enable to pay its indebtedness 56 which, as of P.D. No. 938, was P12 Billion in total domestic indebtedness, at any one time, and U$4 Billion in total foreign loans at any one time. The NPC must be and has to be exempt from all forms of taxes if this goal is to be achieved.

By virtue of P.D. No. 938 NPC's capital stock was raised to P8 Billion. It must be remembered that to pay the government share in its capital stock P.D. No. 758 was issued mandating that P200 Million would be appropriated annually to cover the said unpaid subscription of the Government in NPC's authorized capital stock. And significantly one of the sources of this annual appropriation of P200 million is TAX MONEY accruing to the General Fund of the Government. It does not stand to reason then that former President Marcos would order P200 Million to be taken partially or totally from tax money to be used to pay the Government subscription in the NPC, on one hand, and then order the NPC to pay all its indirect taxes, on the other.

The above conclusion that then President Marcos lumped up Sections 13 (b), 13 (c) and (d) into the phrase "All FORMS OF" is supported by the fact that he did not do the same for the tax exemption provision for the foreign

loans to be incurred.

The tax exemption on foreign loans found in Section 8(b), R.A. No. 6395, reads as follows:

The loans, credits and indebtedness contracted under this subsection and the payment of the principal, interest and other charges thereon, as well as the importation of machinery, equipment, materials and supplies by the Corporation, paid from the proceeds of any loan, credit or indebtedness incurred under this Act, shall also be exempt from all taxes, fees, imposts, other charges and restrictions, including import restrictions, by the Republic of the Philippines, or any of its agencies and political subdivisions. 57

The same was amended by P.D. No. 380 as follows:

The loans, credits and indebtedness contracted this subsection and the payment of the principal, interest and other charges thereon, as well as the importation of machinery, equipment, materials, supplies and services, by the Corporation, paid from the proceeds of any loan, credit or indebtedness incurred under this Act, shall also be exempt from all direct and indirect taxes, fees, imposts, other charges and restrictions, including import restrictions previously and presently imposed, and to be imposed by the Republic of the Philippines, or any of its agencies and political subdivisions. 58 (Emphasis supplied)

P.D. No. 938 did not amend the same 59 and so the tax exemption provision in Section 8 (b), R.A. No. 6395, as amended by P.D. No. 380, still stands. Since the subject matter of this particular Section 8 (b) had to do only with loans and machinery imported, paid for from the proceeds of these foreign loans, THERE WAS NO OTHER SUBJECT MATTER TO LUMP IT UP WITH, and so, the tax exemption stood as is — with the express mention of "direct and indirect" tax exemptions. And this "direct and indirect" tax exemption privilege extended to "taxes, fees, imposts, other charges . . . to be imposed" in the future — surely, an indication that the lawmakers wanted the NPC to be exempt from ALL FORMS of taxes — direct and indirect.

It is crystal clear, therefore, that NPC had been granted tax exemption privileges for both direct and indirect taxes under P.D. No. 938.

VI

Five (5) years on into the now discredited New Society, the Government decided to rationalize government receipts and expenditures by formulating and implementing a National Budget. 60 The NPC, being a government owned and controlled corporation had to be shed off its tax exemption status privileges under P.D. No. 1177. It was, however, allowed to ask for a subsidy from the General Fund in the exact amount of taxes/duties due.

Actually, much earlier, P.D. No. 882 had already repealed NPC's tax-free importation privileges. It allowed, however, NPC to appeal said repeal with the Office of the President and to avail of tax-free importation privileges under its Section 1, subject to the prior approval of an Inter-Agency Committed created by virtue of said P.D. No. 882. It is presumed that the NPC, being the special creation of the State, was allowed to continue its tax-free importations.

This Court notes that petitioner brought to the attention of this Court, the matter of the abolition of NPC's tax exemption privileges by P.D. No. 1177 61 only in his Common Reply/Comment to private Respondents' "Opposition" and "Comment" to Motion for Reconsideration, four (4) months AFTER the motion for Reconsideration had been filed. During oral arguments heard on July 9, 1992, he proceeded to discuss this tax exemption withdrawal as explained by then Secretary of Justice Vicente Abad Santos in opinion No. 133 (S '77). 62 A careful perusal of petitioner's senate Blue Ribbon Committee Report No. 474, the basis of the petition at bar, fails to yield any mention of said P.D. No. 1177's effect on NPC's tax exemption privileges. 63 Applying by analogy Pulido vs. Pablo, 64 the court declares that the matter of P.D. No. 1177 abolishing NPC's tax exemption privileges was not seasonably invoked 65 by the petitioner.

Be that as it may, the Court still has to discuss the effect of P.D. No. 1177 on the NPC tax exemption privileges as this statute has been reiterated twice in P.D. No. 1931. The express repeal of tax privileges of any government-owned or controlled corporation (GOCC). NPC included, was reiterated in the fourth whereas clause of P.D. No. 1931's preamble. The subsidy provided for in Section 23, P.D. No. 1177, being inconsistent with Section 2, P.D. No. 1931, was deemed repealed as the Fiscal Incentives Revenue Board was tasked with

recommending the partial or total restoration of tax exemptions withdrawn by Section 1, P.D. No. 1931.

The records before Us do not indicate whether or not NPC asked for the subsidy contemplated in Section 23, P.D. No. 1177. Considering, however, that under Section 16 of P.D. No. 1177, NPC had to submit to the Office of the President its request for the P200 million mandated by P.D. No. 758 to be appropriated annually by the Government to cover its unpaid subscription to the NPC authorized capital stock and that under Section 22, of the same P.D. No. NPC had to likewise submit to the Office of the President its internal operating budget for review due to capital inputs of the government (P.D. No. 758) and to the national government's guarantee of the domestic and foreign indebtedness of the NPC, it is clear that NPC was covered by P.D. No. 1177.

There is reason to believe that NPC availed of subsidy granted to exempt GOCC's that suddenly found themselves having to pay taxes. It will be noted that Section 23, P.D. No. 1177, mandated that the Secretary of Finance and the Commissioner of the Budget had to establish the necessary procedure to accomplish the tax payment/tax subsidy scheme of the Government. In effect, NPC, did not put any cash to pay any tax as it got from the General Fund the amounts necessary to pay different revenue collectors for the taxes it had to pay.

In his memorandum filed July 16, 1992, petitioner submits:

[T]hat with the enactment of P.D. No. 1177 on July 30, 1977, the NPC lost all its duty and tax exemptions, whether direct or indirect. And so there was nothing to be withdrawn or to be restored under P.D. No. 1931, issued on June 11, 1984. This is evident from sections 1 and 2 of said P.D. No. 1931, which reads:

"Section 1. The provisions of special or general law to the contrary notwithstanding, all exemptions from the payment of duties, taxes, fees, imports and other charges heretofore granted in favor of government-owned or controlled corporations including their subsidiaries are hereby withdrawn."

Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the recommendation of the Fiscal Incentives Review Board created under P.D. No. 776, is hereby empowered to restore partially or totally, the exemptions withdrawn by section 1 above. . . .

Hence, P.D. No. 1931 did not have any effect or did it change NPC's status. Since it had already lost all its tax exemptions privilege with the issuance of P.D. No. 1177 seven (7) years earlier or on July 30, 1977, there were no tax exemptions to be withdrawn by section 1 which could later be restored by the Minister of Finance upon the recommendation of the FIRB under Section 2 of P.D. No. 1931. Consequently, FIRB resolutions No. 10-85, and 1-86, were all illegally and validly issued since FIRB acted beyond their statutory authority by creating and not merely restoring the tax exempt status of NPC. The same is true for FIRB Res. No. 17-87 which restored NPC's tax exemption under E.O. No. 93 which likewise abolished all duties and tax exemptions but allowed the President upon recommendation of the FIRB to restore those abolished.

The Court disagrees.

Applying by analogy the weight of authority that:

When a revised and consolidated act re-enacts in the same or substantially the same terms the provisions of the act or acts so revised and consolidated, the revision and consolidation shall be taken to be a continuation of the former act or acts, although the former act or acts may be expressly repealed by the revised and consolidated act; and all rights and liabilities under the former act or acts are preserved and may be enforced. 66

the Court rules that when P.D. No. 1931 basically reenacted in its Section 1 the first half of Section 23, P.D. No. 1177, on withdrawal of tax exemption privileges of all GOCC's said Section 1, P.D. No. 1931 was deemed to be a continuation of the first half of Section 23, P.D. No. 1177, although the second half of Section 23, P.D. No. 177, on the subsidy scheme for former tax exempt GOCCs had been expressly repealed by Section 2 with its institution of the FIRB recommendation of partial/total restoration of tax exemption privileges.

The NPC tax privileges withdrawn by Section 1. P.D. No. 1931, were, therefore, the same NPC tax exemption privileges withdrawn by Section 23, P.D. No. 1177. NPC could no longer obtain a subsidy for the taxes it had to pay. It could, however, under P.D. No. 1931, ask for a total restoration of its tax exemption privileges, which, it

did, and the same were granted under FIRB Resolutions Nos. 10-85 67 and 1-86 68 as approved by the Minister of Finance.

Consequently, contrary to petitioner's submission, FIRB Resolutions Nos. 10-85 and 1-86 were both legally and validly issued by the FIRB pursuant to P.D. No. 1931. FIRB did not created NPC's tax exemption status but merely restored it. 69

Some quarters have expressed the view that P.D. No. 1931 was illegally issued under the now rather infamous Amendment No. 6 70 as there was no showing that President Marcos' encroachment on legislative prerogatives was justified under the then prevailing condition that he could legislate "only if the Batasang Pambansa 'failed or was unable to act inadequately on any matter that in his judgment required immediate action' to meet the 'exigency'. 71

Actually under said Amendment No. 6, then President Marcos could issue decrees not only when the Interim Batasang Pambansa failed or was unable to act adequately on any matter for any reason that in his (Marcos') judgment required immediate action, but also when there existed a grave emergency or a threat or thereof. It must be remembered that said Presidential Decree was issued only around nine (9) months after the Philippines unilaterally declared a moratorium on its foreign debt payments 72 as a result of the economic crisis triggered by loss of confidence in the government brought about by the Aquino assassination. The Philippines was then trying to reschedule its debt payments. 73 One of the big borrowers was the NPC 74 which had a US$ 2.1 billion white elephant of a Bataan Nuclear Power Plant on its back. 75 From all indications, it must have been this grave emergency of a debt rescheduling which compelled Marcos to issue P.D. No. 1931, under his Amendment 6 power. 76

The rule, therefore, that under the 1973 Constitution "no law granting a tax exemption shall be passed without the concurrence of a majority of all the members of the Batasang Pambansa" 77 does not apply as said P.D. No. 1931 was not passed by the Interim Batasang Pambansa but by then President Marcos under His Amendment No. 6 power.

P.D. No. 1931 was, therefore, validly issued by then President Marcos under his Amendment No. 6 authority.

Under E.O No. 93 (S'86) NPC's tax exemption privileges were again clipped by, this time, President Aquino. Its section 2 allowed the NPC to apply for the restoration of its tax exemption privileges. The same was granted under FIRB Resolution No. 17-87 78 dated June 24, 1987 which restored NPC's tax exemption privileges effective, starting March 10, 1987, the date of effectivity of E.O. No. 93 (S'86).

FIRB Resolution No. 17-87 was approved by the President on October 5, 1987. 79 There is no indication, however, from the records of the case whether or not similar approvals were given by then President Marcos for FIRB Resolutions Nos. 10-85 and 1- 86. This has led some quarters to believe that a "travesty of justice" might have occurred when the Minister of Finance approved his own recommendation as Chairman of the Fiscal Incentives Review Board as what happened in Zambales Chromate vs. Court of Appeals 80 when the Secretary of Agriculture and Natural Resources approved a decision earlier rendered by him when he was the Director of Mines, 81 and in Anzaldo vs. Clave 82 where Presidential Executive Assistant Clave affirmed, on appeal to Malacañang, his own decision as Chairman of the Civil Service Commission. 83

Upon deeper analysis, the question arises as to whether one can talk about "due process" being violated when FIRB Resolutions Nos. 10-85 and 1-86 were approved by the Minister of Finance when the same were recommended by him in his capacity as Chairman of the Fiscal Incentives Review Board. 84

In Zambales Chromite and Anzaldo, two (2) different parties were involved: mining groups and scientist-doctors, respectively. Thus, there was a need for procedural due process to be followed.

In the case of the tax exemption restoration of NPC, there is no other comparable entity — not even a single public or private corporation — whose rights would be violated if NPC's tax exemption privileges were to be restored. While there might have been a MERALCO before Martial Law, it is of public knowledge that the MERALCO generating plants were sold to the NPC in line with the State policy that NPC was to be the State implementing arm for the electrification of the entire country. Besides, MERALCO was limited to Manila and its environs. And as of 1984, there was no more MERALCO — as a producer of electricity — which could have

objected to the restoration of NPC's tax exemption privileges.

It should be noted that NPC was not asking to be granted tax exemption privileges for the first time. It was just asking that its tax exemption privileges be restored. It is for these reasons that, at least in NPC's case, the recommendation and approval of NPC's tax exemption privileges under FIRB Resolution Nos. 10-85 and 1-86, done by the same person acting in his dual capacities as Chairman of the Fiscal Incentives Review Board and Minister of Finance, respectively, do not violate procedural due process.

While as above-mentioned, FIRB Resolution No. 17-87 was approved by President Aquino on October 5, 1987, the view has been expressed that President Aquino, at least with regard to E.O. 93 (S'86), had no authority to sub-delegate to the FIRB, which was allegedly not a delegate of the legislature, the power delegated to her thereunder.

A misconception must be cleared up.

When E.O No. 93 (S'86) was issued, President Aquino was exercising both Executive and Legislative powers. Thus, there was no power delegated to her, rather it was she who was delegating her power. She delegated it to the FIRB, which, for purposes of E.O No. 93 (S'86), is a delegate of the legislature. Clearly, she was not sub-delegating her power.

And E.O. No. 93 (S'86), as a delegating law, was complete in itself — it set forth the policy to be carried out 85

and it fixed the standard to which the delegate had to conform in the performance of his functions, 86 both qualities having been enunciated by this Court in Pelaez vs. Auditor General. 87

Thus, after all has been said, it is clear that the NPC had its tax exemption privileges restored from June 11, 1984 up to the present.

VII

The next question that projects itself is — who pays the tax?

The answer to the question could be gleamed from the manner by which the Commissaries of the Armed Forces of the Philippines sell their goods.

By virtue of P.D. No. 83, 88 veterans, members of the Armed of the Philippines, and their defendants but groceries and other goods free of all taxes and duties if bought from any AFP Commissaries.

In practice, the AFP Commissary suppliers probably treat the unchargeable specific, ad valorem and other taxes on the goods earmarked for AFP Commissaries as an added cost of operation and distribute it over the total units of goods sold as it would any other cost. Thus, even the ordinary supermarket buyer probably pays for the specific, ad valorem and other taxes which theses suppliers do not charge the AFP Commissaries. 89

IN MUCH THE SAME MANNER, it is clear that private respondents-oil companies have to absorb the taxes they add to the bunker fuel oil they sell to NPC.

It should be stated at this juncture that, as early as May 14, 1954, the Secretary of Justice renders an opinion, 90

wherein he stated and We quote:

xxx xxx xxx

Republic Act No. 358 exempts the National Power Corporation from "all taxes, duties, fees, imposts, charges, and restrictions of the Republic of the Philippines and its provinces, cities, and municipalities." This exemption is broad enough to include all taxes, whether direct or indirect, which the National Power Corporation may be required to pay, such as the specific tax on petroleum products. That it is indirect or is of no amount [should be of no moment], for it is the corporation that ultimately pays it. The view which refuses to accord the exemption because the tax is first paid by the seller disregards realities and gives more importance to form than to substance. Equity and law always exalt substance over from.

xxx xxx xxx

Tax exemptions are undoubtedly to be construed strictly but not so grudgingly as knowledge that many impositions taxpayers have to pay are in the nature of indirect taxes. To limit the exemption granted the National Power Corporation to direct taxes notwithstanding the general and broad language of the statue will be to thwrat the legislative intention in giving exemption from all forms of taxes and impositions without distinguishing between those that are direct and those that are not. (Emphasis supplied)

In view of all the foregoing, the Court rules and declares that the oil companies which supply bunker fuel oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold to NPC. By the very nature of indirect taxation, the economic burden of such taxation is expected to be passed on through the channels of commerce to the user or consumer of the goods sold. Because, however, the NPC has been exempted from both direct and indirect taxation, the NPC must beheld 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 could they 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 the part of the "normal" purchase price of bunker fuel oil which represents all or part of the taxes previously paid by the oil companies to BIR. If NPC nonetheless purchases such oil from the oil companies — because to do so may be more convenient and ultimately less costly for NPC than NPC itself importing and hauling and storing the oil from overseas — NPC is entitled to be reimbursed by the BIR for that part of the buying price of NPC which verifiably represents the tax already paid by the oil company-vendor to the BIR.

It should be noted at this point in time that the whole issue of who WILL pay these indirect taxes HAS BEEN RENDERED moot and academic by E.O. No. 195 issued on June 16, 1987 by virtue of which the ad valorem tax rate on bunker fuel oil was reduced to ZERO (0%) PER CENTUM. Said E.O. no. 195 reads as follows:

EXECUTIVE ORDER NO. 195

AMENDING PARAGRAPH (b) OF SECTION 128 OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED BY REVISING THE EXCISE TAX RATES OF CERTAIN PETROLEUM PRODUCTS.

xxx xxx xxx

Sec. 1. Paragraph (b) of Section 128 of the National Internal Revenue Code, as amended, is hereby amended to read as follows:

Par. (b) — For products subject to ad valorem tax only:

PRODUCT AD VALOREM TAX RATE

1. . . .

2. . . .

3. . . .

4. Fuel oil, commercially known as bunker oil and on similar fuel oils having more or less the same generating power 0%

xxx xxx xxx

Sec. 3. This Executive Order shall take effect immediately.

Done in the city of Manila, this 17th day of June, in the year of Our Lord, nineteen hundred and eighty-seven. (Emphasis supplied)

The oil companies can now deliver bunker fuel oil to NPC without having to worry about who is going to bear the economic burden of the ad valorem taxes. What this Court will now dispose of are petitioner's complaints that some indirect tax money has been illegally refunded by the Bureau of Internal Revenue to the NPC and that more claims for refunds by the NPC are being processed for payment by the BIR.

A case in point is the Tax Credit Memo issued by the Bureau of Internal Revenue in favor of the NPC last July 7, 1986 for P58.020.110.79 which were for "erroneously paid specific and ad valorem taxes during the period from October 31, 1984 to April 27, 1985. 91 Petitioner asks Us to declare this Tax Credit Memo illegal as the PNC did not have indirect tax exemptions with the enactment of P.D. No. 938. As We have already ruled otherwise, the only questions left are whether NPC Is entitled to a tax refund for the tax component of the price of the bunker fuel oil purchased from Caltex (Phils.) Inc. and whether the Bureau of Internal Revenue properly refunded the amount to NPC.

After P.D. No. 1931 was issued on June 11, 1984 withdrawing the tax exemptions of all GOCCs — NPC included, it was only on May 8, 1985 when the BIR issues its letter authority to the NPC authorizing it to withdraw tax-free bunker fuel oil from the oil companies pursuant to FIRB Resolution No. 10-85. 92 Since the tax exemption restoration was retroactive to June 11, 1984 there was a need. therefore, to recover said amount as Caltex (PhiIs.) Inc. had already paid the BIR the specific and ad valorem taxes on the bunker oil it sold NPC during the period above indicated and had billed NPC correspondingly. 93 It should be noted that the NPC, in its letter-claim dated September 11, 1985 to the Commissioner of the Bureau of Internal Revenue DID NOT CATEGORICALLY AND UNEQUIVOCALLY STATE that itself paid the P58.020,110.79 as part of the bunker fuel oil price it purchased from Caltex (Phils) Inc. 94

The law governing recovery of erroneously or illegally, collected taxes is section 230 of the National Internal Revenue Code of 1977, as amended which reads as follows:

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

In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment; Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly, to have been erroneously paid.

xxx xxx xxx

Inasmuch as NPC filled its claim for P58.020,110.79 on September 11, 1985, 95 the Commissioner correctly issued the Tax Credit Memo in view of NPC's indirect tax exemption.

Petitioner, however, asks Us to restrain the Commissioner from acting favorably on NPC's claim for P410.580,000.00 which represents specific and ad valorem taxes paid by the oil companies to the BIR from June 11, 1984 to the early part of 1986. 96

A careful examination of petitioner's pleadings and annexes attached thereto does not reveal when the alleged claim for a P410,580,000.00 tax refund was filed. It is only stated In paragraph No. 2 of the Deed of Assignment 97 executed by and between NPC and Caltex (Phils.) Inc., as follows:

That the ASSIGNOR(NPC) has a pending tax credit claim with the Bureau of Internal Revenue amounting to P442,887,716.16. P58.020,110.79 of which is due to Assignor's oil purchases from the Assignee (Caltex [Phils.] Inc.)

Actually, as the Court sees it, this is a clear case of a "Mexican standoff." We cannot restrain the BIR from refunding said amount because of Our ruling that NPC has both direct and indirect tax exemption privileges. Neither can We order the BIR to refund said amount to NPC as there is no pending petition for review on

certiorari of a suit for its collection before Us. At any rate, at this point in time, NPC can no longer file any suit to collect said amount EVEN IF lt has previously filed a claim with the BIR because it is time-barred under Section 230 of the National Internal Revenue Code of 1977. as amended, which states:

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

The date of the Deed of Assignment is June 6. 1986. Even if We were to assume that payment by NPC for the amount of P410,580,000.00 had been made on said date. it is clear that more than two (2) years had already elapsed from said date. At the same time, We should note that there is no legal obstacle to the BIR granting, even without a suit by NPC, the tax credit or refund claimed by NPC, assuming that NPC's claim had been made seasonably, and assuming the amounts covered had actually been paid previously by the oil companies to the BIR.

WHEREFORE, in view of all the foregoing, the Motion for Reconsideration of petitioner is hereby DENIED for lack of merit and the decision of this Court promulgated on May 31, 1991 is hereby AFFIRMED.

SO ORDERED.

Narvasa, C.J., Feliciano, Bidin, Regalado, Romero, Bellosillo and Melo, JJ., concur.

Padilla and Quiason, JJ. took no part.

G.R. No. L-14264             April 30, 1963

RAYMUNDO B. TAN, JOSE ESGUERRA, ROMAN ABASTILLAS, ANTONIO QUEBRADO, ROMAN AGNES, ELISEO AMANDY, NICOLAS SOTOMAYOR, INESTORIO TORRENUEVA and FELIPE TIOSAN, plaintiffs-appellees, vs.THE MUNICIPALITY OF PAGBILAO, ELIAS PORNOBI as Municipal Mayor of Pagbilao and CEFERINO CAPARROS as Municipal Treasurer of Pagbilao, defendants-appellants.

Jose D. Villena for plaintiffs-appellees.Claro M. Recto for defendants-appellants.

PAREDES, J.:

Defendant municipal corporation was the owner and operator of a wharf (Exhs. E & F). On May 31, 1956, the municipal council of defendant municipality enacted Ordinance No. 11, series of 1956, imposing certain charges and/or fees on articles or merchandises landed upon, or loaded from the said wharf and on the strip of shoreline adjacent thereto, measuring 300 meters. The plaintiffs, who were fishermen, merchants and proprietors of Padre Burgos, Quezon, had to pass Pagbilao in order to bring their goods consisting of fish, charcoal, copra, firewood and other merchandise to Lucena. The merchandise were transported in bancas or motor boats from Padre Burgos and unloaded on the Pagbilao wharf or on the shoreline, from where they were brought to Lucena by trucks.

Pursuant to the Ordinance, defendant municipality required plaintiffs to pay the charges and fees, which they did under protest. On January 7, 1957, alleging that the Ordinance was ultra vires, in that the fees prescribed therein partake of the nature of import or export taxes, in the guise of wharfage or rental fees, the plaintiffs, instituted an action, with the CFI of Quezon Province, praying:

(1) That the said Municipal ordinance be declared null and void and of no legal effect; and

(2) Ordering the defendants, jointly and severally, to pay the plaintiffs the sum of P1,800.00 for fees collected and paid under protest.

Defendants answering the complaint, interposed the following special defenses:

1) that the fees collected at the wharf are intended for and actually being exclusively utilized in the repair, improvement, and maintenance of the same;

2) that the municipality has made material and additional construction to date, and if the revenues raised from these fees are sufficient, the wharf is intended to be lengthened along the 300 meters distance by the river;

3) the presence, day and night, of a municipal employee or of a policeman at the wharf, has resulted in the prevailing peace, order, and security of cargoes, vessels, and of the operators therein;

4) the municipality also maintains a 300 candle power kerosene lantern at the wharf.

As counterclaim, defendants asked the payment of P6.00, for twelve truckloads of full-length bamboos, loaded on a vessel at the wharf for which no payment had been made, in spite of repeated demands. The court a quo rendered the following judgment:

x x x           x x x           x x x

In the light of the foregoing, the Court is therefore of the opinion that Ordinance No. 11, Series of 1956, of defendant Municipality of Pagbilao, Quezon, is null and void for having been enacted without lawful authority ....

x x x           x x x           x x x

WHEREFORE, judgment is hereby rendered ordering defendant municipality of PagbiIao, Quezon, to pay to plaintiff Raymundo B. Tan the amount of P774.25, with legal interest thereon from the filing of the complaint, that is, from 4 February 1957, and dismissing defendants' counterclaim against plaintiffs, with the parties bearing their own costs.

The above judgment is now before Us on appeal by the defendants, urging a reversal thereof on seven counts, which converge on the following legal issues:

1) whether the defendant municipality can validly enact the ordinance in question and collect the charges contained therein; and

2) whether plaintiff Tan is entitled to a refund of the fees paid to the defendant municipality.

Appellants contend that aside from the general powers of the council to enact ordinances and make regulations (Sec. 2238 of the Administrative Code),certain provisions of said Code authorizes a municipality to establish a wharf and collect wharfage fees, as compensation for its use, to wit —

SEC. 2242. Certain legislative powers of mandatory character.— It shall be the duty of the municipal council, conformably with law:

x x x           x x x           x x x

(e) To regulate the construction, care, and use of streets, sidewalks, canals, wharves and piers of the municipality, and prevent and remove obstacles and encroachment on the same.

SEC. 2318. Municipal ferries, wharves, markets, etc. — A municipal council shall have authority to acquire or establish municipal ferries, wharves, markets, slaughterhouses, pounds, and cemeteries. Public utilities thus owned by the municipality may be conducted by the municipal authorities upon stipulated return to private parties.

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

SEC. 2320. Establishment of certain public utilities by private parties under license .— Where provision is not made by a municipal council, pursuant to the provisions of the next two preceding sections hereof, for maintaining or conducting ferries, wharves, markets, or slaughterhouses requisite for the needs of the municipality, the council shall have authority, in its discretion, to let the privilege of establishing and maintaining such utilities to private parties by license granted upon such terms as shall be fixed by the council ....

Aside from the above provisions, Executive Order No. 255, dated April 1, 1940, states:

(6) Collection of berthing fees at municipal ports.-Municipalities may collect berthing fees at municipal ports, pursuant to the provisions of section two thousand three hundred eighteen (2318) of the Revised Administrative Code, not to exceed those specified in paragraph (3) hereof, provided that such collection shall be credited to a special fund and used only for the maintenance and improvement of the port at which the collections are made.

Appellants further contended that the wharfage fees which section 3(t), of Commonwealth Act No. 472,

prohibits a municipality from collecting, are customs charges levied in connection with the exportation or importation of goods abroad, through ports of entry, as contemplated in the Tariff and Customs Code, but not the ordinary wharfage rentals which a municipality may collect for the use of its wharf, in relation to local trade and local products.

On the other hand, the appellees maintain that the appellant municipality was devoid one right to pass the ordinance in question, since the Revised Administrative Code also prohibits the imposition of tax on any goods or merchandise carried into or out of the municipality. Section 2287 thereof, provides —

SEC. 2287. Fundamental principles governing municipal taxation. — ... It shall not be in the power of the council to impose a tax in any form whatever upon goods and merchandise carried into the municipality, or out of the same, and any attempt to impose an import or export tax upon such goods in the guise of an unreasonable charge for wharfage, use of bridges or otherwise shall be void.

Moreover, any power granted by the Administrative Code to municipalities had been impliedly repealed or withdrawn by Commonwealth Act No. 472, the pertinent portions of which read —

SEC. 3. It shall be beyond the power of the municipal council and municipal district council to impose the following taxes, charges and fees:

x x x           x x x           x x x

Customs duties, registration, wharfage, tonnage and other kinds of customs fees, charges and duties.

In the light of the legal provisions applicable, We are of the opinion that the ordinance in question, is ultra vires, and hence, null and void. The ordinance calls for a specific tax. It charges a specific sum, ranging from one centavo and up, by the head or number, and requires no assessment beyond a listing and classification of the objects to be charged..

A tax which imposes a specific sum by the head or number, or some standard weight or measurement, and which requires no assessment beyond a listing and classification of the objects to be taxed is specific tax. (We Wa Yu v. City of Lipa, G.R. No. L-9167, Sept. 27, 1956)

Aside from being a specific tax, its nature as wharfage fee is also clear from the import of the ordinance, specifically paragraph 1, which recites -.

PANGKAT 1.— Ang lahat na mayari o tagapangasiwa ng mga sasakyan sa pantalang bayan, ay dapat magbigay-alam sa kinauukulang katiwala ng pamahalaan, upang maisaayos ang pagdaung, pagbaba at pagsakay ng mga kargamentos at iba pa.

The phraseology of the above paragraph points to the fact that the charges collected pursuant thereto, correspond to the words "berthing, unloading and loading of cargoes or merchandise" which fall under the category of wharfage fees. The change or the designation of the said fees as "rental of municipal property" did not change their basic character as "wharfage fees". Being a specific tax, the municipality has no right to impose the same, for taxation is an attribute of sovereignty which municipal corporation do not enjoy (Santo Lumber Co., et al v. City of Cebu, et al., L-10196, Jan. 22, 1958; 54 O.G. 5327; Saldana v. City of Iloilo, L-10470, June 26, 1958). It shall not be in the power of the council to impose a tax in any form whatever upon goods and merchandise carried into the municipality or out of the same, and any attempt to impose such tax in the guise of wharfage fee or charge is void (Sec. 2287, Rev. Adm. Code). And being wharfage fee (Phil. Sugar Central v. Coll. of Customs, 51 Phil. 131), it is likewise beyond the power of the municipal council and municipal district council to impose (Sec. 3, Comm. Act No. 472, supra).

In the case at bar, aside from the fact that the right of the municipality to collect wharfage fees is doubtful for, at most, its claim is based merely by inference, implications and deductions, which have no place in the interpretation of the power to tax of a municipal corporation (Icard v. City Council of Baguio, et al., 46 Off. Gaz., Suppl. No. 11, p. 320; Medina, et al. v. City of Baguio, 48 Off. Gaz., 11, p. 4729) no less than two Secretaries of the Department of Justice, (Secretaries Jose Abad Santos & Bengzon) expressed the opinion that,

"in view of section 3, paragraph (t), Commonwealth Act No. 472, which expressly forbids municipalities from imposing wharfage fees, a municipal ordinance levying wharfage or berthing fees is illegal and void, ... (Opinion No. 373, series of 1940 and No. 165, series of 1951). Opinions and rulings of officials of the government called upon to execute or implement administrative laws command much respect and weight (Regalado v. Yulo, 61 Phil. 173; Grapilon v. Mun. Council of Carigara, L-12347, May 30, 1961)

It should be noted that previous to the ordinance in question (No. 11), ordinance No. 9 was enacted by the same municipal council, providing for "wharfage fees" for goods and merchandise only. But because the Provincial Board ruled the to be null and void, because the prescribed fees were unreasonable and were obviously export or import taxes in the guise of wharfage fees which are contrary to the provisions of section 2287 of the Administrative Code, the municipal council of Pagbilao enacted Ordinance No. 11, providing for the wharfage of boats and vessels and of goods and merchandise; and while it fixed the fees or charges for loading and unloading goods and merchandise, it did not state the berthing fees for boats and vessels carrying the goods, all of which go to show that the council wanted only to impose specific tax on the goods and merchandise, which was the same objective it had, when the annulled Ordinance No. 9 was promulgated.

The question as to whether or not the charges paid should be returned, must be answered in the affirmative. Not only were the payments made under protest, but they were also collected under an invalid ordinance. In a number of cases, We have ruled that monies collected under invalid acts or tax laws are refundable, even if the payments were voluntary (East Asiatic Co., Ltd. v. City of Davao, L-16253, Aug. 21, 1962).

It is insinuated that invalidating the ordinance would leave the municipality with no means to defray the expenses for operation, repair and maintenance of the wharf in question. It would seem, however, that the municipality will not be absolutely helpless and hopeless, for there is always some remedy somewhere, and those indicated in sections 2318 and 2320 of the Adm. Code, (supra) may be availed of.

IN VIEW OF ALL THE FOREGOING, we find that the decision appealed from is in conformity with the law and jurisprudence on the matter. The same should be, as it is hereby affirmed, in all respects. No costs.

Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Barrera, Dizon and Regala, JJ., concur.Makalintal, J., concurs in the result.Padilla and Reyes, J.B.L., JJ., took no part.

G.R. No. L- 41383 August 15, 1988

PHILIPPINE AIRLINES, INC., plaintiff-appellant, vs.ROMEO F. EDU in his capacity as Land Transportation Commissioner, and UBALDO CARBONELL, in his capacity as National Treasurer, defendants-appellants.

Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.

 

GUTIERREZ, JR., J.:

What is the nature of motor vehicle registration fees? Are they taxes or regulatory fees?

This question has been brought before this Court in the past. The parties are, in effect, asking for a re-examination of the latest decision on this issue.

This appeal was certified to us as one involving a pure question of law by the Court of Appeals in a case where the then Court of First Instance of Rizal dismissed the portion-about complaint for refund of registration fees paid under protest.

The disputed registration fees were imposed by the appellee, Commissioner Romeo F. Elevate pursuant to Section 8, Republic Act No. 4136, otherwise known as the Land Transportation and Traffic Code.

The Philippine Airlines (PAL) is a corporation organized and existing under the laws of the Philippines and engaged in the air transportation business under a legislative franchise, Act No. 42739, as amended by Republic Act Nos. 25). and 269.1 Under its franchise, PAL is exempt from the payment of taxes. The pertinent provision of the franchise provides as follows:

Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the National Government during the life of this franchise a tax of two per cent of the gross revenue or gross earning derived by the grantee from its operations under this franchise. Such tax shall be due and payable quarterly and shall be in lieu of all taxes of any kind, nature or description, levied, established or collected by any municipal, provincial or national automobiles, Provided, that if, after the audit of the accounts of the grantee by the Commissioner of Internal Revenue, a deficiency tax is shown to be due, the deficiency tax shall be payable within the ten days from the receipt of the assessment. The grantee shall pay the tax on its real property in conformity with existing law.

On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956) PAL has, since 1956, not been paying motor vehicle registration fees.

Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a regulation requiring all tax exempt entities, among them PAL to pay motor vehicle registration fees.

Despite PAL's protestations, the appellee refused to register the appellant's motor vehicles unless the amounts imposed under Republic Act 4136 were paid. The appellant thus paid, under protest, the amount of P19,529.75

as registration fees of its motor vehicles.

After paying under protest, PAL through counsel, wrote a letter dated May 19,1971, to Commissioner Edu demanding a refund of the amounts paid, invoking the ruling in Calalang v. Lorenzo (97 Phil. 212 [1951]) where it was held that motor vehicle registration fees are in reality taxes from the payment of which PAL is exempt by virtue of its legislative franchise.

Appellee Edu denied the request for refund basing his action on the decision in Republic v. Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the effect that motor vehicle registration fees are regulatory exceptional. and not revenue measures and, therefore, do not come within the exemption granted to PAL? under its franchise. Hence, PAL filed the complaint against Land Transportation Commissioner Romeo F. Edu and National Treasurer Ubaldo Carbonell with the Court of First Instance of Rizal, Branch 18 where it was docketed as Civil Case No. Q-15862.

Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI Carbonell in his capacity as National Treasurer, filed a motion to dismiss alleging that the complaint states no cause of action. In support of the motion to dismiss, defendants repatriation the ruling in Republic v. Philippine Rabbit Bus Lines, Inc., (supra) that registration fees of motor vehicles are not taxes, but regulatory fees imposed as an incident of the exercise of the police power of the state. They contended that while Act 4271 exempts PAL from the payment of any tax except two per cent on its gross revenue or earnings, it does not exempt the plaintiff from paying regulatory fees, such as motor vehicle registration fees. The resolution of the motion to dismiss was deferred by the Court until after trial on the merits.

On April 24, 1973, the trial court rendered a decision dismissing the appellant's complaint "moved by the later ruling laid down by the Supreme Court in the case or Republic v. Philippine Rabbit Bus Lines, Inc., (supra)." From this judgment, PAL appealed to the Court of Appeals which certified the case to us.

Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc. (supra) cited by PAL and Commissioner Romeo F. Edu respectively, discuss the main points of contention in the case at bar.

Resolving the issue in the Philippine Rabbit case, this Court held:

"The registration fee which defendant-appellee had to pay was imposed by Section 8 of the Revised Motor Vehicle Law (Republic Act No. 587 [1950]). Its heading speaks of "registration fees." The term is repeated four times in the body thereof. Equally so, mention is made of the "fee for registration." (Ibid., Subsection G) A subsection starts with a categorical statement "No fees shall be charged." ( lbid., Subsection H) The conclusion is difficult to resist therefore that the Motor Vehicle Act requires the payment not of a tax but of a registration fee under the police power. Hence the incipient, of the section relied upon by defendant-appellee under the Back Pay Law, It is not held liable for a tax but for a registration fee. It therefore cannot make use of a backpay certificate to meet such an obligation.

Any vestige of any doubt as to the correctness of the above conclusion should be dissipated by Republic Act No. 5448. ([1968]. Section 3 thereof as to the imposition of additional tax on privately-owned passenger automobiles, motorcycles and scooters was amended by Republic Act No. 5470 which is (sic) approved on May 30, 1969.) A special science fund was thereby created and its title expressly sets forth that a tax on privately-owned passenger automobiles, motorcycles and scooters was imposed. The rates thereof were provided for in its Section 3 which clearly specifies the" Philippine tax."(Cooley to be paid as distinguished from the registration fee under the Motor Vehicle Act. There cannot be any clearer expression therefore of the legislative will, even on the assumption that the earlier legislation could by subdivision the point be susceptible of the interpretation that a tax rather than a fee was levied. What is thus most apparent is that where the legislative body relies on its authority to tax it expressly so states, and where it is enacting a regulatory measure, it is equally exploded (at p. 22,1969

In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court, on the other hand, held:

The charges prescribed by the Revised Motor Vehicle Law for the registration of motor vehicles are in section 8 of that law called "fees". But the appellation is no impediment to their being considered taxes if taxes they really are. For not the name but the object of the charge determines whether it is a tax or a fee. Geveia speaking, taxes

are for revenue, whereas fees are exceptional. for purposes of regulation and inspection and are for that reason limited in amount to what is necessary to cover the cost of the services rendered in that connection. Hence, a charge fixed by statute for the service to be person,-When by an officer, where the charge has no relation to the value of the services performed and where the amount collected eventually finds its way into the treasury of the branch of the government whose officer or officers collected the chauffeur, is not a fee but a tax."(Cooley on Taxation, Vol. 1, 4th ed., p. 110.)

From the data submitted in the court below, it appears that the expenditures of the Motor Vehicle Office are but a small portion—about 5 per centum—of the total collections from motor vehicle registration fees. And as proof that the money collected is not intended for the expenditures of that office, the law itself provides that all such money shall accrue to the funds for the construction and maintenance of public roads, streets and bridges. It is thus obvious that the fees are not collected for regulatory purposes, that is to say, as an incident to the enforcement of regulations governing the operation of motor vehicles on public highways, for their express object is to provide revenue with which the Government is to discharge one of its principal functions—the construction and maintenance of public highways for everybody's use. They are veritable taxes, not merely fees.

As a matter of fact, the Revised Motor Vehicle Law itself now regards those fees as taxes, for it provides that "no other taxes or fees than those prescribed in this Act shall be imposed," thus implying that the charges therein imposed—though called fees—are of the category of taxes. The provision is contained in section 70, of subsection (b), of the law, as amended by section 17 of Republic Act 587, which reads:

Sec. 70(b) No other taxes or fees than those prescribed in this Act shall be imposed for the registration or operation or on the ownership of any motor vehicle, or for the exercise of the profession of chauffeur, by any municipal corporation, the provisions of any city charter to the contrary notwithstanding: Provided, however, That any provincial board, city or municipal council or board, or other competent authority may exact and collect such reasonable and equitable toll fees for the use of such bridges and ferries, within their respective jurisdiction, as may be authorized and approved by the Secretary of Public Works and Communications, and also for the use of such public roads, as may be authorized by the President of the Philippines upon the recommendation of the Secretary of Public Works and Communications, but in none of these cases, shall any toll fee." be charged or collected until and unless the approved schedule of tolls shall have been posted levied, in a conspicuous place at such toll station. (at pp. 213-214)

Motor vehicle registration fees were matters originally governed by the Revised Motor Vehicle Law (Act 3992 [19511) as amended by Commonwealth Act 123 and Republic Acts Nos. 587 and 1621.

Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as the Land Transportation Code, (as amended by Rep. Acts Nos. 5715 and 64-67, P.D. Nos. 382, 843, 896, 110.) and BP Blg. 43, 74 and 398).

Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992 and remained unsegregated, by Rep. Act Nos. 587 and 1603) states:

Section 73. Disposal of moneys collected.—Twenty per centum of the money collected under the provisions of this Act shall accrue to the road and bridge funds of the different provinces and chartered cities in proportion to the centum shall during the next previous year and the remaining eighty per centum shall be deposited in the Philippine Treasury to create a special fund for the construction and maintenance of national and provincial roads and bridges. as well as the streets and bridges in the chartered cities to be alloted by the Secretary of Public Works and Communications for projects recommended by the Director of Public Works in the different provinces and chartered cities. ....

Presently, Sec. 61 of the Land Transportation and Traffic Code provides:

Sec. 61. Disposal of Mortgage. Collected—Monies collected under the provisions of this Act shall be deposited in a special trust account in the National Treasury to constitute the Highway Special Fund, which shall be apportioned and expended in accordance with the provisions of the" Philippine Highway Act of 1935. "Provided, however, That the amount necessary to maintain and equip the Land Transportation Commission but not to exceed twenty per cent of the total collection during one year, shall be set aside for the purpose. (As amended by RA 64-67, approved August 6, 1971).

It appears clear from the above provisions that the legislative intent and purpose behind the law requiring owners of vehicles to pay for their registration is mainly to raise funds for the construction and maintenance of highways and to a much lesser degree, pay for the operating expenses of the administering agency. On the other hand, the Philippine Rabbit case mentions a presumption arising from the use of the term "fees," which appears to have been favored by the legislature to distinguish fees from other taxes such as those mentioned in Section 13 of Rep. Act 4136 which reads:

Sec. 13. Payment of taxes upon registration.—No original registration of motor vehicles subject to payment of taxes, customs s duties or other charges shall be accepted unless proof of payment of the taxes due thereon has been presented to the Commission.

referring to taxes other than those imposed on the registration, operation or ownership of a motor vehicle (Sec. 59, b, Rep. Act 4136, as amended).

Fees may be properly regarded as taxes even though they also serve as an instrument of regulation, As stated by a former presiding judge of the Court of Tax Appeals and writer on various aspects of taxpayers

It is possible for an exaction to be both tax arose. regulation. License fees are changes. looked to as a source of revenue as well as a means of regulation (Sonzinky v. U.S., 300 U.S. 506) This is true, for example, of automobile license fees. Isabela such case, the fees may properly be regarded as taxes even though they also serve as an instrument of regulation. If the purpose is primarily revenue, or if revenue is at least one of the real and substantial purposes, then the exaction is properly called a tax. (1955 CCH Fed. tax Course, Par. 3101, citing Cooley on Taxation (2nd Ed.) 592, 593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v. Araneta 98 Phil. 198.) These exactions are sometimes called regulatory taxes. (See Secs. 4701, 4711, 4741, 4801, 4811, 4851, and 4881, U.S. Internal Revenue Code of 1954, which classify taxes on tobacco and alcohol as regulatory taxes.) (Umali, Reviewer in Taxation, 1980, pp. 12-13, citing Cooley on Taxation, 2nd Edition, 591-593).

Indeed, taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil. 148).

If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax (Umali, Id.) Such is the case of motor vehicle registration fees. The conclusions become inescapable in view of Section 70(b) of Rep. Act 587 quoted in the Calalang case. The same provision appears as Section 591-593). in the Land Transportation code. It is patent therefrom that the legislators had in mind a regulatory tax as the law refers to the imposition on the registration, operation or ownership of a motor vehicle as a "tax or fee." Though nowhere in Rep. Act 4136 does the law specifically state that the imposition is a tax, Section 591-593). speaks of "taxes." or fees ... for the registration or operation or on the ownership of any motor vehicle, or for the exercise of the profession of chauffeur ..." making the intent to impose a tax more apparent. Thus, even Rep. Act 5448 cited by the respondents, speak of an "additional" tax," where the law could have referred to an original tax and not one in addition to the tax already imposed on the registration, operation, or ownership of a motor vehicle under Rep. Act 41383. Simply put, if the exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other "fees," such as the special permit fees for certain types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec. 11). These are not to be understood as taxes because such fees are very minimal to be revenue-raising. Thus, they are not mentioned by Sec. 591-593). of the Code as taxes like the motor vehicle registration fee and chauffers' license fee. Such fees are to go into the expenditures of the Land Transportation Commission as provided for in the last proviso of see. 61, aforequoted.

It is quite apparent that vehicle registration fees were originally simple exceptional. intended only for rigidly purposes in the exercise of the State's police powers. Over the years, however, as vehicular traffic exploded in number and motor vehicles became absolute necessities without which modem life as we know it would stand still, Congress found the registration of vehicles a very convenient way of raising much needed revenues. Without changing the earlier deputy. of registration payments as "fees," their nature has become that of "taxes."

In view of the foregoing, we rule that motor vehicle registration fees as at present exacted pursuant to the Land Transportation and Traffic Code are actually taxes intended for additional revenues. of government even if one fifth or less of the amount collected is set aside for the operating expenses of the agency administering the program.

May the respondent administrative agency be required to refund the amounts stated in the complaint of PAL?

The answer is NO.

The claim for refund is made for payments given in 1971. It is not clear from the records as to what payments were made in succeeding years. We have ruled that Section 24 of Rep. Act No. 5448 dated June 27, 1968, repealed all earlier tax exemptions Of corporate taxpayers found in legislative franchises similar to that invoked by PAL in this case.

In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al. (G.R. No. 615)." July 11, 1985), this Court ruled:

Under its original franchise, Republic Act No. 21); enacted in 1957, petitioner Radio Communications of the Philippines, Inc., was subject to both the franchise tax and income tax. In 1964, however, petitioner's franchise was amended by Republic Act No. 41-42). to the effect that its franchise tax of one and one-half percentum (1-1/2%) of all gross receipts was provided as "in lieu of any and all taxes of any kind, nature, or description levied, established, or collected by any authority whatsoever, municipal, provincial, or national from which taxes the grantee is hereby expressly exempted." The issue raised to this Court now is the validity of the respondent court's decision which ruled that the exemption under Republic Act No. 41-42). was repealed by Section 24 of Republic Act No. 5448 dated June 27, 1968 which reads:

"(d) The provisions of existing special or general laws to the contrary notwithstanding, all corporate taxpayers not specifically exempt under Sections 24 (c) (1) of this Code shall pay the rates provided in this section. All corporations, agencies, or instrumentalities owned or controlled by the government, including the Government Service Insurance System and the Social Security System but excluding educational institutions, shall pay such rate of tax upon their taxable net income as are imposed by this section upon associations or corporations engaged in a similar business or industry. "

An examination of Section 24 of the Tax Code as amended shows clearly that the law intended all corporate taxpayers to pay income tax as provided by the statute. There can be no doubt as to the power of Congress to repeal the earlier exemption it granted. Article XIV, Section 8 of the 1935 Constitution and Article XIV, Section 5 of the Constitution as amended in 1973 expressly provide that no franchise shall be granted to any individual, firm, or corporation except under the condition that it shall be subject to amendment, alteration, or repeal by the legislature when the public interest so requires. There is no question as to the public interest involved. The country needs increased revenues. The repealing clause is clear and unambiguous. There is a listing of entities entitled to tax exemption. The petitioner is not covered by the provision. Considering the foregoing, the Court Resolved to DENY the petition for lack of merit. The decision of the respondent court is affirmed.

Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly imposed because the tax exemption in the franchise of PAL was repealed during the period. However, an amended franchise was given to PAL in 1979. Section 13 of Presidential Decree No. 1590, now provides:

In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine Government during the lifetime of this franchise whichever of subsections (a) and (b) hereunder will result in a lower taxes.)

(a) The basic corporate income tax based on the grantee's annual net taxable income computed in accordance with the provisions of the Internal Revenue Code; or

(b) A franchise tax of two per cent (2%) of the gross revenues. derived by the grantees from all specific. without distinction as to transport or nontransport corporations; provided that with respect to international airtransport service, only the gross passengers, mail, and freight revenues. from its outgoing flights shall be subject to this law.

The tax paid by the 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, including but not limited to the following:

xxx xxx xxx

(5) All taxes, fees and other charges on the registration, license, acquisition, and transfer of airtransport equipment, motor vehicles, and all other personal or real property of the gravitates (Pres. Decree 1590, 75 OG No. 15, 3259, April 9, 1979).

PAL's current franchise is clear and specific. It has removed the ambiguity found in the earlier law. PAL is now exempt from the payment of any tax, fee, or other charge on the registration and licensing of motor vehicles. Such payments are already included in the basic tax or franchise tax provided in Subsections (a) and (b) of Section 13, P.D. 1590, and may no longer be exacted.

WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of registration fees paid in 1971 is DENIED. The Land Transportation Franchising and Regulatory Board (LTFRB) is enjoined functions-the collecting any tax, fee, or other charge on the registration and licensing of the petitioner's motor vehicles from April 9, 1979 as provided in Presidential Decree No. 1590.

SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera, Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin, Sarmiento, Cortes, Griño Aquino and Medialdea, JJ., concur.

G.R. Nos. L-28508-9 July 7, 1989

ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil Company), petitioner, vs.THE COMMISSIONER OF INTERNAL REVENUE, respondent.

Padilla Law Office for petitioner.

 CRUZ, J.:

On appeal before us is the decision of the Court of Tax Appeals 1 denying petitioner's claims for refund of overpaid income taxes of P102,246.00 for 1959 and P434,234.93 for 1960 in CTA Cases No. 1251 and 1558 respectively.

I

In CTA Case No. 1251, petitioner ESSO deducted from its gross income for 1959, as part of its ordinary and necessary business expenses, the amount it had spent for drilling and exploration of its petroleum concessions. This claim was disallowed by the respondent Commissioner of Internal Revenue on the ground that the expenses should be capitalized and might be written off as a loss only when a "dry hole" should result. ESSO then filed an amended return where it asked for the refund of P323,279.00 by reason of its abandonment as dry holes of several of its oil wells. Also claimed as ordinary and necessary expenses in the same return was the amount of P340,822.04, representing margin fees it had paid to the Central Bank on its profit remittances to its New York head office.

On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed deduction for the margin fees paid.

In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year 1960, in the amount of P367,994.00, plus 18% interest thereon of P66,238.92 for the period from April 18,1961 to April 18, 1964, for a total of P434,232.92. The deficiency arose from the disallowance of the margin fees of Pl,226,647.72 paid by ESSO to the Central Bank on its profit remittances to its New York head office.

ESSO settled this deficiency assessment on August 10, 1964, by applying the tax credit of P221,033.00 representing its overpayment on its income tax for 1959 and paying under protest the additional amount of P213,201.92. On August 13, 1964, it claimed the refund of P39,787.94 as overpayment on the interest on its deficiency income tax. It argued that the 18% interest should have been imposed not on the total deficiency of P367,944.00 but only on the amount of P146,961.00, the difference between the total deficiency and its tax credit of P221,033.00.

This claim was denied by the CIR, who insisted on charging the 18% interest on the entire amount of the deficiency tax. On May 4,1965, the CIR also denied the claims of ESSO for refund of the overpayment of its 1959 and 1960 income taxes, holding that the margin fees paid to the Central Bank could not be considered taxes or allowed as deductible business expenses.

ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959, contending that the margin fees were deductible from gross income either as a tax or as an ordinary and necessary business expense. It also claimed an overpayment of its tax by P434,232.92 in 1960, for the same reason. Additionally, ESSO argued that even if the amount paid as margin fees were not legally deductible, there was still an overpayment by P39,787.94 for 1960, representing excess interest.

After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959 and P434,234.92 for 1960 but sustained its claim for P39,787.94 as excess interest. This portion of the decision was appealed by the CIR but was affirmed by this Court in Commissioner of Internal Revenue v. ESSO, G.R. No. L-28502- 03, promulgated on April 18, 1989. ESSO for its part appealed the CTA decision denying its claims for the refund of the margin fees P102,246.00 for 1959 and P434,234.92 for 1960. That is the issue now before us.

II

The first question we must settle is whether R.A. 2009, entitled An Act to Authorize the Central Bank of the Philippines to Establish a Margin Over Banks' Selling Rates of Foreign Exchange, is a police measure or a revenue measure. If it is a revenue measure, the margin fees paid by the petitioner to the Central Bank on its profit remittances to its New York head office should be deductible from ESSO's gross income under Sec. 30(c) of the National Internal Revenue Code. This provides that all taxes paid or accrued during or within the taxable year and which are related to the taxpayer's trade, business or profession are deductible from gross income.

The petitioner maintains that margin fees are taxes and cites the background and legislative history of the Margin Fee Law showing that R.A. 2609 was nothing less than a revival of the 17% excise tax on foreign exchange imposed by R.A. 601. This was a revenue measure formally proposed by President Carlos P. Garcia to Congress as part of, and in order to balance, the budget for 1959-1960. It was enacted by Congress as such and, significantly, properly originated in the House of Representatives. During its two and a half years of existence, the measure was one of the major sources of revenue used to finance the ordinary operating expenditures of the government. It was, moreover, payable out of the General Fund.

On the claimed legislative intent, the Court of Tax Appeals, quoting established principles, pointed out that —

We are not unmindful of the rule that opinions expressed in debates, actual 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 an aid in the interpretation of a statute which is ambiguous or of doubtful meaning. The courts may take into consideration the facts leading up to, coincident with, and in any way connected with, the passage of the act, in order that they may properly interpret the legislative intent. But it is also well-settled jurisprudence that only in extremely doubtful matters of interpretation does the legislative history of an act of Congress become important. As a matter of fact, there may be no resort to the legislative history of the enactment of a statute, the language of which is plain and unambiguous, since such legislative history may only be resorted to for the purpose of solving doubt, not for the purpose of creating it. [50 Am. Jur. 328.]

Apart from the above consideration, there are at least two cases where we have held that a margin fee is not a tax but an exaction designed to curb the excessive demands upon our international reserve.

In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court stated through Justice Jose P. Bengzon:

A margin levy on foreign exchange is a form of exchange control or restriction designed to discourage imports and encourage exports, and ultimately, 'curtail any excessive demand upon the international reserve' in order to stabilize the currency. Originally adopted to cope with balance of payment pressures, exchange restrictions have come to serve various purposes, such as limiting non-essential imports, protecting domestic industry and when combined with the use of multiple currency rates providing a source of revenue to the government, and are in many developing countries regarded as a more or less inevitable concomitant of their economic development programs. The different measures of exchange control or restriction cover different phases of foreign exchange transactions, i.e., in quantitative restriction, the control is on the amount of foreign exchange allowable. In the case of the margin levy, the immediate impact is on the rate of foreign exchange; in fact, its main function is to control the exchange rate without changing the par value of the peso as fixed in the Bretton Woods Agreement Act. For a member nation is not supposed to alter its exchange rate (at par value) to correct a merely temporary disequilibrium in its balance of payments. By its nature, the margin levy is part of the rate of exchange as fixed

by the government.

As to the contention that the margin levy is a tax on the purchase of foreign exchange and hence should not form part of the exchange rate, suffice it to state that We have already held the contrary for the reason that a tax is levied to provide revenue for government operations, while the proceeds of the margin fee are applied to strengthen our country's international reserves.

Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v. Central Bank, 3 the same idea was expressed, though in connection with a different levy, through Justice J.B.L. Reyes:

Neither do we find merit in the argument that the 20% retention of exporter's foreign exchange constitutes an export tax. A tax is a levy for the purpose of providing revenue for government operations, while the proceeds of the 20% retention, as we have seen, are applied to strengthen the Central Bank's international reserve.

We conclude then that the margin fee was imposed by the State in the exercise of its police power and not the power of taxation.

Alternatively, ESSO prays that if margin fees are not taxes, they should nevertheless be considered necessary and ordinary business expenses and therefore still deductible from its gross income. The fees were paid for the remittance by ESSO as part of the profits to the head office in the Unites States. Such remittance was an expenditure necessary and proper for the conduct of its corporate affairs.

The applicable provision is Section 30(a) of the National Internal Revenue Code reading as follows:

SEC. 30. Deductions from gross income in computing net income there shall be allowed as deductions

(a) Expenses:

(1) In general. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for the purpose of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.

(2) Expenses allowable to non-resident alien individuals and foreign corporations. — In the case of a non-resident alien individual or a foreign corporation, the expenses deductible are the necessary expenses paid or incurred in carrying on any business or trade conducted within the Philippines exclusively.

In the case of Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue, 4

the Court laid down the rules on the deductibility of business expenses, thus:

The principle is recognized that when a taxpayer claims a deduction, he must point to some specific provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows. As previously adverted to, the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30(a) (1) of the National Internal Revenue which allows a deduction of 'all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.' An item of expenditure, in order to be deductible under this section of the statute, must fall squarely within its language.

We come, then, to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense, three conditions are imposed, namely: (1) the expense must be ordinary and necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying on a trade or business. In addition, not only must the taxpayer meet the business test, he must substantially prove by evidence or records the deductions claimed under the law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction.

While it is true that there is a number of decisions in the United States delving on the interpretation of the terms 'ordinary and necessary' as used in the federal tax laws, no adequate or satisfactory definition of those terms is possible. Similarly, this Court has never attempted to define with precision the terms 'ordinary and necessary.' There are however, certain guiding principles worthy of serious consideration in the proper adjudication of conflicting claims. Ordinarily, an expense will be considered 'necessary' where the expenditure is appropriate and helpful in the development of the taxpayer's business. It is 'ordinary' when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. The term 'ordinary' does not require that the payments be habitual or normal in the sense that the same taxpayer will have to make them often; the payment may be unique or non-recurring to the particular taxpayer affected.

There is thus no hard and fast rule on the matter. The right to a deduction depends in each case on the particular facts and the relation of the payment to the type of business in which the taxpayer is engaged. The intention of the taxpayer often may be the controlling fact in making the determination. Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer's business, the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself, which in turn depends on the extent and permanency of the work accomplished by the expenditure.

In the light of the above explanation, we hold that the Court of Tax Appeals did not err when it held on this issue as follows:

Considering the foregoing test of what constitutes an ordinary and necessary deductible expense, it may be asked: Were the margin fees paid by petitioner on its profit remittance to its Head Office in New York appropriate and helpful in the taxpayer's business in the Philippines? Were the margin fees incurred for purposes proper to the conduct of the affairs of petitioner's branch in the Philippines? Or were the margin fees incurred for the purpose of realizing a profit or of minimizing a loss in the Philippines? Obviously not. As stated in the Lopez case, the margin fees are not expenses in connection with the production or earning of petitioner's incomes in the Philippines. They were expenses incurred in the disposition of said incomes; expenses for the remittance of funds after they have already been earned by petitioner's branch in the Philippines for the disposal of its Head Office in New York which is already another distinct and separate income taxpayer.

x x x

Since the margin fees in question were incurred for the remittance of funds to petitioner's Head Office in New York, which is a separate and distinct income taxpayer from the branch in the Philippines, for its disposal abroad, it can never be said therefore that the margin fees were appropriate and helpful in the development of petitioner's business in the Philippines exclusively or were incurred for purposes proper to the conduct of the affairs of petitioner's branch in the Philippines exclusively or for the purpose of realizing a profit or of minimizing a loss in the Philippines exclusively. If at all, the margin fees were incurred for purposes proper to the conduct of the corporate affairs of Standard Vacuum Oil Company in New York, but certainly not in the Philippines.

ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. The petitioner merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires. This is error. The public respondent is correct when it asserts that "the paramount rule is that claims for deductions are a matter of legislative grace and do not turn on mere equitable considerations ... . The taxpayer in every instance has the burden of justifying the allowance of any deduction claimed." 5

It is clear that ESSO, having assumed an expense properly attributable to its head office, cannot now claim this as an ordinary and necessary expense paid or incurred in carrying on its own trade or business.

WHEREFORE, the decision of the Court of Tax Appeals denying the petitioner's claims for refund of P102,246.00 for 1959 and P434,234.92 for 1960, is AFFIRMED, with costs against the petitioner.

SO ORDERED.

Narvasa (Chairman), Gancayco, Griño-Aquino and Medialdea, JJ., concur.

[G.R. Nos. 95119-21 :  December 18, 1990.]

192 SCRA 363

OLIVER O. LOZANO, Petitioner, vs. ENERGY REGULATORY BOARD (ERB), PILIPINAS SHELL PETROLEUM CORPORATION, CALTEX (PHIL.), INC., and PETRON CORPORATION, Respondents.

 

D E C I S I O N

 

SARMIENTO, J.:

 

The petitioners pray for injunctive relief, to stop the Energy Regulatory Board (Board hereinafter) from implementing its Order, dated September 21, 1990, mandating a provisional increase in the prices of petroleum and petroleum products, as follows:

 PRODUCTS IN PESOS PER LITER

  OPSF

 Premium Gasoline 1.7700

 Regular Gasoline 1.7700

 Avturbo 1.8664

 Kerosene 1.2400

 Diesel Oil 1.2400

 Fuel Oil 1.4900

 Feedstock 1.4900

 LPG 0.8487

 Asphalts 2.7160

 Thinners 1.7121 1

It appears that on September 10, 1990, Caltex (Philippines), Inc., Pilipinas Shell Petroleum Corporation, and Petron Corporation proferred separate applications with the Board for permission to increase the wholesale posted prices of petroleum products, as follows:

 Caltex P3.2697 per liter

 Shell 2.0338 per liter

 Petron 2.00 per liter 2

and meanwhile, for provisional authority to increase temporarily such wholesale posted prices pending further proceedings.:-cralaw

On September 21, 1990, the Board, in a joint (on three applications) Order granted provisional relief as follows:

WHEREFORE, considering the foregoing, and pursuant to Section 8 of Executive Order No. 172, this Board hereby grants herein applicants' prayer for provisional relief and, accordingly, authorizes said applicants a weighted average provisional increase of ONE PESO AND FORTY-TWO CENTAVOS (P1.42) per liter in the wholesale posted prices of their various petroleum products enumerated below, refined and/or marketed by them locally. 3

The petitioners submit that the above Order had been issued with grave abuse of discretion, tantamount to lack of jurisdiction, and correctible by Certiorari.

The petitioner, Senator Ernesto Maceda, 4 also submits that the same was issued without proper notice and hearing in violation of Section 3, paragraph (e), of Executive Order No. 172; that the Board, in decreeing an increase, had created a new source for the Oil Price Stabilization Fund (OPSF), or otherwise that it had levied a tax, a power vested in the legislature, and/or that it had "re-collected", by an act of taxation, ad valorem taxes on oil which Republic Act No. 6965 had abolished.

The petitioner, Atty. Oliver Lozano, 5 likewise argues that the Board's Order was issued without notice and hearing, and hence, without due process of law.

The intervenor, the Trade Union of the Philippines and Allied Services (TUPAS/FSM)-W.F.T.U., 6 argues on the other hand, that the increase cannot be allowed since the respondents oil companies had not exhausted their existing oil stock which they had bought at old prices and that they cannot be allowed to charge new rates for stock purchased at such lower rates.

The Court set the cases (in G.R. Nos. 95203-05) for hearing on October 25, 1990, in which Senator Maceda and his counsel, Atty. Alexander Padilla, argued. The Solicitor General, on behalf of the Board, also presented his arguments, together with Board Commissioner Rex Tantiangco. Attys. Federico Alikpala, Jr. and Joselia Poblador represented the oil firms (Petron and Caltex, respectively).

The parties were thereafter required to submit their memorandums after which, the Court considered the cases submitted for resolution.

On November 20, 1990, the Court ordered these cases consolidated.

On November 27, 1990, we gave due course to both petitions.

The Court finds no merit in these petitions.

Senator Maceda and Atty. Lozano, in questioning the lack of a hearing, have overlooked the provisions of Section 8 of Executive Order No. 172, which we quote:

"SECTION 8. Authority to Grant Provisional Relief . — The Board may, upon the filing of an application, petition or complaint or at any stage thereafter and without prior hearing, on the basis of supporting papers duly verified or authenticated, grant provisional relief on motion of a party in the case or on its own initiative, without prejudice to a final decision after hearing, should the Board find that the pleadings, together with such affidavits, documents and other evidence which may be submitted in support of the motion, substantially support the provisional order: Provided, That the Board shall immediately schedule and conduct a hearing thereon within thirty (30) days thereafter, upon publication and notice to all affected parties.: nad

As the Order itself indicates, the authority for provisional increase falls within the above provision.

There is no merit in the Senator's contention that the "applicable" provision is Section 3, paragraph (e) of the Executive Order, which we quote:

(e) Whenever the Board has determined that there is a shortage of any petroleum product, or when public interest so requires, it may take such steps as it may consider necessary, including the temporary adjustment of the levels of prices of petroleum products and the payment to the Oil Price Stabilization Fund created under Presidential Decree No. 1956 by persons or entities engaged in the petroleum industry of such amounts as may be determined by the Board, which will enable the importer to recover its cost of importation.

What must be stressed is that while under Executive Order No. 172, a hearing is indispensable, it does not preclude the Board from ordering, ex parte, a provisional increase, as it did here, subject to its final disposition of whether or not: (1) to make it permanent; (2) to reduce or increase it further; or (3) to deny the application. Section 37 paragraph (e) is akin to a temporary restraining order or a writ of preliminary attachment issued by the courts, which are given ex parte, and which are subject to the resolution of the main case.

Section 3, paragraph (e) and Section 8 do not negate each other, or otherwise, operate exclusively of the other, in that the Board may resort to one but not to both at the same time. Section 3(e) outlines the jurisdiction of the Board and the grounds for which it may decree a price adjustment, subject to the requirements of notice and hearing. Pending that, however, it may order, under Section 8, an authority to increase provisionally, without need of a hearing, subject to the final outcome of the proceeding. The Board, of course, is not prevented from conducting a hearing on the grant of provisional authority — which is of course, the better procedure — however, it cannot be stigmatized later if it failed to conduct one. As we held in Citizens' Alliance for Consumer Protection v. Energy Regulatory Board. 7

In the light of Section 8 quoted above, public respondent Board need not even have conducted formal hearings in these cases prior to issuance of its Order of 14 August 1987 granting a provisional increase of prices. The Board, upon its own discretion and on the basis of documents and evidence submitted by private respondents, could have issued an order granting provisional relief immediately upon filing by private respondents of their respective applications. In this respect, the Court considers the evidence presented by private respondents in support of their applications — i.e., evidence showing that importation costs of petroleum products had gone up; that the peso had depreciated in value; and that the Oil Price Stabilization Fund (OPSF) had by then been depleted — as substantial and hence constitutive of at least prima facie basis for issuance by the Board of a provisional relief order granting an increase in the prices of petroleum products. 8

We do not therefore find the challenged action of the Board to have been done in violation of the due process clause. The petitioners may contest however, the applications at the hearings proper.

Senator Maceda's attack on the Order in question on premises that it constitutes an act of taxation or that it negates the effects of Republic Act No. 6965, cannot prosper. Republic Act No. 6965 operated to lower taxes on petroleum and petroleum products by imposing specific taxes rather than ad valorem taxes thereon; it is, not, however, an insurance against an "oil hike", whenever warranted, or is it a price control mechanism on petroleum and petroleum products. The statute had possibly forestalled a larger hike, but it operated no more.: nad

The Board Order authorizing the proceeds generated by the increase to be deposited to the OPSF is not an act of taxation. It is authorized by Presidential Decree No. 1956, as amended by Executive Order No. 137, as follows:

SECTION 8.  There is hereby created a Trust Account in the books of accounts of the Ministry of Energy to be designated as Oil Price Stabilization Fund (OPSF) for the purpose of minimizing frequent price changes brought about by exchange rate adjustments and/or changes in world market prices of crude oil and imported petroleum products. The Oil Price Stabilization Fund (OPSF) may be sourced from any of the following:

a) Any increase in the tax collection from ad valorem tax or customs duty imposed on petroleum products subject to tax under this Decree arising from exchange rate adjustment, as may be determined by the Minister of Finance in consultation with the Board of Energy;

b) Any increase in the tax collection as a result of the lifting of tax exemptions of government corporations, as may be determined by the Minister of Finance in consultation with the Board of Energy;

c) Any additional amount to be imposed on petroleum products to augment the resources of the Fund through an appropriate Order that may be issued by the Board of Energy requiring payment by persons or companies engaged in the business of importing, manufacturing and/or marketing petroleum products;

d) Any resulting peso cost differentials in case the actual peso costs paid by oil companies in the importation of crude oil and petroleum products is less than the peso costs computed using the reference foreign exchange rates as fixed by the Board of Energy.

Anent claims that oil companies cannot charge new prices for oil purchased at old rates, suffice it to say that the increase in question was not prompted alone by the increase in world oil prices arising from tension in the Persian Gulf. What the Court gathers from the pleadings as well as events of which it takes judicial notice, is that: (1) as of June 30, 1990, the OPSF has incurred a deficit of P6.1 Billion; (2) the exchange rate has fallen to P28.00 to $1.00; (3) the country's balance of payments is expected to reach $1 Billion; (4) our trade deficit is at

$2.855 Billion as of the first nine months of the year.

Evidently, authorities have been unable to collect enough taxes necessary to replenish the OPSF as provided by Presidential Decree No. 1956, and hence, there was no available alternative but to hike existing prices.

The OPSF, as the Court held in the aforecited CACP cases, must not be understood to be a funding designed to guarantee oil firms' profits although as a subsidy, or a trust account, the Court has no doubt that oil firms make money from it. As we held there, however, the OPSF was established precisely to protect the consuming public from the erratic movement of oil prices and to preclude oil companies from taking advantage of fluctuations occurring every so often. As a buffer mechanism, it stabilizes domestic prices by bringing about a uniform rate rather than leaving pricing to the caprices of the market.

In all likelihood, therefore, an oil hike would have probably been imminent, with or without trouble in the Gulf, although trouble would have probably aggravated it.: nad

The Court is not to be understood as having prejudged the justness of an oil price increase amid the above premises. What the Court is saying is that it thinks that based thereon, the Government has made out a prima facie case to justify the provisional increase in question. Let the Court therefore make clear that these findings are not final; the burden, however, is on the petitioners' shoulders to demonstrate the fact that the present economic picture does not warrant a permanent increase.

There is no doubt that the increase in oil prices in question (not to mention another one impending, which the Court understands has been under consideration by policy-makers) spells hard(er) times for the Filipino people. The Court can not, however, debate the wisdom of policy or the logic behind it (unless it is otherwise arbitrary), not because the Court agrees with policy, but because the Court is not the suitable forum for debate. It is a question best judged by the political leadership which after all, determines policy, and ultimately, by the electorate, that stands to be better for it or worse off, either in the short or long run.

At this point, the Court shares the indignation of the people over the conspiracy of events and regrets its own powerlessness, if by this Decision it has been powerless. The constitutional scheme of things has simply left it with no choice.

In fine, we find no grave abuse of discretion committed by the respondent Board in issuing its questioned Order.

WHEREFORE, these petitions are DISMISSED. No costs.

SO ORDERED.

Narvasa, Gutierrez, Jr ., Cruz, Gancayco, Bidin, Griño Aquino, Medialdea and Regalado, JJ., concur.

Fernan, C.J., Melencio-Herrera and Padilla, JJ., no part. 

Feliciano, J., is on leave.

G.R. No. L-46245 May 31, 1982

MERALCO SECURITIES INDUSTRIAL CORPORATION, petitioner, vs.CENTRAL BOARD OF ASSESSMENT APPEALS, BOARD OF ASSESSMENT APPEALS OF LAGUNA and PROVINCIAL ASSESSOR OF LAGUNA, respondents.

 

AQUINO, J.:

In this special civil action of certiorari, Meralco Securities Industrial Corporation assails the decision of the Central Board of Assessment Appeals (composed of the Secretary of Finance as chairman and the Secretaries of Justice and Local Government and Community Development as members) dated May 6, 1976, holding that Meralco Securities' oil pipeline is subject to realty tax.

The record reveals that pursuant to a pipeline concession issued under the Petroleum Act of 1949, Republic Act No. 387, Meralco Securities installed from Batangas to Manila a pipeline system consisting of cylindrical steel pipes joined together and buried not less than one meter below the surface along the shoulder of the public highway. The portion passing through Laguna is about thirty kilometers long.

The pipes for white oil products measure fourteen inches in diameter by thirty-six feet with a maximum capacity of 75,000 barrels daily. The pipes for fuel and black oil measure sixteen inches by forty-eight feet with a maximum capacity of 100,000 barrels daily.

The pipes are embedded in the soil and are firmly and solidly welded together so as to preclude breakage or damage thereto and prevent leakage or seepage of the oil. The valves are welded to the pipes so as to make the pipeline system one single piece of property from end to end.

In order to repair, replace, remove or transfer segments of the pipeline, the pipes have to be cold-cut by means of a rotary hard-metal pipe-cutter after digging or excavating them out of the ground where they are buried. In points where the pipeline traversed rivers or creeks, the pipes were laid beneath the bed thereof. Hence, the pipes are permanently attached to the land.

However, Meralco Securities notes that segments of the pipeline can be moved from one place to another as shown in the permit issued by the Secretary of Public Works and Communications which permit provides that the government reserves the right to require the removal or transfer of the pipes by and at the concessionaire's expense should they be affected by any road repair or improvement.

Pursuant to the Assessment Law, Commonwealth Act No. 470, the provincial assessor of Laguna treated the pipeline as real property and issued Tax Declarations Nos. 6535-6537, San Pedro; 7473-7478, Cabuyao; 7967-7971, Sta. Rosa; 9882-9885, Biñan and 15806-15810, Calamba, containing the assessed values of portions of the pipeline.

Meralco Securities appealed the assessments to the Board of Assessment Appeals of Laguna composed of the register of deeds as chairman and the provincial auditor as member. That board in its decision of June 18, 1975 upheld the assessments (pp. 47-49, Rollo).

Meralco Securities brought the case to the Central Board of Assessment Appeals. As already stated, that Board, composed of Acting Secretary of Finance Pedro M. Almanzor as chairman and Secretary of Justice Vicente Abad Santos and Secretary of Local Government and Community Development Jose Roño as members, ruled that the pipeline is subject to realty tax (p. 40, Rollo).

A copy of that decision was served on Meralco Securities' counsel on August 27, 1976. Section 36 of the Real Property Tax Code, Presidential Decree No. 464, which took effect on June 1, 1974, provides that the Board's decision becomes final and executory after the lapse of fifteen days from the date of receipt of a copy of the decision by the appellant.

Under Rule III of the amended rules of procedure of the Central Board of Assessment Appeals (70 O.G. 10085), a party may ask for the reconsideration of the Board's decision within fifteen days after receipt. On September 7, 1976 (the eleventh day), Meralco Securities filed its motion for reconsideration.

Secretary of Finance Cesar Virata and Secretary Roño (Secretary Abad Santos abstained) denied the motion in a resolution dated December 2, 1976, a copy of which was received by appellant's counsel on May 24, 1977 (p. 4, Rollo). On June 6, 1977, Meralco Securities filed the instant petition for certiorari.

The Solicitor General contends that certiorari is not proper in this case because the Board acted within its jurisdiction and did not gravely abuse its discretion and Meralco Securities was not denied due process of law.

Meralco Securities explains that because the Court of Tax Appeals has no jurisdiction to review the decision of the Central Board of Assessment Appeals and because no judicial review of the Board's decision is provided for in the Real Property Tax Code, Meralco Securities' recourse is to file a petition for certiorari.

We hold that certiorari was properly availed of in this case. It is a writ issued by a superior court to an inferior court, board or officer exercising judicial or quasi-judicial functions whereby the record of a particular case is ordered to be elevated for review and correction in matters of law (14 C.J.S. 121-122; 14 Am Jur. 2nd 777).

The rule is that as to administrative agencies exercising quasi-judicial power there is an underlying power in the courts to scrutinize the acts of such agencies on questions of law and jurisdiction even though no right of review is given by the statute (73 C.J.S. 506, note 56).

"The purpose of judicial review is to keep the administrative agency within its jurisdiction and protect substantial rights of parties affected by its decisions" (73 C.J.S. 507, See. 165). The review is a part of the system of checks and balances which is a limitation on the separation of powers and which forestalls arbitrary and unjust adjudications.

Judicial review of the decision of an official or administrative agency exercising quasi-judicial functions is proper in cases of lack of jurisdiction, error of law, grave abuse of discretion, fraud or collusion or in case the administrative decision is corrupt, arbitrary or capricious (Mafinco Trading Corporation vs. Ople, L-37790, March 25, 1976, 70 SCRA 139, 158; San Miguel Corporation vs. Secretary of Labor, L-39195, May 16, 1975, 64 SCRA 56, 60, Mun. Council of Lemery vs. Prov. Board of Batangas, 56 Phil. 260, 268).

The Central Board of Assessment Appeals, in confirming the ruling of the provincial assessor and the provincial board of assessment appeals that Meralco Securities' pipeline is subject to realty tax, reasoned out that the pipes are machinery or improvements, as contemplated in the Assessment Law and the Real Property Tax Code; that they do not fall within the category of property exempt from realty tax under those laws; that articles 415 and 416 of the Civil Code, defining real and personal property, have no application to this case; that even under article 415, the steel pipes can be regarded as realty because they are constructions adhered to the soil and things attached to the land in a fixed manner and that Meralco Securities is not exempt from realty tax under the Petroleum Law (pp. 36-40).

Meralco Securities insists that its pipeline is not subject to realty tax because it is not real property within the meaning of article 415. This contention is not sustainable under the provisions of the Assessment Law, the Real Property Tax Code and the Civil Code.

Section 2 of the Assessment Law provides that the realty tax is due "on real property, including land, buildings, machinery, and other improvements" not specifically exempted in section 3 thereof. This provision is reproduced with some modification in the Real Property Tax Code which provides:

SEC. 38. Incidence of Real Property Tax.— There shall be levied, assessed and collected in all provinces, cities and municipalities an annual ad valorem tax on real property, such as land, buildings, machinery and other improvements affixed or attached to real property not hereinafter specifically exempted. *

It is incontestable that the pipeline of Meralco Securities does not fall within any of the classes of exempt real property enumerated in section 3 of the Assessment Law and section 40 of the Real Property Tax Code.

Pipeline means a line of pipe connected to pumps, valves and control devices for conveying liquids, gases or finely divided solids. It is a line of pipe running upon or in the earth, carrying with it the right to the use of the soil in which it is placed (Note 21[10],54 C.J.S. 561).

Article 415[l] and [3] provides that real property may consist of constructions of all kinds adhered to the soil and everything attached to an immovable in a fixed manner, in such a way that it cannot be separated therefrom without breaking the material or deterioration of the object.

The pipeline system in question is indubitably a construction adhering to the soil (Exh. B, p. 39, Rollo). It is attached to the land in such a way that it cannot be separated therefrom without dismantling the steel pipes which were welded to form the pipeline.

Insofar as the pipeline uses valves, pumps and control devices to maintain the flow of oil, it is in a sense machinery within the meaning of the Real Property Tax Code.

It should be borne in mind that what are being characterized as real property are not the steel pipes but the pipeline system as a whole. Meralco Securities has apparently two pipeline systems.

A pipeline for conveying petroleum has been regarded as real property for tax purposes (Miller County Highway, etc., Dist. vs. Standard Pipe Line Co., 19 Fed. 2nd 3; Board of Directors of Red River Levee Dist. No. 1 of Lafayette County, Ark vs. R. F. C., 170 Fed. 2nd 430; 50 C. J. 750, note 86).

The other contention of Meralco Securities is that the Petroleum Law exempts it from the payment of realty taxes. The alleged exemption is predicated on the following provisions of that law which exempt Meralco Securities from local taxes and make it liable for taxes of general application:

ART. 102. Work obligations, taxes, royalties not to be changed.— Work obligations, special taxes and royalties which are fixed by the provisions of this Act or by the concession for any of the kinds of concessions to which this Act relates, are considered as inherent on such concessions after they are granted, and shall not be increased or decreased during the life of the concession to which they apply; nor shall any other special taxes or levies be applied to such concessions, nor shall 0concessionaires under this Act be subject to any provincial, municipal or other local taxes or levies; nor shall any sales tax be charged on any petroleum produced from the concession or portion thereof, manufactured by the concessionaire and used in the working of his concession. All such concessionaires, however, shall be subject to such taxes as are of general application in addition to taxes and other levies specifically provided in this Act.

Meralco Securities argues that the realty tax is a local tax or levy and not a tax of general application. This argument is untenable because the realty tax has always been imposed by the lawmaking body and later by the President of the Philippines in the exercise of his lawmaking powers, as shown in section 342 et seq. of the Revised Administrative Code, Act No. 3995, Commonwealth Act No. 470 and Presidential Decree No. 464.

The realty tax is enforced throughout the Philippines and not merely in a particular municipality or city but the

proceeds of the tax accrue to the province, city, municipality and barrio where the realty taxed is situated (Sec. 86, P.D. No. 464). In contrast, a local tax is imposed by the municipal or city council by virtue of the Local Tax Code, Presidential Decree No. 231, which took effect on July 1, 1973 (69 O.G. 6197).

We hold that the Central Board of Assessment Appeals did not act with grave abuse of discretion, did not commit any error of law and acted within its jurisdiction in sustaining the holding of the provincial assessor and the local board of assessment appeals that Meralco Securities' pipeline system in Laguna is subject to realty tax.

WHEREFORE, the questioned decision and resolution are affirmed. The petition is dismissed. No costs.

SO ORDERED.

Barredo (Chairman), Guerrero, De Castro and Escolin, JJ., concur.

Justice Abad Santos, Concepcion, Jr., JJ., took no part.G.R. No. L-24265 December 28, 1979

PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION, plaintiff-appellant, vs.THE MUNICIPALITY OF JAGNA, PROVINCE OF BOHOL, defendant-appellee.

Picazo, Agcaoili, Santayana, Reyes & Tayao for appellant.

Joel P. Tiangco and Jesus N. Borromeo for appellee.

 

MELENCIO-HERRERA, J.:

A direct appeal by plaintiff company from the judgment of the Court of First Instance of Manila, Branch VI, upholding the validity of Ordinance No. 4, Series of 1957, enacted by defendant Municipality, which imposed "storage fees on all exportable copra deposited in the bodega within the jurisdiction of the Municipality of Jagna Bohol.

Plaintiff-appellant is a domestic corporation with principal offices in Manila. lt is a consolidated corporation of Procter & Gamble Trading Company and Philippine Manufacturing Company, which later became Procter & Gamble Trading Company, Philippines. It is engaged in the manufacture of soap, edible oil, margarine and other similar products, and for this purpose maintains a "bodega" in defendant Municipality where it stores copra purchased in the municipality and therefrom ships the same for its manufacturing and other operations.

On December 13, 1957, the Municipal Council of Jagna enacted Municipal Ordinance No. 4, Series of 1957, quoted hereinbelow:

AN ORDINANCE IMPOSING STORAGE FEES OF ALL EXPORTABLE COPRA DEPOSITED IN THE BODEGA WITHIN THE JURISDlCTI0N OF THE MUNICIPALITY OF JAGNA BOHOL.

Be it ordained by the Municipal Council of Jagna Bohol, that:

SECTION 1. Any person, firm or corporation having a deposit of exportable copra in the bodega, within the jurisdiction of the Municipality of Jagna Bohol, shall pay to the Municipal Treasury a storage fee of TEN (P0.10) CENTAVOS FOR EVERY HUNDRED (100) kilos;

SECTION 2. All exportable copra deposited in the bodega within the Municipality of Jagna Bohol, is part of the surveillance and lookout of the Municipal Authorities;

SECTION 3. Any person, firm or corporation found violating the provision of the preceding section of this Ordinance shall be punished by a fine of not less than TWO HUNDRED (P 200.00) PESOS, nor more than

FOUR HUNDRED (P400.00) PESOS, or an imprisonment of hot less than ONE MONTH, nor more than THREE MONTHS, or both fines and imprisonment at the discretion of the court.

SECTION 4. This Ordinance shall take effect on January 1, 1958.

APPROVED December 13,1957.

(Sgd.) TEODORO B. GALACAR Municipal Mayor 1

For a period of six years, from 1958 to 1963, plaintiff paid defendant Municipality, allegedly under protest, storage fees in the total sum of 1142,265.13, broken down as follows:

Procter & Gamble Trading Co. Procter & Gamble Philippine Manufacturing Corp.

1958 5, 072.13 ___________

1959 7, 076.00 ___________

1960 9, 950.00 ___________

1961 7, 830.00 ___________

1962 3, 648.00 P5, 279.00

1963 ______ P3, 410. 00

P33, 576.13 P8, 689.00

TOTAL CLAIM P42, 265.13 2

On March 3, 1964, plaintiff filed this suit in the Court of First Instance of Manila, Branch VI, wherein it prayed that 1) Ordinance No. 4 be declared inapplicable to it, or in the alter. native, that it be pronounced ultra-vires and void for being beyond the power of the Municipality to enact; and 2) that defendant Municipality be ordered to refund to it the amount of P42,265.13 which it had paid under protest; and costs.

For its part, defendant Municipality upheld its power to enact the Ordinance in question; questioned the jurisdiction of the trial Court to take cognizance of the action under section 44(h) of the Judiciary Act in that it seeks to enjoin the enforcement of a Municipal Ordinance; and pleaded prescription and laches for plaintiff's failure to timely question the validity of the said Ordinance.

After the parties had agreed to submit the case for judgment on the pleadings, the trial Court upheld its jurisdiction as well as defendant Municipality's power to enact the Ordinance in question under section 2238 of the Revised Administrative Code, otherwise known as the general welfare clause, and declared that plaintiff's right of action had prescribed under the 5-year period provided for by Article 1149 of the Civil Code.

In this appeal, plaintiff interposes the following Assignments of Error:

I

THE TRIAL COURT ERRED IN HOLDING THAT ORDINANCE NO. 4, SERIES OF 1957, ENACTED BY THE DEFENDANT MUNICIPALITY OF JAGNA BOHOL, IS A VALID, LEGAL AND ENFORCEABLE ORDINANCE AGAINST THE PLAINTIFF.

II

THE TRIAL COURT ERRED IN HOLDING THAT PAYMENT OF THE TAX UNDER ORDINANCE NO. 4, SERIES OF 1957 WAS NOT DONE UNDER PROTEST.

III

THE TRIAL COURT ERRED IN HOLDING THAT THE ACTION OF THE PLAINTIFF TO ANNUL AND TO DECLARE ORDINANCE NO. 4, SERIES OF 1957 OF THE DEFENDANT HAS ALREADY PRESCRIBED.

IV

AND, FINALLY, THE TRIAL COURT ERRED IN NOT HOLDING ORDINANCE NO. 4. SERIES OF 1957 ULTRA-VIRES AND VOID AND IN NOT ORDERING THE REFUND OF TAXES PAID THEREUNDER. 3

It is plaintiff's submission that the subject Ordinance is inapplicable to it as it is not engaged in the business or trade of storing copra for others for compensation or profit and that the only copra it stores is for its exclusive use in connection with its business as manufacturer of soap, edible oil, margarine and other similar products; that the levy is intended as an "export tax" as it is collected on "exportable copra' , and, therefore, beyond the power of the Municipality to enact; and that the fee of P0.10 for every 100 kilos of copra stored in the bodega is excessive, unreasonable and oppressive and is imposed more for revenue than as a regulatory fee.

The main question to determine is whether defendant Municipality was authorized to impose and collect the storage fee provided for in the challenged Ordinance under the laws then prevailing.

The validity of the Ordinance must be upheld pursuant to the broad authority conferred upon municipalities by Commonwealth Act No. 472, approved on June 16, 1939, which was the prevailing law when the Ordinance was enacted (Procter & Gamble Trading Co. vs. Municipality of Medina, 43 SCRA 130 11972]). Section 1 thereof reads:

Section 1. A municipal council or municipal district council shall have the authority to impose municipal license taxes upon persons engaged in any occupation or business, or exercising privileges in the municipality or municipal district, by requiring them to secure licenses at rates fixed by the municipal council, or municipal district council, and to collect fees and charges for services rendered by the municipality or municipal district and shall otherwise have power to levy for public local purposes, and for school purposes, including teachers' salaries, just and uniform taxes other than percentage taxes and taxes on specified articles.

Under the foregoing provision, a municipality is authorized to impose three kinds of licenses: (1) a license for regulation of useful occupation or enterprises; (2) license for restriction or regulation of non-useful occupations or enterprises; and (3) license for revenue. 4 It is thus unnecessary, as plaintiff would have us do, to determine whether the subject storage fee is a tax for revenue purposes or a license fee to reimburse defendant Municipality for service of supervision because defendant Municipality is authorized not only to impose a license fee but also to tax for revenue purposes.

The storage fee imposed under the question Ordinance is actually a municipal license tax or fee on persons, firms and corporations, like plaintiff, exercising the privilege of storing copra in a bodega within the Municipality's territorial jurisdiction. For the term "license tax" has not acquired a fixed meaning. It is often used indiseriminately to designate impositions exacted for the exercise of various privileges. In many instances, it refers to revenue-raising exactions on privileges or activities. 5

Not only is the imposition of the storage fee authorized by the general grant of authority under section 1 of CA No. 472. Neither is the storage fee in question prohibited nor beyond the power of the municipal councils and municipal district councils to impose, as listed in section 3 of said CA No. 472. 6

Moreover, the business of buying and selling and storing copra is property the subject of regulation within the police power granted to municipalities under section 2238 of the Revised Administrative Code or the "general welfare clause", which we quote hereunder:

Section 2238. General power of council to enact ordinances and make regulations. — The municipal council shall enact such ordinances and make such regulations, not repugnant to law, as may be necessary to carry into effect and discharge the powers and duties conferred upon it by law and such as shall seem necessary and proper to provide for the health and safety, promote the prosperity, improve the morals, peace, good order, comfort, and convenience of the municipality and the inhabitants thereof, and for the protection of property therein.

For it has been held that a warehouse used for keeping or storing copra is an establishment likely to endanger the public safety or likely to give rise to conflagration because the oil content of the copra when ignited is difficult to put under control by water and the use of chemicals is necessary to put out the fire. 7 And as the Ordinance itself states, all exportable copra deposited within the municipality is "part of the surveillance and lookout of municipal authorities.

Plaintiff's argument that the imposition of P0.10 per 100 kilos of copra stored in a bodega within defendant's territory is beyond the cost of regulation and surveillance is not well taken. As enunciated in the case of Victorias Milling Co. vs. Municipality of Victorias, supra.

The cost of regulation cannot be taken as a gauge, if the municipality really intended to enact a revenue ordinance. For, 'if the charge exceeds the expense of issuance of a license and costs of regulation, it is a tax'. And if it is, and it is validly imposed, 'the rule that license fees for regulation must bear a reasonable relation to the expense of the regulation has no application'.

Municipal corporations are allowed wide discretion in determining the rates of imposable license fees even in cases of purely police power measures. In the absence of proof as to municipal conditions and the nature of the business being taxed as well as other factors relevant to the issue of arbitrariness or unreasonableness of the questioned rates, Courts will go slow in writing off an Ordinance. 8 In the case at bar, appellant has not sufficiently shown that the rate imposed by the questioned Ordinance is oppressive, excessive and prohibitive.

Plaintiff's averment that the Ordinance, even if presumed valid, is inapplicable to it because it is not engaged in the business or occupation of buying or selling of copra but is only storing copra in connection with its main business of manufacturing soap and other similar products, and that to be compelled to pay the storage fees would amount to double taxation, does not inspire assent. The question of whether appellant is engaged in that business or not is irrelevant because the storage fee, as previously mentioned, is an imposition on the privilege of storing copra in a bodega within defendant municipality by persons, firms or corporations. Section 1 of the Ordinance in question does not state that said persons, firms or corporations should be engaged in the business or occupation of buying or selling copra. Moreover, by plaintiff's own admission that it is a consolidated corporation with its trading company, it will be hard to segregate the copra it uses for trading from that it utilizes for manufacturing.

Thus, it can be said that plaintiff's payment of storage fees imposed by the Ordinance in question does not amount to double taxation. For double taxation to exist, the same property must be taxed twice, when it should be taxed but once. Double taxation has also been defined as taxing the same person twice by the same jurisdiction for the same thing. 9 Surely, a tax on plaintiff's products is different from a tax on the privilege of storing copra in a bodega situated within the territorial boundary of defendant municipality.

Plaintiff's further contention that the storage fee imposed by the Ordinance is actually intended to be an export tax, which is expressly prohibited by section 2287 of the Revised Administrative Code, is without merit. Said provision reads as follows:

Section 2287 ...

It shall not be in the power of the municipal council to impose a tax in any form whatever upon goods and merchandise carried into the municipality, or out of the same, and any attempt to impose an import or export tax upon such goods in the guise of an unreasonable charge for wharfage use of bridges or otherwise, shall be void.

xxx xxx xxx

We have held that only where there is a clear showing that what is being taxed is an export to any foreign country would the prohibition come into play. 10 When the Ordinance itself speaks of "exportable" copra, the meaning conveyed is not exclusively export to a foreign country but shipment out of the municipality. The storage fee impugned is not a tax on export because it is imposed not only upon copra to be exported but also upon copra sold and to be used for domestic purposes if stored in any warehouse in the Municipality and the weight thereof is 100 kilos or more. 11

Thus finding the Ordinance in question to be valid, legal and enforceable, we find it unnecessary to discuss the ascribed error that the Court a quo erred in declaring that appellant had not paid the taxes under protest.

However, we find merit in plaintiff's contention that the lower Court erred in ruling that its action has prescribed under Article 1149 of the Civil Code, which provides for a period of five years for all actions whose periods are not fixed in that Code. The case of Municipality of Opon vs. Caltex Phil., 12 is authority for the view that the period for prescription of actions to recover municipal license taxes is six years under Article 1145(2) of the Civil Code. Thus, plaintiff's action brought within six years from the time the right of action first accrued in 1958 has not yet prescribed.

WHEREFORE, affirming the judgment appealed, from, we sustain the validity of Ordinance No. 4, Series of 1957, of defendant Municipality of Jagna Bohol, under the laws then prevailing.

Costs against plaintiff-appellant.

SO ORDERED.

Teehankee (Chairman), Makasiar, Fernandez, Guerrero and De Castro, JJ., concur.

G.R. No. L- 41383 August 15, 1988

PHILIPPINE AIRLINES, INC., plaintiff-appellant, vs.ROMEO F. EDU in his capacity as Land Transportation Commissioner, and UBALDO CARBONELL, in his capacity as National Treasurer, defendants-appellants.

Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.

 

GUTIERREZ, JR., J.:

What is the nature of motor vehicle registration fees? Are they taxes or regulatory fees?

This question has been brought before this Court in the past. The parties are, in effect, asking for a re-examination of the latest decision on this issue.

This appeal was certified to us as one involving a pure question of law by the Court of Appeals in a case where the then Court of First Instance of Rizal dismissed the portion-about complaint for refund of registration fees paid under protest.

The disputed registration fees were imposed by the appellee, Commissioner Romeo F. Elevate pursuant to Section 8, Republic Act No. 4136, otherwise known as the Land Transportation and Traffic Code.

The Philippine Airlines (PAL) is a corporation organized and existing under the laws of the Philippines and engaged in the air transportation business under a legislative franchise, Act No. 42739, as amended by Republic Act Nos. 25). and 269.1 Under its franchise, PAL is exempt from the payment of taxes. The pertinent provision of the franchise provides as follows:

Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the National Government during the life of this franchise a tax of two per cent of the gross revenue or gross earning derived by the grantee from its operations under this franchise. Such tax shall be due and payable quarterly and shall be in lieu of all taxes of any kind, nature or description, levied, established or collected by any municipal,

provincial or national automobiles, Provided, that if, after the audit of the accounts of the grantee by the Commissioner of Internal Revenue, a deficiency tax is shown to be due, the deficiency tax shall be payable within the ten days from the receipt of the assessment. The grantee shall pay the tax on its real property in conformity with existing law.

On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956) PAL has, since 1956, not been paying motor vehicle registration fees.

Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a regulation requiring all tax exempt entities, among them PAL to pay motor vehicle registration fees.

Despite PAL's protestations, the appellee refused to register the appellant's motor vehicles unless the amounts imposed under Republic Act 4136 were paid. The appellant thus paid, under protest, the amount of P19,529.75 as registration fees of its motor vehicles.

After paying under protest, PAL through counsel, wrote a letter dated May 19,1971, to Commissioner Edu demanding a refund of the amounts paid, invoking the ruling in Calalang v. Lorenzo (97 Phil. 212 [1951]) where it was held that motor vehicle registration fees are in reality taxes from the payment of which PAL is exempt by virtue of its legislative franchise.

Appellee Edu denied the request for refund basing his action on the decision in Republic v. Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the effect that motor vehicle registration fees are regulatory exceptional. and not revenue measures and, therefore, do not come within the exemption granted to PAL? under its franchise. Hence, PAL filed the complaint against Land Transportation Commissioner Romeo F. Edu and National Treasurer Ubaldo Carbonell with the Court of First Instance of Rizal, Branch 18 where it was docketed as Civil Case No. Q-15862.

Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI Carbonell in his capacity as National Treasurer, filed a motion to dismiss alleging that the complaint states no cause of action. In support of the motion to dismiss, defendants repatriation the ruling in Republic v. Philippine Rabbit Bus Lines, Inc., (supra) that registration fees of motor vehicles are not taxes, but regulatory fees imposed as an incident of the exercise of the police power of the state. They contended that while Act 4271 exempts PAL from the payment of any tax except two per cent on its gross revenue or earnings, it does not exempt the plaintiff from paying regulatory fees, such as motor vehicle registration fees. The resolution of the motion to dismiss was deferred by the Court until after trial on the merits.

On April 24, 1973, the trial court rendered a decision dismissing the appellant's complaint "moved by the later ruling laid down by the Supreme Court in the case or Republic v. Philippine Rabbit Bus Lines, Inc., (supra)." From this judgment, PAL appealed to the Court of Appeals which certified the case to us.

Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc. (supra) cited by PAL and Commissioner Romeo F. Edu respectively, discuss the main points of contention in the case at bar.

Resolving the issue in the Philippine Rabbit case, this Court held:

"The registration fee which defendant-appellee had to pay was imposed by Section 8 of the Revised Motor Vehicle Law (Republic Act No. 587 [1950]). Its heading speaks of "registration fees." The term is repeated four times in the body thereof. Equally so, mention is made of the "fee for registration." (Ibid., Subsection G) A subsection starts with a categorical statement "No fees shall be charged." ( lbid., Subsection H) The conclusion is difficult to resist therefore that the Motor Vehicle Act requires the payment not of a tax but of a registration fee under the police power. Hence the incipient, of the section relied upon by defendant-appellee under the Back Pay Law, It is not held liable for a tax but for a registration fee. It therefore cannot make use of a backpay certificate to meet such an obligation.

Any vestige of any doubt as to the correctness of the above conclusion should be dissipated by Republic Act No. 5448. ([1968]. Section 3 thereof as to the imposition of additional tax on privately-owned passenger automobiles, motorcycles and scooters was amended by Republic Act No. 5470 which is (sic) approved on May 30, 1969.) A special science fund was thereby created and its title expressly sets forth that a tax on privately-

owned passenger automobiles, motorcycles and scooters was imposed. The rates thereof were provided for in its Section 3 which clearly specifies the" Philippine tax."(Cooley to be paid as distinguished from the registration fee under the Motor Vehicle Act. There cannot be any clearer expression therefore of the legislative will, even on the assumption that the earlier legislation could by subdivision the point be susceptible of the interpretation that a tax rather than a fee was levied. What is thus most apparent is that where the legislative body relies on its authority to tax it expressly so states, and where it is enacting a regulatory measure, it is equally exploded (at p. 22,1969

In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court, on the other hand, held:

The charges prescribed by the Revised Motor Vehicle Law for the registration of motor vehicles are in section 8 of that law called "fees". But the appellation is no impediment to their being considered taxes if taxes they really are. For not the name but the object of the charge determines whether it is a tax or a fee. Geveia speaking, taxes are for revenue, whereas fees are exceptional. for purposes of regulation and inspection and are for that reason limited in amount to what is necessary to cover the cost of the services rendered in that connection. Hence, a charge fixed by statute for the service to be person,-When by an officer, where the charge has no relation to the value of the services performed and where the amount collected eventually finds its way into the treasury of the branch of the government whose officer or officers collected the chauffeur, is not a fee but a tax."(Cooley on Taxation, Vol. 1, 4th ed., p. 110.)

From the data submitted in the court below, it appears that the expenditures of the Motor Vehicle Office are but a small portion—about 5 per centum—of the total collections from motor vehicle registration fees. And as proof that the money collected is not intended for the expenditures of that office, the law itself provides that all such money shall accrue to the funds for the construction and maintenance of public roads, streets and bridges. It is thus obvious that the fees are not collected for regulatory purposes, that is to say, as an incident to the enforcement of regulations governing the operation of motor vehicles on public highways, for their express object is to provide revenue with which the Government is to discharge one of its principal functions—the construction and maintenance of public highways for everybody's use. They are veritable taxes, not merely fees.

As a matter of fact, the Revised Motor Vehicle Law itself now regards those fees as taxes, for it provides that "no other taxes or fees than those prescribed in this Act shall be imposed," thus implying that the charges therein imposed—though called fees—are of the category of taxes. The provision is contained in section 70, of subsection (b), of the law, as amended by section 17 of Republic Act 587, which reads:

Sec. 70(b) No other taxes or fees than those prescribed in this Act shall be imposed for the registration or operation or on the ownership of any motor vehicle, or for the exercise of the profession of chauffeur, by any municipal corporation, the provisions of any city charter to the contrary notwithstanding: Provided, however, That any provincial board, city or municipal council or board, or other competent authority may exact and collect such reasonable and equitable toll fees for the use of such bridges and ferries, within their respective jurisdiction, as may be authorized and approved by the Secretary of Public Works and Communications, and also for the use of such public roads, as may be authorized by the President of the Philippines upon the recommendation of the Secretary of Public Works and Communications, but in none of these cases, shall any toll fee." be charged or collected until and unless the approved schedule of tolls shall have been posted levied, in a conspicuous place at such toll station. (at pp. 213-214)

Motor vehicle registration fees were matters originally governed by the Revised Motor Vehicle Law (Act 3992 [19511) as amended by Commonwealth Act 123 and Republic Acts Nos. 587 and 1621.

Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as the Land Transportation Code, (as amended by Rep. Acts Nos. 5715 and 64-67, P.D. Nos. 382, 843, 896, 110.) and BP Blg. 43, 74 and 398).

Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992 and remained unsegregated, by Rep. Act Nos. 587 and 1603) states:

Section 73. Disposal of moneys collected.—Twenty per centum of the money collected under the provisions of this Act shall accrue to the road and bridge funds of the different provinces and chartered cities in proportion to the centum shall during the next previous year and the remaining eighty per centum shall be deposited in the Philippine Treasury to create a special fund for the construction and maintenance of national and provincial

roads and bridges. as well as the streets and bridges in the chartered cities to be alloted by the Secretary of Public Works and Communications for projects recommended by the Director of Public Works in the different provinces and chartered cities. ....

Presently, Sec. 61 of the Land Transportation and Traffic Code provides:

Sec. 61. Disposal of Mortgage. Collected—Monies collected under the provisions of this Act shall be deposited in a special trust account in the National Treasury to constitute the Highway Special Fund, which shall be apportioned and expended in accordance with the provisions of the" Philippine Highway Act of 1935. "Provided, however, That the amount necessary to maintain and equip the Land Transportation Commission but not to exceed twenty per cent of the total collection during one year, shall be set aside for the purpose. (As amended by RA 64-67, approved August 6, 1971).

It appears clear from the above provisions that the legislative intent and purpose behind the law requiring owners of vehicles to pay for their registration is mainly to raise funds for the construction and maintenance of highways and to a much lesser degree, pay for the operating expenses of the administering agency. On the other hand, the Philippine Rabbit case mentions a presumption arising from the use of the term "fees," which appears to have been favored by the legislature to distinguish fees from other taxes such as those mentioned in Section 13 of Rep. Act 4136 which reads:

Sec. 13. Payment of taxes upon registration.—No original registration of motor vehicles subject to payment of taxes, customs s duties or other charges shall be accepted unless proof of payment of the taxes due thereon has been presented to the Commission.

referring to taxes other than those imposed on the registration, operation or ownership of a motor vehicle (Sec. 59, b, Rep. Act 4136, as amended).

Fees may be properly regarded as taxes even though they also serve as an instrument of regulation, As stated by a former presiding judge of the Court of Tax Appeals and writer on various aspects of taxpayers

It is possible for an exaction to be both tax arose. regulation. License fees are changes. looked to as a source of revenue as well as a means of regulation (Sonzinky v. U.S., 300 U.S. 506) This is true, for example, of automobile license fees. Isabela such case, the fees may properly be regarded as taxes even though they also serve as an instrument of regulation. If the purpose is primarily revenue, or if revenue is at least one of the real and substantial purposes, then the exaction is properly called a tax. (1955 CCH Fed. tax Course, Par. 3101, citing Cooley on Taxation (2nd Ed.) 592, 593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v. Araneta 98 Phil. 198.) These exactions are sometimes called regulatory taxes. (See Secs. 4701, 4711, 4741, 4801, 4811, 4851, and 4881, U.S. Internal Revenue Code of 1954, which classify taxes on tobacco and alcohol as regulatory taxes.) (Umali, Reviewer in Taxation, 1980, pp. 12-13, citing Cooley on Taxation, 2nd Edition, 591-593).

Indeed, taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil. 148).

If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax (Umali, Id.) Such is the case of motor vehicle registration fees. The conclusions become inescapable in view of Section 70(b) of Rep. Act 587 quoted in the Calalang case. The same provision appears as Section 591-593). in the Land Transportation code. It is patent therefrom that the legislators had in mind a regulatory tax as the law refers to the imposition on the registration, operation or ownership of a motor vehicle as a "tax or fee." Though nowhere in Rep. Act 4136 does the law specifically state that the imposition is a tax, Section 591-593). speaks of "taxes." or fees ... for the registration or operation or on the ownership of any motor vehicle, or for the exercise of the profession of chauffeur ..." making the intent to impose a tax more apparent. Thus, even Rep. Act 5448 cited by the respondents, speak of an "additional" tax," where the law could have referred to an original tax and not one in addition to the tax already imposed on the registration, operation, or ownership of a motor vehicle under Rep. Act 41383. Simply put, if the exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other "fees," such as the special permit fees for certain types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec. 11). These are not to be understood as taxes because such fees are very minimal to be revenue-raising. Thus, they are not mentioned by Sec. 591-593). of the Code as taxes like the motor vehicle registration fee and chauffers' license fee. Such fees are to go into the expenditures of the Land

Transportation Commission as provided for in the last proviso of see. 61, aforequoted.

It is quite apparent that vehicle registration fees were originally simple exceptional. intended only for rigidly purposes in the exercise of the State's police powers. Over the years, however, as vehicular traffic exploded in number and motor vehicles became absolute necessities without which modem life as we know it would stand still, Congress found the registration of vehicles a very convenient way of raising much needed revenues. Without changing the earlier deputy. of registration payments as "fees," their nature has become that of "taxes."

In view of the foregoing, we rule that motor vehicle registration fees as at present exacted pursuant to the Land Transportation and Traffic Code are actually taxes intended for additional revenues. of government even if one fifth or less of the amount collected is set aside for the operating expenses of the agency administering the program.

May the respondent administrative agency be required to refund the amounts stated in the complaint of PAL?

The answer is NO.

The claim for refund is made for payments given in 1971. It is not clear from the records as to what payments were made in succeeding years. We have ruled that Section 24 of Rep. Act No. 5448 dated June 27, 1968, repealed all earlier tax exemptions Of corporate taxpayers found in legislative franchises similar to that invoked by PAL in this case.

In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al. (G.R. No. 615)." July 11, 1985), this Court ruled:

Under its original franchise, Republic Act No. 21); enacted in 1957, petitioner Radio Communications of the Philippines, Inc., was subject to both the franchise tax and income tax. In 1964, however, petitioner's franchise was amended by Republic Act No. 41-42). to the effect that its franchise tax of one and one-half percentum (1-1/2%) of all gross receipts was provided as "in lieu of any and all taxes of any kind, nature, or description levied, established, or collected by any authority whatsoever, municipal, provincial, or national from which taxes the grantee is hereby expressly exempted." The issue raised to this Court now is the validity of the respondent court's decision which ruled that the exemption under Republic Act No. 41-42). was repealed by Section 24 of Republic Act No. 5448 dated June 27, 1968 which reads:

"(d) The provisions of existing special or general laws to the contrary notwithstanding, all corporate taxpayers not specifically exempt under Sections 24 (c) (1) of this Code shall pay the rates provided in this section. All corporations, agencies, or instrumentalities owned or controlled by the government, including the Government Service Insurance System and the Social Security System but excluding educational institutions, shall pay such rate of tax upon their taxable net income as are imposed by this section upon associations or corporations engaged in a similar business or industry. "

An examination of Section 24 of the Tax Code as amended shows clearly that the law intended all corporate taxpayers to pay income tax as provided by the statute. There can be no doubt as to the power of Congress to repeal the earlier exemption it granted. Article XIV, Section 8 of the 1935 Constitution and Article XIV, Section 5 of the Constitution as amended in 1973 expressly provide that no franchise shall be granted to any individual, firm, or corporation except under the condition that it shall be subject to amendment, alteration, or repeal by the legislature when the public interest so requires. There is no question as to the public interest involved. The country needs increased revenues. The repealing clause is clear and unambiguous. There is a listing of entities entitled to tax exemption. The petitioner is not covered by the provision. Considering the foregoing, the Court Resolved to DENY the petition for lack of merit. The decision of the respondent court is affirmed.

Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly imposed because the tax exemption in the franchise of PAL was repealed during the period. However, an amended franchise was given to PAL in 1979. Section 13 of Presidential Decree No. 1590, now provides:

In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine Government during the lifetime of this franchise whichever of subsections (a) and (b) hereunder will result in a lower taxes.)

(a) The basic corporate income tax based on the grantee's annual net taxable income computed in accordance with the provisions of the Internal Revenue Code; or

(b) A franchise tax of two per cent (2%) of the gross revenues. derived by the grantees from all specific. without distinction as to transport or nontransport corporations; provided that with respect to international airtransport service, only the gross passengers, mail, and freight revenues. from its outgoing flights shall be subject to this law.

The tax paid by the 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, including but not limited to the following:

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(5) All taxes, fees and other charges on the registration, license, acquisition, and transfer of airtransport equipment, motor vehicles, and all other personal or real property of the gravitates (Pres. Decree 1590, 75 OG No. 15, 3259, April 9, 1979).

PAL's current franchise is clear and specific. It has removed the ambiguity found in the earlier law. PAL is now exempt from the payment of any tax, fee, or other charge on the registration and licensing of motor vehicles. Such payments are already included in the basic tax or franchise tax provided in Subsections (a) and (b) of Section 13, P.D. 1590, and may no longer be exacted.

WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of registration fees paid in 1971 is DENIED. The Land Transportation Franchising and Regulatory Board (LTFRB) is enjoined functions-the collecting any tax, fee, or other charge on the registration and licensing of the petitioner's motor vehicles from April 9, 1979 as provided in Presidential Decree No. 1590.

SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera, Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin, Sarmiento, Cortes, Griño Aquino and Medialdea, JJ., concur.

G.R. No. L-30727 July 15, 1975

THE CITY OF OZAMIZ, Represented by THE CITY MAYOR, MUNICIPAL BOARD, CITY TREASURER, and CITY AUDITOR, petitioner-appellant, vs.SERAPIO S. LUMAPAS and HONORABLE GERONIMO R. MARAVE, respondents-appellees.

Assistant City Fiscal Artemio C. Engracia for petitioner-appellant.

Francisco D. Boter for respondents-appellees.

 

ANTONIO, J.:

Appeal by certiorari from the decision, dated March 18, 1969, of respondent Judge Geronimo R. Marave, of the Court of First Instance of Misamis Occidental, Branch II, Ozamiz City, declaring Ordinance No. 466, series of 1964, of the Municipal Board of the City of Ozamiz, null and void (Civil Case No. OZ-159), and ordering petitioner to return to respondent Serapio S. Lumapas the sum of P1,243.00, representing the amount collected as parking fees, by virtue of the ordinance, without costs.

The facts of this case, which are not disputed, are as follows:

Respondent Serapio S. Lumapas is an operator of transportation buses for passengers and cargoes, under the name of Romar Line, with Ozamiz City and Pagadian, Zamboanga del Sur, as terminal points, by virtue of a certificate of public convenience issued to him by the Public Service Commission. On September 15, 1964, the Municipal Board of Ozamiz City enacted the following:

ORDINANCE NO. 466

AN ORDINANCE IMPOSING PARKING FEES FOR EVERY MOTOR VEHICLE PARKED ON ANY PORTION OF THE EXISTING PARKING SPACE IN THE CITY OF OZAMIZ. Be it ordained by the

Municipal Board of the City of Ozamiz, that:

SECTION 1 — There is hereby imposed parking fees for all motor vehicles parked on any portion of the duly designated parking areas in the City of Ozamiz;

SECTION 2. — Motor Vechicles' as used in this ordinance shall be construed to mean all vehicles run by engine whether the same is offered for passengers or for cargoes of whatever kind or nature;

SECTION 3. — The word "Parking" as used in this ordinance shall be construed to mean, when a motor vehicle of whatever kind is stopped on any portion of the existing parking areas for the purpose of loading and unloading passengers or cargoes;

SECTION 4. — For purposes of the fee hereinabove provided, the following schedule of rates collectible daily from the conductor, driver, operator and/or owner must be observed:

For Passenger

(a) Passenger Bus ........................................................................ P1.00

(b) Weapon Carrier, Baby Bus & others of similar nature ..... .70

(c) Pick Up, Jeepneys, PU Cars and others of similar nature ....................................................................................................................... .50

For Cargoes

(a) Cargo Trucks .......................................................................... 1.00

(b) Pick Up, Jeeps, Jeepneys, Weapon Carriers & Others of similar nature ...................................................................................................................... .70

SECTION 5. — That the City Treasurer or his authorized representative is hereby empowered to collect the herein parking fees using any form of official receipt he may devise, from the conductor, driver, operator and/or owner of the motor vehicles parked in said designated parking areas;

SECTION 6. — Any person or persons, violating any provision of this ordinance shall, upon conviction thereof, be punished by an imprisonment of not less than two (2) months nor more than six (6) months, or by a fine in the sum of not less than P100.00 but not more than P400.00 or both such fine and imprisonment at the discretion of the Court;

SECTION 7. — This ordinance shall take effect immediately upon its approval.

Enacted, September 15, 1964,

Approved, October 7, 1964. 1

After approval of the above-quoted ordinance, the City of Ozamiz began collecting the prescribed parking' fees and collected from respondent-appellee Serapio S. Lumapas, who had paid under protest, the parking fees at One Peso (P1.00) for each of his buses, from October 1964 to January 1967, or an aggregate amount of P1,259.00 2 for which official receipts were issued by petitioner.

About four (4) years later, or on January 11, 1968, respondent Serapio S. Lumapas filed a complaint, dated August 3, 1967 3 against the City of Ozamiz, represented by the City Mayor, Municipal Board, City Treasurer, and City Auditor, with the Court of First instance of Misamis Occidental, Branch II (Civil Case No. OZ-159), for recovery of parking fees, alleging, among others, that said Ordinance No. 466 is ulta vires, and praying that judgment be issued (1) nullifying Ordinance No. 466, series of 1964, and (2) ordering the Municipal Board to

appropriate the amount of P1,459.00 for the reimbursement of P1,259.00 he had paid as parking fees, plus P200.00 as attorney's fees.

On January 25, 1968, petitioner filed its answer, with affirmative defenses 4 to which respondent-appellee Serapio S. Lumapas filed his reply, dated January 30, 1968. 5

On January 3, 1969, the parties, through their respective counsel, filed the following:

STIPULATION OF FACTS

COME NOW the plaintiff and the defendants, through their respective counsel, and unto this Honorable Court respectfully submit this stipulation of facts, to wit:

(1) That the area enclosed in red pencil in the sketch is a market site of the City of Ozamiz which holds the same in its proprietary character as evidenced by Tax Declaration No. 51234. This area is for public use.

(2) That the Zulueta Street is now extended up to the end of the market site passing a row of tiendas up to the end marked "toilet" in the sketch plan of market site when the market building was constructed in 1969;

(3) That on the right side near the row of tiendas and near the toilet and marked with series of x's and where the buses of plaintiff were parking waiting for passengers going to the south;

(4) That this space marked "rig parking" in the sketch plan marked "x" has been designated by City Ordinance No. 233 as a parking place marked Exhibit "2";

(5) That the defendant City Government has been collecting parking fees and issued corresponding official receipts to the plaintiff for each unit belonging to the plaintiff every time it left Ozamiz City from said parking place but once a day at one peso per unit;

(6) That the total amount of parking fees collected from the plaintiff by the defendant is P1,243.00 as per official receipts actually counted in the presence of both parties;

(7) That the plaintiff made a demand for the reimbursement of the total amount collected from 1964 to 1967 and this demand was received on September 1, 1967, by the City Treasurer and that the City Treasurer replied by first indorsement dated September 11, 1967, asking for reference and verification; and

(8) That in reply to said first indorsement, the plaintiff sent a letter to the City Treasurer dated January 18, 1967, citing cases in support of the demand, and in answer to that letter, the City Treasurer in his communication dated January 11, 1968, flatly denied payment of the demand.

(9) That the parties will file their respective memoranda within twenty days from today.

WHEREFORE, it is respectfully prayed of this Honorable Court that judgment be rendered based upon this stipulation of facts after the parties shall have submitted their respective memoranda or after the lapse of twenty days from today.

Ozamiz City, December 27, 1968. 6

On the basis of the foregoing Stipulation of Facts, and of the court's finding, after an ocular inspection of the parking area designated by Ordinance No. 286, series of 1956, 7 superseding Ordinance No. 234, series of 1953, that it is a municipal street, although part of the public market, said court rendered judgment on March 18, 1969 declaring that such parking fee is in the nature of toll fees for the use of public road and made in violation of Section 59[b] of Republic Act No. 4136 (Land Transportation and Traffic Code), there being no prior approval therefor by the President of the Philippines upon recommendation of the Secretary of Public Works and Communications (now Public Works). Hence, the present appeal by certiorari.

Petitioner now contends that the lower court erred: (1) in declaring Ordinance No. 466, series of 1964, of Ozamiz City, null and void; (2) in considering parking fees as road tolls under Section 59[b] of Republic Act No. 4136; (3) in declaring the parking area as a public street and not the patrimonial property of the city; and (4) in ordering the reimbursement of parking fees paid by respondent-appellee.

Decisive of this controversy is whether the Municipal Board of the City of Ozamiz, herein petitioner-appellant, had the power to enact said Ordinance No. 466.

Petitioner-appellant, in maintaining the affirmative view, contends: (1)that the ordinance is valid for the fees collected thereunder are in the nature of property rentals for the use of parking spaces belonging to the City in its proprietary character, as evidenced by Tax Declaration No. 51234, and are authorized by Section 2308 (f) of the Revised Administrative Code, 8(2) that Section 15 (y) of the Charter of Ozamiz City (Republic Act No. 321) 9 also authorizes the Municipal Board to regulate the use of streets which carries with it the power to impose fees for its implementation; (3) that, pursuant to such power, the Municipal Board passed said Ordinance No. 234, the purpose of which is to minimize accidents, to avoid congestion of traffic, to enable the passengers to know the exact time of the departure of trucks and, for this purpose, the Municipal Board provided for parking areas for which the City has to have funds for the implementation of the purposes abovestated; (4) that Section 2 of the Local Autonomy Law (Republic Act No. 2264)likewise empowers the local governments to impose taxes and fees, except those that are enumerated therein, and parking fee is not among the exceptions: and (5) that the word "toll" connotes the act of passing along the road and the collection of toll fees may not be imposed unless approved by the President of the Philippines upon the recommendation of the Secretary of Public Works, pursuant to Section 59[b] of Republic Act No. 4136; whereas the word "parking" implies a stationary condition and the parking fees provided for in Ordinance No. 466 is for the privilege of using the designated parking area, which is owned by the City of Ozamiz, as its patrimonial property.

On the other hand, respondent-appellee insists (1) that Ozamiz City has no power to impose parking fees on motor vehicles parked on Zulueta Street, which is property for public use and, as such, Ordinance No. 466 imposing such fees is null and void; (2) that granting arguendo that Zulueta Street is part of the City's public market site, its conversion into a street removes it from its category as patrimonial property to one for public use; 10 (3) that the use of Zulueta Street as a parking place is only incidental to the free passage of motor vehicles for, as soon as the buses are loaded with passengers, the vehicles start their journey to their respective destinations and pay the toll clerk at a station about one hundred; (100) feet ahead along Zulueta Street before they are allowed to get out of the City and as such, the prohibition to impose taxes or fees embodied in Section 59[b] of Republic. Act No. 4136 applies to this case; (4) that Section 2308[f] of the Revised Administrative Code providing that the "proceeds on income from the ... use or management of property lawfully held by the municipality" accrue to the municipality, does not grant, either expressly or by implication, to the municipality, the power to impose such tax, (5) that Section 15[y] of the Charter of Ozamiz City (Republic Act No. 321) which authorizes the City, among others, "to regulate the use of a street," does not empower the City to impose parking fees; besides, said section contains a proviso, i.e., "except as otherwise provided by law", which, in this case, is Republic Act No. 4136; and (6) that, since the power to impose parking fees is not among those conferred by the Local Autonomy Act on local government, said City cannot, therefore, impose such parking fees.

After the filing of its brief, or on December 10, 1969, the petitioner- appellant, through its counsel, First Assistant City Fiscal Artemio C. Engracia, filed the following Manifestation, dated November 27, 1969, praying that the decision of the lower court be reversed in view of the approval by the President of the Philippines upon the recommendation of the Secretary of Public Works of the ordinance in question that validates the same, to wit:

1. That the decision of the lower court, marked Annex "E" of the petition, declaring Ordinance No. 466, series of 1964, of Ozamiz City, marked Annex "G" of the petition, null and void is based on the non-compliance with the provisions of Section 59[b] of Republic Act No. 4136, otherwise known as The Land Transportation Law, which requires the approval by the President of the Philippines upon the recommendation of the Secretary of Public Works of such kind of ordinance..

2. That the President of the Philippines has now approved the Ordinance in question. A certified copy of said approval is hereunder quoted.

xxx xxx xxx

4th IndorsementManila, September 26, 1969

Respectfully returned to the Mayor, City of Ozamiz, hereby approving, as recommended in the 3rd indorsement hereon of the Secretary of Public Works and Communications, Ordinance No. 466, series of 1964, of that city, entitled: "AN ORDINANCE IMPOSING PARKING FEES FOR EVERY MOTOR VEHICLE PARKED ON ANY PORTION OF THE EXISTING PARKING SPACE IN THE OZAMIZ."

By Authority of the President:(Sgd.) FLORES BAYOTAssistant Executive Secretary

3. That the approval by the President of the Philippines is based upon the recommendation of the Secretary of Public Works. A certified copy of said recommendation is hereunder reproduced:

3rd IndorsementJune 3, 1969

Respectfully forwarded to His Excellency, the President of the Philippines, Malacañang, recommending favorable action, in view of the representations herein made, on the within letter dated March 21, 1969 of Mayor Hilarion A. Ramiro, Ozamiz City, requesting approval No. 466, series of 1964, passed by the Municipal Board, same city regarding the collection of fees for the privilege of parking vehicles in the lots privately-owned by said City.

(Sgd.) ANTONIO V. RAQUIZASecretary

4. That the action of the Secretary of Public Works is based upon the findings of the Commissioner of the Land Transportation Commission. A certified copy of the same is herein reproduced:

xxx xxx xxx

2nd IndorsementMay 16, 1969

Respectfully returned to the Honorable Secretary, Department of Public Works and Communications, Manila, with the statement that this Commission interposes no objection on the approval of Ordinance No. 466, series of 1964, of Ozamiz City, considering that the schedule of rate collectible from the conductor, driver, operator and/or owner as stated under Section 4 thereof appears to be reasonable.

It may be stated in this connection that on the Decision of the CFI of Misamis Occidental, Branch II, dated March 18, 1969 under Civil Case No. OZ(159), the said Ordinance was declared null and void for failure to comply with the provisions of Section 59[b] of R. A. 4136, regarding the required "approval by the President of the Philippines upon recommendation of the Secretary of Public Works and Communications."

(Sgd.) ROMEO F. EDUCommissioner

The rule is well-settled that municipal corporations, being mere creatures of the law, have only such powers as are expressly granted to them and those which are necessarily implied or incidental to the exercise thereof, and the power to tax is inherent upon the State and it can only be exercised by Congress, unless delegated or conferred by it to a municipal corporation. As such, said corporation has only such powers as the legislative department may have deemed fit to grant. By reason of the limited powers of local governments and the nature thereof, said powers are to be construed strictissimi juris and any doubt or ambiguity arising out of the terms used in granting said powers must be construed against the municipality. 11

The implied powers which a municipal corporation possesses and can exercise are only those necessarily incident to the powers expressly conferred. Inasmuch as a city has no power, except by delegation from Congress, in order to enable it to impose a tax or license fee, the power must be expressly granted or be necessarily implied in, or incident to, the powers expressly conferred upon the city.

Under Sec. 15[Y] of the Ozamiz City Charter (Rep. Act No. 321), the municipal board has the power "... to

regulate the use of streets, avenues, alleys, sidewalks, wharves, piers, parks, cemeteries and other public places; ...", and in subsection [nn] of the same section 15, the authority "To enact all ordinances it may deem necessary and proper for the sanitation and safety, the furtherance of prosperity and the promotion of the morality, peace, good order, comfort, convenience, and general welfare of the city and its inhabitants, and such others as may be necessary to carry into effect and discharge the powers and duties conferred by this Charter ..." By this express legislative grant of authority, police power is delegated to the municipal corporation to be exercised as a governmental function for municipal purposes.

It is, therefore, patent that the City of Ozamiz has been clothed with full power to control and regulate its streets for the purpose of promoting the public health, safety and welfare. Indeed, municipal power to regulate the use of streets is a delegation of the police power of the national government, and in the exercise of such power, a municipal corporation can make all necessary and desirable regulations which are reasonable and manifestly in the interest of public safety and convenience.

By virtue of the aforecited statutory grant of authority, the City of Ozamiz can regulate the time, place, manner of parking in the streets and public places. It is, however, insisted that the ordinance did not charge a parking fee but a toll fee for the use of the street. It is true that the term " parking" ordinarily implies "something more than a mere temporary and momentary stoppage at a curb for the purpose of loading or unloading passengers or merchandize; it involves the idea of using a portion of the street as storage space for an automobile." 12

In the case at bar, the TPU buses of respondent-appellee Sergio S. Lumapas stopped on the extended portion of Zulueta Street beside the public market (Exhibit "X-1" of Exhibit "X", Development Plan for Ozamiz Market Site),and that as soon as the buses were loaded, they proceeded to the station, about one hundred (100) feet away from the parking area, where a toll clerk of the City collected the "Parking" fee of P1.00 per bus once a day, before said buses were allowed to proceed to their destination.

Section 3 of the questioned Ordinance No. 466 defines the word "'parking' to mean the stoppage of a motor vehicle of whatever kind on any portion of the existing parking areas for the purpose of loading and unloading passengers or cargoes." 13 (Emphasis supplied.)

The word "toll" when used in connection with highways has been defined as a duty imposed on goods and passengers travelling public roads. 14 The toll for use of a toll road is for its use in travelling thereon, not for its use as a parking place for vehicles. 15

It is not pretended, however, that the public utility vehicles are subject to the payment, if they pass without stopping thru the aforesaid sections of Zulueta Street. Considering that the public utility vehicles are only charged the fee when said vehicles stop on "any portion of the existing parking areas for the purpose of loading or unloading passengers or cargoes", the fees collected are actually in the nature of parking fees and not toll fees for the use of Zulueta Street. This is clear from the Stipulation of Facts which shows that fees were not exacted for mere passage thru the street but for stopping in the designated parking areas therein to unload or load passengers or cargoes. It was not, therefore a toll fee for the use of public roads, within the context of Section 59[b] of Republic Act No. 4136, which requires the authorization of the President of the Philippines.

As adverted to above, the Municipal Board of Ozamiz City is expressly granted by its Charter the power to regulate the use of its streets. The ordinance in question appears to have been enacted in pursuance of this grant. The parking fee imposed is minimal in amount, the maximum being only P1.00 a day for each passenger bus and P1.00 for each cargo truck, the rates being lower for smaller types of vehicles. This indicates that its purpose is not for revenue but for regulation. Moreover, it is undeniable that by designating a specific place wherein passenger and freight vehicles may load and unload passengers and cargoes, benefits are accorded to the city's residents in the form of increased safety and convenience arising from the decongestion of traffic.

Undoubtedly the city may impose a fee sufficient in amount to include the expense of issuing the license and the cost of necessary inspection or police surveillance connected with the business or calling licensed.

The fees charged in the case at bar are undeniably to cover the expenses for supervision, inspection and control, to ensure the smooth flow of traffic in the environs of the public market, and for the safety and convenience of the public.

WHEREFORE, the appealed decision is hereby reversed and Ordinance No. 466, series of 1964 declared valid. No pronouncement as to costs.

Fernando (Chairman), Barredo, Aquino and Concepcion Jr., JJ., concur.

G.R. No. 73705 August 27, 1987

VICTORIAS MILLING CO., INC., petitioner, vs.OFFICE OF THE PRESIDENTIAL ASSISTANT FOR LEGAL AFFAIRS and PHILIPPINE PORTS AUTHORITY, respondents.

 

PARAS, J.:

This is a petition for review on certiorari of the July 27, 1984 Decision of the Office of the Presidential Assistant For Legal Affairs dismissing the appeal from the adverse ruling of the Philippine Ports Authority on the sole ground that the same was filed beyond the reglementary period.

On April 28, 1981, the Iloilo Port Manager of respondent Philippine Ports Authority (PPA for short) wrote petitioner Victorias Milling Co., requiring it to have its tugboats and barges undergo harbor formalities and pay entrance/clearance fees as well as berthing fees effective May 1, 1981. PPA, likewise, requiring petitioner to secure a permit for cargo handling operations at its Da-an Banua wharf and remit 10% of its gross income for said operations as the government's share.

To these demands, petitioner sent two (2) letters, both dated June 2, 1981, wherein it maintained that it is exempt from paying PPA any fee or charge because: (1) the wharf and an its facilities were built and installed in its land; (2) repair and maintenance thereof were and solely paid by it; (3) even the dredging and maintenance of the Malijao River Channel from Guimaras Strait up to said private wharf are being done by petitioner's equipment and personnel; and (4) at no time has the government ever spent a single centavo for such activities. Petitioner further added that the wharf was being used mainly to handle sugar purchased from district planters pursuant to existing milling agreements.

In reply, on November 3, 1981, PPA Iloilo sent petitioner a memorandum of PPA's Executive Officer, Maximo Dumlao, which justified the PPA's demands. Further request for reconsideration was denied on January 14, 1982.

On March 29, 1982, petitioner served notice to PPA that it is appealing the case to the Court of Tax Appeals; and accordingly, on March 31, 1982, petitioner filed a Petition for Review with the said Court, entitled "Victorias Milling Co., Inc. v. Philippine Ports Authority," and docketed therein as CTA Case No. 3466.

On January 10, 1984, the Court of Tax Appeals dismissed petitioner's action on the ground that it has no jurisdiction. It recommended that the appeal be addressed to the Office of the President.

On January 23, 1984, petitioner filed a Petition for Review with this Court, docketed as G.R. No. 66381, but the same was denied in a Resolution dated February 29, 1984.

On April 2, 1984, petitioner filed an appeal with the Office of the President, but in a Decision dated July 27, 1984 (Record, p. 22), the same was denied on the sole ground that it was filed beyond the reglementary period. A motion for Reconsideration was filed, but in an Order dated December 16, 1985, the same was denied ( ibid., pp. 3-21): Hence, the instant petition.

The Second Division of this Court, in a Resolution dated June 2, 1986, resolved to require the respondents to comment (ibid., p. 45); and in compliance therewith, the Solicitor General filed his Comment on June 4, 1986 (Ibid., pp. 50-59).

In a Resolution of July 2, 1986, petitioner was required to file a reply (Ibid., p. 61) but before receipt of said resolution, the latter filed a motion on July 1, 1986 praying that it be granted leave to file a reply to respondents' Comment, and an extension of time up to June 30, 1986 within which to file the same. (Ibid., p. 62).

On July 18, 1986, petitioner filed its reply to respondents' Comment (Ibid., pp. 68-76).

The Second Division of this Court, in a Resolution dated August 25, 1986, resolved to give due course to the petition and to require the parties to file their respective simultaneous memoranda (Ibid., p. 78).

On October 8, 1986, the Solicitor General filed a Manifestation and Rejoinder, stating, among others, that respondents are adopting in toto their Comment of June 3, 1986 as their memorandum; with the clarification that the assailed PPA Administrative Order No. 13-77 was duly published in full in the nationwide circulated newspaper, "The Times Journal", on November 9,1977 (ibid., pp. 79-81).

The sole legal issue raised by the petitioner is —

WHETHER OR NOT THE 30-DAY PERIOD FOR APPEAL UNIDER SECTION 131 OF PPA ADMINISTRATIVE ORDER NO. 13-77 WAS TOLLED BY THE PENDENCY OF THE PETITIONS FILED FIRST WITH THE COURT OF TAX APPEALS, AND THEN WITH THIS HONORABLE TRIBUNAL.

The instant petition is devoid of merit.

Petitioner, in holding that the recourse first to the Court of Tax Appeals and then to this Court tolled the period to appeal, submits that it was guided, in good faith, by considerations which lead to the assumption that procedural rules of appeal then enforced still hold true. It contends that when Republic Act No. 1125 (creating the Court of Tax Appeals) was passed in 1955, PPA was not yet in existence; and under the said law, the Court of Tax Appeals had exclusive appellate jurisdiction over appeals from decisions of the Commissioner of Customs regarding, among others, customs duties, fees and other money charges imposed by the Bureau under the Tariff and Customs Code. On the other hand, neither in Presidential Decree No. 505, creating the PPA on July 11, 1974 nor in Presidential Decree No. 857, revising its charter (said decrees, among others, merely transferred to the PPA the powers of the Bureau of Customs to impose and collect customs duties, fees and other money charges concerning the use of ports and facilities thereat) is there any provision governing appeals from decisions of the PPA on such matters, so that it is but reasonable to seek recourse with the Court of Tax Appeals. Petitioner, likewise, contends that an analysis of Presidential Decree No. 857, shows that the PPA is

vested merely with corporate powers and duties (Sec. 6), which do not and can not include the power to legislate on procedural matters, much less to effectively take away from the Court of Tax Appeals the latter's appellate jurisdiction.

These contentions are untenable for while it is true that neither Presidential Decree No. 505 nor Presidential Decree No. 857 provides for the remedy of appeal to the Office of the President, nevertheless, Presidential Decree No. 857 empowers the PPA to promulgate such rules as would aid it in accomplishing its purpose. Section 6 of the said Decree provides —

Sec. 6. Corporate Powers and Duties —

a. The corporate duties of the Authority shall be:

xxx xxx xxx

(III) To prescribe rules and regulations, procedures, and guidelines governing the establishment, construction, maintenance, and operation of all other ports, including private ports in the country.

xxx xxx xxx

Pursuant to the aforequoted provision, PPA enacted Administrative Order No. 13-77 precisely to govern, among others, appeals from PPA decisions. It is now finally settled that administrative rules and regulations issued in accordance with law, like PPA Administrative Order No. 13-77, have the force and effect of law (Valerio vs. Secretary of Agriculture and Natural Resources, 7 SCRA 719; Antique Sawmills, Inc. vs. Zayco, et al., 17 SCRA 316; and Macailing vs. Andrada, 31 SCRA 126), and are binding on all persons dealing with that body.

As to petitioner's contention that Administrative Order No. 13-77, specifically its Section 131, only provides for appeal when the decision is adverse to the government, worth mentioning is the observation of the Solicitor General that petitioner misleads the Court. Said Section 131 provides —

Sec. 131. Supervisory Authority of General Manager and PPA Board. — If in any case involving assessment of port charges, the Port Manager/OIC renders a decision adverse to the government, such decision shall automatically be elevated to, and reviewed by, the General Manager of the authority; and if the Port Manager's decision would be affirmed by the General Manager, such decision shall be subject to further affirmation by the PPA Board before it shall become effective; Provided, however, that if within thirty (30) days from receipt of the record of the case by the General Manager, no decision is rendered, the decision under review shall become final and executory; Provided further, that any party aggrieved by the decision of the General Manager as affirmed by the PPA Board may appeal said decision to the Office of the President within thirty (30) days from receipt of a copy thereof. (Emphasis supplied).

From a cursory reading of the aforequoted provision, it is evident that the above contention has no basis.

As to petitioner's allegation that to its recollection there had been no prior publication of said PPA Administrative Order No. 13-77, the Solicitor General correctly pointed out that said Administrative Order was duly published in full in the nationwide newspaper, "The Times Journal", on November 9,1977.

Moreover, it must be stated that as correctly observed by the Solicitor General, the facts of this case show that petitioner's failure to appeal to the Office of the President on time stems entirely from its own negligence and not from a purported ignorance of the proper procedural steps to take. Petitioner had been aware of the rules governing PPA procedures. In fact, as embodied in the December 16, 1985 Order of the Office of the President, petitioner even assailed the PPA's rule making powers at the hearing before the Court of Tax Appeals.

It is axiomatic that the right to appeal is merely a statutory privilege and may be exercised only in the manner and in accordance with the provision of law (United CMC Textile Workers Union vs. Clave, 137 SCRA 346, citing the cases of Bello vs. Fernando, 4 SCRA 138; Aguila vs. Navarro, 55 Phil. 898; and Santiago vs. Valenzuela, 78 Phil. 397).

Furthermore, even if petitioner's appeal were to be given due course, the result would still be the same as it does not present a substantially meritorious case against the PPA.

Petitioner maintains and submits that there is no basis for the PPA to assess and impose the dues and charges it is collecting since the wharf is private, constructed and maintained at no expense to the government, and that it exists primarily so that its tugboats and barges may ferry the sugarcane of its Panay planters.

As correctly stated by the Solicitor General, the fees and charges PPA collects are not for the use of the wharf that petitioner owns but for the privilege of navigating in public waters, of entering and leaving public harbors and berthing on public streams or waters. (Rollo, pp. 056-057).

In Compañia General de Tabacos de Filipinas vs. Actg. Commissioner of Customs (23 SCRA 600), this Court laid down the rule that berthing charges against a vessel are collectible regardless of the fact that mooring or berthing is made from a private pier or wharf. This is because the government maintains bodies of water in navigable condition and it is to support its operations in this regard that dues and charges are imposed for the use of piers and wharves regardless of their ownership.

As to the requirement to remit 10% of the handling charges, Section 6B-(ix) of the Presidential Decree No. 857 authorized the PPA "To levy dues, rates, or charges for the use of the premises, works, appliances, facilities, or for services provided by or belonging to the Authority, or any organization concerned with port operations." This 10% government share of earnings of arrastre and stevedoring operators is in the nature of contractual compensation to which a person desiring to operate arrastre service must agree as a condition to the grant of the permit to operate.

PREMISES CONSIDERED, the instant petition is hereby DISMISSED.

SO ORDERED.

Teehankee, C.J., Narvasa and Gancayco, JJ., concur.

G.R. No. L-13912             September 30, 1960

THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.CONSUELO L. VDA. DE PRIETO, respondent.

Office of the Solicitor General Edilberto Barot, Solicitor F.R. Rosete and Special Atty. B. Gatdula, Jr. for petitioner.Formilleza and Latorre for respondent.

GUTIERREZ DAVID, J.:

This is an appeal from a decision of the Court of tax Appeals reversing the decision of the Commissioner of Internal Revenue which held herein respondent Consuelo L. Vda. de Prieto liable for the payment of the sum of P21,410.38 as deficiency income tax, plus penalties and monthly interest.

The case was submitted for decision in the court below upon a stipulation of facts, which for brevity is summarized as follows: On December 4, 1945, the respondent conveyed by way of gifts to her four children, namely, Antonio, Benito, Carmen and Mauro, all surnamed Prieto, real property with a total assessed value of P892,497.50. After the filing of the gift tax returns on or about February 1, 1954, the petitioner Commissioner of Internal Revenue appraised the real property donated for gift tax purposes at P1,231,268.00, and assessed the total sum of P117,706.50 as donor's gift tax, interest and compromises due thereon. Of the total sum of P117,706.50 paid by respondent on April 29, 1954, the sum of P55,978.65 represents the total interest on account of deliquency. This sum of P55,978.65 was claimed as deduction, among others, by respondent in her 1954 income tax return. Petitioner, however, disallowed the claim and as a consequence of such disallowance assessed respondent for 1954 the total sum of P21,410.38 as deficiency income tax due on the aforesaid P55,978.65, including interest up to March 31, 1957, surcharge and compromise for the late payment.

Under the law, for interest to be deductible, it must be shown that there be an indebtedness, that there should be

interest upon it, and that what is claimed as an interest deduction should have been paid or accrued within the year. It is here conceded that the interest paid by respondent was in consequence of the late payment of her donor's tax, and the same was paid within the year it is sought to be declared. The only question to be determined, as stated by the parties, is whether or not such interest was paid upon an indebtedness within the contemplation of section 30 (b) (1) of the Tax Code, the pertinent part of which reads:

SEC. 30 Deductions from gross income. — In computing net income there shall be allowed as deductions —

x x x           x x x           x x x

(b) Interest:

(1) In general. — The amount of interest paid within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations the interest upon which is exempt from taxation as income under this Title.

The term "indebtedness" as used in the Tax Code of the United States containing similar provisions as in the above-quoted section has been defined as an unconditional and legally enforceable obligation for the payment of money.1awphîl.nèt (Federal Taxes Vol. 2, p. 13,019, Prentice-Hall, Inc.; Merten's Law of Federal Income Taxation, Vol. 4, p. 542.) Within the meaning of that definition, it is apparent that a tax may be considered an indebtedness. As stated by this Court in the case of Santiago Sambrano vs. Court of Tax Appeals and Collector of Internal Revenue (101 Phil., 1; 53 Off. Gaz., 4839) —

Although taxes already due have not, strictly speaking, the same concept as debts, they are, however, obligations that may be considered as such.

The term "debt" is properly used in a comprehensive sense as embracing not merely money due by contract but whatever one is bound to render to another, either for contract, or the requirement of the law. (Camben vs. Fink Coule and Coke Co. 61 LRA 584)

Where statute imposes a personal liability for a tax, the tax becomes, at least in a board sense, a debt. (Idem).

A tax is a debt for which a creditor's bill may be brought in a proper case. (State vs. Georgia Co., 19 LRA 485).

It follows that the interest paid by herein respondent for the late payment of her donor's tax is deductible from her gross income under section 30(b) of the Tax Code above quoted.

The above conclusion finds support in the established jurisprudence in the United States after whose laws our Income Tax Law has been patterned. Thus, under sec. 23(b) of the Internal Revenue Code of 1939, as amended 1

, which contains similarly worded provisions as sec. 30(b) of our Tax Code, the uniform ruling is that interest on taxes is interest on indebtedness and is deductible. (U.S. vs. Jaffray, 306 U.S. 276. See also Lustig vs. U.S., 138 F. Supp. 870; Commissioner of Internal Revenue vs. Bryer, 151 F. 2d 267, 34 AFTR 151; Penrose vs. U.S. 18 F. Supp. 413, 18 AFTR 1289; Max Thomas Davis, et al. vs. Commissioner of Internal Revenue, 46 U.S. Boared of Tax Appeals Reports, p. 663, citing U.S. vs. Jaffray, 6 Tax Court of United States Reports, p. 255; Armour vs. Commissioner of Internal Revenue, 6 Tax Court of the United States Reports, p. 359; The Koppers Coal Co. vs. Commissioner of Internal Revenue, 7 Tax Court of United States Reports, p. 1209; Toy vs. Commissioner of Internal Revenue; Lucas vs. Comm., 34 U.S. Board of Tax Appeals Reports, 877; Evens and Howard Fire Brick Co. vs. Commissioner of Internal Revenue, 3 Tax Court of United States Reports, p. 62). The rule applies even though the tax is nondeductible. (Federal Taxes, Vol. 2, Prentice Hall, sec. 163, 13,022; see also Merten's Law of Federal Income Taxation, Vol. 5, pp. 23-24.)

To sustain the proposition that the interest payment in question is not deductible for the purpose of computing respondent's net income, petitioner relies heavily on section 80 of Revenue Regulation No. 2 (known as Income Tax Regulation) promulgated by the Department of Finance, which provides that "the word `taxes' means taxes proper and no deductions should be allowed for amounts representing interest, surcharge, or penalties incident to delinquency." The court below, however, held section 80 as inapplicable to the instant case because while it implements sections 30(c) of the Tax Code governing deduction of taxes, the respondent taxpayer seeks to come

under section 30(b) of the same Code providing for deduction of interest on indebtedness. We find the lower court's ruling to be correct. Contrary to petitioner's belief, the portion of section 80 of Revenue Regulation No. 2 under consideration has been part and parcel of the development to the law on deduction of taxes in the United States. (See Capital Bldg. and Loan Assn. vs. Comm., 23 BTA 848. Thus, Mertens in his treatise says: "Penalties are to be distinguished from taxes and they are not deductible under the heading of taxs." . . . Interest on state taxes is not deductible as taxes." (Vol. 5, Law on Federal Income Taxation, pp. 22-23, sec. 27.06, citing cases.) This notwithstanding, courts in that jurisdiction, however, have invariably held that interest on deficiency taxes are deductible, not as taxes, but as interest. (U.S. vs. Jaffray, et al., supra; see also Mertens, sec. 26.09, Vol. 4, p. 552, and cases cited therein.) Section 80 of Revenue Regulation No. 2, therefore, merely incorporated the established application of the tax deduction statute in the United States, where deduction of "taxes" has always been limited to taxes proper and has never included interest on delinquent taxes, penalties and surcharges.

To give to the quoted portion of section 80 of our Income Tax Regulations the meaning that the petitioner gives it would run counter to the provision of section 30(b) of the Tax Code and the construction given to it by courts in the United States. Such effect would thus make the regulation invalid for a "regulation which operates to create a rule out of harmony with the statute, is a mere nullity." (Lynch vs. Tilden Produce Co., 265 U.S. 315; Miller vs. U.S., 294 U.S. 435.) As already stated, section 80 implements only section 30(c) of the Tax Code, or the provision allowing deduction of taxes, while herein respondent seeks to be allowed deduction under section 30(b), which provides for deduction of interest on indebtedness.

In conclusion, we are of the opinion and so hold that although interest payment for delinquent taxes is not deductible as tax under Section 30(c) of the Tax Code and section 80 of the Income Tax Regulations, the taxpayer is not precluded thereby from claiming said interest payment as deduction under section 30(b) of the same Code.

In view of the foregoing, the decision sought to be reviewed is affirmed, without pronouncement as to costs.

Bengzon, Bautista Angelo, Labrador, Barrera, Paredes, and Dizon, JJ., concur.Paras, C. J., Concepcion, and Reyes, J.B.L., JJ., concur in the result.

[G.R. No. 107135.  February 23, 1999]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF APPEALS CENTRAL VEGETABLE MANUFACTURING CO., INC., and THE COURT OF TAX APPEALS, respondents.

D E C I S I O N

PURISIMA, J.:

Before the Court is a Petition for Review on Certiorari from the judgment of the Court of Appeals affirming in toto the decision of the Court of Tax Appeals which required the Commissioner of Internal Revenue to credit the sales taxes paid by Central Vegetable Oil Manufacturing Co., Inc. (CENVOCO) on containers and packaging materials of its milled products, against the deficiency miller's tax due thereon for the year 1986.

As culled in the decision of the Court of Tax Appeals, the undisputed facts are, as follows:

"Petitioner (private respondent CENVOCO herein) is a manufacturer of edible and coconut/coprameal cake and such other coconut related oil subject to the miller's tax of 3%.  Petitioner also manufactures lard, detergent and laundry soap subject to the sales tax of 10%.

In 1986, petitioner purchased a specified number of containers and packaging materials for its edible oil from its suppliers and paid the sales tax due thereon.

After an investigation conducted by respondent's Revenue Examiner, Assessment Notice No. FAS-B-86-88-001661-001664 dated April 22, 1988 was issued against petitioner for deficiency miller's tax in the total amount of P1,575,514.70 x x x .

On June 29, 1988, petitioner filed with respondent a letter dated June 27, 1988 requesting for reconsideration of the above deficiency miller's tax assessments, contending that the final provision of Section 168 of the Tax Code does not apply to sales tax paid on containers and packaging materials, hence, the amount paid therefor should have been credited against the miller's tax assessed against it.  Again, thru letter dated September 28, 1988, petitioner reiterated its request for reconsideration.

On November 17, 1988, respondent wrote CENVOCO, the full text of which letter reads

November 17, 1988

Central Vegetable OilManufacturing Co. Inc.P.O. Box 2816Manila

Attention: Mr. James ChuaPresident

Gentlemen:

We have received your letter of September 28, 1988, relative to our assessment against your company in the amount of P1,575,514.75, as deficiency miller's tax for the year 1986.

Section 168 of the Tax Code provides that sales, miller's or excise taxes paid on raw materials or supplies used in the milling process shall not be allowed against the miller's tax due.  You contend that since packaging materials are not used in the milling process then, the sales taxes paid thereon should be allowed as a credit against the miller's tax due because they do not fall within the scope of the prohibition.

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

In view of the above, we are reiterating the assessment referred to above.  We request that you make payment immediately so that this case may be considered closed and terminated.

Very truly yours,(SGD) EUFRACIO D. SANTOSDeputy Commissioner

(CA Decision, pp.31-33 Rollo)

Dissatisfied with the adverse action taken by the BIR, CENVOCO filed a petition for review with the Court of Tax Appeals, which came out with a decision, dated December 3, 1990, in favor of CENVOCO, disposing, thus:

"WHEREFORE, in view of the foregoing, petitioner Central Vegetable Oil Manufacturing Co., Inc., is not liable for deficiency miller's tax for the year 1986 in the amount of P1,575,514.70.

No pronouncement as to costs.

SO ORDERED." (Rollo, p. 53)

Appealed to the Court of Appeals, the said decision was affirmed in toto. (Rollo, p. 38)

The Court of Appeals adopted the reasons cited and ratiocination by the Court of Tax Appeals for allowing the sales tax paid by CENVOCO on the containers and packaging materials of its millled products to be credited against the miller's tax due thereon, viz -

"The main issue in this case is whether or not respondent CENVOCO is liable for deficiency miller's tax for the year 1986 in the amount of P1,575,514.70. This in turn hinges on whether or not containers and packaging materials are raw materials used in the milling process within the contemplation of the final proviso of Section 168 of the National Internal Revenue Code, which reads:

'Provided, finally, that credit for any sales, miller's or excise taxes paid on raw materials or supplies used in the milling process shall not be allowed against the miller's tax due, except in the case of a proprietor or operator of a refined sugar factory as provided hereunder.'

xxx                                           xxx                                   xxx

"xxx We agree with respondent Court that containers and packages cannot be considered "raw materials" utilized in the milling process.  In arriving at the conclusion, respondent Court quoted with approval the reasons cited by CENVOCO, as follows:

'FIRST; The raw materials used by Cenvoco in manufacturing edible oil are copra and/or coconut oil.  In other words, the term "used" in the final proviso of Section 168 of the NIRC refers or is strictly confined to "raw materials" or supplies fed, supplied or put into the apparatus, equipment, machinery or its adjuncts that cause or execute the milling process.  On the other hand, the containers, such as tin cans, and/or packages are not used or fed into the milling machinery nor were ever intended for conversion to form part of the finished product, i.e., refined coconut/edible oil.  Consequently, it would be absurd to say that said containers and packages are "used in the milling process", for the process involves "grinding, crushing, stamping, cutting, shaping or polishing". (See THE DICTIONARY, by TIME, COPYRIGHT 1974, p. 444) x x x

'SECOND; Petitioner's interpretation of the term raw materials is contrary to law and jurisprudence.  Thus, raw materials as used in the definition of " manufacture", denotes materials from which final product is made (Black's Law Dictionary, 4th ed. citing State vs.  Hennessy Co., 71 Mont. 301, 230, p. 64, 65).  And consistent with said definition, Revenue Regulations Nos. 2-86 and 11-86 [effective January 1, 1986 and August 1, 1986, respectively] which govern the filing of quarterly percentage tax returns and payment thereof under the provisions, inter alia, of Section 168 of the NIRC, define raw materials or material, to wit:

Any article which when used in the MANUFACTURE of another article becomes a homogenous part thereof, such that it can no longer be identified in its original state nor may be removed therefrom without destroying or rendering useless the finished article to which it has been merged, mixed or dissolved. x x x'

"Tested in the light of the foregoing statutory definition, it is evident that containers and packages used by Cenvoco are not 'raw materials' and do not fall within the purview of the final proviso of Section 168 of the NIRC. x x x As a coup de grace, it is pertinent to note the case of Caltex (Phils.) Inc. vs.  Manila Port Service (17 SCRA 1075) where the Supreme Court aptly defined containers and/or packages.

'x x x a package or a bundle made up for transportation; a packet; a bale; a parcel; or that in which anything is packed: box, case, barrel, crate, etc. in which goods are packed: a container.' (Underscoring Ours)

"The definition is an emphatic rejection of petitioner's construction that Cenvoco's containers and packages are raw materials used in the milling process. x x x

"xxx Moreover, Section 168 of the Revenue Code expressly limits the articles subject to percentage tax (miller's tax) to: 'rope, sugar, coconut oil, palm oil, cassava flour or starch, desiccated coconuts, manufactured, processed or milled by them, including the by-product of the raw materials, from which said articles are produced, processed or manufactured'. x x x "

(CA Decision, Rollo pp. 34-36)

Hence, the petition under consideration, posing the issue:

WHETHER OR NOT THE SALES TAX PAID BY CENVOCO WHEN IT PURCHASED CONTAINERS AND PACKAGING MATERIALS FOR ITS MILLED PRODUCTS CAN BE CREDITED AGAINST THE DEFICIENCY MILLER'S TAX DUE THEREON.

Resolution of the issue posited by the petitioner hinges on the proper application of Section 168 of the then applicable National Internal Revenue Code, particularly the last proviso of said section, which reads:

"Sec. 168.  Percentage tax upon proprietors or operators of rope factories, sugar centrals and mills, coconut oil mills, palm oil mills, casava mills and desiccated coconut factories.  Proprietors or operators of rope factories, sugar centrals and mills, coconut oil mills, palm oil mills, cassava mills, and desiccated coconut factories, shall pay a tax equivalent to three (3) percent of the gross value of money of all the rope, sugar, coconut, oil, palm oil, cassava flour or starch, dessiccated coconut, manufactured, processed or milled by them, including the by-product of the raw materials, from which said articles are produced, processed or manufactured, such tax to be based on the actual selling price or market value of these articles at the time they leave the factory or mill warehouse: Provided, however, that this tax shall not apply to rope, coconut oil, palm oil and the by-product of copra from which it is produced or manufactured, and dessicated coconuts, if such rope, coconut oil, palm oil, copra by-products and dessicated coconuts, shall be removed for exportation by the proprietor of operator or the factory or mill himself, and are actually exported without returning to the Philippines, whether in their original state or as an ingredient or part of any manufactured article or product: Provided further, That where the planter or the owner of the raw materials is the exporter of the aforementioned milled or manufactured products, he shall be entitled to a tax credit of the miller's taxes withheld by the proprietor or operator of the factory or mill, corresponding to the quantity exported, which may be used against any internal revenue tax directly due from him: and Provided, finally, That credit for any sales, miller's or excise taxes paid on raw materials or supplies used in the milling process shall not be allowed against the miller's tax due, except in the case of a proprietor or operator of a refined sugar factory as provided hereunder." (underscoring supplied)

Notably, the law relied upon by the BIR Commissioner as the basis for not allowing Cenvoco's tax credit is just a proviso of Section 168 of the old Tax Code.  The restriction in the said proviso, however, is limited only to sales, miller's or excise taxes paid "on raw materials used in the milling process".

Under the rules of statutory construction, exceptions, as a general rule, should be strictly but reasonably construed.  They extend only so far as their language fairly warrants, and all doubts should be resolved in favor of the general provisions rather than the exception.  Where a general rule is established by statute with exceptions, the court will not curtail the former nor add to the latter by implication. x x x (Samson vs.   Court of Appeals, 145 SCRA 659 [1986]).

The exception provided for in Section 168 of the old Tax Code should thus be strictly construed.  Conformably, the sales, miller's and excise taxes paid on all other materials (except on raw materials used in the milling process), such as the sales taxes paid on containers and packaging materials of the milled products under consideration, may be credited against the miller's tax due therefor.

It is a basic rule of interpretation that words and phrases used in the statute, in the absence of a clear legislative intent to the contrary, should be given their plain, ordinary and common usage or meaning. (Mustang Lumber Inc. v. CA, 257 SCRA 430 [1996] citing Ruben E. Agpalo, Statutory Construction, second ed. [1990], 131).

From the disquisition and rationalization aforequoted, containers and packaging materials are certainly not raw materials.  Cans and tetrakpaks are not used in the manufacture of Cenvoco's finished products which are coconut, edible oil or coprameal cake.  Such finished products are packed in cans and tetrapaks.

Petitioner laments the pronouncement by the Court of Appeals that Deputy Commissioner Eufracio Santos' 1988 ruling may not reverse Commissioner Ruben Ancheta's favorable ruling on a similar claim of CENVOCO of October, 1984, which reads in part:

"x x x This refers to your letter dated September 5, 1984 requesting that the 10% sales tax paid on container cans purchased by you, be credited against the 2% (now 3%) miller's tax due on the refined coconut edible oil.

It is represented that you process copra and/or coconut oil and sell the refined edible oil in cans; that said cans are purchased from can manufacturers who in turn bill to you the price of the cans and the 10% tax paid thereon

which are separately shown on the invoice; and that the cost of the cans, including the 2% millier's tax is computed.

In reply, I have the honor to inform you that your request is hereby granted. x x x (Pacific Oxygen & Acetylene Co. vs. Commissioner, GR No. L-17708, April 30, 1965)."  (Rollo p. 36)

According to petitioner, to hold, as what the Court of Appeals did, that a reversal of the aforesaid ruling would be violative of the rule on non-retroactivity of rulings of tax officials when prejudicial to the taxpayer (Section 278 of the old Tax Code) would, in effect, create a perpetual exemption in favor of CENVOCO although there may be subsequent changes in circumstances warranting a reversal.

This Court is mindful of the well-entrenched principle that the government is never estopped from collecting taxes because of mistakes or errors on the part of its agents, but this rule admits of exceptions in the interest of justice and fairplay. (ABS CBN Broadcasting Corp. vs.  Court of Tax Appeals, 108 SCRA 151 [1981]) More so in the present case, where we discern no error in allowing the sales taxes paid by CENVOCO on the containers and packages of its milled products, to be credited against the deficiency miller's tax due thereon, for a proper application of the law.

It bears stressing that tax burdens are not to be imposed, nor presumed to be imposed beyond what the statute expressly and clearly imports, tax statutes being construed strictissimi juris against the government. (The Province of Bulacan, et. al, vs.  Hon.  CA, et. al., GR No. 126232, November 27, 1998; Republic vs.  IAC, 196 SCRA 335[1991]; CIR vs.  Firemen's Fund Ins.  Co., 148 SCRA 315 (1987); CIR vs.  CA, 204 SCRA 182 [1991])

Then, too, it has been the long standing policy and practice of this Court to respect conclusions arrived at by quasi-judicial agencies, especially the Court of Tax Appeals which, by the nature of its functions, is dedicated exclusively to the study and consideration of tax problems, and which has thus developed an expertise on the subject, unless an abuse or improvident exercise of its authority is shown.  Finding no such abuse or improvident exercise of authority or discretion under the premises, the decision of the Court of Appeals, affirming that of the Court of Tax Appeals, should be upheld. (Commissioner of Internal Revenue vs.   Court of Appeals, 204 SCRA 189 [1991])

WHEREFORE, the petition is hereby DISMISSED and the decision of the Court of Appeals AFFIRMED.  No pronouncement as to costs.

SO ORDERED.

Romero (Chairman), Panganiban, and Gonzaga-Reyes, JJ., concur.G.R. No. L-30232 July 29, 1988

LUZON STEVEDORING CORPORATION, petitioner-appellant, vs.COURT OF TAX APPEALS and the HONORABLE COMMISSIONER OF INTERNAL REVENUE, respondents-appellees.

H. San Luis & V.L. Simbulan for petitioner-appellant.

 

PARAS, J.:

This is a petition for review of the October 21, 1968 Decision * of the Court of Tax Appeals in CTA Case No. 1484, "Luzon Stevedoring Corporation v. Hon. Ramon Oben, Commissioner, Bureau of Internal Revenue", denying the various claims for tax refund; and the February 20, 1969 Resolution of the same court denying the motion for reconsideration.

Herein petitioner-appellant, in 1961 and 1962, for the repair and maintenance of its tugboats, imported various engine parts and other equipment for which it paid, under protest, the assessed compensating tax. Unable to secure a tax refund from the Commissioner of Internal Revenue, on January 2, 1964, it filed a Petition for Review (Rollo, pp. 14-18) with the Court of Tax Appeals, docketed therein as CTA Case No. 1484, praying among others, that it be granted the refund of the amount of P33,442.13. The Court of Tax Appeals, however, in

a Decision dated October 21, 1969 (Ibid., pp. 22-27), denied the various claims for tax refund. The decretal portion of the said decision reads:

WHEREFORE, finding petitioner's various claims for refund amounting to P33,442.13 without sufficient legal justification, the said claims have to be, as they are hereby, denied. With costs against petitioner.

On January 24, 1969, petitioner-appellant filed a Motion for Reconsideration (Ibid., pp. 28-34), but the same was denied in a Resolution dated February 20, 1969 (Ibid., p. 35). Hence, the instant petition.

This Court, in a Resolution dated March 13, 1969, gave due course to the petition ( Ibid., p. 40). Petitioner-appellant raised three (3) assignments of error, to wit:

I

The lower court erred in holding that the petitioner-appellant is engaged in business as stevedore, the work of unloading and loading of a vessel in port, contrary to the evidence on record.

II

The lower court erred in not holding that the business in which petitioner-appellant is engaged, is part and parcel of the shipping industry.

III

The lower court erred in not allowing the refund sought by petitioner-appellant.

The instant petition is without merit.

The pivotal issue in this case is whether or not petitioner's tugboats" can be interpreted to be included in the term "cargo vessels" for purposes of the tax exemption provided for in Section 190 of the National Internal Revenue Code, as amended by Republic Act No. 3176.

Said law provides:

Sec. 190. Compensating tax. — ... And Provided further, That the tax imposed in this section shall not apply to articles to be used by the importer himself in the manufacture or preparation of articles subject to specific tax or those for consignment abroad and are to form part thereof or to articles to be used by the importer himself as passenger and/or cargo vessel, whether coastwise or oceangoing, including engines and spare parts of said vessel. ....

Petitioner contends that tugboats are embraced and included in the term cargo vessel under the tax exemption provisions of Section 190 of the Revenue Code, as amended by Republic Act. No. 3176. He argues that in legal contemplation, the tugboat and a barge loaded with cargoes with the former towing the latter for loading and unloading of a vessel in part, constitute a single vessel. Accordingly, it concludes that the engines, spare parts and equipment imported by it and used in the repair and maintenance of its tugboats are exempt from compensating tax (Rollo, p. 23).

On the other hand, respondents-appellees counter that petitioner-appellant's "tugboats" are not "Cargo vessel" because they are neither designed nor used for carrying and/or transporting persons or goods by themselves but are mainly employed for towing and pulling purposes. As such, it cannot be claimed that the tugboats in question are used in carrying and transporting passengers or cargoes as a common carrier by water, either coastwise or oceangoing and, therefore, not within the purview of Section 190 of the Tax Code, as amended by Republic Act No. 3176 (Brief for Respondents-Appellees, pp. 45).

This Court has laid down the rule that "as the power of taxation is a high prerogative of sovereignty, the relinquishment is never presumed and any reduction or dimunition thereof with respect to its mode or its rate, must be strictly construed, and the same must be coached in clear and unmistakable terms in order that it may be

applied." (84 C.J.S. pp. 659-800), More specifically stated, the general rule is that any claim for exemption from the tax statute should be strictly construed against the taxpayer (Acting Commissioner of Customs v. Manila Electric Co. et al., 69 SCRA 469 [1977] and Commissioner of Internal Revenue v. P.J. Kiener Co. Ltd., et al., 65 SCRA 142 [1975]).

As correctly analyzed by the Court of Tax Appeals, in order that the importations in question may be declared exempt from the compensating tax, it is indispensable that the requirements of the amendatory law be complied with, namely: (1) the engines and spare parts must be used by the importer himself as a passenger and/or cargo, vessel; and (2) the said passenger and/or cargo vessel must be used in coastwise or oceangoing navigation (Decision, CTA Case No. 1484; Rollo, p. 24).

As pointed out by the Court of Tax Appeals, the amendatory provisions of Republic Act No. 3176 limit tax exemption from the compensating tax to imported items to be used by the importer himself as operator of passenger and/or cargo vessel (Ibid., p. 25).

As quoted in the decision of the Court of Tax Appeals, a tugboat is defined as follows:

A tugboat is a strongly built, powerful steam or power vessel, used for towing and, now, also used for attendance on vessel. (Webster New International Dictionary, 2nd Ed.)

A tugboat is a diesel or steam power vessel designed primarily for moving large ships to and from piers for towing barges and lighters in harbors, rivers and canals. (Encyclopedia International Grolier, Vol. 18, p. 256).

A tug is a steam vessel built for towing, synonymous with tugboat. (Bouvier's Law Dictionary.) (Rollo, p. 24).

Under the foregoing definitions, petitioner's tugboats clearly do not fall under the categories of passenger and/or cargo vessels. Thus, it is a cardinal principle of statutory construction that where a provision of law speaks categorically, the need for interpretation is obviated, no plausible pretense being entertained to justify non-compliance. All that has to be done is to apply it in every case that falls within its terms (Allied Brokerage Corp. v. Commissioner of Customs, L-27641, 40 SCRA 555 [1971]; Quijano, etc. v. DBP, L-26419, 35 SCRA 270 [1970]).

And, even if construction and interpretation of the law is insisted upon, following another fundamental rule that statutes are to be construed in the light of purposes to be achieved and the evils sought to be remedied (People v. Purisima etc., et al., L-42050-66, 86 SCRA 544 [1978], it will be noted that the legislature in amending Section 190 of the Tax Code by Republic Act 3176, as appearing in the records, intended to provide incentives and inducements to bolster the shipping industry and not the business of stevedoring, as manifested in the sponsorship speech of Senator Gil Puyat (Rollo, p. 26).

On analysis of petitioner-appellant's transactions, the Court of Tax Appeals found that no evidence was adduced by petitioner-appellant that tugboats are passenger and/or cargo vessels used in the shipping industry as an independent business. On the contrary, petitioner-appellant's own evidence supports the view that it is engaged as a stevedore, that is, the work of unloading and loading of a vessel in port; and towing of barges containing cargoes is a part of petitioner's undertaking as a stevedore. In fact, even its trade name is indicative that its sole and principal business is stevedoring and lighterage, taxed under Section 191 of the National Internal Revenue Code as a contractor, and not an entity which transports passengers or freight for hire which is taxed under Section 192 of the same Code as a common carrier by water (Decision, CTA Case No. 1484; Rollo, p. 25).

Under the circumstances, there appears to be no plausible reason to disturb the findings and conclusion of the Court of Tax Appeals.

As a matter of principle, this Court will not set aside the conclusion reached by an agency such as the Court of Tax Appeals, which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject unless there has been an abuse or improvident exercise of authority (Reyes v. Commissioner of Internal Revenue, 24 SCRA 199 [1981]), which is not present in the instant case.

PREMISES CONSIDERED, the instant petition is DISMISSED and the decision of the Court of Tax Appeals is AFFIRMED.

SO ORDERED.

Melencio-Herrera, Padilla and Sarmiento, JJ., concur.

G.R. No. L-31092 February 27, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.JOHN GOTAMCO & SONS, INC. and THE COURT OF TAX APPEALS, respondents.

 

YAP, J.:

The question involved in this petition is whether respondent John Gotamco & Sons, Inc. should pay the 3% contractor's tax under Section 191 of the National Internal Revenue Code on the gross receipts it realized from the construction of the World Health Organization office building in Manila.

The World Health Organization (WHO for short) is an international organization which has a regional office in Manila. As an international organization, it enjoys privileges and immunities which are defined more specifically in the Host Agreement entered into between the Republic of the Philippines and the said Organization on July 22, 1951. Section 11 of that Agreement provides, inter alia, that "the Organization, its assets, income and other properties shall be: (a) exempt from all direct and indirect taxes. It is understood, however, that the Organization will not claim exemption from taxes which are, in fact, no more than charges for public utility services; . . .

When the WHO decided to construct a building to house its own offices, as well as the other United Nations offices stationed in Manila, it entered into a further agreement with the Govermment of the Republic of the Philippines on November 26, 1957. This agreement contained the following provision (Article III, paragraph 2):

The Organization may import into the country materials and fixtures required for the construction free from all duties and taxes and agrees not to utilize any portion of the international reserves of the Government.

Article VIII of the above-mentioned agreement referred to the Host Agreement concluded on July 22, 1951 which granted the Organization exemption from all direct and indirect taxes.

In inviting bids for the construction of the building, the WHO informed the bidders that the building to be constructed belonged to an international organization with diplomatic status and thus exempt from the payment of all fees, licenses, and taxes, and that therefore their bids "must take this into account and should not include items for such taxes, licenses and other payments to Government agencies."

The construction contract was awarded to respondent John Gotamco & Sons, Inc. (Gotamco for short) on February 10, 1958 for the stipulated price of P370,000.00, but when the building was completed the price reached a total of P452,544.00.

Sometime in May 1958, the WHO received an opinion from the Commissioner of the Bureau of Internal Revenue stating that "as the 3% contractor's tax is an indirect tax on the assets and income of the Organization, the gross receipts derived by contractors from their contracts with the WHO for the construction of its new building, are exempt from tax in accordance with . . . the Host Agreement." Subsequently, however, on June 3, 1958, the Commissioner of Internal Revenue reversed his opinion and stated that "as the 3% contractor's tax is not a direct nor an indirect tax on the WHO, but a tax that is primarily due from the contractor, the same is not covered by . . . the Host Agreement."

On January 2, 1960, the WHO issued a certification state 91 inter alia,:

When the request for bids for the construction of the World Health Organization office building was called for, contractors were informed that there would be no taxes or fees levied upon them for their work in connection with the construction of the building as this will be considered an indirect tax to the Organization caused by the increase of the contractor's bid in order to cover these taxes. This was upheld by the Bureau of Internal Revenue and it can be stated that the contractors submitted their bids in good faith with the exemption in mind.

The undersigned, therefore, certifies that the bid of John Gotamco & Sons, made under the condition stated above, should be exempted from any taxes in connection with the construction of the World Health Organization office building.

On January 17, 1961, the Commissioner of Internal Revenue sent a letter of demand to Gotamco demanding payment of P 16,970.40, representing the 3% contractor's tax plus surcharges on the gross receipts it received from the WHO in the construction of the latter's building.

Respondent Gotamco appealed the Commissioner's decision to the Court of Tax Appeals, which after trial rendered a decision, in favor of Gotamco and reversed the Commissioner's decision. The Court of Tax Appeal's decision is now before us for review on certiorari.

In his first assignment of error, petitioner questions the entitlement of the WHO to tax exemption, contending that the Host Agreement is null and void, not having been ratified by the Philippine Senate as required by the Constitution. We find no merit in this contention. While treaties are required to be ratified by the Senate under the Constitution, less formal types of international agreements may be entered into by the Chief Executive and become binding without the concurrence of the legislative body. 1 The Host Agreement comes within the latter category; it is a valid and binding international agreement even without the concurrence of the Philippine Senate.

The privileges and immunities granted to the WHO under the Host Agreement have been recognized by this Court as legally binding on Philippine authorities. 2

Petitioner maintains that even assuming that the Host Agreement granting tax exemption to the WHO is valid and enforceable, the 3% contractor's tax assessed on Gotamco is not an "indirect tax" within its purview. Petitioner's position is that the contractor's tax "is in the nature of an excise tax which is a charge imposed upon the performance of an act, the enjoyment of a privilege or the engaging in an occupation. . . It is a tax due primarily and directly on the contractor, not on the owner of the building. Since this tax has no bearing upon the WHO, it cannot be deemed an indirect taxation upon it."

We agree with the Court of Tax Appeals in rejecting this contention of the petitioner. Said the respondent court:

In context, direct taxes are those that are demanded from the very person who, it is intended or desired, should pay them; while indirect taxes are those that are demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else. (Pollock vs. Farmers, L & T Co., 1957 US 429, 15 S. Ct. 673, 39 Law. Ed. 759.) The contractor's tax is of course payable by the contractor but in the last analysis it is the owner of the building that shoulders the burden of the tax because the same is shifted by the contractor to the owner as a matter of self-preservation. Thus, it is an indirect tax. And it is an indirect tax on the WHO because, although it is payable by the petitioner, the latter can shift its burden on the WHO. In the last analysis it is the WHO that will pay the tax indirectly through the contractor and it certainly cannot be said that 'this tax has no bearing upon the World Health Organization.

Petitioner claims that under the authority of the Philippine Acetylene Company versus Commissioner of Internal Revenue, et al., 3 the 3% contractor's tax fans directly on Gotamco and cannot be shifted to the WHO. The Court of Tax Appeals, however, held that the said case is not controlling in this case, since the Host Agreement specifically exempts the WHO from "indirect taxes." We agree. The Philippine Acetylene case involved a tax on sales of goods which under the law had to be paid by the manufacturer or producer; the fact that the manufacturer or producer might have added the amount of the tax to the price of the goods did not make the sales tax "a tax on the purchaser." The Court held that the sales tax must be paid by the manufacturer or producer even if the sale is made to tax-exempt entities like the National Power Corporation, an agency of the Philippine Government, and to the Voice of America, an agency of the United States Government.

The Host Agreement, in specifically exempting the WHO from "indirect taxes," contemplates taxes which, although not imposed upon or paid by the Organization directly, form part of the price paid or to be paid by it. This is made clear in Section 12 of the Host Agreement which provides:

While the Organization will not, as a general rule, in the case of minor purchases, claim exemption from excise duties, and from taxes on the sale of movable and immovable property which form part of the price to be paid, nevertheless, when the Organization is making important purchases for official use of property on which such duties and taxes have been charged or are chargeable the Government of the Republic of the Philippines shall make appropriate administrative arrangements for the remission or return of the amount of duty or tax. (Emphasis supplied).

The above-quoted provision, although referring only to purchases made by the WHO, elucidates the clear intention of the Agreement to exempt the WHO from "indirect" taxation.

The certification issued by the WHO, dated January 20, 1960, sought exemption of the contractor, Gotamco, from any taxes in connection with the construction of the WHO office building. The 3% contractor's tax would be within this category and should be viewed as a form of an "indirect tax" On the Organization, as the payment thereof or its inclusion in the bid price would have meant an increase in the construction cost of the building.

Accordingly, finding no reversible error committed by the respondent Court of Tax Appeals, the appealed decision is hereby affirmed.

SO ORDERED.

Narvasa, Melencio-Herrera, Cruz, Feliciano, Gancayco and Sarmiento, JJ., concur.

G.R. No. 115349 April 18, 1997

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE MANILA UNIVERSITY, respondents.

 

PANGANIBAN, J.:

In conducting researches and studies of social organizations and cultural values thru its Institute of Philippine Culture, is the Ateneo de Manila University performing the work of an independent contractor and thus taxable within the purview of then Section 205 of the National Internal Revenue Code levying a three percent contractor's tax? This question is answer by the Court in the negative as it resolves this petition assailing the Decision 1 of the Respondent Court of Appeals 2 in CA-G.R. SP No. 31790 promulgated on April 27, 1994 affirming that of the Court of Tax Appeals. 3

The Antecedent Facts

The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same being largely undisputed by the parties.

Private respondent is a non-stock, non-profit educational institution with auxiliary units and branches all over the Philippines. One such auxiliary unit is the Institute of Philippine Culture (IPC), which has no legal personality separate and distinct from that of private respondent. The IPC is a Philippine unit engaged in social science studies of Philippine society and culture. Occasionally, it accepts sponsorships for its research activities from international organizations, private foundations and government agencies.

On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue a demand letter dated June 3, 1983, assessing private respondent the sum of P174,043.97 for alleged deficiency contractor's tax, and an assessment dated June 27, 1983 in the sum of P1,141,837 for alleged deficiency income tax, both for the fiscal year ended March 31, 1978. Denying said tax liabilities, private respondent sent petitioner a letter-protest

and subsequently filed with the latter a memorandum contesting the validity of the assessments.

On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for deficiency income tax but modifying the assessment for deficiency contractor's tax by increasing the amount due to P193,475.55. Unsatisfied, private respondent requested for a reconsideration or reinvestigation of the modified assessment. At the same time, it filed in the respondent court a petition for review of the said letter-decision of the petitioner. While the petition was pending before the respondent court, petitioner issued a final decision dated August 3, 1988 reducing the assessment for deficiency contractor's tax from P193,475.55 to P46,516.41, exclusive of surcharge and interest.

On July 12, 1993, the respondent court rendered the questioned decision which dispositively reads:

WHEREFORE, in view of the foregoing, respondent's decision is SET ASIDE. The deficiency contractor's tax assessment in the amount of P46,516.41 exclusive of surcharge and interest for the fiscal year ended March 31, 1978 is hereby CANCELED. No pronouncement as to cost.

SO ORDERED.

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

1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE PURVIEW OF INDEPENDENT CONTRACTOR PURSUANT TO SECTION 205 OF THE TAX CODE; and

2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3% CONTRACTOR'S TAX UNDER SECTION 205 OF THE TAX CODE.

The pertinent portions of Section 205 of the National Internal Revenue Code, as amended, provide:

Sec. 205. Contractor, proprietors or operators of dockyards, and others. — A contractor's tax of three per centum of the gross receipts is hereby imposed on the following:

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 Republic Act No. 5186:

xxx xxx xxx

The term "independent contractors" include persons (juridical or natural) not enumerated above (but not including individuals subject to the occupation tax under Section 12 of the Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees.

xxx xxx xxx

Petitioner contends that the respondent court erred in holding that private respondent is not an "independent contractor" within the purview of Section 205 of the Tax Code. To petitioner, the term "independent contractor", as defined by the Code, encompasses all kinds of services rendered for a fee and that the only exceptions are the following:

a. Persons, association and corporations under contract for embroidery and apparel for export and gross receipts of or from pioneer industry registered with the Board of Investment under R.A. No. 5186;

b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old Section 182 [b] of the Tax

Code); and

c. Regional or area headquarters established in the Philippines by multinational corporations, including their alien executives, and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communication and coordinating centers for their affiliates, subsidiaries or branches in the Asia Pacific Region (Section 205 of the Tax Code).

Petitioner thus submits that since private respondent falls under the definition of an "independent contractor" and is not among the aforementioned exceptions, private respondent is therefore subject to the 3% contractor's tax imposed under the same Code. 4

The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and affirmed the assailed decision of the Court of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA through this petition for review.

The Issues

Petitioner submits before us the following issues:

1) Whether or not private respondent falls under the purview of independent contractor pursuant to Section 205 of the Tax Code.

2) Whether or not private respondent is subject to 3% contractor's tax under Section 205 of the Tax Code. 5

In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its auxiliary unit or branch — the Institute of Philippine Culture — performing the work of an independent contractor and, thus, subject to the three percent contractor's tax levied by then Section 205 of the National Internal Revenue Code?

The Court's Ruling

The petition is unmeritorious.

Interpretation of Tax Laws

The parts of then Section 205 of the National Internal Revenue Code germane to the case before us read:

Sec. 205. Contractors, proprietors or operators of dockyards, and others. — A contractor's tax of three per centum of the gross receipts is hereby imposed on the following:

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(16) Business agents and other independent contractors, except persons, associations and corporations under contract for embroidery and apparel for export, as well as their agents and contractors, and except gross receipts of or from a pioneer industry registered with the Board of Investments under the provisions of Republic Act No. 5186;

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The term "independent contractors" include persons (juridical or natural) not enumerated above (but not including individuals subject to the occupation tax under Section 12 of the Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees.

The term "independent contractor" shall not include regional or area headquarters established in the Philippines by multinational corporations, including their alien executives, and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating centers for their

affiliates, subsidiaries or branches in the Asia-Pacific Region.

The term "gross receipts" means all amounts received by the prime or principal contractor as the total contract price, undiminished by amount paid to the subcontractor, shall be excluded from the taxable gross receipts of the subcontractor.

Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila University "falls within the definition" of an independent contractor and "is not one of those mentioned as excepted"; hence, it is properly a subject of the three percent contractor's tax levied by the foregoing provision of law. 6

Petitioner states that the "term 'independent contractor' is not specifically defined so as to delimit the scope thereof, so much so that any person who . . . renders physical and mental service for a fee, is now indubitably considered an independent contractor liable to 3% contractor's tax." 7 According to petitioner, Ateneo has the burden of proof to show its exemption from the coverage of the law.

We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and impractical to determine who are exempted without first determining who are covered by the aforesaid provision. The Commissioner should have determined first if private respondent was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo to prove its exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws that "(a) statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously . . . (A) tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication." 8

Parenthetically, in answering the question of who is subject to tax statutes, it is basic that "in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import." 9

To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the independent contractor be engaged in the business of selling its services. Hence, to impose the three percent contractor's tax on Ateneo's Institute of Philippine Culture, it should be sufficiently proven that the private respondent is indeed selling its services for a fee in pursuit of an independent business. And it is only after private respondent has been found clearly to be subject to the provisions of Sec. 205 that the question of exemption therefrom would arise. Only after such coverage is shown does the rule of construction — that tax exemptions are to be strictly construed against the taxpayer — come into play, contrary to petitioner's position. This is the main line of reasoning of the Court of Tax Appeals in its decision, 10 which was affirmed by the CA.

The Ateneo de Manila University Did Not Contractfor the Sale of the Service of its Institute of Philippine Culture

After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine Culture ever sold its services for a fee to anyone or was ever engaged in a business apart from and independently of the academic purposes of the university.

Stressing that "it is not the Ateneo de Manila University per se which is being taxed," Petitioner Commissioner of Internal Revenue contends that "the tax is due on its activity of conducting researches for a fee. The tax is due on the gross receipts made in favor of IPC pursuant to the contracts the latter entered to conduct researches for the benefit primarily of its clients. The tax is imposed on the exercise of a taxable activity. . . . [T]he sale of services of private respondent is made under a contract and the various contracts entered into between private respondent and its clients are almost of the same terms, showing, among others, the compensation and terms of payment." 11 (Emphasis supplied.)

In theory, the Commissioner of Internal Revenue may be correct. However, the records do not show that Ateneo's IPC in fact contracted to sell its research services for a fee. Clearly then, as found by the Court of Appeals and the Court of Tax Appeals, petitioner's theory is inapplicable to the established factual milieu obtaining in the instant case.

In the first place, the petitioner has presented no evidence to prove its bare contention that, indeed, contracts for

sale of services were ever entered into by the private respondent. As appropriately pointed out by the latter:

An examination of the Commissioner's Written Formal Offer of Evidence in the Court of Tax Appeals shows that only the following documentary evidence was presented:

Exhibit 1 BIR letter of authority no. 331844

2 Examiner's Field Audit Report

3 Adjustments to Sales/Receipts

4 Letter-decision of BIR Commissioner Bienvenido A. Tan Jr.

None of the foregoing evidence even comes close to purport to be contracts between private respondent and third parties. 12

Moreover, the Court of Tax Appeals accurately and correctly declared that the " funds received by the Ateneo de Manila University are technically not a fee. They may however fall as gifts or donations which are tax-exempt" as shown by private respondent's compliance with the requirement of Section 123 of the National Internal Revenue Code providing for the exemption of such gifts to an educational institution. 13

Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:

To our mind, private respondent hardly fits into the definition of an "independent contractor".

For one, the established facts show that IPC, as a unit of the private respondent, is not engaged in business. Undisputedly, private respondent is mandated by law to undertake research activities to maintain its university status. In fact, the research activities being carried out by the IPC is focused not on business or profit but on social sciences studies of Philippine society and culture. Since it can only finance a limited number of IPC's research projects, private respondent occasionally accepts sponsorship for unfunded IPC research projects from international organizations, private foundations and governmental agencies. However, such sponsorships are subject to private respondent's terms and conditions, among which are, that the research is confined to topics consistent with the private respondent's academic agenda; that no proprietary or commercial purpose research is done; and that private respondent retains not only the absolute right to publish but also the ownership of the results of the research conducted by the IPC. Quite clearly, the aforementioned terms and conditions belie the allegation that private respondent is a contractor or is engaged in business.

For another, it bears stressing that private respondent is a non-stock, non-profit educational corporation. The fact that it accepted sponsorship for IPC's unfunded projects is merely incidental. For, the main function of the IPC is to undertake research projects under the academic agenda of the private respondent. Moreover the records do not show that in accepting sponsorship of research work, IPC realized profits from such work. On the contrary, the evidence shows that for about 30 years, IPC had continuously operated at a loss, which means that sponsored funds are less than actual expenses for its research projects. That IPC has been operating at a loss loudly bespeaks of the fact that education and not profit is the motive for undertaking the research projects.

Then, too, granting arguendo that IPC made profits from the sponsored research projects, the fact still remains that there is no proof that part of such earnings or profits was ever distributed as dividends to any stockholder, as in fact none was so distributed because they accrued to the benefit of the private respondent which is a non-profit educational institution. 14

Therefore, it is clear that the funds received by Ateneo's Institute of Philippine Culture are not given in the concept of a fee or price in exchange for the performance of a service or delivery of an object. Rather, the amounts are in the nature of an endowment or donation given by IPC's benefactors solely for the purpose of sponsoring or funding the research with no strings attached. As found by the two courts below, such sponsorships are subject to IPC's terms and conditions. No proprietary or commercial research is done, and IPC retains the ownership of the results of the research, including the absolute right to publish the same. The copyrights over the results of the research are owned byAteneo and, consequently, no portion thereof may be

reproduced without its permission. 15 The amounts given to IPC, therefore, may not be deemed, it bears stressing as fees or gross receipts that can be subjected to the three percent contractor's tax.

It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture cannot be deemed either as a contract of sale or a contract of a piece of work. "By the contract of sale, one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent." 16 By its very nature, a contract of sale requires a transfer of ownership. Thus, Article 1458 of the Civil Code "expressly makes the obligation to transfer ownership as an essential element of the contract of sale, following modern codes, such as the German and the Swiss. Even in the absence of this express requirement, however, most writers, including Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and Capitant, have considered such transfer of ownership as the primary purpose of sale. Perez and Alguer follow the same view, stating that the delivery of the thing does not mean a mere physical transfer, but is a means of transmitting ownership. Transfer of title or an agreement to transfer it for a price paid or promised to be paid is the essence of sale." 17 In the case of a contract for a piece of work, "the contractor binds himself to execute a piece of work for the employer, in consideration of a certain price or compensation. . . . If the contractor agrees to produce the work from materials furnished by him, he shall deliver the thing produced to the employer and transfer dominion over the thing, . . ." 18 Ineludably, whether the contract be one of sale or one for a piece of work, a transfer of ownership is involved and a party necessarily walks away with an object. 19 In the case at bench, it is clear from the evidence on record that there was no sale either of objects or services because, as adverted to earlier, there was no transfer of ownership over the research data obtained or the results of research projects undertaken by the Institute of Philippine Culture.

Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done in pursuance of maintaining Ateneo's university status and not in the course of an independent business of selling such research with profit in mind. This is clear from a reading of the regulations governing universities:

31. In addition to the legal requisites an institution must meet, among others, the following requirements before an application for university status shall be considered:

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(e) The institution must undertake research and operate with a competent qualified staff at least three graduate departments in accordance with the rules and standards for graduate education. One of the departments shall be science and technology. The competence of the staff shall be judged by their effective teaching, scholarly publications and research activities published in its school journal as well as their leadership activities in the profession.

(f) The institution must show evidence of adequate and stable financial resources and support, a reasonable portion of which should be devoted to institutional development and research. (emphasis supplied)

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32. University status may be withdrawn, after due notice and hearing, for failure to maintain satisfactorily the standards and requirements therefor. 20

Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and not the Ateneo is patently erroneous because the former is not an independent juridical entity that is separate and distinct form the latter.

Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the Court of Appeals Generally Conclusive

In addition, we reiterate that the "Court of Tax Appeals is a highly specialized body specifically created for the purpose of reviewing tax cases. Through its expertise, it is undeniably competent to determine the issue of whether" 21 Ateneo de Manila University may be deemed a subject of the three percent contractor's tax "through the evidence presented before it." Consequently, "as a matter of principle, this Court will not set aside the conclusion reached by . . . the Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the

subject unless there has been an abuse or improvident exercise of authority . . ." 22 This point becomes more evident in the case before us where the findings and conclusions of both the Court of Tax Appeals and the Court of Appeals appear untainted by any abuse of authority, much less grave abuse of discretion. Thus, we find the decision of the latter affirming that of the former free from any palpable error.

Public Service, Not Profit, is the Motive

The records show that the Institute of Philippine Culture conducted its research activities at a huge deficit of P1,624,014.00 as shown in its statements of fund and disbursements for the period 1972 to 1985. 23 In fact, it was Ateneo de Manila University itself that had funded the research projects of the institute, and it was only when Ateneo could no longer produce the needed funds that the institute sought funding from outside. The testimony of Ateneo's Director for Accounting Services, Ms. Leonor Wijangco, provides significant insight on the academic and nonprofit nature of the institute's research activities done in furtherance of the university's purposes, as follows:

Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the Institute of Philippine Culture) that as far as grants from sponsored research it is possible that the grant sometimes is less than the actual cost. Will you please tell us in this case when the actual cost is a lot less than the grant who shoulders the additional cost?

A The University.

Q Now, why is this done by the University?

A Because of our faculty development program as a university, because a university has to have its own research institute. 24

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

WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court of Appeals is hereby AFFIRMED in full.

SO ORDERED.

Narvasa, C.J., Davide, Jr., Melo and Francisco JJ., concur.G.R. No. L-45355 January 12, 1990

THE PROVINCE OF MISAMIS ORIENTAL, represented by its PROVINCIAL TREASURER, petitioner, vs.CAGAYAN ELECTRIC POWER AND LIGHT COMPANY, INC. (CEPALCO), respondent.

Jaime A. Chaves for petitioner.

Quiason, Makalintal, Barot & Torres for respondent.

 

GRIÑO-AQUINO, J.:

The issue in this case is a legal one: whether or not a corporation whose franchise expressly provides that the payment of the "franchise tax of three per centum of the gross earnings shall be in lieu of all taxes and assessments of whatever authority upon privileges, earnings, income, franchise, and poles, wires, transformers,

and insulators of the grantee." (p. 20, Rollo), is exempt from paying a provincial franchise tax.

Cagayan Electric Power and Light Company, Inc. (CEPALCO for short) was granted a franchise on June 17, 1961 under Republic Act No. 3247 to install, operate and maintain an electric light, heat and power system in the City of Cagayan de Oro and its suburbs. Said franchise was amended on June 21, 1963 by R.A. No. 3570 which added the municipalities of Tagoloan and Opol to CEPALCO's sphere of operation, and was further amended on August 4, 1969 by R.A. No. 6020 which extended its field of operation to the municipalities of Villanueva and Jasaan.

R.A. Nos. 3247, 3570 and 6020 uniformly provide that:

Sec. 3. In consideration of the franchise and rights hereby granted, the grantee shall pay a franchise tax equal to three per centum of the gross earnings for electric current sold under this franchise, of which two per centum goes into the National Treasury and one per centum goes into the treasury of the Municipalities of Tagoloan, Opol, Villanueva and Jasaan and Cagayan de Oro City, as the case may be: Provided, That the said franchise tax of three per centum of the gross earnings shall be in lieu of all taxes and assessments of whatever authority upon privileges earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee from which taxes and assessments the grantee is hereby expressly exempted. (Emphasis supplied.)

On June 28, 1973, the Local Tax Code (P.D. No. 231) was promulgated, Section 9 of which provides:

Sec. 9. Franchise Tax.—Any provision of special laws to the contrary notwithstanding, the province may impose a tax on businesses enjoying franchise, based on the gross receipts realized within its territorial jurisdiction, at the rate of not exceeding one-half of one per cent of the gross annual receipts for the preceding calendar year.

In the case of newly started business, the rate shall not exceed three thousand pesos per year. Sixty per cent of the proceeds of the tax shall accrue to the general fund of the province and forty per cent to the general fund of the municipalities serviced by the business on the basis of the gross annual receipts derived therefrom by the franchise holder. In the case of a newly started business, forty per cent of the proceeds of the tax shall be divided equally among the municipalities serviced by the business. (Emphasis supplied.)

Pursuant thereto, the Province of Misamis Oriental (herein petitioner) enacted Provincial Revenue Ordinance No. 19, whose Section 12 reads:

Sec. 12. Franchise Tax.—There shall be levied, collected and paid on businesses enjoying franchise tax of one-half of one per cent of their gross annual receipts for the preceding calendar year realized within the territorial jurisdiction of the province of Misamis Oriental. (p. 27, Rollo.)

The Provincial Treasurer of Misamis Oriental demanded payment of the provincial franchise tax from CEPALCO. The company refused to pay, alleging that it is exempt from all taxes except the franchise tax required by R.A. No. 6020. Nevertheless, in view of the opinion rendered by the Provincial Fiscal, upon CEPALCO's request, upholding the legality of the Revenue Ordinance, CEPALCO paid under protest on May 27, 1974 the sum of P 4,276.28 and appealed the fiscal's ruling to the Secretary of Justice who reversed it and ruled in favor of CEPALCO.

On June 26, 1976, the Secretary of Finance issued Local Tax Regulation No. 3-75 adopting entirely the opinion of the Secretary of Justice.

On February 16, 1976, the Province filed in the Court of First Instance of Misamis Oriental a complaint for declaratory relief praying, among others, that the Court exercise its power to construe P.D. No. 231 in relation to the franchise of CEPALCO (R.A. No. 6020), and to declare the franchise as having been amended by P.D. No. 231. The Court dismissed the complaint and ordered the Province to return to CEPALCO the sum of P4,276.28 paid under protest.

The Province has appealed to this Court, alleging that the lower court erred in holding that:

1) CEPALCO's tax exemption under Section 3 of Republic Act No. 6020 was not amended or repealed by P.D. No. 231;

2) the imposition of the provincial franchise tax on CEPALCO would subvert the purpose of P.D. No. 231;

3) CEPALCO is exempt from paying the provincial franchise tax; and

4) petitioner should refund CEPALCO's tax payment of P4,276.28.

We find no merit in the petition for review.

There is no provision in P.D. No. 231 expressly or impliedly amending or repealing Section 3 of R.A. No. 6020. The perceived repugnancy between the two statutes should be very clear before the Court may hold that the prior one has been repealed by the later, since there is no express provision to that effect (Manila Railroad Co. vs. Rafferty, 40 Phil. 224). The rule is that a special and local statute applicable to a particular case is not repealed by a later statute which is general in its terms, provisions and application even if the terms of the general act are broad enough to include the cases in the special law (id.) unless there is manifest intent to repeal or alter the special law.

Republic Acts Nos. 3247, 3570 and 6020 are special laws applicable only to CEPALCO, while P.D. No. 231 is a general tax law. The presumption is that the special statutes are exceptions to the general law (P.D. No. 231) because they pertain to a special charter granted to meet a particular set of conditions and circumstances.

The franchise of respondent CEPALCO expressly exempts it from payment of "all taxes of whatever authority" except the three per centum (3%) tax on its gross earnings.

In an earlier case, the phrase "shall be in lieu of all taxes and at any time levied, established by, or collected by any authority" found in the franchise of the Visayan Electric Company was held to exempt the company from payment of the 5% tax on corporate franchise provided in Section 259 of the Internal Revenue Code (Visayan Electric Co. vs. David, 49 O.G. [No. 4] 1385).

Similarly, we ruled that the provision: "shall be in lieu of all taxes of every name and nature" in the franchise of the Manila Railroad (Subsection 12, Section 1, Act No. 1510) exempts the Manila Railroad from payment of internal revenue tax for its importations of coal and oil under Act No. 2432 and the Amendatory Acts of the Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).

The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act No. 1497) justified the exemption of the Philippine Railway Company from payment of the tax on its corporate franchise under Section 259 of the Internal Revenue Code, as amended by R.A. No. 39 (Philippine Railway Co. vs. Collector of Internal Revenue, 91 Phil. 35).

Those magic words: "shall be in lieu of all taxes" also excused the Cotabato Light and Ice Plant Company from the payment of the tax imposed by Ordinance No. 7 of the City of Cotabato (Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA 231).

So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company when it was required to pay the corporate franchise tax under Section 259 of the Internal Revenue Code, as amended by R.A. No. 39 (Carcar Electric & Ice Plant vs. Collector of Internal Revenue, 53 O.G. [No. 4] 1068). This Court pointed out that such exemption is part of the inducement for the acceptance of the franchise and the rendition of public service by the grantee. As a charter is in the nature of a private contract, the imposition of another franchise tax on the corporation by the local authority would constitute an impairment of the contract between the government and the corporation.

Recently, this Court ruled that the franchise (R.A. No. 3843) of the Lingayen Gulf Electric Power Company which provided that the company shall pay:

tax equal to 2% per annum of the gross receipts . . . and shall be in lieu of any and all taxes . . . now or in the

future . . . from which taxes . . . the grantee is hereby expressly exempted and . . . no other tax . . . other than the franchise tax of 2% on the gross receipts as provided for in the original franchise shall be collected.

exempts the company from paying the franchise tax under Section 259 of the National Internal Revenue Code (Commissioner of Internal Revenue vs. Lingayen Gulf Electric Power Co., Inc., G.R. No. 23771, August 4, 1988).

On the other hand, the Balanga Power Plant Company, Imus Electric Company, Inc., Guagua Electric Company, Inc. were subjected to the 5% tax on corporate franchise under Section 259 of the Internal Revenue Code, as amended, because Act No. 667 of the Philippine Commission and the ordinance or resolutions granting their respective franchises did not contain the "in-lieu-of-all-taxes" clause (Balanga Power Plant Co. vs. Commissioner of Internal Revenue, G.R. No. L-20499, June 30, 1965; Imus Electric Co. vs. Court of Tax Appeals, G.R. No. L-22421, March 18, 1967; Guagua Electric Light vs. Collector of Internal Revenue, G.R. No. L-23611, April 24, 1967).

Local Tax Regulation No. 3-75 issued by the Secretary of Finance on June 26, 1976, has made it crystal clear that the franchise tax provided in the Local Tax Code (P.D. No. 231, Sec. 9) may only be imposed on companies with franchises that do not contain the exempting clause. Thus it provides:

The franchise tax imposed under local tax ordinance pursuant to Section 9 of the Local Tax Code, as amended, shall be collected from businesses holding franchise but not from business establishments whose franchise contain the "in-lieu-of-all-taxes-proviso".

Manila Electric Company vs. Vera, 67 SCRA 351, cited by the petitioner, is not applicable here because what the Government sought to impose on Meralco in that case was not a franchise tax but a compensating tax on the poles, wires, transformers and insulators which it imported for its use.

WHEREFORE, the petition for review is denied, and the decision of the Court of First Instance is hereby affirmed in toto. No costs.

SO ORDERED.

Narvasa, Cruz, Gancayco and Medialdea, JJ., concur.

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:

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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:

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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.

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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.

[G.R. No. 80276 : December 21, 1990.]

192 SCRA 604

HYDRO RESOURCES CONTRACTORS CORPORATION, Petitioner, vs. THE COURT OF TAX APPEALS and THE HON. DEPUTY MINISTER OF FINANCE, ALFREDO PIO DE RODA, Respondents.

 

D E C I S I O N

 

PARAS, J.:

 

This is a special civil action of Certiorari instituted by petitioner Hydro Resources Contractors Corporation against respondents Court of Tax Appeals and Deputy Minister of Finance which seeks to set aside the decisions of both public respondents holding petitioner liable for a 3% ad valorem duty in the amount of P281,591.00.

It appears that the National Irrigation Administration (referred to hereinafter as NIA for brevity) a government owned and controlled corporation, entered into an agreement, sometime in August 1978, with petitioner Hydro Resources Contractors Corporation (Hydro for short), for the construction of the Magat River Multipurpose Project in Isabela.

Under the aforesaid contract, designated as Contract No. MPI-C-1, petitioner was allowed to procure new construction equipment, spare parts and tools from abroad, the payment for which was advanced by NIA under a financing plan embodied in the contract, as follows:

a) Procurement — Petitioner is required to submit to NIA for approval a list of new construction equipment, spare parts and tools which it intends to acquire from abroad. Petitioner shall procure these items as an agent of NIA as all invoices shall be in the name of said government agency. NIA undertakes to pay all import taxes, duties and all fees, imposts and other charges that may be due on said importations.: nad

b) Ownership and delivery — The equipment and spare parts imported from abroad shall be owned by NIA and delivered to its construction site in Isabela.

c) Repayment — Petitioner shall repay NIA the costs of the above procurement and the manner of repayment shall be through deductions from each monthly or periodic progress payment due to petitioner.

d) Transfer of Ownership — Ownership shall be transferred to petitioner only upon complete payment of the costs above mentioned.

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

 DESCRIPTION OF EQUIPMENT NET BOOK VALUE

 1 Tamrock Hyd. Jumbo Drill

 Ser. #18153 P1,566,116.55

 3 units Cat Drill Toyo TYPR 120 278,264.25

 1 unit Tamrock Hyd. Drill

 16 units Air Leg Drills Toyo 1,493,834.29

 1 unit Toyo Reinforcing Bar 12,000.92

 3 units Toyo TYCD 10 CY Cralwer 265,421.35

 2 units Scheele K-60 Pump 624,772.80

 2 units New Reed Gun Mdl. IAS 67,349.90

 1 unit Prota Tunnel Profile 43,340.26

 2 units Wild Theodolite Surveying

 Equipment 28,545.93

 1 unit Toyo Mud Sub Pump 201,108.01

 2 units Aichi Skymaster Truck

 mounted Boom 93,622.78

 2 units Grindex Sub Type Pump 140,518.35

 6 units K/Worth C500 Truck Mixer 1,690,054.60

 1 unit Putamesitor 201,863.77

 6 units Sullair Air Comp. 588,940.53

 2 units Well Air Driven Grout 20,582.40

 10 units Stancom VHF Radio Tran. 32,537.70

 4 units Cummins 1,055,209.20

By the terms of the contract (quoted earlier) NIA undertakes payment of all the import duties and taxes incident to the importations deductible from the proceeds of the contract price. HYDRO shall repay NIA in full the value of the construction equipment out of the same proceeds before eventual transfer or taking ownership of subject construction equipment upon termination of the contract.

NIA reneged and failed in the compliance of its tax obligations. In the meantime, HYDRO had fully repaid the value of the construction equipment in the amount of P14,537,783.63 (US$1,991,477.21) so much so that on December 6, 1982 and March 24, 1983, NIA executed deeds of sale covering the same and transferring the ownership thereof in favor of petitioner.

Upon the transfer of the ownership of the said equipment HYDRO was assessed by the Bureau of Customs the corresponding customs duty and compensating tax, respectively, as follows:

 Customs Duty —      P1,214,010.00

 Compensating Tax — 1,089,368.63

                             ——————

                             P2,303,378.63

                             =========

This amount was paid by HYDRO to the Bureau of Customs.

In addition, HYDRO was assessed additional 3% ad valorem duty in the amount of P281,591.00 prescribed in Executive Order 860. HYDRO also paid this amount but this time under protest.:-cralaw

The Collector of Customs acted favorably on petitioner's protest and ordered the refund of the amount paid for the ad valorem duty in the form of tax credit, ruling that —

"The foregoing scheme entered into between NIA and HYDRO had generated a contract and it will be unfair to involve new proposal as in the imposition of 3% additional duty ad valorem which was not obtaining at the time of the agreement nor at the time of arrival and release of the shipment from the piers. For one thing, the scheme may be viewed in the same light as sales of commodities to be delivered at some future date, whose price or prices at the time of delivery may be way above or below the sale price or prices. For another thing, HYDRO may not be deprived of rights vested before the promulgation of Executive Order 860 prescribing 3% additional duty ad valorem." (p. 22, Rollo)

The Acting Commissioner of Customs affirmed the ruling of the Collector of Customs. In his 2nd Indorsement dated June 25, 1984, (p. 25, Rollo) Acting Commissioner Ramon Farolan stated —

"This Office shares the view of the Collector of Customs to the effect that the various equipment and parts in question which the National Irrigation Administration imported in 1978 and 1979 and subsequently sold to Hydro Resources Construction Corporation by virtue of a previous agreement, are subject to duties and taxes but not the additional 3% ad valorem duty under Executive Order No. 860 which took effect only on December 21, 1982. Moreover, the Deputy Minister of Finance, in his 1st Indorsement to the Central Bank dated March 26, 1983, which was then reproduced by the Central Bank Governor in a circular letter to all authorized agent banks, clarified to all authorized agent banks, clarified that —

Letters of Credit opened prior to the effectivity of P.D. 1853 and E.O. 860 are not subject to the provisions thereof even if they are amended after the effectivity thereof.

(p. 15, Rollo).

These findings of the Collector of Customs as well as the Acting Customs Commissioner were reversed by the Deputy Minister of Finance.

Petitioner appealed to the Court of Tax Appeals but in its Decision dated May 22, 1987, the said court (with a dissenting opinion) affirmed the ruling of the Deputy Minister of Finance denying petitioner's claim for refund.

Hence, the present recourse, after petitioner's motion for reconsideration was denied.

In this petition, Hydro presents the following issues —

I

THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION IN REFUSING TO CONSIDER THE FACT THAT THE SALE OF THE NIA-FINANCED EQUIPMENT TOOK PLACE IN 1978.

II

THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION IN APPLYING EXECUTIVE ORDER NO. 860 RETROACTIVELY.

III

THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OF IN EXCESS OF ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION IN FAILING TO CONSIDER THAT THE IMPOSITION OF THE 3% AD VALOREM TAX ON IMPORTATIONS MADE PRIOR TO ITS ISSUANCE IS VIOLATIVE OF THE CONSTITUTION.

 

IV

THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OF IN EXCESS OF ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION IN IMPOSING THE AD VALOREM TAX SANS STATUTORY AND LEGAL BASIS.

The petition is meritorious.

Executive Order No. 860 which was the basis for the imposition of the 3% ad valorem duty upon the said importations, took effect on December 21, 1982. The importations were effected in 1978 and 1979 by NIA. Nonetheless, respondent Court of Tax Appeals denied petitioner's claim for refund because —

"When NIA transferred the equipment in question supposedly 'after its (HYDRO's) use for a number of years', it cannot be doubted that these equipment were sold and transferred presumably 'several years' after the equipment's importation in 1978 and 1979. It is obvious therefore that the sale or transfer of the ownership of the equipment to petitioner HYDRO were unquestionably made after the effectivity of PD 882 on January 20, 1976, undisputably said sale or transfer thereof was (sic) governed by Section 4 of PD 882 and was correctly applied by respondent. We take particular note of the fact that we cannot pinpoint with definiteness or exactitude from the evidence, when or what years after the years 1978 and 1979 importations were the equipment sold or transferred by NIA to petitioner HYDRO so that we can determine outright whether the sale or transfers are covered by the mandatory provision of Executive Order 860 effective on December 21, 1982 imposing 3% additional ad valorem duty on such importations. Such that if the sale or transfer of the ownership of the equipment were effected to petitioner HYDRO after December 21, 1982, the effective date of Executive Order No. 860, the 3% ad valorem duty is imposable as said Executive Order 860 was applied prospectively and rightly. If the sale or transfer of the ownership of the equipment to HYDRO were (sic) prior to the effectivity of Executive Order No. 860, then said Executive Order 860 is inapplicable, and petitioner is not liable to pay the 3% ad valorem duty of P281,591.00 and is entitled to the refund thereof.

As a rule and principle, it was incumbent upon petitioner-taxpayer HYDRO to have shown that the sale or transfer of said equipment to it were made before December 21, 1982, when the Executive Order No. 860 was effective in order that it shall not be subject to the imposition of 3% additional ad valorem duty. Failing thus, its claim for refund in the amount of P281,591.00 unquestionably fails." (pp. 37-38; Rollo).:- nad

The foregoing conclusion is erroneous. The subsequent executions of the Deeds of Sale of the equipment in question on December 6, 1982 and March 24, 1983 are not relevant and material in the consideration of the application of Executive Order No. 860 because said Deeds of Sale were mere formalities in the implementation of Contract No. MPI-C-1 executed on August 1978, which should be reckoned and construed as the actual date

of sale. This must be so because the contract of purchase and sale of the NIA-financed/owned equipment to Hydro took place in 1978 when Contract No. MPI-C-1 was signed by NIA and HYDRO wherein the contracting parties provided for their financing, procurement, delivery, repayment, transfer of possession and ownership. The said scheme contemplated a Contract of Sale within the purview of Art. 1458 of the Civil Code which provides —

"Art. 1458. By the contract of sale, one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay thereafter a price certain in money or its equivalent.

"A contract of sale may be absolute or conditional." (p. 11, Rollo)

This view is shared by the Collector of Customs in his decision when he declared that there being a meeting of the minds between NIA and HYDRO upon the object of the contract of sale and upon the price, the contract of sale of the equipment between them was perfected in 1978. It is a perfected contract of sale subject to a suspensive condition, the full payment by HYDRO of the consideration for the subject of the contract is the operative act to compel NIA to effect the transfer of absolute ownership thereof to HYDRO. And under Art. 1187 of the Civil Code, the effectivity of said contract reverts back to the constitution of the contract, in this case August 1978.

"ART. 1187. The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroact to the day of the constitution of the obligation." (p. 12, Rollo)

It is a cardinal rule that laws shall have no retroactive effect, unless the contrary is provided. (Art. 4, Civil Code) Except for a statement providing for its immediate execution, Executive Order No. 860 does not provide for its retroactivity. Moreover, the Deputy Minister of Finance in his 1st Indorsement to the Central Bank dated March 26, 1983 which was reproduced by the Central Bank Governor in a circular letter to all authorized agent banks, clarified that letters of credit opened prior to the effectivity of E.O. 860 are not subject to the provisions thereof. Consequently, the importations in question which arrived in 1977 and 1978 are not subject to the 3% additional ad valorem duty, the same being imposed only on those whose letter of credit were opened after the promulgation of Executive Order 860. In this regard Judge Alex Reyes in his dissenting opinion correctly observed —

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

"Taken in the above light, it would be unfair and incongruous to hold petitioner to an additional levy sans any statutory basis. The majority could have fumbled into a precipitate action in taking an adverse position on petitioner's right to a refund." (pp. 44-45, Rollo)

IN VIEW OF THE FOREGOING CONSIDERATIONS, the petition is GRANTED; the assailed Decisions of respondents Court of Tax Appeals and Deputy Minister of Finance are SET ASIDE and another one rendered ordering the refund of the amount of P281,591.00 representing 3% additional ad valorem duty to petitioner Hydro Resources Contractors Corporation in the form of tax credit.

SO ORDERED.

Melencio-Herrera, Padilla, Sarmiento and Regalado, JJ., concur.

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

CENTRAL AZUCARERA DON PEDRO, petitioner, vs.COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

Leido, Andrada, Perez and Associates for petitioner.Office of the Solicitor General Anturo A. Alafriz, Solicitor A.B. Afurong and Attorney M.R. Balasbas for respondents.

REYES, J.B.L., J.:

Separate appeals, by the same petitioner, Central Azucarera Don Pedro, from two (2) decisions of the Court of Tax Appeals, the first (CTA Case No. 1273) holding it liable for the payment of the sum of P1,507.30, as ½% monthly (6% per annum) interest on the deficiency income tax assessed against it for the fiscal year ending August 31, 1954; and, the other (CTA Case No. 1278) denying its claim for refund in the total amount of P2,307.10, already paid and collected, as ½% monthly (6% per annum) interest on the deficiency income taxes assessed against it for the fiscal years ending August 31 — 1955, 1956, 1957 and 1958.

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

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

Petitioner Central Azucarera Don Pedro, a domestic corporation with office at Nasugbu, Batangas, had been filing its income tax returns on the "fiscal year" basis ending August 31, of every year. Within the period allowed it under Section 46 of the National Internal Revenue Code, petitioner filed, on October 24, 1954, with the Bureau of Internal Revenue, its income tax return for the fiscal year ending August 31, 1954, for which it paid the total sum of P491,038.00, as income tax, computed on the basis of said return.

On October 15, 1959, Respondent Commissioner of Internal Revenue assessed against petitioner the amount of P167,935.00, as deficiency income tax for the abovementioned fiscal year, but he did not assess and impose any interest thereon.

Petitioner protested, in a letter dated October 26, 1959, said deficiency income tax assessment and requested that the same be cancelled.

Acting on the letter-protest, respondent finally ascertained and assessed, in a letter dated December 20, 1961, against petitioner the amount of P10,062.00, as deficiency income tax, to which was added the sum of P1,509.30 as ½% monthly interest thereon, which interest was imposed pursuant to Section 51 (d) of the National Internal Revenue Code, as amended by Republic Act No. 2343 (effective June 20, 1959), and computed from June 20, 1959 to December 20, 1961 which was the date of the revised assessment. In the same letter, respondent required petitioner to pay said revised assessment and interest thereon on or before January 16, 1962.

Petitioner was satisfied with the revised assessment of said deficiency income tax proper and, accordingly, it paid, on January 16, 1962, the said amount of P10,062.00 to respondent; however, it objected, in a letter-protest dated January 18, 1962, to the demand and imposition of interest which was assessed and included for the first time in respondent's letter of December 20,1961.

Respondent decided said protest in a letter dated September 22, 1962, maintaining the correctness and validity of the imposition of the interest.

In due time petitioner went to the Tax Court in a petition for review, claiming that the imposition of ½% monthly interest on its deficiency tax for the fiscal year 1954, Pursuant to Section 51 (d) of the Revenue Code, as amended by Republic Act No. 2343, is illegal, because the imposition of interest on efficiency income tax earned prior to the effectivity of the amendatory law (Rep. Act 2343) will be tantamount to giving it (Rep. Act No. 2343) retroactive application.

Respondent filed his answer to the petition, and there being no genuine issue raised therein as to any material fact, petitioner presented a motion for summary judgment. Respondent did not oppose the motion.

The Tax Court found that the only issue involved in the case is purely legal. It ordered the parties to submit their respective memoranda and, upon so doing, the case was deemed submitted for decision.

On June 15, 1964, the Tax Court rendered its decision, upholding the ruling of respondent Commissioner.

In G. R. No. L-23254 (CTA Case No. 1278), the undisputed facts are as follows:

The same petitioner (Central Azucarera Don Pedro) filed its income tax returns within the prescribed period for the succeeding fiscal years ending August 31 — 1955, 1956, 1957, and 1958, for which it paid the corresponding income taxes, based on said returns.

After verification and examination of petitioner's income tax returns for the abovestated fiscal years, respondent Commissioner ascertained and assessed, for each of said fiscal years against petitioner, deficiency income taxes in the total amount of P21,330.00, and interest thereon in the total sum of P2,307.10, which interest were likewise imposed pursuant to Section 51 (d) of the Internal Revenue Code, as amended by Republic Act No. 2343.

Petitioner paid said deficiency income taxes and interests within the period prescribed by respondent to pay the same; however, on January 19, 1962, it filed with the latter a claim for refund or tax credit of the aforesaid sum of P2,307.00, which was paid as interests, claiming that said payment was erroneous and the collection thereof by respondent was illegal, which contention is similar to that alleged in its previous protest (now CTA Case No. 1273).

Respondent Commissioner was unable to decide immediately this claim for refund, and view of the fact that the two-year prescriptive period provided for in Section 306 of the Revenue Code was about to expire, petitioner filed, on October 23, 1962, its petition for review in the Court of Tax Appeals, disputing the legality and validity of the imposition of interest on taxable incomes earned prior to, although assessed after, the effectivity of Republic Act No. 2343, and praying that the said sum of P2,307.10, which it paid is interest, be ordered refunded.

Respondent answered the petition, maintaining, among other things, that the imposition of said interest is in accordance with law.

The issues having been joined, the case was set for hearing wherein the parties presented their respective evidences which were entirely documentary. Thereafter, the case was submitted for decision.

On June 29, 1964, the Court of Tax Appeals rendered its decision, sustaining the ruling of respondent Commissioner.

In both cases, the Court of Tax Appeals ruled that Congress had power to impose interest on deficiency income tax due on income earned prior to the amendatory law, but assessed after its enactment, that the deficiency income tax in the case it bar was assessed after the effectivity of the new law (Rep. Act No. 2343), and inasmuch as the interest imposed thereon has been computed only from June 20, 1959 (which was the date of effectivity of said law), Republic Act No. 2343 is not being applied retroactively. It also ruled that the provision of Section 13 of Republic Act No. 2343 providing that its new tax rates should apply to income earned in 1959, did not indicate that Congress intended to limit the applicability of the interest prescribed in Section 51 (d) of the Revenue Code, as amended by Republic Act No. 2343, to the deficiency income tax on income earned after the effectivity of the new law, since said Section 51 (d) does not distinguish between taxable income earned prior to, or after, the effectivity of said Republic Act No. 2343.

The petitioner appealed in both cases to this Court, insisting on its original stand previously outlined.

The common issue posed in both cases is: whether or not the interest of six per centum (6%)per annum (or ½% monthly interest), provided for in Section 51 (d) of the National Internal Revenue Code, as amended by Republic Act No. 2343 (effective June 20, 1959) is imposable on deficiency income tax due on income earned prior to the effectivity of said Republic Act No. 2343, but assessed after it.

It is not disputed that petitioner is a domestic corporation which filed its income tax returns on a fiscal year basis; that it filed its income tax returns and paid the corresponding income taxes, based on said returns, within the period prescribed therefor; that the taxable incomes, in these two cases, were earned before, but were assessed after, the effectivity on June 20, 1959 of Republic Act No. 2343; that the deficiency income tax assessments proper, including the interests in the later case (CTA Case No. 1278) were paid by petitioner within the period prescribed by respondent Commissioner to pay the same; and that these deficiency income tax assessments were made on account of petitioner's erroneous (but not fraudulent or false) returns.

When petitioner filed its income tax returns and paid the corresponding income taxes, based on said returns, the pertinent provisions of the Tax Code then in force (before the effectivity of Rep. Act 2343) read —

Sec. 51. Assessment and payment of income tax. — (a) Assessment of Tax. — All assessments shall be made by the Collector of Internal Revenue and all persons and corporation subject to tax shall be notified of the amount for which the are respectively liable on or before the first day of May each successive year.

(b) Time of payment. — The total amount of tax imposed by this Title shall be paid on or before the fifteenth day of May following the close of the calendar year, by the person subject to tax, and in case of a corporation, by the president, vice-president, or other responsible officer thereof. If the return is made on the basis of a fiscal year, the total amount of the tax shall be paid on or before the fifteenth day of the fifth month following the close of the fiscal year.

x x x           x x x           x x x

(d) Refusal or neglect to make returns; fraudulent returns, etc. — In case(s) of . . . erroneous . . . returns, the Collector of Internal Revenue shall, upon discovery thereof, . . . make a return upon information obtained as provided for in this code or by existing law, or require the necessary corrections to be made, and the assessment made by the Collector of Internal Revenue thereon shall be paid by such person or corporation immediately upon notification of the amount of such assessment.

(e) Surcharge and interest in case of delinquency.—To any sum or sums due and unpaid after the dates prescribed in subsections (b), (c) and (d) for the payment of the same, there shall be added the sum of five per centum on the amount of tax unpaid and interest at the rate of one per centum a month upon said tax from the time the same became due, except from the estates of insane, deceased, or insolvent persons.1äwphï1.ñët

Sec. 46. Corporation returns. — . . .

(b) When to file. — The return shall be rendered on or before the first day of March of each year for the preceding calendar year, or if the corporation has designated a fiscal year, then within sixty days after the close of such fiscal year.

while the pertinent provisions of the same Sections 51 and 46, after their amendment by Republic Act No. 2343, read as follows:

Sec. 51. Payment and Assessment of income tax. — (a) Payment of tax. — (1) In general. — The total amount of tax imposed by this Title shall be paid at the time the return is filed but not later than the fifteenth day of April following the close of the calendar year, or, if the return is made on the basis of a fiscal year, then not later than the fifteenth day of the fourth month following the close of the fiscal year. Such tax shall be paid by the person subject thereto, and in the case of a corporation by the President, Vice-President, or other responsible officer thereof: Provided, That if in any preceding year, the payer was entitled to a refund of any amount thereof, if not yet refunded, it may be deducted from the amount of tax to be paid.

x x x           x x x           x x x

(b) Assessment and payment of deficiency tax. — After the return is filed, the Commissioner of Internal Revenue shall examine it and assess the correct amount of the tax. The tax or deficiency in tax so discovered shall be paid upon notice and demand from the Commissioner of Internal Revenue.

x x x           x x x           x x x

(d) Interest on deficiency. — Interest upon the amount determined as a deficiency shall be assessed at the same time as the deficiency and shall be paid upon notice and demand from the Commissioner of Internal Revenue; and shall be collected as a part of the tax, at the rate of six per centum per annum from the date prescribed for the payment of the tax (or, if the tax is paid in installments, from the date prescribed for the payment of the first installment) to the date the deficiency is assessed: Provided, That the maximum amount that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three years, the present

provisions regarding prescription to the contrary notwithstanding.

Sec. 46. Corporation returns. — . . . .

(b) When to file. — The return shall be filed on or before the fifteenth day of April of each year for the preceding calendar year, or if the corporation has designated a fiscal year, on or before the fifteenth day of the fourth month following the close of such fiscal year.

and insofar as the effectivity of said Republic Act No. 2343 is concerned, Section 13 thereof provides —

(c) Sec. 13. This Act shall take effect upon its approval: Provided, That the rate hereinabove stipulated shall apply to income received from January first, nineteen hundred and fifty-nine, and for the fiscal periods ending after June thirty, nineteen hundred and fifty nine.

From a perusal and comparison of the abovequoted sections of the Tax Code, before and after its amendment, it will be observed that, although the Commissioner (formerly Collector) of Internal Revenue, under the old Section 51 (a) was required to assess the tax due, based on the taxpayer's return, and notify the taxpayer of said assessment, still, under subsection (b) of the same old Section 51, the time prescribed for the payment of tax was fixed, whether or not a notice of the assessment was given to the taxpayer. Under the new provision, the time of payment is also fixed and pre-determined (usually coinciding with the filing of the return) without the necessity of giving notification of the assessment to the taxpayer by the Commissioner.

It should further be observed that, under the old Section 51 (e), the interest on deficiency was imposed from the time the tax became due; while under the new Section 51 (d), said interest is imposed on the deficiency from the date prescribed for the payment of the tax.

It is thus evident that petitioner's contention that "interest on such deficiency accrued only when the taxpayer failed to pay the tax within the period prescribed therefor by respondent (Commissioner of Internal Revenue)" is not correct; said interest was imposable in case of non-payment on time, not only on the basic income tax, but also on the deficiency tax, since the deficiency was part and parcel of petitioner's income tax liability.

It appearing that the new Section 51 (d) under Republic Act 2343 expressly provides that the interest on deficiency shall be assessed at the same time as the deficiency income tax; and that respondent Commissioner of Internal Revenue imposed and sought to collect the interest only from June 20, 1959, which was the date of effectivity of said Republic Act No. 2343; that the deficiency income taxes in question were assessed and unpaid when said Act was already in force, the Tax Court correctly held that said Section 51 (d), as amended, is not being applied retroactively as contended by petitioner herein.

Moreover, the application of said Section 51 (d), as amended, in the cases at bar, operated and worked in favor of petitioner-appellant, since instead of imposing the rate of one per centum (1%) monthly interest prescribed in the old section 51 (e) from the time the tax became due, i.e., from January 15, — 1955, 1956, 1957, 1958 and 1959, respectively, respondent Commissioner merely imposed the new ½% monthly interest from January 20, 1959, which interests, as computed, are less than what would be due under the old law.

With respect to the petitioner's contention that the application of the amended provision (now Sec. 51-d of the Tax Code) to the cases at bar would run counter to the constitutional restriction against the enactment of ex post facto laws, it is to be noted that the collection of interest in these cases is not penal in nature, thus —

the imposition of . . . interest is but a just compensation to the state for the delay in paying the tax, and for the concomitant use by the taxpayer of funds that rightfully should be in the government's hands (U.S. vs. Goldstein, 189 F [2d] 752; Ross vs. U.S., 148 Fed. Supp. 330; U.S. vs. Joffray, 97 Fed. [2d] 488). The fact that the interest charged is made proportionate to the period of delay constitutes the best evidence that such interest is not penal but compensatory. (Castro vs. Collector of Internal Revenue, G.R. No. L-12174, Resolution on Motion for Reconsideration, December 28, 1962)

and we had already held that —

The doctrine of unconstitutionality raised by appellant is based on the prohibition against ex post facto laws. But this prohibition applies only to criminal or penal matters, and not to laws which concern civil matters or proceedings generally, or which affect or regulate civil or private rights (Ex parte Garland, 18 Law Ed., 366; 16 C.J.S., 889-891). (Republic vs. Oasan Vda. de Fernandez, 99 Phil. 934, 937).

Finally, section 13 of the amendatory Republic Act No. 2343 refers only to the basic tax rates, which are made applicable to income received in 1959 onward, but does not affect the interest due on deficiencies, which are left to be governed by section 51 (d).

Wherefore, the decisions under review in G.R. No. L-23236 (CTA Case No. 1273) and G.R. No. L-23254 (CTA Case No. 1278) should be, as they are hereby, affirmed. With costs against petitioner-appellant Central Azucarera Don Pedro in both instances. So ordered.

Concepcion, C.J., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Castro, JJ., concur.Sanchez, J., took no part.

G.R. No. 155343 September 2, 2005

BENGUET CORPORATION, Petitioners, vs.CORDILLERA CARABALLO MISSION, INC., herein represented by its Chairman, Greg Bernabe, Jr., TEOFILO "BOY" DICANG and GREG BERNABE, JR., Respondent.

D E C I S I O N

QUISUMBING, J.:

This petition for review on certiorari seeks to set aside the Resolution1 dated August 22, 2002 of the Court of Appeals in CA-G.R. SP No. 72150 and the Decision2 dated June 14, 2002 of the Regional Trial Court of La Trinidad, Benguet, Branch VIII, in Civil Case No. 2K-CV-1698, and thus reinstate the Decision3 dated December 21, 2001 of the Municipal Trial Court of Itogon, Benguet in Civil Case No. 314.

Petitioner Benguet Corporation owns Pilo mineral claim covering several hectares of land in Virac, Itogon, Benguet. It planted pine trees in compliance with the directive of the Department of Environment and Natural Resources (DENR) and built roads, buildings and security gates in the covered area. Sometime in September 1997, petitioner discovered that representatives of respondent Cordillera Caraballo Mission, Inc. (CCMI) bulldozed and leveled the grounds within its Pilo mineral claim in preparation for the construction of a school. Despite petitioner’s demands to cease, respondents continued with the construction activities.

Petitioner filed a complaint4 for forcible entry against respondents in the Municipal Trial Court (MTC) of Itogon, Benguet. The MTC ruled in favor of petitioner’s prior possession of the land since August 10, 1964, vis-à-vis CCMI’s possession which began only in 1994. The court ordered respondents to vacate the premises, restore complete possession to the petitioner, and pay the cost. 5

On appeal, the RTC reversed the judgment of the MTC and dismissed the complaint for failure to state a cause of action. It found that the complaint did not state the means of dispossession and did not constitute an action for forcible entry.6

Petitioner elevated the case to the Court of Appeals. The appellate court dismissed the petition for failure to attach (a) the board resolution authorizing the affiant to file the complaint, and (b) the certified copies of other pleadings and documents pertinent and relevant thereto.7

Petitioner now comes before us alleging that

The Honorable Court of Appeals committed reversible error –

a) in denying due course the petition (sic);

b) in not considering the issues raised in the petition which are actually based on facts not controverted but even stipulated by the parties;

c) in not disposing the issues which are not even factual but legal issues based on duly established facts at the trial court.8

Simply stated, we are asked to resolve the following issues: (1) Is petitioner’s failure to attach the board resolution and the copies of other pleadings an excusable mistake? (2) Does the complaint state a cause of action? and (3) If it does, who should have possession?

On the first issue, petitioner claims to have substantially complied with the rules, and pleads for the liberal construction, as a matter of substantive justice. It averred that affiant Marcelo A. Bolaño was authorized by the board but copies of the board resolution were in its Makati Office while its counsel was based in Baguio City. It maintains that the attached complaint and decisions of the MTC and RTC were sufficient since the petition before the Court of Appeals was limited to pure questions of law. It posits that the complaint itself is the best evidence to determine whether the allegations therein sufficiently state a cause of action.

This Court has consistently held that the requirement regarding verification of a pleading is formal, not jurisdictional.9 Such requirement is a condition affecting the form of the pleading; non-compliance with this requirement does not necessarily render the pleading fatally defective. Verification is simply intended to secure an assurance that the allegations in the pleading are true and correct and not the product of the imagination or a matter of speculation, and that the pleading is filed in good faith.10 Further, the purpose of the aforesaid certification is to prohibit and penalize the evils of forum-shopping.11 Considering that later on Mr. Bolaño’s authority to sign the verification and certificate of non-forum shopping was ratified 12 by the board, there is no

circumvention of these objectives.

On the necessity of other pleadings and documents, Section 2 of Rule 42 of the Rules of Court requires attachments if these would support the allegations of the petition. We note that the facts alleged in the petition filed before the Court of Appeals were the same facts found in the decisions of the MTC and RTC. Accordingly, we find no compelling need to attach other portions of the records. Besides, the appellate court can always refer to the records transmitted13 by the clerk of the trial court if it wanted to verify the allegations.

The Rules of Civil Procedure should be applied with reason and liberality14 to promote its objective of securing a just, speedy and inexpensive disposition of every action and proceeding. Rules of procedure are used to help secure and not override substantial justice. Thus, the dismissal of an appeal on a purely technical ground is frowned upon especially if it will result in unfairness.15 No such result happened here.

Anent the second issue, which goes to the merits of the instant controversy, petitioner asserts that it specifically alleged the acts constituting forcible entry and it points to paragraphs 4, 5, and 6 of the complaint as well as to the annexed photographs. For its part, the respondent defends the ruling of the RTC that petitioner failed to state sufficiently a cause of action in the complaint before the MTC.

The pertinent portion of the complaint reads:

. . .

3. The plaintiff is the owner as well as lawful and peaceful possessor of a parcel of land covered by PILO Mineral Claim shown in the approved plan hereto attached as Annex "A" hereof.

4. Sometime in the later part of September 1997, plaintiff’s caretaker noticed an ongoing bulldozing and ground leveling activities within Pilo Mineral Claim. His investigation revealed that the illegal activity was being undertaken by individual defendants who were supervising the heavy equipment owned by one Pio Wasit. When confronted, said defendant represented themselves to be representatives of defendant Cordillera Caraballo Mission, Inc. To this effect, hereto attached….

5. The defendants were warned of their unlawful entry in the above-described property of the plaintiff but defendants refused to stop to the damage and prejudice of the plaintiff herein. In fact, in the process of forcible entry in the property, the defendants destroyed young and full grown pine trees alike which your plaintiff had been protecting and spending considerable amount therefor.

6. The unlawful activities by the defendants and their refusal to stop despite demand prompted plaintiff to send them demand letter dated October 1, 1997, copy of which is hereto attached as Annex "G", but in spite of the receipt of said letter, the defendants ignored it and continued in their activities dispossessing plaintiff of its peaceful possession over the property. In fact, the defendants even proceeded in laying the foundation of the construction of a building as shown in the photographs hereto attached as Annex "H".16

In actions for forcible entry, it may be stressed, two allegations are mandatory for the municipal court to acquire jurisdiction. First, the plaintiff must allege his prior physical possession of the property. Second, he must also allege that he was deprived of his possession by any of the means provided for in Section 1, Rule 70 of the Rules of Court, namely, force, intimidation, threat, strategy, and stealth.17 If the alleged dispossession did not occur by any of these means, the proper recourse is to file not an action for forcible entry but a plenary action to recover possession with the Regional Trial Court.18

Nothing in the complaint before the MTC would show how the entry was effected nor how dispossession took place. The complaint merely stated that petitioner’s caretaker noticed an ongoing bulldozing and leveling activities. The allegations that these activities were illegal and that respondents’ entry was unlawful are not statements of bare facts but conclusions of law. The complaint should have specified what made the activities illegal and the entry unlawful.19 Without these ultimate facts, the MTC did not acquire jurisdiction over the case. In view of the foregoing, the RTC properly reversed the MTC’s decision and then dismissed the complaint of petitioner for failure to state a cause of action. The appellate court would not and did not commit a reversible error in sustaining in effect the RTC’s decision of dismissal.

WHEREFORE, the petition is DENIED for lack of merit. The Resolution dated August 22, 2002 of the Court of Appeals in CA-G.R. SP No. 72150 and the Decision dated June 14, 2002 of the Regional Trial Court of La Trinidad, Benguet, Branch VIII, in Civil Case No. 2K-CV-1698 are AFFIRMED.

SO ORDERED.

G.R. No. 153205             January 22, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC., Respondent.

D E C I S I O N

CARPIO, J.:

The Case

This petition for review1 seeks to set aside the 16 April 2002 Decision2 of the Court of Appeals in CA-G.R. SP No. 66341 affirming the 8 August 2001 Decision3 of the Court of Tax Appeals (CTA). The CTA ordered the Commissioner of Internal Revenue (petitioner) to issue a tax credit certificate for P6,994,659.67 in favor of Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (respondent).

The Antecedents

The CTA summarized the facts, which the Court of Appeals adopted, as follows:

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

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

BWSC-Denmark established [respondent] which subcontracted the actual operation and maintenance of NAPOCOR’s two power barges as well as the performance of other duties and acts which necessarily have to be done in the Philippines.

NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies (Mark, Yen, and Peso). The freely convertible non-Peso component is deposited directly to the Consortium’s bank accounts in Denmark and Japan, while the Peso-denominated component is deposited in a separate and special designated bank account in the Philippines. On the other hand, the Consortium pays [respondent] in foreign currency inwardly remitted to the Philippines through the banking system.

In order to ascertain the tax implications of the above transactions, [respondent] sought a ruling from the BIR which responded with BIR Ruling No. 023-95 dated February 14, 1995, declaring therein that if [respondent] chooses to register as a VAT person and the consideration for its services is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to VAT at zero-rate.

[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the Certificate of Registration bearing RDO Control No. 95-113-007556 was issued in favor of [respondent] by the Revenue District Office No. 113 of Davao City.

For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax Returns reflecting, among others, a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14, detailed as follows:

Qtr.

Exh.

Date Filed Zero-Rated Sales VAT Input Tax

1st E 04-18-96 P 33,019,651.07 P608,953.48

2nd

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

3rd G 10-14-96 34,196,372.35 930,279.14

4th H 01-20-97 42,992,302.87 1,065,138.86

Totals P147,317,189.62 P3,361,174.14

On December 29, 1997, [respondent] availed of the Voluntary Assessment Program (VAP) of the BIR. It allegedly misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable to its case. Revenue Regulations No. 5-96 provides in part thus:

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby amended to read as follows:

Section 4.102-2(b)(2) – "Services other than processing, manufacturing or repacking for other persons doing business outside the Philippines for goods which are subsequently exported, as well as services by a resident to a non-resident foreign client such as project studies, information services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP."

x x x x x x x x x x.

In [conformity] with the aforecited Revenue Regulations, [respondent] subjected its sale of services to the Consortium to the 10% VAT in the total amount of P103,558,338.11 representing April to December 1996 sales since said Revenue Regulations No. 5-96 became effective only on April 1996. The sum of P43,893,951.07, representing January to March 1996 sales was subjected to zero rate. Consequently, [respondent] filed its 1996 amended VAT return consolidating therein the VAT output and input taxes for the four calendar quarters of 1996. It paid the amount of P6,994,659.67 through BIR’s collecting agent, PCIBank, as its output tax liability for the year 1996, computed as follows:

Amount subject to 10% VAT P103,558,338.11

Multiply by 10%

VAT Output Tax P 10,355,833.81

Less: 1996 Input VAT P 3,361,174.14

VAT Output Tax Payable P 6,994,659.67

On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99 from the VAT Review Committee which reconfirmed BIR Ruling No. 023-95 "insofar as it held that the services being rendered by BWSCMI is subject to VAT at zero percent (0%)."

On the strength of the aforementioned rulings, [respondent] on April 22,1999, filed a claim for the issuance of a tax credit certificate with Revenue District No. 113 of the BIR. [Respondent] believed that it erroneously paid the output VAT for 1996 due to its availment of the Voluntary Assessment Program (VAP) of the BIR.4

On 27 December 1999, respondent filed a petition for review with the CTA in order to toll the running of the two-year prescriptive period under the Tax Code.

The Ruling of the Court of Tax Appeals

In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit certificate for P6,994,659.67 in favor of respondent. The CTA’s ruling stated:

[Respondent’s] sale of services to the Consortium [was] paid for in acceptable foreign currency inwardly remitted to the Philippines and accounted for in accordance with the rules and regulations of Bangko Sentral ng Pilipinas. These were established by various BPI Credit Memos showing remittances in Danish Kroner (DKK)

and US dollars (US$) as payments for the specific invoices billed by [respondent] to the consortium. These remittances were further certified by the Branch Manager x x x of BPI-Davao Lanang Branch to represent payments for sub-contract fees that came from Den Danske Aktieselskab Bank-Denmark for the account of [respondent]. Clearly, [respondent’s] sale of services to the Consortium is subject to VAT at 0% pursuant to Section 108(B)(2) of the Tax Code.

x x x x

The zero-rating of [respondent’s] sale of services to the Consortium was even confirmed by the [petitioner] in BIR Ruling No. 023-95 dated February 15, 1995, and later by VAT Ruling No. 003-99 dated January 7,1999, x x x.

Since it is apparent that the payments for the services rendered by [respondent] were indeed subject to VAT at zero percent, it follows that it mistakenly availed of the Voluntary Assessment Program by paying output tax for its sale of services. x x x

x x x Considering the principle of solutio indebiti which requires the return of what has been delivered by mistake, the [petitioner] is obligated to issue the tax credit certificate prayed for by [respondent]. x x x5

Petitioner filed a petition for review with the Court of Appeals, which dismissed the petition for lack of merit and affirmed the CTA decision.6

Hence, this petition.

The Court of Appeals’ Ruling

In affirming the CTA, the Court of Appeals rejected petitioner’s view that since respondent’s services are not destined for consumption abroad, they are not of the same nature as project studies, information services, engineering and architectural designs, and other similar services mentioned in Section 4.102-2(b)(2) of Revenue Regulations No. 5-967 as subject to 0% VAT. Thus, according to petitioner, respondent’s services cannot legally qualify for 0% VAT but are subject to the regular 10% VAT.8

The Court of Appeals found untenable petitioner’s contention that under VAT Ruling No. 040-98, respondent’s services should be destined for consumption abroad to enjoy zero-rating. Contrary to petitioner’s interpretation, there are two kinds of transactions or services subject to zero percent VAT under VAT Ruling No. 040-98. These are (a) services other than repacking goods for other persons doing business outside the Philippines which goods are subsequently exported; and (b) services by a resident to a non-resident foreign client, such as project studies, information services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).9

The Court of Appeals stated that "only the first classification is required by the provision to be consumed abroad in order to be taxed at zero rate. In x x x the absence of such express or implied stipulation in the statute, the second classification need not be consumed abroad."10

The Court of Appeals further held that assuming petitioner’s interpretation of Section 4.102-2(b)(2) of Revenue Regulations No. 5-96 is correct, such administrative provision is void being an amendment to the Tax Code. Petitioner went beyond merely providing the implementing details by adding another requirement to zero-rating. "This is indicated by the additional phrase ‘as well as services by a resident to a non-resident foreign client, such as project studies, information services and engineering and architectural designs and other similar services.’ In effect, this phrase adds not just one but two requisites: (a) services must be rendered by a resident to a non-resident; and (b) these must be in the nature of project studies, information services, etc."11

The Court of Appeals explained that under Section 108(b)(2) of the Tax Code,12 for services which were performed in the Philippines to enjoy zero-rating, these must comply only with two requisites, to wit: (1) payment in acceptable foreign currency and (2) accounted for in accordance with the rules of the BSP. Section 108(b)(2) of the Tax Code does not provide that services must be "destined for consumption abroad" in order to

be VAT zero-rated.13

The Court of Appeals disagreed with petitioner’s argument that our VAT law generally follows the destination principle (i.e., exports exempt, imports taxable).14 The Court of Appeals stated that "if indeed the ‘destination principle’ underlies and is the basis of the VAT laws, then petitioner’s proper remedy would be to recommend an amendment of Section 108(b)(2) to Congress. Without such amendment, however, petitioner should apply the terms of the basic law. Petitioner could not resort to administrative legislation, as what [he] had done in this case."15

The Issue

The lone issue for resolution is whether respondent is entitled to the refund of P6,994,659.67 as erroneously paid output VAT for the year 1996.16

The Ruling of the Court

We deny the petition.

At the outset, the Court declares that the denial of the instant petition is not on the ground that respondent’s services are subject to 0% VAT. Rather, it is based on the non-retroactivity of the prejudicial revocation of BIR Ruling No. 023-9517 and VAT Ruling No. 003-99,18 which held that respondent’s services are subject to 0% VAT and which respondent invoked in applying for refund of the output VAT.

Section 102(b) of the Tax Code,19 the applicable provision in 1996 when respondent rendered the services and paid the VAT in question, enumerates which services are zero-rated, thus:

(b) Transactions subject to zero-rate. ― The following services performed in the Philippines by VAT-registered persons shall be subject to 0%:

(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

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

(4) Services rendered to vessels engaged exclusively in international shipping; and

(5) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production. (Emphasis supplied)

In insisting that its services should be zero-rated, respondent claims that it complied with the requirements of the Tax Code for zero rating under the second paragraph of Section 102(b). Respondent asserts that (1) the payment of its service fees was in acceptable foreign currency, (2) there was inward remittance of the foreign currency into the Philippines, and (3) accounting of such remittance was in accordance with BSP rules. Moreover, respondent contends that its services which "constitute the actual operation and management of two (2) power barges in Mindanao" are not "even remotely similar to project studies, information services and engineering and architectural designs under Section 4.102-2(b)(2) of Revenue Regulations No. 5-96." As such, respondent’s services need not be "destined to be consumed abroad in order to be VAT zero-rated."

Respondent is mistaken.

The Tax Code not only requires that the services be other than "processing, manufacturing or repacking of goods" and that payment for such services be in acceptable foreign currency accounted for in accordance with BSP rules. Another essential condition for qualification to zero-rating under Section 102(b)(2) is that the recipient of such services is doing business outside the Philippines. While this requirement is not expressly stated in the second paragraph of Section 102(b), this is clearly provided in the first paragraph of Section 102(b) where the listed services must be "for other persons doing business outside the Philippines." The phrase "for other persons doing business outside the Philippines" not only refers to the services enumerated in the first paragraph of Section 102(b), but also pertains to the general term "services" appearing in the second paragraph of Section 102(b). In short, services other than processing, manufacturing, or repacking of goods must likewise be performed for persons doing business outside the Philippines.

This can only be the logical interpretation of Section 102(b)(2). If the provider and recipient of the "other services" are both doing business in the Philippines, the payment of foreign currency is irrelevant. Otherwise, those subject to the regular VAT under Section 102(a) can avoid paying the VAT by simply stipulating payment in foreign currency inwardly remitted by the recipient of services. To interpret Section 102(b)(2) to apply to a payer-recipient of services doing business in the Philippines is to make the payment of the regular VAT under Section 102(a) dependent on the generosity of the taxpayer. The provider of services can choose to pay the regular VAT or avoid it by stipulating payment in foreign currency inwardly remitted by the payer-recipient. Such interpretation removes Section 102(a) as a tax measure in the Tax Code, an interpretation this Court cannot sanction. A tax is a mandatory exaction, not a voluntary contribution.

When Section 102(b)(2) stipulates payment in "acceptable foreign currency" under BSP rules, the law clearly envisions the payer-recipient of services to be doing business outside the Philippines. Only those not doing business in the Philippines can be required under BSP rules20 to pay in acceptable foreign currency for their purchase of goods or services from the Philippines. In a domestic transaction, where the provider and recipient of services are both doing business in the Philippines, the BSP cannot require any party to make payment in foreign currency.

Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the payer-recipient of services is doing business outside the Philippines. Under BSP rules,21 the proceeds of export sales must be reported to the Bangko Sentral ng Pilipinas. Thus, there is reason to require the provider of services under Section 102(b) (1) and (2) to account for the foreign currency proceeds to the BSP. The same rationale does not apply if the provider and recipient of the services are both doing business in the Philippines since their transaction is not in the nature of an export sale even if payment is denominated in foreign currency.

Further, when the provider and recipient of services are both doing business in the Philippines, their transaction falls squarely under Section 102(a) governing domestic sale or exchange of services. Indeed, this is a purely local sale or exchange of services subject to the regular VAT, unless of course the transaction falls under the other provisions of Section 102(b).

Thus, when Section 102(b)(2) speaks of "[s]ervices other than those mentioned in the preceding subparagraph," the legislative intent is that only the services are different between subparagraphs 1 and 2. The requirements for zero-rating, including the essential condition that the recipient of services is doing business outside the Philippines, remain the same under both subparagraphs.

Significantly, the amended Section 108(b)22 [previously Section 102(b)] of the present Tax Code clarifies this legislative intent. Expressly included among the transactions subject to 0% VAT are "[s]ervices other than those mentioned in the [first] paragraph [of Section 108(b)] rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP."

In this case, the payer-recipient of respondent’s services is the Consortium which is a joint-venture doing business in the Philippines. While the Consortium’s principal members are non-resident foreign corporations, the Consortium itself is doing business in the Philippines. This is shown clearly in BIR Ruling No. 023-95 which states that the contract between the Consortium and NAPOCOR is for a 15-year term, thus:

This refers to your letter dated January 14, 1994 requesting for a clarification of the tax implications of a

contract between a consortium composed of Burmeister & Wain Scandinavian Contractor A/S ("BWSC"), Mitsui Engineering & Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. ("MITSUI"), all referred to hereinafter as the "Consortium", and the National Power Corporation ("NAPOCOR") for the operation and maintenance of two 100-Megawatt power barges ("Power Barges") acquired by NAPOCOR for a 15-year term.23

(Emphasis supplied)

Considering this length of time, the Consortium’s operation and maintenance of NAPOCOR’s power barges cannot be classified as a single or isolated transaction. The Consortium does not fall under Section 102(b)(2) which requires that the recipient of the services must be a person doing business outside the Philippines. Therefore, respondent’s services to the Consortium, not being supplied to a person doing business outside the Philippines, cannot legally qualify for 0% VAT.

Respondent, as subcontractor of the Consortium, operates and maintains NAPOCOR’s power barges in the Philippines. NAPOCOR pays the Consortium, through its non-resident partners, partly in foreign currency outwardly remitted. In turn, the Consortium pays respondent also in foreign currency inwardly remitted and accounted for in accordance with BSP rules. This payment scheme does not entitle respondent to 0% VAT. As the Court held in Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch),24 the place of payment is immaterial, much less is the place where the output of the service is ultimately used. An essential condition for entitlement to 0% VAT under Section 102(b)(1) and (2) is that the recipient of the services is a person doing business outside the Philippines. In this case, the recipient of the services is the Consortium, which is doing business not outside, but within the Philippines because it has a 15-year contract to operate and maintain NAPOCOR’s two 100-megawatt power barges in Mindanao.

The Court recognizes the rule that the VAT system generally follows the "destination principle" (exports are zero-rated whereas imports are taxed). However, as the Court stated in American Express, there is an exception to this rule.25 This exception refers to the 0% VAT on services enumerated in Section 102 and performed in the Philippines. For services covered by Section 102(b)(1) and (2), the recipient of the services must be a person doing business outside the Philippines. Thus, to be exempt from the destination principle under Section 102(b)(1) and (2), the services must be (a) performed in the Philippines; (b) for a person doing business outside the Philippines; and (c) paid in acceptable foreign currency accounted for in accordance with BSP rules.

Respondent’s reliance on the ruling in American Express26 is misplaced. That case involved a recipient of services, specifically American Express International, Inc. (Hongkong Branch), doing business outside the Philippines. There, the Court stated:

Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-registered person that facilitates the collection and payment of receivables belonging to its non-resident foreign client [American Express International, Inc. (Hongkong Branch)], for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in accordance with BSP rules and regulations. x x x x27 (Emphasis supplied)

In contrast, this case involves a recipient of services – the Consortium – which is doing business in the Philippines. Hence, American Express’ services were subject to 0% VAT, while respondent’s services should be subject to 10% VAT.

Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT Ruling No. 003-99, 28 which reconfirmed BIR Ruling No. 023-9529 "insofar as it held that the services being rendered by BWSCMI is subject to VAT at zero percent (0%)." Respondent’s reliance on these BIR rulings binds petitioner.

Petitioner’s filing of his Answer before the CTA challenging respondent’s claim for refund effectively serves as a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95. However, such revocation cannot be given retroactive effect since it will prejudice respondent. Changing respondent’s status will deprive respondent of a refund of a substantial amount representing excess output tax.30 Section 246 of the Tax Code provides that any revocation of a ruling by the Commissioner of Internal Revenue shall not be given retroactive application if the revocation will prejudice the taxpayer. Further, there is no showing of the existence of any of the exceptions enumerated in Section 246 of the Tax Code for the retroactive application of such revocation.

However, upon the filing of petitioner’s Answer dated 2 March 2000 before the CTA contesting respondent’s claim for refund, respondent’s services shall be subject to the regular 10% VAT. 31 Such filing is deemed a

revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95.

WHEREFORE, the Court DENIES the petition.

SO ORDERED.

G.R. No. L-31156 February 27, 1976

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant, vs.MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant appellees.

Sabido, Sabido & Associates for appellant.

Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and Assistant Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes for appellees.

 

MARTIN, J.:

This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No. 3294, which was certified to Us by the Court of Appeals on October 6, 1969, as involving only pure questions of law, challenging the power of taxation delegated to municipalities under the Local Autonomy Act (Republic Act No. 2264, as amended, June 19, 1959).

On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc., commenced a complaint with preliminary injunction before the Court of First Instance of Leyte for that court to declare Section 2 of Republic Act No. 2264. 1 otherwise known as the Local Autonomy Act, unconstitutional as an undue delegation of taxing authority as well as to declare Ordinances Nos. 23 and 27, series of 1962, of the municipality of Tanauan, Leyte, null and void.

On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which state that, first, both Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the production tax rates imposed therein are practically the same, and second, that on January 17, 1963, the acting Municipal Treasurer of Tanauan, Leyte, as per his letter addressed to the Manager of the Pepsi-Cola Bottling Plant in said municipality, sought to enforce compliance by the latter of the provisions of said Ordinance No. 27, series of 1962.

Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, levies and collects "from soft drinks producers and manufacturers a tai of one-sixteenth (1/16) of a centavo for every bottle of soft drink corked." 2 For the purpose of computing the taxes due, the person, firm, company or corporation producing soft drinks shall submit to the Municipal Treasurer a monthly report, of the total number of bottles produced and corked during the month. 3

On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, levies and collects "on soft drinks produced or manufactured within the territorial jurisdiction of this municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity." 4 For the purpose of computing the taxes due, the person, fun company, partnership, corporation or plant producing soft drinks shall submit to the Municipal Treasurer a monthly report of the total number of gallons produced or manufactured during the month. 5

The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.'

On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay the taxes due under the oft the said Ordinances; and to pay the costs."

From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals, which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as amended.

There are three capital questions raised in this appeal:

1. — Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory and oppressive?

2. — Do Ordinances Nos. 23 and 27 constitute double taxation and impose percentage or specific taxes?

3. — Are Ordinances Nos. 23 and 27 unjust and unfair?

1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent government, without being expressly conferred by the people. 6 It is a power that is purely legislative and which the central legislative body cannot delegate either to the executive or judicial department of the government without infringing upon the theory of separation of powers. The exception, however, lies in the case of municipal corporations, to which, said theory does not apply. Legislative powers may be delegated to local governments in respect of matters of local concern. 7 This is sanctioned by immemorial practice. 8 By necessary implication, the legislative power to create political corporations for purposes of local self-government carries with it the power to confer on such local governmental agencies the power to tax. 9 Under the New Constitution, local governments are granted the autonomous authority to create their own sources of revenue and to levy taxes. Section 5, Article XI provides: "Each local government unit shall have the power to create its sources of revenue and to levy taxes, subject to such limitations as may be provided by law." Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the sphere of the legislative power to enact and vest in local governments the power of local taxation.

The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense, would not suffice to invalidate the said law as confiscatory and oppressive. In delegating the authority, the State is not limited 6 the exact measure of that which is exercised by itself. When it is said that the taxing power may be delegated to municipalities and the like, it is meant that there may be delegated such measure of power to impose and collect taxes as the legislature may deem expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public policy the State has not deemed wise to tax for more general purposes. 10

This is not to say though that the constitutional injunction against deprivation of property without due process of law may be passed over under the guise of the taxing power, except when the taking of the property is in the lawful exercise of the taxing power, as when (1) the tax is for a public purpose; (2) the rule on uniformity of taxation is observed; (3) either the person or property taxed is within the jurisdiction of the government levying the tax; and (4) in the assessment and collection of certain kinds of taxes notice and opportunity for hearing are provided. 11 Due process is usually violated where the tax imposed is for a private as distinguished from a public purpose; a tax is imposed on property outside the State, i.e., extraterritorial taxation; and arbitrary or oppressive methods are used in assessing and collecting taxes. But, a tax does not violate the due process clause, as applied to a particular taxpayer, although the purpose of the tax will result in an injury rather than a benefit to such taxpayer. Due process does not require that the property subject to the tax or the amount of tax to be raised should be determined by judicial inquiry, and a notice and hearing as to the amount of the tax and the manner in which it shall be apportioned are generally not necessary to due process of law. 12

There is no validity to the assertion that the delegated authority can be declared unconstitutional on the theory of double taxation. It must be observed that the delegating authority specifies the limitations and enumerates the taxes over which local taxation may not be exercised. 13 The reason is that the State has exclusively reserved the same for its own prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental law, since We have not adopted as part thereof the injunction against double taxation found in the Constitution of the United States and some states of the Union. 14 Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity 15 or by the same jurisdiction for the same purpose, 16

but not in a case where one tax is imposed by the State and the other by the city or municipality. 17

2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation, because these two ordinances cover the same subject matter and impose practically the same tax rate. The thesis proceeds from its assumption that both ordinances are valid and legally enforceable. This is not so. As earlier quoted, Ordinance No. 23, which was approved on September 25, 1962, levies or collects from soft drinks producers or manufacturers a tax of one-sixteen (1/16) of a centavo for .every bottle corked, irrespective of the volume contents of the bottle used. When it was discovered that the producer or manufacturer could increase the volume contents of the bottle and still pay the same tax rate, the Municipality of Tanauan enacted Ordinance No. 27, approved on October 28, 1962, imposing a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The difference between the two ordinances clearly lies in the tax rate of the soft drinks produced: in Ordinance No. 23, it was 1/16 of a centavo for every bottle corked; in Ordinance No. 27, it is one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The intention of the Municipal Council of Tanauan in enacting Ordinance No. 27 is thus clear: it was intended as a plain substitute for the prior Ordinance No. 23, and operates as a repeal of the latter, even without words to that effect. 18 Plaintiff-appellant

in its brief admitted that defendants-appellees are only seeking to enforce Ordinance No. 27, series of 1962. Even the stipulation of facts confirms the fact that the Acting Municipal Treasurer of Tanauan, Leyte sought t6 compel compliance by the plaintiff-appellant of the provisions of said Ordinance No. 27, series of 1962. The aforementioned admission shows that only Ordinance No. 27, series of 1962 is being enforced by defendants-appellees. Even the Provincial Fiscal, counsel for defendants-appellees admits in his brief "that Section 7 of Ordinance No. 27, series of 1962 clearly repeals Ordinance No. 23 as the provisions of the latter are inconsistent with the provisions of the former."

That brings Us to the question of whether the remaining Ordinance No. 27 imposes a percentage or a specific tax. Undoubtedly, the taxing authority conferred on local governments under Section 2, Republic Act No. 2264, is broad enough as to extend to almost "everything, accepting those which are mentioned therein." As long as the text levied under the authority of a city or municipal ordinance is not within the exceptions and limitations in the law, the same comes within the ambit of the general rule, pursuant to the rules of exclucion attehus and exceptio firmat regulum in cabisus non excepti 19 The limitation applies, particularly, to the prohibition against municipalities and municipal districts to impose "any percentage tax or other taxes in any form based thereon nor impose taxes on articles subject to specific tax except gasoline, under the provisions of the National Internal Revenue Code." For purposes of this particular limitation, a municipal ordinance which prescribes a set ratio between the amount of the tax and the volume of sale of the taxpayer imposes a sales tax and is null and void for being outside the power of the municipality to enact. 20 But, the imposition of "a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity" on all soft drinks produced or manufactured under Ordinance No. 27 does not partake of the nature of a percentage tax on sales, or other taxes in any form based thereon. The tax is levied on the produce (whether sold or not) and not on the sales. The volume capacity of the taxpayer's production of soft drinks is considered solely for purposes of determining the tax rate on the products, but there is not set ratio between the volume of sales and the amount of the tax. 21

Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified articles, such as distilled spirits, wines, fermented liquors, products of tobacco other than cigars and cigarettes, matches firecrackers, manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing cards, saccharine, opium and other habit-forming drugs. 22 Soft drink is not one of those specified.

3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all softdrinks, produced or manufactured, or an equivalent of 1-½ centavos per case, 23 cannot be considered unjust and unfair. 24 an increase in the tax alone would not support the claim that the tax is oppressive, unjust and confiscatory. Municipal corporations are allowed much discretion in determining the reates of imposable taxes. 25 This is in line with the constutional policy of according the widest possible autonomy to local governments in matters of local taxation, an aspect that is given expression in the Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the amount is so excessive as to be prohibitive, courts will go slow in writing off an ordinance as unreasonable. 27 Reluctance should not deter compliance with an ordinance such as Ordinance No. 27 if the purpose of the law to further strengthen local autonomy were to be realized. 28

Finally, the municipal license tax of P1,000.00 per corking machine with five but not more than ten crowners or P2,000.00 with ten but not more than twenty crowners imposed on manufacturers, producers, importers and dealers of soft drinks and/or mineral waters under Ordinance No. 54, series of 1964, as amended by Ordinance No. 41, series of 1968, of defendant Municipality, 29 appears not to affect the resolution of the validity of Ordinance No. 27. Municipalities are empowered to impose, not only municipal license taxes upon persons engaged in any business or occupation but also to levy for public purposes, just and uniform taxes. The ordinance in question (Ordinance No. 27) comes within the second power of a municipality.

ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known as the Local Autonomy Act, as amended, is hereby upheld and Municipal Ordinance No. 27 of the Municipality of Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance No. 23, same series, is hereby declared of valid and legal effect. Costs against petitioner-appellant.

SO ORDERED.

Castro, C.J., Teehankee, Barredo, Makasiar, Antonio, Esguerra, Muñoz Palma, Aquino and Concepcion, Jr., JJ., concur.

G.R. No. 127105 June 25, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.

 

GONZAGA-REYES, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set aside the decision of the Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802 affirming the decision of the Court of Tax Appeals in CTA Case No. 5136.

The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:

[Respondent], a domestic corporation organized and operating under the Philippine laws, entered into a license agreement with SC Johnson and Son, United States of America (USA), a non-resident foreign corporation based in the U.S.A. pursuant to which the [respondent] was granted the right to use the trademark, patents and technology owned by the latter including the right to manufacture, package and distribute the products covered by the Agreement and secure assistance in management, marketing and production from SC Johnson and Son, U. S. A.

The said License Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents, Trade Marks and Technology Transfer under Certificate of Registration No. 8064 (Exh. "A").

For the use of the trademark or technology, [respondent] was obliged to pay SC Johnson and Son, USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which [respondent] paid for the period covering July 1992 to May 1993 in the total amount of P1,603,443.00 (Exhs. "B" to "L" and submarkings).

On October 29, 1993, [respondent] filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that, "the antecedent facts attending [respondent's] case fall squarely within the same circumstances under which said MacGeorge and Gillete rulings were issued. Since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the [respondent]. We therefore submit that royalties paid by the [respondent] to SC Johnson and Son, USA is only subject to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax Treaty [Article 12 (2) (b)]" (Petition for Review [filed with the Court of Appeals], par. 12). [Respondent's] claim for there fund of P963,266.00 was computed as follows:

Gross 25% 10%

Month/ Royalty Withholding Withholding

Year Fee Tax Paid Tax Balance

——— ——— ——— ——— ———

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

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

September 595,956 148,989 59,596 89,393

October 634,405 158,601 63,441 95,161

November 620,885 155,221 62,089 93,133

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

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

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

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

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

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

———— ———— ———— ———

P6,421,770 P1,605,443 P642,177 P963,266 1

======== ======== ======== ========

The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son, Inc. (S.C. Johnson) then filed a petition for review before the Court of Tax Appeals (CTA) where the case was docketed as CTA Case No. 5136, to claim a refund of the overpaid withholding tax on royalty payments from July 1992 to May 1993.

On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and ordered the Commissioner of Internal Revenue to issue a tax credit certificate in the amount of P963,266.00 representing overpaid withholding tax on royalty payments, beginning July, 1992 to May, 1993. 2

The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals which rendered the decision subject of this appeal on November 7, 1996 finding no merit in the petition and affirming in toto the CTA ruling. 3

This petition for review was filed by the Commissioner of Internal Revenue raising the following issue:

THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA IS ENTITLED TO THE "MOST FAVORED NATION" TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX TREATY.

Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the "most favored nation" clause, the lowest rate of the Philippine tax at 10% may be imposed on royalties derived by a resident of the United States from sources within the Philippines only if the circumstances of the resident of the United States are similar to those of the resident of West Germany. Since the RP-US Tax Treaty contains no "matching credit" provision as that provided under Article 24 of the RP-West Germany Tax Treaty, the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Even assuming that the phrase "paid under similar circumstances" refers to the payment of royalties, and not taxes, as held by the Court of Appeals, still, the "most favored nation" clause cannot be invoked for the reason that when a tax treaty contemplates circumstances attendant to the payment of a tax, or royalty remittances for that matter, these must necessarily refer to circumstances that are tax-related. Finally, petitioner argues that since S.C. Johnson's invocation of the "most favored nation" clause is in the nature of a claim for exemption from the application of the regular tax rate of 25% for royalties, the provisions of the treaty must be construed strictly against it.

In its Comment, private respondent S.C. Johnson avers that the instant petition should be denied (1) because it

contains a defective certification against forum shopping as required under SC Circular No. 28-91, that is, the certification was not executed by the petitioner herself but by her counsel; and (2) that the "most favored nation" clause under the RP-US Tax Treaty refers to royalties paid under similar circumstances as those royalties subject to tax in other treaties; that the phrase "paid under similar circumstances" does not refer to payment of the tax but to the subject matter of the tax, that is, royalties, because the "most favored nation" clause is intended to allow the taxpayer in one state to avail of more liberal provisions contained in another tax treaty wherein the country of residence of such taxpayer is also a party thereto, subject to the basic condition that the subject matter of taxation in that other tax treaty is the same as that in the original tax treaty under which the taxpayer is liable; thus, the RP-US Tax Treaty speaks of "royalties of the same kind paid under similar circumstances". S.C. Johnson also contends that the Commissioner is estopped from insisting on her interpretation that the phrase "paid under similar circumstances" refers to the manner in which the tax is paid, for the reason that said interpretation is embodied in Revenue Memorandum Circular ("RMC") 39-92 which was already abandoned by the Commissioner's predecessor in 1993; and was expressly revoked in BIR Ruling No. 052-95 which stated that royalties paid to an American licensor are subject only to 10% withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. Said ruling should be given retroactive effect except if such is prejudicial to the taxpayer pursuant to Section 246 of the National Internal Revenue Code.

Petitioner filed Reply alleging that the fact that the certification against forum shopping was signed by petitioner's counsel is not a fatal defect as to warrant the dismissal of this petition since Circular No. 28-91 applies only to original actions and not to appeals, as in the instant case. Moreover, the requirement that the certification should be signed by petitioner and not by counsel does not apply to petitioner who has only the Office of the Solicitor General as statutory counsel. Petitioner reiterates that even if the phrase "paid under similar circumstances" embodied in the most favored nation clause of the RP-US Tax Treaty refers to the payment of royalties and not taxes, still the presence or absence of a "matching credit" provision in the said RP-US Tax Treaty would constitute a material circumstance to such payment and would be determinative of the said clause's application.1âwphi1.nêt

We address first the objection raised by private respondent that the certification against forum shopping was not executed by the petitioner herself but by her counsel, the Office of the Solicitor General (O.S.G.) through one of its Solicitors, Atty. Tomas M. Navarro.

SC Circular No. 28-91 provides:

SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS FILED WITH THE SUPREME COURT AND THE COURT OF APPEALS TO PREVENT FORUM SHOPPING OR MULTIPLE FILING OF PETITIONS AND COMPLAINTS

TO: xxx xxx xxx

The attention of the Court has been called to the filing of multiple petitions and complaints involving the same issues in the Supreme Court, the Court of Appeals or other tribunals or agencies, with the result that said courts, tribunals or agencies have to resolve the same issues.

(1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court of Appeals, the petitioner aside from complying with pertinent provisions of the Rules of Court and existing circulars, must certify under oath to all of the following facts or undertakings: (a) he has not theretofore commenced any other action or proceeding involving the same issues in the Supreme Court, the Court of Appeals, or any tribunal oragency; . . .

(2) Any violation of this revised Circular will entail the following sanctions: (a) it shall be a cause for the summary dismissal of the multiple petitions or complaints; . . .

The circular expressly requires that a certificate of non-forum shopping should be attached to petitions filed before this Court and the Court of Appeals. Petitioner's allegation that Circular No. 28-91 applies only to original actions and not to appeals as in the instant case is not supported by the text nor by the obvious intent of the Circular which is to prevent multiple petitions that will result in the same issue being resolved by different courts.

Anent the requirement that the party, not counsel, must certify under oath that he has not commenced any other action involving the same issues in this Court or the Court of Appeals or any other tribunal or agency, we are inclined to accept petitioner's submission that since the OSG is the only lawyer for the petitioner, which is a government agency mandated under Section 35, Chapter 12, title III, Book IV of the 1987 Administrative Code 4

to be represented only by the Solicitor General, the certification executed by the OSG in this case constitutes substantial compliance with Circular No. 28-91.

With respect to the merits of this petition, the main point of contention in this appeal is the interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be imposed by the Philippines upon royalties received by a non-resident foreign corporation. The provision states insofar as pertinentthat —

1) Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States.

2) However, the tax imposed by that Contracting State shall not exceed.

a) In the case of the United States, 15 percent of the gross amount of the royalties, and

b) In the case of the Philippines, the least of:

(i) 25 percent of the gross amount of the royalties;

(ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; and

(iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State.

xxx xxx xxx

(emphasis supplied)

Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is entitled to the concessional tax rate of 10 percent on royalties based on Article 12 (2) (b) of the RP-Germany Tax Treaty which provides:

(2) However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax so charged shall not exceed:

xxx xxx xxx

b) 10 percent of the gross amount of royalties arising from the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process, or from the use of or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience.

For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate mentioned under b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities.

Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent of the gross amount of such royalties against German income and corporation tax for the taxes payable in the Philippines on such royalties where the tax rate is reduced to 10 or 15 percent under such treaty. Article 24 of the RP-Germany Tax Treaty states —

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

xxx xxx xxx

b) Subject to the provisions of German tax law regarding credit for foreign tax, there shall be allowed as a credit against German income and corporation tax payable in respect of the following items of income arising in the Republic of the Philippines, the tax paid under the laws of the Philippines in accordance with this Agreement on:

xxx xxx xxx

dd) royalties, as defined in paragraph 3 of Article 12;

xxx xxx xxx

c) For the purpose of the credit referred in subparagraph; b) the Philippine tax shall be deemed to be

xxx xxx xxx

cc) in the case of royalties for which the tax is reduced to 10 or 15 per cent according to paragraph 2 of Article 12, 20 percent of the gross amount of such royalties.

xxx xxx xxx

According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under circumstances similar to those in the RP-West Germany Tax Treaty since there is no provision for a 20 percent matching credit in the former convention and private respondent cannot invoke the concessional tax rate on the strength of the most favored nation clause in the RP-US Tax Treaty. Petitioner's position is explained thus:

Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax paid on income from sources within the Philippines is allowed as a credit against German income and corporation tax on the same income. In the case of royalties for which the tax is reduced to 10 or 15 percent according to paragraph 2 of Article 12 of the RP-West Germany Tax Treaty, the credit shall be 20% of the gross amount of such royalty. To illustrate, the royalty income of a German resident from sources within the Philippines arising from the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, is taxed at 10% of the gross amount of said royalty under certain conditions. The rate of 10% is imposed if credit against the German income and corporation tax on said royalty is allowed in favor of the German resident. That means the rate of 10% is granted to the German taxpayer if he is similarly granted a credit against the income and corporation tax of West Germany. The clear intent of the "matching credit" is to soften the impact of double taxation by different jurisdictions.

The RP-US Tax Treaty contains no similar "matching credit" as that provided under the RP-West Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Therefore, the "most favored nation" clause in the RP-West Germany Tax Treaty cannot be availed of in interpreting the provisions of the RP-US Tax Treaty. 5

The petition is meritorious.

We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the Court of Appeals, that the phrase "paid under similar circumstances in Article 13 (2) (b), (iii) of the RP-US Tax Treaty should be interpreted to refer to payment of royalty, and not to the payment of the tax, for the reason that the phrase "paid under similar circumstances" is followed by the phrase "to a resident of a third state". The respondent court held that "Words are to be understood in the context in which they are used", and since what is paid to a resident of a third state is not a tax but a royalty "logic instructs" that the treaty provision in question should refer to royalties of the same kind paid under similar circumstances.

The above construction is based principally on syntax or sentence structure but fails to take into account the purpose animating the treaty provisions in point. To begin with, we are not aware of any law or rule pertinent to the payment of royalties, and none has been brought to our attention, which provides for the payment of

royalties under dissimilar circumstances. The tax rates on royalties and the circumstances of payment thereof are the same for all the recipients of such royalties and there is no disparity based on nationality in the circumstances of such payment. 6 On the other hand, a cursory reading of the various tax treaties will show that there is no similarity in the provisions on relief from or avoidance of double taxation 7 as this is a matter of negotiation between the contracting parties. 8 As will be shown later, this dissimilarity is true particularly in the treaties between the Philippines and the United States and between the Philippines and West Germany.

The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for the avoidance of double taxation. 9 The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. 10 More precisely, the tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. 11 The apparent rationale for doing away with double taxation is of encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. 12 Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate. 13

Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in, the other contracting state and both states impose tax on that income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. 14

The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation. There are two methods of relief — the exemption method and the credit method. In the exemption method, the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayer's remaining income or capital. On the other hand, in the credit method, although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference between the two methods is that in the exemption method, the focus is on the income or capital itself, whereas the credit method focuses upon the tax. 15

In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a part of the tax in the expectation that the tax given up for this particular investment is not taxed by the othercountry. 16 Thus the petitioner correctly opined that the phrase "royalties paid under similar circumstances" in the most favored nation clause of the US-RP Tax Treaty necessarily contemplated "circumstances that are tax-related".

In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use property or rights, i.e. trademarks, patents and technology, located within the Philippines. 17 The United States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of residence and the state of source are both permitted to tax the royalties, with a restraint on the tax that may be collected by the state of source. 18 Furthermore, the method employed to give relief from double taxation is the allowance of a tax credit to citizens or residents of the United States (in an appropriate amount based upon the taxes paid or accrued to the Philippines) against the United States tax, but such amount shall not exceed the limitations provided by United States law for the taxable year. 19 Under Article 13 thereof, the Philippines may impose one of three rates — 25 percent of the gross amount of the royalties; 15 percent when the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; or the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third state.

Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances.

This would mean that private respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon royalties earned from sources within the Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty.

The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against German income and corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for double taxation, does not provide for similar crediting of 20% of the gross amount of royalties paid. Said Article 23 reads:

Article 23

Relief from double taxation

Double taxation of income shall be avoided in the following manner:

1) In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle thereof), the United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United States corporation owning at least 10 percent of the voting stock of a Philippine corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the purpose of limiting the credit to the United States tax on income from sources within the Philippines or on income from sources outside the United States) provided by United States law for the taxable year. . . .

The reason for construing the phrase "paid under similar circumstances" as used in Article 13 (2) (b) (iii) of the RP-US Tax Treaty as referring to taxes is anchored upon a logical reading of the text in the light of the fundamental purpose of such treaty which is to grant an incentive to the foreign investor by lowering the tax and at the same time crediting against the domestic tax abroad a figure higher than what was collected in the Philippines.

In one case, the Supreme Court pointed out that laws are not just mere compositions, but have ends to be achieved and that the general purpose is a more important aid to the meaning of a law than any rule which grammar may lay down. 20 It is the duty of the courts to look to the object to be accomplished, the evils to be remedied, or the purpose to be subserved, and should give the law a reasonable or liberal construction which will best effectuate its purpose. 21 The Vienna Convention on the Law of Treaties states that a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object andpurpose. 22

As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign investors to invest in the Philippines — a crucial economic goal for developing countries. 23 The goal of double taxation conventions would be thwarted if such treaties did not provide for effective measures to minimize, if not completely eliminate, the tax burden laid upon the income or capital of the investor. Thus, if the rates of tax are lowered by the state of source, in this case, by the Philippines, there should be a concomitant commitment on the part of the state of residence to grant some form of tax relief, whether this be in the form of a tax credit or exemption. 24

Otherwise, the tax which could have been collected by the Philippine government will simply be collected by another state, defeating the object of the tax treaty since the tax burden imposed upon the investor would remain unrelieved. If the state of residence does not grant some form of tax relief to the investor, no benefit would redound to the Philippines, i.e., increased investment resulting from a favorable tax regime, should it impose a lower tax rate on the royalty earnings of the investor, and it would be better to impose the regular rate rather than lose much-needed revenues to another country.

At the same time, the intention behind the adoption of the provision on "relief from double taxation" in the two tax treaties in question should be considered in light of the purpose behind the most favored nation clause.

The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the "most favored" among other countries. 25 The most favored nation clause is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. 26 The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West Germany Tax Treaty, above-quoted, speaks of tax on royalties for the use of trademark, patent, and technology. The entitlement of the 10% rate by U.S. firms despite the absence of a matching credit (20% for royalties) would derogate from the design behind the most grant equality of international treatment since the tax burden laid upon the income of the investor is not the same in the two countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment.

We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances.

It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. 27

The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law. 28 Private respondent is claiming for a refund of the alleged overpayment of tax on royalties; however, there is nothing on record to support a claim that the tax on royalties under the RP-US Tax Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.

WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7, 1996 of the Court of Tax Appeals and the decision dated November 7, 1996 of the Court of Appeals are hereby SET ASIDE.

SO ORDERED.

Vitug, Panganiban and Purisima, JJ., concur.

Romero, J., abroad, on official business leave.

G.R. Nos. L-33665-68 February 27, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.VICENTE A. RUFINO and REMEDIOS S. RUFINO, ERNESTO D. RUFINO and ELVIRA B. RUFINO, RAFAEL R. RUFINO and JULIETA A. RUFINO, MANUEL S. GALVEZ and ESTER R. GALVEZ, and COURT OF TAX APPEALS, respondents.

Leonardo Abola for respondents.

 

CRUZ, J.:

Petition for review on certiorari of the decision of the Court of Tax Appeals absolving the private respondents from liability for capital gains tax on the stocks received by them from the Eastern Theatrical Inc. These were originally four cages involving appeals from the decision of the Commissioner of Internal Revenue dated July 11, 1966, holding the said respondents, Vicente A. Rufino and Remedies S. Rufino, Ernesto D. Rufino and Elvira B. Rufino, Rafael R. Rufino and Julieta A. Rufino, and Manuel S. Galvez and Ester R. Galvez, liable for deficiency income tax, surcharge and interest in the sums of P44,294.88, P27,229.44, P58,082.60 and P58,074.24, respectively, for the year 1959.

The facts, as narrated by the Court of Tax Appeals, are as follows:

The private respondents were the majority stockholders of the defunct Eastern Theatrical Co., Inc., a corporation organized in 1934, for a period of twenty-five years terminating on January 25, 1959. It had an original capital stock of P500,000.00, which was increased in 1949 to P2,000,000.00, divided into 200,000 shares at P10.00 per share, and was organized to engage in the business of operating theaters, opera houses, places of amusement and other related business enterprises, more particularly the Lyric and Capitol Theaters in Manila. The President of this corporation (hereinafter referred to as the Old Corporation) during the year in question was Ernesto D. Rufino.

The private respondents are also the majority and controlling stockholders of another corporation, the Eastern Theatrical Co Inc., which was organized on December 8, 1958, for a term of 50 years, with an authorized capital stock of P200,000.00, each share having a par value of P10.00. This corporation is engaged in the same kind of business as the Old Corporation. The General-Manager of this corporation (hereinafter referred to as the New Corporation) at the time was Vicente A. Rufino.

In a special meeting of stockholders of the Old Corporation on December 17, 1958, to provide for the continuation of its business after the end of its corporate life, and upon the recommendation of its board of directors, a resolution was passed authorizing the Old Corporation to merge with the New Corporation by transferring its business, assets, goodwill, and liabilities to the latter, which in exchange would issue and distribute to the shareholders of the Old Corporation one share for each share held by them in the said Corporation.

It was expressly declared that the merger of the Old Corporation with the New Corporation was necessary to continue the exhibition of moving pictures at the Lyric and Capitol Theaters even after the expiration of the corporate existence of the former, in view of its pending booking contracts, not to mention its collective bargaining agreements with its employees.

Pursuant to the said resolution, the Old Corporation, represented by Ernesto D. Rufino as President, and the New Corporation, represented by Vicente A. Rufino as General Manager, signed on January 9, 1959, a Deed of Assignment providing for the conveyance and transfer of all the business, property, assets and goodwill of the Old Corporation to the New Corporation in exchange for the latter's shares of stock to be distributed among the shareholders on the basis of one stock for each stock held in the Old Corporation except that no new and unissued shares would be issued to the shareholders of the Old Corporation; the delivery by the New

Corporation to the Old Corporation of 125,005-3/4 shares to be distributed to the shareholders of the Old Corporation as their corresponding shares of stock in the New Corporation; the assumption by the New Corporation of all obligations and liabilities of the Old Corporation under its bargaining agreement with the Cinema Stage & Radio Entertainment Free Workers (FFW) which included the retention of all personnel in the latter's employ; and the increase of the capitalization of the New Corporation in compliance with their agreement. This agreement was made retroactive to January 1, 1959.

The aforesaid transfer was eventually made by the Old Corporation to the New Corporation, which continued the operation of the Lyric and Capitol Theaters and assumed all the obligations and liabilities of the Old Corporation beginning January 1, 1959.

The resolution of the Old Corporation of December 17, 1958, and the Deed of Assignment of January 9, 1959, were approved in a resolution by the stockholders of the New Corporation in their special meeting on January 12, 1959. In the same meeting, the increased capitalization of the New Corporation to P2,000,000.00 was also divided into 200,000 shares at P10.00 par value each share, and the said increase was registered on March 5, 1959, with the Securities and Exchange Commission, which approved the same on August 20,1959.

As agreed, and in exchange for the properties, and other assets of the Old Corporation, the New Corporation issued to the stockholders of the former stocks in the New Corporation equal to the stocks each one held in the Old Corporation, as follows:

Mr. & Mrs. Vicente A. Rufino............... 17,083 shares

Mr. & Mrs. Rafael R. Rufino ................. 16,881 shares

Mr. & Mrs. Ernesto D. Rufino .............. 18,347 shares

Mr. & Mrs. Manuel S. Galvez ............... 16,882 shares

It was this above-narrated series of transactions that the Bureau of Internal Revenue examined later, resulting in the petitioner declaring that the merger of the aforesaid corporations was not undertaken for a bona fide business purpose but merely to avoid liability for the capital gains tax on the exchange of the old for the new shares of stock. Accordingly, he imposed the deficiency assessments against the private respondents for the amounts already mentioned. The private respondents' request for reconsideration having been denied, they elevated the matter to the Court of Tax Appeals, which reversed the petitioner.

We have given due course to the instant petition questioning the decision of the said court holding that there was a valid merger between the Old Corporation and the New Corporation and declaring that:

It is well established that where stocks for stocks were exchanged, and distributed to the stockholders of the corporations, parties to the merger or consolidation, pursuant to a plan of reorganization, such exchange is exempt from capital gains tax . . .

In view of the foregoing, we are of the opinion and so hold that no taxable gain was derived by petitioners from the exchange of their old stocks solely for stocks of the New Corporation pursuant to Section 35(c) (2), in relation to (c) (5), of the National Internal Revenue Code, as amended by Republic Act 1921. 1

The above-cited Section 35 of the Tax Code, on the proper interpretation and application of which the resolution of this case depends, provides in material part as follows:

Sec. 35. Determination of gain or loss from the sale or other disposition of property. — The gain derived or loss sustained from the sale or other disposition of property, real, personal or mixed, shall be determined in accordance with the following schedule:

xxx xxx xxx

(c) Exchange of property-

(1) General Rule. — Except as herein provided upon the sale or exchange of property, the entire amount of the gain or loss, as the case may be, shall be recognized.

(2) Exceptions. — No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation (a) a corporation which is a party to a merger or consolidation, exchanges property solely for stock in a corporation which is a party to the merger or consolidation, (b) a shareholder exchanges stock in a corporation which is a party to the merger or consolidation solely for the stock of another corporation, also a party to the merger or consolidation, or (c) a security holder of a corporation which is a party to the merger or consolidation exchanges his securities in such corporation solely for stock or securities in another corporation, a party to the merger or consolidation.

xxx xxx xxx

(5) Definitions.-(a) x x x (b) The term "merger" or "consolidation," when used in this section, shall be understood to mean: (1) The ordinary merger or consolidation, or (2) the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock; Provided, That for a transaction to be regarded as a merger or consolidation within the purview of this section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation; Provided further, That in determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit: ...

In support of its position that the Deed of Assignment was concluded by the private respondents merely to evade the burden of taxation, the petitioner points to the fact that the New Corporation did not actually issue stocks in exchange for the properties of the Old Corporation at the time of the supposed merger on January 9, 1959. The exchange, he says, was only on paper. The increase in capitalization of the New Corporation was registered with the Securities and Exchange Commission only on March 5, 1959, or 37 days after the Old Corporation expired on January 25, 1959. Prior to such registration, it was not possible for the New Corporation to effect the exchange provided for in the said agreement because it was capitalized only at P200,000.00 as against the capitalization of the Old Corporation at P2,000,000.00. Consequently, as there was no merger, the automatic dissolution of the Old Corporation on its expiry date resulted in its liquidation, for which the respondents are now liable in taxes on their capital gains.

For their part, the private respondents insist that there was a genuine merger between the Old Corporation and the New Corporation pursuant to a plan aimed at enabling the latter to continue the business of the former in the operation of places of amusement, specifically the Capitol and Lyric Theaters. The plan was evolved through the series of transactions above narrated, all of which could be treated as a single unit in accordance with the requirements of Section 35. Obviously, all these steps did not have to be completed at the time of the merger, as there were some of them, such as the increase and distribution of the stock of the New Corporation, which necessarily had to come afterwards. Moreover, the Old Corporation was dissolved on January 1, 1959, pursuant to the Deed of Assignment, and not on January 25, 1959, its original expiry date. As the properties of the Old Corporation were transferred to the New Corporation before that expiry date, there could not have been any distribution of liquidating dividends by the Old Corporation for which the private respondents should be held liable in taxes.

We sustain the Court of Tax Appeals. We hold that it did not err in finding that no taxable gain was derived by the private respondents from the questioned transaction.

Contrary to the claim of the petitioner, there was a valid merger although the actual transfer of the properties subject of the Deed of Assignment was not made on the date of the merger. In the nature of things, this was not possible. Obviously, it was necessary for the Old Corporation to surrender its net assets first to the New Corporation before the latter could issue its own stock to the shareholders of the Old Corporation because the New Corporation had to increase its capitalization for this purpose. This required the adoption of the resolution to this effect at the special stockholders meeting of the New Corporation on January 12, 1959, the registration of such issuance with the SEC on March 5, 1959, and its approval by that body on August 20, 1959. All these took place after the date of the merger but they were deemed part and parcel of, and indispensable to the validity and enforceability of, the Deed of Assignment.

The Court finds no impediment to the exchange of property for stock between the two corporations being

considered to have been effected on the date of the merger. That, in fact, was the intention, and the reason why the Deed of Assignment was made retroactive to January 1, 1959. Such retroaction provided in effect that all transactions set forth in the merger agreement shall be deemed to be taking place simultaneously on January 1, 1959, when the Deed of Assignment became operative.

The certificates of stock subsequently delivered by the New Corporation to the private respondents were only evidence of the ownership of such stocks. Although these certificates could be issued to them only after the approval by the SEC of the increase in capitalization of the New Corporation, the title thereto, legally speaking, was transferred to them on the date the merger took effect, in accordance with the Deed of Assignment.

The basic consideration, of course, is the purpose of the merger, as this would determine whether the exchange of properties involved therein shall be subject or not to the capital gains tax. The criterion laid down by the law is that the merger" must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation." We must therefore seek and ascertain the intention of the parties in the light of their conduct contemporaneously with, and especially after, the questioned merger pursuant to the Deed of Assignment of January 9, 1959.

It has been suggested that one certain indication of a scheme to evade the capital gains tax is the subsequent dissolution of the new corporation after the transfer to it of the properties of the old corporation and the liquidation of the former soon thereafter. This highly suspect development is likely to be a mere subterfuge aimed at circumventing the requirements of Section 35 of the Tax Code while seeming to be a valid corporate combination. Speaking of such a device, Justice Sutherland declared for the United States Supreme Court in Helvering v. Gregory:

When subdivision (b) speaks of a transfer of assets by one corporation to another, it means a transfer made 'in pursuance of a plan of reorganization' (Section 112[g]) of corporate business; and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of proceeding by what actually occurred, what do we find? Simply an operation having no business or corporate purpose — a mere devise which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. No doubt, a new and valid corporation was created. But that corporation was nothing more than a contrivance to the end last described. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function. When that limited function had been exercised, it immediately was put to death.

In these circumstances, the facts speak for themselves and are susceptible of but one interpretation. The whole undertaking, though conducted according to the terms of subdivision (b), was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization and nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because the transaction upon its face lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose. 2

We see no such furtive intention in the instant case. It is clear, in fact, that the purpose of the merger was to continue the business of the Old Corporation, whose corporate life was about to expire, through the New Corporation to which all the assets and obligations of the former had been transferred. What argues strongly, indeed, for the New Corporation is that it was not dissolved after the merger agreement in 1959. On the contrary, it continued to operate the places of amusement originally owned by the Old Corporation and transfered to the New Corporation, particularly the Capitol and Lyric Theaters, in accordance with the Deed of Assignment. The New Corporation, in fact, continues to do so today after taking over the business of the Old Corporation twenty-seven years ago.

It may be recalled at this point that under the original provisions of the old Corporation Law, which was in effect when the merger agreement was concluded in 1959, it was not possible for a corporation, by mere amendment of its charter, to extend its life beyond the time fixed in the original articles; in fact, this was specifically prohibited by Section 18, which provided that "any corporation may amend its articles of incorporation by a majority vote of its board of directors or trustees and the vote or written assent of two-thirds

of its members, if it be a non-stock corporation, or if it be a stock corporation, by the vote or written assent of the stockholders representing at least two-thirds of the subscribed capital stock of the corporation ... : Provided, however, That the life of said corporation shall not be extended by said amendment beyond the fixed in the original articles ... "

This prohibition, which incidentally has since been deleted, made it necessary for the Old and New Corporations to enter into the questioned merger, to enable the former to continue its unfinished business through the latter.

The procedure for such merger was prescribed in Section 28 1/2 of the old Corporation Law which, although not expressly authorizing a merger by name (as the new Corporation Code now does in its Section 77), provided that "a corporation may, by action taken at any meeting of its board of directors, sell, lease, exchange, or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such considerations, which may be money, stocks, bond, or other instruments for the payment of money or other property or other considerations, as its board of directors deem expedient." The transaction contemplated in the old law covered the second type of merger defined by Section 35 of the Tax Code as "the acquisition by one corporation of all or substantially all of the properties of another corporation solely for stock," which is precisely what happened in the present case.

What is also worth noting is that, as in the case of the Old Corporation when it was dissolved on December 31, 1958, there has been no distribution of the assets of the New Corporation since then and up to now, as far as the record discloses. To date, the private respondents have not derived any benefit from the merger of the Old Corporation and the New Corporation almost three decades earlier that will make them subject to the capital gains tax under Section 35. They are no more liable now than they were when the merger took effect in 1959, as the merger, being genuine, exempted them under the law from such tax.

By this decision, the government is, of course, not left entirely without recourse, at least in the future. The fact is that the merger had merely deferred the claim for taxes, which may be asserted by the government later, when gains are realized and benefits are distributed among the stockholders as a result of the merger. In other words, the corresponding taxes are not forever foreclosed or forfeited but may at the proper time and without prejudice to the government still be imposed upon the private respondents, in accordance with Section 35(c) (4) of the Tax Code. Then, in assessing the tax, "the basis of the property transferred in the hands of the transferee shall be the same as it would be in the hands of the transferor, increased by the amount of gain recognized to the transferor on the transfer." The only inhibition now is that time has not yet come.

The reason for this conclusion is traceable to the purpose of the legislature in adopting the provision of law in question. The basic Idea was to correct the Tax Code which, by imposing taxes on corporate combinations and expansions, discouraged the same to the detriment of economic progress, particularly the promotion of local industry. Speaking of this problem, HB No. 7233, which was subsequently enacted into R.A. No. 1921 embodying Section 35 as now worded, declared in the Explanatory Note:

The exemption from the tax of the gain derived from exchanges of stock solely for stock of another corporation resulting from corporate mergers or consolidations under the above provisions, as amended, was intended to encourage corporations in pooling, combining or expanding their resources conducive to the economic development of the country. 3

Our ruling then is that the merger in question involved a pooling of resources aimed at the continuation and expansion of business and so came under the letter and intendment of the National Internal Revenue Code, as amended by the abovecited law, exempting from the capital gains tax exchanges of property effected under lawful corporate combinations.

WHEREFORE, the decision of the Court of Tax Appeals is affirmed in full, without any pronouncement as to costs.

SO ORDERED.

Yap (Chairman), Narvasa, Melencio-Herrera, Feliciano, Gancayco and sarmiento, JJ., concur.

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.

Fernan (Chairman), Bidin and Cortes, JJ., concur.

Feliciano, J., took no part.

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 notice 10 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 Balance of tax due

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.

Quisumbing, Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

G.R. No. 125704 August 28, 1998

PHILEX MINING CORPORATION, petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE COURT OF TAX APPEALS, respondents.

 

ROMERO, J.:

Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on April 8, 1996 in CA-G.R. SP No. 36975 1 affirming the Court of Tax Appeals decision in CTA Case No. 4872 dated March 16, 1995 2 ordering it to pay the amount of P110,677,668.52 as excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code of 1977.

The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in the total amount of P123,821.982.52 computed as follows:

PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE

TAX DUE

2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91

3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60

4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88

————— ————— —————— ——————

47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39

————— ————— —————— ——————

1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25

2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88

————— ————— —————— ——————

43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13

————— ————— —————— ——————

90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52 3

========= ========= ========= =========

In a letter dated August 20, 1992, 4 Philex protested the demand for payment of the tax liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore these claims for tax credit/refund should be applied against the tax liabilities, citing our ruling in Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc. 5

In reply, the BIR, in a letter dated September 7, 1992, 6 found no merit in Philex's position. Since these pending claims have not yet been established or determined with certainty, it follows that no legal compensation can take place. Hence, the BIR reiterated its demand that Philex settle the amount plus interest within 30 days from the receipt of the letter.

In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund against its excise tax obligation, Philex raised the issue to the Court of Tax Appeals on November 6, 1992. 7 In the course of the proceedings, the BIR issued Tax Credit Certificate SN 001795 in the amount of P13,144,313.88 which, applied to the total tax liabilities of Philex of P123,821,982.52; effectively lowered the latter's tax obligation to P110,677,688.52.

Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining balance of P110,677,688.52 plus interest, elucidating its reason, to wit:

Thus, for legal compensation to take place, both obligations must be liquidated and demandable. "Liquidated" debts are those where the exact amount has already been determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition, p. 259). In the instant case, the claims of the Petitioner for VAT refund is still pending litigation, and still has to be determined by this Court (C.T.A. Case No. 4707). A fortiori, the liquidated debt of the Petitioner to the government cannot, therefore, be set-off against the unliquidated claim which Petitioner conceived to exist in its favor (see Compañia General de Tabacos vs. French and Unson, No. 14027, November 8, 1918, 39 Phil. 34). 8

Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to set-off on compensation since claim for taxes is not a debt or contract." 9 The dispositive portion of the CTA decision 10 provides:

In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and Petitioner is hereby ORDERED to PAY the Respondent the amount of P110,677,668.52 representing excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Section 248 and 249 of the Tax Code, as amended.

Aggrieved with the decision, Philex appealed the case before the Court of Appeals docketed as CA-GR. CV No. 36975. 11 Nonetheless, on April 8, 1996, the Court of Appeals a Affirmed the Court of Tax Appeals observation. The pertinent portion of which reads: 12

WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the decision dated March 16, 1995 is AFFIRMED.

Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution dated July 11, 1996. 13

However, a few days after the denial of its motion for reconsideration, Philex was able to obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but also for 1992 and 1994, computed as follows: 14

Period Covered Tax Credit Date

By Claims For Certificate of

VAT refund/credit Number Issue Amount

1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01

1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61

1989 007732 11 July 1996 P37,322,799.19

1990-1991 007751 16 July 1996 P84,662,787.46

1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95

In view of the grant of its VAT input credit/refund, Philex now contends that the same should, ipso jure, off-set its excise tax liabilities 15 since both had already become "due and demandable, as well as fully liquidated;" 16

hence, legal compensation can properly take place.

We see no merit in this contention.

In several instances prior to the instant case, we have already made the pronouncement that taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other. 17 There is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. 18 We find no cogent reason to deviate from the aforementioned distinction.

Prescinding from this premise, in Francia v. Intermediate Appellate Court, 19 we categorically held that taxes cannot be subject to set-off or compensation, thus:

We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.

The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on Audit, 20 which reiterated that:

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

Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc Mines Inc., wherein we ruled that a pending refund may be set off against an existing tax liability even though the refund has not yet been approved by the Commissioner, 21 is no longer without any support in statutory law.

It is important to note, that the premise of our ruling in the aforementioned case was anchored on Section 51 (d) of the National Revenue Code of 1939. However, when the National Internal Revenue Code of 1977 was enacted, the same provision upon which the Itogon-Suyoc pronouncement was based was omitted. 22

Accordingly, the doctrine enunciated in Itogon-Suyoc cannot be invoked by Philex.

Despite the foregoing rulings clearly adverse to Philex's position, it asserts that the imposition of surcharge and interest for the non-payment of the excise taxes within the time prescribed was unjustified. Philex posits the theory that it had no obligation to pay the excise tax liabilities within the prescribed period since, after all, it still has pending claims for VAT input credit/refund with BIR. 23

We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle in tax law that

taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. 24

Evidently, to countenance Philex's whimsical reason would render ineffective our tax collection system. Too simplistic, it finds no support in law or in jurisprudence.

To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. 25 Hence, a tax does not depend upon the consent of the taxpayer. 26 If any taxpayer can defer the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against the government or that the collection of the tax is contingent on the result of the lawsuit it filed against the government. 27 Moreover, Philex's theory that would automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion and abuse, depriving the government of authority over the manner by which taxpayers credit and offset their tax liabilities.

Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the government is immaterial for the imposition of charges and penalties prescribed under Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory and the BIR is not vested with any authority to waive the collection thereof. 28 The same cannot be condoned for flimsy reasons, 29 similar to the one advanced by Philex in justifying its non-payment of its tax liabilities.

Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the National Internal Revenue Code of 1977, which requires the refund of input taxes within 60 days, 31 when it took five years for the latter to grant its tax claim for VAT input credit/refund. 32

In this regard, we agree with Philex. While there is no dispute that a claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund, 33 however, once the claimant has submitted all the required documents it is the function of the BIR to assess these documents with purposeful dispatch. After all, since taxpayers owe honestly to government it is but just that government render fair service to the taxpayers. 34

In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more diligent and judicious with their duty, it could have granted the refund earlier. We need not remind the BIR that simple justice requires the speedy refund of wrongly-held taxes. 35 Fair dealing and nothing less, is expected by the taxpayer from the BIR in the latter's discharge of its function. As aptly held in Roxas v. Court of Tax Appeals: 36

The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg" And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously.

Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it is a settled rule that in the performance of governmental function, the State is not bound by the neglect of its agents and officers. Nowhere is this more true than in the field of taxation. 37 Again, while we understand Philex's predicament, it must be stressed that the same is not a valid reason for the non-payment of its tax liabilities.

To be sure, this is not to state that the taxpayer is devoid of remedy against public servants or employees, especially BIR examiners who, in investigating tax claims are seen to drag their feet needlessly. First, if the BIR takes time in acting upon the taxpayer's claim for refund, the latter can seek judicial remedy before the Court of Tax Appeals in the manner prescribed by law. 38 Second, if the inaction can be characterized as willful neglect of duty, then recourse under the Civil Code and the Tax Code can also be availed of.

Art. 27 of the Civil Code provides:

Art. 27. Any person suffering material or moral loss because a public servant or employee refuses or neglects, without just cause, to perform his official duty may file an action for damages and other relief against the latter, without prejudice to any disciplinary action that may be taken.

More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states:

xxx xxx xxx

(c) Wilfully neglecting to give receipts, as by law required for any sum collected in the performance of duty or wilfully neglecting to perform, any other duties enjoyed by law.

Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay in the performance of official duties. 39 In no uncertain terms must we stress that every public employee or servant must strive to render service to the people with utmost diligence and efficiency. Insolence and delay have no place in government service. The BIR, being the government collecting arm, must and should do no less. It simply cannot be apathetic and laggard in rendering service to the taxpayer if it wishes to remain true to its mission of hastening the country's development. We take judicial notice of the taxpayer's generally negative perception towards the BIR; hence, it is up to the latter to prove its detractors wrong.

In sum, while we can never condone the BIR's apparent callousness in performing its duties, still, the same cannot justify Philex's non-payment of its tax liabilities. The adage "no one should take the law into his own hands" should have guided Philex's action.

WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED.

SO ORDERED.

Narvasa, C.J., Kapunan and Purisima, JJ., concur.

G.R. Nos. L-28502-03 April 18, 1989

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.ESSO STANDARD EASTERN, INC. and THE COURT OF TAX APPEALS, respondents.

 

NARVASA, J.:

In two (2) cases appealed to it 1 by the private respondent, hereafter simply referred to as ESSO, the Court of Tax Appeals rendered judgment 2 sustaining the decisions of the Commissioner of Internal Revenue excepted to, save "the refund-claim .. in the amount of P39,787.94 as overpaid interest which it ordered refunded to ESSO

Reversal of this decision is sought by the Commissioner by a petition for review on certiorari filed with this Court. He ascribes to the Tax Court one sole error: "of applying the tax credit for overpayment of the 1959 income tax of .. ESSO, granted by the petitioner (Commissioner), to .. (ESSO's) basic 1960 deficiency income tax liability x x and imposing the 1-1/2% monthly interests

The facts are simple enough and are quite quickly recounted. ESSO overpaid its 1959 income tax by P221,033.00. It was accordingly granted a tax credit in this amount by the Comissioner on August 5,1964. However, ESSOs payment of its income tax for 1960 was found to be short by P367,994.00. So, on July 10, 1964, the Commissioner wrote to ESSO demanding payment of the deficiency tax, together with interest thereon for the period from April 18,1961 to April 18,1964. On August 10, 1964, ESSO paid under protest the amount alleged to be due, including the interest as reckoned by the Commissioner. It protested the computation of interest, contending it was more than that properly due. It claimed that it should not have been required to pay interest on the total amount of the deficiency tax, P367,994.00, but only on the amount of P146,961.00—representing the difference between said deficiency, P367,994.00, and ESSOs earlier overpayment of P221,033.00 (for which it had been granted a tax credit). ESSO thus asked for a refund.

The Internal Revenue Commissioner denied the claim for refund. ESSO appealed to the Court of Tax Appeals. As aforestated. that Court ordered payment to ESSO of its "refund-claim x x in the amount of P39,787.94 as overpaid interest. Hence, this appeal by the Commissioner. The CTA justified its award of the refund as follows:

... In the letter of August 5, 1964, .. (the Commissioner) admitted that .. ESSO had overpaid its 1959 income tax by P221,033.00. Accordingly .. (the Commissioner) granted to .. ESSO a tax credit of P221,033.00. In short, the said sum of P221,033.00 of ESSO's money was in the Government's hands at the latest on July 15, 1960 when it ESSO paid in full its second installment of income tax for 1959. On July 10, 1964 .. (the Commissioner) claimed that for 1960, .. ESSO underpaid its income tax by P367,994.00. However, instead of deducting from P367,994.00 the tax credit of P221,033.00 which .. (the Commissioner) had already admitted was due .. ESSO .. (the Commissioner) still insists in collecting the interest on the full amount of P367,994.00 for the period April 18, 1961 to April 18,1964 when the Government had already in its hands the sum of P221,033.00 of .. ESSOs

money even before the latter's income tax for 1960 was due and payable. If the imposition of interest does not amount to a penalty but merely a just compensation to the State for the delay in paying the tax, and for the concomitant use by the taxpayer of funds that rightfully should be in the Government's hand (Castro v. Collector, G.R. No. L-1274, Dec. 28, 1962), the collection of the interest on the full amount of P367,994.00 without deducting first the tax credit of P221,033.00, which has long been in the hands of the Government, becomes erroneous, illegal and arbitrary.

.. (ESSO) could hardly be charged of delinquency in paying P221,033.00 out of the deficiency income tax of P367,994.00, for which the State should be compensated by the payment of interest, because the said amount of P221,033.00 was already in the coffers of the Government. Neither could .. ESSO be charged for the concomitant use of funds that rightfully belong to the Government because as early as July 15, 1960, it was the Government that was using .. ESSOs funds of P221,033.00. In the circumstances, we find it unfair and unjust for .. (the Commissioner) to exact the interest on the said sum of P221,033.00 which, after all, was paid to and received by the Government even before the incidence of the deficiency income tax of P367,994.00. (Itogon-Suyoc Mines, Inc. v. Commissioner, C.T.A. Case No. 1327, Sept. 30,1965). On the contrary, the Government should be the first to blaze the trail and set the example of fairness and honest dealing in the administration of tax laws.

Accordingly, we hold that the tax credit of P221,033.00 for 1959 should first be deducted from the basic deficiency tax of P367,994.00 for 1960 and the resulting difference of P146,961.00 would be subject to the 18% interest prescribed by Section 51 (d) of the Revenue Code. According to the prayer of ..(ESSO) .. (the Commissioner) is hereby ordered to refund to .. (ESSO) the amount of P39,787.94 as overpaid interest in the settlement of its 1960 income tax liability. However, as the collection of the tax was not attended with arbitrariness because .. (ESSO) itself followed x x (the Commissioner's) manner of computing the tax in paying the sum of P213,189.93 on August 10, 1964, the prayer of .. (ESSO) that it be granted the legal rate of interest on its overpayment of P39,787.94 from August 10, 1964 to the time it is actually refunded is denied. (See Collector of Internal Revenue v. Binalbagan Estate, Inc., G.R. No. 1,12752, Jan. 30, 1965).

The Commissioner's position is that income taxes are determined and paid on an annual basis, and that such determination and payment of annual taxes are separate and independent transactions; and that a tax credit could not be so considered until it has been finally approved and the taxpayer duly notified thereof. Since in this case, he argues, the tax credit of P221,033.00 was approved only on August 5, 1964, it could not be availed of in reduction of ESSOs earlier tax deficiency for the year 1960; as of that year, 1960, there was as yet no tax credit to speak of, which would reduce the deficiency tax liability for 1960. In support of his position, the Commissioner invokes the provisions of Section 51 of the Tax Code pertinently reading as follows:

(c) Definition of deficiency. As used in this Chapter in respect of tax imposed by this Title, the term 'deficiency' means:

(1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amount previously abated credited, returned, or otherwise in respect of such tax; ..

xxx xxx xxx

(d) Interest on deficiency. — Interest upon the amount determined as deficiency shall be assessed at the same time as the deficiency and shall be paid upon notice and demand from the Commissioner of Internal Revenue; and shall be collected as a part of the tax, at the rate of six per centum per annum from the date prescribed for the payment of the tax (or, if the tax is paid in installments, from the date prescribed for the payment of the first installment) to the date the deficiency is assessed; Provided, That the amount that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three years, the present provision regarding prescription to the contrary notwithstanding.

The fact is that, as respondent Court of Tax Appeals has stressed, as early as July 15, 1960, the Government already had in its hands the sum of P221,033.00 representing excess payment. Having been paid and received by mistake, as petitioner Commissioner subsequently acknowledged, that sum unquestionably belonged to ESSO, and the Government had the obligation to return it to ESSO That acknowledgment of the erroneous payment

came some four (4) years afterwards in nowise negates or detracts from its actuality. The obligation to return money mistakenly paid arises from the moment that payment is made, and not from the time that the payee admits the obligation to reimburse. The obligation of the payee to reimburse an amount paid to him results from the mistake, not from the payee's confession of the mistake or recognition of the obligation to reimburse. In other words, since the amount of P221,033.00 belonging to ESSO was already in the hands of the Government as of July, 1960, although the latter had no right whatever to the amount and indeed was bound to return it to ESSO, it was neither legally nor logically possible for ESSO thereafter to be considered a debtor of the Government in that amount of P221,033.00; and whatever other obligation ESSO might subsequently incur in favor of the Government would have to be reduced by that sum, in respect of which no interest could be charged. To interpret the words of the statute in such a manner as to subvert these truisms simply can not and should not be countenanced. "Nothing is better settled than that courts are not to give words a meaning which would lead to absurd or unreasonable consequences. That is a principle that goes back to In re Allen (2 Phil. 630) decided on October 29, 1903, where it was held that a literal interpretation is to be rejected if it would be unjust or lead to absurd results." 6 "Statutes should receive a sensible construction, such as will give effect to the legislative intention and so as to avoid an unjust or absurd conclusion." 7

WHEREFORE, the petition for review is DENIED, and the Decision of the Court of Tax Appeals dated October 28, 1967 subject of the petition is AFFIRMED, without pronouncement as to costs.

Cruz, Gancayco, Griño-Aquino and Medialdea, JJ., concur.

This case has to do with the so-called "back pay certificates" issued by the Philippine Government in the aftermath of the Pacific War, pursuant to Republic Act No. 304, as amended by Republic Act No. 800. These enactments generally recognized the right of persons who at the outbreak of the war were employed in the classified and unclassified civil service as well as in government-owned or controlled corporations, and those who had served in the free local civil governments organized for purposes of resistance against the invaders, to salaries, wages, emoluments, per diems, not received by them by reason of the war. The Treasurer of the Philippines was empowered to receive applications for back pay and to issue in favor of the applicants certificates of indebtedness redeemable by the Government within ten years for the amounts determined to be justly due them.

It appears that in relation to its business of producing motion pictures, Sampaguita Pictures, Inc., hereafter simply Sampaguita, came to incur an obligation for percentage, withholding and amusement taxes in the amount of P10,268.41 in favor of the Republic of the Philippines.

Thirteen (13) days later, however, the Assistant Regional Director of the BIR wrote to Vera-Perez Corporation (his letter is dated June 22, 1961) advising that the acceptance of the Negotiable Certificates of Indebtedness in payment of amusement, percentage and withholding taxes (in the total sum of P16,753.50) was erroneous and the payment was invalid, because actually said certificates were "not acceptable as payments of internal revenue taxes in accordance with the provisions of .. General Circular No. V-289 dated May 8, 1959." Request was thus made for the payment of the tax liabilities in cash.

The Solicitor General's complaint

Sampaguita's answer admitted the basic facts, but asserted that the plaintiffs cause of action had already prescribed; that the tender of the certificates in 1961 had been "made in absolute good faith," "prior to the promulgation of the decision .. (in) de Borja vs. Vicente Gella et al. on July 31, 1963;" that the certificates "having duly matured .. in the year 1958, (and) plaintiff .. (being then) already duty bound to redeem them and pay for their value," Sampaguita and the Republic became "mutual creditors and debtors of each other for the amount of P10,268.41" with the result that their obligations were extinguished by legal compensation." These averments were inter alia reproduced and set up also as a counterclaim, with the additional plea that "in the remote possibility that ..(it [Sampaguita 1) be still required .. to pay plaintiff the amount of P10,268.41 for alleged unpaid taxes, the plaintiff be ordered to pay the defendant the same amount of Pl 0,268.41 representing the face value of the negotiable certificates of indebtedness."

On December 29, 1971, judgment was rendered by the Trial Judge "dismissing both the complaint and the counterclaim without pronouncement as to costs."

The Solicitor General presented a motion of reconsideration. When this was denied, he appealed to this Court by certiorari positing reversible legal error on the part of respondent Judge in holding that (1) the Republic's claim is offset by Sampaguita's counterclaim, and (2) the negotiable certificates of indebtedness in question were "long overdue and redeemable." The petitioner's postulations are untenable.

1. The Trial Court ruled that the taxes sought to be collected by the Republic from Sampaguita were still unpaid, its tender of the certificates of indebtedness in question not constituting payment; hence, it ought properly to be sentenced to pay the taxes. It also ruled that even assuming the contrary, legal compensation as a mode of extinguishing an obligation to pay taxes was nonetheless unavailing against the government, conformably with de Borja v. Gella.

On the other hand, according to the Trial Court, at least as of date of judgment, more than 10 years from June 18, 1958, the date when, as expressly stated in the certificates of indebtedness, the same were redeemable, the obligation thereby evidenced was unquestionably already due and payable; hence, Sampaguita was entitled to a judgment against the Republic for the payment of the face value of the certificates, the same having already been presented and surrendered within the said period of ten years (on June 9, 1961) to the Treasurer of the Philippines (thru the Municipal Treasurer of Bocaue, Bulacan )

2. What has just been said confutes the petitioner's second argument that redemption of the certificates of indebtedness was not yet demandable of it because "there is no certainty when the certificates are actually redeemable, within the meaning of the law." It is true that, as the Solicitor General contends, "the law does not say that they are redeemable from its approval on June 18, 1958 but 'within ten years from the date of issuance' of the certificates, "

WHEREFORE, the petition is DENIED, and the judgment subject thereof, being in accord with the facts and the law, is AFFIRMED in toto. No costs.

SO ORDERED.

Cruz, Gancayco, Griño-Aquino and Medialdea, JJ., concur.

G.R. No. L-18994             June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner, vs.HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte, and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott Price, respondents.

Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.Benedicto and Martinez for respondents.

LABRADOR, J.:

This is a petition for certiorari and mandamus against the Judge of the Court of First Instance of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and for an order in this Court directing the respondent court below to execute the judgment in favor of the Government against the estate of Walter Scott Price for internal revenue taxes.

It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January 30, 1960, this Court declared as final and executory the order for the payment by the estate of the estate and inheritance taxes, charges and penalties, amounting to P40,058.55, issued by the Court of First Instance of Leyte in, special proceedings No. 14 entitled "In the matter of the Intestate Estate of the Late Walter Scott Price." In order to enforce the claims against the estate the fiscal presented a petition dated June 21, 1961, to the court below for the execution of the judgment. The petition was, however, denied by the court which held that the execution is not justifiable as the Government is indebted to the estate under administration in the amount of P262,200. The orders of the court below dated August 20, 1960 and September 28, 1960, respectively, are as follows:

Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price, Administratrix of the estate of her late husband Walter Scott Price and Director Zoilo Castrillo of the Bureau of Lands dated September 19, 1956 and acknowledged before Notary Public Salvador V. Esguerra, legal adviser in Malacañang to Executive Secretary De Leon dated December 14, 1956, the note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated August 2, 1958, directing the latter to pay to Mrs. Price the sum ofP368,140.00, and an extract of page 765 of Republic Act No. 2700 appropriating the sum of P262.200.00 for the payment to the Leyte Cadastral Survey, Inc., represented by the administratrix Simeona K. Price, as directed in the above note of the President. Considering these facts, the Court orders that the payment of inheritance taxes in the sum of P40,058.55 due the Collector of Internal Revenue as ordered paid by this Court on July 5, 1960 in accordance with the order of the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674, be deducted from the amount of P262,200.00 due and payable to the Administratrix Simeona K. Price, in this estate, the balance to be paid by the Government to her without further delay. (Order of August 20, 1960)

The Court has nothing further to add to its order dated August 20, 1960 and it orders that the payment of the claim of the Collector of Internal Revenue be deferred until the Government shall have paid its accounts to the administratrix herein amounting to P262,200.00. It may not be amiss to repeat that it is only fair for the Government, as a debtor, to its accounts to its citizens-creditors before it can insist in the prompt payment of the latter's account to it, specially taking into consideration that the amount due to the Government draws interests while the credit due to the present state does not accrue any interest. (Order of September 28, 1960)

The petition to set aside the above orders of the court below and for the execution of the claim of the Government against the estate must be denied for lack of merit. The ordinary procedure by which to settle claims of indebtedness against the estate of a deceased person, as an inheritance tax, is for the claimant to present a claim before the probate court so that said court may order the administrator to pay the amount thereof. To such effect is the decision of this Court in Aldamiz vs. Judge of the Court of First Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:

. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the payment of debts and expenses of administration. The proper procedure is for the court to order the sale of personal estate or the sale or mortgage of real property of the deceased and all debts or expenses of administrator and with the written notice to all the heirs legatees and devisees residing in the Philippines, according to Rule 89, section 3, and Rule 90, section 2. And when sale or mortgage of real estate is to be made, the regulations contained in Rule 90, section 7, should be complied with.1äwphï1.ñët

Execution may issue only where the devisees, legatees or heirs have entered into possession of their respective portions in the estate prior to settlement and payment of the debts and expenses of administration and it is later ascertained that there are such debts and expenses to be paid, in which case "the court having jurisdiction of the estate may, by order for that purpose, after hearing, settle the amount of their several liabilities, and order how much and in what manner each person shall contribute, and may issue execution if circumstances require" (Rule 89, section 6; see also Rule 74, Section 4; Emphasis supplied.) And this is not the instant case.

The legal basis for such a procedure is the fact that in the testate or intestate proceedings to settle the estate of a deceased person, the properties belonging to the estate are under the jurisdiction of the court and such jurisdiction continues until said properties have been distributed among the heirs entitled thereto. During the pendency of the proceedings all the estate is in custodia legis and the proper procedure is not to allow the sheriff, in case of the court judgment, to seize the properties but to ask the court for an order to require the administrator to pay the amount due from the estate and required to be paid.

Another ground for denying the petition of the provincial fiscal is the fact that the court having jurisdiction of the estate had found that the claim of the estate against the Government has been recognized and an amount of P262,200 has already been appropriated for the purpose by a corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim of the Government for inheritance taxes and the claim of the intestate for services rendered have already become overdue and demandable is well as fully liquidated. Compensation, therefore, takes place by operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount, thus:

ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes effect by operation of law, and extinguished both debts to the concurrent amount, eventhough the creditors and debtors are not aware of the compensation.

It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against the estate of the deceased Walter Scott Price. Furthermore, the petition for certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the remedy.

The petition is, therefore, dismissed, without costs.

Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon, Regala and Makalintal, JJ., concur.Bengzon, C.J., took no part.