Tax 1 cases - PDFCOFFEE.COM (2024)

SECOND DIVISION

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

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MEGA GENERAL MERCHANDISING CORPORATION and THE COURT OF TAX APPEALS, respondents.

PARAS, J.:

This is a petition for review of the decision of the Court of Tax Appeals, promulgated on May 21, 1984, in CTA Case No. 3078 entitled "Mega General Merchandising Corporation vs. Commissioner of Internal Revenue," holding that respondent corporation is not liable for specific tax in the sum of P275,652.00 on its importations of crude paraffin wax on June 21 and August 17, 1977 under Section 142(i) of the Tax Code, as amended by P.D. No. 392, but to 7% advance sales tax, (now Section 197 II) in relation to Section 186 (now Section 200 of the Tax Code) and further ordering the Commissioner of Internal Revenue to refund or credit to petitioner the said assessment (Rollo, Annex "C", pp. 38-47).

The antecedent facts of this case are as follows:

Prior to the promulgation of P.D. No. 392 on February 18, 1974, all importations of paraffin wax, irrespective of kind and nature, were subject to 7% advance sales tax on landed costs plus 25% mark up pursuant to Section 183(b) now Section 197(II) in relation to Section 186 (now Section 200) of the Tax Code.

With the promulgation of P.D. No. 392, a new provision for the imposition of specific tax was added to Section 142 of the Tax Code, that is, sub- section (i) which reads:

Section 142. Specific tax on manufactured oils and other fuels.—On refined and manufactured mineral oils and other motor fuels, there shall be collected the following taxes:

xxx xxx xxx

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

Therefore, beginning February 18,1974, the date of effectivity of P.D. No. 392, all importations of paraffin wax were subject to the specific tax imposed under Section 142(i) of the Tax Code, instead of the former 7% sales tax.

Hence, respondent corporation paid the corresponding specific tax thereon in the total amount of P177,750.00 which applies to its total importation of crude paraffin on April 18, 1975, or exactly 1 year and 2 months after the effectivity of P.D. No. 392.

On April 22, 1975, the respondent corporation wrote the Commissioner of Internal Revenue for clarification as to whether imported crude paraffin wax is subject to specific tax under Section 142 (i) of the Tax Code, as amended by P.D. No. 392, or to the 7% advance sales tax.

Former Commissioner Misael P. Vera in his reply to said query dated May 14, 1975 ruled that only wax used as high pressure lubricant and micro crystallin is subject to specific tax; that paraffin which was used as raw material in the manufacture of candles, wax paper, matches, crayons, drugs, appointments etc., is subject to the 7% advance sales tax, the tax to be based on the landed cost thereof, plus 25% mark-up.

Due to Commissioner Vera's ruling of May 14, 1975, several importers including respondent corporation filed several claims for tax refund or tax credit of specific tax paid by them on importation of crude paraffin wax.

Considering that respondent corporation had paid the amount of P477,750.00 as specific tax pursuant to Section 142(i) of the Tax Code on its importation of crude paraffin wax on April 18, 1975 (an amount bigger than the 7% advance sales tax prescribed under Section 183(b) (now Section 197 II) in relation to Section 186 (now Sec. 200 of the Tax Code) respondent corporation in a letter, dated November 27, 1975, requested for a refund or tax credit of the amount of P321,436.79 representing the difference between the amount paid as specific tax and the 7% advance sales tax.

Since the law (Section 142(i) of the Tax Code, amended by P.D. No. 392) does not make any distinction as to the kind of wax subject to specific tax, then Acting Commissioner of Internal Revenue Efren I. Plana, on January 28, 1977 denied respondent Corporation's claim for refund or tax credit of the amount of P321,436,79. On this ruling, respondent corporation filed a request for reconsideration. This was denied by petitioner.

During the pendency of respondent corporation's request for reconsideration, an investigation was conducted by the Bureau of Internal Revenue in connection with the importations of wax and petroleum that arrived in the country on or subsequent to the date of the ruling of January 28, 1977 and it was ascertained that respondent Corporation owes the government specific tax for importation of 1,214,400 kilograms of paraffin wax on June 21, 1977 and August 17, 1977 which gave rise to the letter of assessment dated May 8, 1978 for P275,652.00 re the subject matter in this case.

Prior, however, to the issuance of the said letter of assessment of May 8, 1978, petitioner in a letter dated January 11, 1978, granted respondent

corporation's claim for refund or tax credit of the amount of P321,436.79 since the importation which had arrived in Manila on April 18, 1975 was covered by the ruling of May 14, 1975 (before its revocation by the ruling of January 28, 1977).

Respondent corporation protested the tax assessment of May 8,1978 in the amount of P275,652.00 in a letter dated June 5, 1978 alleging that crude paraffin wax is subject to 7% advance sales tax pursuant to petitioner's ruling of May 14, 1975. The protest was denied by petitioner in a letter dated February 15, 1980.

During the pendency of the request of respondent corporation for reconsideration, it appealed to respondent Court of Tax Appeals (Annex "A", Rollo, pp. 26-35) and petitioner filed his answer on September 10, 1980 (Annex "B", Rollo, pp. 3647).

On May 21,1984, respondent Court of Tax Appeals rendered its decision, the dispositive portion of which reads as follows:

WHEREFORE, the decision of the Commissioner of Internal Revenue appealed from is hereby reversed. Petitioner is not liable for specific tax on its importation of crude paraffin wax in the sum of P275,652.00 imposed against petitioner, but only subject to the 7% advance sales tax which petitioner had already paid. Accordingly, respondent is hereby ordered to refund or credit petitioner specific tax it paid in the sum of P275,652.00. Without pronouncement as to costs.

SO ORDERED.

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

This was later amended to read:

WHEREFORE the decision of the Commissioner of Internal Revenue appealed from is hereby reversed. Petitioner is not liable for specific tax on its importation of crude paraffin wax in the sum of P275,652.00 imposed against petitioner but only subject to the 7% D advance sales tax which petitioner had already paid. Without pro- announcement as to costs.

SO ORDERED.

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

The sole issue raised by petitioner is whether or not respondent corporation's importation of crude paraffin wax on June 21 and August 17, 1977 are subject to specific tax under Section 142(i) of the Tax Code, as amended by P.D. No. 392, promulgated on February 18, 1974.

Petitioner contends that the controlling interpretation is that given by Commissioner Plana and not that of Commissioner Vera.

Petitioner further argues that respondent corporation's request for refund of the amount of P321,436.79 was granted in the letter of petitioner dated January 11, 1978 because the importation of private respondent was made on April 18,1975 wherein petitioner made clear that all importation of crude paraffin wax only after the ruling of January 28, 1977, is subject to specific tax prescribed in Section 142(i) of the Tax Code as amended by P.D. No. 392.

Moreover, the importation which gave rise to the assessment in the amount of P275,652.00 subject of this case, was made on June 27, 1977 and August 17, 1977 and that the petitioner's ruling of January 28,1977 was not revoked or overruled by his letter of January 11, 1978 granting respondent corporation's request for refund of the amount of P321,436.79.

Petitioner's contention is completely meritorious.

The Court of Tax Appeals' decision aptly stated:

It will be starkly noted that in a ruling of respondent Commissioner of Internal Revenue dated January 11, 1978 (p. 204, BIR Rec.), the request for reconsideration of petitioner of the ruling holding it liable for specific tax and for the tax credit of the sum of P321,436.79 paid as specific tax was granted by the Commissioner of Internal Revenue. In effect, this ruling overrules that of January 28, 1977 holding petitioner liable for specific tax on its importations of crude paraffin wax. The ruling of January 11, 1978 having overruled that of January 28, 1977, the importations of crude paraffin made on June 21 and August 17, 1977 ostensibly became once more subject to the ruling of May 14, 1975 which held such importation of crude paraffin wax as not liable to specific tax under the provisions of Section 142(i) of the National Internal Revenue Code, as amended by PD 392. In other words, there was no other ruling which is prior to or was made to apply to the importations of petitioner of crude paraffin wax on June 21 and August 17, 1977, except only that ruling of the Commissioner of Internal Revenue of May 14, 1975 which applied Section 142(i), as amended by PD 392, of the National Revenue Code, which took effect on February 18, 1974, and that this provision of Section 142(i), as amended, has remained unchanged since then. It is clearly and legally justified to conclude that this ruling of the Commissioner of Internal Revenue of May 14, 1975 shall prospectively apply in favor of the importations of crude paraffin wax on June 21 and August 17, 1977 in question. This is the ruling which assured the taxpayer, Mega General Merchandising Corporation, that for its importations of crude paraffin wax, it shall only be liable to 7% advance sales tax and no more. To make petitioner liable for specific tax after it has made the importations, would surely prejudice petitioner as it would be subject to a tax liability of which the Bureau of Internal Revenue has not made it fully aware. As a result, the rulings of May 8, 1978 and February 15, 1980 having been issued long after the importations on June 21 and August 1 7,

1977 in question cannot be applied with legal effect in this case because to do so will violate the prohibition against retroactive application of the rulings of executive bodies. Rulings or circulars promulgated by the Commissioner of Internal Revenue, such as the rulings of January 28, 1977 and those of May 8, 1978 and February 15, 1980, can not have any retroactive application, where to do so, as it did in the case at bar, would prejudice the taxpayer. (ABS-CBN Broadcasting Corp. vs. Court of Tax Appeals & Com. of Int. Revenue, G.R. No. L-523b6, October 23, 1981). Also, the re-enactment of Section 142(i) of the National Internal Revenue Code, as amended by PD 392, which provision of law has substantially remained unchanged is a clear indication that Congress has adopted its prior executive construction and which means that imported crude paraffin wax is not subject to specific tax thereunder pursuant to the BIR ruling dated May 14, 1975. (Alexander Howden & Co., Ltd. vs. Coll. of Int. Rev., 13 SCRA 601). (pp. 11-13, Petition; pp. 18-20, Rollo)

Contrary to the Court of Tax Appeals' ruling, We believe that the letter of Commissioner Plana dated January 11, 1978 did not in any way revoke his ruling dated January 28,1977 which ruling applied the specific tax to wax (without distinction). The reason he removed in 1978 private respondent's liability for the specific tax was NOT (as erroneously pointed out by the Court of Tax Appeals) because he wanted to revoke, expressly or implicitly, his ruling of January 28, 1977 but because the P321,436.79 tax referred to importation BEFORE January 28, 1977 and hence still covered by the ruling of Commissioner Vera, and not by the January 28,1977 ruling of Commissioner Plana.

PREMISES CONSIDERED, the decision of the Court of Tax Appeals is hereby REVERSED and SET ASIDE, and the private respondent is ordered to pay the tax as assessed by the Commissioner of Internal Revenue, together with interest. No costs.

SO ORDERED.

FIRST DIVISION

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

ABS-CBN BROADCASTING CORPORATION, petitioner, vs. COURT OF TAX APPEALS and THE COMMISSIONER OF INTERNAL REVENUE, respondents.

MELENCIO-HERRERA, J.:

This is a Petition for Review on certiorari of the Decision of the Court of Tax Appeals in C.T.A. Case No. 2809, dated November 29, 1979, which affirmed the assessment by the Commissioner of Internal Revenue, dated April 16, 1971, of a deficiency withholding income tax against petitioner, ABS-CBN Broadcasting Corporation, for the years 1965, 1966, 1967 and 1968 in the respective amounts of P75,895.24, P99,239.18, P128,502.00 and P222, 260.64, or a total of P525,897.06.

During the period pertinent to this case, petitioner corporation was engaged in the business of telecasting local as well as foreign films acquired from foreign corporations not engaged in trade or business within the Philippines. for which petitioner paid rentals after withholding income tax of 30%of one-half of the film rentals.

In so far as the income tax on non-resident corporations is concerned, section 24 (b) of the National Internal Revenue Code, as amended by Republic Act No. 2343 dated June 20, 1959, used to provide:

(b) Tax on foreign corporations.—(1) Non-resident corporations.— There shall be levied, collected, and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph, upon the amount received by every foreign corporation not engaged in trade or business within the Philippines, from sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, a tax equal to thirty per centum of such amount. (Emphasis supplied)

On April 12, 1961, in implementation of the aforequoted provision, the Commissioner of Internal Revenue issued General Circular No. V-334 reading thus:

In connection with Section 24 (b) of Tax Code, the amendment introduced by Republic Act No. 2343, under which an income tax equal to 30% is levied upon the amount received by every foreign corporation not engaged in trade or business within the Philippines from all sources within this country as interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, it has been determined that the tax is still imposed on income derived from capital, or labor, or both combined, in accordance with the basic principle of income taxation (Sec. 39, Income Tax Regulations), and that a mere return of capital or investment is not income (Par. 5,06, 1 Mertens Law of Federal 'Taxation). Since according to the findings of the Special Team who inquired into business of the nonresident foreign film distributors, the distribution or exhibition right on a film is invariably acquired for a consideration, either for a lump sum or a percentage of the film rentals, whether from a parent company or an independent outside producer, apart of the receipts of a non-resident foreign film distributor derived from said film represents, therefore, a return of investment.

xxx xxx xxx

4. The local distributor should withhold 30% of one-half of the film rentals paid to the non-resident foreign film distributor and pay the same to this office in accordance with law unless the non- resident foreign film distributor makes a prior settlement of its income tax liability. (Emphasis ours).

Pursuant to the foregoing, petitioner dutifully withheld and turned over to the Bureau of Internal Revenue the amount of 30% of one-half of the film rentals paid by it to foreign corporations not engaged in trade or business within the Philippines. The last year that petitioner withheld taxes pursuant to the foregoing Circular was in 1968.

On June 27, 1968, Republic Act No. 5431 amended Section 24 (b) of the Tax Code increasing the tax rate from 30 % to 35 % and revising the tax basis from "such amount" referring to rents, etc. to "gross income," as follows:

(b) Tax on foreign corporations.—(1) Non-resident corporations.—A foreign corporation not engaged in trade or business in the Philippines including a foreign life insurance company not engaged in the life insurance business in the Philippines shall pay a tax equal to thirty-five per cent of the gross income received during each taxable year from all sources within the Philippines, as interests, dividends, rents, royalties, salaries, wages, premiums, annuities, compensations, remunerations for technical services or otherwise, emoluments or other fixed or determinable annual, periodical or casual gains, profits, and income, and capital gains, Provided however, That premiums shah not include reinsurance premiums. (Emphasis supplied)

On February 8, 1971, the Commissioner of Internal Revenue issued Revenue Memorandum Circular No. 4-71, revoking General Circular No. V-334, and holding that the latter was "erroneous for lack of legal basis," because "the tax

therein prescribed should be based on gross income without deduction whatever," thus:

After a restudy and analysis of Section 24 (b) of the National Internal Revenue Code, as amended by Republic Act No. 5431, and guided by the interpretation given by tax authorities to a similar provision in the Internal Revenue Code of the United States, on which the aforementioned provision of our Tax Code was patterned, this Office has come to the conclusion that the tax therein prescribed should be based on gross income without t deduction whatever. Consequently, the ruling in General Circular No. V-334, dated April 12, 1961, allowing the deduction of the proportionate cost of production or exhibition of motion picture films from the rental income of non- resident foreign corporations, is erroneous for lack of legal basis.

In view thereof, General Circular No. V-334, dated April 12, 1961, is hereby revoked and henceforth, local films distributors and exhibitors shall deduct and withhold 35% of the entire amount payable by them to non-resident foreign corporations, as film rental or royalty, or whatever such payment may be denominated, without any deduction whatever, pursuant to Section 24 (b), and pay the withheld taxes in accordance with Section 54 of the Tax Code, as amended.

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

On the basis of this new Circular, respondent Commissioner of Internal Revenue issued against petitioner a letter of assessment and demand dated April 15, 1971, but allegedly released by it and received by petitioner on April 12, 1971, requiring them to pay deficiency withholding income tax on the remitted film rentals for the years 1965 through 1968 and film royalty as of the end of 1968 in the total amount of P525,897.06 computed as follows:

1965

Total amount remitted

P 511,059.48

Withholding tax due thereon

153,318.00

Less: Amount already assessed

89,000.00

Balance

P64,318.00

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

11,577.24

Total amount due & collectible

P 75,895.24

1966 Total amount remitted

P373,492.24

Withholding tax due thereon

112,048.00

Less: Amount already assessed

27,947.00

Balance

84,101.00

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

15,138.18

Total amount due & collectible

P99,239.18

1967 Total amount remitted

P601,160.65

Withholding tax due thereon

180,348.00

Less: Amount already assessed

71,448.00

Balance

108,900.00

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

19,602.00

Total amount due & collectible

P128,502.00

1968 Total amount remitted

P881,816.92

Withholding tax due thereon

291,283.00

Less: Amount already assessed

92,886.00

Balance

P198,447.00

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

23,813.64

Total amount due & collectible

P222,260.44

1

On May 5, 1971, petitioner requested for a reconsideration and withdrawal of the assessment. However, without acting thereon, respondent, on April 6, 1976, issued a warrant of distraint and levy over petitioner's personal as well as real properties. The petitioner then filed its Petition for Review with the Court of Tax Appeals whose Decision, dated November 29, 1979, is, in turn, the subject of this review. The Tax Court held:

For the reasons given, the Court finds the assessment issued by respondent on April 16, 1971 against petitioner in the amounts of P75,895.24, P 99,239.18, P128,502.00 and P222,260.64 or a total of P525,897.06 as deficiency withholding income tax for the years 1965, 1966, 1967 and 1968, respectively, in accordance with law. As prayed for, the petition for review filed in this case is dismissed, and petitioner ABS-CBN Broadcasting Corporation is hereby ordered to pay the sum of P525,897.06 to respondent Commissioner of Internal Revenue as deficiency withholding income tax for the taxable years 1965 thru 1968, plus the surcharge and interest which have accrued thereon

incident to delinquency pursuant to Section 51 (e) of the National Internal Revenue Code, as amended.

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

SO ORDERED.

2

The issues raised are two-fold:

I. Whether or not respondent can apply General Circular No. 4-71 retroactively and issue a deficiency assessment against petitioner in the amount of P 525,897.06 as deficiency withholding income tax for the years 1965, 1966, 1967 and 1968.

II. Whether or not the right of the Commissioner of Internal Revenue to assess the deficiency withholding income tax for the year 196,5 has prescribed.

3

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

In point is Sec. 338-A (now Sec. 327) of the Tax Code. As inserted by Republic Act No. 6110 on August 9, 1969, it provides:

Sec. 338-A. Non-retroactivity of rulings. — Any revocation, modification, or reversal of and of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner of Internal Revenue shall not be given retroactive application if the relocation, modification, or reversal will be prejudicial to the taxpayers, except in the following cases: (a) where the taxpayer deliberately mis-states or omits material facts from his return or any document required of him by the Bureau of Internal Revenue: (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which

the ruling is based; or (c) where the taxpayer acted in bad faith. (italics for emphasis)

It is clear from the foregoing that rulings or circulars promulgated by the Commissioner of Internal Revenue have no retroactive application where to so apply them would be prejudicial to taxpayers. The prejudice to petitioner of the retroactive application of Memorandum Circular No. 4-71 is beyond question. It was issued only in 1971, or three years after 1968, the last year that petitioner had withheld taxes under General Circular No. V-334. The assessment and demand on petitioner to pay deficiency withholding income tax was also made three years after 1968 for a period of time commencing in 1965. Petitioner was no longer in a position to withhold taxes due from foreign corporations because it had already remitted all film rentals and no longer had any control over them when the new Circular was issued. And in so far as the enumerated exceptions are concerned, admittedly, petitioner does not fall under any of them.

Respondent claims, however, that the provision on non-retroactivity is inapplicable in the present case in that General Circular No. V-334 is a nullity because in effect, it changed the law on the matter. The Court of Tax Appeals sustained this position holding that: "Deductions are wholly and exclusively within the power of Congress or the law-making body to grant, condition or deny; and where the statute imposes a tax equal to a specified rate or percentage of the gross or entire amount received by the taxpayer, the authority of some administrative officials to modify or change, much less reduce, the basis or measure of the tax should not be read into law."

4

Therefore, the Tax Court concluded, petitioner did not acquire any vested right thereunder as the same was a nullity.

The rationale behind General Circular No. V-334 was clearly stated therein, however: "It ha(d) been determined that the tax is still imposed on income

derived from capital, or labor, or both combined, in accordance with the basic principle of income taxation ...and that a mere return of capital or investment is not income ... ." "A part of the receipts of a non-resident foreign film distributor derived from said film represents, therefore, a return of investment." The Circular thus fixed the return of capital at 50% to simplify the administrative chore of determining the portion of the rentals covering the return of capital."

5

Were the "gross income" base clear from Sec. 24 (b), perhaps, the ratiocination of the Tax Court could be upheld. It should be noted, however, that said Section was not too plain and simple to understand. The fact that the issuance of the General Circular in question was rendered necessary leads to no other conclusion than that it was not easy of comprehension and could be subjected to different interpretations.

In fact, Republic Act No. 2343, dated June 20, 1959, supra, which was the basis of General Circular No. V-334, was just one in a series of enactments regarding Sec. 24 (b) of the Tax Code. Republic Act No. 3825 came next on June 22, 1963 without changing the basis but merely adding a proviso (in bold letters).

(b) Tax on foreign corporation.—(1) Non-resident corporations. — There shall be levied, collected and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph, upon the amount received by every foreign corporation not engaged in trade or business within the Philippines, from all sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, a tax equal to thirty per centum of such amount: PROVIDED, HOWEVER, THAT PREMIUMS SHALL NOT INCLUDE REINSURANCE PREMIUMS. (double emphasis ours).

Republic Act No. 3841, dated likewise on June 22, 1963, followed after, omitting the proviso and inserting some words (also in bold letters).

(b) Tax on foreign corporations.—(1) Non-resident corporations.—There shall be levied, collected and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph, upon the amount received by every foreign corporation not engaged in trade or business within the Philippines, from all sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical OR CASUAL gains, profits and income, AND CAPITAL GAINS, a tax equal to thirty per centum of such amount. 6

(double emphasis supplied)

The principle of legislative approval of administrative interpretation by reenactment clearly obtains in this case. It provides that "the re-enactment of a statute substantially unchanged is persuasive indication of the adoption by Congress of a prior executive construction.

7

Note should be taken of the fact

that this case involves not a mere opinion of the Commissioner or ruling rendered on a mere query, but a Circular formally issued to "all internal revenue officials" by the then Commissioner of Internal Revenue.

It was only on June 27, 1968 under Republic Act No. 5431, supra, which became the basis of Revenue Memorandum Circular No. 4-71, that Sec. 24 (b) was amended to refer specifically to 35% of the "gross income."

This Court is not unaware of the well-entrenched principle that the Government is never estopped from collecting taxes because of mistakes or errors on the part of its agents.

8

In fact, utmost caution should be taken in this regard.

9

But, like

other principles of law, this also admits of exceptions in the interest of justice and fairplay. The insertion of Sec. 338-A into the National Internal Revenue

Code, as held in the case of Tuason, Jr. vs. Lingad,

10

is indicative of legislative

intention to support the principle of good faith. In fact, in the United States, from where Sec. 24 (b) was patterned, it has been held that the Commissioner of Collector is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom, been a misrepresentation to the taxpayer.

11

or where there has

12

We have also noted that in its Decision, the Court of Tax Appeals further required the petitioner to pay interest and surcharge as provided for in Sec. 51 (e) of the Tax Code in addition to the deficiency withholding tax of P 525,897.06. This additional requirement is much less called for because the petitioner relied in good faith and religiously complied with no less than a Circular issued "to all internal revenue officials" by the highest official of the Bureau of Internal Revenue and approved by the then Secretary of Finance.

13

With the foregoing conclusions arrived at, resolution of the issue of prescription becomes unnecessary.

WHEREFORE, the judgment of the Court of Tax Appeals is hereby reversed, and the questioned assessment set aside. No costs.

SO ORDERED.

Footnotes

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

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

3 Memorandum of Petitioner, Rollo. p. 97.

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

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

6 The omission of the proviso "Provided, however, That premiums shall not include reinsurance premiums" appears to be due to oversight as the purpose of the amendment was to include capital gains in gross income of foreign non-resident corporations. See footnote 13, Filipinas Life Assurance Co. vs. Court of Tax Appeals, 21 SCRA 622 (1967).

7 Biddle vs. Commissioner, 302 U.S., 573 (1938); Alexander Howden & Co., Ltd. vs. Collector of Internal Revenue, 13 SCRA 601 (1965).

8 Visayan Cebu Terminal Co., Inc. vs. Commissioner of Internal Revenue, 13 SCRA 357 (1965); Zamora vs. Court of Tax Appeals, 36 SCRA 77 (1970); Balmaceda vs. Corominas & Co., Inc. 66 SCRA 555 (1975).

9 Senator James Couzens 11 BTA 1040 (1928), 48 Harvard Law Review 1281, 1300, cited in 10A Metens Law of Federal Income Taxation, Sec. 60.13, p. 189.

10 58 SCRA 170 (1974).

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

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

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

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

EN BANC

G.R. No. L-20563

October 29, 1968

CEBU PORTLAND CEMENT COMPANY, petitioner, vs. COLLECTOR (Now COMMISSIONER) OF INTERNAL REVENUE, respondent.

ANGELES, J.:

This case involves petitioner's claim for refund of P458,241.45 sales tax paid from November 1, 1954 to March, 1955, and P427,552.95 ad valorem tax paid from April, 1955 to September 30, 1956 from the sale of APO portland cement produced by the petitioner.

Prior to the effectivity of Republic Act No. 1299 on June 16, 1955, 1 the petitioner had been paying the sales tax (known also as percentage tax) of APO Portland cement produced by it,2 computed at 7% of the gross selling price inclusive of the cost of the bag containers of cement and the gypsum 3 used in the manufacture of said product. After the approval of the amendment of the law petitioner stopped paying sales tax on its gross sales and instead paid the ad valorem tax4 on the selling price of the product after deducting therefrom the corresponding cost of the containers thereof.

It appears, however, that since 1952, petitioner had been protesting the imposition of the sales tax on its APO portland cement, and on January 16, 1953, it also protested the payment of ad valorem taxes. A written claim for refund of sales and ad valorem taxes paid by petitioner was filed two years later (September 1955) which was reiterated on July 26, 1956.

Without awaiting respondent's ruling on said claims for refund, petitioner, on January 24, 1957, filed with the Court of Tax Appeals a petition for review "of the action of the Collector of Internal Revenue in refusing to entertain petitioner's claim for refund of the percentage tax on sales of its APO cement." It was alleged in the petition that the percentage taxes collected by respondent are refundable since under Republic Act 1299, producers of cement are exempt from the payment of said tax. The petition was amended on October 24, 1959, and again amended on June 23, 1961, to include a claim for refund of ad valorem taxes alleged to have been overpaid through double payments.

After hearing and consideration of the evidence submitted in connection therewith, the Court of Tax Appeals rendered judgment dismissing the petition for review, holding: (1) that petitioner was not exempt from payment of the sales taxes on its APO portland cement prior to the effectivity of Republic Act No. 1299, it being then considered a manufactured product; (2) that petitioner is not entitled to deduction from the gross selling price of the cost of raw materials, the value of the bag containers and gypsum in the absence of evidence that they had been previously subjected to the 7% tax imposed by sections 186 and 190 of the Tax Code; (3) that for so much of the sales taxes that were billed, charged to, and paid for by its customers, the petitioner is not the proper party to claim for refund; and (4) that the right to claim for refund of taxes alleged to have been erroneously paid thru wrong computation, double payment, or otherwise, is already barred by prescription. Dissatisfied with the findings of the Tax Court, the petitioner elevated the case to the Supreme Court on a petition for review of the decision, assigning as errors the conclusions as above enumerated.

The first assigned error calls for a ruling on the prospective or retrospective application of Republic Act No. 1299, which became effective upon its approval on June 16, 1955, amending section 246 of the National Internal Revenue Code, as follows:

SEC. 246. Definitions of the terms "gross output", "minerals" and "mineral products" — disposition of royalties and ad valorem taxes. — The term "gross output" shall be interpreted as the actual market value of minerals or products, or of bullion from each mine or mineral products, or of bullion from each mine or mineral lands operated as a separate entity without any deduction from mining, milling, refining, transporting, handling, marketing, or any other expenses: Provided, however, That if the minerals or mineral products are sold or consigned abroad by the lessee or owner of the mine under C.K.F. terms, the actual cost of ocean freight and insurance shall be deducted. The output of any group of contiguous mining claims shall not be subdivided. The word "Minerals" shall mean all inorganic substances found in nature whether in solid, liquid, gaseous, or any intermediate state. The term "mineral products" shall mean things produced by the lessee, concessionaire or owner of mineral lands, at least eighty per cent of which things must be minerals extracted by such lessee, concessionaire, or owner of mineral lands. Ten per centum of the royalties and ad valorem taxes herein provided shall accrue to the municipality and ten per centum to the province where the mines are situated, and eighty per centum to the national treasury.

The only change brought about by said amendment is the incorporation of the definition of the word "minerals" and the term "mineral products".

It is urged by petitioner that since the purpose of the amendment was merely to clarify the meaning of said terms, the section should be construed as if it had been originally passed in its amended form, so that cement should be considered as "mineral product" even before the enactment of Republic Act 1299,5 and therefore exempt from the sales or percentage tax, pursuant to the provision of section 188(c) of the National Internal Revenue Code. 6

We cannot subscribe to this view. It is a settled rule in statutory construction that a statute operates prospectively only and never retroactively, unless the

legislative intent to the contrary is made manifest either by the express terms of the statute or by necessary implication. 7 In every case of doubt, the doubt must be resolved against the retrospective effect. 8 There is nothing in the context of the provision in question that would manifest the Legislature's intention to have the provision apply to taxes due in the past. On the other hand, the use of the word, "shall" gives the unmistakable impression that the lawmakers intended this enactment to be effective only in futuro. Quite recently, in Central Azucarera Don Pedro vs. Court of Tax Appeals,9 this Court sustained the holding of the respondent Court that section 51(d) of the Tax Code, as amended, which imposes the collection of interest on a deficiency income tax assessment, became effective only on the approval of the amendment, observing that the provision uses the phrase "shall be assessed at the same time."

Furthermore, careful perusal of the explanatory note to House Bill No. 3251, which was later approved as Republic Act No. 1299, and the portions of the record of the discussions in Congress relative thereto, reveals nothing that would suggest that the amendment was enacted to operate retrospectively. While the purpose of the amendment, as mentioned in the explanatory note to the bill, was not only to "accelerate the collection of mining royalties and ad valorem taxes but also clarify the doubt of the tax-paying public on the interpretative scope of the two terms," it, certainly, could not have been the intention of the lawmakers to unsettle previously consumated transactions between the taxpayer and the Government, no matter in what manner the meaning of the terms were construed in the past. No mention was made, in the deliberations, about the taxes previously collected or on the sales of cement, although Congress must have been aware of these assessments due to an admitted confusion as to the meaning of the terms defined in the amendment.

Indeed, like other statutes, tax laws operate prospectively, whether they enact, amend or repeal, unless, as aforesaid, the purpose of the Legislature to give retrospective effect is expressly declared or may clearly be implied from the language used.10 It thus results that before the enactment of the amendment to section 246 of the Tax Code, when cement was not yet placed under the category of either "minerals" or "mineral products" it was not exempt from the percentage tax imposed by section 186 of said Code, and was, therefore, taxable as a manufactured product.

11

However, We agree with the petitioner that the gypsum and bag containers used in the production and sale of cement are deductible from the gross selling price in computing the 7% compensating tax levied on the sale of cement before Republic Act 1299. In the absence of any showing that the petitioner itself manufactured the bag containers, the inference is that these bags were bought from others from whom taxes had been levied for the original sale thereof. The same holds true with the gypsum used in the process of the manufacture of cement, considering that said component is imported, 12 and subject to compensating tax.13

Again, We agree with the petitioner in assigning as error of the respondent Court its conclusion that for so much of the sales taxes that were billed, charged, and paid for by the petitioner's customers, the petitioner is not the proper party to claim refund. The first paragraph of section 186 of the Tax Code, pursuant to which the 7% sales taxes were collected from the petitioner, reads:

SEC. 186. Percentage tax on sales of other articles. — There shall be levied, assessed and collected once only on every original sale, barter, exchange, and similar transaction either for nominal or valuable considerations intended to transfer ownership of, or title to, the articles not enumerated in sections one hundred and eighty-four, and one hundred and eighty-five a tax equivalent to

seven per centum of the gross selling price or grass value in money of the articles so sold, bartered, exchanged, or transferred, such tax to be paid by the manufacturer or producer: Provided, That where the articles subject to tax under this section are manufactured out of materials likewise subject to tax under this section, and section one hundred and eighty-nine, the total cost of such materials, as duly established shall be deductible from the gross selling price or gross value in money of such manufactured articles.

The tax provided under this section of the Code is imposed upon the manufacturer or producer and not on the purchaser. On this matter of who bears the burden of the sales tax, this Court, after an extensive research on the subject, said:14

We begin with an analysis on the nature of the percentage (sales) tax imposed by section 186 of the Code. Is it a tax on the producer or on the purchaser? Statutes of the type under consideration, which impose a tax on sales, have been described as "act(s) with schizophrenic symptoms" as they apparently have two faces — one that of a vendor tax, and the other, a vendee tax. Fortunately, for us, the provisions of the Code throw some light on the problem. The Code states that the sales tax "shall be paid by the manufacturer or producer," who must make a true and complete return of the amount of his, her or its gross monthly sales, receipts or earnings or gross value of output actually removed from the factory or mill warehouse and within twenty days after the end of each month, pay the tax due thereon.

xxx

xxx

xxx

It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does the tax becomes a part of the price which the purchaser must pay. It does not matter that an additional amount is billed as tax to the purchaser. The method of listing the price and the tax separately

and defining taxable gross receipts as the amount received less the amount of the tax added, merely avoids payment by the seller of a tax on the amount of the tax. The effect is still the same, namely, that the purchaser does not pay the tax. He pays, or may pay the seller more for the goods because of the seller's obligation, but that is all and the amount added because of the tax is paid to get the goods and for nothing else.

But the tax burden may not even be shifted to the purchaser at all. A decision to absorb the burden of the tax is largely a matter of economics. Then it can no longer be contended that a sales tax is a tax on the purchaser.

It follows that it is petitioner, and not its customers, that may ask for a refund of whatever amounts it is entitled for the percentage or sales taxes it paid before the amendment of section 246 of the Tax Code.

Petitioner finally disputes the ruling of the respondent Court that the action for refund has prescribed. Its contention is that the defense of prescription was belated in that it was raised for the first time in the answer of respondent when the original petition was amended to incorporate more explicitly petitioner's claim for refund of ad valorem taxes paid on cement produced during the period from April 1, 1955 to September 30, 1956.

In analyzing this issue, We need to first have a complete perspective of the original and amended pleadings filed by the parties in the Court of Tax Appeals, thus — On January 24, 1957, the petitioner filed its petition for review, claiming refund of sales or percentage taxes amounting to P448,893.63. In its answer of February 27, 1957, respondent did not raise the defense of prescription. On September 3, 1959, respondent filed an amended answer but again said defense was not included. On October 24, 1959 the petitioner asked for leave to file an amended petition for review in which amendment it added the sum of P400,499.99 representing overpaid ad

valorem taxes, in its claim for refund. On December 28, 1959, the amended petition was deemed admitted as of the date of its filing on October 24, 1959, and respondent was given time to file his answer. The respondent filed his answer on February 26, 1960, this time pleading prescription as a defense insofar as portion of the sales tax sought to be refunded was paid more than two years from the date the petition for review was filed with the Tax Court. On June 23, 1961, the petitioner re-amended its petition with said court praying, finally, that respondent be ordered to refund the amount of P458,241.45 paid as percentage taxes, and the amount of P427,552.95, representing overpayments of ad valorem taxes; or alternatively, the amount of P590,649.92, or P854,619.89, depending on the correct basis for the computation of the ad valorem tax.

Section 306 of the Tax Code provides:

Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Collector of Internal Revenue; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty.

Construing the above provision, this Court has ruled that the two requirements — (1) filing of a written claim for refund with the Commissioner of Internal Revenue; and (2) institution of a suit or proceeding in court within two years from the date of payment — are mandatory and noncompliance therewith is fatal.15

As there appears to be no dispute on the written claims filed with the Commissioner of Internal Revenue, We shall proceed to analyze the effect of the prescriptive period in relation to the pleadings filed with the Court of Tax Appeals. For the refund of the 7% sales or percentage taxes covering the period from November 1, 1954, to March, 1955, amounting to P446,898.63, as shown in Annex A of the Amended Petition, the suit is deemed to have been instituted on January 24, 1957, when the original petition was filed. Counting two years back, that is to January 25, 1955, all taxes paid after this date may still be properly refunded, speaking from the prescription angle. As to the allegedly overpaid ad valorem taxes of 1-1/2% for the period from April, 1955 to September, 1956 amounting to P400,499.99, the suit should be deemed to have been instituted only with the filing of the amended petition on October 24, 1959, which added as a new cause of action the recovery of said overpaid ad valorem taxes. Again, counting two years back from October 24, 1959, when the amended complaint was filed, to October 25, 1957 — all taxes paid thereafter may still be recovered. It is not claimed, however, nor is there any showing, that among the alleged over payments of ad valorem taxes were remitted after October 25, 1957.

Petitioner's claim that the defense of prescription had been waived, for failure of the respondent Commissioner to raise it in his original answer, does not hold water. Respondent's answer to the amended petition for review, dated February 26, 1960, wherein it was pleaded the defense of prescription, superseded the answers filed February 27, 1957 and September 3, 1959, respectively, so that any defense or defenses raised in his latest answer would be considered as though contained in his original answer. For the rule is that "an amended complaint and the answer thereto, when filed, take the place of the originals. The latter are then regarded as abandoned and cease to perform any further functions as pleadings."16

Anent the contention that "with respect to the ad valorem taxes paid for the period from April 1, 1955 though not explicitly included in the original petition, was actually mentioned therein and should therefore be deemed filed on the date of the original petition," We note that the aforesaid ad valorem taxes were only mentioned in Annex "A" to the petition as part of the tabulation of taxes paid by petitioner to the respondent, but in the body of the petition itself, the refund of said payments was not sought. All the allegations in said original petition pertain to and are in support of petitioner's claim for refund of the sales taxes in question.

In recapitulation, We hold:

1. That before the effectivity of Republic Act No. 1299, amending section 246 of the National Internal Revenue Code, cement was taxable as a manufactured product under section 186, in connection with section 194 (x) of said Code;

2. That in computing the gross selling price, of the cement as basis for the 7% percentage tax levied in pursuance to section 186, the cost of the bag containers used in the sale, and the gypsum used in the manufacture, of cement should be deducted;

3. That the petitioner, and not its customers, is the proper party to seek refund of taxes erroneously paid under section 186 of the Tax Code;

4. That the action for refund has not prescribed in so far as concerns the sales or percentage taxes paid after January 25, 1953;

5. That action for refund has prescribed for sales or percentage taxes paid before January 25, 1955, and for all ad valorem taxes alleged in the amended petition, which were paid more than two years back from October 24, 1959, when said taxes were sought to be refunded for the first time.

PREMISES CONSIDERED, the decision appealed from is modified as hereby above-stated, and as thus modified, the decision is affirmed.

Footnotes

1

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

products".

2

Pursuant to sec. 196 of the Tax Code.

3

A constituent of cement, imported from abroad.

4

See Sec. 243, Tax Code.

5

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

resolution of Dec. 29, 1967; see also another case between the same parties, G.R. No. L-22603, Jan. 17, 1968. In both cases, it was held that for purposes of Sec. 243 of the Tax Code, what is taxable are the quarried minerals used in producing cement, in which case cement is not considered as mineral product.

6

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

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

7

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

546.

8

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

9

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

10

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

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

11

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

12

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

13

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

abroad, while the littter is levied on products manufactured locally. Sec. 190 of the Tax Code requires that the compensating tax to be paid in pursuance thereof be "equivalent to the percentage taxes imposed under this Title on original transactions affected merchants, importers, or manufacturers, such tax to be paid before the withdrawal or removal of said commodities, goods, wares, or merchandise from the customhouse or the post office."

14

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

1967.

15

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

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

16

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

THIRD DIVISION

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

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. RIO TUBA NICKEL MINING CORPORATION and THE COURT OF TAX APPEALS, respondents.

RESOLUTION

GUTIERREZ, JR., J.:

Private respondent Rio Tuba Nickel Mining Corporation (Rio Tuba) seeks a reconsideration of the Court's decision in G.R. Nos. 83583-84 dated September 30, 1991 denying its claim for refund of specific taxes paid on manufactured oils and diesel fuel oil.

The Court ruled in the decision that Section 5 of Republic Act (R.A) No. 1435, which granted to lumber and mining companies the privilege of refund of twenty five (25%) percent of specific taxes paid by them when such oils are used in their operations, was impliedly repealed by Presidential Decree (P.D.) No. 711 which abolished all special and fiduciary funds.

Under R.A. No. 1435, the specific taxes on manufactured oils and diesel fuel oil accrued to the Highway Special Fund. The Court stated that miners and lumbermen were accorded refund privileges under R.A. No. 1435 because they seldom use the national highways since they have their own roads and it was unfair to subject them to the increased tax rates and in effect make them

subsidize the construction of highways from which they did not directly benefit. According to the Court, since by virtue of P.D. No. 711, all funds that have accrued from the various special funds are channeled to the so-called General Fund, there is, therefore, no need for justification for the continued special treatment of these miners and loggers. Thus, reasoned the Court, since under P.D. No. 711 any government project can be the beneficiary of such funds as long as it is for the general welfare of the masses and it is inevitable that sooner or later the miners and loggers will stand to benefit from these government benefits, then the refund privilege in R.A. No. 1435 has become an anachronism. The Court ruled that the refund privilege granted to miners and loggers under R.A. 1435 was impliedly repealed by P.D. No. 711.

This decision was premised on the assumption that the Highway Special Fund was one of those funds abolished and transferred to the General Fund by P.D. No. 711 which took effect on July 1, 1975.

Despite the mandate of P.D. No. 711, however, several special funds were still retained and the Highway Special Funds was one of them.

Proof that some of these special and fiduciary funds were retained may be extracted from the provisions of P.D. No. 1741 dated October 31, 1980 which governs the computation of national internal revenue allotments to local government units. Section 2 of said decree provides:

Sec. 2. Magnitude of Assistance. — A maximum of twenty per cent (20%) of national internal revenue taxes shall be available for national assistance to local government units. Provided, That the national revenue used as basis in computation shall exclude receipts accruing to Special or Fiduciary Funds and to Special Accounts in the General Fund, amounts authorized by law to be used by the collecting agency, and amounts recorded as income of the General

Fund but which are charged to appropriations in the Central or other Appropriations Laws. (Emphasis Supplied)

The Internal Revenue Allotments annually prepared by the Bureau of Internal Revenue in accordance with the foregoing decree showed that the Highway Special Fund continued its existence up to 1985 and was channeled to the General Fund only in 1986.

It is not clear why the Highway Special Fund was maintained for 10 years after the effectivity P.D. No. 711 or why it was abolished in 1986. The stark fact remains that it retained its status as a special fund up to 1985.

With the foregoing consideration, we cannot therefore state with definiteness that it was P.D. No. 711 which impliedly repealed Section 5 of R.A. No. 1435. We can however safely conclude that Section 5 of R.A. No. 1435 is now an anachronism because the Highway Special Fund, after 1985, no longer exists.

The rationale for the Court's decision denying the private respondent's twin claims for refund was that the specific taxes on these manufactured oils paid by the mining and lumber companies no longer accrued to the Highway Special Fund. But given the added circumstance that the Highway Special Fund which was financed by these specific taxes still continued up to 1985, it will be highly inequitable for the private respondent if we were to rule that no refund of specific taxes paid up to 1985 which actually accrued to the Highway Special Fund (not the General Fund) may be given. The private respondent still did not directly benefit from the projects supported by the Highway Special Fund.

We therefore, modify our decision in this case and rule that mining and logging companies are entitled to the refund privilege granted by R.A. No. 1435 on specific taxes paid up to 1985 on manufactured and diesel fuel oils.

Since the private respondent's claim for refund covers specific taxes paid from 1980 to July 1983 then we find that the private respondent is entitled to a refund. It should be made clear, however, that Rio Tuba is not entitled the whole amount it claims as refund.

The specific taxes on oils which Rio Tuba paid for the aforesaid period were no longer based on the rates specified by Sections 1 and 2 of R.A. No. 1435 but on the increased rates mandated under Sections 153 and 156 of the National Internal Revenue Code of 1977. We note, however, that the latter law does not specifically provide for a refund to these mining and lumber companies of specific taxes paid on manufactured and diesel fuel oils.

In Insular Lumber Co. v. Court of Tax Appeals, (104 SCRA 710 [1981]), the Court held that the authorized partial refund under section 5 of R.A. No. 1435 partakes of the nature of a tax exemption and therefore cannot be allowed unless granted in the most explicit and categorical language. Since the grant of refund privileges must be strictly construed against the taxpayer, the basis for the refund shall be the amounts deemed paid under Sections 1 and 2 of R.A. No. 1435.

ACCORDINGLY, the decision in G.R. Nos. 83583-84 is hereby MODIFIED. The private respondent's CLAIM for REFUND is GRANTED, computed on the basis of the amounts deemed paid under Sections 1 and 2 of R.A. No. 1435, without interest.

SO ORDERED.

SECOND DIVISION

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

HIJO PLANTATION INC., DAVAO FRUITS CORPORATION, TWIN RIVERS PLANTATION, INC. and MARSMAN & CO., INC., for themselves and in behalf of other persons and entities similarly situated, petitioners, vs. CENTRAL BANK OF THE PHILIPPINES, respondent.

PARAS, J.:

This is a petition for certiorari and prohibition which seeks: (1) to declare Monetary Board Resolution No. 1995, series of 1971, as null and void; (2) to prohibit the Central Bank from collecting the stabilization tax on banana exports shipped during the period January 1, 1972 to June 30, 1982; and (3) a refund of the amount collected as stabilization tax from the Central Bank.

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

Hijo Plantation, Inc., Davao Fruits Corporation, Twin Rivers Plantation, Inc. and Marsman Plantation (Manifestation, Rollo, P. 18), collectively referred to herein as petitioners, are domestic corporations duly organized and existing under the laws of the Philippines, all of which are engaged in the production and exportation of bananas in and from Mindanao.

Owing to the difficulty of determining the exchange rate of the peso to the dollar because of the floating rate and the promulgation of Central Bank Circular No. 289 which imposes an 80% retention scheme on all dollar earners, Congress passed Republic Act No. 6125 entitled "an act imposing

STABILIZATION TAX ON CONSIGNMENTS ABROAD TO ACCELERATE THE ECONOMIC DEVELOPMENT OF THE PHILIPPINES AND FOR OTHER PURPOSES," approved and made effective on May 1, 1970 (Comment on Petition, Rollo, p, 32), to eliminate the necessity for said circular and to stabilize the peso. Among others, it provides as follows:

SECTION 1. There shall be imposed, assessed and collected a stabilization tax on the gross F.O.B. peso proceeds, based on the rate of exchange prevailing at the time of receipt of such proceeds, whether partial or total, of any exportation of the following products in accordance with the following schedule:

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

Ten per centum of the F.O.B. peso proceeds of exports received on or after the date of effectivity of this Act to June thirty, nineteen hundred seventy one;

Eight per centum of the F.O.B. peso proceeds of exports received from July first, nineteen hundred seventy-one to June thirty, nineteen hundred seventytwo;

Six per centum of the F.O.B. peso proceeds of exports received from July first, nineteen hundred seventy two to June thirty, nineteen hundred seventythree; and

Four per centum of the F.O.B. peso proceeds of exports received from July first, nineteen hundred seventy-three to June thirty, nineteen hundred seventy-four.

b. In the case of molasses, coconut oil, dessicated coconut, iron ore and concentrates, chromite ore and concentrates, copra meal or cake, unmanufactured abaca, unmanufactured tobacco, veneer core and sheets,

plywood (including plywood panels faced with plastics), lumber, canned pineapples, and bunker fuel oil;

Eight per centum of the F.O.B. peso proceeds of exports shipped on or after the date of effectivity of this Act to June thirty, nineteen hundred seventy-one;

Six per centum of the F.O.B. peso proceeds of exports shipped from July first, nineteen hundred seventy one to June thirty nineteen hundred seventy- two;

Four per centum of the F.O.B. peso proceeds of exports shipped from July first, nineteen hundred seventy-two to June thirty nineteen hundred seventythree; and

Two per centum of the F.O.B. peso proceeds of exports shipped from July first, nineteen hundred seventy three to June thirty nineteen hundred seventy-four.

Any export product the aggregate annual F.O.B. value of which shall exceed five million United States dollars in any one calendar year during the effectivity of this Act shall likewise be subject to the rates of tax in force during the fiscal years following its reaching the said aggregate value. (Emphasis supplied).

During the first nine (9) months of calendar year 1971, the total banana export amounted to an annual aggregate F.O.B. value of P8,949,000.00 (Answer, Rollo, p. 73) thus exceeding the aggregate F.O.B. value of five million United States Dollar, bringing it within the ambit of Republic Act No. 6125. Consequently, the banana industry was in a dilemma as to when the stabilization tax was to become due and collectible from it and under what schedule of Section 1 (b) of Republic Act 6125 should said tax be collected. Accordingly, petitioners through their counsel, by letter dated November 5, 1971, sought the authoritative pronouncement of the Central Bank (herein referred to as respondent), therein advancing the opinion that the stabilization tax does not become due and collectible from the petitioners until July 1, 1972

at the rate of 4% of the F.O.B. peso proceeds of the exports shipped from July 1, 1972 to June 30,1973. Replying by letter dated December 17,1971 (Rollo, p. 11), the Central Bank called attention to Monetary Board Resolution No. 1995 dated December 3, 1971 which clarified that:

1) For exports of bananas shipped during the period from January 1, 1972 to June 30, 1972; the stabilization tax shall be at the rate of 6%;

2) For exports of bananas shipped during the period from July 1, 1972 to June 30, 1973, the stabilization tax shall be at the rate of 4%; and

3) For exports of bananas shipped during the period from July 1, 1973, to June 30, 1974, the stabilization tax shall be at the rate of 2%."

Contending that said Board Resolution No. 1995 was manifestly contrary to the legislative intent, petitioners sought a reconsideration of said Board Resolution by letter dated December 27, 1971 (Rollo, p. 12) which request for reconsideration was denied by the respondent, also by letter dated January 20, 1972 (Rollo, p. 24). With the denial of petitioners' request for reconsideration, respondent thru its agent Bank, Rizal Commercial Banking Corporation has been collecting from the petitioners who have been forced to pay under protest, such stabilization tax.

Petitioners view respondent's act as a clear violation of the provision of Republic Act No. 6125, and as an act in excess of its jurisdiction, hence, this petition.

The sole issue in this case is whether or not respondent acted with grave abuse of discretion amounting to lack of jurisdiction when it issued Monetary Board Resolution No. 1995, series of 1971 which in effect reaffirmed Central Bank Circular No. 309, enacted pursuant to Monetary Board Resolution No. 1179.

There is here no dispute that the banana industry is liable to pay the stabilization tax prescribed under Republic Act No. 1995, it being the admission of both parties, that the Industry has indeed reached and for the first time in the calendar year 1971, a total banana export exceeding the aggregate annual F.O.B. value of five million United States dollars. The crux of the controversy, however, is the manner of implementation of Republic Act No. 6125.

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

An export product the aggregate annual F.O.B. value of which shall exceed five million US dollars in any one calendar year during the effectivity of the act shall likewise be subject to the rates of tax in force during the fiscal year following its reaching the said aggregate value."

Petitioners contend that the stabilization tax to be collected from the banana industry does not become due and collectible until July 1, 1972 at the rate of 4% of the F.O.B. peso proceeds of the export shipped from July 1, 1972 to June 30,1973. They further contend that respondent gave retroactive effect to the law (RA 6125) by ruling in Monetary Board Resolution No. 1995 dated December 3, 1 971, that the export stabilization tax on banana industry would start to accrue on January 1, 1972 at the rate of 6% of the F.O.B. peso proceeds of export shipped from July 1, 1971 to June 30, 1972 (Rollo, pp. 34).

Respondent, on the other hand, contends that the aforecited provision of RA 6125 merely prescribes the rates that may be imposed but does not provide when the tax shall be collected and makes no reference to any definite fixed period when the tax shall begin to be collected (Rollo, pp. 77-78).

There is merit in this petition.

In the very nature of things, in many cases it becomes impracticable for the legislative department of the Government to provide general regulations for the various and varying details for the management of a particular department of the Government. It therefore becomes convenient for the legislative department of the government, by law, in a most general way, to provide for the conduct, control, and management of the work of the particular department of the government; to authorize certain persons, in charge of the management and control of such department (United States v. Tupasi Molina, 29 Phil. 119 [19141).

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

All rules and regulations for the purpose of carrying out the provisions of the act shall be promulgated by the Central Bank of the Philippines and shall take effect fifteen days after publication in three newspapers of general circulation throughout the Philippines, one of which shall be in the national language.

Such regulations have uniformly been held to have the force of law, whenever they are found to be in consonance and in harmony with the general purposes and objects of the law. Such regulations once established and found to be in conformity with the general purposes of the law, are just as binding upon all the parties, as if the regulation had been written in the original law itself (29 Phil. 119, Ibid). Upon the other hand, should the regulation conflict with the law, the validity of the regulation cannot be sustained (Director of Forestry vs. Muroz 23 SCRA 1183).

Pursuant to the aforecited provision, the Monetary Board issued Resolution No. 1179 which contained the rules and regulations for the implementation of said provision which Board resolution was subsequently embodied in Central Bank Circular No. 309, dated August 10, 1970 (duly published in the Official Gazette, Vol. 66, No. 34, August 24, 1940, p. 7855 and in three newspapers of

general circulation throughout the Philippines namely, the Manila Times, Manila Chronicle and Manila Daily Bulletin). Section 3 of Central Bank Circular No. 309, "provides that the stabilization tax shall begin to apply on January first following the calendar year during which such export products shall have reached the aggregate annual F.O.B. value of more than $5 million and the applicable tax rates shall be the rates prescribed in schedule (b) of Section 1 of RA No. 6125 for the fiscal year following the reaching of the said aggregate value." Central Bank Circular No. 309 was subsequently reaffirmed in Monetary Board Resolution No. 1995 herein assailed by petitioners for being null and void (Rollo, pp. 97- 98).

In its comment (Rollo, p. 40), respondent argues that the request for authoritative pronouncement of petitioners was made because there was no express provision in Section 1 of RA 6125 which categorically states, when the stabilization tax shall begin to accrue on those aggregate annual F.O.B. values exceeding five (5) million United States dollars in any one calendar year during the effectivity of said act. For which reason, the law itself authorized it under Section 7 to promulgate rules and regulations to carry out the provisions of said law.

In petitioner's reply (Rollo, p. 154) they argue that since the Banana Exports reached the aggregate annual F.O.B. value of US $5 million in August 1971, the stabilization tax on banana should be imposed only on July 1, 1972, the fiscal year following the calendar year during which the industry attained the $5 million mark. Their argument finds support in the very language of the law and upon congressional record where a clarification on the applicability of the law was categorically made by the then Senator Aytona who stated that the tax shall be applicable only after the $5 million aggregate value is reached, making such tax prospective in application and for a period of one year- referring to the fiscal year (Annex 8, Comment of Respondent; Rollo, p. 60). Clearly such clarification was indicative of the legislative intent. Further, they argue that

respondent bank through the Monetary Board clearly overstepped RA 6125 which empowered it to promulgate rules and regulations for the purpose of carrying out the provisions of said act, because while Section 1 of the law authorizes it to levy a stabilization tax on petitioners only in the fiscal year following their reaching the aggregate annual F.O.B. value of US $5 million, that is, the fiscal year July 1, 1972 to June 30, 1973, at a tax rate of 4% of the F.O.B. peso proceeds, respondent in gross violation of the law, instead issued Resolution No. 1995 which impose a 6% stabilization tax for the calendar year January 1, 1972 to June 30, 1972, which obviously is in excess of its jurisdiction. It was further argued that in directing its agent bank to collect the stabilization tax in accordance with Monetary Board Resolution No. 1995, it acted whimsically and capriciously. (Rollo, p. 155).

It will be observed that while Monetary Board Resolution No. 1995 cannot be said to be the product of grave abuse of discretion but rather the result of respondent's overzealous desire to carry into effect the provisions of RA 6125, it is evident that the Board acted beyond its authority under the law and the Constitution. Hence, the petition for certiorari and prohibition in the case at bar, is proper.

Moreover, there is no dispute that in case of discrepancy between the basic law and a rule or regulation issued to implement said law, the basic law prevails because said rule or regulation cannot go beyond the terms and provisions of the basic law (People vs. Lim, 108 Phil. 1091). Rules that subvert the statute cannot be sanctioned (University of Sto. Tomas v. Board of Tax Appeals, 93 Phil. 376; Del Mar v. Phil. Veterans Administration, 51 SCRA 340). Except for constitutional officials who can trace their competence to act to the fundamental law itself, a public official must locate to the statute relied upon a grant of power before he can exercise it. Department zeal may not be permitted to outrun the authority conferred by statute (Radio Communications of the Philippines, Inc. v. Santiago L-29236, August 21, 1974, 58 SCRA 493;

cited in Tayug Rural Bank v. Central Bank, L-46158, November 28,1986,146 SCRA 120,130).

PREMISES CONSIDERED, this petition is hereby GRANTED.

SO ORDERED.

EN BANC

G.R. No. L-14880

April 29, 1960

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. FILIPINAS COMPAÑIA DE SEGUROS, respondent.

Assistant Solicitor General Jose P. Alejandro and Special Attorney Jaime M. Maza for petitioner. Ramon T. Garcia for respondent.

BARRERA, J.:

Respondent Filipinas Compañia de Seguros, an insurance company, is also engaged in business as a real estate dealer. On January 4, 1956, respondent, in accordance with the single rate then prescribed under Section 182 of the National Internal Revenue Code.1 paid the amount of P150.00 as real estate dealer's fixed annual tax for the year 1956. Subsequently said Section 182 of the Code was amended by Republic Act No. 1612, which took effect on August 24, 1956, by providing a small of graduated rates: P150 if the annual income of the real estate dealer from his business as such is P4,000, but does not exceed P10,000; P300, if such annual income exceeds P10,000 but does not exceed P30,000; and P500 if such annual income exceeds P30,000.

On June 17, 1957, petitioner Commissioner of Internal Revenue assessed and demanded from respondent (whose annual income exceeded P30,000.00) the amount of P350.00 as additional real estate dealer's fixed annual tax for the year 1956. On July 16, 1957, respondent wrote a letter to petitioner stating that the "records will show that the real estate dealer's fixed tax for 1956 of this Company was fully paid by us prior to the effectivity of Republic Act No. 1612 which amended, among other things, Sections 178 and 192 of the

National Internal Revenue Code." And, as to the retroactive effect of said Republic Act No. 1612, respondent added that the Republic Act No. 1856 which, among other things, amended Section 182 of the National Internal Revenue Code, Congress has clearly shown its intention when it provided that the increase in rates of taxes envisioned by Republic Act No. 1612 is to be made effective as of 1 January 1957".

On October 23, 1957, petitioner informed respondent that "Republic Act No. 1856 which took effect June 22, 1957 amended the date of effectivity of Republic Act 1612 to January 1, 1957. However, the said amendment applies only to fixed taxes on occupation and not to fixed taxes on business." Hence, petitioner insisted that respondent should pay the amount of P350.00 as additional real estate dealer's fixed annual tax for the year 1956.

On November 20, 1957, respondent filed with the Court of Tax Appeals a petition for review. To this petition, petitioner filed his answer on December 6, 1957. As petitioner practically admitted the material factual allegations in the petition for review, the case was submitted for judgment on the pleadings.

On November 22, 1958, the Court of Tax Appeals rendered a decision sustaining the contention of respondent company and ordering the petitioner Commissioner of Internal Revenue to desist from collecting the P350.00 additional assessment. From this decision, petitioner appealed to us.

As a rule, laws have no retroactive effect, unless the contrary is provided. (Art. 4, Civil Code of the Philippines; Manila Trading and Supply Co. vs. Santos, et al., 66 Phil., 237; La Provisora Filipina vs. Ledda, 66 Ph 573.) Otherwise stated, a state shou!d be consider as prospective in its operation whether it enacts, amen or repeals a tax, unless the language of the statute clearly demands or expresses that it shall have a retroactive effect (61 C. J. 1602, cited in Loremo vs. Posadas, 64 Phi 353.) The rule applies with greater force to

the case bar, considering that Republic Act No. 1612, which imposes the new and higher rates of real estate dealer's annual fixed tax, expressly provides in Section 21 thereof the said Act "shall take effect upon its approval" on August 24, 1956.

The instant case involves the fixed annual real estat dealer's tax for 1956. There is no dispute that before the enactment of Republic Act No. 1612 on August 2 1956, the uniform fixed annual real estate dealer's was P150.00 for all owners of rental properties receiving an aggregate amount of P3,000.00 or more a year in the form of rentals2 and that. "the yearly fixed taxes are due on the first of January of each year" unless tendered in semi-annual or quarterly installments.3 Since the petitioner indisputably paid in full on January 4, 1956, the total annual tax then prescribed for the year 1956, require it to pay an additional sum of P350.00 to complete the P500.00 provided in Republic Act No. 1612 which became effective by its very terms only on August 24 1956, would, in the language of the Court of Tax Appeals result in the imposition upon respondent of a tax burden to which it was not liable before the enactment of said amendatory act, thus rendering its operation retroactive rather than prospective, which cannot be done, as it would contravene the aforecited Section 21 of Republic Act No. 1612 as well as the established rule regarding prospectivity of operation of statutes.

The view that Congress did intend to impose said increased rates of real estate dealer's annual tax prospectively and not retroactively, finds some affirmation in Republic Act No. 1856, approved on June 22, 1957, which fixed the effective date of said new rates under Republic Act No. 1612 by inserting the following proviso in Section 182 of the National Internal Revenue Code:

Provided, further, That any amount collected in excess of the rates in effect prior to January one, nineteen hundred and fifty-seven, shall be refunded or

credited to the taxpayer concerned subject to the provisions of section three hundred and nine of this Code. (Sec. 182 (b) (2) (1).)

Petitioner, however, contends that the above-quoted provision refers only to fixed taxes on occupation and does not cover fixed taxes on business, such as the real estate dealer's fixed tax herein involved. This is technically correct, but we note from the deliberations in the Senate, where the proviso in question was introduced as an amendment, that said House Bill No. 5919 which became Republic Act No. 1856 was considered, amended, and enacted into law, in order precisely that the "iniquitous effects" which were then being felt by taxpayers. in general, on account of the approval of Republic Act No. 1612, Which was being given retroactive effect by the Bureau of Internal Revenue by collecting these taxes retroactively from January 1, 1956, be eliminated and complaints against such action be finally settled. (See Senate Congressional Record, May 4, 1957, pp. 10321033.)

It is also to be observed that said House Bill No. 5819 as originally presented, was expressly intended to amend certain provisions of the National Internal Revenue Code dealing on fixed taxes on business. The provisions in respect of fixed tax on occupation were merely subsequently added. This would seem to indicate that the proviso in question was intended to cover not only fixed taxes on occupation, but also fixed taxes on business. (Senate Congressional Record, March 7, 1957, p. 444.)The fact that said proviso was placed only at the end of paragraph "(B) On occupation" is not, therefore, view of the circumstances, decisive and unmistakable indication that Congress limited the proviso to occupation taxes.

Even though the primary purpose of the proviso is to limit restrain the general language of a statute, the legislature, unfotunately, does not always use it with technical correctness; consequently, where its use creates an ambiguity, it is the duty of the court to ascertain the legislative intention, through resort to

usual rules of construction applicable to statutes, generally an give it effect even though the statute is thereby enlarged, or the proviso made to assume the force of an independent enactment and although a proviso as such has no existence apart from provision which it is designed to limit or to qualify. (Statutory Construction by E. T. Crawford, pp. 604-605.)

. . . When construing a statute, the reason for its enactment should be kept in mind, and the statute should be construe with reference to its intended scope and purpose. (Id. at p. 249.)

On the general principle of prospectivity of statute on the language of Republic Act 1612 itself, especially Section 21 thereof, and on the basis of its intended scope and purpose as disclosed in the Congressional Record we find ourselves in agreement with the Court of Tax Appeals.

Wherefore, the decision appealed from is hereby affirmed without costs. So ordered.

Paras, C.J., Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion, Endencia and Gutierrez David, JJ. concur.

Footnotes

1

In relation to Republic Act No. 588.

2

Republic Act No. 588.

3

See Section 180, Com. Act No. 466, before its amendment on June22, 1957 by Republic Act No. 2025.

EN BANC

[G.R. No. 132527. July 29, 2005]

COCONUT OIL REFINERS ASSOCIATION, INC. represented by its President, JESUS L. ARRANZA, PHILIPPINE ASSOCIATION OF MEAT PROCESSORS, INC. (PAMPI), represented by its Secretary, ROMEO G. HIDALGO, FEDERATION OF FREE FARMERS (FFF), represented by its President, JEREMIAS U. MONTEMAYOR, and BUKLURAN NG MANGGAGAWANG PILIPINO (BMP), represented by its Chairperson, FELIMON C. LAGMAN, petitioners, vs. HON. RUBEN TORRES, in his capacity as Executive Secretary; BASES CONVERSION AND DEVELOPMENT AUTHORITY, CLARK DEVELOPMENT CORPORATION, SUBIC BAY METROPOLITAN AUTHORITY, 88 MART DUTY FREE, FREEPORT TRADERS, PX CLUB, AMERICAN HARDWARE, ROYAL DUTY FREE SHOPS, INC., DFS SPORTS, ASIA PACIFIC, MCI DUTY FREE DISTRIBUTOR CORP. (formerly MCI RESOURCES, CORP.), PARK & SHOP, DUTY FREE COMMODITIES, L. FURNISHING, SHAMBURGH, SUBIC DFS, ARGAN TRADING CORP., ASIPINE CORP., BEST BUY, INC., PX CLUB, CLARK TRADING, DEMAGUS TRADING CORP., D.F.S. SPORTS UNLIMITED, INC., DUTY FREE FIRST SUPERSTORE, INC., FREEPORT, JC MALL DUTY FREE INC. (formerly 88 Mart [Clark] Duty Free Corp.), LILLY HILL CORP., MARSHALL, PUREGOLD DUTY FREE, INC., ROYAL DFS and ZAXXON PHILIPPINES, INC., respondents.

DECISION

AZCUNA, J.:

This is a Petition for Prohibition and Injunction seeking to enjoin and prohibit the Executive Branch, through the public respondents Ruben Torres in his

capacity as Executive Secretary, the Bases Conversion Development Authority (BCDA), the Clark Development Corporation (CDC) and the Subic Bay Metropolitan Authority (SBMA), from allowing, and the private respondents from continuing with, the operation of tax and duty-free shops located at the Subic Special Economic Zone (SSEZ) and the Clark Special Economic Zone (CSEZ), and to declare the following issuances as unconstitutional, illegal, and void:

1. Section 5 of Executive Order No. 80,[1] dated April 3, 1993, regarding the CSEZ.

2. Executive Order No. 97-A, dated June 19, 1993, pertaining to the SSEZ.

3. Section 4 of BCDA Board Resolution No. 93-05-034,[2] dated May 18, 1993, pertaining to the CSEZ.

Petitioners contend that the aforecited issuances are unconstitutional and void as they constitute executive lawmaking, and that they are contrary to Republic Act No. 7227[3] and in violation of the Constitution, particularly Section 1, Article III (equal protection clause), Section 19, Article XII (prohibition of unfair competition and combinations in restraint of trade), and Section 12, Article XII (preferential use of Filipino labor, domestic materials and locally produced goods).

The facts are as follows:

On March 13, 1992, Republic Act No. 7227 was enacted, providing for, among other things, the sound and balanced conversion of the Clark and Subic military reservations and their extensions into alternative productive uses in the form of special economic zones in order to promote the economic and social development of Central Luzon in particular and the country in general. Among the salient provisions are as follows:

SECTION 12. Subic Special Economic Zone. —

...

The abovementioned zone shall be subject to the following policies:

(a)

Within the framework and subject to the mandate and limitations of the

Constitution and the pertinent provisions of the Local Government Code, the Subic Special Economic Zone shall be developed into a self-sustaining, industrial, commercial, financial and investment center to generate employment opportunities in and around the zone and to attract and promote productive foreign investments;

(b)

The Subic Special Economic Zone shall be operated and managed as a

separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as tax and duty-free importations of raw materials, capital and equipment. However, exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines;[4]

(c)

The provision of existing laws, rules and regulations to the contrary

notwithstanding, no taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises within the Subic Special Ecoomic Zone shall be remitted to the National Government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the development of municipalities

outside the City of Olangapo and the Municipality of Subic, and other municipalities contiguous to the base areas.

...

SECTION 15.

Clark and Other Special Economic Zones. — Subject to

the concurrence by resolution of the local government units directly affected, the President is hereby authorized to create by executive proclamation a Special Economic Zone covering the lands occupied by the Clark military reservations and its contiguous extensions as embraced, covered and defined by the 1947 Military Bases Agreement between the Philippines and the United States of America, as amended, located within the territorial jurisdiction of Angeles City, Municipalities of Mabalacat and Porac, Province of Pampanga and the Municipality of Capas, Province of Tarlac, in accordance with the policies as herein provided insofar as applicable to the Clark military reservations.

The governing body of the Clark Special Economic Zone shall likewise be established by executive proclamation with such powers and functions exercised by the Export Processing Zone Authority pursuant to Presidential Decree No. 66 as amended.

The policies to govern and regulate the Clark Special Economic Zone shall be determined upon consultation with the inhabitants of the local government units directly affected which shall be conducted within six (6) months upon approval of this Act.

Similarly, subject to the concurrence by resolution of the local government units directly affected, the President shall create other Special Economic Zones, in the base areas of Wallace Air Station in San Fernando, La Union (excluding areas designated for communications, advance warning and radar

requirements of the Philippine Air Force to be determined by the Conversion Authority) and Camp John Hay in the City of Baguio.

Upon recommendation of the Conversion Authority, the President is likewise authorized to create Special Economic Zones covering the Municipalities of Morong, Hermosa, Dinalupihan, Castillejos and San Marcelino.

On April 3, 1993, President Fidel V. Ramos issued Executive Order No. 80, which declared, among others, that Clark shall have all the applicable incentives granted to the Subic Special Economic and Free Port Zone under Republic Act No. 7227. The pertinent provision assailed therein is as follows:

SECTION 5. Investments Climate in the CSEZ. — Pursuant to Section 5(m) and Section 15 of RA 7227, the BCDA shall promulgate all necessary policies, rules and regulations governing the CSEZ, including investment incentives, in consultation with the local government units and pertinent government departments for implementation by the CDC.

Among others, the CSEZ shall have all the applicable incentives in the Subic Special Economic and Free Port Zone under RA 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investments Code of 1987, the Foreign Investments Act of 1991 and new investments laws which may hereinafter be enacted.

The CSEZ Main Zone covering the Clark Air Base proper shall have all the aforecited investment incentives, while the CSEZ Sub-Zone covering the rest of the CSEZ shall have limited incentives. The full incentives in the Clark SEZ Main Zone and the limited incentives in the Clark SEZ Sub-Zone shall be determined by the BCDA.

Pursuant to the directive under Executive Order No. 80, the BCDA passed Board Resolution No. 93-05-034 on May 18, 1993, allowing the tax and duty-

free sale at retail of consumer goods imported via Clark for consumption outside the CSEZ. The assailed provisions of said resolution read, as follows:

Section 4. SPECIFIC INCENTIVES IN THE CSEZ MAIN ZONE. – The CSEZregistered enterprises/businesses shall be entitled to all the incentives available under R.A. No. 7227, E.O. No. 226 and R.A. No. 7042 which shall include, but not limited to, the following:

I.

A.

As in Subic Economic and Free Port Zone:

Customs:

...

4.

Tax and duty-free purchase and consumption of goods/articles (duty free

shopping) within the CSEZ Main Zone.

5.

For individuals, duty-free consumer goods may be brought out of the

CSEZ Main Zone into the Philippine Customs territory but not to exceed US$200.00 per month per CDC-registered person, similar to the limits imposed in the Subic SEZ. This privilege shall be enjoyed only once a month. Any excess shall be levied taxes and duties by the Bureau of Customs.

On June 10, 1993, the President issued Executive Order No. 97, ―Clarifying the Tax and Duty Free Incentive Within the Subic Special Economic Zone Pursuant to R.A. No. 7227.‖ Said issuance in part states, thus:

SECTION 1. On Import Taxes and Duties – Tax and duty-free importations shall apply only to raw materials, capital goods and equipment brought in by business enterprises into the SSEZ. Except for these items, importations of other goods into the SSEZ, whether by business enterprises or resident individuals, are subject to taxes and duties under relevant Philippine laws.

The exportation or removal of tax and duty-free goods from the territory of the SSEZ to other parts of the Philippine territory shall be subject to duties and taxes under relevant Philippine laws.

Nine days after, on June 19, 1993, Executive Order No. 97-A was issued, ―Further Clarifying the Tax and Duty-Free Privilege Within the Subic Special Economic and Free Port Zone.‖ The relevant provisions read, as follows:

SECTION 1. The following guidelines shall govern the tax and duty-free privilege within the Secured Area of the Subic Special Economic and Free Port Zone:

1.1

The Secured Area consisting of the presently fenced-in former Subic

Naval Base shall be the only completely tax and duty-free area in the SSEFPZ. Business enterprises and individuals (Filipinos and foreigners) residing within the Secured Area are free to import raw materials, capital goods, equipment, and consumer items tax and duty-free. Consumption items, however, must be consumed within the Secured Area. Removal of raw materials, capital goods, equipment and consumer items out of the Secured Area for sale to non-SSEFPZ registered enterprises shall be subject to the usual taxes and duties, except as may be provided herein.

1.2.

Residents of the SSEFPZ living outside the Secured Area can enter

the Secured Area and consume any quantity of consumption items in hotels and restaurants within the Secured Area. However, these residents can purchase and bring out of the Secured Area to other parts of the Philippine territory consumer items worth not exceeding US$100 per month per person. Only residents age 15 and over are entitled to this privilege.

1.3.

Filipinos not residing within the SSEFPZ can enter the Secured Area

and consume any quantity of consumption items in hotels and restaurants within the Secured Area. However, they can purchase and bring out [of] the

Secured Area to other parts of the Philippine territory consumer items worth not exceeding US$200 per year per person. Only Filipinos age 15 and over are entitled to this privilege.

Petitioners assail the $100 monthly and $200 yearly tax-free shopping privileges granted by the aforecited provisions respectively to SSEZ residents living outside the Secured Area of the SSEZ and to Filipinos aged 15 and over residing outside the SSEZ.

On February 23, 1998, petitioners thus filed the instant petition, seeking the declaration of nullity of the assailed issuances on the following grounds:

I.

EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND SECTION 4 OF BCDA BOARD RESOLUTION NO. 93-05-034 ARE NULL AND VOID [FOR] BEING AN EXERCISE OF EXECUTIVE LAWMAKING.

II.

EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND SECTION 4 OF BCDA BOARD RESOLUTION NO. 93-05-034 ARE UNCONSTITUTIONAL FOR BEING VIOLATIVE OF THE EQUAL PROTECTION CLAUSE AND THE PROHIBITION AGAINST UNFAIR COMPETITION AND PRACTICES IN RESTRAINT OF TRADE.

III.

EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND SECTION 4 OF BCDA BOARD RESOLUTION NO. 93-05-034 ARE NULL AND VOID [FOR] BEING VIOLATIVE OF REPUBLIC ACT NO. 7227.

IV.

THE CONTINUED IMPLEMENTATION OF THE CHALLENGED ISSUANCES IF NOT RESTRAINED WILL CONTINUE TO CAUSE PETITIONERS TO SUFFER GRAVE AND IRREPARABLE INJURY.[5]

In their Comments, respondents point out procedural issues, alleging lack of petitioners‘ legal standing, the unreasonable delay in the filing of the petition, laches, and the propriety of the remedy of prohibition.

Anent the claim on lack of legal standing, respondents argue that petitioners, being mere suppliers of the local retailers operating outside the special economic zones, do not stand to suffer direct injury in the enforcement of the issuances being assailed herein. Assuming this is true, this Court has nevertheless held that in cases of paramount importance where serious constitutional questions are involved, the standing requirements may be relaxed and a suit may be allowed to prosper even where there is no direct injury to the party claiming the right of judicial review.[6]

In the same vein, with respect to the other alleged procedural flaws, even assuming the existence of such defects, this Court, in the exercise of its discretion, brushes aside these technicalities and takes cognizance of the petition considering the importance to the public of the present case and in keeping with the duty to determine whether the other branches of the government have kept themselves within the limits of the Constitution.[7]

Now, on the constitutional arguments raised:

As this Court enters upon the task of passing on the validity of an act of a coequal and coordinate branch of the Government, it bears emphasis that deeply ingrained in our jurisprudence is the time-honored principle that a statute is presumed to be valid.[8] This presumption is rooted in the doctrine of separation of powers which enjoins upon the three coordinate departments of the Government a becoming courtesy for each other‘s acts.[9] Hence, to doubt

is to sustain. The theory is that before the act was done or the law was enacted, earnest studies were made by Congress, or the President, or both, to insure that the Constitution would not be breached.[10] This Court, however, may declare a law, or portions thereof, unconstitutional where a petitioner has shown a clear and unequivocal breach of the Constitution, not merely a doubtful or argumentative one.[11] In other words, before a statute or a portion thereof may be declared unconstitutional, it must be shown that the statute or issuance violates the Constitution clearly, palpably and plainly, and in such a manner as to leave no doubt or hesitation in the mind of the Court.[12]

The Issue on Executive Legislation

Petitioners claim that the assailed issuances (Executive Order No. 97-A; Section 5 of Executive Order No. 80; and Section 4 of BCDA Board Resolution No. 93-05-034) constitute executive legislation, in violation of the rule on separation of powers. Petitioners argue that the Executive Department, by allowing through the questioned issuances the setting up of tax and duty-free shops and the removal of consumer goods and items from the zones without payment of corresponding duties and taxes, arbitrarily provided additional exemptions to the limitations imposed by Republic Act No. 7227, which limitations petitioners identify as follows:

(1)

[Republic Act No. 7227] allowed only tax and duty-free importation of raw

materials, capital and equipment.

(2)

It provides that any exportation or removal of goods from the territory of

the Subic Special Economic Zone to other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines.

Anent the first alleged limitation, petitioners contend that the wording of Republic Act No. 7227 clearly limits the grant of tax incentives to the

importation of raw materials, capital and equipment only. Hence, they claim that the assailed issuances constitute executive legislation for invalidly granting tax incentives in the importation of consumer goods such as those being sold in the duty-free shops, in violation of the letter and intent of Republic Act No. 7227.

A careful reading of Section 12 of Republic Act No. 7227, which pertains to the SSEZ, would show that it does not restrict the duty-free importation only to ―raw materials, capital and equipment.‖ Section 12 of the cited law is partly reproduced, as follows:

SECTION 12. Subic Special Economic Zone. —

...

The abovementioned zone shall be subject to the following policies:

...

(b)

The Subic Special Economic Zone shall be operated and managed as a

separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as tax and duty-free importations of raw materials, capital and equipment. However, exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines.[13]

While it is true that Section 12 (b) of Republic Act No. 7227 mentions only raw materials, capital and equipment, this does not necessarily mean that the tax and duty-free buying privilege is limited to these types of articles to the exclusion of consumer goods. It must be remembered that in construing statutes, the proper course is to start out and follow the true intent of the

Legislature and to adopt that sense which harmonizes best with the context and promotes in the fullest manner the policy and objects of the Legislature.[14]

In the present case, there appears to be no logic in following the narrow interpretation petitioners urge. To limit the tax-free importation privilege of enterprises located inside the special economic zone only to raw materials, capital and equipment clearly runs counter to the intention of the Legislature to create a free port where the ―free flow of goods or capital within, into, and out of the zones‖ is insured.

The phrase ―tax and duty-free importations of raw materials, capital and equipment‖ was merely cited as an example of incentives that may be given to entities operating within the zone. Public respondent SBMA correctly argued that the maxim expressio unius est exclusio alterius, on which petitioners impliedly rely to support their restrictive interpretation, does not apply when words are mentioned by way of example.[15] It is obvious from the wording of Republic Act No. 7227, particularly the use of the phrase ―such as,‖ that the enumeration only meant to illustrate incentives that the SSEZ is authorized to grant, in line with its being a free port zone.

Furthermore, said legal maxim should be applied only as a means of discovering legislative intent which is not otherwise manifest, and should not be permitted to defeat the plainly indicated purpose of the Legislature.[16]

The records of the Senate containing the discussion of the concept of ―special economic zone‖ in Section 12 (a) of Republic Act No. 7227 show the legislative intent that consumer goods entering the SSEZ which satisfy the needs of the zone and are consumed there are not subject to duties and taxes in accordance with Philippine laws, thus:

Senator Guingona. . . . The concept of Special Economic Zone is one that really includes the concept of a free port, but it is broader. While a free port is necessarily included in the Special Economic Zone, the reverse is not true that a free port would include a special economic zone.

Special Economic Zone, Mr. President, would include not only the incoming and outgoing of vessels, duty-free and tax-free, but it would involve also tourism, servicing, financing and all the appurtenances of an investment center. So, that is the concept, Mr. President. It is broader. It includes the free port concept and would cater to the greater needs of Olangapo City, Subic Bay and the surrounding municipalities.

Senator Enrile. May I know then if a factory located within the jurisdiction of Morong, Bataan that was originally a part of the Subic Naval reservation, be entitled to a free port treatment or just a special economic zone treatment?

Senator Guingona. As far as the goods required for manufacture is concerned, Mr. President, it would have privileges of duty-free and taxfree. But in addition, the Special Economic Zone could embrace the needs of tourism, could embrace the needs of servicing, could embrace the needs of financing and other investment aspects.

Senator Enrile. When a hotel is constructed, Mr. President, in this geographical unit which we call a special economic zone, will the goods entering to be consumed by the customers or guests of the hotel be subject to duties?

Senator Guingona. That is the concept that we are crafting, Mr. President.

Senator Enrile. No. I am asking whether those goods will be duty-free, because it is constructed within a free port.

Senator Guingona. For as long as it services the needs of the Special Economic Zone, yes.

Senator Enrile. For as long as the goods remain within the zone, whether we call it an economic zone or a free port, for as long as we say in this law that all goods entering this particular territory will be duty-free and tax-free, for as long as they remain there, consumed there or reexported or destroyed in that place, then they are not subject to the duties and taxes in accordance with the laws of the Philippines?

Senator Guingona. Yes.[17]

Petitioners rely on Committee Report No. 1206 submitted by the Ad Hoc Oversight Committee on Bases Conversion on June 26, 1995. Petitioners put emphasis on the report‘s finding that the setting up of duty-free stores never figured in the minds of the authors of Republic Act No. 7227 in attracting foreign investors to the former military baselands. They maintain that said law aimed to attract manufacturing and service enterprises that will employ the dislocated former military base workers, but not investors who would buy consumer goods from duty-free stores.

The Court is not persuaded. Indeed, it is well-established that opinions expressed in the debates and proceedings of the Legislature, steps taken in the enactment of a law, or the history of the passage of the law through the Legislature, may be resorted to as aids in the interpretation of a statute with a doubtful meaning.[18] Petitioners‘ posture, however, overlooks the fact that the 1995 Committee Report they are referring to came into being well after the enactment of Republic Act No. 7227 in 1993. Hence, as pointed out by respondent Executive Secretary Torres, the aforementioned report cannot be said to form part of Republic Act No. 7227‘s legislative history.

Section 12 of Republic Act No. 7227, provides in part, thus:

SEC. 12. Subic Special Economic Zone. -- . . .

The abovementioned zone shall be subject to the following policies:

(a)

Within the framework and subject to the mandate and limitations of the

Constitution and the pertinent provisions of the Local Government Code, the Subic Special Economic Zone shall be developed into a self-sustaining, industrial, commercial, financial and investment center to generate employment opportunities in and around the zone and to attract and promote productive foreign investments. [19]

The aforecited policy was mentioned as a basis for the issuance of Executive Order No. 97-A, thus:

WHEREAS, Republic Act No. 7227 provides that within the framework and subject to the mandate and limitations of the Constitution and the pertinent provisions of the Local Government Code, the Subic Special Economic and Free Port Zone (SSEFPZ) shall be developed into a self-sustaining industrial, commercial, financial and investment center to generate employment opportunities in and around the zone and to attract and promote productive foreign investments; and

WHEREAS, a special tax and duty-free privilege within a Secured Area in the SSEFPZ subject, to existing laws has been determined necessary to attract local and foreign visitors to the zone.

Executive Order No. 97-A provides guidelines to govern

the ―tax and duty-

free privileges within the Secured Area of the Subic Special Economic and Free Port Zone.‖ Paragraph 1.6 thereof states that ―(t)he sale of tax and duty-free consumer items in the Secured Area shall only be allowed in duly authorized duty-free shops.‖

The Court finds that the setting up of such commercial establishments which are the only ones duly authorized to sell consumer items tax and dutyfree is still well within the policy enunciated in Section 12 of Republic Act No. 7227 that ―. . .the Subic Special Economic Zone shall be developed into a self-sustaining, industrial, commercial, financial and investment center to generate employment opportunities in and around the zone and to attract and promote productive foreign investments.‖ (Emphasis supplied.)

However, the Court reiterates that the second sentences of paragraphs 1.2 and 1.3 of Executive Order No. 97-A, allowing tax and duty-free removal of goods to certain individuals, even in a limited amount, from the Secured Area of the SSEZ, are null and void for being contrary to Section 12 of Republic Act No. 7227. Said Section clearly provides that ―exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines.‖

On the other hand, insofar as the CSEZ is concerned, the case for an invalid exercise of executive legislation is tenable.

In John Hay Peoples Alternative Coalition, et al. v. Victor Lim, et al.,[20] this Court resolved an issue, very much like the one herein, concerning the legality of the tax exemption benefits given to the John Hay Economic Zone under Presidential Proclamation No. 420, Series of 1994, ―CREATING AND DESIGNATING A PORTION OF THE AREA COVERED BY THE FORMER CAMP JOHN AS THE JOHN HAY SPECIAL ECONOMIC ZONE PURSUANT TO REPUBLIC ACT NO. 7227.‖

In that case, among the arguments raised was that the granting of tax exemptions to John Hay was an invalid and illegal exercise by the President of the powers granted only to the Legislature. Petitioners therein argued that

Republic Act No. 7227 expressly granted tax exemption only to Subic and not to the other economic zones yet to be established. Thus, the grant of tax exemption to John Hay by Presidential Proclamation contravenes the constitutional mandate that ―[n]o law granting any tax exemption shall be passed without the concurrence of a majority of all the members of Congress.‖[21]

This Court sustained the argument and ruled that the incentives under Republic Act No. 7227 are exclusive only to the SSEZ. The President, therefore, had no authority to extend their application to John Hay. To quote from the Decision:

More importantly, the nature of most of the assailed privileges is one of tax exemption. It is the legislature, unless limited by a provision of a state constitution, that has full power to exempt any person or corporation or class of property from taxation, its power to exempt being as broad as its power to tax. Other than Congress, the Constitution may itself provide for specific tax exemptions, or local governments may pass ordinances on exemption only from local taxes.

The challenged grant of tax exemption would circumvent the Constitution‘s imposition that a law granting any tax exemption must have the concurrence of a majority of all the members of Congress. In the same vein, the other kinds of privileges extended to the John Hay SEZ are by tradition and usage for Congress to legislate upon.

Contrary to public respondents‘ suggestions, the claimed statutory exemption of the John Hay SEZ from taxation should be manifest and unmistakable from the language of the law on which it is based; it must be expressly granted in a statute stated in a language too clear to be mistaken. Tax exemption cannot be implied as it must be categorically and unmistakably expressed.

If it were the intent of the legislature to grant to John Hay SEZ the same tax exemption and incentives given to the Subic SEZ, it would have so expressly provided in R.A. No. 7227.[22]

In the present case, while Section 12 of Republic Act No. 7227 expressly provides for the grant of incentives to the SSEZ, it fails to make any similar grant in favor of other economic zones, including the CSEZ. Tax and duty-free incentives being in the nature of tax exemptions, the basis thereof should be categorically and unmistakably expressed from the language of the statute. Consequently, in the absence of any express grant of tax and duty-free privileges to the CSEZ in Republic Act No. 7227, there would be no legal basis to uphold the questioned portions of two issuances:

Section 5 of Executive

Order No. 80 and Section 4 of BCDA Board Resolution No. 93-05-034, which both pertain to the CSEZ.

Petitioners also contend that the questioned issuances constitute executive legislation for allowing the removal of consumer goods and items from the zones without payment of corresponding duties and taxes in violation of Republic Act No. 7227 as Section 12 thereof provides for the taxation of goods that are exported or removed from the SSEZ to other parts of the Philippine territory.

On September 26, 1997, Executive Order No. 444 was issued, curtailing the duty-free shopping privileges in the SSEZ and the CSEZ ―to prevent abuse of duty-free privilege and to protect local industries from unfair competition.‖ The pertinent provisions of said issuance state, as follows:

SECTION 3. Special Shopping Privileges Granted During the Year-round Centennial Anniversary Celebration in 1998. — Upon effectivity of this Order and up to the Centennial Year 1998, in addition to the permanent residents, locators and employees of the fenced-in areas of the Subic Special Economic

and Freeport Zone and the Clark Special Economic Zone who are allowed unlimited duty free purchases, provided these are consumed within said fenced-in areas of the Zones, the residents of the municipalities adjacent to Subic and Clark as respectively provided in R.A. 7227 (1992) and E.O. 97-A s. 1993 shall continue to be allowed One Hundred US Dollars (US$100) monthly shopping privilege until 31 December 1998. Domestic tourists visiting Subic and Clark shall be allowed a shopping privilege of US$25 for consumable goods which shall be consumed only in the fenced-in area during their visit therein.

SECTION 4. Grant of Duty Free Shopping Privileges Limited Only To Individuals Allowed by Law. — Starting 1 January 1999, only the following persons shall continue to be eligible to shop in duty free shops/outlets with their corresponding purchase limits:

a.

Tourists and Filipinos traveling to or returning from foreign destinations

under E.O. 97-A s. 1993 — One Thousand US Dollars (US$1,000) but not to exceed Ten Thousand US Dollars (US$10,000) in any given year;

b.

Overseas Filipino Workers (OFWs) and Balikbayans defined under R.A.

6768 dated 3 November 1989 — Two Thousand US Dollars (US$2,000);

c.

Residents, eighteen (18) years old and above, of the fenced-in areas of the

freeports under R.A. 7227 (1992) and E.O. 97-A s. 1993 — Unlimited purchase as long as these are for consumption within these freeports.

The term "Residents" mentioned in item c above shall refer to individuals who, by virtue of domicile or employment, reside on permanent basis within the freeport area. The term excludes (1) non-residents who have entered into short- or long-term property lease inside the freeport, (2) outsiders engaged in doing business within the freeport, and (3) members of private clubs (e.g., yacht and golf clubs) based or located within the freeport. In this regard, duty

free privileges granted to any of the above individuals (e.g., unlimited shopping privilege, tax-free importation of cars, etc.) are hereby revoked.[23]

A perusal of the above provisions indicates that effective January 1, 1999, the grant of duty-free shopping privileges to domestic tourists and to residents living adjacent to SSEZ and the CSEZ had been revoked. Residents of the fenced-in area of the free port are still allowed unlimited purchase of consumer goods, ―as long as these are for consumption within these freeports.‖ Hence, the only individuals allowed by law to shop in the duty-free outlets and remove consumer goods out of the free ports tax-free are tourists and Filipinos traveling to or returning from foreign destinations, and Overseas Filipino Workers and Balikbayans as defined under Republic Act No. 6768.[24]

Subsequently, on October 20, 2000, Executive Order No. 303 was issued, amending Executive Order No. 444. Pursuant to the limited duration of the privileges granted under the preceding issuance, Section 2 of Executive Order No. 303 declared that ―[a]ll special shopping privileges as granted under Section 3 of Executive Order 444, s. 1997, are hereby deemed terminated. The grant of duty free shopping privileges shall be restricted to qualified individuals as provided by law.‖

It bears noting at this point that the shopping privileges currently being enjoyed by Overseas Filipino Workers, Balikbayans, and tourists traveling to and from foreign destinations, draw authority not from the issuances being assailed herein, but from Executive Order No. 46[25] and Republic Act No. 6768, both enacted prior to the promulgation of Republic Act No. 7227.

From the foregoing, it appears that petitioners‘ objection to the allowance of tax-free removal of goods from the special economic zones as previously authorized by the questioned issuances has become moot and academic.

In any event, Republic Act No. 7227, specifically Section 12 (b) thereof, clearly provides that ―exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines.‖

Thus, the removal of goods from the SSEZ to other parts of the Philippine territory without payment of said customs duties and taxes is not authorized by the Act. Consequently, the following italicized provisions found in the second sentences of paragraphs 1.2 and 1.3, Section 1 of Executive Order No. 97-A are null and void:

1.2

Residents of the SSEFPZ living outside the Secured Area can enter and

consume any quantity of consumption items in hotels and restaurants within the Secured Area. However, these residents can purchase and bring out of the Secured Area to other parts of the Philippine territory consumer items worth not exceeding US $100 per month per person. Only residents age 15 and over are entitled to this privilege.

1.3

Filipinos not residing within the SSEFPZ can enter the Secured Area and

consume any quantity of consumption items in hotels and restaurants within the Secured Area. However, they can

purchase and bring out of the Secured

Area to other parts of the Philippine territory consumer items worth not exceeding US $200 per year per person. Only Filipinos age 15 and over are entitled to this privilege.[26]

A similar provision found in paragraph 5, Section 4(A) of BCDA Board Resolution No. 93-05-034 is also null and void. Said Resolution applied the incentives given to the SSEZ under Republic Act No. 7227 to the CSEZ, which, as aforestated, is without legal basis.

Having concluded earlier that the CSEZ is excluded from the tax and duty-free incentives provided under Republic Act No. 7227, this Court will resolve the remaining arguments only with regard to the operations of the SSEZ. Thus, the assailed issuance that will be discussed is solely Executive Order No. 97-A, since it is the only one among the three questioned issuances which pertains to the SSEZ.

Equal Protection of the Laws

Petitioners argue that the assailed issuance (Executive Order No. 97-A) is violative of their right to equal protection of the laws, as enshrined in Section 1, Article III of the Constitution. To support this argument, they assert that private respondents operating inside the SSEZ are not different from the retail establishments located outside, the products sold being essentially the same. The only distinction, they claim, lies in the products‘ variety and source, and the fact that private respondents import their items tax-free, to the prejudice of the retailers and manufacturers located outside the zone.

Petitioners‘ contention cannot be sustained. It is an established principle of constitutional law that the guaranty of the equal protection of the laws is not violated by a legislation based on a reasonable classification.[27] Classification, to be valid, must (1) rest on substantial distinction, (2) be germane to the purpose of the law, (3) not be limited to existing conditions only, and (4) apply equally to all members of the same class.[28]

Applying the foregoing test to the present case, this Court finds no violation of the right to equal protection of the laws. First, contrary to petitioners‘ claim, substantial distinctions lie between the establishments inside and outside the zone, justifying the difference in their treatment. In Tiu v. Court of Appeals,[29] the constitutionality of Executive Order No. 97-A was challenged for being violative of the equal protection clause. In that case, petitioners claimed that

Executive Order No. 97-A was discriminatory in confining the application of Republic Act No. 7227 within a secured area of the SSEZ, to the exclusion of those outside but are, nevertheless, still within the economic zone.

Upholding the constitutionality of Executive Order No. 97-A, this Court therein found substantial differences between the retailers inside and outside the secured area, thereby justifying a valid and reasonable classification:

Certainly, there are substantial differences between the big investors who are being lured to establish and operate their industries in the so-called ―secured area‖ and the present business operators outside the area. On the one hand, we are talking of billion-peso investments and thousands of new jobs. On the other hand, definitely none of such magnitude. In the first, the economic impact will be national; in the second, only local. Even more important, at this time the business activities outside the ―secured area‖ are not likely to have any impact in achieving the purpose of the law, which is to turn the former military base to productive use for the benefit of the Philippine economy. There is, then, hardly any reasonable basis to extend to them the benefits and incentives accorded in R.A. 7227. Additionally, as the Court of Appeals pointed out, it will be easier to manage and monitor the activities within the ―secured area,‖ which is already fenced off, to prevent ―fraudulent importation of merchandise‖ or smuggling.

It is well-settled that the equal-protection guarantee does not require territorial uniformity of laws. As long as there are actual and material differences between territories, there is no violation of the constitutional clause. And of course, anyone, including the petitioners, possessing the requisite investment capital can always avail of the same benefits by channeling his or her resources or business operations into the fenced-off free port zone.[30]

The Court in Tiu found real and substantial distinctions between residents within the secured area and those living within the economic zone but outside the fenced-off area. Similarly, real and substantial differences exist between the establishments herein involved. A significant distinction between the two groups is that enterprises outside the zones maintain their businesses within Philippine customs territory, while private respondents and the other dulyregistered zone enterprises operate within the so-called ―separate customs territory.‖ To grant the same tax incentives given to enterprises within the zones to businesses operating outside the zones, as petitioners insist, would clearly defeat the statute‘s intent to carve a territory out of the military reservations in Subic Bay where free flow of goods and capital is maintained.

The classification is germane to the purpose of Republic Act No. 7227. As held in Tiu, the real concern of Republic Act No. 7227 is to convert the lands formerly occupied by the US military bases into economic or industrial areas. In furtherance of such objective, Congress deemed it necessary to extend economic incentives to the establishments within the zone to attract and encourage foreign and local investors. This is the very rationale behind Republic Act No. 7227 and other similar special economic zone laws which grant a complete package of tax incentives and other benefits.

The classification, moreover, is not limited to the existing conditions when the law was promulgated, but to future conditions as well, inasmuch as the law envisioned the former military reservation to ultimately develop into a selfsustaining investment center.

And, lastly, the classification applies equally to all retailers found within the ―secured area.‖ As ruled in Tiu, the individuals and businesses within the ―secured area,‖ being in like circumstances or contributing directly to the achievement of the end purpose of the law, are not categorized further. They are all similarly treated, both in privileges granted and in obligations required.

With all the four requisites for a reasonable classification present, there is no ground to invalidate Executive Order No. 97-A for being violative of the equal protection clause.

Prohibition against Unfair Competition

and Practices in Restraint of Trade

Petitioners next argue that the grant of special tax exemptions and privileges gave the private respondents undue advantage over local enterprises which do not operate inside the SSEZ, thereby creating unfair competition in violation of the constitutional prohibition against unfair competition and practices in restraint of trade.

The argument is without merit. Just how the assailed issuance is violative of the prohibition against unfair competition and practices in restraint of trade is not clearly explained in the petition. Republic Act No. 7227, and consequently Executive Order No. 97-A, cannot be said to be distinctively arbitrary against the welfare of businesses outside the zones. The mere fact that incentives and privileges are granted to certain enterprises to the exclusion of others does not render the issuance unconstitutional for espousing unfair competition. Said constitutional prohibition cannot hinder the Legislature from using tax incentives as a tool to pursue its policies.

Suffice it to say that Congress had justifiable reasons in granting incentives to the private respondents, in accordance with Republic Act No. 7227‘s policy of developing the SSEZ into a self-sustaining entity that will generate employment and attract foreign and local investment. If petitioners had wanted to avoid any alleged unfavorable consequences on their profits, they should upgrade their standards of quality so as to effectively compete in the market. In the alternative, if petitioners really wanted the preferential

treatment accorded to the private respondents, they could have opted to register with SSEZ in order to operate within the special economic zone.

Preferential Use of Filipino Labor, Domestic Materials

and Locally Produced Goods

Lastly, petitioners claim that the questioned issuance (Executive Order No. 97A) openly violated the State policy of promoting the preferential use of Filipino labor, domestic materials and locally produced goods and adopting measures to help make them competitive.

Again, the argument lacks merit. This Court notes that petitioners failed to substantiate their sweeping conclusion that the issuance has violated the State policy of giving preference to Filipino goods and labor. The mere fact that said issuance authorizes the importation and trade of foreign goods does not suffice to declare it unconstitutional on this ground.

Petitioners cite Manila Prince Hotel v. GSIS[31] which, however, does not apply. That case dealt with the policy enunciated under the second paragraph of Section 10, Article XII of the Constitution,[32] applicable to the grant of rights, privileges, and concessions ―covering the national economy and patrimony,‖ which is different from the policy invoked in this petition, specifically that of giving preference to Filipino materials and labor found under Section 12 of the same Article of the Constitution. (Emphasis supplied).

In Tañada v. Angara,[33] this Court elaborated on the meaning of Section 12, Article XII of the Constitution in this wise:

[W]hile the Constitution indeed mandates a bias in favor of Filipino goods, services, labor and enterprises, at the same time, it recognizes the need for business exchange with the rest of the world on the bases of equality and reciprocity and limits protection of Filipino enterprises only against foreign

competition and trade practices that are unfair. In other words, the Constitution did not intend to pursue an isolationist policy. It did not shut out foreign investments, goods and services in the development of the Philippine economy. While the Constitution does not encourage the unlimited entry of foreign goods, services and investments into the country, it does not prohibit them either. In fact, it allows an exchange on the basis of equality and reciprocity, frowning only on foreign competition that is unfair.[34]

This Court notes that the Executive Department, with its subsequent issuance of Executive Order Nos. 444 and 303, has provided certain measures to prevent unfair competition. In particular, Executive Order Nos. 444 and 303 have restricted the special shopping privileges to certain individuals.[35] Executive Order No. 303 has limited the range of items that may be sold in the duty-free outlets,[36] and imposed sanctions to curb abuses of duty-free privileges.[37] With these measures, this Court finds no reason to strike down Executive Order No. 97-A for allegedly being prejudicial to Filipino labor, domestic materials and locally produced goods.

WHEREFORE, the petition is PARTLY GRANTED. Section 5 of Executive Order No. 80 and Section 4 of BCDA Board Resolution No. 93-05-034 are hereby declared NULL and VOID and are accordingly declared of no legal force and effect. Respondents are hereby enjoined from implementing the aforesaid void provisions. All portions of Executive Order No. 97-A are valid and effective, except the second sentences in paragraphs 1.2 and 1.3 of said Executive Order, which are hereby declared INVALID.

No costs.

SO ORDERED.

Footnotes

[1] Executive Order No. 80 is entitled, ―Authorizing the Establishment of the Clark Development Corporation as the Implementing Arm of the Bases Conversion and Development Authority for the Clark Special Economic Zone, and Directing all Heads of Departments, Bureaus, Offices, Agencies and Instrumentalities of Government to Support the Program.‖

[2] BCDA

Board Resolution No. 93-05-034 is entitled, ―Prescribing the Investment Climate in the Clark Special Economic Zone

for Implementation by the Clark Development Corporation.‖

[3] Bases Conversion and Development Act of 1992.

[4] Underscoring supplied.

[5] Rollo, pp. 13, 15, 17, and 18.

[6] Bayan (Bagong Alyansang Makabayan) v. Zamora, G.R. No. 138570, October 10, 2000, 342 SCRA 449, citing Kilosbayan v. Guingona, Jr., G.R. No. 113375, May 5, 1994, 232 SCRA 110.

[7] Osmeña v. Commission on Elections, G.R. Nos. 100318, 100417, and 100420, July 30, 1991, 199 SCRA 750.

[8] Basco v. Phil. Amusements and Gaming Corporation, G.R. No. 91649, May 14, 1991, 197 SCRA 52.

[9] Cawaling, Jr. v. Commission on Elections, G.R. Nos. 146319 and 146342 , October 26, 2001, 368 SCRA 453.

[10] Association of Small Landowners in the Philippines., Inc., v. Secretary of Agrarian Reform, G.R. No. 78742, July 14, 1989, 175 SCRA 343.

[11] Cawaling, Jr., v. Commission on Elections, supra, note 9.

[12] Misolas v. Panga, G.R. No. 83341, January 30, 1990, 181 SCRA 648.

[13] Underscoring supplied.

[14] Eugenio v. Drilon, G.R. No. 109404, January 22, 1996, 252 SCRA 106.

[15] Gomez v. Ventura and Board of Medical Examiners, No. 32441, March 29, 1930, 54 Phil. 726.

[16] Dimaporo v. Mitra, Jr.,

G.R. No. 96859, October 15, 1991, 202 SCRA 779; Primero v. Court of Appeals, G.R. Nos. 48468-69,

November 22, 1989, 179 SCRA 542.

[17] Emphasis supplied.

[18] Esso Standard Eastern, Inc. v. Commissioner of Internal Revenue, G.R. No. 28508-9, July 7, 1989, 175 SCRA 149.

[19] Emphasis supplied.

[20] G.R. No. 119775, October 24, 2003, 414 SCRA 356.

[21] Section 28(4), Article VI of the Constitution.

[22] Supra, note 20, at 377.

[23] Underscoring supplied.

[24] Republic Act No. 6768 entitled, ―AN ACT INSTITUTING A BALIKBAYAN PROGRAM.‖

[25] E.O. No. 46,

―GRANTING THE MINISTRY OF TOURISM, THROUGH THE PHILIPPINE TOURISM AUTHORITY (PTA),

AUTHORITY TO ESTABLISH AND OPERATE A DUTY AND TAX FREE MERCHANDISING SYSEM IN THE PHILIPPINES‖ . . . .

“SEC. 1.

The Ministry of Tourism, through the Philippine Tourism Authority (PTA) is hereby authorized to establish a duty and

tax free merchandising system in the Philippines to augment the service facilities for tourists and to generate foreign exchange and revenue for the government. Under this system, the Philippine Tourism Authority shall have the exclusive authority to operate stores and shops that would sell, among others, tax and duty free merchandise, goods and articles, in international airports and sea ports throughout the country in accordance with the rules and regulations issued by the Ministry of Tourism.‖

[26] Italics supplied.

[27] People v. Cayat, G.R. No. 45987, May 5, 1939, 68 Phil. 12.

[28] Tiu v. Court of Appeals, G.R. No. 127410 , January 20, 1999, 301 SCRA 278.

[29] Ibid.

[30] Id. at 291.

[31] G.R. No. 122156, February 3, 1997, 267 SCRA 408.

[32] Sec. 10, Art. XII, provides that:

...

In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give preference to qualified Filipinos. . . .

[33] G.R. No. 118295, May 2, 1997, 272 SCRA 18.

[34] Id. at 58-59.

[35] Executive Order No. 303, Section 3; Executive Order No.

[36] Executive Order No. 303, Section 3.

[37] Executive Order No. 303, Section 5.

444, Section 4.

FIRST DIVISION

G.R. No. L-29987 October 22, 1975

MANILA ELECTRIC COMPANY, petitioner, vs. MISAEL P. VERA, in his capacity as Commissioner of Internal Revenue, respondent.

G.R. No. L-23847 October 22, 1975

MANILA ELECTRIC COMPANY, petitioner, vs. BENJAMIN. TABIOS, as Commissioner of Internal Revenue, respondent.

MUÑOZ PALMA, J.:

Manila Electric Company, petitioner in these two cases, poses a single before Us: is Manila Electric Company (MERALCO for short) exempt from payment of a compensating tax on poles, wires, transformers, and insulators imported by it for use in the operation of its electric light, heat, and power system? MERALCO answers the query in the affirmative while the Commissioner of Internal Revenue asserts the contrary.

MERALCO is the holder of a franchise to construct, maintain, and operate an electric light, heat, and power system in the City of Manila and its suburbs. 1

In 1962, MERALCO imported and received from abroad on various dates copper wires, transformers, and insulators for use in the operation of its

business on which, the Collector of Customs, as Deputy of Commissioner of Internal Revenue, levied and collected a compensating tax amounting to a total of P62,335.00. A claim for refund of said amount was presented by MERALCO and because no action was taken by the Commissioner of Internal Revenue on its claim, it appealed to the Court of Tax Appeals by filing a petition for review on February 25, 1964 (CTA Case No. 1495). On November 28, 1968, the Court of Tax Appeals denied MERALCO claim, forthwith, the case was elevated to the Court on appeal (L-29987).

Again in 1963, MERALCO imported certain quantities of copper wires, transformers and insulators also to be used in its business and again a compensating tax of P6,587.00 on said purchases was collected. Its claim for refund of the amount having been denied by the Commissioner of Internal Revenue on January 23, 1964, MERALCO filed with the Court of Tax Appeals CTA Case No. 1493. On September 23, 1964 the Court of Tax Appeals decided against petitioner, and the latter filed with this Court the corresponding Petition for Review of said decision docketed herein as G.R. No. L-23847.

Inasmuch as the two appeals raise the same issue, they are consolidated in this Decision.

The law under which the Commissioner of Internal Revenue, respondent in these two cases, assessed and collected the corresponding compensating taxes in 1962 and 1963 was found in Section 190 of the National Internal Revenue Code(Commonwealth Act No. 466, as amended) the pertinent provision of which read at the time as follows:

Sec. 190. Compensating Tax. — All persons residing or doing business in the Philippines, who purchase or receive from without the Philippines any commodities, goods, wares, or merchandise, excepting those subject to specific taxes under Title IV of this Code, shall pay on the total value thereof at the

time they are received by such persons, including freight, postage, insurance, commission and all similar charges, a compensating tax equivalent to the percentage taxes imposed under this Title on original transactions effected by merchants, importers, or manufacturers, such tax to be paid before the withdrawal or removal of said commodities, goods, wares, or merchandise from the customhouse or the post office: ...

2

In deciding against petitioner, the Court of Tax Appeals held that following the ruling of the Supreme Court in the case of Panay Electric Co. vs. Collector of Internal Revenue, G.R. No. L-6753, July 30, 1955, Manila Gas Corp. vs. Collector of Internal Revenue, G.R. No. L-11784, October 24, 1958, and Borja vs. Collector of Internal Revenue, G.R. No. L-12134, November 30,1961, MERALCO is not exempt from paying the compensating tax provided for in Section 190 of the National Internal Revenue Code, the purpose of which is to "place casual importers, who are not merchants on equal putting with established merchants who pay sales tax on articles imported by them." The court further stated that MERALCO's claim for exemption from the payment of the compensating tax is not clear or expressed, contrary to the cardinal rule in taxation that "exemptions from taxation are highly disfavored in law, and he who claims exemption must be able to justify his claim by the clearest grant of organic or statute law. (pp. 10-11, L-23847, rollo)

Petitioner, on the other hand, bases its claim for exemption from the compensating tax on poles, wires, transformers and insulators purchased by it from abroad on paragraph 9 of its franchise which We quote from its brief:

PARAGRAPH 9. The grantee shall be liable to pay the same taxes upon its real estate, buildings, plant (not including poles, wires, transformers, and insulators), machinery, and personal property as other persons are or may be hereafter by law to pay. In consideration of Part Two of the franchise herein granted, to wit, the right to build and maintain in the City of Manila and its

suburbs a plant for the conveying and furnishing of electric current for light, heat, and power, and to charge for the same, the grantee shall pay to the City of Manila a five per centum of the gross earnings received form its business under this franchise in the City and its suburbs: PROVIDED, That two and one-half per centum of the gross earnings received from the business of the line to Malabon shall be paid to the Province of Rizal. Said percentage shall be due and payable at the times stated in paragraph nineteen of Part One hereof, and after an audit, like that provided in paragraph twenty of Part One hereof, and shall be in lieu of all taxes and assessments of whatsoever nature, and by whatsoever authority upon the privileges, earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee, from which taxes and assessments the grantee is hereby expressly exempted. (Petitioner's brief, p. 4, G.R. No. L-29987; see also pp. 3-4, petitioner's brief, L-23847)

Petitioner argues that the abovequoted provision in plain and unambiguous terms makes two references to the exemption of the articles in question from all taxes except the franchise tax. Thus, after prescribing in the opening sentence that "the grantee shall be liable to pay the said taxes upon its real estate buildings, plant (not including poles, wires, transformers and insulators), machinery and personal property as other persons are or may be hereinafter required by law to pay," par. 9, specifically provides that the percentage tax payable by petitioner as fixed therein "shall be in lieu of all taxes and assessments of whatsoever nature, and by whatsoever authority upon the privileges, earnings, income, franchise, and poles, wires, transformers and insulators of the grantee from which taxes and assessments the grantee is hereby expressly exempted." Petitioner further states that while par. 9 does not specifically mention the compensating tax for the obvious reason that petitioner's original franchise was an earlier enactment, the words "in lieu of all taxes and assessments of whatsoever nature and by whatsoever authority"

are broad and sweeping enough to include the compensating tax. (p. 5, petitioner's brief, L-29987; pp, 4-5, ibid, L-23847)

Petitioner also contends that the ruling of this Court in the cases of Panay Electric Co., Manila Gas Corporation, and Borja (supra) are not applicable to its situation.

We find no merit in petitioner's cause.

1. One who claims to be exempt from the payment of a particular tax must do so under clear and unmistakable terms found in the statute. Tax exemptions are strictly construed against the taxpayer, they being highly disfavored and may almost be said "to be odious to the law." He who claims an exemption must be able to print to some positive provision of law creating the right; it cannot be allowed to exist upon a mere vague implication or inference. 3 The right of taxation will not beheld to have been surrendered unless the intention to surrender is manifested by words too plain to be mistaken (Ohio Life Insurance & Trust Co. vs. Debolt, 60 Howard, 416), for the state cannot strip itself of the most essential power of taxation by doubtful words; it cannot, by ambiguous language, be deprived of this highest attribute of sovereignty (Erie Railway Co. vs. Commonwealth of Pennsylvania, 21 Wallace 492, 499). So, when exemption is claimed, it must be shown indubitably to exist, for every presumption is against it, and a well-founded doubt is fatal to the claim (Farrington vs. Tennessee & County of Shelby, 95 U.S. 679, 686). 4

2. Petitioner's submission that its right to exemption is supported by the "plain and unambiguous" term of paragraph 9 of its franchise is positively without basis.

First, the Court cannot overlook the tax court's finding that, and We quote:

At the outset it should be noted that the franchise by the Municipal Board of the City of Manila to Mr. Charles M. Swift and later assumed and taken over by petitioner (see Rep. Act No. 150, CTA rec. p. 84), is a municipal franchise and not a legal franchise. While it is true that Section 1 of Act No. 484 of the Philippine Commission of 1902 authorizes the Municipal Board of the City of Manila to grant a franchise to the person making the most favorable bid for the construction and maintenance of an electric street railway and the construction, maintenance, and operation of an electric light, heat, and power system in Manila and its suburbs, Section 2 of the same Act authorize the said Municipal Board to make necessary amendments to be fixed by the terms of the successful bid; otherwise, the form of the franchise to be granted shall be in the words and figures appearing in Act No. 484 of the Philippine Commission, which includes Par. 9. Part Two, thereof, supra.

This Court is not aware whether or not the tax exemption provisions contained in Par. 9, Part Two of Act No. 484 of the Philippine Commission of 1902 was incorporated in the municipal franchise granted to Mr. Charles M. Swift by the Municipal Board of the City of Manila and later assumed and taken over by petitioner because no admissible copy of Ordinance No. 44 of the said Board was ever presented in evidence by the herein petitioner. Neither is this Court aware of any amendment to the terms of this franchise granted by the aforesaid Municipal Board to the successful bidder in the absence of Ordinance No. 44 and the amendment thereto, if any. In the circumstances, we are at a Las to interpret and apply the tax exemption provisions relied upon by petitioner. (pp. 11-13, rollo, L-29987)

Second, and this is the controlling reason for the denial of petitioner's claim in these cases, We do not see in paragraph 9 of its petitioner's franchise, on the assumption that it does exist as worded, what may be considered as "plain and unambiguous terms" declaring petitioner MERALCO exempt from paying a compensating tax on its imports of poles, wires, transformers, and insulators.

What MERALCO really wants Us to do, but which We cannot under the principles enumerated earlier, is to infer and imply that there is such an exemption from the following phrase: "... the grantee shall pay to the City of Manila five per centum of the gross earnings received from its business ... and shall be in lieu of all taxes and assessments of whatsoever nature, and by whatsoever authority upon the privileges, earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee, from which taxes and assessments the grantee is hereby expressly exempted."

Note that what the above provision exempts petitioner from, is the payment of property, tax on its poles, wires, transformers, and insulators; it does not exempt it from payment of taxes like the one in question which, by mere necessity or consequence alone, fall upon property. The first sentence of paragraph 9 of petitioner's franchise expressly states that the grantee like any other taxpayer shall pay taxes upon its real estate, buildings, plant (not including poles, wires, transformers, and insulators),machinery, and personal property. These are direct taxes imposed upon the thing or property itself. Thus, while the grantee is to pay tax on its plant, its poles, wires, transformers, and insulators as forming part of the plant or installation(significantly the enumeration is in parenthesis and follows the word "plant") are exempt and as such are not to be included in the assessment of the property tax to be paid.

The ending clause of paragraph 9 providing in effect that the percentage tax imposed upon petitioner shall be in lieu of "all taxes and assessments of what and by whatsoever authority" cannot be said to have granted it exemption from payment of compensating tax. The phrase "all taxes and assessments of whatsoever nature and by whatsoever authority" is not so broad and sweeping, as petitioner would have Us think, as to include the tax in question because there is an immediately succeeding phrase which limits the scope of exemption to taxes and assessments "upon the privileges earnings, income,

franchise, and poles, wires, transformers, and insulators of the grantee." The last clause of paragraph 9 merely reaffirms, with regards to poles, wires, transformers, and insulators, what has been expressed in the that first sentence of the same paragraph namely, exemption of petitioner from payment of property tax. It is a principle of statutory construction that general terms may be restricted by specific words, with the result that the general language will be limited by the specific language which indicates the statute's object and purpose. (Statutory Construction by Crawford, 1940 ed. p. 324-325)

3. It is a well-settled rule or principle in taxation that a compensating tax is not a property tax but is an excise tax. 5 Generally stated, an excise tax is one that is imposed on the performance of an act, the engaging in an occupation, or the enjoyment of a privilege. 6 A tax upon property because of its ownership its a direct tax, whereas one levied upon property because of its use is an excise duty. (Manufacturer's Trust Co. vs. United States, Ct. Cl., 32 F. Supp. 289, 296) Thus, where a tax which is not on the property as such, is upon certain kinds of property, having reference to their origin and their intended use, that is an excise tax. (State v. Wynne, 133 S.W. 2d 951, 956,957, 133 Tex. 622)

The compensating tax being imposed upon petitioner herein, MERALCO, is an impost on its use of imported articles and is not in the nature of a direct tax on the articles themselves, the latter tax falling within the exemption. Thus, in International Business Machine Corp. vs. Collector of Internal Revenue, 1956, 98 Phil. Reports 595, 593, which involved the collection of a compensating tax from the plaintiff-petitioner on business machines imported by it, this Court stated in unequivocal terms that "it is not the act of importation that is taxed under section 190, but the use of imported goods not subjected to sales tax" because "the compensating tax was expressly designed as a substitute to make up or compensate for the revenue lost to the government through the avoidance of sales taxes by means of direct purchases abroad. ..."

It is true that upon the collection of a compensating tax on petitioner's poles, wires, transformers, and insulators purchased from abroad, the tax falls on the goods themselves; this fact leads petitioner to claim that what is being imposed upon it is a property tax. But petitioner loses sight of the principle that "every excise necessarily must finally fall upon and be paid by property, and so may be indirectly a tax upon property; but if it is really imposed upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation, it will be considered an excise." (51 Am. Jur. 1d, Taxation, Sec. 34, emphasis supplied) And so, to reiterate, what is being taxed here is the use of goods purchased from out of the country, and the imposition is in the nature of an excise tax.

4. There is no valid reason for Us not to apply to petitioner the ruling of the Court in Panay Electric Co. and Borja, supra, for MERALCO is similarly situated.

Panay Electric Co. sought exemption from payment of a compensating tax on equipments purchased abroad for use in its electric plant. A provision in its franchise reads:

Sec 8. ... Said percentage shall be due and payable quarterly and shall be lieu of all taxes of any kind levied, established, or collected by any authority whatsoever, now or in the future, on its poles, wires, insulators, switches, transformers and other structures, installations, conductors, and accessories, placed in and over the public streets, avenues, roads, thoroughfares, squares, bridges, and other places on its franchise, from which taxes the grantee is hereby expressly exempted. (113 Phil. 570)

This Court rejected the exemption sought by Panay Electric and held that the cited provision in its franchise exempts from taxation those rights and privileges which are not enjoyed by the public in general but only by the

grantee of a franchise, but do not include the common right or privileges of every citizen to make purchases anywhere; and that we must bear in mind the purpose for the imposition of compensating tax which as explained in the report of the Tax Commission is as follows:

The purpose of this proposal is to place persons purchasing goods from dealers doing business in the Philippines on an equal footing, for tax purposes, with those who purchase goods directly from without the Philippines. Under the present tax law, the former bear the burden of the local sales tax because it is shifted to them as part of the selling price demanded by the local merchants, while the latter do not. The proposed tax will do away with this inequality and render justice to merchants and firms of all nationalities who are in legitimate business here, paying taxes and giving employment to a large number of people. (113 Phil. 571)

In Borja, petitioner Consuelo P. Borja, a grantee of a legislative franchise, also claimed to be free from paying the compensating tax imposed on the materials and equipment such as wires, insulators, transformers, conductors, etc. imported from Japan, on the basis of Sec. 10 of Act No. 3636 (Model Electric Light and Power Franchise Act) which has been incorporated by reference in franchise under Act No. 3810. Section 10 provides:

The grantee shall pay the same taxes as are now or may "hereafter be required by law from other individuals, co-partnerships, private, public or quasi-public associations, corporations, or joint-stock companies, on his (its) real estate, buildings, plants, machinery; and other personal property, except property section. In consideration of the franchise and rights hereby granted, the grantee shall pay into the municipal treasury of the (of each) municipality in which it is supplying electric current to the public under this franchise, a tax equal to two per centum of the gross earnings from electric current sold or supplied under this franchise in said (each) municipality. Said tax shall be due

and payable quarterly and shall be in lieu of any and all taxes of any kind, nature or description levied, established, or collected by any authority whatsoever, municipal, provincial or insular, now or in the future, on its poles, wires, insulators, switches; transformers and structures, installations, conductors, and accessories, placed in and over and under all public property, including public streets and highways, provincial roads, bridges and public squares, and on its franchise, rights, privileges, receipts, revenues and profits, from which taxes the grantee is hereby expressly exempted. (113 Phil. 569570)

The Court applying the ruling in Panay Electric denied the exemption with the added statement that

Considering, therefore, the fact that section 190 of the Tax Code is a sort of an equalizer, to place casual importers, who are not merchants on equal footing with established merchants who pay sales tax on articles imported by them ... We may conclude that it was not the intention of the law to exempt the payment of compensating tax on the personal properties in question. The principle and legal philosophy underlying the imposition of compensating tax, as enunciated in the above case (referring to Borja), are fundamentally correct, and no plausible reason is advanced for their non-application to the case at bar. (p. 572, ibid.)

Petitioner claims that there exists a difference between paragraph 9 of its franchise and the corresponding provisions of the franchise of Panay Electric and Borja in that in the latter, unlike in the former, there is no statement that the grantee is exempt from "all taxes of whatsoever nature and whatsoever authority." In addition, petitioner points out, the franchise of Panay Electric and Borja contains a qualifying phrase, to wit: "placed in and over the public streets, avenues, roads, thoroughfares, etc."

A comparison of the pertinent provisions mentioned by petitioner and which are quoted in the preceding pages reveals no substantial or fundamental distinction as to remove petitioner MERALCO from the ambit of the Panay Electric and Borja ruling. There may be differences in the phraseology used, but the intent to exempt the grantee from the payment only of property tax on its poles, wires, transformers, and insulators is evidently common to the three; withal, in all the franchises in question there is no specific mention of exemption of the grantee from the payment of compensating tax.

Petitioner disputes, however, the applicability of the stare decisis principle to its case claiming that this Court should not blindly follow the doctrine of Panay Electric and Borja, and that in Philippine Trust Co. et al. vs. Mitchell, 59 Phil. 30, 36, the Court had occasion to state: ,the rule of stare decisis is entitled to respect. Stability in the law, particularly in the business field, is desirable. But idolatrous reverence for precedent, simply as precedent, no longer rules. More important than anything else is that the court should be right." (pp. 18-19, petitioner's brief, L-29987)

But what possible ground can there be for deviating from the decisions of this Court in these two cases? A doctrine buttressed by the law, reason, and logic is not to be simply brushed aside to suit the convenience of a particular party or interest or to avoid hardship to one. As We view this legal problem, no justification can be found for giving petitioner herein preferential treatment by reading into its franchise an exemption from a particular kind of tax which is not there. If it had been the legislative intent to exempt MERALCO from paying a tax on the use of imported equipments, the legislative body could have easily done so by expanding the provision of paragraph 9 and adding to the exemption such words as "compensating tax" or "purchases from abroad for use in its business," and the like. We cannot ignore the principle that express mention in a statute of one exemption precludes reading others into it. (Hoard vs. Sears, Roebuck & Co., 122 Conn. 185, 193, 188 A. 269)

On this point, the Government correctly argues that the provision in petitioner's franchise that the payment of the percentage tax on the gross earnings shall be "in lieu of all taxes and assessments of whatsoever nature, and whatsoever authority" is not to be given a literal meaning as to preclude the imposition of the compensating tax in this particular case, and cites for its authority the Opinion of the Supreme Court of Connecticut rendered in Connecticut Light & Power Co., et al. vs. Walsh, 1948, which involved the construction of a statute imposing a sales and use tax, and which inter alia held:

The broad statement that the tax upon the gross earning of telephone companies shall be "in lieu of all other taxation" upon them is not necessarily to be given a literal meaning. "In construing the act it is our duty to seek the real intent of the legislature, even though by so doing we may limit the literal meaning of the broad language used." Greenwich Trust Co. v. Tyson, 129 Conn. 211, 222, 27 A. 2d 166, 172. It is not reasonable to assume that the General Assembly intended by the provisions we have quoted that the tax on gross earnings should take the place of taxes of a kind not then anywhere imposed and entire outside its knowledge. ... ." (57 A.R., 2d S, pp. 129, 133134, emphasis supplied)

In 1902 when Act 484 of the Philippine Commission was enacted, "compensating tax' was certainly not generally known or in use, hence, to paraphrase the above-mentioned Connecticut decision, the Court cannot assume that the Philippine Commission in providing that the gross earnings taxes imposed on the grantee of the electric light franchise shall be in lieu of all taxes and assessments, meant to include impositions in the nature of a compensating tax which came into use in this country only upon the enactment of Commonwealth Act 466 in 1939.

5. One last argument of petitioner to support its cause is that just as a new and necessary industry was held to be exempt from paying a compensating tax on its imports under the tax exemption provision of Republic Act 901, so should MERALCO be exempt from such a tax under the general clause in its franchise, to wit: "... in lieu of all taxes and assessments of whatsoever nature and whatsoever authority upon poles, wires, etc."

We agree with the court below that there can be no analogy between MERALCO and what is considered as a new and necessary industry under Republic Act 35 now superseded by Republic Act 901.

The rationale of Republic Act 901 is "to encourage the establishment or exploitation of new and necessary industries to promote the economic growth of the country," and because "an entrepreneur engaging in a new and necessary industry faces uncertainty and assumes a risk bigger than one engaging in a venture already known and developed ... the law grants him tax exemption — to lighten onerous financial burdens and reduce losses." (Marcelo Steel Corporation vs. Collector of Internal Revenue, 109 Phil. 921, 926) This intendment of the legislature in enacting Republic Act 901 is not the motivation behind the tax exemption clause found in petitioner MERALCO's franchise; consequently, there can be no analogy between the two.

IN VIEW OF THE FOREGOING, We find no merit in these Petitions for Review and We hereby AFFIRM the decision of the Court of Tax Appeals in these two cases, with costs against petitioner in both instances.

So Ordered.

Footnotes

1 Act No. 484 of the Philippine Commission enacted on October 20, 1902, granted to the Municipal Board of the City of Manila authority to award to the person or persons making the most favorable bid a franchise to construct and maintain in the streets of Manila and its suburbs an electric street railway and a franchise to construct, maintain, and operate an electric light, heat, and power system in the city of Manila and its subsurbs. (Sec. 1) Pursuant to this authority, the Municipal Board of Manila in its Ordinance No. 44 granted the franchise to Charles M. Swift who on March 27, 1903 transferred said franchise to Manila Railway and Light Company now known as the Manila Electric Company. (see Sec. 1, Act No. 1112 of the Philippine Commission, Vol. IV, Public Laws Annotated, Guevara, p. 101) The franchise of the Manila Electric Company was extended for a period of twenty years under Republic Act 150, and was further extended for another thirty years under Republic Act 4159, approved on June 20, 1964.

2 The original text of Sec. 190 of Commonwealth Act 466 was amended by:

CA 503 section 4 and 6 effective October 1, 1939; RA 48 sections 8 and 14 effective October 1, 1946; RA 253 sections 2 and 4 effective July 1, 1948; RA 361 sections 1 and 2 effective June 9, 1949; RA 1511 sections 2 and 3 effective June 16, 1956; RA 1612 sections 11 and 21 effective August 24, 1956; RA 2362 sections 1 and 2 effective June 20, 1959; RA 3176 sections 1 and 2 effective June 17, 1961; RA 4103 sections 1 and 2 effective June 19, 1964.

After the proclamation of martial law, Sec. 190 saw several changes under Presidential Decrees Nos. 69, 237, and 413.

3 Asiatic Petroleum vs. Llanes, 49 Phil. 466, 471; Union Garment Co., Inc. vs. Court of Tax Appeals, L-16809, January 31, 1962, 4 SCRA 304; Philippine Acetylene Co., Inc. vs. Commissioner of Internal Revenue, L-19707, August 17, 1967, 20 SCRA 1056; Republic Flour Mills, Inc. vs Commissioner of Internal Revenue, L-25602, February 18, 1970, 31 SCRA 520; Commissioner of Customs vs. Philippine Acetylene Co. & CTA, L-22443, May 29, 1971, 39 SCRA 71; Davao Light and Power Co., Inc. vs. Commissioner of Customs, L-28902, March 29, 1972, 44 SCRA 122.

4 see Asiatic Petroleum Co. vs. Llanes, supra, wherein all the above mentioned American doctrines are cited and quoted with approval.

5 129 A.L.R. p. 223, 230; 103 A.L.R. 93; Hennefored v. Silas Mason Co., 81 L Ed 814; Connecticut Light and Power Co. v. Walsh, 1 A.L.R. 2d 453; Watson Industries v. Shaw, 69 SE 2d 505, 510; Northern P.R. Co. v. Hennefored [1936; DC], 15 F Supp 302.

6 State vs. Brown, 148 N.E. 95, 112 Ohio St. 590; Buckstaff BathHouse Co. vs. McKinley, 127 S.W. 2d 802, 806, 198 Ark. 91; State vs. Fields, Ohio App., 35 N.E. 2d 744, 747.

EN BANC

G.R. No. L-10431

July 31, 1962

COLLECTOR OF INTERNAL REVENUE, petitioner, vs. LA TONDEÑA INC., and THE COURT OF TAX APPEALS, respondents.

PAREDES, J.:

The respondent "La Tondeña, Inc." a duly licensed rectifier, has been engaged in the business of manufacturing wines, and liquors, with a distillery at 1068 Velasquez, Tondo, Manila. The principal products of the respondent are "Ginebra San Miguel", "Manila Rum", "Oak Barrel Rum", "Mallorca Wine", "Anizado", "Creme de Mente", "Creme de Cacao", etc. Since 1929, respondent has been purchasing the alcohol used in the manufacture of its products, principally from Binalbagan Isabela Sugar Central, Negros Occidental and Central Azcarera Don Pedro in Nasugbu, Batangas, and has been removing this alcohol from the centrals to respondent's distillery under joint bonds, without prepayment of specific taxes, with the express permission and approval of the petitioner Collector of Internal Revenue. The quantity of alcohol purchased and received by the respondent from the centrals are recorded and entered in the BIR Official Register Books of "La Tondeña, Inc. A-Account", under the column "CRUDE spirit" (Exhs. A, A-1, G, G-1), attested by the Inspector of the Bureau assigned to respondent's distillery. In the manufacture of "Manila Rum", respondent uses as basic materials low test alcohol, purchased in crude form from the suppliers, which it re-rectifies or subjects to further distillation, in order to suit the purpose of respondent in producing only high quality products. In the process of further rectification or

distillation, losses thru evaporation had necessarily been incurred, for which the petitioner in the past had given the respondent allowance of not exceeding 7% for said losses. Respondent stated that the process adopted by it in the manufacture of its "Manila Rum", has now made this product the largest selling rum in the Philippines and the specific taxes that it had been paying the government, had steadily increased from P3,172,515.30 in 1950 to P4,973,123.40 in 1954. On May 8, 1954, petitioner wrote a demand letter to respondent for the payment of specific taxes, in the total amount of P154,663.10 on alcohol lost by evaporation, thru re-rectification or reredistillation, covering the period from June 7, 1950 to February 7, 1954. A first extension of 30 days within which to reply was granted the respondent by the petitioner. On July 26, 1954, it asked for another 30-day extension to reply (Exh. I-3). On August 2, 1954, petitioner granted 5 days only, from August 2, 1954 (Exh. I-f), or until August 7, 1954. On August 6, 1954, respondent answered the demand letter dated May 8, 1954 (Exh. I), protesting against the said assessment (Exhs. 1-5 and 1-b). In a letter dated August 26, 1954, the petitioner made manifest its refusal to reconsider the assessment and urged the respondent to pay within 3 days from receipt, the amount of the assessment, which communication was received by the respondent on August 31, 1954 (Exh. I-7). On September 1, 1954, the respondent appealed the decision to the Conference Staff in the same Bureau (Exh. I-8). On September 3, 1954, the Conference Staff gave the appeal due course (Exh. I-9).

Before any hearing could be had in the Conference Staff, on January 8, 1955, the respondent received a letter from the petitioner dated December 22, 1954, requiring it to comply with Department of Finance Order No. 213, to deposit one-half of the amount of assessment in cash and the balance guaranteed by a surety bond (Exh. 1-11). Respondent requested for reconsideration of this requirement (Exh. I-1a) on January 10, 1955, which was denied on February 10, 1955 (Exh. I-13). A second motion for reconsideration presented on

February 15, 1955 (Exh. I-14), followed by a supplementary letter (Exh. I-15) dated February 17, 1955 was denied, same having been received by respondent on March 16, 1955, and gave the respondent 5 days from receipt thereof, within which to comply with the said Order. Not satisfied with the said rulings, the La Tondeña, Inc. presented an action with the respondent Court of Tax Appeals on March 18, 1955. The Tax Court on December 7, 1955, rendered the following judgment —

IN VIEW OF THE FOREGOING CONSIDERATION, the decision of respondent Collector of Internal Revenue, dated May 8, 1954, is hereby modified, and petitioner La Tondeña, Inc., is hereby ordered to pay the respondent Collector of Internal Revenue the sum of P672.15, by way of specific tax. However, with respect to the balance of the assessment amounting to P153,990.95, which corresponds to the period after January 1, 1951 and up to February 27, 1954, pursuant to Republic Act No. 592, the petitioner is declared exempt from liability for the specific taxes assessed therefor. Without pronouncement as to costs.

On appeal to this Court, the petitioner alleges that the Court of Tax Appeals erred (1) In exempting the respondent La Tondeña, Inc. from the payment of the specific tax on rectified alcohol lost in process of further rectification, during the period from January 1, 1951 to February 27, 1954; and (2) In assuming jurisdiction over the case.

It appears that the specific taxes in question were assessed by the petitioner "in accordance with section 133 the Tax Code". Up to December 31, 1950, said section reads:

SEC 133. Specific tax on distilled spirits. — On distilled spirits there shall be collected, except as hereinafter provided, specific taxes as follows:

(a) If produced from sap of the nipa, coconut, casava, camote, or buri palm, or from the juice syrup, or sugar of the cane, per proof liter, forty-five centavo.

(b) If produced from any other material, per proof liter, one peso and seventy centavos.

This tax shall be proportionately increased for any strength of the spirits taxed over proof spirits.

"Distilled spirits", as here used, includes all substances known as ethyl alcohol, dehydrated oxide of ethyl, or spirits of wine, which are commonly produced by the fermentation and subsequent distillation of grain starch, molasses, or sugar, or of some syrup of sap, including all dilutions or mixtures; and the tax shall attach to this substance as soon as it is in existence as such, whether it be subsequently separated as pure or impure spirits, or be immediately or at any subsequent time transformed into any other substance either in process of original production or by any subsequent process.

Pursuant to the above provision of law, therefore, "the tax shall attach to this substance as soon is it is in existence as such" etc. However, on January 1, 1951, Republic Act No. 592 took effect, amending section 133 and the clause underlined above had been eliminated. The evident intention of the law maker in deleting the all embracing underlined clauses, was to subject to specific tax not all kinds of alcoholic substances, but only distilled spirits as finished products, actually removed from the factory or bonded warehouse. The said amendment could not mean anything else; it is in harmony with section 129, of the same Tax Code which provides —

SEC 129. Removal of spirits or cigar under bond. — Spirits requiring rectification may be removed from the place of their manufacture to some other establishment for the purpose of rectification without the prepayment of the specific tax, provided the distiller removing such spirits and the rectifier receiving them shall file with the Collector of Internal Revenue their joint bond

conditioned upon the future payment by the rectifier of the specific tax that may be due on any finished product. . . . .

And if one would consider that the Tax Code does no prohibit further rectification or distillation and defines in section 194 thereof, a rectifier as a person who rectifies, purifies or refines distilled spirits, the conclusion is logical that when alcohol, even if already distilled (as in the present case) or rectified, is again rectified, purified or refined, the specific tax should be based on the finished product, and not on the evaporated alcohol. The intention not to subject to specific tax all kinds of alcoholic substances but only distilled spirits as finished products, is reflected in former Senator Garcia's observation on the floor of the Senate, during the discussion of House Bill No. 1443 (now Rep. Act No. 592), when he proposed the elimination of the phrase "and the tax shall attach to this substances as soon as it is in existence as such, etc." He said —

xxx

xxx

xxx

That is why, Mr. President, in Section 1 of this Bill now under consideration. I have some serious objections to the provision where all kinds of alcoholic substance which falls under the definition of proof spirits in the last paragraph of the same Section I of the proposed measure are taxable because this is one of those that I consider of deterrent effect to the industrialization of this country . . . (Senate Diario No. 6, Jan. 15, 1951, Original 4th Special Session; Emphasis supplied.)

And on August 23, 1956, upon the recommendation of the Bureau of Internal Revenue itself, Rep. Act No. 1608 was passed, amending section 133 of the Tax Code, as amended by R. A. No. 592, restoring the very same clause which was eliminated (Sec. 7, R.A. No. 1608). The inference, therefore, is clear that from January 1, 1951, when Rep. Act No. 592, took effect, until August 23,

1956, when R.A. No. 1608 became a law, the tax on alcohol did not attach as soon as it was in existence as such, but on the finished product. And this must be so, otherwise a great injustice would be caused upon a duly licensed rectifier, who, like the respondent herein, will be made to pay the specific tax on the alcohol lost thru evaporation, from which no one has been benefited, based on the provision of laws then extant, of doubtful application. In every case of doubt, tax statutes are construed most strongly against the government and in favor of the citizens, because burdens are not to be imposed beyond what the statutes expressly and clearly import (MRR Co. v. Coll. of Customs, 52 Phil. 950 Luzon Stev. Co. v. Trinidad, 43 Phil. 803, 809). It should be pointed out also that said section 129 was amended adding the following —

And provided, further, That in cases where alcohol has already been rectified either by original and continuous distillation or by redistillation is further rectified, no loss for rectification and handling shall be allowed and the rectifier thereof shall pay the specific tax due on such losses (Sec. 5, Rep. Act No. 1608).

which obviously reveals that the purpose of the amendment is to tax, only now, alcohol lost, in further distillation or rectification. This law certainly should not be given retroactive effect, so as to cover the period in question (January 1, 1951 to February 27, 1954). It is only after August 23, 1956 that the government woke up from its lethargy and hastened to fill the hiatus.

The second assignment of error is predicated upon the proposition, that the respondent Court of Tax Appeals had no jurisdiction over the case, because the petition for review was not filed within the 30-day period as provided by section 11 of Rep. Act No. 1125 (Law creating the CTA), which states —

SEC. 11. Who may appeal; effect of appeal. — Any person, association or corporation adversely affected by a decision or ruling of the Collector of

Internal Revenue, the Collector of Customs . . . or any provincial or city Board of Assessment Appeals, may file an appeal in the Court of Tax Appeals within thirty days after the receipt of such decision or ruling . . .

Conceding for the purpose of argument that the ruling appealable was the letter-assessment dated May 1, 1954, still We believe that the petition for review to the Tax Court was filed within the time. The intra-office arrangement in the Bureau of Internal Revenue allowed a taxpayer to appeal from the ruling of the Collector to a Conference Staff of the same Bureau. The appeal made on September 1, 1954, to the Conference Staff, from said letter-assessment dated May 8, 1954 (received by the respondent on May 28, 1954), which was reiterated in petitioner's letter of August 26, 1954, (received by the respondent on August 31, 1954), had suspended the period because it was a remedy prescribed by the petitioner himself, made available to the respondent (Collector of Int. Rev. v. Suyoc Consolidated Mining Co., L-11527, Nov. 25, 1958). When the Conference Staff gave due course to the appeal on September 3, 1954, the petitioner gave the impression that his letter-assessments of May 8 and August 26, 1954, were still subject to review by his Conference Staff. And when the Conference Staff finally refused to reconsider its ruling requiring respondent to deposit ½ of the amount of the tax in cash, and payment of the balance or guaranteed by a surety bond, after the submission of two requests for reconsideration, the second denial having been received by respondent only on March 16, 1955 (Exh. I-16), said it was then only, that the petitioner may or can be said to have rejected the administrative appeal and gave finality to his letter of August 26, 1954. We believe that petitioner did not create the Conference Staff and permitted a taxpayer to appeal to it from his ruling, as a mere administrative expediency, to delay the taxpayer from appealing to the Tax Court, and thus allow the period of his appeal to lapse. We should presume that this injurious result was not intended by the Government. This being the case, as it is the case, when respondent lodged its petition for review

with the Tax Court on March 18, 1955, only three (3) days in all, had elapsed, out of the period. The period within which the review must be sought, should be counted from the denial of the motion for reconsideration because of the principle that all administrative remedies must be exhausted before recourse to the courts can be had against orders or decisions of administrative bodies (Sec. of Agriculture, etc., et al. v. Hora, et al., G.R. No. L-7752, May 27, 1955). If, as it should be, the final appealable ruling of the petitioner, was that received by respondent on March 16, 1955, then only two (2) days had been consumed by the respondent of the statutory period. In either case, the appeal to the Tax Court was presented on time and the latter has jurisdiction to take cognizance of the case.

WHEREFORE, the decision appealed from is hereby affirmed, without pronouncement as to costs.

EN BANC

G.R. No. 104037 May 29, 1992

REYNALDO V. UMALI, petitioner, vs. HON. JESUS P. ESTANISLAO, Secretary of Finance, and HON. JOSE U. ONG, Commissioner of Internal Revenue, respondents.

G.R. No. 104069 May 29, 1992

RENE B. GOROSPE, LEIGHTON R. SIAZON, MANUEL M. SUNGA, PAUL D. UNGOS, BIENVENIDO T. JAMORALIN, JR., JOSE D. FLORES, JR., EVELYN G. VILLEGAS, DOMINGO T. LIGOT, HENRY E. LARON, PASTOR M. DALMACION, JR., and, JULIUS NORMAN C. CERRADA, petitioners,

vs

COMMISSIONER OF INTERNAL REVENUE, respondent.

PADILLA, J.:

These consolidated cases are petitions for mandamus and prohibition, premised upon the following undisputed facts:

Congress enacted Rep. Act 7167, entitled "AN ACT ADJUSTING THE BASIC PERSONAL AND ADDITIONAL EXEMPTIONS ALLOWABLE TO INDIVIDUALS FOR INCOME TAX PURPOSES TO THE POVERTY THRESHOLD LEVEL, AMENDING FOR THE PURPOSE SECTION 29, PARAGRAPH (L), ITEMS (1)

AND (2) (A) OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES." It provides as follows:

Sec. (1). The first paragraph of item (1), paragraph (1) of Section 29 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows:

(1) Personal Exemptions allowable to individuals –– (1) Basic personal exemption as follows:

For single individual or married individual judicially decreed as legally separated with no qualified dependents P9,000

For head of a family P12,000

For married individual P18,000

Provided, That husband and wife electing to compute their income tax separately shall be entitled to a personal exemption of P9,000 each.

Sec. 2. The first paragraph of item (2) (A), paragraph (1) of Section 29 of the same Code, as amended, is hereby further amended to read as follows:

(2) Additional exemption.

(a) Taxpayers with dependents. –– A married individual or a head of family shall be allowed an additional exemption of Five Thousand Pesos (P5,000) for each dependent: Provided, That the total number of dependents for which additional exemptions may be claimed shall not exceed four dependents: Provided, further, That an additional exemption of One Thousand Pesos (1,000) shall be allowed for each child who otherwise qualified as dependent prior to January 1, 1980: Provided, finally, That the additional exemption for

dependents shall be claimed by only one of the spouses in case of married individuals electing to compute their income tax liabilities separately.

Sec. 3. This act shall take effect upon its approval.

Approved.

1

The said act was signed and approved by the President on 19 December 1991 and published on 14 January 1992 in "Malaya" a newspaper of general circulation.

On 26 December 1991, respondents promulgated Revenue Regulations No. 192, the pertinent portions of which read as follows:

Sec. 1. SCOPE –– Pursuant to Sections 245 and 72 of the National Internal Revenue Code in relation to Republic Act No. 7167, these Regulations are hereby promulgated prescribing the collection at source of income tax on compensation income paid on or after January 1, 1992 under the Revised Withholding Tax Tables (ANNEX "A") which take into account the increase of personal and additional exemptions.

xxx xxx xxx

Sec. 3. Section 8 of Revenue Regulations No. 6-82 is amended by Revenue Regulations No. 1-86 is hereby further amended to read as follows:

Section 8. –– Right to claim the following exemptions. . . .

Each employee shall be allowed to claim the following amount of exemption with respect to compensation paid on or after January 1, 1992.

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Sec. 5. EFFECTIVITY. –– These regulations shall take effect on compensation income from January 1, 1992.

On 27 February 1992, the petitioner in G.R. No. 104037, a taxpayer and a resident of Gitnang Bayan Bongabong, Oriental Mindoro, filed a petition for mandamus for himself and in behalf all individual Filipino taxpayers, to COMPEL the respondents to implement Rep. Act 7167 with respect to taxable income of individual taxpayers earned or received on or after 1 January 1991 or as of taxable year ending 31 December 1991.

On 28 February 1992, the petitioners in G.R. No. 104069 likewise filed a petition for mandamus and prohibition on their behalf as well as for those other individual taxpayers who might be similarly situated, to compel the Commissioner of Internal Revenue to implement the mandate of Rep. Act 7167 adjusting the personal and additional exemptions allowable to individuals for income tax purposes in regard to income earned or received in 1991, and to enjoin the respondents from implementing Revenue Regulations No. 1-92.

In the Court's resolution of 10 March 1992, these two (2) cases were consolidated. Respondents were required to comment on the petitions, which they did within the prescribed period.

The principal issues to be resolved in these cases are: (1) whether or not Rep. Act 7167 took effect upon its approval by the President on 19 December 1991, or on 30 January 1992, i.e., after fifteen (15) days following its publication on 14 January 1992 in the "Malaya" a newspaper of general circulation; and (2) assuming that Rep. Act 7167 took effect on 30 January 1992, whether or not the said law nonetheless covers or applies to compensation income earned or received during calendar year 1991.

In resolving the first issue, it will be recalled that the Court in its resolution in Caltex (Phils.), Inc. vs. The Commissioner of Internal Revenue, G.R. No. 97282,

26 June 1991 –– which is on all fours with this case as to the first issue –– held:

The central issue presented in the instant petition is the effectivity of R.A. 6965 entitled "An Act Revising The Form of Taxation on Petroleum Products from Ad Valorem to Specific, Amending For the Purpose Section 145 of the National Internal Revenue Code, As amended by Republic Act Numbered Sixty Seven Hundred Sixty Seven."

Sec. 3 of R.A. 6965 contains the effectivity clause which provides. "This Act shall take effect upon its approval"

R.A. 6965 was approved on September 19, 1990. It was published in the Philippine Journal, a newspaper of general circulation in the Philippines, on September 20, 1990. Pursuant to the Act, an implementing regulation was issued by the Commissioner of Internal Revenue, Revenue Memorandum Circular 85-90, stating that R.A. 6965 took effect on October 5, 1990. Petitioner took exception thereof and argued that the law took effect on September 20, 1990 instead.

Pertinent is Article 2 of the Civil Code (as amended by Executive Order No. 200) which provides:

Art. 2. Laws shall take effect after fifteen days following the completion of their publication either in the official Gazette or in a newspaper of general circulation in the Philippines, unless it is otherwise provided. . . .

In the case of Tanada vs. Tuvera (L-63915, December 29, 1986, 146 SCRA 446, 452) we construed Article 2 of the Civil Code and laid down the rule:

. . .: the) clause "unless it is otherwise provided" refers to the date of effectivity and not to the requirement of publication itself, which cannot in any event be omitted. This clause does not mean that the legislator may make the law

effective immediately upon approval, or on any other date without its previous publication.

Publication is indispensable in every case, but the legislature may in its discretion provide that the usual fifteen-day period shall be shortened or extended. . . .

Inasmuch as R.A. 6965 has no specific date for its effectivity and neither can it become effective upon its approval notwithstanding its express statement, following Article 2 of the Civil Code and the doctrine enunciated in Tanada, supra, R.A. 6965 took effect fifteen days after September 20, 1990, or specifically, on October 5, 1990.

Accordingly, the Court rules that Rep. Act 7167 took effect on 30 January 1992, which is after fifteen (15) days following its publication on 14 January 1992 in the "Malaya."

Coming now to the second issue, the Court is of the considered view that Rep. Act 7167 should cover or extend to compensation income earned or received during calendar year 1991.

Sec. 29, par. (L), Item No. 4 of the National Internal Revenue Code, as amended, provides:

Upon the recommendation of the Secretary of Finance, the President shall automatically adjust not more often than once every three years, the personal and additional exemptions taking into account, among others, the movement in consumer price indices, levels of minimum wages, and bare subsistence levels.

As the personal and additional exemptions of individual taxpayers were last adjusted in 1986, the President, upon the recommendation of the Secretary of Finance, could have adjusted the personal and additional exemptions in 1989

by increasing the same even without any legislation providing for such adjustment. But the President did not.

However, House Bill 28970, which was subsequently enacted by Congress as Rep. Act 7167, was introduced in the House of Representatives in 1989 although its passage was delayed and it did not become effective law until 30 January 1992. A perusal, however, of the sponsorship remarks of Congressman Hernando B. Perez, Chairman of the House Committee on Ways and Means, on House Bill 28970, provides an indication of the intent of Congress in enacting Rep. Act 7167. The pertinent legislative journal contains the following:

At the outset, Mr. Perez explained that the Bill Provides for increased personal additional exemptions to individuals in view of the higher standard of living.

The Bill, he stated, limits the amount of income of individuals subject to income tax to enable them to spend for basic necessities and have more disposable income.

xxx xxx xxx

Mr. Perez added that inflation has raised the basic necessities and that it had been three years since the last exemption adjustment in 1986.

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Subsequently, Mr. Perez stressed the necessity of passing the measure to mitigate the effects of the current inflation and of the implementation of the salary standardization law. Stating that it is imperative for the government to take measures to ease the burden of the individual income tax filers, Mr. Perez then cited specific examples of how the measure can help assuage the burden to the taxpayers.

He then reiterated that the increase in the prices of commodities has eroded the purchasing power of the peso despite the recent salary increases and emphasized that the Bill will serve to compensate the adverse effects of inflation on the taxpayers. . . . (Journal of the House of Representatives, May 23, 1990, pp. 32-33).

It will also be observed that Rep. Act 7167 speaks of the adjustments that it provides for, as adjustments "to the poverty threshold level." Certainly, "the poverty threshold level" is the poverty threshold level at the time Rep. Act 7167 was enacted by Congress, not poverty threshold levels in futuro, at which time there may be need of further adjustments in personal exemptions. Moreover, the Court can not lose sight of the fact that these personal and additional exemptions are fixed amounts to which an individual taxpayer is entitled, as a means to cushion the devastating effects of high prices and a depreciated purchasing power of the currency. In the end, it is the lower-income and the middle-income groups of taxpayers (not the high-income taxpayers) who stand to benefit most from the increase of personal and additional exemptions provided for by Rep. Act 7167. To that extent, the act is a social legislation intended to alleviate in part the present economic plight of the lower income taxpayers. It is intended to remedy the inadequacy of the heretofore existing personal and additional exemptions for individual taxpayers.

And then, Rep. Act 7167 says that the increased personal exemptions that it provides for shall be available thenceforth, that is, after Rep. Act 7167 shall have become effective. In other words, these exemptions are available upon the filing of personal income tax returns which is, under the National Internal Revenue Code, done not later than the 15th day of April after the end of a calendar year. Thus, under Rep. Act 7167, which became effective, as aforestated, on 30 January 1992, the increased exemptions are literally available on or before 15 April 1992 (though not before 30 January 1992). But

these increased exemptions can be available on 15 April 1992 only in respect of compensation income earned or received during the calendar year 1991.

The personal exemptions as increased by Rep. Act 7167 cannot be regarded as available in respect of compensation income received during the 1990 calendar year; the tax due in respect of said income had already accrued, and been presumably paid, by 15 April 1991 and by 15 July 1991, at which time Rep. Act 7167 had not been enacted. To make Rep. Act 7167 refer back to income received during 1990 would require language explicitly retroactive in purport and effect, language that would have to authorize the payment of refunds of taxes paid on 15 April 1991 and 15 July 1991: such language is simply not found in Rep. Act 7167.

The personal exemptions as increased by Rep. Act 7167 cannot be regarded as available only in respect of compensation income received during 1992, as the implementing Revenue Regulations No. 1-92 purport to provide. Revenue Regulations No. 1-92 would in effect postpone the availability of the increased exemptions to 1 January-15 April 1993, and thus literally defer the effectivity of Rep. Act 7167 to 1 January 1993. Thus, the implementing regulations collide frontally with Section 3 of Rep. Act 7167 which states that the statute "shall take effect upon its approval." The objective of the Secretary of Finance and the Commissioner of Internal Revenue in postponing through Revenue Regulations No. 1-92 the legal effectivity of Rep. Act 7167 is, of course, entirely understandable –– to defer to 1993 the reduction of governmental tax revenues which irresistibly follows from the application of Rep. Act 7167. But the lawmaking authority has spoken and the Court can not refuse to apply the lawmaker's words. Whether or not the government can afford the drop in tax revenues resulting from such increased exemptions was for Congress (not this Court) to decide.

WHEREFORE, Sections 1, 3 and 5 of Revenue Regulations No. 1-92 which provide that the regulations shall take effect on compensation income earned or received from 1 January 1992 are hereby SET ASIDE. They should take effect on compensation income earned or received from 1 January 1991.

Since this decision is promulgated after 15 April 1992, the individual taxpayers entitled to the increased exemptions on compensation income earned during calendar year 1991 who may have filed their income tax returns on or before 15 April 1992 (later extended to 24 April 1992) without the benefit of such increased exemptions, are entitled to the corresponding tax refunds and/or credits, and respondents are ordered to effect such refunds and/or credits. No costs.

SO ORDERED.

Footnotes

1 Before the enactment of Rep. Act 7167, Executive Order No. 37 approved by the President on 31 July 1986, provided for the following personal and additional exemptions for individual taxpayers:

(1) Personal exemptions allowable to individuals. –– (1) Basic personal exemption. –– For the purpose of determining the tax provided in Section 21(a) of this Title, there shall be allowed a basic personal exemption as follows:

For single individual or married individual

judicially decreed as legally separated

with no qualified dependents P6,000

For head of a family P7,500

For married individual P12,000

Provided, That husband and wife electing to compute their income tax separately shall be entitled to a personal exemption of P6,000 each.

For purposes of this paragraph, the term "Head of Family" means an unmarried or legally separated man or woman with one or both parents, or with one or more brothers or sisters, or with one or more legitimate, recognized natural or legally adopted children

living with and dependent upon him for their chief support, where such brothers or sisters or children are not more than twentyone (21) years of age, unmarried and not gainfully employed or where such children, brothers or sisters, regardless of age are incapable of self-support because of mental or physical defect.

(2) Additional exemption

(A) Taxpayers with dependents. –– A married individual or a head of family shall be allowed an additional exemption of Three thousand pesos (P3,000) for each dependent: Provided, That the total number of dependents for which additional exemptions may be claimed shall not exceed four dependents: Provided, further, That an additional exemption of One thousand pesos (P1,000) shall be allowed for each child who otherwise qualified as dependent prior to January 1, 1980; and Provided, finally, That the additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals electing to compute their income tax liabilities separately.

In case of legally separated spouses, additional exemptions may be claimed only by the spouse who was awarded custody of the child or children: Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed:

For purposes of this paragraph, a dependent means a legitimate, recognized natural or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.

SECOND DIVISION

G.R. No. L-36130 January 17, 1985

LA SUERTE CIGAR AND CIGARETTE FACTORY, BATAAN CIGAR AND CIGARETTE FACTORY, INC., LA PERLA INDUSTRIES, INC., PIONEER TOBACCO CORPORATION, INSULAR-YEBANA TOBACCO CORPORATION, LAS BUENAS FABRICA DE CIGARILLOS, INC., LA DICHA CIGAR & CIGARETTE FACTORY, CONSOLIDATED TOBACCO INDUSTRIES OF THE PHILIPPINES, INC., LA CAMPANA FABRICA DE TABACOS, INC., ASSOCIATED ANGLO-AMERICAN TOBACCO CORPORATION, FORTUNE TOBACCO CORPORATION, BAGUMBUHAY CIGAR AND CIGARETTE FACTORY, STANDARD CIGARETTE MANUFACTURING CO., INC., and D.L. TERUEL TOBACCO CO., INC., petitioners, vs. COURT OF TAX APPEALS and HON. MISAEL P. VERA, in his capacity as Commissioner of Internal Revenue, respondents.

G.R. No. L-36131 January 17, 1985

ALHAMBRA INDUSTRIES, INC., LA FLOR DE LA ISABELA, INCORPORADA and COLUMBIA TOBACCO COMPANY, INC., petitioners, vs. COURT OF TAX APPEALS and HON. MISAEL P. VERA, in his capacity as Commissioner of Internal Revenue, respondents.

CUEVAS, J.:

Petition for Review on certiorari of the decisions

1

of the Court of Tax Appeals

in CTA Cases Nos. 2048 and 2031, denying petitioners' claims for the refund

of P1,606,509.83 imposed and collected by respondent Commissioner of Internal Revenue as tobacco inspection fees on cigars and cigarettes manufactured for domestic sale and/or consumption.

These two cases were heard jointly by the Court of Tax Appeals the parties being represented by one and the same counsel and involving as they do, the same legal issues. The amounts involved are not disputed.

On August 22, 1967, respondent Commissioner of Internal Revenue issued Memorandum Circular No. 30-67

2

requiring the inspection of (a) all locally

produced leaf tobacco and partially manufactured tobacco intended for domestic sale, for factory use or for export; (b) all manufactured products of tobacco contemplated in Sec. 194(m) of the Tax Code intended for domestic sale; and (c) all imported foreign leaf tobacco and partially manufactured tobacco for domestic sale or factory use, and the collection of the corresponding inspection fees.

Pursuant to said Memorandum respondent collected from petitioners, over the latter's vehement protests, the following inspection fees:

(a) 199,632.19 during the period from September 1967 to April 1969, in CTA Case No. 2031;

(b) 1,406,877.64 during the period from September 1967 to August 1969, in CTA Case No. 2048.

Petitioners in two separate cases, sought the refund of the aforementioned inspection fees collected from them CTA Case No. 2031 was submitted by petitioners for summary judgment. In a decision dated November 28, 1970, CTA denied the claim for the refund of the amount of P199,632.19.

Before the finality of the said decision, however, petitioners moved for a reconsideration thereby praying that in case of a denial, CTA Case No. 2031 be

reopened for the reception of evidence in support of their argument that there was no inspection made by the BIR nor were inspection labels affixed to the boxes and packages containing the cigars and cigarettes which would warrant the imposition and collection of the disputed tobacco inspection fees.

On September 28, 1971, the CTA granted petitioners' motion to reopen but denied the motion for reconsideration. Said court likewise ordered that CTA Cases Nos. 2048 and 2031 be heard jointly. After hearing, the CTA on December 15, 1972 denied both claims.

Petitioners contend that the CTA erred:

I

IN REACHING A CONCLUSION CONTRARY TO PETITIONERS' POSITION THAT INSPECTION FEES COLLECTED FROM THEM BY RESPONDENT ON THE CIGARS AND CIGARETTES MANUFACTURED BY THEM FOR DOMESTIC SALE OR CONSUMPTION WERE SO COLLECTED ILLEGALLY AND HENCE, SHOULD BE REFUNDED TO THEM;

II

IN REFUSING TO HOLD THAT RESPONDENT COMMISSIONER'S REVENUE MEMORANDUM CIRCULAR WHICH PURPORTS TO DECLARE PETITIONERS LIABLE FOR THE AFORESAID INSPECTION FEES, AND IN VIRTUE OF WHICH, THE SAID FEES WERE COLLECTED, IS WITHOUT ANY BINDING FORCE AND EFFECT ON THE LATTER, BECAUSE OF THE ADMITTED FACT THAT IT IS NOT A REGULATION PROMULGATED BY THE SECRETARY OF FINANCE, AS REQUIRED BY SECTION 4(j) AND 338 OF THE NIRC, AND FURTHER, BECAUSE OF THE EQUALLY ADMITTED FACT THAT IT HAS NEVER BEEN PUBLISHED IN THE OFFICIAL GAZETTE, AS REQUIRED NOT

ONLY BY ART. 2 OF THE CIVIL CODE, BUT ALSO BY SEC. 79(b) OF THE REVISED ADMINISTRATIVE CODE;

III

IN DISREGARDING THE FACT BORNE OUT BY UNDISPUTED EVIDENCE THAT NO INSPECTION OF THE CIGARS AND CIGARETTES AFOREMENTIONED WAS ACTUALLY CONDUCTED FOR WHICH REASON NO COLLECTION OF INSPECTION FEES WAS LEGALLY WARRANTED; and

IV

IN FAILING TO HOLD THAT THE PROVISIONS OF THE TOBACCO INSPECTION LAW (SEC. 6[c]) UNDER WHICH THE SAID REVENUE MEMORANDUM CIRCULAR PURPORTS TO DECLARE PETITIONERS' CIGAR AND CIGARETTES FOR DOMESTIC SALE OR CONSUMPTION SUBJECT TO INSPECTION AND THE PAYMENT OF INSPECTION FEES, REFER ALONE TO LEAF TOBACCO FOR DOMESTIC SALE OR FACTORY USE, NOT TO CIGARS AND CIGARETTES FOR DOMESTIC CONSUMPTION, AND HENCE, THE SAID MEMORANDUM CIRCULAR IS ULTRA VIRES AND VOID.

Section 6(c) of Act 2613 (Tobacco Inspection Law), before its amendment by Republic Act No. 3 1, provides:

Sec. 6. The Commissioner of Internal Revenue shall have the power and it shall be his duty: ...

xxx xxx xxx

(c) To require, whenever it shall be deemed expedient, the inspection of and affixture of inspection labels to tobacco removed from the province before such removal or to tobacco for domestic sale or factory use.

As amended, (by RA 31) said Section 6, Republic Act No. 31 (October 1, 1946) now reads:

Sec. 6. The Commissioner of Internal Revenue shall have the power and it shall be his duty:

xxx xxx xxx

(c) To require, whenever it shall be deemed expedient, the inspection of and affixture of inspection labels to tobacco removed from province of its origin to another or other provinces before such removal or to tobacco for domestic sale or factory use. (Emphasis supplied)

The amendatory bill (House Bill No. 735) which later on became Republic Act No. 31, carried the following explanatory note:

EXPLANATORY NOTE

Under Section 6 of the Tobacco Inspection Law (Act No. 2613), the Collector of Internal Revenue is authorized to promulgate rules relative to the classification, marking and packaging of leaf tobacco for domestic sale or for exportation in order to insure the use of leaf tobacco of good quality and its handling under sanitary conditions. Section 1 of the attached bill seeks to extend this regulatory power of the Collector of Internal Revenue to leaf tobacco intended for factory use.

xxx xxx xxx

xxx xxx xxx

Under the present law only leaf and manufactured tobacco for export to the United States are subject to inspection. Under the proposed amendment, the standard type and packing of all leaf and manufactured tobacco for export to

any foreign country will come under the regulatory power of the Collector of Internal Revenue. (Emphasis supplied)

It was petitioners' contention that the amendatory portion reading "or to tobacco for domestic sale or factory use" in Sec. 6(c) of Act 2613, refers to leaf tobacco whether for local sale or factory use and does not include cigars and cigarettes for domestic sale or consumption.

We do not agree.

Prior to the amendment of said Act, Sec. 6 and 7 thereof, already covered the inspection of leaf tobacco, partially manufactured tobacco or local sale and leaf tobacco and its products for export. If the intention of Congress was to apply the amendment to those items already covered by Act 2613, then the word "leaf" should have been easily included to modify the term "tobacco". The omission of the word "leaf" is a clear indication that Congress intended to include within the purview of the law a new item; namely, manufactured tobacco products for domestic sale and imported tobacco for factory use.

As aptly held by the CTA:

xxx xxx xxx

Petitioners' contention that the phrase 'tobacco for domestic sale' refers to leaf tobacco alone is restrictive, misleading, and against sound statutory construction.

Webster's New International Dictionary 2nd Edition, p. 2653 defines tobacco as the leaves of the tobacco plant, prepared by drying and various manufacturing processes, and use either for smoking or chewing, or as snuff, or the manufactured products from tobacco leave smoking or chewing tobacco cigar cigarette etc. collectively

From the above definition, it is clear that the word "tobacco" refers both to leaf and manufactured tobacco such as cigars, and cigarettes It is to be noted that either Section 6(c) of Act No. 2613 or the amendatory law does not make a distinction as to the meaning of the word "tobacco". Since our la g body used the word tobacco in the general sense without any qualification, this Court is powerless to give it a restrictive meaning.

xxx xxx xxx

If Congress of the Philippines really intended to restrict the meaning of the word 'tobacco' under Republic Act No. 31, which took effect on October 1, 1946, in order to limit the scope of the term tobacco under the law originally passed in 1916 and its implementing Regulations Nos. 17 and 47, it could have easily inserted the word "leaf" to modify "tobacco" contained in the amendatory law. An examination of Sections 6(a), 6(b) and 7, supra, reveals that, if our lawmaking body intended to limit the coverage of said sections to either leaf or manufactured tobacco, it qualified the word 'tobacco' with such antecedent words. In Section 6(c) of Act 2613, as amended, no such qualification was made by Congress, thereby showing the broad scope and meaning of the word tobacco. For the Court to adopt petitioners' construction that tobacco means 'leaf tobacco' would be engaging in unauthorized judicial legislation by rewriting the law and inserting words and phrases not found in it.

xxx xxx xxx

Settled is the rule that where the law does not distinguish, we should not distinguish.

3

The validity and efficacy of Revenue Memorandum Circular No. 30-67 is now being assailed by petitioners on the ground that it is not a regulation promulgated by the Secretary of Finance (now Minister of Finance) and that it

has never been published in the Official Gazette as required by the Civil Code and the Revised Administrative Code.

As herein earlier mentioned, the word "leaf", although used to modify the term "tobacco" only in the Explanatory Note to then House Bill No. 735 was omitted when the Bill was signed into law (RA 31). However, when General Circular No. V-27 dated October 29, 1946 was issued by then Collector of Internal Revenue Bibiano L. Meer to implement the provisions of Sections 6, 7 and 14 of Act 2613 (Tobacco Inspection Law), the word "leaf" was erroneously included therein, causing damage to the financial stability of the Government as the inspection fees due on cigars and cigarettes for domestic sale and imported leaf and partially manufactured tobacco for factory use were not collected for more than twenty (20) years. Such error was only discovered when an Assistant Chief of the Tobacco Inspection Service of the BIR appeared in a public hearing of the Joint Legislative-Executive Tax Commission. As a result thereof, the Philippine Tobacco Board, a policy making body of the National Government on Tobacco Authority, adopted Resolution No. 2-67 interpreting the phrase "tobacco for domestic sale" as referring to wholesale disposal of tobacco products by cigar and cigarettes factories to its dealers while the phrase "tobacco for factory use" meant "imported leaf tobacco" intended for use by cigar and cigarette factories in the manufacture of tobacco products. The approval of this Resolution on May 31, 1967 prompted respondent Commissioner to promulgate Memorandum Circular No. 30-67 which was approved by then Secretary of Finance Eduardo Z. Romualdez and the effectivity of which is specifically dated September 1, 1967 and not contingent on its publication in the Official Gazette.

Thus, the assailed Revenue Memorandum Circular was issued to rectify the error in General Circular No. V-27 and to interpret the phrase "tobacco for domestic sale or factory use" with the view of arresting huge losses of tobacco inspection fees which were not collected and imposed since the said Circular

(No. V-27) took effect. Furthermore, the questioned Revenue Memorandum Circular was also issued to apprise those concerned of the construction and interpretation which should be accorded to Act No. 2613, as amended, and which respondent is duty bound to enforce. It is an opinion on how the law should be construed and there was no attempt whatsoever to enlarge or restrict the meaning of the law.

The basis for the issuance of said Memorandum Circular was so stated in Resolution No. 2-67 of the Tobacco Board, wherein petitioners as members of the Manila Tobacco Association, Inc. were duly represented, the pertinent portions of which read:

xxx xxx xxx

WHEREAS, tills original recommendation of Mr. Hernandez was perfectly in accordance with eating law, more particularly Sec. 1 of Republic Act No. 31 which took effect since September 25, 1946, but perhaps thru oversight by the former Commissioners and officers of the Tobacco Inspection Service the property and legality of effecting the inspection of tobacco products for local sales and imported leaf tobacco for factory use might have overlooked resulting in huge losses of tobacco inspection fees ... (Emphasis supplied)

As admitted by counsel for petitioners, the latter were each furnished with a copy of the Revenue Memorandum Circular in question and the purpose of the law, that is to inform or notify those who may be affected, has been substantially complied with. Since it was further admitted by petitioners that said Memorandum is but a "Memorandum Circular for purposes of the internal administration of the BIR and not a regulation within the contemplation of Sections 4 and 338 of the NIRC and Section 79(b) of the Revised Administrative Code", said circular needs no publication in the Official Gazette as erroneously argued by the petitioners.

Section 79(b) of the Revised Administrative Code so provides:

Chiefs, of bureaus or offices, may, however, be authorized to promulgate circulars or information or instructions for the government of the officers and employees in the interior administration of the business of each bureau or office, and in such case said circular shall not be required to be published.

When an administrative agency renders an opinion by means of a circular or Memorandum, it merely interprets a pre-existing law, and no publication is necessary for its validity.

4

Construction by an executive branch of government

of a particular law although not binding upon courts must be given weight as the construction come from the branch of the government called upon to implement the law.

5

The promulgation of Revenue Memorandum Circular No. 30-67 being in accordance with the Revised Administrative Code, having been issued by the Commissioner of Internal Revenue with the approval of the Secretary (now Minister) of Finance for the implementation of the Tobacco Inspection Law, has therefore the force and effect of law.

Tobacco Inspection fees are undoubtedly National Internal Revenue taxes, they being one of the miscellaneous taxes provided for under the Tax Code. Section 228 (formerly Section 302) of Chapter VII of the Code specifically provides for the collection and manner of payment of the said inspection fees. It is within the power and duty of the Commissioner to collect the same, even without inspection, should tobacco products be removed clandestinely or surreptitiously from the establishment of the wholesaler, manufacturer or redrying plant and from the customs custody in case of imported leaf tobacco. Errors, omissions or flaws committed by BIR inspectors and representatives while in the performance of their duties cannot be set up as estoppel nor estop the Government from collecting a tax legally due.

6

Tobacco inspection fees are

levied and collected for purposes of regulation and control and also as a source of revenue since fifty percentum (50%) of said fees shall accrue to the Tobacco Inspection Fee Fund created by Sec. 12 of Act No. 2613, as amended and the other fifty percentum to the Cultural Center of the Philippines. (Sec. 88, Chapter VII, NIRC)

Under the circumstances, a refund of the tobacco inspection fees collected from petitioners is not legally warranted.

As disclosed by the records, the party-litigants agreed that Mr. Vicente Chua's, (Production Manager of La Suerte Cigar & Cigarette Factory) testimony shall be considered as the Procedure of inspection followed in all factories of petitioners, thus:

7

... before the cigarettes were removed from the factory, they were invoiced by the revenue agents assigned there to check on the number of cases of cigarettes to be removed; revenue agents checked the quantity of cigarettes manufactured, quantity of cigarettes removed, strip stamps affixed; and early in the morning before the start of the operation, the revenue agents checked the cigarette bobbins strip stamps and saw to it that cigarettes removed were properly recorded in the books.

From the testimonies of other witnesses for petitioners, it was shown that revenue agents and tobacco inspectors "saw to it that an raw materials for use in the manufacture of the finished products were duly recorded; and in the process of manufacture, all tobacco products found unfit for sales were segregated by the factory employees thru the supervision of the revenue agents."

The CTA held that the foregoing belie petitioners' assertions that no actual inspection was conducted to justify the collection of the tobacco inspection

fees. The findings of the Tax Court are duly supported by evidence. We find no cogent reason to disturb the same. They are therefore binding on this Court.

Accordingly, the petition for review is hereby DISMISSED. Costs against petitioners.

SO ORDERED.

Footnotes

1 CTA Decision, pages 40-60, Rollo.

2 Pages, 61-62, Rollo.

3 Colgate-Palmolive (Phils.), Inc. vs. Gimenez, 1 SCRA 267.

4 Romualdez vs. Arca, 27 SCRA 828.

5 Salaria vs. Buenviaje 81 SCRA 722.

6 Phil. American Drug Co. vs. Collector of BIR, 106 Phil. 161.

7 Pages 57-58, Rollo.

THIRD DIVISION

[G.R. No. 153866. February 11, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE TECHNOLOGY (PHILIPPINES), respondent.

DECISION

PANGANIBAN, J.:

Business companies registered in and operating from the Special Economic Zone in Naga, Cebu -- like herein respondent -- are entities exempt from all internal revenue taxes and the implementing rules relevant thereto, including the value-added taxes or VAT. Although export sales are not deemed exempt transactions, they are nonetheless zero-rated. Hence, in the present case, the distinction between exempt entities and exempt transactions has little significance, because the net result is that the taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise, has complied with all requisites for claiming a tax refund of or credit for the input VAT it paid on capital goods it purchased. Thus, the Court of Tax Appeals and the Court of Appeals did not err in ruling that it is entitled to such refund or credit.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set aside the May 27, 2002 Decision[2] of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal portion of the Decision reads as follows:

“WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of merit.‖[3]

The Facts

The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:

“As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows:

1. [Respondent] is a resident foreign corporation duly registered with the Securities and Exchange Commission to do business in the Philippines, with principal office address at the new Cebu Township One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu;

2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to perform the duties of his office, including, among others, the duty to act and approve claims for refund or tax credit;

3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to engage in the manufacture of recording components primarily used in computers for export. Such registration was made on 6 June 1997;

4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration Certification No. 97-083-000600-V issued on 2 April 1997;

5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];

6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition for Review), was filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu;

7. No final action has been received by [respondent] from [petitioner] on [respondent‘s] claim for VAT refund.

“The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by the [petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way of Petition for Review in order to toll the running of the two-year prescriptive period.

“For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:

1. [Respondent‘s] alleged claim for tax refund/credit is subject to administrative routinary investigation/examination by [petitioner‘s] Bureau;

2. Since ‗taxes are presumed to have been collected in accordance with laws and regulations,‘ the [respondent] has the burden of proof that the taxes sought to be refunded were erroneously or illegally collected x x x;

3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that:

“A claimant has the burden of proof to establish the factual basis of his or her claim for tax credit/refund.‖

4. Claims for tax refund/tax credit are construed in ‗strictissimi juris‘ against the taxpayer. This is due to the fact that claims for refund/credit [partake of] the nature of an exemption from tax. Thus, it is incumbent upon the [respondent] to prove that it is indeed entitled to the refund/credit sought. Failure on the part of the [respondent] to prove the same is fatal to its claim for tax credit. He who claims exemption must be able to justify his claim by the clearest grant of organic or statutory law. An exemption from the common burden cannot be permitted to exist upon vague implications;

5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority (PEZA) registered Ecozone Enterprise, then its business is not subject to VAT pursuant to Section 24 of Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax Code, as amended. As [respondent‘s] business is not subject to VAT, the capital goods and services it alleged to have purchased are considered not used in VAT taxable business. As such, [respondent] is not entitled to refund of input taxes on such capital goods pursuant to Section 4.106.1 of Revenue Regulations No. ([RR])7-95, and of input taxes on services pursuant to Section 4.103 of said regulations.

6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of the 1997 Tax Code on filing of a written claim for refund within two (2) years from the date of payment of tax.‘

“On July 19, 2001, the Tax Court rendered a decision granting the claim for refund.‖[4]

Ruling of the Court of Appeals

The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax credit certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This sum represented the unutilized but substantiated input VAT paid on capital goods purchased for the period covering April 1, 1998 to June 30, 1999.

The appellate court reasoned that respondent had availed itself only of the fiscal incentives under Executive Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987), not of those under both Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916. Respondent was, therefore, considered exempt only from the payment of income tax when it opted for the income tax holiday in lieu of the 5 percent preferential tax on

gross income earned. As a VAT-registered entity, though, it was still subject to the payment of other national internal revenue taxes, like the VAT.

Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and 4.103-1 of RR 7-95 were applicable. Having paid the input VAT on the capital goods it purchased, respondent correctly filed the administrative and judicial claims for its refund within the two-year prescriptive period. Such payments were -- to the extent of the refundable value -- duly supported by VAT invoices or official receipts, and were not yet offset against any output VAT liability.

Hence this Petition.[5]

Sole Issue

Petitioner submits this sole issue for our consideration:

“Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the amount of P12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased for the period April 1, 1998 to June 30, 1999.‖[6]

The Court‘s Ruling

The Petition is unmeritorious.

Sole Issue:

Entitlement of a VAT-Registered PEZA Enterprise to

a Refund of or Credit for Input VAT

No doubt, as a PEZA-registered enterprise within a special economic zone,[7] respondent is entitled to the fiscal incentives and benefits[8] provided for in

either PD 66[9] or EO 226.[10] It shall, moreover, enjoy all privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA) 7227[11] and 7844.[12]

Preferential Tax Treatment

Under Special Laws

If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary, respondent shall not be subject to internal revenue laws and regulations for raw materials, supplies, articles, equipment, machineries, spare parts and wares, except those prohibited by law, brought into the zone to be stored, broken up, repacked, assembled, installed, sorted, cleaned, graded or otherwise processed, manipulated, manufactured, mixed or used directly or indirectly in such activities.[13] Even so, respondent would enjoy a net-operating loss carry over; accelerated depreciation; foreign exchange and financial assistance; and exemption from export taxes, local taxes and licenses.[14]

Comparatively, the same exemption from internal revenue laws and regulations applies if EO 226[15] is chosen. Under this law, respondent shall further be entitled to an income tax holiday; additional deduction for labor expense; simplification of customs procedure; unrestricted use of consigned equipment; access to a bonded manufacturing warehouse system; privileges for foreign nationals employed; tax credits on domestic capital equipment, as well as for taxes and duties on raw materials; and exemption from contractors‘ taxes, wharfage dues, taxes and duties on imported capital equipment and spare parts, export taxes, duties, imposts and fees,[16] local taxes and licenses, and real property taxes.[17]

A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation of raw materials, capital and equipment[18] -- is, ipso

facto, also accorded to the zone[19] under RA 7916. Furthermore, the latter law -- notwithstanding other existing laws, rules and regulations to the contrary -- extends[20] to that zone the provision stating that no local or national taxes shall be imposed therein.[21] No exchange control policy shall be applied; and free markets for foreign exchange, gold, securities and future shall be allowed and maintained.[22] Banking and finance shall also be liberalized under minimum Bangko Sentral regulation with the establishment of foreign currency depository units of local commercial banks and offshore banking units of foreign banks.[23]

In the same vein, respondent benefits under RA 7844 from negotiable tax credits[24] for locally-produced materials used as inputs. Aside from the other incentives possibly already granted to it by the Board of Investments, it also enjoys preferential credit facilities[25] and exemption from PD 1853.[26]

From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax treatment.[27] It is not subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on capital goods is an internal revenue tax from which petitioner as an entity is exempt. Although the transactions involving such tax are not exempt, petitioner as a VATregistered person,[28] however, is entitled to their credits.

Nature of the VAT and

the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on every importation of goods, whether or not in the course of trade or business, or imposed on each sale, barter, exchange or lease of goods or properties or on each rendition of services in the course of trade or business[29] as they pass along the production and distribution chain, the tax being limited only to the value added[30] to such goods, properties or services

by the seller, transferor or lessor.[31] It is an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services.[32] As such, it should be understood not in the context of the person or entity that is primarily, directly and legally liable for its payment, but in terms of its nature as a tax on consumption.[33] In either case, though, the same conclusion is arrived at.

The law[34] that originally imposed the VAT in the country, as well as the subsequent amendments of that law, has been drawn from the tax credit method.[35] Such method adopted the mechanics and self-enforcement features of the VAT as first implemented and practiced in Europe and subsequently adopted in New Zealand and Canada.[36] Under the present method that relies on invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.[37]

If at the end of a taxable quarter the output taxes[38] charged by a seller[39] are equal to the input taxes[40] passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid.[41] If, however, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters.[42] Should the input taxes result from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods,[43] any excess over the output taxes shall instead be refunded[44] to the taxpayer or credited[45] against other internal revenue taxes.[46]

Zero-Rated and Effectively

Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-rated transactions as to their source.

Zero-rated transactions generally refer to the export sale of goods and supply of services.[47] The tax rate is set at zero.[48] When applied to the tax base, such rate obviously results in no tax chargeable against the purchaser. The seller of such transactions charges no output tax,[49] but can claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.

Effectively zero-rated transactions, however, refer to the sale of goods[50] or supply of services[51] to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such transactions to a zero rate.[52] Again, as applied to the tax base, such rate does not yield any tax chargeable against the purchaser. The seller who charges zero output tax on such transactions can also claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.

Zero Rating and

Exemption

In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that results from either one of them is not.

Applying the destination principle[53] to the exportation of goods, automatic zero rating[54] is primarily intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller internationally competitive by allowing the refund or credit of input taxes that are attributable to export sales.[55] Effective zero rating, on the contrary, is intended to benefit the purchaser who, not being directly and legally liable for the payment of the VAT, will ultimately bear the burden of the tax shifted by the suppliers.

In both instances of zero rating, there is total relief for the purchaser from the burden of the tax.[56] But in an exemption there is only partial relief,[57]

because the purchaser is not allowed any tax refund of or credit for input taxes paid.[58]

Exempt Transaction

and Exempt Party

The object of exemption from the VAT may either be the transaction itself or any of the parties to the transaction.[59]

An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status -- VAT-exempt or not -of the party to the transaction.[60] Indeed, such transaction is not subject to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid.

An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from the VAT.[61] Such party is also not subject to the VAT, but may be allowed a tax refund of or credit for input taxes paid, depending on its registration as a VAT or non-VAT taxpayer.

As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or passed on by the seller to the purchaser of the goods, properties or services.[62] While the liability is imposed on one person, the burden may be passed on to another. Therefore, if a special law merely exempts a party as a seller from its direct liability for payment of the VAT, but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchase transaction is

not exempt. Applying this principle to the case at bar, the purchase transactions entered into by respondent are not VAT-exempt.

Special laws may certainly exempt transactions from the VAT.[63] However, the Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law under which respondent was registered. The purchase transactions it entered into are, therefore, not VATexempt. These are subject to the VAT; respondent is required to register.

Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10 percent,[64] depending again on the application of the destination principle.[65]

If respondent enters into such sales transactions with a purchaser -- usually in a foreign country -- for use or consumption outside the Philippines, these shall be subject to 0 percent.[66] If entered into with a purchaser for use or consumption in the Philippines, then these shall be subject to 10 percent,[67] unless the purchaser is exempt from the indirect burden of the VAT, in which case it shall also be zero-rated.

Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate,[68] because the ecozone within which it is registered is managed and operated by the PEZA as a separate customs territory.[69] This means that in such zone is created the legal fiction of foreign territory.[70] Under the cross-border principle[71] of the VAT system being enforced by the Bureau of Internal Revenue (BIR),[72] no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. If exports of goods and services from the Philippines to a foreign country are free of the VAT,[73] then the same

rule holds for such exports from the national territory -- except specifically declared areas -- to an ecozone.

Sales made by a VAT-registered person in the customs territory to a PEZAregistered entity are considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-registered person in the customs territory are deemed imports from a foreign country.[74] An ecozone -- indubitably a geographical territory of the Philippines -- is, however, regarded in law as foreign soil.[75] This legal fiction is necessary to give meaningful effect to the policies of the special law creating the zone.[76] If respondent is located in an export processing zone[77] within that ecozone, sales to the export processing zone, even without being actually exported, shall in fact be viewed as constructively exported under EO 226.[78] Considered as export sales,[79] such purchase transactions by respondent would indeed be subject to a zero rate.[80]

Tax Exemptions

Broad and Express

Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue laws and regulations.

This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on consumption, for which the direct liability is imposed on one person but the indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not to distinguish.

Moreover, the exemption is both express and pervasive for the following reasons:

First, RA 7916 states that ―no taxes, local and national, shall be imposed on business establishments operating within the ecozone.‖[81] Since this law does not exclude the VAT from the prohibition, it is deemed included. Exceptio firmat regulam in casibus non exceptis. An exception confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as coming within the purview of the general rule.

Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be passed on and, therefore, indirectly imposed on the same entity -- a patent circumvention of the law. That no VAT shall be imposed directly upon business establishments operating within the ecozone under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited indirectly.

Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except for real property taxes that presently are imposed on land owned by developers.[82] This similar and repeated prohibition is an unambiguous ratification of the law‘s intent in not imposing local or national taxes on business enterprises within the ecozone.

Third, foreign and domestic merchandise, raw materials, equipment and the like ―shall not be subject to x x x internal revenue laws and regulations‖ under PD 66[83] -- the original charter of PEZA (then EPZA) that was later amended by RA 7916.[84] No provisions in the latter law modify such exemption.

Although this exemption puts the government at an initial disadvantage, the reduced tax collection ultimately redounds to the benefit of the national

economy by enticing more business investments and creating more employment opportunities.[85]

Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except those prohibited by law -- ―shall not be subject to x x x internal revenue laws and regulations x x x‖[86] if brought to the ecozone‘s restricted area[87] for manufacturing by registered export enterprises,[88] of which respondent is one. These rules also apply to all enterprises registered with the EPZA prior to the effectivity of such rules.[89]

Fifth, export processing zone enterprises registered[90] with the Board of Investments (BOI) under EO 226 patently enjoy exemption from national internal revenue taxes on imported capital equipment reasonably needed and exclusively used for the manufacture of their products;[91] on required supplies and spare part for consigned equipment;[92] and on foreign and domestic merchandise, raw materials, equipment and the like -- except those prohibited by law -- brought into the zone for manufacturing.[93] In addition, they are given credits for the value of the national internal revenue taxes imposed on domestic capital equipment also reasonably needed and exclusively used for the manufacture of their products,[94] as well as for the value of such taxes imposed on domestic raw materials and supplies that are used in the manufacture of their export products and that form part thereof.[95]

Sixth, the exemption from local and national taxes granted under RA 7227[96] are ipso facto accorded to ecozones.[97] In case of doubt, conflicts with respect to such tax exemption privilege shall be resolved in favor of the ecozone.[98]

And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used in the production of export goods,[99] and for locally produced raw materials, capital equipment and spare parts used by exporters

of non-traditional products[100] -- shall also be continuously enjoyed by similar exporters within the ecozone.[101] Indeed, the latter exporters are likewise entitled to such tax exemptions and credits.

Tax Refund as

Tax Exemption

To be sure, statutes that grant tax exemptions are construed strictissimi juris[102] against the taxpayer[103] and liberally in favor of the taxing authority.[104]

Tax refunds are in the nature of such exemptions.[105] Accordingly, the claimants of those refunds bear the burden of proving the factual basis of their claims;[106] and of showing, by words too plain to be mistaken, that the legislature intended to exempt them.[107] In the present case, all the cited legal provisions are teeming with life with respect to the grant of tax exemptions too vivid to pass unnoticed. In addition, respondent easily meets the challenge.

Respondent, which as an entity is exempt, is different from its transactions which are not exempt. The end result, however, is that it is not subject to the VAT. The non-taxability of transactions that are otherwise taxable is merely a necessary incident to the tax exemption conferred by law upon it as an entity, not upon the transactions themselves.[108] Nonetheless, its exemption as an entity and the non-exemption of its transactions lead to the same result for the following considerations:

First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to execute or administer such laws[109] will have to be adopted. Their prior tax issuances have held inconsistent positions brought about by their probable failure to comprehend and fully appreciate the nature of the VAT as a tax on consumption and the application of the destination

principle.[110] Revenue Memorandum Circular No. (RMC) 74-99, however, now clearly and correctly provides that any VAT-registered supplier‘s sale of goods, property or services from the customs territory to any registered enterprise operating in the ecozone -- regardless of the class or type of the latter‘s PEZA registration -- is legally entitled to a zero rate.[111]

Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is its very soul.

In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the establishment of export processing zones, seeks ―to encourage and promote foreign commerce as a means of x x x strengthening our export trade and foreign exchange position, of hastening industrialization, of reducing domestic unemployment, and of accelerating the development of the country.‖[112]

RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the special economic zones, ―the government shall actively encourage, promote, induce and accelerate a sound and balanced industrial, economic and social development of the country x x x through the establishment, among others, of special economic zones x x x that shall effectively attract legitimate and productive foreign investments.‖[113]

Under EO 226, the ―State shall encourage x x x foreign investments in industry x x x which shall x x x meet the tests of international competitiveness[,] accelerate development of less developed regions of the country[,] and result in increased volume and value of exports for the economy.‖[114] Fiscal incentives that are cost-efficient and simple to administer shall be devised and extended to significant projects ―to compensate for market imperfections, to reward performance contributing to

economic development,‖[115] and ―to stimulate the establishment and assist initial operations of the enterprise.‖[116]

Wisely accorded to ecozones created under RA 7916[117] was the government‘s policy -- spelled out earlier in RA 7227 -- of converting into alternative productive uses[118] the former military reservations and their extensions,[119] as well as of providing them incentives[120] to enhance the benefits that would be derived from them[121] in promoting economic and social development.[122]

Finally, under RA 7844, the State declares the need ―to evolve export development into a national effort‖[123] in order to win international markets. By providing many export and tax incentives,[124] the State is able to drive home the point that exporting is indeed ―the key to national survival and the means through which the economic goals of increased employment and enhanced incomes can most expeditiously be achieved.‖[125]

The Tax Code itself seeks to ―promote sustainable economic growth x x x; x x x increase economic activity; and x x x create a robust environment for business to enable firms to compete better in the regional as well as the global market.‖[126] After all, international competitiveness requires economic and tax incentives to lower the cost of goods produced for export. State actions that affect global competition need to be specific and selective in the pricing of particular goods or services.[127]

All these statutory policies are congruent to the constitutional mandates of providing incentives to needed investments,[128] as well as of promoting the preferential use of domestic materials and locally produced goods and adopting measures to help make these competitive.[129] Tax credits for domestic inputs strengthen backward linkages. Rightly so, ―the rule of law and the existence of credible and efficient public institutions are essential prerequisites for sustainable economic development.‖[130]

VAT Registration, Not Application

for Effective Zero Rating,

Indispensable to VAT Refund

Registration is an indispensable requirement under our VAT law.[131] Petitioner alleges that respondent did register for VAT purposes with the appropriate Revenue District Office. However, it is now too late in the day for petitioner to challenge the VAT-registered status of respondent, given the latter‘s prior representation before the lower courts and the mode of appeal taken by petitioner before this Court.

The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from internal revenue laws and regulations the equipment -including capital goods -- that registered enterprises will use, directly or indirectly, in manufacturing.[132] EO 226 even reiterates this privilege among the incentives it gives to such enterprises.[133] Petitioner merely asserts that by virtue of the PEZA registration alone of respondent, the latter is not subject to the VAT. Consequently, the capital goods and services respondent has purchased are not considered used in the VAT business, and no VAT refund or credit is due.[134] This is a non sequitur. By the VAT‘s very nature as a tax on consumption, the capital goods and services respondent has purchased are subject to the VAT, although at zero rate. Registration does not determine taxability under the VAT law.

Moreover, the facts have already been determined by the lower courts. Having failed to present evidence to support its contentions against the income tax holiday privilege of respondent,[135] petitioner is deemed to have conceded. It is a cardinal rule that ―issues and arguments not adequately and seriously brought below cannot be raised for the first time on appeal.‖[136] This is a ―matter of procedure‖[137] and a ―question of fairness.‖[138] Failure to assert

―within a reasonable time warrants a presumption that the party entitled to assert it either has abandoned or declined to assert it.‖[139]

The BIR regulations additionally requiring an approved prior application for effective zero rating[140] cannot prevail over the clear VAT nature of respondent‘s transactions. The scope of such regulations is not ―within the statutory authority x x x granted by the legislature.[141]

First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot purport to do any more than interpret the latter.[142] The courts will not countenance one that overrides the statute it seeks to apply and implement.[143]

Other than the general registration of a taxpayer the VAT status of which is aptly determined, no provision under our VAT law requires an additional application to be made for such taxpayer‘s transactions to be considered effectively zero-rated. An effectively zero-rated transaction does not and cannot become exempt simply because an application therefor was not made or, if made, was denied. To allow the additional requirement is to give unfettered discretion to those officials or agents who, without fluid consideration, are bent on denying a valid application. Moreover, the State can never be estopped by the omissions, mistakes or errors of its officials or agents.[144]

Second, grantia argumenti that such an application is required by law, there is still the presumption of regularity in the performance of official duty.[145] Respondent‘s registration carries with it the presumption that, in the absence of contradictory evidence, an application for effective zero rating was also filed and approval thereof given. Besides, it is also presumed that the law has been obeyed[146] by both the administrative officials and the applicant.

Third, even though such an application was not made, all the special laws we have tackled exempt respondent not only from internal revenue laws but also from the regulations issued pursuant thereto. Leniency in the implementation of the VAT in ecozones is an imperative, precisely to spur economic growth in the country and attain global competitiveness as envisioned in those laws.

A VAT-registered status, as well as compliance with the invoicing requirements,[147] is sufficient for the effective zero rating of the transactions of a taxpayer. The nature of its business and transactions can easily be perused from, as already clearly indicated in, its VAT registration papers and photocopied documents attached thereto. Hence, its transactions cannot be exempted by its mere failure to apply for their effective zero rating. Otherwise, their VAT exemption would be determined, not by their nature, but by the taxpayer‘s negligence -- a result not at all contemplated. Administrative convenience cannot thwart legislative mandate.

Tax Refund or

Credit in Order

Having determined that respondent‘s purchase transactions are subject to a zero VAT rate, the tax refund or credit is in order.

As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives in EO 226 over those in RA 7916 and PD 66. It opted for the income tax holiday regime instead of the 5 percent preferential tax regime.

The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law,[148] for EO 226[149] also has provisions to contend with. These two regimes are in fact incompatible and cannot be availed of simultaneously by the same entity. While EO 226 merely exempts it from income taxes, the PEZA law exempts it from all taxes.

Therefore, respondent can be considered exempt, not from the VAT, but only from the payment of income tax for a certain number of years, depending on its registration as a pioneer or a non-pioneer enterprise. Besides, the remittance of the aforesaid 5 percent of gross income earned in lieu of local and national taxes imposable upon business establishments within the ecozone cannot outrightly determine a VAT exemption. Being subject to VAT, payments erroneously collected thereon may then be refunded or credited.

Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916, Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that such provision merely exempts respondent from taxes imposed on business. To repeat, the VAT is a tax imposed on consumption, not on business. Although respondent as an entity is exempt, the transactions it enters into are not necessarily so. The VAT payments made in excess of the zero rate that is imposable may certainly be refunded or credited.

Compliance with All Requisites

for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT refund or credit.[150]

First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from Contex, in which this Court held that the petitioner therein was registered as a non-VAT taxpayer.[151] Hence, for being merely VATexempt, the petitioner in that case cannot claim any VAT refund or credit.

Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices and have not been offset against any output taxes. Although enterprises registered with the BOI after December 31, 1994

would no longer enjoy the tax credit incentives on domestic capital equipment -- as provided for under Article 39(d), Title III, Book I of EO 226[152] -- starting January 1, 1996, respondent would still have the same benefit under a general and express exemption contained in both Article 77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones by RA 7916.

There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones from national and local taxes, but also to grant them tax credits. This fact was revealed by the sponsorship speeches in Congress during the second reading of House Bill No. 14295, which later became RA 7916, as shown below:

”MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and local taxes; x x x tax credit for locally-sourced inputs x x x.―

xxx

xxx

xxx

”MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment conducive for investors, the bill offers incentives such as the exemption from local and national taxes, x x x tax credits for locally sourced inputs x x x.―[153]

And third, no question as to either the filing of such claims within the prescriptive period or the validity of the VAT returns has been raised. Even if such a question were raised, the tax exemption under all the special laws cited above is broad enough to cover even the enforcement of internal revenue laws, including prescription.[154]

Summary

To summarize, special laws expressly grant preferential tax treatment to business establishments registered and operating within an ecozone, which by law is considered as a separate customs territory. As such, respondent is exempt from all internal revenue taxes, including the VAT, and regulations pertaining thereto. It has opted for the income tax holiday regime, instead of the 5 percent preferential tax regime. As a matter of law and procedure, its registration status entitling it to such tax holiday can no longer be questioned. Its sales transactions intended for export may not be exempt, but like its purchase transactions, they are zero-rated. No prior application for the effective zero rating of its transactions is necessary. Being VAT-registered and having satisfactorily complied with all the requisites for claiming a tax refund of or credit for the input VAT paid on capital goods purchased, respondent is entitled to such VAT refund or credit.

WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to costs.

SO ORDERED.

[1] Rollo, pp. 8-20.

[2] Id., pp. 21-30.

Thirteenth Division. Penned by Justice Mercedes Gozo-Dadole, with the concurrence of Justices Salvador J. Valdez Jr.

(chair) and Amelita G. Tolentino (member).

[3] CA Decision, p. 10; rollo, p. 30.

Bold types and caps in the original.

[4] CA Decision, pp. 2-4; rollo, pp. 22-24.

Citations omitted.

[5] The Petition was deemed submitted for decision on April 3, 2003, upon receipt by the Court of petitioner‘s Memorandum, signed by Assistant Solicitors General Cecilio O. Estoesta and Fernanda Lampas Peralta and Associate Solicitor Romeo D. Galzote. Respondent‘s Memorandum, signed by Attys. Dennis G. Dimagiba and Franklin A. Prestousa, was filed on March 7, 2003.

[6] Petitioner‘s Memorandum, p. 5; rollo, p. 99.

Original in upper case.

[7] Referred to as ecozone, it is a selected area with highly developed, or which has the potential to be developed into, agro-industrial, industrial, tourist/recreational, commercial, banking, investment and financial centers. §4(a), Chapter I of RA 7916, otherwise known as ―The Special Economic Zone Act of 1995.‖

[8] §35, Chapter III of RA 7916.

[9] PD 66 is the law creating the Export Processing Zone Authority or EPZA.

See 1st paragraph of §23, Chapter III of RA 7916.

[10] EO 226, in Article 1 thereof, is also known as the ―Omnibus Investments Code‖ of 1987.

See 1st paragraph of §23, Chapter III of RA

7916.

[11] RA 7227, in §1 thereof, is also known as the ―Bases Conversion and Development Act of 1992.‖

[12] RA 7844, in §1 thereof, is also known as the ―Export Development Act of 1994.‖

See §51, Chapter VI of RA 7916.

See 2nd paragraph of §23, Chapter III of RA 7916.

[13] §17(1) of PD 66.

[14] §18 of PD 66.

[15] Article 77(1), Book VI of EO 226.

[16] Article 39 of EO 226, certain paragraphs of which are expressly repealed by the 2 the ―Expanded Value Added Tax Law,‖ deemed effective May 27, 1994. See

Lhuillier Pawnshop, Inc., 406 SCRA 178, 187, July 15, 2003.

[17] Article 78 of EO 226.

[18] (b) of the 2

nd

paragraph of §12 of RA 7227.

[19] §51, Chapter VI of RA 7916.

[20] §51, Chapter VI of RA 7916.

[21] (c) of the 2

nd

[22] (d) of the 2

nd

paragraph of §12 of RA 7227.

paragraph of §12 of RA 7227.

nd

paragraph of §20 of RA 7716, otherwise known as

Commissioner of Internal Revenue v. Michel J.

[23] Referred to as the Central Bank under (e) of the 2

paragraph of §12 of RA 7227.

nd

[24] §17 of RA 7844.

[25] §16 of RA 7844.

See 2nd paragraph of §23, Chapter III of RA 7916.

[26] PD 1853 was the law that took effect in 1983, requiring deposits of duties upon the opening of letters of credit to cover imports.

[27] 2

nd

paragraph of §4, Chapter I of RA 7916.

[28] A ―VAT-registered person‖ is a taxable person who has registered for VAT purposes under §236 of the Tax Code.

Deoferio and

Mamalateo, The Value Added Tax in the Philippines (1st ed., 2000), p. 265. See 9th paragraph of §4.107-1(a) of Revenue Regulations No. (RR) 7-95, implemented beginning January 1, 1996, as amended by §6 of RR 6-97, effective January 1, 1997.

[29] §§105 to 109 of RA 8424, as amended, otherwise known as the Tax Code.

[30] Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc., 163 SCRA 371, 378-379, June 30, 1988.

[31] De Leon, The Fundamentals of Taxation (12

th

[32] 2

nd

ed., 1998), p. 131.

paragraph of §105 of the Tax Code.

[33] Deoferio Jr. and Mamalateo, The Value Added Tax in the Philippines (1

st

ed., 2000), pp. 33 & 36.

[34] EO 273.

[35] Vitug, J. and Acosta, Tax Law and Jurisprudence (2

nd

ed., 2000), p. 227.

See §193(d) of the National Internal Revenue Code of 1977 as further amended by §1 of Pres. Decree No. 1358 dated April 21, 1978, wherein the tax credit method, instead of the cost deduction method, was mandated to be applied in computing the VAT due.

[36] Deoferio Jr. and Mamalateo, supra, p. 34.

[37] Id., pp. 34-35.

[38] ―Output taxes‖ refer to the VAT due on the sale or lease of taxable goods, properties or services by a VAT-registered or VAT-registrable person. See last paragraph of §110(A)(3) and §236 of the Tax Code.

[39] Presumed to be VAT-registered.

[40] By ―input taxes‖ is meant the VAT due from or paid by a VAT-registered person in the course of trade or business on the importation of goods or local purchases of goods or services, including the lease or use of property from a VAT-registered person. See penultimate paragraph of §110(A)(3) of the Tax Code.

[41] §110(B) of the Tax Code.

VAT-registered persons shall pay the VAT on a monthly basis. §114(A) of the Tax Code.

[42] §110(B) of the Tax Code.

[43] These are goods or properties with estimated useful lives greater than one year and which are treated as depreciable assets under §34(F) [formerly §29(f)] of the Tax Code, used directly or indirectly in the production or sale of taxable goods or services. 3rd paragraph of §4.106-1(b) of RR 7-95.

These goods also refer to ―capital assets‖ as this term is defined in §39(A)(1) of the Tax Code.

[44] De Leon, p. 135.

[45] Deoferio Jr. and Mamalateo, supra, p. 244.

[46] Subject to the provisions of §§106, 108 and 112 of the Tax Code.

[47] De Leon, p. 133.

[48] Deoferio Jr. and Mamalateo, supra, p. 190.

[49] De Leon, p. 133.

[50] §106(A)(2)(c) of the Tax Code.

[51] §108(B)(3) of the Tax Code.

[52] Deoferio Jr. and Mamalateo, supra, p. 215.

[53] Under this principle, goods and services are taxed only in the country where these are consumed.

Thus, exports are zero-rated, but

imports are taxed. Id., p. 43.

[54] In business parlance, ―automatic zero rating‖ refers to the standard zero rating as provided for in the Tax Code.

[55] Deoferio Jr. and Mamalateo, supra, p. 189.

[56] Id., p. 43.

[57] Id., p. 121.

[58] De Leon, pp. 133 & 135.

[59] Deoferio Jr. and Mamalateo, supra, p. 118.

[60] Id., p. 132.

[61] Id., pp. 132-133.

[62] De Leon, p. 132.

[63] §109(q) of the Tax Code.

[64] Deoferio Jr. and Mamalateo, supra, p. 187.

[65] Id., p. 69.

[66] §106(A)(2) of the Tax Code.

[67] §106(A)(1) of the Tax Code.

[68] §106(A)(2)(c) of the Tax Code.

[69] 1

st

paragraph of §8, Chapter I of RA 7916.

A ―customs territory‖ means the national territory of the Philippines outside of the proclaimed boundaries of the ecozones, except those areas specifically declared by other laws and/or presidential proclamations to have the status of special economic zones and/or free ports. §2.g, Rule 1, Part I of the ―Rules and Regulations to Implement Republic Act No. 7916, otherwise known as ‗The Special Economic Zone Act of 1995.‘‖

[70] Deoferio Jr. and Mamalateo, supra, p. 227.

[71] This principle is not clearly defined by any law or administrative issuance.

See Id., p. 227.

[72] §2 of Revenue Memorandum Circular No. (RMC) 74-99 dated October 15, 1999.

This circular is an example of an agency statement of general applicability that takes the form of a revenue tax issuance ―bearing on internal revenue tax rules and regulations.‖ Commissioner of Internal Revenue v. CA, 329 Phil. 987, 1009, August 29, 1996, per Vitug, J., citing RMC 10-86. See §2(2), Chapter 1, Book VII of Executive Order No. (EO) 292, otherwise known as the ―Administrative Code of 1987‖ dated July 25, 1987.

[73] §106(A)(2)(a) of the Tax Code.

[74] See Deoferio Jr. and Mamalateo, supra, p. 201.

[75] This zone is akin to the former army bases or installations within the Philippines.

Saura Import and Export Co., Inc. v. Meer, 88 Phil.

199, 202, February 26, 1951.

[76] Deoferio Jr. and Mamalateo, supra, p. 199.

[77] An ―export processing zone‖ is a specialized industrial estate located physically and/or administratively outside customs territory, predominantly oriented to export production, and may be contained in an ecozone. §4(a) and (d), Chapter I of RA 7916.

[78] Article 23, Chapter I, Title I, Book I of EO 226.

See §2.mm.2), Rule I, Part I of the ―Rules and Regulations to Implement Republic Act

No. 7916, otherwise known as ‗The Special Economic Zone Act of 1995.‘‖

[79] Article 77(2), Book VI of EO 226.

[80] §106(A)(2)(a)(5) of the Tax Code.

[81] §24, Chapter III of RA 7916.

[82] §24, Chapter III of RA 7916, as amended by §4 of RA 8748 dated June 1, 1999.

[83] §17(1) of PD 66.

[84] Estate of Salud Jimenez v. Philippine Export Processing Zone, 349 SCRA 240, 260-261, January 16, 2001.

See 4th paragraph, §11,

Chapter II of RA 7916.

[85] Commissioner of Customs v. Philippine Phosphate Fertilizer Corp., GR No. 144440, September 1, 2004, p. 7.

[86] §1, Rule VIII, Part V and Rule XV of the ―Rules and Regulations to Implement Republic Act No. 7916, otherwise known as ‗The Special Economic Zone Act of 1995.‘‖

[87] A ―restricted area‖ is a specific area within an ecozone that is classified and/or fenced-in as an export processing zone.

§2.h, Rule I,

Part I of the ―Rules and Regulations to Implement Republic Act No. 7916, otherwise known as ‗The Special Economic Zone Act of 1995.‘‖

[88] A ―registered export enterprise‖ is one that is registered with the PEZA, and that engages in manufacturing activities within the purview of the PEZA law for the exportation of its production. §2.i, Rule I, Part I of the ―Rules and Regulations to Implement Republic Act No. 7916, otherwise known as ‗The Special Economic Zone Act of 1995.‘‖

[89] §1, Rule XXV of the ―Rules and Regulations to Implement Republic Act No. 7916, otherwise known as ‗The Special Economic Zone Act of 1995.‘‖ See §56, Chapter VI of RA 7916.

[90] Article 11, Chapter I, Book I of EO 226.

[91] Article 39(c), Title III, Book I of EO 226, expressly repealed by the 2

nd

paragraph of §20 of RA 7716. Consequently, enterprises

registered with the BOI after December 31, 1994 will no longer enjoy the incentives provided under said article starting January 1, 1996.

[92] Article 39(m), Title III, Book I of EO 226.

[93] Article 77(1), Book VI of EO 226.

[94] Article 39(d), Title III, Book I of EO 226, also expressly repealed by the 2

nd

paragraph of §20 of RA 7716. Consequently, enterprises

registered with the BOI after December 31, 1994 will no longer enjoy the incentives provided under said article starting January 1, 1996.

[95] Article 39(k), Title III, Book I of EO 226.

[96] 1

paragraph of §12(c) of RA 7227.

st

[97] §51, Chapter VI of RA 7916.

[98] 2

nd

paragraph of §12(c) of RA 7227.

[99] §16(c), Article III of RA 7844.

[100] §16(e), Article III of RA 7844.

[101] 2

nd

paragraph of §23, Chapter III of RA 7916.

[102] Commissioner of Internal Revenue v. General Foods (Phils.), Inc ., 401 SCRA 545, 550, April 24, 2003.

[103] Commissioner of Internal Revenue v. Solidbank Corp ., 416 SCRA 436, 461, November 25, 2003

[104] Agpalo, Statutory Construction (2

nd

ed., 1990), p. 217.

[105] BPI Leasing Corp. v. CA, 416 SCRA 4, 14, November 18, 2003.

[106] Paseo Realty & Development Corp. v. CA, GR No. 119286, October 13, 2004, p. 14.

[107] Surigao Consolidated Mining Co., Inc. v. Collector of Internal Revenue, 119 Phil. 33, 37, December 26, 1963.

[108] Deoferio Jr. and Mamalateo, supra, p. 155.

[109] Agpalo, supra, pp. 82-83.

[110] Deoferio Jr. and Mamalateo, supra, p. 218.

[111] §3(3) of Revenue Memorandum Circular No. (RMC) 74-99.

[112] §§1 and 2 of PD 66.

[113] 2

nd

paragraph of §2, Chapter I of RA 7916.

[114] Article 2.1, Chapter I of EO 226.

[115] Article 2.3, Chapter I of EO 226.

[116] Article 2.8, Chapter I of EO 226.

[117] §51, Chapter VI of RA 7916.

[118] Tiu v. CA, 361 Phil. 229, 242, January 20, 1999.

[119] 1

st

paragraph of §2, RA 7227.

[120] §§12 and 15 of RA 7227.

[121] John Hay Peoples Alternative Coalition v. Lim, 414 SCRA 356, 369, October 24, 2003.

[122] 2

nd

paragraph of §2, RA 7227.

[123] 1

st

paragraph of §2, Article I of RA 7844.

[124] §§4(c) of Article I , 16, and 17 of RA 7844.

[125] 2

nd

paragraph of §2, Article I of RA 7844.

[126] §2 of the Tax Code, as amended by RA 8761 effective January 1, 2000; and by RA 9010, the effectivity of which has been retroacted to January 1, 2001.

[127] American Society of International Law Proceedings, ―Indigenous People and the Global Trade Regime,‖ 96 Asilproc 279, 281, March 16, 2002.

[128] §20 of Article II of the 1987 Constitution.

[129] 2

nd

paragraph of §1 and §12 of Article XII of the 1987 Constitution.

[130] Schwab, extract from the Preface of the Global Competitiveness Report 2003-2004, www.weforum.org, last visited January 27, 2005, 9:05am PST.

[131] §236 of the Tax Code.

[132] §17(1) of PD 66 and §56, Chapter VI of RA 7916.

[133] Article 77(1), Book VI of EO 226.

[134] Petitioner‘s Memorandum, p. 9; rollo, p. 103.

[135] CA Decision, p. 7; rollo, p. 27; and CTA Decision, p. 5, rollo, p. 35.

[136] Magnolia Dairy Products Corp. v. NLRC, 322 Phil. 508, 517, per Francisco, J.

[137] Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corp., 204 SCRA 377, 383, December 2, 1991, per Feliciano, J.

[138] Ibid.

See Advertising Associates, Inc. v. Collector of Internal Revenue, 97 Phil. 636, 641, September 30, 1955.

[139] Atlas Consolidated Mining & Development Corp. v. Commissioner of Internal Revenue, 102 SCRA 246, 259, January 27, 1981, per De Castro, J.

[140] §4.107-1(d) of RR 7-95.

[141] Commissioner of Internal Revenue v. Solidbank Corp., supra, p. 448, per Panganiban, J.

[142] Vitug and Acosta, supra, p. 56.

[143] Id., p. 57.

[144] Spouses Morandarte v. CA, GR No. 123586, August 12, 2004, p. 15.

[145] §3(m) of Rule 131 of the Rules of Court.

[146] §3(ff) of Rule 131 of the Rules of Court.

[147] §113(A) of the Tax Code.

[148] §24, Chapter III of RA 7916, as amended by §4 of RA 8748.

[149] 1

st

paragraph, §23, Chapter III of RA 7916.

[150] As a matter of principle, it is inadvisable to set aside such a conclusion, because by the very nature of its functions and sans abuse or improvident exercise of its authority, the Tax Court is ―dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject x x x.‖ Paseo Realty & Development Corp. v. CA; supra, per Tinga, J., p. 8.

[151] Contex Corp. v. Hon. Commissioner of Internal Revenue, GR No. 151135, July 2, 2004, p. 11.

[152] This provision has been expressly repealed by the 2

nd

paragraph of §20 of RA 7716. See note 94.

[153] Legislative Archives, Committee Report No. 01027, House of Representatives, December 14, 1994, pp. 00132 & 00141.

[154] Commissioner of Customs v. Philippine Phosphate Fertilizer Corp.; supra, pp. 9-10.

FIRST DIVISION

G.R. No. 108584 December 22, 1994

PEOPLE OF THE PHILIPPINES, plaintiff-appellee, vs. PETRONILO ABAPO, accused-appellant.

PADILLA, J.:

This is an appeal from the decision 1 of the court a quo finding herein accusedappellant Petronilo Abapo guilty of two (2) crimes of rape alleged to have been committed as follows: 2

In Criminal Case No. 133(90) —

The Undersigned Offended Party accuses PETRONILO ABAPO of the crime of Rape under Article 335 of the Revised Penal Code, committed as follows:

That sometime in January, 1989, in Digos, Davao del Sur, Philippines and within the jurisdiction of this Honorable Court, the accused aforenamed, after covering the mouth of said offended party who was then sleeping with his hand and after warning her not to shout, otherwise he would kill her, her mother, and her brother and sisters, did, then and there wilfully, unlawfully, and feloniously have carnal knowledge of said Offended Party, against her will and consent to her damage and prejudice.

CONTRARY TO LAW.

xxx xxx xxx

In Criminal Case No. 136(90)

The Undersigned pursuant to a complaint signed by Cherry Lyn M. Navalon, herein Offended Party, and attached hereto as Annex "A," accuses PETRONILO ABAPO of the crime of Rape under Article 335 of the Revised Penal Code, committed as follows:

That sometime in late September and/or early October, 1989, in Digos, Davao del Sur, Philippines, and within the jurisdiction of this Honorable Court, the accused aforenamed, by means of force or intimidation exerted upon the aforenamed offended party, a minor of 11 years of age, did, then, and there wilfully, unlawfully and feloniously have carnal knowledge of said Cherry Lyn M. Navalon, against her will and consent to her damage and prejudice.

CONTRARY TO LAW.

When arraigned, accused pleaded not guilty. A joint trial of the two (2) cases on the merits ensued, after which a decision was rendered, the dispositive part of which reads: 3

WHEREFORE, premises considered and in view of the foregoing, this Court finds the accused Petronilo Abapo guilty of the 2 crimes of rape and hereby punishes him to suffer two (2) life sentences as follows:

In Criminal Case No. 133(90) an imprisonment of reclusion perpetua or life sentence and to pay the victim Merlyn Navalon the following amounts:

1) P100,000.00 for moral damages;

2) P100,000.00 for corrective or exemplary damages to serve as warning and stern lesson to others in the future for the public good;

3) P20,000.00 in the concept of actual or compensatory damages;

4) P30,000.00 as attorney's fees; and

5) P10,000.00 for expenses of litigation.

In Criminal Case No. 136(90) an imprisonment of reclusion perpetua or life sentence and to pay the victim Cherry Lyn Navalon the following amounts:

1) P100,000.00 for moral damages;

2) P100,000.00 for corrective or exemplary damages to serve as warning and stern lesson to others in the future for the public good;

3) P20,000.00 in the concept of actual or compensatory damages;

4) P30,000.00 as attorney's fees; and

5) P10,000.00 for expenses of litigation.

In both cases, to pay the costs of suit.

The accused is now before the Court and assigns the following as errors allegedly committed by the trial court:

ASSIGNMENT OF ERRORS

I. THE HONORABLE COURT ERRED IN NOT HOLDING THAT THE HEREIN TWO (2) CASES OF RAPE AGAINST THE ACCUSED WERE MERELY FABRICATIONS.

II. THE HONORABLE COURT ERRED IN NOT BELIEVING THAT BERNARDO NAVALON, JR., THE FATHER OF THE TWO COMPLAINANTS IS NOT A GOOD FATHER AND HAS THE CAPACITY TO DO THE EVIL DESIGN, WITH NENITA DONATO (HALF SISTER) AND CESAR NAVORRA (HALF BROTHER) OF FABRICATING CHARGES AGAINST THE ACCUSED AND THE TWO (2) COMPLAINANTS COLLABORATED WITH THEM.

III. THE HONORABLE COURT ERRED IN NOT FINDING THAT THE ACCUSED WAS ILLEGALLY ARRESTED, INVESTIGATED AND LOCKED UP IN JAIL WITHOUT A WARRANT OF ARREST AND HIS RIGHTS UNDER THE CIRCUMSTANCES AND UNDER THE CONSTITUTION VIOLATED. HE WAS NOT INFORMED AND EXPLAINED OF HIS RIGHTS. FORCE WAS USED AGAINST THE ACCUSED AND YET THE ACCUSED WAS NOT ARMED AND THE ARRESTING OFFICER WAS ARMED, WORST [sic] THE ARRESTING OFFICER PATM. GERARDO DIAMANTE AND THE COMPLAINANTS TRIED TO EXTORT MONEY FROM THE ACCUSED SO THAT THE CASE WOULD BE WITHDRAWN.

IV. THE HONORABLE COURT ERRED IN NOT HOLDING THAT THE GUN, BULLETS, LEATHER BAG, ETC. ALLEGEDLY USED BY THE ACCUSED IN THREATENING THE TWO (2) PRIVATE COMPLAINANTS WERE PLANTED AND WAS PART OF THE FRAME UP. THEY WERE NOT TAKEN FROM THE ACCUSED BUT IN THE HOUSE OF A STRANGER WHILE THE ACCUSED WAS IN JAIL AND WORST [sic] THEY WERE TAKEN WITHOUT A SEARCH WARRANT. HENCE INADMISSIBLE AS EVIDENCE ESPECIALLY THAT THE OFFER OF EXHIBITS WERE PROPERLY AND SEASONABLY OBJECTED.

V. THE TRIAL COURT ERRED IN NOT FINDING THAT AT THE TIME OF THE ALLEGED RAPES IN APLAYA AND 4th BONIFACIO ST., DIGOS, DAVAO DEL SUR, THE TWO PRIVATE COMPLAINANTS WERE NO LONGER IN THOSE TWO PLACES MAKING THE ALLEGATIONS OF RAPE IMPOSSIBLE.

VI. THE HONORABLE COURT ERRED IN NOT FINDING THAT THE CLAIM OF RAPE BY MERLYN NAVALON THAT AT THE TIME SHE WAS RAPE [sic] HER ELDER BROTHER MELCHOR, SISTER ARGELYN, WERE BESIDE HER AND ANOTHER SISTER CARMELYN JUST NEARBY IS INCREDIBLE AND NOT BELIEVABLE.

VII. THE HONORABLE COURT ERRED IN NOT HOLDING THAT THE TWO PRIVATE COMPLAINANTS, MERLYN AND CHERRY LYN LOST THEIR VIRGINITY AS PER MEDICAL CERTIFICATE BECAUSE BOTH HAD A SEXUAL INTERCOURSE WITH THEIR ELDEST BROTHER, BERNARDO NAVALON III, WHICH EXPLAINS THE LOSS OF VIRGINITY AND FREE ENTRY IN THE VAGINA OF THE TWO PRIVATE COMPLAINANTS.

VIII. THE HONORABLE COURT ERRED IN NOT BELIEVING THAT THE ACCUSED AND CARMENIA MANLICLIC ARE NOT AMOROUSLY RELATED.

The evidence for the prosecution was summarized by the Solicitor General in the following manner: 4

Merlyn and Cherry Lyn Navalon are two (2) of the eight (8) children of Carmenia Manliclic with common-law husband Bernardo Navalon, Jr., with whom Carmenia lived from 1971 to 1987. Merlyn was born on June 10, 1977 (Exh. "C," Birth Certificate) while Cherry Lyn was born on June 28, 1978 (Exh. "D," Birth Certificate; TSN, Oct. 29, 1990, pp. 13-14, Carmenia Manliclic). Sometime in 1987, Carmenia left the family abode in Bob, Magsaysay, Davao del Sur bringing with her the two younger children, Melchor and Argelyn. Together with appellant, they lived as husband and wife in Bonifacio 4th Street, Digos and later transferred to Aplaya, Digos in April 1989 in a house they rented from Magdalena Romero. Carmenia's other children, namely Bernardo III, Alquin, Carmelyn, Merlyn and Cherry Lyn joined and lived with their mother at one time or another (TSN, Oct. 29, 1990, pp. 17-18, Carmenia Manliclic; Sept. 23, 1991, pp. 6-7, Magdalena Romero; Sept. 25, 1991, pp. 5-6, Merlyn Navalon).

In January, 1989, Merlyn was living with her mother and appellant in Bonifacio 4th, Digos, Davao del Sur. As appellant was the one who shouldered the family expenses, the children in return cared for him, washed his clothes,

cleaned the house, and in case of Merlyn and Cherry Lyn, even plucked appellant's mustache. The house they lived in had only one bedroom for Carmenia and appellant, while the children slept in the sala (TSN, Sept. 25, 1991, pp. 6-7, Merlyn Navalon). One night in January, 1989 (near midnight), while Merlyn was sleeping, appellant crawled towards her and started touching her private parts, her nipples and kissed her face and removed her panty. When Carmenia moved in her room, appellant hurriedly went back inside. Merlyn tried to stay awake but unfortunately fell asleep. She was awakened with appellant already on top of her. She tried to free herself but was warned by appellant who threatened to kill her and her younger brother and sisters. A gun was placed beside her. Appellant succeeded in having intercourse with her (TSN, Sept. 25, 1991, pp. 13-16, Merlyn Navalon; Sept. 26, 1991, p. 9, Merlyn Navalon).

In the case of Cherry Lyn, sometime in the first week of October, 1989 in their house in Aplaya, Digos, Davao del Sur, appellant requested her to pluck his mustache. Appellant further asked Cherry Lyn to kiss him which she complied with as appellant gets angry if Cherry Lyn fails to obey any command. Afterwards, appellant started touching her body, her face and nipple. He also succeeded in having sexual intercourse with Cherry Lyn. During that time, Cherry Lyn's brothers and sisters were around but was [sic] ordered by appellant to go to another room and sleep. Carmenia Manliclic was attending a meeting in the school but she arrived at the house when Cherry Lyn and appellant were still in a compromising situation. A quarrel ensued between appellant and Carmenia (TSN, Oct. 9, 1991, pp. 9-10, 14, Cherry Lyn Navalon).

On October 10, 1989, Cherry Lyn's uncle Cesar Navorra (sic)(her father's halfbrother) came to the beach in Aplaya. Cherry Lyn decided to leave Aplaya and go with her uncle. She first stayed in her father's house in Bob, Magsaysay but was later transferred by her aunt, Nenita Donato (her father's half-sister) and

enrolled at Bansalan (TSN, Oct. 9, 1991, p. 5, 17, 23, Cherry Lyn Navalon). It was only during the first week of March 1990 that Cherry Lyn was able to tell her aunt about what happened to her and to her sister Merlyn and requested her aunt to get her two younger sisters who might be victimized by appellant. She did not tell her mother what really happened not only because of appellant's threat to kill them but also because she felt that her mother knew about the rape as she was able to witness the tail-end of the incident (TSN, Oct. 9, 1991, pp. 9, 12, 15, Cherry Lyn Navalon; Oct. 11, 1991, p. 5, Nenita Donato).

Nenita Donato brought Cherry Lyn to the police station to complain about the incident. She was also subjected to a medical examination (TSN, Oct. 9, 1991, p. 12, Cherry Lyn Navalon; Oct. 11, 1991, p. 6, Nenita Donato). Dr. Asuncion Z. Tajon, Municipal Health Officer of Digos, Davao del Sur, found as follows: pelvic examination — vulva, no abrasion, no swelling . . . . Vagina admits middle finger freely (Exh. "A," Medical Certificate dated March 8, 1990; TSN, July 30, 1991, p. 6, Dr. Asuncion Tajon).

Nenita Donato proceeded to Monkayo, Davao to talk to Merlyn about Cherry Lyn's story. Merlyn was earlier taken by her elder sister Novilla from Aplaya to Monkayo when Novilla, who was visiting from Tagum, Davao del Norte where she was studying, found her inside the room with appellant and suspected an untoward incident happened (TSN, Oct. 11, 1991, p. 8, Nenita Donato; Sept. 26, 1991, pp. 14-15, Merlyn Navalon). She brought Merlyn to the health center for examination and Dr. Tajon, who also conducted the examination, found that "no physical injury noted, vulva — no sign of inflammation or injury, vagina admits middle finger freely without pain or resistance" (Exh. "B"), Medical Certificate, March 12, 1990; TSN, July 30, 1991, p. 7, Dr. Asuncion Tajon).

The defense, on the other hand, presented an entirely different narrative. It vehemently denied the charges and averred that the two (2) rape cases were mere fabrications of Bernardo Navalon Jr., Nenita Donato, Cesar Navorra, Cherry Lyn Navalon and Merlyn Navalon because (1) they were jealous of the accused whom they suspected to have an illicit relation with Carmenia Manliclic, and (2) they wanted to take vengeance against the accused for having financially supported Carmenia Manliclic in her case for support against Bernardo Navalon, Jr. which resulted in the award of portions of the Navalon rice land to Carmenia Manliclic and her children.

The defense further alleged that Joan Narvasa, a Navalon relative and a school teacher of Barayong, Magsaysay, Davao del Sur, conspired with the Navalons and falsified the school register to evidence that Cherry Lyn and Merlyn were not in Barayong, Magsaysay, Davao del Sur nor in Bansalan, Davao del Sur, but rather in Digos, Davao del Sur at the time they were raped. As testified to by Carmenia Manliclic, Merlyn was taken by Novilla Navalon and brought to Monkayo in March 1989, while Cherry Lyn was taken by Cesar Navorra in August 1989. Cherry Lyn herself testified that she was attending school at Bansalan Central Elementary School, a place very far from Digos, Davao del Sur, from June 1989 to March 1990.

The defense likewise presented Bernardo Navalon III, the eldest brother of Cherry Lyn and Merlyn, who admitted having sexual intercourse with the two (2) private complainants (his sisters). He also claimed that Pat. Gerardo Diamante, a prosecution witness, was overzealous in filing the case against the accused for the purpose of extorting money from the accused. Lastly, the defense averred that the accused was arrested without a warrant of arrest and was not informed, under the circumstances, of his constitutional rights.

The principal issue in this appeal is anchored on the credibility of the witnesses.

It is well-entrenched in our jurisprudence that where the issue is one of credibility of witnesses, appellate courts give treat weight to the findings of fact by the trial courts as they are in a better position to examine real evidence, as well as observe the demeanor of the witnesses. 5

We find the testimonies of Merlyn and Cherry Lyn to be credible. It is an accepted rule that the credibility of a rape victim is not destroyed by some inconsistencies in her testimony. In fact, such inconsistencies are to be expected if a witness is unrehearsed and testifies spontaneously. The fact also stands out that the results of the medical examination show that the complainants had previous sexual intercourse, since they were no longer in a virgin state. We seriously doubt that two (2) young inexperienced girls who were below twelve (12) years when they were raped, would concoct such a ghastly story about the physical abuse done to them, if this did not actually happen.

The appellant contends that the charges against him are mere fabrications of the complainants, their father and some relatives. He alleges that he is a frame-up victim. And yet, these allegations cannot outweight and invalidate the positive identification of the accused-appellant by the complainants. Further, and no matter how hard the appellant tries to convince this Court that the complainants' father, along with his relatives, have the capacity to do evil, we are not convinced that a father would subject his two (2) young daughters to the humiliation and trauma of a rape trial simply because he has allegedly lost a case which resulted in an award of some portions of land to his common-law wife and their children (including complainants herein). Moreover, no amount of coercion from their father could have prepared the complainants for the rigors of a rape trial and convince the trial court for their honesty and integrity, if no rape had been committed against them. As observed by the trial court:

The denial by the accused is dwarfed by the positive identification by the victims of the rape (sic) whose declarations were all ringing with earmarks of sincerity. . . .The idea of vengeance arising from a land conflict would not inspire any belief, for nobody would invent rape for an alleged loss of a piece of land in a court decision. Why will two (2) young women, who are minors, agree to expose their virtues as women and subject themselves with loss of honor as women for love of a small estate? Besides, one-half of such land was in fact given to the children by amicable settlement. . . .

We likewise cannot credence to the assertion of the appellant that it was the brother of the two (2) complainants who abused them resulting in the loss of their virginity. This we see as an utterly desperate attempt to distract the Court and focus on some other person who could be suspected of abusing the two (2) complainants. Merlyn and Cherry Lyn vehemently denied having sexual intercourse with their brother, Bernardo Navalon III. And even if we were to assume arguendo that the above imputation were true, the same would just be the basis of an entirely different criminal case, without any bearing on the present suit because, here, we speak of two (2) incidents where the appellant has been positively identified as having sexually abused Merlyn and Cherry Lyn. It just amazes us to see the power that the appellant and Carmenia Manliclic (the mother) have over Bernardo Navalon III to have effectively convinced the latter to confess to such a crime in order to exculpate and save the skin of the appellant. As regards the contention that the appellant and Carmenia Manliclic are not paramours, this circumstance, in the light of the present charges, is trivial and not fatal to the prosecution's case. Neither does the fact that the brother and sister of Merlyn were beside her at the time of her rape render the accusation of rape against appellant incredible and not believable. As earlier stated, the fact of rape and the supporting medical findings have been clearly established in this case 6 and we find no reason to doubt their veracity.

We now come to the contention that at the time of the alleged rapes, the two (2) complainants were no longer in Digos, Davao del Sur, thus making the allegations of rape incredible. We agree with the observation of the Solicitor General:

Appellant contends that it was impossible for him to have raped the victims since at the time the crimes were allegedly committed, both the victims were no longer residing with their mother either in Bonifacio 4th, Digos or in Aplaya.

Thus, as regards Cherry Lyn who was allegedly raped on the first week of October, 1989, she was already studying in Bansalan, Davao del Sur and living with an aunt. But Cherry Lyn categorically stated that she left her mother on October 19, 1989, which was corroborated by the testimony of her aunt. The reliance of appellant on Exhibit "J" or "3" which is Cherry Lyn's report card is misplaced. Cherry Lyn is a transferee from another school and her records from one school are simply carried to another and reported in the report card of the issuing school.

More importantly, Cherry Lyn could no longer remember the exact date when she was raped by appellant but it was during the time when she was staying with her mother who was then living together with appellant. That she had been living with her mother is admitted by Carmenia herself and Joan Narvasa who testified that Cherry Lyn was unable to finish her studies in Barayong Elementary School as she was taken by her mother on November 28, 1988 (TSN, July 30, 1991, pp. 19-20).

With respect to Merlyn, it was alleged that she was brought to Monkayo, Davao in March, 1989. As the crime was committed in January, 1989, its commission is not improbable, as claimed by appellant. Carmenia, in a futile attempt to save her paramour, claimed that Merlyn had not lived with her. Yet,

her testimony is debunked by her statement in a complaint against Bernardo, Jr. for support claiming that her children, including Merlyn, were staying with her and in her custody. Such inconsistent claims, arrayed against the positive statement of Merlyn that she lived with her mother, and the testimonies of other witnesses, could not be given any credence.

Thus, the discrepancy in the report card of Cherry Lyn 7 has been satisfactorily explained. As a transferee, her records were simply carried over to the new school. This fact is further bolstered by the testimony of Joan Narvasa 8 who affirmed that Merlyn and Cherry Lyn indeed dropped out of their classes at Barayong Central Elementary School in November 1988 in order for them to stay with their mother at Digos, Davao del Sur. The lame attempt of the defense to discredit the testimony of Narvasa (due to an alleged distant relation to an aunt of the two (2) complainants) cannot be given credence because the mere relationship to a party does not militate against the credibility of the witness. 9 As shown by the records of the case at bench, the evidence provided by Merlyn and Cherry Lyn Navalon is positive, clear and exhibited no sign of exaggeration or inconsistency despite the rigorous crossexamination they underwent.

Besides, the defense itself showed inconsistencies in its arguments when, first, it claimed that the allegations of rape were impossible because Merlyn and Cherry Lyn were no longer in Digos, Davao del Sur at the time the rapes were allegedly committed, and then, on the other hand, it claimed that the allegations of rape on Merlyn were incredible and not believable because at the time she was allegedly raped, her brother and two (2) sisters were just nearby. The defense should have taken the time to reconcile the two (2) conflicting theories or simply should have stuck to one theory and then supported the same. As it stands, the theory of the facts proferred by the defense only becomes seriously impaired by such inconsistencies.

Further, the appellant argues that the court a quo erred in not finding that his rights under the Constitution were violated in view of his illegal arrest and the lack of a search warrant over the evidence offered against him, and that the arresting officer and the complainants tried to extort money from the appellant so that the case against him could be withdrawn.

On the matter of the illegal arrest, it is well-settled that the filing of a petition for bail should be considered as a waiver of any irregularity attending the arrest.

10

The appellant cannot likewise attempt to exculpate himself by

alleging that the evidence (i.e., gun, bullets) were planted as part of the frameup against him and that, nonetheless, they were taken without a search warrant. We emphasize that the crimes charged in the present cases are statutory rapes, that is, having carnal knowledge of a woman under twelve (12) years of age. All that is necessary to convict the accused of such charge is the fact of carnal knowledge, which has been more than adequately proven in this case. All other matters bear little significance to the case.

Finally, neither are we inclined to consider the allegation of extortion as the same is self-serving and without basis. The appellant has raised too many extraneous issues which only serve to convince this Court all the more of his guilt.

WHEREFORE, in view of all the foregoing, the appealed decision is hereby AFFIRMED with the clarification that the penalty imposed on appellant is RECLUSION PERPETUA (not Life Imprisonment) in each of the two (2) cases.

The award for moral damages is reduced from P100,000.00 to P50,000.00 for each rape victim. The award of P100,000.00 for exemplary damages is deleted, but the award of P20,000.00 for each of the victims as actual damages stands, while the awards for attorney's fees and expenses of litigation are reduced

from P30,000.00 and P10,000.00 respectively to P15,000.00 and P5,000.00, respectively for each of the victims.

SO ORDERED.

# Footnotes

1 Penned By Hon. Dominador F. Carillo, Regional Trial Court of Davao del Sur, Branch 19.

2 Rollo, pp. 23-24.

3 Ibid., p. 37.

4 Ibid., pp., 162-167.

5 People v. Rodriguez, 172 SCRA 742 (1989).

6 TSNs, 25 September 1991, pp. 12-16; 9 October 1991, pp. 8-10; 30 July 1991, pp. 6-10.

7 Exhibits "J" and "K."

8 TSN, 30 July 1991, pp. 19.

9 Primero v. Court of Appeals, 179 SCRA 542 (1989).

10 Harvey vs. Defensor-Santiago, 162 SCRA 840 (1988).

SECOND DIVISION

G.R. No. 90776 June 3, 1991

PHILIPPINE PETROLEUM CORPORATION, petitioner, vs. MUNICIPALITY OF PILILLA, RIZAL, Represented by MAYOR NICOMEDES F. PATENIA, respondent.

PARAS, J.:p

This is a petition for certiorari seeking to annul and set aside: (a) the March 17, 1989 decision * of the Regional Trial Court, Branch 80, Tanay, Rizal in Civil Case No. 057-T entitled, "Municipality of Pililla, Rizal, represented by Mayor Nicomedes F. Patenia vs. Philippine Petroleum Corporation", (PPC for short) upholding the legality of the taxes, fees and charges being imposed in Pililla under Municipal Tax Ordinance No. 1 and directing the herein petitioner to pay the amount of said taxes, fees and charges due the respondent: and (b) the November 2, 1989 resolution of the same court denying petitioner's motion for reconsideration of the said decision.

The undisputed facts of the case are:

Petitioner, Philippine Petroleum Corporation (PPC for short) is a business enterprise engaged in the manufacture of lubricated oil basestock which is a petroleum product, with its refinery plant situated at Malaya, Pililla, Rizal, conducting its business activities within the territorial jurisdiction of the Municipality of Pililla, Rizal and is in continuous operation up to the present (Rollo p. 60). PPC owns and maintains an oil refinery including forty-nine storage tanks for its petroleum products in Malaya, Pililla, Rizal (Rollo, p. 12).

Under Section 142 of the National Internal Revenue Code of 1939, manufactured oils and other fuels are subject to specific tax.

On June 28, 1973, Presidential Decree No. 231, otherwise known as the Local Tax Code was issued by former President Ferdinand E. Marcos governing the exercise by provinces, cities, municipalities and barrios of their taxing and other revenue-raising powers. Sections 19 and 19 (a) thereof, provide among others, that the municipality may impose taxes on business, except on those for which fixed taxes are provided on manufacturers, importers or producers of any article of commerce of whatever kind or nature, including brewers, distillers, rectifiers, repackers, and compounders of liquors, distilled spirits and/or wines in accordance with the schedule listed therein.

The Secretary of Finance issued Provincial Circular No. 26-73 dated December 27, 1973, directed to all provincial, city and municipal treasurers to refrain from collecting any local tax imposed in old or new tax ordinances in the business of manufacturing, wholesaling, retailing, or dealing in petroleum products subject to the specific tax under the National Internal Revenue Code (Rollo, p. 76).

Likewise, Provincial Circular No. 26 A-73 dated January 9, 1973 was issued by the Secretary of Finance instructing all City Treasurers to refrain from collecting any local tax imposed in tax ordinances enacted before or after the effectivity of the Local Tax Code on July 1, 1973, on the businesses of manufacturing, wholesaling, retailing, or dealing in, petroleum products subject to the specific tax under the National Internal Revenue Code (Rollo, p. 79).

Respondent Municipality of Pililla, Rizal, through Municipal Council Resolution No. 25, S-1974 enacted Municipal Tax Ordinance No. 1, S-1974 otherwise known as "The Pililla Tax Code of 1974" on June 14, 1974, which

took effect on July 1, 1974 (Rollo, pp. 181-182). Sections 9 and 10 of the said ordinance imposed a tax on business, except for those for which fixed taxes are provided in the Local Tax Code on manufacturers, importers, or producers of any article of commerce of whatever kind or nature, including brewers, distillers, rectifiers, repackers, and compounders of liquors, distilled spirits and/or wines in accordance with the schedule found in the Local Tax Code, as well as mayor's permit, sanitary inspection fee and storage permit fee for flammable, combustible or explosive substances (Rollo, pp. 183-187), while Section 139 of the disputed ordinance imposed surcharges and interests on unpaid taxes, fees or charges (Ibid., p. 193).

On March 30, 1974, Presidential Decree No. 426 was issued amending certain provisions of P.D. 231 but retaining Sections 19 and 19 (a) with adjusted rates and 22(b).

On April 13, 1974, P.D. 436 was promulgated increasing the specific tax on lubricating oils, gasoline, bunker fuel oil, diesel fuel oil and other similar petroleum products levied under Sections 142, 144 and 145 of the National Internal Revenue Code, as amended, and granting provinces, cities and municipalities certain shares in the specific tax on such products in lieu of local taxes imposed on petroleum products.

The questioned Municipal Tax Ordinance No. 1 was reviewed and approved by the Provincial Treasurer of Rizal on January 13, 1975 (Rollo, p. 143), but was not implemented and/or enforced by the Municipality of Pililla because of its having been suspended up to now in view of Provincial Circular Nos. 26-73 and 26 A-73.

Provincial Circular No. 6-77 dated March 13, 1977 was also issued directing all city and municipal treasurers to refrain from collecting the so-called storage fee on flammable or combustible materials imposed under the local tax

ordinance of their respective locality, said fee partaking of the nature of a strictly revenue measure or service charge.

On June 3, 1977, P.D. 1158 otherwise known as the National Internal Revenue Code of 1977 was enacted, Section 153 of which specifically imposes specific tax on refined and manufactured mineral oils and motor fuels.

Enforcing the provisions of the above-mentioned ordinance, the respondent filed a complaint on April 4, 1986 docketed as Civil Case No. 057-T against PPC for the collection of the business tax from 1979 to 1986; storage permit fees from 1975 to 1986; mayor's permit and sanitary inspection fees from 1975 to 1984. PPC, however, have already paid the last-named fees starting 1985 (Rollo, p. 74).

After PPC filed its answer, a pre-trial conference was held on August 24, 1988 where the parties thru their respective counsel, after coming up with certain admissions and stipulations agreed to the submission of the case for decision based on documentary evidence offered with their respective comments (Rollo, p. 41).

On March 17, 1987, the trial court rendered a decision against the petitioner, the dispositive part of which reads as follows:

WHEREFORE, premises considered, this Court hereby renders judgment in favor of the plaintiffs as against the defendants thereby directing the defendants to 1) pay the plaintiffs the amount of P5,301,385.00 representing the Tax on Business due from the defendants under Sec. 9 (A) of the Municipal Tax Ordinance of the plaintiffs for the period from 1979 to 1983 inclusive plus such amount of tax that may accrue until final determination of case; 2) to pay storage permit fee in the amount of P3,321,730.00 due from the defendants under Sec. 10, par. z (13) (b) (1 C) of the Municipal Tax Ordinance of the plaintiffs for the period from 1975 to 1986 inclusive plus such amount

of fee that may accrue until final determination of case; 3) to pay Mayor's Permit Fee due from the defendants under Sec. 10, par. (P) (2) of the Municipal Tax Ordinance of the plaintiffs from 1975 to 1984 inclusive in the amount of P12,120.00 plus such amount of fee that may accrue until final determination of the case; and 4) to pay sanitary inspection fee in the amount of P1,010.00 for the period from 1975 to 1984 plus such amount that may accrue until final determination of case and 5) to pay the costs of suit.

SO ORDERED. (Rollo, pp. 49-50)

PPC moved for reconsideration of the decision, but this was denied by the lower court in a resolution of November 2, 1989, hence, the instant petition.

The Court resolved to give due course to the petition and required both parties to submit simultaneous memoranda (June 21, 1990 Resolution; Rollo, p. 305).

PPC assigns the following alleged errors:

1. THE RTC ERRED IN ORDERING THE PAYMENT OF THE BUSINESS TAX UNDER SECTION 9 (A) OF THE TAX ORDINANCE IN THE LIGHT OF PROVINCIAL CIRCULARS NOS. 26-73 AND 26 A-73;.

2. THE RTC ERRED IN HOLDING THAT PETITIONER WAS LIABLE FOR THE PAYMENT OF STORAGE PERMIT FEE UNDER SECTION 10 Z (13) (b) (1-c) OF THE TAX ORDINANCE CONSIDERING THE ISSUANCE OF PROVINCIAL CIRCULAR NO. 6-77;

3. THE RTC ERRED IN FAILING TO HOLD THAT RESPONDENTS COMPUTATION OF TAX LIABILITY HAS ABSOLUTELY NO BASIS;

4. THE RTC ERRED IN ORDERING THE PAYMENT OF MAYOR'S PERMIT AND SANITARY INSPECTION FEES CONSIDERING THAT THE SAME HAS BEEN VALIDLY AND LEGALLY WAIVED BY THE MAYOR;

5. THE RTC ERRED IN FAILING TO HOLD THAT THE TAXES AND DUTIES NOT COLLECTED FROM PETITIONER PRIOR TO THE FIVE (5) YEAR PERIOD FROM THE FILING OF THIS CASE ON APRIL 4, 1986 HAS ALREADY PRESCRIBED.

The crucial issue in this case is whether or not petitioner PPC whose oil products are subject to specific tax under the NIRC, is still liable to pay (a) tax on business and (b) storage fees, considering Provincial Circular No. 6-77; and mayor's permit and sanitary inspection fee unto the respondent Municipality of Pililla, Rizal, based on Municipal Ordinance No. 1.

Petitioner PPC contends that: (a) Provincial Circular No. 2673 declared as contrary to national economic policy the imposition of local taxes on the manufacture of petroleum products as they are already subject to specific tax under the National Internal Revenue Code; (b) the above declaration covers not only old tax ordinances but new ones, as well as those which may be enacted in the future; (c) both Provincial Circulars (PC) 26-73 and 26 A-73 are still effective, hence, unless and until revoked, any effort on the part of the respondent to collect the suspended tax on business from the petitioner would be illegal and unauthorized; and (d) Section 2 of P.D. 436 prohibits the imposition of local taxes on petroleum products.

PC No. 26-73 and PC No. 26 A-73 suspended the effectivity of local tax ordinances imposing a tax on business under Section 19 (a) of the Local Tax Code (P.D. No. 231), with regard to manufacturers, retailers, wholesalers or dealers in petroleum products subject to the specific tax under the National Internal Revenue Code NIRC, in view of Section 22 (b) of the Code regarding non-imposition by municipalities of taxes on articles, subject to specific tax under the provisions of the NIRC.

There is no question that Pililla's Municipal Tax Ordinance No. 1 imposing the assailed taxes, fees and charges is valid especially Section 9 (A) which according to the trial court "was lifted in toto and/or is a literal reproduction of Section 19 (a) of the Local Tax Code as amended by P.D. No. 426." It conforms with the mandate of said law.

But P.D. No. 426 amending the Local Tax Code is deemed to have repealed Provincial Circular Nos. 26-73 and 26 A-73 issued by the Secretary of Finance when Sections 19 and 19 (a), were carried over into P.D. No. 426 and no exemptions were given to manufacturers, wholesalers, retailers, or dealers in petroleum products.

Well-settled is the rule that administrative regulations must be in harmony with the provisions of the law. In case of discrepancy between the basic law and an implementing rule or regulation, the former prevails (Shell Philippines, Inc. v. Central Bank of the Philippines, 162 SCRA 628 [1988]). As aptly held by the court a quo:

Necessarily, there could not be any other logical conclusion than that the framers of P.D. No. 426 really and actually intended to terminate the effectivity and/or enforceability of Provincial Circulars Nos. 26-73 and 26 A-73 inasmuch as clearly these circulars are in contravention with Sec. 19 (a) of P.D. 426-the amendatory law to P.D. No. 231. That intention to terminate is very apparent and in fact it is expressed in clear and unequivocal terms in the effectivity and repealing clause of P.D. 426 . . .

Furthermore, while Section 2 of P.D. 436 prohibits the imposition of local taxes on petroleum products, said decree did not amend Sections 19 and 19 (a) of P.D. 231 as amended by P.D. 426, wherein the municipality is granted the right to levy taxes on business of manufacturers, importers, producers of any article of commerce of whatever kind or nature. A tax on business is

distinct from a tax on the article itself. Thus, if the imposition of tax on business of manufacturers, etc. in petroleum products contravenes a declared national policy, it should have been expressly stated in P.D. No. 436.

The exercise by local governments of the power to tax is ordained by the present Constitution. To allow the continuous effectivity of the prohibition set forth in PC No. 26-73 (1) would be tantamount to restricting their power to tax by mere administrative issuances. Under Section 5, Article X of the 1987 Constitution, only guidelines and limitations that may be established by Congress can define and limit such power of local governments. Thus:

Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy . . .

Provincial Circular No. 6-77 enjoining all city and municipal treasurers to refrain from collecting the so-called storage fee on flammable or combustible materials imposed in the local tax ordinance of their respective locality frees petitioner PPC from the payment of storage permit fee.

The storage permit fee being imposed by Pililla's tax ordinance is a fee for the installation and keeping in storage of any flammable, combustible or explosive substances. Inasmuch as said storage makes use of tanks owned not by the municipality of Pililla, but by petitioner PPC, same is obviously not a charge for any service rendered by the municipality as what is envisioned in Section 37 of the same Code.

Section 10 (z) (13) of Pililla's Municipal Tax Ordinance No. 1 prescribing a permit fee is a permit fee allowed under Section 36 of the amended Code.

As to the authority of the mayor to waive payment of the mayor's permit and sanitary inspection fees, the trial court did not err in holding that "since the power to tax includes the power to exempt thereof which is essentially a legislative prerogative, it follows that a municipal mayor who is an executive officer may not unilaterally withdraw such an expression of a policy thru the enactment of a tax." The waiver partakes of the nature of an exemption. It is an ancient rule that exemptions from taxation are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority (Esso Standard Eastern, Inc. v. Acting Commissioner of Customs, 18 SCRA 488 [1966]). Tax exemptions are looked upon with disfavor (Western Minolco Corp. v. Commissioner of Internal Revenue, 124 SCRA 121 [1983]). Thus, in the absence of a clear and express exemption from the payment of said fees, the waiver cannot be recognized. As already stated, it is the law-making body, and not an executive like the mayor, who can make an exemption. Under Section 36 of the Code, a permit fee like the mayor's permit, shall be required before any individual or juridical entity shall engage in any business or occupation under the provisions of the Code.

However, since the Local Tax Code does not provide the prescriptive period for collection of local taxes, Article 1143 of the Civil Code applies. Said law provides that an action upon an obligation created by law prescribes within ten (10) years from the time the right of action accrues. The Municipality of Pililla can therefore enforce the collection of the tax on business of petitioner PPC due from 1976 to 1986, and NOT the tax that had accrued prior to 1976.

PREMISES CONSIDERED, with the MODIFICATION that business taxes accruing PRIOR to 1976 are not to be paid by PPC (because the same have prescribed) and that storage fees are not also to be paid by PPC (for the storage tanks are owned by PPC and not by the municipality, and therefore cannot be a charge for service by the municipality), the assailed DECISION is hereby AFFIRMED.

SO ORDERED.

Footnotes

* Penned by Judge Felipe Almazan.

EN BANC

[G.R. No. L-9141. September 25, 1956.]

Testate Estate of OLIMPIO FERNANDEZ, deceased. REPUBLIC OF THE PHILIPPINES, claimant-Appellee, vs. ANGELINA OASAN VDA DE FERNANDEZ, PRISCILLA O. FERNANDEZ, and ESTELA O. FERNANDEZ, Oppositors-Appellants.

DECISION

LABRADOR, J.:

Appeal from a decision of the Court of Tax Appeals sustaining the validity of a tax amounting to P7,614.60 against the estate of Olimpio Fernandez under the War Profits Tax Law (Republic Act No. 55).

Olimpio Fernandez and his wife Angelina Oasan had a net worth of P8,600 on December 8, 1941. During the Japanese occupation the spouses acquired several real properties, and at the time of his death on February 11, 1945 he had a net worth of P31,489. The Collector of Internal Revenue assessed a war profits tax on the estate of the deceased at P7,614.60, which his administratrix refused to pay. The case was brought to the Court of Tax Appeals which sustained the validity and legality of the assessment. The administratrix has appealed this decision to this Court.

The most important questions raised by the Appellant are: (a) the unconstitutionality of the war profits tax law for the reason that it is retroactive; (b) the inapplicability of said law to the estate of the deceased Olimpio Fernandez, because the law taxes individuals; and (c) the separate

taxation of the estate of the deceased Olimpio Fernandez from that of his wife‘s, because Olimpio Fernandez died before the law was passed.

Appellant‘s contention that the law is invalid or unconstitutional because it acts retroactively, thus violating the due process of law clause, is not supported by reason or authority. The tax, insofar as applicable to the estate of the deceased Olimpio Fernandez, is both a property tax and a tax on income. It is a property tax in relation to the properties that Fernandez had in December, 1941; and it is an income tax in relation to the properties which he purchased during the Japanese occupation. In both cases, however, the war profits tax may not be considered as unconstitutional.

The doctrine of unconstitutionality raised by Appellant is based on the prohibition against ex post facto laws. But this prohibition applies only to criminal or penal matters, and not to laws which concern civil matters or proceedings generally, or which affect or regulate civil or private rights (Ex parte Garland, 18 Law Ed., 366; 16 C.J. S., 889-891).

“At an early day it was settled by authoritative decisions, in opposition to what might seem the more natural and obvious meaning of the term ex post facto, that in their scope and purpose these provisions were confined to laws respecting criminal punishments, and had no relation whatever to retrospective legislation of any other description. And it has, therefore, been repeatedly held, that retrospective laws, when not of a criminal nature, do not come in conflict with the national Constitution, unless obnoxious to its provisions on other grounds than their respective character.‖ (1 Cooley, Constitutional Limitations, 544-545.)

We have applied the above principle in the cases of Mekin vs. Wolf, 2 Phil. 74 and Ongsiako vs. Gamboa, 47 Off. Gaz., No. 11, 5613, 5616.

It has also been held that property taxes and benefit assessments on real estate, retroactively applied, are not open to the objection that they infringe upon the due process of law clause of the Constitution (Wagner vs. Baltimore, 239 U. S. 207, 60 L. Ed. 230); that taxes on income are not subject to the constitutional objection because of their retroactivity. The universal practice has been to increase taxes on incomes already earned; yet notwithstanding this retroactive operation, income taxes have not been successfully assailed as invalid. The uniform ruling of the courts in the United States has been to reject the contention that the retroactive application of revenue acts is a denial of the due process guaranteed by the Fifth Amendment (Welch vs. Henry, 305 U. S. 134, 83 L. Ed. 87).

It has also been held that in order to declare a tax as transgressing the constitutional limitation, it must be so harsh and oppressive in its retroactive application (Idem.). But we hold that far from being unjust or harsh and oppressive our war profits tax is both wise and just. The last Pacific war and the Japanese occupation of the Islands have wrought divergent effects upon the different sectors of the population. The quiet and the timid, who were afraid to go out of their homes or who refused to have any dealings with the enemy, stopped from exercising their callings or professions, losing their incomes; and they supported themselves with properties they already owned, selling these from time to time to raise funds with which to purchase their daily needs. These were reduced to penury and want. But the bold and the daring, as well as those who were callous to the criticism of being collaborators, engaged in trading in all forms or sorts of commodities, from foodstuffs to war materials, earning fabulous incomes and acquiring properties with their earnings. Those who were able to retain their properties found themselves possessed of increased wealth because inflation set in, the currency dropped in value and properties soared in prices. It would have been unrealistic for the legislature to have ignored all these facts and

circumstances. After the war it could not, with justice to all concerned, apportion the expenses of government equally on all the people irrespective of the vicissitudes of war, equally on those who had their properties decimated as on those who had become fabulously rich after the war. Those who were fortunate to increase their wealth during the troubulous period of the war were made to contribute a portion of their newly-acquired wealth for the maintenance of the government and defray its expenses. Those who in turn were reduced to penury or whose incomes suffered reductions could not be compelled to share in the expenses to the same extent as those who grew rich. This in effect is what the legislature did when it enacted the War Profits Tax Law. The law may not be considered harsh and oppressive because the force of its impact fell on those who had amassed wealth or increased their wealth during the war, but did not touch the less fortunate. The policy followed is the same as that which underlies the Income Tax Law, imposing the burden upon those who have and relieving those who have not. No one can dare challenge the law as harsh and oppressive. We declare it to be just and sound and overrule the objection thereto on the ground of unconstitutionality.

The contention that the deceased Olimpio Fernandez or his estate should not be responsible because he died in 1945 and was no longer living when the law was enacted at a later date, in 1946, is absolutely without merit. Fernandez died immediately before the liberation and the actual cessation of hostilities. He profited by the war; there is no reason why the incident of his death should relieve his estate from the tax. On this matter we agree with the Court of Tax Appeals that the provisions of section 18 of the Internal Revenue Code have been incorporated in Republic Act No. 55 by virtue of Section 9 thereof, which provides:

SEC. 9. Administrative remedies. — All administrative, special and general provisions of law, including the laws in relation to the assessment, remission, collection and refund of national internal revenue taxes, not inconsistent with

the provisions of the Act, are hereby extended and made applicable to all the provisions of this law, and to the tax herein imposed.‖

Under section 84 of the National Internal Revenue Code, the term ―person‖ means an individual, a trust, estate, corporation, or a duly registered general co-partnership. If the individual is already dead, property or estate left by him should be subject to the tax in the same manner as if he were alive.

The last contention is also without merit. The property which Olimpio Fernandez was possessed of in December, 1941 is presumed to be conjugal property and so are the properties which were acquired by him during the war, because at that time he was married. There is no claim or evidence to support the claim that any of the properties were paraphernal properties of the wife; so the presumption stands that they were conjugal properties of the husband and wife. Under these circumstances they cannot be considered as properties belonging to two individuals, each of which shall be subject to the tax independently of the other.

For the foregoing considerations, the judgment appealed from is hereby affirmed, with costs against the Appellants.

EN BANC

[G.R. No. L-9408. October 31, 1956.]

EMILIO Y. HILADO, Petitioner, vs. THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, Respondents.

DECISION

BAUTISTA ANGELO, J.:

On March 31, 1952, Petitioner filed his income tax return for 1951 with the treasurer of Bacolod City wherein he claimed, among other things, the amount of P12,837.65 as a deductible item from his gross income pursuant to General Circular No. V-123 issued by the Collector of Internal Revenue. This circular was issued pursuant to certain rules laid down by the Secretary of Finance On the basis of said return, an assessment notice demanding the payment of P9,419 was sent to Petitioner, who paid the tax in monthly installments, the last payment having been made on January 2, 1953.

Meanwhile, on August 30, 1952, the Secretary of Finance, through the Collector of Internal Revenue, issued General Circular No. V-139 which not only revoked and declared void his general Circular No. V- 123 but laid down the rule that losses of property which occurred during the period of World War II from fires, storms, shipwreck or other casualty, or from robbery, theft, or embezzlement are deductible in the year of actual loss or destruction of said property. As a consequence, the amount of P12,837.65 was disallowed as a deduction from the gross income of Petitioner for 1951 and the Collector of Internal Revenue demanded from him the payment of the sum of P3,546 as deficiency income tax for said year. When the petition for reconsideration filed

by Petitioner was denied, he filed a petition for review with the Court of Tax Appeals. In due time, this court rendered decision affirming the assessment made by Respondent Collector of Internal Revenue. This is an appeal from said decision.

It appears that Petitioner claimed in his 1951 income tax return the deduction of the sum of P12,837.65 as a loss consisting in a portion of his war damage claim which had been duly approved by the Philippine War Damage Commission under the Philippine Rehabilitation Act of 1946 but which was not paid and never has been paid pursuant to a notice served upon him by said Commission that said part of his claim will not be paid until the United States Congress should make further appropriation. He claims that said amount of P12,837.65 represents a ―business asset‖ within the meaning of said Act which he is entitled to deduct as a loss in his return for 1951. This claim is untenable.

To begin with, assuming that said amount represents a portion of the 75% of his war damage claim which was not paid, the same would not be deductible as a loss in 1951 because, according to Petitioner, the last installment he received from the War Damage Commission, together with the notice that no further payment would be made on his claim, was in 1950. In the circumstance, said amount would at most be a proper deduction from his 1950 gross income. In the second place, said amount cannot be considered as a ―business asset‖ which can be deducted as a loss in contemplation of law because its collection is not enforceable as a matter of right, but is dependent merely upon the generosity and magnanimity of the U. S. government. Note that, as of the end of 1945, there was absolutely no law under which Petitioner could claim compensation for the destruction of his properties during the battle for the liberation of the Philippines. And under the Philippine Rehabilitation Act of 1946, the payments of claims by the War Damage Commission merely depended upon its discretion to be exercised in the

manner it may see fit, but the non-payment of which cannot give rise to any enforceable right, for, under said Act, ―All findings of the Commission concerning the amount of loss or damage sustained, the cause of such loss or damage, the persons to whom compensation pursuant to this title is payable, and the value of the property lost or damaged, shall be conclusive and shall not be reviewable by any court‖. (section 113).

It is true that under the authority of section 338 of the National Internal Revenue Code the Secretary of Finance, in the exercise of his administrative powers, caused the issuance of General Circular No. V-123 as an implementation or interpretative regulation of section 30 of the same Code, under which the amount of P12,837.65 was allowed to be deducted ―in the year the last installment was received with notice that no further payment would be made until the United States Congress makes further appropriation therefor‖, but such circular was found later to be wrong and was revoked. Thus, when doubts arose as to the soundness or validity of such circular, the Secretary of Finance sought the advice of the Secretary of Justice who, accordingly, gave his opinion the pertinent portion of which reads as follows:

“Yet it might be argued that war losses were not included as deductions for the year when they were sustained because the taxpayers had prospects that losses would be compensated for by the United States Government; that since only uncompensated losses are deductible, they had to wait until after the determination by the Philippine War Damage Commission as to the compensability in part or in whole of their war losses so that they could exclude from the deductions those compensated for by the said Commission; and that, of necessity, such determination could be complete only much later than in the year when the loss was sustained. This contention falls to the ground when it is considered that the Philippine Rehabilitation Act which authorized the payment by the United States Government of war losses suffered by property owners in the Philippines was passed only on August 30,

1946, long after the losses were sustained. It cannot be said therefore, that the property owners had any conclusive assurance during the years said losses were sustained, that the compensation was to be paid therefor. Whatever assurance they could have had, could have been based only on some information less reliable and less conclusive than the passage of the Act itself. Hence, as diligent property owners, they should adopt the safest alternative by considering such losses deductible during the year when they were sustained.‖

In line with this opinion, the Secretary of Finance, through the Collector of Internal Revenue, issued General Circular No. V-139 which not only revoked and declared void his previous Circular No. V — 123 but laid down the rule that losses of property which occurred during the period of World War II from fires, storms, shipwreck or other casualty, or from robbery, theft, or embezzlement are deductible for income tax purposes in the year of actual destruction of said property. We can hardly argue against this opinion. Since we have already stated that the amount claimed does not represent a ―business asset‖ that may be deducted as a loss in 1951, it is clear that the loss of the corresponding asset or property could only be deducted in the year it was actually sustained. This is in line with section 30 (d) of the National Internal Revenue Code which prescribes that losses sustained are allowable as deduction only within the corresponding taxable year.

Petitioner‘s contention that during the last war and as a consequence of enemy occupation in the Philippines ―there was no taxable year‖ within the meaning of our internal revenue laws because during that period they were unenforceable, is without merit. It is well known that our internal revenue laws are not political in nature and as such were continued in force during the period of enemy occupation and in effect were actually enforced by the occupation government. As a matter of fact, income tax returns were filed during that period and income tax payment were effected and considered valid

and legal. Such tax laws are deemed to be the laws of the occupied territory and not of the occupying enemy.

“Furthermore, it is a legal maxim, that excepting that of a political nature, ‗Law once established continues until changed by some competent legislative power. It is not changed merely by change of sovereignty.‘ (Joseph H. Beale, Cases on Conflict of Laws, III, Summary section 9, citing Commonwealth vs. Chapman, 13 Met., 68.) As the same author says, in his Treatise on the Conflict of Laws (Cambridge, 1916, section 131): ‗There can be no break or interregnun in law. From the time the law comes into existence with the firstfelt corporateness of a primitive people it must last until the final disappearance of human society. Once created, it persists until a change takes place, and when changed it continues in such changed condition until the next change and so forever. Conquest or colonization is impotent to bring law to an end; inspite of change of constitution, the law continues unchanged until the new sovereign by legislative act creates a change.‘― (Co Kim Chan vs. Valdes Tan Keh and Dizon, 75 Phil., 113, 142-143.)

It is likewise contended that the power to pass upon the validity of General Circular No. V-123 is vested exclusively in our courts in view of the principle of separation of powers and, therefore, the Secretary of Finance acted without valid authority in revoking it and approving in lieu thereof General Circular No. V-139. It cannot be denied, however, that the Secretary of Finance is vested with authority to revoke, repeal or abrogate the acts or previous rulings of his predecessor in office because the construction of a statute by those administering it is not binding on their successors if thereafter the latter become satisfied that a different construction should be given. [Association of Clerical Employees vs. Brotherhood of Railways & Steamship Clerks, 85 F. (2d) 152, 109 A.L.R., 345.]

“When the Commissioner determined in 1937 that the Petitioner was not exempt and never had been, it was his duty to determine, assess and collect the tax due for all years not barred by the statutes of limitation. The conclusion reached and announced by his predecessor in 1924 was not binding upon him. It did not exempt the Petitioner from tax, This same point was decided in this way in Stanford University Bookstore, 29 B. T. A., 1280; affd., 83 Fed. (2d) 710.‖ (Southern Maryland Agricultural Fair Association vs. Commissioner of Internal Revenue, 40 B. T. A., 549, 554).

With regard to the contention that General Circular No. V-139 cannot be given retroactive effect because that would affect and obliterate the vested right acquired by Petitioner under the previous circular, suffice it to say that General Circular No. V-123, having been issued on a wrong construction of the law, cannot give rise to a vested right that can be invoked by a taxpayer. The reason is obvious: a vested right cannot spring from a wrong interpretation. This is too clear to require elaboration.

“It seems too clear for serious argument that an administrative officer cannot change a law enacted by Congress. A regulation that is merely an interpretation of the statute when once determined to have been erroneous becomes nullity. An erroneous construction of the law by the Treasury Department or the collector of internal revenue does not preclude or estop the government from collecting a tax which is legally due.‖ (Ben Stocker, et al., 12 B. T. A., 1351.)

“Art. 2254. — No vested or acquired right can arise from acts or omissions which are against the law or which infringe upon the rights of others.‖ (Article 2254, New Civil Code.)

Wherefore, the decision appealed from is affirmed Without pronouncement as to costs.

FIRST DIVISION

G.R. No. 188497

COMMISSIONER OF INTERNAL REVENUE,

Petitioner,

Present:

CORONA, C.J., - versus Chairperson,

LEONARDO-DE CASTRO,

BERSAMIN,

DEL CASTILLO, and

VILLARAMA, JR., JJ. PILIPINAS SHELL PETROLEUM CORPORATION, Promulgated: Respondent.

April 25, 2012

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

DECISION

VILLARAMA, JR., J.:

Petitioner Commissioner of Internal Revenue appeals the Decision[1][1] dated March 25, 2009 and Resolution[2][2] dated June 24, 2009 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 415. The CTA dismissed the petition for review filed by petitioner assailing the CTA First Division‘s Decision[3][3] dated April 25, 2008 and Resolution[4][4] dated July 10, 2008 which ordered petitioner to refund the excise taxes paid by respondent Pilipinas Shell Petroleum Corporation on petroleum products it sold to international carriers.

The facts are not disputed.

Respondent is engaged in the business of processing, treating and refining petroleum for the purpose of producing marketable products and the subsequent sale thereof.[5][5]

On July 18, 2002, respondent filed with the Large Taxpayers Audit & Investigation Division II of the Bureau of Internal Revenue (BIR) a formal claim for refund or tax credit in the total amount of P28,064,925.15, representing excise taxes it allegedly paid on sales and deliveries of gas and fuel oils to various international carriers during the period October to December 2001. Subsequently, on October 21, 2002, a similar claim for refund or tax credit was filed by respondent with the BIR covering the period January to March 2002 in the amount of P41,614,827.99. Again, on July 3, 2003, respondent filed another formal claim for refund or tax credit in the amount of P30,652,890.55 covering deliveries from April to June 2002.[6][6]

Since no action was taken by the petitioner on its claims, respondent filed petitions for review before the CTA on September 19, 2003 and December 23, 2003, docketed as CTA Case Nos. 6775 and 6839, respectively.

In its decision on the consolidated cases, the CTA‘s First Division ruled that respondent is entitled to the refund of excise taxes in the reduced amount of P95,014,283.00. The CTA First Division relied on a previous ruling rendered by the CTA En Banc in the case of ―Pilipinas Shell Petroleum Corporation v. Commissioner of Internal Revenue‖[7][7] where the CTA also granted respondent‘s claim for refund on the basis of excise tax exemption for petroleum products sold to international carriers of foreign registry for their use or consumption outside the Philippines. Petitioner‘s motion for reconsideration was denied by the CTA First Division.

Petitioner elevated the case to the CTA En Banc which upheld the ruling of the First Division. The CTA pointed out the specific exemption mentioned under Section 135 of the National Internal Revenue Code of 1997 (NIRC) of petroleum products sold to international carriers such as respondent‘s clients. It said that this Court‘s ruling in Maceda v. Macaraig, Jr.[8][8] is inapplicable because said case only put to rest the issue of whether or not the National Power Corporation (NPC) is subject to tax considering that NPC is a tax-exempt entity mentioned in Sec. 135 (c) of the NIRC (1997), whereas the present case involves the tax exemption of the sale of petroleum under Sec. 135 (a) of the same Code. Further, the CTA said that the ruling in Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue[9][9] likewise finds no application because the party asking for the refund in said case was the sellerproducer based on the exemption granted under the law to the tax-exempt buyers, NPC and Voice of America (VOA), whereas in this case it is the article or product which is exempt from tax and not the international carrier.

Petitioner filed a motion for reconsideration which the CTA likewise denied.

Hence, this petition anchored on the following grounds:

I

SECTION 148 OF THE NATIONAL INTERNAL REVENUE CODE EXPRESSLY SUBJECTS THE PETROLEUM PRODUCTS TO AN EXCISE TAX BEFORE THEY ARE REMOVED FROM THE PLACE OF PRODUCTION.

II

THE ONLY SPECIFIC PROVISION OF THE LAW WHICH GRANTS TAX CREDIT OR TAX REFUND OF THE EXCISE TAXES PAID REFERS TO THOSE CASES WHERE GOODS LOCALLY PRODUCED OR MANUFACTURED ARE ACTUALLY EXPORTED WHICH IS NOT SO IN THIS CASE.

III

THE PRINCIPLES LAID DOWN IN MACEDA VS. MACARAIG, JR. AND PHILIPPINE ACETYLENE CO. VS. CIR ARE APPLICABLE TO THIS CASE.[10][10]

The Solicitor General argues that the obvious intent of the law is to grant excise tax exemption to international carriers and exempt entities as buyers of petroleum products and not to the manufacturers or producers of said goods. Since the excise taxes are collected from manufacturers or producers before removal of the domestic products from the place of production, respondent paid the subject excise taxes as manufacturer or producer of the petroleum products pursuant to Sec. 148 of the NIRC. Thus, regardless of who the buyer/purchaser is, the excise tax on petroleum

products attached to the said goods before their sale or delivery to international carriers, as in fact respondent averred that it paid the excise tax on its petroleum products when it ―withdrew petroleum products from its place of production for eventual sale and delivery to various international carriers as well as to other customers.‖[11][11] Sec. 135 (a) and (c) granting exemption from the payment of excise tax on petroleum products can only be interpreted to mean that the respondent cannot pass on to international carriers and exempt agencies the excise taxes it paid as a manufacturer or producer.

As to whether respondent has the right to file a claim for refund or tax credit for the excise taxes it paid for the petroleum products sold to international carriers, the Solicitor General contends that Sec. 130 (D) is explicit on the circumstances under which a taxpayer may claim for a refund of excise taxes paid on manufactured products, which express enumeration did not include those excise taxes paid on petroleum products which were eventually sold to international carriers (expressio unius est exclusio alterius). Further, the Solicitor General asserts that contrary to the conclusion made by the CTA, the principles laid down by this Court in Maceda v. Macaraig, Jr.[12][12] and Philippine Acetylene Co. v. Commissioner of Internal Revenue[13][13] are applicable to this case. Respondent must shoulder the excise taxes it previously paid on petroleum products which it later sold to international carriers because it cannot pass on the tax burden to the said international carriers which have been granted exemption under Sec. 135 (a) of the NIRC. Considering that respondent failed to prove an express grant of a right to a tax refund, such claim cannot be implied; hence, it must be denied.

On the other hand, respondent maintains that since petroleum products sold to qualified international carriers are exempt from excise tax, no taxes should be imposed on the article, to which goods the tax attaches, whether in

the hands of the said international carriers or the petroleum manufacturer or producer. As these excise taxes have been erroneously paid taxes, they can be recovered under Sec. 229 of the NIRC. Respondent contends that contrary to petitioner‘s assertion, Sections 204 and 229 authorizes respondent to maintain a suit or proceeding to recover such erroneously paid taxes on the petroleum products sold to tax-exempt international carriers.

As to the jurisprudence cited by the petitioner, respondent argues that they are not applicable to the case at bar. It points out that Maceda v. Macaraig, Jr. is an adjudication on the issue of tax exemption of NPC from direct and indirect taxes given the passage of various laws relating thereto. What was put in issue in said case was NPC‘s right to claim for refund of indirect taxes. Here, respondent‘s claim for refund is not anchored on the exemption of the buyer from direct and indirect taxes but on the tax exemption of the goods themselves under Sec. 135. Respondent further stressed that in Maceda v. Macaraig, Jr., this Court recognized that if NPC purchases oil from oil companies, NPC is entitled to claim reimbursement from the BIR for that part of the purchase price that represents excise taxes paid by the oil company to the BIR. Philippine Acetylene Co. v. CIR, on the other hand, involved sales tax, which is a tax on the transaction, which this Court held as due from the seller even if such tax cannot be passed on to the buyers who are tax-exempt entities. In this case, the excise tax is a tax on the goods themselves. While indeed it is the manufacturer who has the duty to pay the said tax, by specific provision of law, Sec. 135, the goods are stripped of such tax under the circumstances provided therein. Philippine Acetylene Co., Inc. v. CIR was thus not anchored on an exempting provision of law but merely on the argument that the tax burden cannot be passed on to someone.

Respondent further contends that requiring it to shoulder the burden of excise taxes on petroleum products sold to international carriers would effectively defeat the principle of international comity upon which the grant of tax

exemption on aviation fuel used in international flights was founded. If the excise taxes paid by respondent are not allowed to be refunded or credited based on the exemption provided in Sec. 135 (a), respondent avers that the manufacturers or oil companies would then be constrained to shift the tax burden to international carriers in the form of addition to the selling price.

Respondent cites as an analogous case Commissioner of International Revenue v. Tours Specialists, Inc.[14][14] which involved the inclusion of hotel room charges remitted by partner foreign tour agents in respondent TSI‘s gross receipts for purposes of computing the 3% contractor‘s tax. TSI opposed the deficiency assessment invoking, among others, Presidential Decree No. 31, which exempts foreign tourists from paying hotel room tax. This Court upheld the CTA in ruling that while CIR may claim that the 3% contractor‘s tax is imposed upon a different incidence, i.e., the gross receipts of the tourist agency which he asserts includes the hotel room charges entrusted to it, the effect would be to impose a tax, and though different, it nonetheless imposes a tax actually on room charges. One way or the other, said the CTA, it would not have the effect of promoting tourism in the Philippines as that would increase the costs or expenses by the addition of a hotel room tax in the overall expenses of said tourists.

The instant petition squarely raised the issue of whether respondent as manufacturer or producer of petroleum products is exempt from the payment of excise tax on such petroleum products it sold to international carriers.

In the previous cases[15][15] decided by this Court involving excise taxes on petroleum products sold to international carriers, what was only resolved is the question of who is the proper party to claim the refund of excise taxes paid on petroleum products if such tax was either paid by the international carriers themselves or incorporated into the selling price of the petroleum products sold to them. We have ruled in the said cases that the statutory taxpayer, the

local manufacturer of the petroleum products who is directly liable for the payment of excise tax on the said goods, is the proper party to seek a tax refund. Thus, a foreign airline company who purchased locally manufactured petroleum products for use in its international flights, as well as a foreign oil company who likewise bought petroleum products from local manufacturers and later sold these to international carriers, have no legal personality to file a claim for tax refund or credit of excise taxes previously paid by the local manufacturers even if the latter passed on to the said buyers the tax burden in the form of additional amount in the price.

Excise taxes, as the term is used in the NIRC, refer to taxes applicable to certain specified goods or articles manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition and to things imported into the Philippines. These taxes are imposed in addition to the value-added tax (VAT).[16]

As to petroleum products, Sec. 148 provides that excise taxes attach to the following refined and manufactured mineral oils and motor fuels as soon as they are in existence as such:

(a)

Lubricating oils and greases;

(b)

Processed gas;

(c)

Waxes and petrolatum;

(d)

Denatured alcohol to be used for motive power;

(e)

Naphtha, regular gasoline and other similar products of distillation;

(f)

Leaded premium gasoline;

(g)

Aviation turbo jet fuel;

(h)

Kerosene;

(i)

Diesel fuel oil, and similar fuel oils having more or less the same

generating power;

(j)

Liquefied petroleum gas;

(k)

Asphalts; and

(l)

Bunker fuel oil and similar fuel oils having more or less the same

generating capacity.

Beginning January 1, 1999, excise taxes levied on locally manufactured petroleum products and indigenous petroleum are required to be paid before their removal from the place of production.[17][17] However, Sec. 135 provides:

SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies. – Petroleum products sold to the following are exempt from excise tax:

(a) International carriers of Philippine or foreign registry on their use or consumption outside the Philippines: Provided, That the petroleum products sold to these international carriers shall be stored in a bonded storage tank and may be disposed of only in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner;

(b) Exempt entities or agencies covered by tax treaties, conventions and other international agreements for their use or consumption: Provided, however, That the country of said foreign international carrier or exempt entities or agencies exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies; and

(c) Entities which are by law exempt from direct and indirect taxes.

Respondent claims it is entitled to a tax refund because those petroleum products it sold to international carriers are not subject to excise tax, hence the excise taxes it paid upon withdrawal of those products were erroneously or illegally collected and should not have been paid in the first place. Since the excise tax exemption attached to the petroleum products themselves, the manufacturer or producer is under no duty to pay the excise tax thereon.

We disagree.

Under Chapter II ―Exemption or Conditional Tax-Free Removal of Certain Goods‖ of Title VI, Sections 133, 137, 138, 139 and 140 cover conditional tax-free removal of specified goods or articles, whereas Sections 134 and 135 provide for tax exemptions. While the exemption found in Sec. 134 makes reference to the nature and quality of the goods manufactured (domestic denatured alcohol) without regard to the tax status of the buyer of the said goods, Sec. 135 deals with the tax treatment of a specified article (petroleum products) in relation to its buyer or consumer. Respondent‘s failure to make this important distinction apparently led it to mistakenly assume that the tax exemption under Sec. 135 (a) ―attaches to the goods themselves‖ such that the excise tax should not have been paid in the first place.

On July 26, 1996, petitioner Commissioner issued Revenue Regulations 896[18][18] (―Excise Taxation of Petroleum Products‖) which provides:

SEC. 4. Time and Manner of Payment of Excise Tax on Petroleum Products, Non-Metallic Minerals and Indigenous Petroleum –

I.

Petroleum Products

xxxx

a) On locally manufactured petroleum products

The specific tax on petroleum products locally manufactured or produced in the Philippines shall be paid by the manufacturer, producer, owner or person having possession of the same, and such tax shall be paid within fifteen (15) days from date of removal from the place of production. (Underscoring supplied.)

Thus, if an airline company purchased jet fuel from an unregistered supplier who could not present proof of payment of specific tax, the company is liable to pay the specific tax on the date of purchase.[19][19] Since the excise tax must be paid upon withdrawal from the place of production, respondent cannot anchor its claim for refund on the theory that the excise taxes due thereon should not have been collected or paid in the first place.

Sec. 229 of the NIRC allows the recovery of taxes erroneously or illegally collected. An ―erroneous or illegal tax‖ is defined as one levied without statutory authority, or upon property not subject to taxation or by some officer having no authority to levy the tax, or one which is some other similar respect is illegal.[20][20]

Respondent‘s locally manufactured petroleum products are clearly subject to excise tax under Sec. 148. Hence, its claim for tax refund may not be predicated on Sec. 229 of the NIRC allowing a refund of erroneous or excess payment of tax. Respondent‘s claim is premised on what it determined as a tax exemption ―attaching to the goods themselves,‖ which must be based on a statute granting tax exemption, or ―the result of legislative grace.‖ Such a claim is to be construed strictissimi juris against the taxpayer, meaning that the claim cannot be made to rest on vague inference. Where the rule of strict interpretation against the taxpayer is applicable as the claim for refund

partakes of the nature of an exemption, the claimant must show that he clearly falls under the exempting statute.[21]

The exemption from excise tax payment on petroleum products under Sec. 135 (a) is conferred on international carriers who purchased the same for their use or consumption outside the Philippines. The only condition set by law is for these petroleum products to be stored in a bonded storage tank and may be disposed of only in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

On January 22, 2008, or five years after the sale by respondent of the subject petroleum products, then Secretary of Finance Margarito B. Teves issued Revenue Regulations No. 3-2008 ―Amending Certain Provisions of Existing Revenue Regulations on the Granting of Outright Excise Tax Exemption on Removal of Excisable Articles Intended for Export or Sale/Delivery to International Carriers or to Tax-Exempt Entities/Agencies and Prescribing the Provisions for Availing Claims for Product Replenishment.‖

Said issuance recognized the ―tax relief to which the

taxpayers are entitled‖ by availing of the following remedies: (a) a claim for excise tax exemption pursuant to Sections 204 and 229 of the NIRC; or (2) a product replenishment.

SEC. 2. IMPOSITION OF EXCISE TAX ON REMOVAL OF EXCISABLE ARTICLES FOR EXPORT OR SALE/DELIVERY TO INTERNATIONAL CARRIERS AND OTHER TAX-EXEMPT ENTITIES/AGENCIES. – Subject to the subsequent filing of a claim for excise tax credit/refund or product replenishment, all manufacturers of articles subject to excise tax under Title VI of the NIRC of 1997, as amended, shall pay the excise tax that is otherwise due on every removal thereof from the place of production that is intended for exportation or sale/delivery to international carriers or to tax-exempt entities/agencies: Provided, That in case the said articles are likewise being

sold in the domestic market, the applicable excise tax rate shall be the same as the excise tax rate imposed on the domestically sold articles.

In the absence of a similar article that is being sold in the domestic market, the applicable excise tax shall be computed based on the value appearing in the manufacturer‘s sworn statement converted to Philippine currency, as may be applicable.

x x x x (Emphasis supplied.)

In this case, however, the Solicitor General has adopted a position contrary to existing BIR regulations and rulings recognizing the right of oil companies to seek a refund of excise taxes paid on petroleum products they sold to international carriers. It is argued that there is nothing in Sec. 135 (a) which explicitly grants exemption from the payment of excise tax in favor of oil companies selling their petroleum products to international carriers and that the only claim for refund of excise taxes authorized by the NIRC is the payment of excise tax on exported goods, as explicitly provided in Sec. 130 (D), Chapter I under the same Title VI:

(D) Credit for Excise Tax on Goods Actually Exported. -- When goods locally produced or manufactured are removed and actually exported without returning to the Philippines, whether so exported in their original state or as ingredients or parts of any manufactured goods or products, any excise tax paid thereon shall be credited or refunded upon submission of the proof of actual exportation and upon receipt of the corresponding foreign exchange payment: Provided, That the excise tax on mineral products, except coal and coke, imposed under Section 151 shall not be creditable or refundable even if the mineral products are actually exported.

According to the Solicitor General, Sec. 135 (a) in relation to the other provisions on excise tax and from the nature of indirect taxation, may only be

construed as prohibiting the manufacturers-sellers of petroleum products from passing on the tax to international carriers by incorporating previously paid excise taxes into the selling price. In other words, respondent cannot shift the tax burden to international carriers who are allowed to purchase its petroleum products without having to pay the added cost of the excise tax.

We agree with the Solicitor General.

In Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue[22][22] this Court held that petitioner manufacturer who sold its oxygen and acetylene gases to NPC, a tax-exempt entity, cannot claim exemption from the payment of sales tax simply because its buyer NPC is exempt from taxation. The Court explained that the percentage tax on sales of merchandise imposed by the Tax Code is due from the manufacturer and not from the buyer.

Respondent attempts to distinguish this case from Philippine Acetylene Co., Inc. on grounds that what was involved in the latter is a tax on the transaction (sales) and not excise tax which is a tax on the goods themselves, and that the exemption sought therein was anchored merely on the taxexempt status of the buyer and not a specific provision of law exempting the goods sold from the excise tax. But as already stated, the language of Sec. 135 indicates that the tax exemption mentioned therein is conferred on specified buyers or consumers of the excisable articles or goods (petroleum products). Unlike Sec. 134 which explicitly exempted the article or goods itself (domestic denatured alcohol) without due regard to the tax status of the buyer or purchaser, Sec. 135 exempts from excise tax petroleum products which were sold to international carriers and other tax-exempt agencies and entities.

Considering that the excise taxes attaches to petroleum products ―as soon as they are in existence as such,‖[23][23] there can be no outright exemption from the payment of excise tax on petroleum products sold to international carriers. The sole basis then of respondent‘s claim for refund is the express grant of excise tax exemption in favor of international carriers under Sec. 135 (a) for their purchases of locally manufactured petroleum products. Pursuant to our ruling in Philippine Acetylene, a tax exemption being enjoyed by the buyer cannot be the basis of a claim for tax exemption by the manufacturer or seller of the goods for any tax due to it as the manufacturer or seller.

The

excise tax imposed on petroleum products under Sec. 148 is the direct liability of the manufacturer who cannot thus invoke the excise tax exemption granted to its buyers who are international carriers.

In Maceda v. Macaraig, Jr.,[24][24] the Court specifically mentioned excise tax as an example of an indirect tax where the tax burden can be shifted to the buyer:

On the other hand, ―indirect taxes are taxes primarily paid by persons who can shift the burden upon someone else‖. For example, the excise and ad valorem taxes that the oil companies pay to the Bureau of Internal Revenue upon removal of petroleum products from its refinery can be shifted to its buyer, like the NPC, by adding them to the ―cash‖ and/or ―selling price.‖

An excise tax is basically an indirect tax. Indirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to someone else. Stated elsewise, indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it. When the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the

liability to pay it, to the purchaser as part of the price of goods sold or services rendered.[25][25]

Further, in Maceda v. Macaraig, Jr., the Court ruled that because of the tax exemptions privileges being enjoyed by NPC under existing laws, the tax burden may not be shifted to it by the oil companies who shall pay for fuel oil taxes on oil they supplied to NPC. Thus:

In view of all the foregoing, the Court rules and declares that the oil companies which supply bunker fuel oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold to NPC. By the very nature of indirect taxation, the economic burden of such taxation is expected to be passed on through the channels of commerce to the user or consumer of the goods sold. Because, however, the NPC has been exempted from both direct and indirect taxation, the NPC must be held exempted from absorbing the economic burden of indirect taxation. This means, on the one hand, that the oil companies which wish to sell to NPC absorb all or part of the economic burden of the taxes previously paid to BIR, which they could shift to NPC if NPC did not enjoy exemption from indirect taxes.

This means also, on

the other hand, that the NPC may refuse to pay that part of the ―normal‖ purchase price of bunker fuel oil which represents all or part of the taxes previously paid by the oil companies to BIR. If NPC nonetheless purchases such oil from the oil companies – because to do so may be more convenient and ultimately less costly for NPC than NPC itself importing and hauling and storing the oil from overseas – NPC is entitled to be reimbursed by the BIR for that part of the buying price of NPC which verifiably represents the tax already paid by the oil company-vendor to the BIR.[26][26] (Emphasis supplied.)

In the case of international air carriers, the tax exemption granted under Sec. 135 (a) is based on ―a long-standing international consensus that fuel used for international air services should be tax-exempt.‖ The provisions of

the 1944 Convention of International Civil Aviation or the ―Chicago Convention‖, which form binding international law, requires the contracting parties not to charge duty on aviation fuel already on board any aircraft that has arrived in their territory from another contracting state. Between individual countries, the exemption of airlines from national taxes and customs duties on a range of aviation-related goods, including parts, stores and fuel is a standard element of the network of bilateral ―Air Service Agreements.‖[27][27] Later, a Resolution issued by the International Civil Aviation Organization (ICAO) expanded the provision as to similarly exempt from taxes all kinds of fuel taken on board for consumption by an aircraft from a contracting state in the territory of another contracting State departing for the territory of any other State.[28][28] Though initially aimed at establishing uniformity of taxation among parties to the treaty to prevent double taxation, the tax exemption now generally applies to fuel used in international travel by both domestic and foreign carriers.

On April 21, 1978, then President Ferdinand E. Marcos issued Presidential Decree (P.D.) No. 1359:

PRESIDENTIAL DECREE No. 1359

AMENDING SECTION 134 OF THE NATIONAL INTERNAL REVENUE CODE OF 1977.

WHEREAS, under the present law oil products sold to international carriers are subject to the specific tax;

WHEREAS, some countries allow the sale of petroleum products to Philippine Carriers without payment of taxes thereon;

WHEREAS, to foster goodwill and better relationship with foreign countries, there is a need to grant similar tax exemption in favor of foreign international carriers;

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

Section 1. Section 134 of the National Internal Revenue Code of 1977 is hereby amended to read as follows:

“Sec. 134. Articles subject to specific tax. Specific internal revenue taxes apply to things manufactured or produced in the Philippines for domestic sale or consumption and to things imported, but not to anything produced or manufactured here which shall be removed for exportation and is actually exported without returning to the Philippines, whether so exported in its original state or as an ingredient or part of any manufactured article or product.

“HOWEVER, PETROLEUM PRODUCTS SOLD TO AN INTERNATIONAL CARRIER FOR ITS USE OR CONSUMPTION OUTSIDE OF THE PHILIPPINES SHALL NOT BE SUBJECT TO SPECIFIC TAX, PROVIDED, THAT THE COUNTRY OF SAID CARRIER EXEMPTS FROM TAX PETROLEUM PRODUCTS SOLD TO PHILIPPINE CARRIERS.

“In case of importations the internal revenue tax shall be in addition to the customs duties, if any.‖

Section 2. This Decree shall take effect immediately.

Contrary to respondent‘s assertion that the above amendment to the former provision of the 1977 Tax Code supports its position that it was not liable for excise tax on the petroleum products sold to international carriers, we find

that no such inference can be drawn from the words used in the amended provision or its introductory part. Founded on the principles of international comity and reciprocity, P.D. No. 1359 granted exemption from payment of excise tax but only to foreign international carriers who are allowed to purchase petroleum products free of specific tax provided the country of said carrier also grants tax exemption to Philippine carriers.

Both the earlier

amendment in the 1977 Tax Code and the present Sec. 135 of the 1997 NIRC did not exempt the oil companies from the payment of excise tax on petroleum products manufactured and sold by them to international carriers.

Because an excise tax is a tax on the manufacturer and not on the purchaser, and there being no express grant under the NIRC of exemption from payment of excise tax to local manufacturers of petroleum products sold to international carriers, and absent any provision in the Code authorizing the refund or crediting of such excise taxes paid, the Court holds that Sec. 135 (a) should be construed as prohibiting the shifting of the burden of the excise tax to the international carriers who buys petroleum products from the local manufacturers. Said provision thus merely allows the international carriers to purchase petroleum products without the excise tax component as an added cost in the price fixed by the manufacturers or distributors/sellers. Consequently, the oil companies which sold such petroleum products to international carriers are not entitled to a refund of excise taxes previously paid on the goods.

Time and again, we have held that tax refunds are in the nature of tax exemptions which result to loss of revenue for the government. Upon the person claiming an exemption from tax payments rests the burden of justifying the exemption by words too plain to be mistaken and too categorical to be misinterpreted,[29][29] it is never presumed[30][30] nor be allowed solely on the ground of equity.[31][31] These exemptions, therefore, must not rest on vague, uncertain or indefinite inference, but should be granted only by a clear

and unequivocal provision of law on the basis of language too plain to be mistaken. Such exemptions must be strictly construed against the taxpayer, as taxes are the lifeblood of the government.[32][32]

WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated March 25, 2009 and Resolution dated June 24, 2009 of the Court of Tax Appeals En Banc in CTA EB No. 415 are hereby REVERSED and SET ASIDE.

The claims for tax refund or credit filed by respondent Pilipinas Shell

Petroleum Corporation are DENIED for lack of basis.

No pronouncement as to costs.

SO ORDERED.

THIRD DIVISION

COMMISSIONER OF INTERNAL REVENUE,

G.R. No. 180043

Petitioner,

Present:

YNARES-SANTIAGO, J.,

Chairperson, - versus -

CARPIO,*

CHICO-NAZARIO,

VELASCO, JR., and

PERALTA, JJ.

PHILIPPINE AIRLINES, INC.,

Promulgated:

Respondent.

July 14, 2009

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

DECISION

CHICO-NAZARIO, J.:

In this Petition for Review on Certiorari, under Rule 45 of the Revised Rules of Court, petitioner Commissioner of Internal Revenue assails the Decision[33][1] of the Court of Tax Appeals (CTA) En Banc dated 9 August 2007 in CTA EB No. 221, affirming the Decision[34][2] dated 14 June 2006 of the CTA First Division in CTA Case No. 6735, which granted the claim of respondent Philippine Airlines, Inc. (PAL) for the refund of its Overseas Communications Tax (OCT) for the period April to December 2001.

Petitioner, as the Commissioner of the Bureau of Internal Revenue (BIR), is responsible for the assessment and collection of all national internal revenue taxes, fees, and charges, including the 10% Overseas Communications Tax (OCT), imposed by Section 120 of the National Internal Revenue Code (NIRC) of 1997, which reads:

SEC. 120. Tax on Overseas Dispatch, Message or Conversation Originating from the Philippines. -

(A) Persons Liable—There shall be collected upon every overseas dispatch, message or conversation transmitted from the Philippines by telephone,

telegraph, telewriter exchange, wireless and other communication equipment service, a tax of ten percent (10%) on the amount paid of [the transaction involving overseas dispatch, message or conversation] such services. The tax imposed in this Section shall be payable by the person paying for the services rendered and shall be paid to the person rendering the services who is required to collect and pay the tax within twenty (20) days after the end of each quarter.

On the other hand, respondent is a domestic corporation organized under the corporate laws of the Republic of the Philippines; declared the national flag carrier of the country; and the grantee under Presidential Decree No. 1590[35][3] of a franchise to establish, operate, and maintain transport services for the carriage of passengers, mail, and property by air, in and between any and all points and places throughout the Philippines, and between the Philippines and other countries.[36][4]

For the period January to December 2001, the Philippine Long Distance Telephone Company (PLDT) collected from respondent the 10% OCT on the amount paid by the latter for overseas telephone calls it had made through the former. In all, PLDT collected from respondent the amount of P202,471.18 as OCT for 2001, summarized as follows[37][5]:

PERIOD January to March 2001

AMOUNT P 75,332.26

April to June 2001

50,271.43

July to September

43,313.96

2001 October to December

33,553.53

2001 Total

P 202,471.18

On 8 April 2003, respondent filed with the BIR an administrative claim for refund of the P202,471.18 OCT it alleged to have erroneously paid in 2001. In a letter[38][6] dated 4 April 2003, addressed to petitioner, Ma. Stella L. Diaz (Diaz), the Assistant Vice-President for Financial Planning & Analysis of respondent, explained that the claim for refund of respondent was based on its franchise, Section 13 of Presidential Decree No. 1590, which granted it (1) the option to pay either the basic corporate income tax on its annual net taxable income or the two percent franchise tax on its gross revenues, whichever was lower; and (2) the exemption from all other taxes, duties, royalties, registration, license and other fees and charges imposed by any municipal, city, provincial or national authority or government agency, now or in the future, except only real property tax. Also invoking BIR Ruling No. 9794[39][7] dated 13 April 1994, Diaz maintained that, other than being liable for basic corporate income tax or the franchise tax, whichever was lower, respondent was clearly exempted from all other taxes, including OCT, by virtue of the ―in lieu of all taxes‖ clause in Section 13 of Presidential Decree No. 1590.

Petitioner failed to act on the request for refund of respondent, which prompted respondent to file on 4 June 2003, with the CTA in Division, a

Petition for Review, docketed as CTA Case No. 6735. Respondent sought the refund of the amount P127,138.92, representing OCT, which PLDT erroneously collected from respondent for the second, third and fourth quarters of 2001.[40][8] The claim of respondent for the refund of the OCT for the first quarter of 2001, amounting to P75,323.26, had already prescribed after the passing of more than two years since said amount was paid.

Respondent alleged in its Petition that per its computation, reflected in its annual income tax return, it incurred a net loss in 2001 resulting in zero basic corporate income tax liability, which was necessarily lower than the franchise tax due on its gross revenues. Respondent argued that in opting for the basic corporate income tax, regardless of whether or not it actually paid any amount as tax, it was already entitled to the exemption from all other taxes granted to it by Section 13 of Presidential Decree No. 1590. [41][9]

After a hearing on the merits, the CTA First Division rendered a Decision[42][10] dated 14 June 2006, the dispositive part of which reads:

WHEREFORE, the Petition for Review is hereby GRANTED. Respondent is ORDERED to refund to the petitioner the substantiated amount of P126,243.80 representing the erroneously collected 10% Overseas Communications Tax for the period April to December 2001.

The CTA First Division reasoned that under Section 13 of Presidential Decree No. 1590, respondent had the option to choose between two alternatives: the

basic corporate income tax and the franchise tax, whichever would result in a lower amount of tax, and this would be in lieu of all other taxes, with the exception only of tax on real property. In the event that respondent incurred a net loss for the taxable year resulting in zero basic corporate income tax liability, respondent could not be required to pay the franchise tax before it could avail itself of the exemption from all other taxes under Section 13 of Presidential Decree No. 1590. The possibility that respondent would incur a net loss for a given taxable period and, thus, have zero liability for basic corporate income tax, was already anticipated by Section 13 of Presidential Decree No. 1590, the very same section granting respondent tax exemption, since it authorized respondent to carry over its excess net loss as a deduction for the next five taxable years.

However, the CTA First Division held that out of the total amount of P127,138.92 respondent sought to refund, only the amount of P126,243.80 was supported by either original or photocopied PLDT billing statements, original office receipts, and original copies of check vouchers of respondent. Respondent was also able to prove, through testimonial evidence, that the OCT collected by PLDT from it was included in the quarterly percentage tax returns of PLDT for the second, third, and fourth quarters of 2001, which were submitted to and received by an authorized agent bank of the BIR.[43][11]

Not satisfied with the foregoing Decision dated 14 June 2006, petitioner filed a Motion for Reconsideration, which was denied by the CTA First Division in a Resolution dated 17 October 2006. [44][12]

Petitioner filed an appeal with the CTA en banc, docketed as CTA EB No. 221. The latter promulgated its Decision[45][13] on 9 August 2007 denying petitioner‘s appeal. The CTA En Banc found that Presidential Decree No. 1590 does not provide that only the actual payment of basic corporate income tax or franchise tax by respondent would entitle it to the tax exemption provided under Section 13 of the latter‘s franchise. Like the CTA First Division, the CTA en banc ruled that by providing for net loss carry-over, Presidential Decree No. 1590 recognized the possibility that respondent would end up with a net loss in the computation of its taxable income, which would mean zero liability for basic corporate income tax. The CTA En Banc further cited Commissioner of Internal Revenue v. Philippine Airlines, Inc.[46][14] (PAL case) to support its conclusions. In the said case, this Court declared that despite the fact that respondent did not pay any basic corporate income tax, given its net loss position for the taxable years concerned, it was still exempted from paying all other taxes, including final withholding tax on interest income, pursuant to Section 13 of Presidential Decree No. 1590. Lastly, the CTA en banc sustained the finding of the CTA First Division that respondent was only able to establish its claim for OCT refund in the amount of P126,243.80.

The CTA En Banc denied petitioner‘s Motion for Reconsideration in a Resolution dated 11 October 2007.[47][15]

Hence, the present Petition for Review where the petitioner raises the following issues:

I

THE COURT OF TAX APPEALS EN BANC ERRED IN HOLDING THAT THE PHRASE ―IN LIEU OF ALL OTHER TAXES‖ IN SECTIONS 13 AND 14 OF PRESIDENTIAL DECREE NO. 1590 DOES NOT CONTEMPLATE THE FULFILLMENT OF A CONDITION BEFORE THE EXEMPTION FROM ALL OTHER TAXES MAY BE APPLIED; AND

II

TAX REFUNDS ARE IN THE NATURE OF TAX EXEMPTIONS. AS SUCH, THEY SHOULD BE CONSTRUED STRICTISSIMI JURIS AGAINST THE PERSON OR ENTITY CLAIMING THE EXEMPTION.[48][16]

The present Petition is without merit.

Petitioner argues that the PAL case is not applicable to the case at bar, since the former involves final withholding tax on interest income, while the latter concerns another type of tax, the OCT.[49][17]

Petitioner‘s argument is untenable.

Pertinent portions of Section 13 of Presidential Decree No. 1590 are quoted hereunder:

Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine Government during the life of this franchise, whichever of subsections (a) and (b) hereunder will result in a lower tax:

(a)

The basic corporate income tax based on the grantee‘s annual net taxable

income computed in accordance with the provisions of the National Internal Revenue Code; or

(b)

A franchise tax of two per cent (2%) of the gross revenues, derived by the

grantee from all sources, without distinction as to transport or non-transport operations; provided, that with respect to international air-transport service, only the gross passenger, mail and freight revenues from its outgoing flights shall be subject to this tax.

The tax paid by grantee under either of the above alternatives shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges of any kind, nature, or description imposed, levied, established, assessed or collected by any municipal, city, provincial, or national authority or government agency, now or in the future x x x

xxxx

The grantee, shall, however, pay the tax on its real property in conformity with existing law.

The language used in Section 13 of Presidential Decree No. 1590, granting respondent tax exemption, is clearly all-inclusive. The basic corporate income tax or franchise tax paid by respondent shall be ―in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges of any kind, nature, or description imposed, levied, established, assessed or collected by any municipal, city, provincial, or national authority or government agency, now or in the future x x x,‖ except only real property tax. Even a meticulous examination of Presidential Decree No. 1590 will not reveal any provision therein limiting the tax exemption of respondent to final withholding tax on interest income or excluding from said exemption the OCT.

Moreover, although the PAL case may involve a different type of tax, certain pronouncements made by the Court therein are still significant in the instant case.

In the PAL case, petitioner likewise opposed the claim for refund of respondent based on the argument that the latter was not exempted from final withholding tax on interest income, because said tax should be deemed part of

the basic corporate income tax, which respondent had opted to pay. This Court was unconvinced by petitioner‘s argument, ratiocinating that ―basic corporate income tax,‖ under Section 13(a) of Presidential Decree No. 1590, relates to the general rate of 35% (reduced to 32% by the year 2000) imposed on taxable income by Section 27(A) of the NIRC. Although the definition of ―gross income‖ is broad enough to include all passive incomes, the passive incomes already subjected to different rates of final tax to be withheld at source shall no longer be included in the computation of gross income, which shall be used in the determination of taxable income. The interest income of respondent is already subject to final withholding tax of 20%, and no longer to the basic corporate income tax of 35%. Having established that final tax on interest income is not part of the basic corporate income tax, then the former is considered as among ―all other taxes‖ from which respondent is exempted under Section 13 of Presidential Decree No. 1590.

It is true that the discussion in the PAL case on ―gross income‖ is immaterial to the case at bar. OCT is not even an income tax. It is a business tax, which the government imposes on the gross annual sales of operators of communication equipment sending overseas dispatches, messages or conversations from the Philippines. According to Section 120 of the NIRC, the person paying for the services rendered (respondent, in this case) shall pay the OCT to the person rendering the service (PLDT); the latter, in turn, shall remit the amount to the BIR. If this Court deems that final tax on interest income – which is also an income tax, but distinct from basic corporate income tax – is included among ―all other taxes‖ from which respondent is exempt, then with all the more reason should the Court consider OCT, which is altogether a different type of tax, as also covered by the said exemption.

Petitioner further avers that respondent cannot avail itself of the benefit of the ―in lieu of all other taxes‖ proviso in Section 13 of Presidential Decree No. 1590 when it made no actual payment of either the basic corporate income tax or the franchise tax.

Petitioner made the same averment in the PAL case, which the Court rejected for the following reasons:

A careful reading of Section 13 rebuts the argument of the CIR that the “in lieu of all other taxes” proviso is a mere incentive that applies only when PAL actually pays something. It is clear that PD 1590 intended to give respondent the option to avail itself of Subsection (a) or (b) as consideration for its franchise. Either option excludes the payment of other taxes and dues imposed or collected by the national or the local government. PAL has the option to choose the alternative that results in lower taxes. It is not the fact of tax payment that exempts it, but the exercise of its option.

Under Subsection (a), the basis for the tax rate is respondent‘s annual net taxable income, which (as earlier discussed) is computed by subtracting allowable deductions and exemptions from gross income. By basing the tax rate on the annual net taxable income, PD 1590 necessarily recognized the situation in which taxable income may result in a negative amount and thus translate into a zero tax liability.

xxxx

The fallacy of the CIR’s argument is evident from the fact that the payment of a measly sum of one peso would suffice to exempt PAL from other taxes, whereas a zero liability arising from its losses would not. There is no substantial distinction between a zero tax and a onepeso tax liability.[50][18] (Emphases ours.)

In insisting that respondent needs to actually pay a certain amount as basic corporate income tax or franchise tax, before it can enjoy the tax exemption granted to it, petitioner places too much reliance on the use of the word ―pay‖ in the first line of Section 13 of Presidential Decree No. 1590.

It must do well for petitioner to remember that a statute‘s clauses and phrases should not be taken as detached and isolated expressions, but the whole and every part thereof must be considered in fixing the meaning of any of its parts.[51][19] A strict interpretation of the word ―pay‖ in Section 13 of Presidential Decree No. 1590 would effectively render nugatory the other rights categorically conferred upon the respondent by its franchise.

Section 13 of Presidential Decree No. 1590 clearly gives respondent the option to ―pay‖ either basic corporate income tax on its net taxable income or franchise tax on its gross revenues, whichever would result in lower tax. The rationale for giving respondent such an option is explained in the PAL case, to wit:

Notably, PAL was owned and operated by the government at the time the franchise was last amended. It can reasonably be contemplated that PD 1590 sought to assist the finances of the government corporation in the form of lower taxes. When the respondent operates at a loss (as in the instant case), no taxes are due; in this [sic] instances, it has a lower tax liability than that provided by Subsection (b).[52][20]

In the event that respondent incurs a net loss, it shall have zero liability for basic corporate income tax, the lowest possible tax liability.

There being no

qualification to the exercise of its options under Section 13 of Presidential Decree No. 1590, then respondent is free to choose basic corporate income tax, even if it would have zero liability for the same in light of its net loss position for the taxable year. Additionally, a ruling by this Court compelling respondent to pay a franchise tax when it incurs a net loss and is, thus, not liable for any basic corporate income tax would be contrary to the evident intent of the law to give respondent options and to make the latter liable for the least amount of tax.

Moreover, then President Ferdinand E. Marcos, the author of Presidential Decree No. 1590, was mindful of the possibility that respondent would incur a net loss for a taxable year, resulting in zero tax liability for basic corporate income tax, when he included in the franchise of respondent the following provisions:

For the purposes of computing the basic corporate income tax as provided herein, the grantee is authorized:

xxxx

(2) To carry over as a deduction from taxable income any net loss incurred in any year up to five years following the year of such loss.

In allowing respondent to carry over its net loss for five consecutive years following the year said loss was incurred, Presidential Decree No. 1590 takes into account the possibility that respondent shall be in a net loss position for six years straight, during which it shall have zero basic corporate income tax liability. The Court also notes that net loss carry-over may only be used in the computation of basic corporate income tax. Hence, if respondent is required to pay a franchise tax every time it has zero basic corporate income tax liability due to net loss, then it shall never have the opportunity to avail itself of the benefit of net loss carry-over.

Finally, petitioner contends that according to well-established doctrine, a tax refund, which is in the nature of a tax exemption, should be construed strictissimi juris against the taxpayer.[53][21]

However, when the claim for

refund has clear legal basis and is sufficiently supported by evidence, as in the present case, then the Court shall not hesitate to grant the same.

In its previous discussion, the Court has already established that by merely exercising its option to pay for basic corporate income tax – even if it had zero liability for the same due to its net loss position in 2001 – respondent was already exempted from all other taxes, including the OCT. Therefore, respondent is entitled to recover the amount of OCT erroneously collected from it in 2001. Also, the CTA, both in Division and en banc, found that respondent submitted ample evidence to prove its payment of OCT to PLDT during the second, third, and fourth quarters of 2001, in the total amount of P126,243.80, which, in turn, was paid by PLDT to the BIR. Said finding by the CTA, being factual in nature, is already conclusively binding upon this Court. Under our tax system, the CTA acts as a highly specialized body specifically created for the purpose of reviewing tax cases. Accordingly, its findings of fact are generally regarded as final, binding, and conclusive on this Court, and will not ordinarily be reviewed or disturbed on appeal when supported by substantial evidence, in the absence of gross error or abuse on its part.[54][22]

WHEREFORE, the instant Petition for Review is DENIED. The Decision of the Court of Tax Appeals En Banc dated 9 August 2007 in CTA EB No. 221, affirming the Decision dated 14 June 2006 of the CTA First Division in CTA Case No. 6735, which granted the claim of Philippine Airlines, Inc. for a refund of Overseas Communications Tax erroneously collected from it for the period April to December 2001, in the amount of P126,243.80, is AFFIRMED. No costs.

FIRST DIVISION

G.R. Nos. L-22805 & L-27858 June 30, 1975

WONDER MECHANICAL ENGINEERING CORPORATION represented by Mr. LUCIO QUIJANO, President & General Manager, petitioner, vs. THE HON. COURT OF TAX APPEALS and THE BUREAU OF INTERNAL REVENUE BEING REPRESENTED BY THE COMMISSIONER OF INTERNAL REVENUE, respondents.

ESGUERRA, J.:

Two petitions for review of the decisions of the respondent Court of Tax Appeals in G.R. Nos. L-22805 and L-27858. The first decision (L-22805) dismissed the appeal of petitioner Wonder Mechanical Engineering Corporation in C.T.A. Case No. 1036, "for lack of jurisdiction, the same having been filed beyond the 30 day period prescribed in Section 11 of Republic Act No. 1125", and confirmed the decision of respondent Commissioner of Internal Revenue which "assessed against petitioner the total amount of P69,699.56 as fixed taxes and sales and percentage taxes, inclusive of the 25% surcharge for the years 1953-54". The second decision (L-27858) ordered the same petitioner to pay, respondent Commissioner of Internal Revenue the amount of "P25,080.91 as deficiency sales and percentage taxes from 1957 to June 30, 1960, inclusive of the 25% surcharge, plus costs", based on the common principal issue of "whether or not the manufacture and sale of steel chairs,

jeepney parts and other articles which are not machines for making other products, and job orders done by petitioner come within the purview of the tax exemption granted it under Republic Act Nos. 35 and 901."

Petitioner is a corporation which was granted tax exemption privilege under Republic Act 35 in respect to the "manufacture of machines for making cigarette paper, pails, lead washers, rivets, nails, candies. chairs, etc.". The tax exemption expired on May 30, 1951. On September 14, 1953, petitioner applied with the Secretary of Finance for reinstatement of the exemption privilege under the provisions of R.A. 901 approved July 7, 1954, the reinstatement to commence on June 20, 1953, the date Republic Act 901 took effect.

In G.R. No. L-22805, respondent Commissioner of Internal Revenue, sometime in 1955, caused the investigation of petitioner for the purpose of ascertaining whether or not it had any tax liability. The findings of Revenue Examiner Alfonso B. Camillo on September 30, 1955, stated "that during the years 1953 and 1954 the petitioner was engaged in the business of manufacturing various articles, namely, auto spare parts, flourescent lamp shades, rice threshers, post clips, radio screws, washers, electric irons, kerosene stoves and other articles; that it also engaged in business of electroplating and in repair of machines; that although it was engaged in said business, it did not provide itself with the proper privilege tax receipts as required by Section 182 of the Tax Code and did not pay the sales tax on its gross sales of articles manufactured by it and the percentage tax due on the gross receipts of its electroplating and repair business pursuant to Sections 183, 185, 186 and 191 of the same Code".

Based on the foregoing, respondent Commissioner of Internal Revenue assessed against petitioner on November 29, 1955, the total amount of

P69,699.56 as fixed taxes and sales and percentage taxes, inclusive of the 25% surcharge, as follows:

Sales and percentage taxes for 1953 and 1954 P55,719.65

25% surcharge 13,929.91

C-14 fixed tax (1953-1954) 20.00

C-4 (27) fixed tax (1954) 10.00

C-4 (37) fixed tax (1953-1954) 20.00

TOTAL P69.699.56

Respondent also suggested the payment of the amount of P3,300.00 as penalties in extrajudicial settlement of petitioner's violations of Sections 182, 183, 185, 186 and 191 of the Tax Code and of the Bookkeeping Regulations (p. 25, B.I.R. rec.).

In G.R. No. L-27858, respondent Commissioner of Internal Revenue caused the investigation of petitioner for the purpose of ascertaining its tax liability on August 10, 1960, as a result of which on December 7, 1960, Revenue Examiner Pedro Cabigao reported that "petitioner had manufactured and sold steel chairs without paying the 30% sales tax imposed by Section 185(c) of the Tax Code; accepted job orders without paying the 3% tax in gross receipts imposed by Section 191 of the same Code; manufactured and sold other articles subject to 7% sales tax under Section 186 of the same Code but not covered by the tax exemption privilege; failed to register with the Bureau of Internal Revenue books of accounts and sales invoices as required by the Bookkeeping Regulations; failed to indicate in the sales invoices the Residence Certificate number of customers who purchased articles worth P50.00 or over,

in violation of the Bookkeeping Regulation; and failed to produce its books of accounts and business records for inspection and examination when required to do so by the revenue examiner in violation of the Bookkeeping Regulations (pp. 17-18 B.I.R. rec.)".

Based on the foregoing, the respondent Commissioner of Internal Revenue on October 6, 1961, assessed against the petitioner "the payment of P25,080.91 as deficiency percentage taxes and 25% surcharge for 1957 to 1960 and suggested the payment of P5,020.00 as total compromise penalty in extrajudicial settlement of the various violations of the Tax Code and Bookkeeping Regulation (pp. 28-29 B.I.R. rec.).1äwphï1.ñët "

Regarding the compromise penalty suggested by respondent Bureau of Internal Revenue in both G.R. L-22805 and L-27858, it does not appear that petitioner accepted the imposition of the compromise amounts. Hence We find no compelling reasons to alter the decision of respondent Court of Tax Appeals in L-27858 that —

With respect to the compromise penalty in the total amount of P5,020.00 suggested by respondent to be paid by petitioner, it is now a well settled doctrine that compromise penalty cannot be imposed or collected without the agreement or conformity of the tax payer (Collector of Internal Revenue vs. University of Santo Tomas, et al., G.R. Nos. L-11274 & L-11280, November 28, 1958; the Collector of Internal Revenue v. Bautista, et al., G.R. Nos. L-12250 & 12259, May 27, 1959; the Philippines International Fair, Inc. v. Collector of Internal Revenue, G.R. Nos. L-12928 & L-12932, March 31, 1962). (Emphasis for emphasis)

Inasmuch as the figures appearing in the Bureau of Internal Revenue's tax delinquency assessments in both cases (L-22805 and L-27858) are not in dispute, and the respondent Court of Tax Appeals ruled in its decision in G.R.

No. L-27858 on the lone issue presented in both cases that the tax assessment of "P25,080.91 as deficiency sales and percentage taxes from 1957 to June 30, 1960" must be paid by petitioner as the sale of other manufactured items did not come within the purview, of the tax exemption granted petitioner. We find it no longer necessary to make a definite stand on the question raised in L22805 as to the alleged error committed by respondent Court of Tax Appeals in dismissing the appeal in C.T.A. 1036 (subject matter of L-22805) for lack of jurisdiction, the same having been filed beyond the 30-day period prescribed in Section 11 of Republic Act 1126. Suffice it to say on that issue that appellants must perfect their appeal from the decision of the Commissioner of Internal Revenue to the Court of Tax Appeals within the statutory period of 30 days, otherwise said Court acquires no jurisdiction.

We turn Our attention on the vital issue of tax exemption claimed by petitioner as basis for questioning the tax assessments made by respondent Bureau of Internal Revenue in both cases (G.R. L-22805 and 27858). There is no doubt that petitioner was given a Certificate of Tax Exemption By the Secretary of Finance on July 7,1954, as follows:

Be it known that upon application filed by Wonder Mechanical Engineering Corporation, 1310 M. Hizon, Sta. Cruz, Manila, in respect to the manufacture of machines for making cigarette paper, pails, lead washers, nails, rivets, candies, etc., the said industry/industries have been determined to be new and necessary under the provisions of Republic Act No. 901 (or of Republic Act No. 35), in view of which this Certificate of Tax Exemption has been issued entitling the abovenamed firm/person to tax exemption from the payment of taxes directly payable by it/him in respect to the said industry/industries until December 31, 1958, and thereafter to a diminishing exemption until June 20, 1959, as provided in section 1 of Republic Act No. 901, except the exemption from the income tax which will wholly terminate on June 20, 1955 (B.I.R. rec., page 13). (Emphasis for emphasis)

Republic Act 35, approved on September 30, 1946, grants to persons "who or which shall engage in a new and necessary industry", for a period of four years from the date of the organization of such industry, exemption "from the payment of all internal revenue taxes directly payable by such person". Republic Act 901, approved on June 20, 1953, which amended Republic Act 35 by extending the period of tax exemption, elaborated on the meaning of "new and necessary industry" as follows:

Sec. 2. For the purposes of this Act, a "new industry is one not existing or operating on a commercial scale prior to January first, nineteen hundred and forty-five. Where several applications for exemption are filed in connection with the same kind of industry, the Secretary of Finance shall approve them in the order in which they have been filed until the total output or production of those already granted exemption for that particular kind of industry is sufficient to meet local demand or consumption: Provided, That the limitation shall not apply to products intended for export. (Emphasis for emphasis)

Sec. 3. For the purposes of this Act, a "necessary" industry is one complying with the following requirements:

(1) Where the establishment of the industry will contribute to the attainment of a stable and balanced national economy.

(2) Where the industry will operate on a commercial scale in conformity with up-to-date practices and will make its products available to the general public in quantities and at prices which justify its operation with a reasonable degree of permanency.

(3) Where the imported raw materials represent a value not exceeding sixty percentum of the manufacturing cost plus reasonable selling price and administrative expenses: Provided, That a grantee of tax exemption shall use materials of domestic origin, growth, or manufacture wherever the same are

available or could be made available in reasonable quantity and quality and at reasonable prices. ... (Emphasis for emphasis) .

From the above-quoted provisions of the law, it is clear that an industry to be entitled to tax exemption must be "new and necessary" and that the tax exemption was granted to new and necessary industries as an incentive to greater and adequate production of products made scarce by the second world war which wrought havoc on our national economy, a production "sufficient to meet local demand or consumption"; that will contribute "to the attainment of a stable and balanced national economy"; an industry that "will make its products available to the general public in quantities and at prices which will justify its operation."

Viewed in the light of the foregoing reasons for the State grant of tax exemption, We are firmly convinced that petitioner was granted tax exemption in the manufacture and sale "of machines for making cigarette paper, pails, lead washers, nails, rivets, candies, etc.", as explicitly stated in the Certificate of Exemption (Annex A of the petition in G.R. No. L-22805), but certainly not for the manufacture and sale of the articles produced by those machines.

That such was the intention of the State when it granted tax exemption to the petitioner in the manufacture of machines for making certain products could be deduced from the following:

Before the approval of the original grant of tax exemption to Petitioner for engaging in a new and necessary industry under Republic Act No. 35, the then Secretary of Finance submitted a memorandum to the Cabinet, dated March 3, 1949, the pertinent portions of which read as follows:

"... If (petitioner) turns out machines whenever orders therefore are received. Among its products are a medicine tablet wrapping machine for Dr. Agustin

Liboro, photographs of which are attached, a loud speaker for the Manila Supply, and a "Lompia wrapping" machine for a certain Chinese. ...

The manufacture of the above-mentioned machines can be considered a new and necessary industry for the purpose of Republic Act No. 35. It is recommended that the benefits of said Act be extended to this corporation in respect to said industry.

Respectfully submitted:

(SGD.) PIO PEDROSA Secretary"

The letter of the Executive Secretary to the petitioner dated May 30, 1949, reads as follows:

"Sirs:

I have the honor to advise you that His Excellency, the President, has today, upon recommendation of the Honorable, the Secretary of Finance, approved your application for exemption from the payment of internal revenue taxes on your business of manufacturing machines for making a number of products, such as cigarette paper, pails, lead washers, rivets, nails, candies, chairs, etc., under the provisions of Section 2 of Republic Act No. 35.

Very respectfully,

(SGD.) TEODORO EVANGELISTA Executive Secretary" (Emphasis for emphasis)

Aside from the clarity of the State's intention in granting tax exemption to petitioner in so far as it manufactures machines for making certain products,

as manifested in the acts of its duly authorized representatives in the Executive branch of the government, it is quite difficult for Us to believe that the manufacture of steel chairs, jeep parts, and other articles not constituting machines for making certain products would fall under the classification of "new and necessary" industries envisioned in Republic Acts 35 and 901 as to entitle the petitioner to tax exemption.

There is no way to dispute the "cardinal rule in taxation that exemptions therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his claim or right thereto by the dearest grant of organic or statute law" as succinctly stated in the decision of the respondent Court of Tax Appeals in C.T.A. No. 1265 (L-27858).1äwphï1.ñët

Tax exemption must be clearly expressed and cannot be established by implication. Exemption from a common burden cannot be permitted to exist upon vague implication. (Asiatic Petroleum Co. vs. Llanes, 49 Phil. 466; House vs. Posadas, 53 Phil. 338; Collector of Internal Revenue vs. Manila Jockey Club, Inc., G.R. No. L-8755, March 23, 1956, 98 Phil. 676).

WHEREFORE, the decisions of respondent Court of Tax Appeals in these two cases are affirmed. Costs against the petitioner in both cases.

EN BANC

G.R. No. 143867

March 25, 2003

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, INC., petitioner, vs. CITY OF DAVAO and ADELAIDA B. BARCELONA, in her capacity as the City Treasurer of Davao, respondents.

RESOLUTION

MENDOZA, J.:

Petitioner seeks a reconsideration of the decision of the Second Division in this case. Because the decision bears directly on issues involved in other cases brought by petitioner before other Divisions of the Court, the motion for reconsideration was referred to the Court en banc for resolution.1 The parties were heard in oral arguments by the Court en banc on January 21, 2003 and were later granted time to submit their memoranda. Upon the filing of the last memorandum by the City of Davao on February 10, 2003, the motion was deemed submitted for resolution.

To provide perspective, it will be helpful to restate the basic facts.

Petitioner PLDT paid a franchise tax equal to three percent (3%) of its gross receipts. The franchise tax was paid "in lieu of all taxes on this franchise or earnings thereof" pursuant to R.A. No. 7082 amending its charter, Act. No. 3436. The exemption from "all taxes on this franchise or earnings thereof" was subsequently withdrawn by R.A. No. 7160 (Local Government Code of 1991), which at the same time gave local government units the power to tax businesses enjoying a franchise on the basis of income received or earned by

them within their territorial jurisdiction. The Local Government Code (LGC) took effect on January 1, 1992.

The pertinent provisions of the LGC state:

Sec. 137. Franchise Tax. — Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction. . . .

Sec. 193. Withdrawal of Tax Exemption Privileges. — Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including governmentowned or -controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code.

Pursuant to these provisions, the City of Davao enacted Ordinance No. 519, Series of 1992, which in pertinent part provides:

Notwithstanding any exemption granted by any law or other special law, there is hereby imposed a tax on businesses enjoying a franchise, at a rate of Seventy-five percent (75%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the income or receipts realized within the territorial jurisdiction of Davao City.

Subsequently, Congress granted in favor of Globe Mackay Cable and Radio Corp. (Globe)2 and Smart Information Technologies, Inc. (Smart) 3 franchises which contained "in lieu of all taxes" provisos. In 1995, it enacted R.A. No. 7925 (Public Telecommunications Policy of the Philippines), § 23 of which

provides that "Any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto become part of previously granted telecommunications franchises and shall be accorded immediately and unconditionally to the grantees of such franchises." The law took effect on March 16, 1995.

In January 1999, when PLDT applied for a mayor‘s permit to operate its Davao Metro Exchange, it was required to pay the local franchise tax for the first to the fourth quarter of 1999 which then had amounted to P3,681,985.72. PLDT challenged the power of the city government to collect the local franchise tax and demanded a refund of what it had paid as local franchise tax for the year 1997 and for the first to the third quarters of 1998. For this reason, it filed a petition in the Regional Trial Court of Davao. However, its petition was dismissed and its claim for exemption under R.A. No. 7925 was denied. The trial court ruled that the LGC had withdrawn tax exemptions previously enjoyed by persons and entities and authorized local government units to impose a tax on businesses enjoying franchises within their territorial jurisdictions, notwithstanding the grant of tax exemption to them. Petitioner, therefore, brought this appeal.

In its decision of August 22, 2001, this Court, through its Second Division, held that R.A. No. 7925, § 23 cannot be so interpreted as granting petitioner exemption from local taxes because the word "exemption," taking into consideration the context of the law, does not mean "tax exemption." Hence this motion for reconsideration.

The question is whether, by virtue of R.A. No. 7925, § 23, PLDT is again entitled to exemption from the payment of local franchise tax in view of the grant of tax exemption to Globe and Smart.

Petitioner contends that because their existing franchises contain "in lieu of all taxes" clauses, the same grant of tax exemption must be deemed to have become ipso facto part of its previously granted telecommunications franchise. But the rule is that tax exemptions should be granted only by clear and unequivocal provision of law "expressed in a language too plain to be mistaken."4 If, as PLDT contends, the word "exemption" in R.A. No. 7925 means "tax exemption" and assuming for the nonce that the charters of Globe and of Smart grant tax exemptions, then this runabout way of granting tax exemption to PLDT is not a direct, "clear and unequivocal" way of communicating the legislative intent.

But the best refutation of PLDT‘s claim that R.A. No. 7925, § 23 grants tax exemption is the fact that after its enactment on March 16, 1995, Congress granted several franchises containing both an "equality clause" similar to § 23 and an "in lieu of all taxes" clause. If the equality clause automatically extends the tax exemption of franchises with "in lieu of all taxes" clauses, there would be no need in the same statute for the "in lieu of all taxes" clause in order to extend its tax exemption to other franchises not containing such clause. For example, the franchise of Island Country Telecommunications, Inc., granted under R.A. No. 7939 and which took effect on March 22, 1995, contains the following provisions:

Sec. 8. Equality Clause. — If any subsequent franchise for telecommunications service is awarded or granted by the Congress of the Philippines with terms, privileges and conditions more favorable and beneficial than those contained in this Act, then the same privileges or advantages shall ipso facto accrue to the herein grantee and be deemed part of this Act.

Sec. 10. Tax Provisions. — The grantee shall be liable to pay the same taxes on their real estate, buildings and personal property exclusive of this franchise, as other persons or telecommunications entities are now or hereafter may be

required by law to pay. In addition hereto, the grantee, its successors or assigns, shall pay a franchise tax equivalent to three percent (3%) of all gross receipts transacted under this franchise, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof; Provided, That the grantee shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code. The grantee shall file the return with and pay the taxes due thereon to the Commissioner of Internal Revenue or his duly authorized representatives in accordance with the National Revenue Code and the return shall be subject to audit by the Bureau of Internal Revenue. (Emphasis added)

Similar provisions ("in lieu of all taxes" and equality clauses) are also found in the franchises of Cruz Telephone Company, Inc.,5 Isla Cellular Communications, Inc.,6 and Islatel Corporation.7

We shall now turn to the other points raised in the motion for reconsideration of PLDT.

First. Petitioner contends that the legislative intent to promote the development of the telecommunications industry is evident in the use of words as "development," "growth," and "financial viability," and that the way to achieve this purpose is to grant tax exemption or exclusion to franchises belonging in this industry. Furthermore, by using the words "advantage," "favor," "privilege," "exemption," and "immunity" and the terms "ipso facto," "immediately," and "unconditionally," Congress intended to automatically extend whatever tax exemption or tax exclusion has been granted to the holder of a franchise enacted after the LGC to the holder of a franchise enacted prior thereto, such as PLDT.

The contention is untenable. The thrust of the law is to promote the gradual deregulation of entry, pricing, and operations of all public telecommunications

entities and thus to level the playing field in the telecommunications industry. An intent to grant tax exemption cannot even be discerned from the law. The records of Congress are bereft of any discussion or even mention of tax exemption. To the contrary, what the Chairman of the Committee on Transportation, Rep. Jerome V. Paras, mentioned in his sponsorship of H.B. No. 14028, which became R.A. No. 7925, were "equal access clauses" in interconnection agreements, not tax exemptions. He said:

There is also a need to promote a level playing field in the telecommunications industry. New entities must be granted protection against dominant carriers through the encouragement of equitable access charges and equal access clauses in interconnection agreements and the strict policing of predatory pricing by dominant carriers. Equal access should be granted to all operators connecting into the interexchange network. There should be no discrimination against any carrier in terms of priorities and/or quality of service. 8

Nor does the term "exemption" in § 23 of R.A. No. 7925 mean tax exemption. The term refers to exemption from certain regulations and requirements imposed by the National Telecommunications Commission (NTC). For instance, R.A. No. 7925, § 17 provides: "The Commission shall exempt any specific telecommunications service from its rate or tariff regulations if the service has sufficient competition to ensure fair and reasonable rates or tariffs." Another exemption granted by the law in line with its policy of deregulation is the exemption from the requirement of securing permits from the NTC every time a telecommunications company imports equipment. 9

Second. PLDT says that the policy of the law is to promote healthy competition in the telecommunications industry.10 According to PLDT, the LGC did not repeal the "in lieu of all taxes" provision in its franchise but only excluded from it local taxes, such as the local franchise tax. However, some franchises, like those of Globe and Smart, which contain "in lieu of all taxes" provisions were

subsequently granted by Congress, with the result that the holders of franchises granted prior to January 1, 1992, when the LGC took effect, had to pay local franchise tax in view of the withdrawal of their local tax exemption. It is argued that it is this disparate situation which R.A. No. 7925, § 23 seeks to rectify.

One can speak of healthy competition only between equals. For this reason, the law seeks to break up monopoly in the telecommunications industry by gradually dismantling the barriers to entry and granting to new telecommunications entities protection against dominant carriers through equitable access charges and equal access clauses in interconnection agreements and through the strict policing of predatory pricing by dominant carriers.11 Interconnection among carriers is made mandatory to prevent a dominant carrier from delaying the establishment of connection with a new entrant and to deter the former from imposing excessive access charges. 12

That is also the reason there are franchises13 granted by Congress after the effectivity of R.A. No. 7925 which do not contain the "in lieu of all taxes" clause, just as there are franchises, also granted after March 16, 1995, which contain such exemption from other taxes. 14 If, by virtue of § 23, the tax exemption granted under existing franchises or thereafter granted is deemed applicable to previously granted franchises (i.e., franchises granted before the effectivity of R.A. No. 7925 on March 16, 1995), then those franchises granted after March 16, 1995, which do not contain the "in lieu of all taxes" clause, are not entitled to tax exemption. The "in lieu of all taxes" provision in the franchises of Globe and Smart, which are relatively new entrants in the telecommunications industry, cannot thus be deemed applicable to PLDT, which had virtual monopoly in the telephone service in the country for a long time,15 without defeating the very policy of leveling the playing field of which PLDT speaks.

Third. Petitioner argues that the rule of strict construction of tax exemptions does not apply to this case because the "in lieu of all taxes" provision in its franchise is more a tax exclusion than a tax exemption. Rather, the applicable rule should be that tax laws are to be construed most strongly against the government and in favor of the taxpayer.

This is contrary to the uniform course of decisions 16 of this Court which consider "in lieu of all taxes" provisions as granting tax exemptions. As such, it is a privilege to which the rule that tax exemptions must be interpreted strictly against the taxpayer and in favor of the taxing authority applies. Along with the police power and eminent domain, taxation is one of the three necessary attributes of sovereignty. Consequently, statutes in derogation of sovereignty, such as those containing exemption from taxation, should be strictly construed in favor of the state. A state cannot be stripped of this most essential power by doubtful words and of this highest attribute of sovereignty by ambiguous language.17

Indeed, both in their nature and in their effect there is no difference between tax exemption and tax exclusion. Exemption is an immunity or privilege; it is freedom from a charge or burden to which others are subjected. 18 Exclusion, on the other hand, is the removal of otherwise taxable items from the reach of taxation, e.g., exclusions from gross income and allowable deductions. 19 Exclusion is thus also an immunity or privilege which frees a taxpayer from a charge to which others are subjected. Consequently, the rule that tax exemption should be applied in strictissimi juris against the taxpayer and liberally in favor of the government applies equally to tax exclusions. To construe otherwise the "in lieu of all taxes" provision invoked is to be inconsistent with the theory that R.A. No. 7925, § 23 grants tax exemption because of a similar grant to Globe and Smart.

Petitioner cites Cagayan Electric Power & Light Co., Inc. v. Commissioner of Internal Revenue20 in support of its argument that a "tax exemption" is restored by a subsequent law re-enacting the "tax exemption." It contends that by virtue of R.A. No. 7925, its tax exemption or exclusion was restored by the grant of tax exemptions to Globe and Smart. Cagayan Electric Power & Light Co., Inc., however, is not in point. For there, the re-enactment of the exemption was made in an amendment to the charter of Cagayan Electric Power and Light Co.

Indeed, petitioner‘s justification for its claim of tax exemption rests on a strained interpretation of R.A. No. 7925, § 23. For petitioner‘s claim for exemption is not based on an amendment to its charter but on a circuitous reasoning involving inquiry into the grant of tax exemption to other telecommunications companies and the lack of such grant to others,21 when Congress could more clearly and directly have granted tax exemption to all franchise holders or amend the charter of PLDT to again exempt it from tax if this had been its purpose.

The fact is that after petitioner‘s tax exemption by R.A. No. 7082 had been withdrawn by the LGC,22 no amendment to re-enact its previous tax exemption has been made by Congress. Considering that the taxing power of local government units under R.A. No. 7160 is clear and is ordained by the Constitution, petitioner has the heavy burden of justifying its claim by a clear grant of exemption.23

Tax exemptions should be granted only by clear and unequivocal provision of law on the basis of language too plain to be mistaken. 24 They cannot be extended by mere implication or inference. Thus, it was held in Home Insurance & Trust Co. v. Tennessee25 that a law giving a corporation all the "powers, rights reservations, restrictions, and liabilities" of another company does not give an exemption from taxation which the latter may possess. In

Rochester R. Co. v. Rochester,26 the U.S. Supreme Court, after reviewing cases involving the effect of the transfer to one company of the powers and privileges of another in conferring a tax exemption possessed by the latter, held that a statute authorizing or directing the grant or transfer of the "privileges" of a corporation which enjoys immunity from taxation or regulation should not be interpreted as including that immunity. Thus:

We think it is now the rule, notwithstanding earlier decisions and dicta to the contrary, that a statute authorizing or directing the grant or transfer of the "privileges" of a corporation which enjoys immunity from taxation or regulation should not be interpreted as including that immunity. We, therefore, conclude that the words "the estate, property, rights, privileges, and franchises" did not embrace within their meaning the immunity from the burden of paving enjoyed by the Brighton Railroad Company. Nor is there anything in this, or any other statute, which tends to show that the legislature used the words with any larger meaning than they would have standing alone. The meaning is not enlarged, as faintly suggested, by the expression in the statute that they are to be held by the successor "fully and entirely, and without change and diminution," — words of unnecessary emphasis, without which all included in "estate, property, rights, privileges, and franchises" would pass, and with which nothing more could pass. On the contrary, it appears, as clearly as it did in the Phoenix Fire Insurance Company Case, that the legislature intended to use the words "rights, franchises, and privileges" in the restricted sense. . . .27

Fourth. It is next contended that, in any event, a special law prevails over a general law and that the franchise of petitioner giving it tax exemption, being a special law, should prevail over the LGC, giving local governments taxing power, as the latter is a general law. Petitioner further argues that as between two laws on the same subject matter which are irreconcilably inconsistent,

that which is passed later prevails as it is the latest expression of legislative will.

This proposition flies in the face of settled jurisprudence. In City Government of San Pablo, Laguna v. Reyes,28 this Court held that the phrase "in lieu of all taxes" found in special franchises should give way to the peremptory language of § 193 of the LGC specifically providing for the withdrawal of such exemption privileges. Thus, the rule that a special law must prevail over the provisions of a later general law does not apply as the legislative purpose to withdraw tax privileges enjoyed under existing laws or charters is apparent from the express provisions of §§ 137 and 193 of the LGC.

As to the alleged inconsistency between the LGC and R.A. No. 7925, this Court has already explained in the decision under reconsideration that no inconsistency exists and that the rule that the later law is the latest expression of the legislature does not apply. The matter need not be further discussed.

In any case, it is contended, the ruling of the Bureau of Local Government Finance (BLGF) that petitioner‘s exemption from local taxes has been restored is a contemporaneous construction of § 23 and, as such, it is entitled to great weight.

The ruling of the BLGF has been considered in this case. But unlike the Court of Tax Appeals, which is a special court created for the purpose of reviewing tax cases, the BLGF was created merely to provide consultative services and technical assistance to local governments and the general public on local taxation and other related matters.29 Thus, the rule that the "Court will not set aside conclusions rendered by the CTA, which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject, unless there has

been an abuse or improvident exercise of authority" 30 cannot apply in the case of BLGF.

WHEREFORE, the motion for reconsideration is DENIED and this denial is final.

SO ORDERED.

Footnotes

1 Resolution, dated July 9, 2002.

2

R.A. No. 7229, effective March 19, 1992.

3

R.A. No. 7294, effective March 27, 1992.

4

Davao Gulf Lumber Corp. v. Commissioner of Internal Revenue, 293 SCRA 76, 89 (1998).

5

R.A. No. 7961, §§ 7 & 9 (April 20, 1995).

6

R.A. No. 8065, §§ 9 & 17 (June 19, 1995)

7

R.A. No. 8095, §§ 10 & 18 (July 6, 1995)

8

3 Records of Plenary Proceedings, House of Representatives 552 (Dec. 5, 1994). (emphasis added)

9

3 Record of the Senate 827 (January 17, 1995); 4 Record of the Senate 52 (January 24, 1995); See R.A. No. 7925, § 16:

Expansion and financing of network and services, utilizing equipment compatible with or homologous to existing or previously approved plant and facilities, in order to service additional demand in the same areas where the previously approved network and services have been installed, shall not require any approval by the Commission.

The upgrading of existing plant and network facilities including the financing thereof, for the purpose of retiring or replacing obsolete or outmoded equipment with state of the art equipment and technology in order to improve the quality or grade of service being rendered to the public within the same areas covered by the existing plant and facilities previously approved, shall likewise not require the approval of the Commission.

10

Motion for Reconsideration, pp. 5-6, 16-17.

11

3 Record of the Senate 810 (Jan. 16, 1995); 3 Records of Plenary Proceedings, House of Representatives 552 (Dec. 5, 1994).

12

4 Record of the Senate 872 (April 20, 1994); id., p. 557.

13

E.g., R.A. No. 8198 (Unicorn Communications Corporation; July 11, 1996); R.A. No. 8675 (Mati Telephone Corporation; June 25,

1998); R.A. No. 8676 (Western Misamis Oriental Telephone Cooperative, Inc.; June 25, 1998); R.A. No. 8677 (Radio Communications of the Philippines, Inc.; June 25, 1998); R.A. No. 8678 (Sear Telecommunications Inc.; June 25, 1998); R.A. No. 8690 (Santos Telephone Corporation, Inc.; July 2, 1998); R.A. No. 8955 (Polaris Telecommunications, Inc.; Sept. 2, 2000); R.A. No. 8956 (Odiongan Telephone Corporation; Sept. 2, 2000); R.A. No. 8959 (Palawan Telephone Company, Inc.; Sept. 7, 2000); R.A. No. 8961 (L.M. United Telephone Company, Inc.; Sept. 7, 2000); R.A. No. 8962 (Iriga Telephone Company, Inc.; Sept. 7, 2000); R.A. No. 8992 (Primeworld Digital Systems, Inc.; Jan. 5, 2001); R.A. No. 9002 (Click Communications, Inc.; Jan. 21, 2001); R.A. No. 9101 (Tupi Telephone Cooperative, Inc.; April 9, 2001); R.A. No. 9116 (Solid Broadband Corporation; April 15, 2001); R.A. No. 9117 (Battlex, Inc./Bataan Telephone Exchange; April 15, 2001); R.A. No. 9124 (Zenith Telecommunications Company, Inc.; April 20, 2001); R.A. No. 9130 (Connectivity Unlimited Resource Enterprise, Inc.; April 24, 2001); and R.A. No. 9133 (Pampanga Telephone Company, Inc.; April 24, 2001).

14

E.g., R.A. No. 7961 (Cruz Telephone Company, Inc.; March 29, 1995); R.A. No. 8004 (Millenia Telecommunications Corporation;

April 27, 1995); R.A. No. 8065 (Isla Cellular Communication, Inc.; June 19, 1995); R.A. No. 8095 (Islatel Corporation; July 6, 1995); R.A. No. 8153 (Rex Electronics Communications System, Inc.; September 23, 1995).

15

Compare: "Free competition in the industry may also provide the answer to a much-desired improvement in the quality and

delivery of this type of public utility, to improved technology, fast and handy mobile service, and reduced user dissatisfaction. After all, neither PLDT nor any other public utility has a constitutional right to a monopoly position in view of the Constitutional proscription that no franchise certificate or authorization shall be exclusive in character or shall last longer that fifty (50) years (ibid., Section 11; Article XIV, Section 5, 1973 Constitution; Article XIV, Section 8, 1935 Constitution). Additionally, the State is empowered to decide whether public interest demands that monopolies be regulated or prohibited (1987 Constitution, Article XII, Section 19)." (PLDT v. National Telecommunications Commission, 190 SCRA 717, 737 (1990)).

16

Province of Tarlac v. Alcantara, 216 SCRA 790 (1992), where real property taxes were held not included in the exemption granted

to all electric franchise holders by the "in lieu of all taxes" provision of P.D. No. 551; Manila Gas Corp. v. Collector of Internal Revenue, 104 Phil. 727 (1958), where the Court ruled that the rights and privileges which the "in lieu of all taxes" provision exempts from taxation are those enjoyed by the grantee of the franchise and not by the public in general; Philippine Telephone and Telegraph Company v. Collector of Internal Revenue, 58 Phil. 639 (1933), where the exemption was not extended to the income tax on the dividends paid and delivered to stockholders as they ceased to be corporate property and have already become property of the stockholders.

17

Memphis Gas-Light Co. v. Taxing District, 109 U.S. 398, 27 L.Ed. 976 (1883).

18

Greenfield v. Meer, 77 Phil. 394 (1946).

19

National Internal Revenue Code of 1997, §§ 32(b) and 34.

20

138 SCRA 629 (1985).

21

All along, we simply assume that Globe and Smart enjoy exemption from local taxation.

22

See Manila Electric Company v. Province of Laguna, 306 SCRA 750, 760 (1999), citing City Government of San Pablo v. Reyes, 305

SCRA 353, 362 (1999).

23

Light Rail Transit Authority v. Central Board of Assessment Appeals, 342 SCRA 692 (2000); Commissioner of Customs v. Court of

Tax Appeals, 328 SCRA 822 (2000); Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue, 293 SCRA 76 (1998).

24

Afisco Ins. Corp. v. Court of Appeals, 302 SCRA 1 (1999).

25

161 U.S. 198, 40 L.Ed. 669 (1896).

26

205 U.S. 236, 51 L.Ed. 784 (1907).

27

At 252-253, 51 L.Ed., 791.

28

305 SCRA 353 (1999).

29

Administrative Code, Book IV, Title II, Chapter 4, §33(4).

30

Commissioner of Internal Revenue v. Court of Appeals, 271 SCRA 605, 619 (1997).

SECOND DIVISION

G.R. No. 143867

August 22, 2001

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, INC., petitioner, vs. CITY OF DAVAO and ADELAIDA B. BARCELONA, in her capacity as the City Treasurer of Davao, respondents.

MENDOZA, J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure of the resolution, 1 dated June 23, 2000, of the Regional Trial Court, Branch 13, Davao City, affirming the tax assessment of petitioner and the denial of its claim for tax refund by the City Treasurer of Davao.

The facts are as follows:

On January 1999, petitioner Philippine Long Distance Telephone Co., Inc. (PLDT) applied for a Mayor's Permit to operate its Davao Metro Exchange. Respondent City of Davao withheld action on the application pending payment by petitioner of the local franchise tax in the amount of P3,681,985.72 for the first to the fourth quarter of 1999. 2 In a letter dated May 31, 1999, 3 petitioner protested the assessment of the local franchise tax and requested a refund of the franchise tax paid by it for the year 1997 and the first to the third quarters of 1998. Petitioner contended that it was exempt from the payment of franchise tax based on an opinion of the Bureau of Local Government Finance (BLGF), dated June 2, 1998, which reads as follows:

PLDT:

Section 12 of RA 7082 provides as follows:

"SECTION 12. The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate, buildings, and personal property, exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the telephone or other telecommunications businesses transacted under this franchise by the grantee, its successors or assigns, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof . . ."

It appears that RA 7082 further amending Act No. 3436 which granted to PLDT a franchise to install, operate and maintain a telephone system throughout the Philippine Islands was approved on August 3, 1991. Section 12 of said franchise, likewise, contains the "in lieu of all taxes" proviso.

In this connection, Section 23 of RA 7925, quoted hereunder, which was approved on March 1, 1995, provides for the equality of treatment in the telecommunications industry:

"SECTION 23. Equality of Treatment in the Telecommunications Industry. — Any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto become part of previously granted telecommunications franchise and shall be accorded immediately and unconditionally to the grantees of such franchises: Provided, however, That the foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning territory covered by the franchise, the life span of the franchise, or the type of service authorized by the franchise." (Italics supplied.)

On the basis of the aforequoted Section 23 of RA 7925, PLDT as a telecommunications franchise holder becomes automatically covered by the tax exemption provisions of RA 7925, which took effect on March 16, 1995.

Accordingly, PLDT shall be exempt from the payment of franchise and business taxes imposable by LGUs under Sections 137 and 143 (sic), respectively, of the LGC, upon the effectivity of RA 7925 on March 16, 1995. However, PLDT shall be liable to pay the franchise and business taxes on its gross receipts realized from January 1, 1992 up to March 15, 1995, during which period PLDT was not enjoying the "most favored clause" proviso of RA 7025 (sic).4

In a letter dated September 27, 1999, respondent Adelaida B. Barcelona, City Treasurer of Davao, denied the protest and claim for tax refund of petitioner, 5 citing the legal opinion of the City Legal Officer of Davao and Art. 10, §1 of Ordinance No. 230, Series of 1991, as amended by Ordinance No. 519, Series of 1992, which provides:

Notwithstanding any exemption granted by any law or other special law, there is hereby imposed a tax on businesses enjoying a franchise, at a rate of Seventy-five percent (75%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the income or receipts realized within the territorial jurisdiction of Davao City.6

Petitioner received respondent City Treasurer's order of denial on October 1, 1999. On November 3, 1999, it filed a petition in the Regional Trial Court of Davao seeking a reversal of respondent City Treasurer's denial of petitioner's protest and the refund of the franchise tax paid by it for the year 1998 in the amount of P2,580,829.23. The petition was filed pursuant to §§195 and 196 of the Local Government Code (R.A. No. 7160). No claim for refund of franchise taxes paid in 1997 was made as the same had already prescribed under §196

of the LGC, which provides that claims for the refund of taxes paid under it must be made within two (2) years from the date of payment of such taxes. 7

The trial court denied petitioner's appeal and affirmed the City Treasurer's decision. It ruled that the LGC withdrew all tax exemptions previously enjoyed by all persons and authorized local government units to impose a tax on businesses enjoying a franchise notwithstanding the grant of tax exemption to them. The trial court likewise denied petitioner's claim for exemption under R.A. No. 7925 for the following reasons: (1) it is clear from the wording of §193 of the Local Government Code that Congress did not intend to exempt any franchise holder from the payment of local franchise and business taxes; (2) the opinion of the Executive Director of the Bureau of Local Government Finance to the contrary is not binding on respondents; and (3) petitioner failed to present any proof that Globe and Smart were enjoying local franchise and business tax exemptions.

Hence, this petition for review based on the following grounds:

I. THE LOWER COURT ERRED IN APPLYING SECTION 137 OF THE LOCAL GOVERNMENT CODE, WHICH ALLOWS A CITY TO IMPOSE A FRANCHISE TAX, AND SECTION 193 THEREOF, WHICH PROVIDES FOR WITHDRAWAL OF TAX EXEMPTION PRIVILEGES.

II. THE LOWER COURT ERRED IN NOT HOLDING THAT UNDER PETITIONER'S FRANCHISE, AS IMPLICITLY AMENDED AND EXPANDED BY SECTION 23 OF REPUBLIC ACT NO. 7925 (PUBLIC TELECOMMUNICATIONS POLICY ACT), TAKING INTO ACCOUNT THE FRANCHISES OF GLOBE TELECOM, INC. AND SMART COMMUNICATIONS, INC., WHICH WERE ENACTED SUBSEQUENT TO THE LOCAL GOVERNMENT CODE, NO FRANCHISE AND BUSINESS TAXES MAY BE IMPOSED ON PETITIONER BY RESPONDENT CITY.

III. THE LOWER COURT ERRED IN NOT GIVING WEIGHT TO THE RULING OF THE BUREAU OF LOCAL GOVERNMENT FINANCE THAT PETITIONER IS EXEMPT FROM THE PAYMENT OF FRANCHISE AND BUSINESS TAXES, AMONG OTHERS, IMPOSABLE BY LOCAL GOVERNMENT UNITS UNDER THE LOCAL GOVERNMENT CODE.

First. The LGC, which took effect on January 1, 1992, provides:

SECTION 137. Franchise Tax. — Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction.

In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the business started to operate, the tax shall be based on the gross receipts for the preceding calendar year, or any fraction thereof, as provided herein.8

SECTION 193. Withdrawal of Tax Exemption Privileges. — Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including governmentowned or -controlled corporations, except local water districts, cooperatives duly registered under R.A. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code.

The trial court held that, under these provisions, all exemptions granted to all persons, whether natural and juridical, including those which in the future might be granted, are withdrawn unless the law granting the exemption expressly states that the exemption also applies to local taxes. We disagree.

Sec. 137 does not state that it covers future exemptions. In Philippine Airlines, Inc. v. Edu,9 where a provision of the Tax Code enacted on June 27, 1968 (R.A. 5431) withdrew the exemption enjoyed by PAL, it was held that a subsequent amendment of PAL's franchise, exempting it from all other taxes except that imposed by its franchise, again entitled PAL to exemption from the date of the enactment of such amendment. The Tax Code provision withdrawing the tax exemption was not construed as prohibiting future grants of exemptions from all taxes.

Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations. 10

The question, therefore, is whether, after the withdrawal of its exemption by virtue of §137 of the LGC, petitioner has again become entitled to exemption from local franchise tax. Petitioner answers in the affirmative and points to §23 of R.A. No. 7925, in relation to the franchises of Globe Telecom (Globe) and Smart Communications, Inc. (Smart), which allegedly grant the latter exemption from local franchise taxes.

To begin with, tax exemptions are highly disfavored. The reason for this was explained by this Court in Asiatic Petroleum Co. v. Llanes,11 in which it was held:

. . . Exemptions from taxation are highly disfavored, so much so that they may almost be said to be odious to the law. He who claims an exemption must be able to point to some positive provision of law creating the right. . . As was said by the Supreme Court of Tennessee in Memphis vs. U. & P. Bank (91

Tenn., 546, 550), "The right of taxation is inherent in the State. It is a prerogative essential to the perpetuity of the government; and he who claims an exemption from the common burden must justify his claim by the clearest grant of organic or statute law." Other utterances equally or more emphatic come readily to hand from the highest authority. In Ohio Life Ins. and Trust Co. vs. Debolt (16 Howard, 416), it was said by Chief Justice Taney, that the right of taxation will not be held to have been surrendered, "unless the intention to surrender is manifested by words too plain to be mistaken." In the case of the Delaware Railroad Tax (18 Wallace, 206, 226), the Supreme Court of the United States said that the surrender, when claimed, must be shown by clear, unambiguous language, which will admit of no reasonable construction consistent with the reservation of the power. If a doubt arises as to the intent of the legislature, that doubt must be solved in favor of the State. In Erie Railway Company vs. Commonwealth of Pennsylvania (21 Wallace, 492, 499), Mr. Justice Hunt, speaking of exemptions, observed that a State cannot strip itself of the most essential power of taxation by doubtful words. "It cannot, by ambiguous language, be deprived of this highest attribute of sovereignty." In Tennessee vs. Whitworth (117 U.S., 129, 136), it was said: "In all cases of this kind the question is as to the intent of the legislature, the presumption always being against any surrender of the taxing power." In Farrington vs. Tennessee and County of Shelby (95 U.S., 679, 686), Mr. Justice Swayne said: ". . . When exemption is claimed, it must be shown indubitably to exist. At the outset, every presumption is against it. A well-founded doubt is fatal to the claim. It is only when the terms of the concession are too explicit to admit fairly of any other construction that the proposition can be supported."

The tax exemption must be expressed in the statute in clear language that leaves no doubt of the intention of the legislature to grant such exemption. And, even if it is granted, the exemption must be interpreted in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. 12

In the present case, petitioner justifies its claim of tax exemption by strained inferences. First, it cites R.A. No. 7925, otherwise known as the Public Telecommunications Policy Act of the Philippines, §23 of which reads:

SECTION 23. Equality of Treatment in the Telecommunications Industry. — Any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto become part of previously granted telecommunications franchises and shall be accorded immediately and unconditionally to the grantees of such franchises: Provided, however, That the foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning territory covered by the franchise, the life span of the franchise, or the type of service authorized by the franchise.

Petitioner then claims that Smart and Globe enjoy exemption from the payment of the franchise tax by virtue of their legislative franchises per opinion of the Bureau of Local Government Finance of the Department of Finance. Finally, it argues that because Smart and Globe are exempt from the franchise tax, it follows that it must likewise be exempt from the tax being collected by the City of Davao because the grant of tax exemption to Smart and Globe ipso facto extended the same exemption to it.

The acceptance of petitioner's theory would result in absurd consequences. To illustrate: In its franchise, Globe is required to pay a franchise tax of only one and one-half percentum (1½%) of all gross receipts from its transactions while Smart is required to pay a tax of three percent (3%) on all gross receipts from business transacted. Petitioner's theory would require that, to level the playing field, any "advantage, favor, privilege, exemption, or immunity" granted to Globe must be extended to all telecommunications companies, including Smart. If, later, Congress again grants a franchise to another telecommunications company imposing, say, one percent (1%) franchise tax,

then all other telecommunications franchises will have to be adjusted to "level the playing field" so to speak. This could not have been the intent of Congress in enacting §23 of Rep. Act 7925. Petitioner's theory will leave the Government with the burden of having to keep track of all granted telecommunications franchises, lest some companies be treated unequally. It is different if Congress enacts a law specifically granting uniform advantages, favor, privilege, exemption, or immunity to all telecommunications entities.

The fact is that the term "exemption" in §23 is too general. A cardinal rule in statutory construction is that legislative intent must be ascertained from a consideration of the statute as a whole and not merely of a particular provision. For, taken in the abstract, a word or phrase might easily convey a meaning which is different from the one actually intended. A general provision may actually have a limited application if read together with other provisions.13 Hence, a consideration of the law itself in its entirety and the proceedings of both Houses of Congress is in order. 14

Art. I of Rep. Act No. 7925 contains the general provisions, stating that the Act shall be known as the Public Telecommunications Policy Act of the Philippines, and a definition of terms.15 Art. II provides for its policies and objectives, which is to foster the improvement and expansion of telecommunications services in the country through: (1) the construction of telecommunications infrastructure and interconnection facilities, having in mind the efficient use of the radio frequency spectrum and extension of basic services to areas not yet served; (2) fair, just, and reasonable rates and tariff charges; (3) stable, transparent, and fair administrative processes; (4) reliance on private enterprise for direct provision of telecommunications services; (5) dispersal of ownership of telecommunications entities in compliance with the constitutional mandate to democratize the ownership of public utilities; (6) encouragement of the establishment of interconnection with other countries to provide access to international communications highways and development of

a competitive export-oriented domestic telecommunications manufacturing industry; and (7) development of human resources skills and capabilities to sustain the growth and development of telecommunications. 16

Art. III provides for its administration. The operational and administrative functions are delegated to the National Telecommunications Commission (NTC), while policy-making, research, and negotiations in international telecommunications matters are left with the Department of Transportation and Communications.17

Art. IV classifies the categories of telecommunications entities as: Local Exchange Operator, Inter-Exchange Carrier, International Carrier, ValueAdded Service Provider, Mobile Radio Services, and Radio Paging Services. 18 Art. V provides for the use of other services and facilities, such as customer premises equipment, which may be used within the premises of telecommunications subscribers subject only to the requirement that it is type-approved by the NTC, and radio frequency spectrum, the assignment of which shall be subject to periodic review. 19

Art. VI, entitled Franchise, Rates and Revenue Determination, provides for the requirement to obtain a franchise from Congress and a Certificate of Public Convenience and Necessity from the NTC before a telecommunications entity can begin its operations. It also provides for the NTC's residual power to regulate the rates or tariffs when ruinous competition results or when a monopoly or a cartel or combination in restraint of free competition exists and the rates or tariffs are distorted or unable to function freely and the public is adversely affected. There is also a provision relating to revenue sharing arrangements between inter-connecting carriers.20

Art. VII provides for the rights of telecommunications users. 21

Art. VIII, entitled Telecommunications Development, where §23 is found, provides for public ownership of telecommunications entities, privatization of existing facilities, and the equality of treatment provision. 22

Art. IX contains the Final Provisions. 23

R.A. No. 7925 is thus a legislative enactment designed to set the national policy on telecommunications and provide the structures to implement it to keep up with the technological advances in the industry and the needs of the public. The thrust of the law is to promote gradually the deregulation of the entry, pricing, and operations of all public telecommunications entities and thus promote a level playing field in the telecommunications industry.24 There is nothing in the language of §23 nor in the proceedings of both the House of Representatives and the Senate in enacting R.A. No. 7925 which shows that it contemplates the grant of tax exemptions to all telecommunications entities, including those whose exemptions had been withdrawn by the LGC.

What this Court said in Asiatic Petroleum Co. v. Llanes25 applies mutatis mutandis to this case: "When exemption is claimed, it must be shown indubitably to exist. At the outset, every presumption is against it. A wellfounded doubt is fatal to the claim. It is only when the terms of the concession are too explicit to admit fairly of any other construction that the proposition can be supported." In this case, the word "exemption" in §23 of R.A. No. 7925 could contemplate exemption from certain regulatory or reporting requirements, bearing in mind the policy of the law. It is noteworthy that, in holding Smart and Globe exempt from local taxes, the BLGF did not base its opinion on §23 but on the fact that the franchises granted to them after the effectivity of the LGC exempted them from the payment of local franchise and business taxes.

Second. In the case of petitioner, the BLGF opined that §23 of R.A. No. 7925 amended the franchise of petitioner and in effect restored its exemptions from local taxes. Petitioner contends that courts should not set aside conclusions reached by the BLGF because its function is precisely the study of local tax problems and it has necessarily developed an expertise on the subject.

To be sure, the BLGF is not an administrative agency whose findings on questions of fact are given weight and deference in the courts. The authorities cited by petitioner pertain to the Court of Tax Appeals, 26 a highly specialized court which performs judicial functions as it was created for the review of tax cases.27 In contrast, the BLGF was created merely to provide consultative services and technical assistance to local governments and the general public on local taxation, real property assessment, and other related matters, among others.28 The question raised by petitioner is a legal question, to wit, the interpretation of §23 of R.A. No. 7925. There is, therefore, no basis for claiming expertise for the BLGF that administrative agencies are said to possess in their respective fields.

Petitioner likewise argues that the BLGF enjoys the presumption of regularity in the performance of its duty. It does enjoy this presumption, but this has nothing to do with the question in this case. This case does not concern the regularity of performance of the BLGF in the exercise of its duties, but the correctness of its interpretation of a provision of law.

In sum, it does not appear that, in approving §23 of R.A. No. 7925, Congress intended it to operate as a blanket tax exemption to all telecommunications entities. Applying the rule of strict construction of laws granting tax exemptions and the rule that doubts should be resolved in favor of municipal corporations in interpreting statutory provisions on municipal taxing powers, we hold that §23 of R.A. No. 7925 cannot be considered as having amended petitioner's franchise so as to entitle it to exemption from the imposition of

local franchise taxes. Consequently, we hold that petitioner is liable to pay local franchise taxes in the amount of P3,681,985.72 for the period covering the first to the fourth quarter of 1999 and that it is not entitled to a refund of taxes paid by it for the period covering the first to the third quarter of 1998.

WHEREFORE, the petition for review on certiorari is DENIED and the decision of the Regional Trial Court, Branch 13, Davao City is AFFIRMED.

SO ORDERED.

Footnotes

1

Per Judge Isaac G. Robillo, Jr.

2

Respondent's Comment, Annex A; Rollo, pp. 102, 116.

3

Id., Annex B; id., pp. 118-119.

4

Rollo, pp. 57-58, 118; 2nd Indorsement, pp. 1-2.

5

Respondents' Comment, Annex C; Rollo, p. 120.

6

Id.

7

Rollo, p. 73; Petition, p. 3.

8

This applies to cities by virtue of the following provision:

SEC. 151. Scope of Taxing Powers. — Except as otherwise provided in this Code, the city may levy the taxes, fees, and charges which the province or municipality may impose: Provided, however, That the taxes, fees, and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of this Code.

The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes.

9

164 SCRA 320 (1988).

10

Manila Electric Company v. Province of Laguna, 306 SCRA 750 (1999); City Government of San Pablo, Laguna v. Reyes, 305

SCRA 353 (1999).

11

49 Phil. 466, 471-472 (1926).

12

Commissioner of Internal Revenue v. Court of Appeals, 298 SCRA 83 (1998); Commissioner of Customs v. Philippine Acetylene

Company, 39 SCRA 70 (1971); Commissioner of Internal Revenue v. Guerrero, 21 SCRA 180 (1967).

13

People v. Purisima, 86 SCRA 542 (1978).

14

National Police Commission v. De Guzman, Jr., 229 SCRA 801 (1994).

15

REP. ACT NO. 7925, §§1-3.

16

Id., §4.

17

Id., §§5-6.

18

Id., §§7-13.

19

Id., §§14-15.

20

Id., §§16-19

21

Id., §20.

22

Id., §§21-23

23

Id., §§24-27.

24

RECORD OF THE SENATE, NO. 73, April 20, 1994, p. 871; 3 RECORD OF THE HOUSE OF REPRESENTATIVES, December 5,

1994, p. 552.

25

49 Phil. 466, 472 (1926).

26

Commissioner of Internal Revenue v. Court of Appeals, 271 SCRA 605 (19973 citing Commissioner of Internal Revenue v.

Wander Philippines, Inc., 160 SCRA 573 (1988).

27

Philippine Refining Company v. Court of Appeals, 256 SCRA 667 (1996); See REP. ACT NO. 1125.

28

ADMINISTRATIVE CODE, Title 2, Chapter 4, § 33(4).

EN BANC

G.R. No. 117359 July 23, 1998

DAVAO GULF LUMBER CORPORATION, petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS, respondents.

PANGANIBAN, J.:

Because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government. Otherwise stated, any exemption from the payment of a tax must be clearly stated in the language of the law; it cannot be merely implied therefrom.

Statement of the Case

This principium is applied by the Court in resolving this petition for review under Rule 45 of the Rules of Court, assailing the Decision Court of Appeals

2

1

of Respondent

in CA-GR SP No. 34581 dated September 26, 1994, which

affirmed the June 21, 1994 Decision

3

of the Court of Tax Appeals

4

in CTA

Case No. 3574. The dispositive portion of the CTA Decision affirmed by Respondent Court reads:

WHEREFORE, judgment is hereby rendered ordering the respondent to refund to the petitioner the amount of P2,923.15 representing the partial refund of specific taxes paid on manufactured oils and fuels.

5

The Antecedent Facts

The facts are undisputed.

6

Petitioner is a licensed forest concessionaire

possessing a Timber License Agreement granted by the Ministry of Natural Resources (now Department of Environment and Natural Resources). From July 1, 1980 to January 31, 1982 petitioner purchased, from various oil companies, refined and manufactured mineral oils as well as motor and diesel fuels, which it used exclusively for the exploitation and operation of its forest concession. Said oil companies paid the specific taxes imposed, under Sections 153 and 156

7

of the 1977 National Internal Revenue Code (NIRC), on

the sale of said products. Being included in the purchase price of the oil products, the specific taxes paid by the oil companies were eventually passed on to the user, the petitioner in this case.

On December 13, 1982, petitioner filed before Respondent Commissioner of Internal Revenue (CIR) a claim for refund in the amount of P120,825.11, representing 25% of the specific taxes actually paid on the above-mentioned fuels and oils that were used by petitioner in its operations as forest concessionaire. The claim was based on Insular Lumber Co. vs. Court of Tax Appeals

8

and Section 5 of RA 1435 which reads:

Sec. 5. The proceeds of the additional tax on manufactured oils shall accrue to the road and bridge funds of the political subdivision for whose benefit the tax is collected: Provided, however, That whenever any oils mentioned above are used by miners or forest concessionaires in their operations, twenty-five per centum of the specific tax paid thereon shall be refunded by the Collector of Internal Revenue upon submission of proof of actual use of oils and under

similar conditions enumerated in subparagraphs one and two of section one hereof, amending section one hundred forty-two of the Internal Revenue Code: Provided, further, That no new road shall be constructed unless the routes or location thereof shall have been approved by the Commissioner of Public Highways after a determination that such road can be made part of an integral and articulated route in the Philippine Highway System, as required in section twenty-six of the Philippine Highway Act of 1953.

It is an unquestioned fact that petitioner complied with the procedure for refund, including the submission of proof of the actual use of the aforementioned oils in its forest concession as required by the above-quoted law. Petitioner, in support of its claim for refund, submitted to the CIR the affidavits of its general manager, the president of the Philippine Wood Products Association, and three disinterested persons, all attesting that the said manufactured diesel and fuel oils were actually used in the exploitation and operation of its forest concession.

On January 20, 1983, petitioner filed at the CTA a petition for review docketed as CTA Case No. 3574. On June 21, 1994, the CTA rendered its decision finding petitioner entitled to a partial refund of specific taxes the latter had paid in the reduced amount of P2,923.15. The CTA ruled that the claim on purchases of lubricating oil (from July 1, 1980 to January 19, 1981) and on manufactured oils other than lubricating oils (from July 1, 1980 to January 4, 1981) had prescribed. Disallowed on the ground that they were not included in the original claim filed before the CIR were the claims for refund on purchases of manufactured oils from January 1, 1980 to June 30, 1980 and from February 1, 1982 to June 30, 1982. In regard to the other purchases, the CTA granted the claim, but it computed the refund based on rates deemed paid under RA 1435, and not on the higher rates actualhy paid by petitioner under the NIRC.

Insisting that the basis for computing the refund should be the increased rates prescribed by Sections 153 and 156 of the NIRC, petitioner elevated the matter to the Court of Appeals. As noted earlier, the Court of Appeals affirmed the CTA Decision. Hence, this petition for review.

9

Public Respondent's Ruling

In its petition before the Court of Appeals, petitioner raised the following arguments:

I. The respondent Court of Tax Appeals failed to apply the Supreme Court's Decision in Insular Lumber Co. v. Court of Tax Appeals which granted the claim for partial refund of specific taxes paid by the claimant, without qualification or limitation.

II. The respondent Court of Tax Appeals ignored the increase in rates imposed by succeeding amendatory laws,under which the petitioner paid the specific taxes on manufactured and diesel fuels.

III. In its decision, the respondent Court of Tax Appeals ruled contrary to established tenets of law when it lent itself to interpreting Section 5 of R.A. 1435, when the construction of said law is not necessary.

IV. Sections 1 and 2 of R.A. 1435 are not the operative provisions to be applied but rather, Sections 153 and 156 of the National Internal Revenue Code, as amended.

V. To rule that the basis for computation of the refunded taxes should be Sections 1 and 2 of R.A. 1435 rather than Section 153 and 156 of the National Internal Revenue Code is unfair, erroneous, arbitrary, inequitable and oppressive.

10

The Court of Appeals held that the claim for refund should indeed be computed on the basis of the amounts deemed paid under Sections 1 and 2 of RA 1435. In so ruling, it cited our pronouncement in Commissioner of Internal Revenue v. Rio Tuba Nickel Mining Corporation

11

and subsequent Resolution

dated June 15, 1992 clarifying the said Decision. Respondent Court further ruled that the claims for refund which prescribed and those which were not filed at the administrative level must be excluded.

The Issue

In its Memorandum, petitioner raises one critical issue:

Whether or not petitioner is entitled under Republic Act No. 1435 to the refund of 25% of the amount of specific taxes it actually paid on various refined and manufactured mineral oils and other oil products taxed under Sec. 153 and Sec. 156 of the 1977 (Sec. 142 and Sec. 145 of the 1939) National Internal Revenue Code.

12

In the main, the question before us pertains only to the computation of the tax refund. Petitioner argues that the refund should be based on the increased rates of specific taxes which it actually paid, as prescribed in Sections 153 and 156 of the NIRC. Public respondent, on the other hand, contends that it should be based on specific taxes deemed paid under Sections 1 and 2 of RA 1435.

The Court's Ruling

The petition is not meritorious.

Petitioner Entitled to Refund

Under Sec. 5 of RA 1435

At the outset, it must be stressed that petitioner is entitled to a partial refund under Section 5 of RA 1435, which was enacted to provide means for increasing the Highway Special Fund.

The rationale for this grant of partial refund of specific taxes paid on purchases of manufactured diesel and fuel oils rests on the character of the Highway Special Fund. The specific taxes collected on gasoline and fuel accrue to the Fund, which is to be used for the construction and maintenance of the highway system. But because the gasoline and fuel purchased by mining and lumber concessionaires are used within their own compounds and roads, and their vehicles seldom use the national highways, they do not directly benefit from the Fund and its use. Hence, the tax refund gives the mining and the logging companies a measure of relief in light of their peculiar situation.

13

When the Highway Special Fund was abolished in 1985, the reason for the refund likewise ceased to exist.

14

Since petitioner purchased the subject

manufactured diesel and fuel oils from July 1, 1980 to January 31, 1982 and submitted the required proof that these were actually used in operating its forest concession, it is entitled to claim the refund under Section 5 of RA 1435.

Tax Refund Strictly Constrtued

Against the Grantee

Petitioner submits that it is entitled to the refund of 25 percent of the specific taxes it had actually paid for the petroleum products used in its operations. In other words, it claims a refund based on the increased rates under Sections 153 and 156 of the NIRC.

15

Petitioner argues that the statutory grant of the

refund privilege, specifically the phrase "twenty-five per centum of the specific tax paid thereon shall be refunded by the Collector of Internal Revenue," is "clear and unambiguous" enough to require construction or qualification

thereof.

16

In addition, it cites our pronouncement in Insular Lumber vs. Court

of Tax Appeals:

17

. . . Sec. 5 [of RA 1435] makes reference to subparagraphs 1 and 2 of Section 1 only for the purpose of prescribing the procedure for refund. This express reference cannot be expanded in scope to include the limitation of the period of refund. If the limitation of the period of refund of specific taxes paid on oils used in aviation and agriculture is intended to cover similar taxes paid on oil used by miners and forest concessionaires, there would have been no need of dealing with oil used by miners and forest concessions separately and Section 5 would very well have been included in Section 1 of Republic Act No. 1435, notwithstanding the different rate of exemption.

Petitioner then reasons that "the express mention of Section 1 of RA 1435 in Section 5 cannot be expanded to include a limitation on the tax rates to be applied . . . [otherwise,] Section 5 should very well have been included in Section 1 . . . ."

18

The Court is nor persuaded. The relevant statutory provisions do not clearly support petitioner's claim for refund. RA 1435 provides:

Sec. 1 Section one hundred and forty-two of the National Internal Revenue Code, as amended, is further amended to read as follows:

Sec. 142. Specific tax on manufactured oils and other fuels. — On refined and manufactured mineral oils and motor fuels, there shall be collected the following taxes:

(a) Kerosene or petroleum, per liter of volume capacity, two and one-half centavos;

(b) Lubricating oils, per liter of volume capacity, seven centavos;

(c) Naptha, gasoline, and all other similar products of distillation, per liter of volume capacity, eight centavos; and

(d) On denatured alcohol to be used for motive power, per liter of volume capacity, one centavo: Provided, That if the denatured alcohol is mixed with gasoline, the specific tax on which has already been paid, only the alcohol content shall be subject to the tax herein prescribed. For the purpose of this subsection, the removal of denatured alcohol of not less than one hundred eighty degrees proof (ninety per centum absolute alcohol) shall be deemed to have been removed for motive power, unless shown to the contrary.

Whenever any of the oils mentioned above are, during the five years from June eighteen, nineteen hundred and fifty two, used in agriculture and aviation, fifty per centum of the specific tax paid thereon shall be refunded by the Collector of Internal Revenue upon the submission of the following:

(1) A sworn affidavit of the producer and two disinterested persons proving that the said oils were actually used in agriculture, or in lieu thereof.

(2) Should the producer belong to any producers' association or federation, duly registered with the Securities and Exchange Commission, the affidavit of the president of the association or federation, attesting to the fact that the oils were actually used in agriculture.

(3) In the case of aviation oils, a sworn certificate satisfactory to the Collector proving that the said oils were actually used in aviation: Provided, That no such refunds shall be granted in respect to the oils used in aviation by citizens and corporations of foreign countries which do not grant equivalent refunds or exemptions in respect to similar oils used in aviation by citizens and corporations of the Philippines.

Sec. 2 Section one hundred and forty-five of the National Internal Revenue Code, as amended, is further amended to read as follows:

Sec. 145. Specific Tax on Diesel fuel oil. — On fuel oil, commercially known as diesel fuel oil, and on all similar fuel oils, having more or less the same generating power, there shall be collected, per metric ton, one peso.

xxx xxx xxx

Sec. 5. The proceeds of the additional tax on manufactured oils shall accrue to the road and bridge funds of the political subdivision for whose benefit the tax is collected: Provided, however, That whenever any oils mentioned above are used by miners or forest concessionaires in their operations, twenty-five per centum of the specific tax paid thereon shall be refunded by the Collector of Internal Revenue upon submission of proof of actual use of oils and under similar conditions enumerated in subparagraphs one and two of section one hereof, amending section one hundred forty-two of the Internal Revenue Code: Provided, further, That no new road shall be constructed unless the route or location thereof shall have been approved by the Commissioner of Public Highways after a determination that such road can be made part of an integral and articulated route in the Philippine Highway System, as required in section twenty-six of the Philippine Highway Act of 1953.

Subsequently the 1977 NIRC, PD 1672 and EO 672 amended the first two provisions, renumbering them and prescribing higher rates. Accordingly, petitioner paid specific taxes on petroleum products purchased from July 1, 1980 to January 31, 1982 under the following statutory provisions.

From February 8, 1980 to March 20, 1981, Sections 153 and 156 provided as follows:

Sec. 153. Specific tax on manufactured oils and other fuels. — On refined and manufactured mineral oils and motor fuels, there shall be collected the following taxes which shall attach to the articles hereunder enumerated as soon as they are in existence as such:

(a) Kerosene, per liter of volume capacity, seven centavos;

(b) Lubricating oils, per liter of volume capacity, eighty centavos;

(c) Naphtha, gasoline and all other similar products of distillation, per liter of volume capacity, ninety-one centavos: Provided, That on premium and aviation gasoline, the tax shall be one peso per liter of volume capacity;

(d) On denatured alcohol to be used for motive power, per liter of volume capacity, one centavo: Provided, That unless otherwise provided for by special laws, if the denatured alcohol is mixed with gasoline, the specific tax on which has already been paid, only the alcohol content shall be subject to the tax herein prescribed. For the purposes of this subsection, the removal of denatured alcohol of not less than one hundred eighty degrees proof (ninety per centum absolute alcohol) shall be deemed to have been removed for motive power, unless shown to the contrary;

(e) Processed gas, per liter of volume capacity, three centavos;

(f) Thinners and solvents, per liter of volume capacity, fifty-seven centavos;

(g) Liquefied petroleum gas, per kilogram, fourteen centavos: Provided, That liquefied petroleum gas used for motive power shall be taxed at the equivalent rate as the specific tax on diesel fuel oil;

(h) Asphalts, per kilogram, eight centavos;

(i) Greases, waxes and petrolatum, per kilogram, fifty centavos;

(j) Aviation turbo jet fuel, per liter of volume capacity, fifty-five centavos. (As amended by Sec. 1, P.D. No. 1672.)

xxx xxx xxx

Sec. 156. Specific tax on diesel fuel oil. — On fuel oil, commercially known as diesel fuel oil, and on all similar fuel oils, having more or less the same generating power, per liter of volume capacity, seventeen and one-half centavos, which tax shall attach to this fuel oil as soon as it is in existence as such.

Then on March 21, 1981, these provisions were amended by EO 672 to read:

Sec. 153. Specific tax on manufactured oils and other fuels. — On refined and manufactured mineral oils and motor fuels, there shall be collected the following taxes which shall attach to the articles hereunder enumerated as soon as they are in existence as such:

(a) Kerosene, per liter of volume capacity, nine centavos;

(b) Lubricating oils, per liter of volume capacity, eighty centavos;

(c) Naphtha, gasoline and all other similar products of distillation, per liter of volume capacity, one peso and six centavos: Provided, That on premium and aviation gasoline, the tax shall be one peso and ten centavos and one peso, respectively, per liter of volume capacity;

(d) On denatured alcohol to be used for motive power, per liter of volume capacity, one centavo; Provided, That unless otherwise provided for by special laws, if the denatured alcohol is mixed with gasoline, the specific tax on which has already been paid, only the alcohol content shall be subject to the tax herein prescribed. For the purpose of this subsection, the removal of denatured alcohol of not less than one hundred eighty degrees proof (ninety

per centum absolute alcohol) shall be deemed to have been removed for motive power, unless shown to the contrary;

(e) Processed gas, per liter of volume capacity, three centavos;

(f) Thinners and solvents, per liter of volume capacity, sixty-one centavos;

(g) Liquefied petroleum gas, per kilogram, twenty-one centavos: Provided, That, liquified petroleum gas used for motive power shall be taxed at the equivalent rate as the specific tax on diesel fuel oil;

(h) Asphalts, per kilogram, twelve centavos;

(i) Greases, waxes and petrolatum, per kilogram, fifty centavos;

(j) Aviation turbo-jet fuel, per liter of volume capacity, sixty-four centavos.

xxx xxx xxx

Sec. 156. Specific tax on diesel fuel oil. — On fuel oil, commercially known as diesel fuel oil, and all similar fuel oils, having more or less the same generating power, per liter of volume capacity, twenty-five and one-half centavos, which tax shall attach to this fuel oil as soon as it is in existence as such.

A tax cannot be imposed unless it is supported by the clear and express language of a statute;

19

on the other hand, once the tax is unquestionably

imposed, "[a] claim of exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken."

20

Since the

partial refund authorized under Section 5, RA 1435, is in the nature of a tax exemption,

21

it must be construed strictissimi Juris against the grantee.

Hence, petitioner's claim of refund on the basis of the specific taxes it actually paid must expressly be granted in a statute stated in a language too clear to be mistaken.

We have carefully scrutinized RA 1435 and the subsequent pertinent statutes and found no expression of a legislative will authorizing a refund based on the higher rates claimed by petitioner. The mere fact that the privilege of refund was included in Section 5, and not in Section 1, is insufficient to support petitioner's claim. When the law itself does not explicitly provide that a refund under RA 1435 may be based on higher rates which were nonexistent at the time of its enactment, this Court cannot presume otherwise. A legislative lacuna cannot be filled by judicial fiat.

22

The issue is not really novel. In Commissioner of Internal Revenue vs. Court of Appeals and Atlas Consolidated Mining and Development Corporation

23

(the second Atlas case), the CIR contended that the refund

should be based on Sections 1 and 2 of RA 1435, not Sections 153 and 156 of the NIRC of 1977. In categorically ruling that Private Respondent Atlas Consolidated Mining and Development Corporation was entitled to a refund based on Sections 1 and 2 of RA 1435, the Court, through Mr. Justice Hilario G. Davide, Jr., reiterated our pronouncement in Commissioner of Internal Revenue vs. Rio Tuba Nickel and Mining Corporation:

Our Resolution of 25 March 1992 modifying our 30 September 1991 Decision in the Rio Tuba case sets forth the controlling doctrine. In that Resolution, we stated:

Since the private respondent's claim for refund covers specific taxes paid from 1980 to July 1983 then we find that the private respondent is entitled to a refund. It should be made clear, however, that Rio Tuba is not entitled to the whole amount it claims as refund.

The specific taxes on oils which Rio Tuba paid for the aforesaid period were no longer based on the rates specified by Sections 1 and 2 of R.A. No. 1435 but on the increased rates mandated under Sections 153 and 156 of the National

Internal Revenue Code of 1977. We note however, that the latter law does not specifically provide for a refund to these mining and lumber companies of specific taxes paid on manufactured and diesel fuel oils.

In Insular Lumber Co. v. Court of Tax Appeals, (104 SCRA 710 [1981]), the Court held that the authorized partial refund under Section 5 of R.A. No. 1435 partakes of the nature of a tax exemption and therefore cannot be allowed unless granted in the most explicit and categorical language. Since the grant of refund privileges must be strictly construed against the taxpayer, the basis for the refund shall be the amounts deemed paid under Sections 1 and 2 of R.A. No. 1435.

ACCORDINGLY, the decision in G.R. Nos. 83583-84 is hereby MODIFIED. The private respondent's CLAIM for REFUND is GRANTED, computed on the basis of the amounts deemed paid under Sections 1 and 2 of R.A. No. 1435, without interest.

24

We rule, therefore, that since Atlas's claims for refund cover specific taxes paid before 1985, it should be granted the refund based on the rates specified by Sections 1 and 2 of R.A. No. 1435 and not on the increased rates under Sections 153 and 156 of the Tax Code of 1977, provided the claims are not yet barred by prescription. (Emphasis supplied.)

Insular Lumber Co. and First Atlas Case

Not Inconsistent With Rio Tuba

and Second Atlas Case

Petitioner argues that the applicable jurisprudence in this case should be Commissioner of Internal Revenue vs. Atlas Consolidated and Mining Corp. (the first Atlas case), an unsigned resolution, and Insular Lumber Co. vs. Court of Tax Appeals, an en banc decision.

25

Petitioner also asks the Court to take a

"second look" at Rio Tuba and the second Atlas case, both decided by Divisions, in view of Insular which was decided en banc. Petitioner posits that "[I]n view of the similarity of the situation of herein petitioner with Insular Lumber Company (claimant in Insular Lumber) and Rio Tuba Nickel Mining Corporation (claimant in Rio Tuba), a dilemma has been created as to whether or not Insular Lumber, which has been decided by the Honorable Court en banc, or Rio Tuba, which was decided only [by] the Third Division of the Honorable Court, should apply."

26

We find no conflict between these two pairs of cases. Neither Insular Lumber Co. nor the first Atlas case ruled on the issue of whether the refund privilege under Section 5 should be computed based on the specific tax deemed paid under Sections 1 and 2 of RA 1435, regardless of what was actually paid under the increased rates. Rio Tuba and the second Atlas case did.

Insular Lumber Co. decided a claim for refund on specific tax paid on petroleum products purchased in the year 1963, when the increased rates under the NIRC of 1977 were nor yet in effect. Thus, the issue now before us did not exist at the time, since the applicable rates were still those prescribed under Sections 1 and 2 of RA 1435.

On the other hand, the issue raised in the first Atlas case was whether the claimant was entitled to the refund under Section 5, notwithstanding its failure to pay any additional tax under a municipal or city ordinance. Although Atlas purchased petroleum products in the years, 1976 to 1978 when the rates had already been changed, the Court did not decide or make any pronouncement on the issue in that case.

Clearly, it is impossible for these two decisions to clash with our pronouncement in Rio Tuba and second Atlas case, in which we ruled that the

refund granted be computed on the basis of the amounts deemed paid under Sections 1 and 2 of RA 1435. In this light, we find no basis for petitioner's invocation of the constitutional proscription that "no doctrine or principle of law laid down by the Court in a decision rendered en banc or in division may be modified or reversed except by the Court sitting en banc.

27

Finally, petitioner asserts that "equity and justice demand that the computation of the tax refunds be based on actual amounts paid under Sections 153 and 156 of the NIRC."

28

We disagree. According to an eminent

authority on taxation, "there is no tax exemption solely on the, ground of equity."

29

WHEREFORE, the petition is hereby DENIED and the assailed Decision of the Court of Appeals is AFFIRMED.

SO ORDERED.

# Footnotes

1 Rollo, pp. 48-54.

2 Thirteenth Division composed of J. Minerva P. Gonzaga Reyes, ponente and chairman; JJ. Eduardo G. Montenegro and Delilah Vidallon Magtolis, concuring.

3 Rollo, pp. 55-67.

4 Judge Emesto D. Acosca, ponente and presiding judge; Judges Manuel K. Gruba and Ramon O. De Veyra, concuring.

5 CTA Decision, p. 12; rollo, p. 66.

6 See Petitioner's Memorandum, pp. 3-8 and Public Respondent's Memorandum, pp. 2-4; rollo, pp. 145-150 and 115-117, respecrively. See also Decision of the Court of Appeals, pp. 1-5; rollo, pp. 48-51a.

7 Previously Sections 142 and 145 of the 1939 NIRC which were amended by Sections 1 and 2 of RA 1435 and later renumbered as Sections 153 and 156 of the 1977 NIRC.

8 104 SCRA 710, May 29, 1981.

9 The case was deemed submitted for resolution on August 15, 1997 upon receipt by this Court of Petitioner's Memorandum.

10 Decision of the Court of Appeals, p. 4.; rollo, p. 51.

11 207 SCRA 549, March 25, 1992, per Gutierrez, J.

12 Memorandum of Petitioner, p. 8; rollo, p. 150.

13 See Commissioner of Internal vs. Atlas Consolididated Mining and Development Corp., et al., GR No. 93631, November 12, 1990.

14 Commissioner of Internal Revenue vs. Rio Tuba Nickel Mining Corporation, supra, pp. 551-552.

15 Petitioner's Memorandum, pp. 12-15; rollo, pp. 154-158.

16 Ibid., pp. 29-30; rollo, pp. 171-172.

17 Supra, pp. 718-719, per de Castro, J.

18 Petitioner's Memorandum, p. 31; rollo, p. 173.

19 Commissioner of Internal Revenue vs. The Court of Appeals, the Court of Tax Appeals and Ateneo De Manila University, G.R. No. 115349, April 18, 1997, p. 8.

20 Mactan Cebu International Airport Authority vs. Marcos, 261 SCRA 667, 680, September 11, 1996, per Davide, Jr., J. See also Wonder Mechanical Engineering Corporation vs. Court of Tax Appeals, 64 SCRA 555, 563, June 30, 1975; cited in Vitug, Compendium of Tax Law and Jurispridence, pp. 28-29, 2nd rev. ed. (1989).

21 Insular Lumber Co. vs. Court of Tax Appeals, supra, p. 719.

22 See Paper Industries Corp. of the Phil. vs. CA, 250 SCRA 434, 455, December 1, 1995.

23 SCRA 321, 325, May 10, 1994.

24 Ibid., pp. 326-327.

25 Ibid., pp. 18-21; rollo, pp. 160-163.

26 Petitioner's Memorandum, p. 17; rollo, p. 159.

27 Par. 3, Sec. 4, Art. VIII, Constitution, cited in Petitioner's Memorandum, pp. 17-18; rollo, pp. 159-160. See also Petitioner's Memorandum, pp. 32-37; rollo, pp. 174-180.

28 Petitioner's Memorandum, p. 32; rollo, p. 174.

29 Vitug, supra, p. 30.

THIRD DIVISION

G.R. No. 72477 October 16, 1990

NATIONAL POWER CORPORATION, petitioner, vs. HON. PRESIDING JUDGE, REGIONAL TRIAL COURT, 10TH JUDICIAL REGION BRANCH XXV, CAGAYAN DE ORO CITY, PROVINCE OF MISAMIS ORIENTAL, MUNICIPALITY OF JASAAN, MISAMIS ORIENTAL AND BARANGAY APLAYA, JASAAN, MISAMIS ORIENTAL, respondents.

FERNAN, C.J.:

In this Special Civil Action for Certiorari, petitioner National Power Corporation (NAPOCOR for brevity) questions the jurisdiction of the Regional Trial Court of Cagayan de Oro City, Branch XXV to hear Civil Case No. 9901 filed by respondents Province of Misamis Oriental and Municipality of Jasaan for the collection of real property tax and special education fund tax from petitioner covering the years 1978 to 1984. The antecedent facts are as follows:

On October 10, 1984, the Province of Misamis Oriental filed a complaint

1

with

the Regional Trial Court of Cagayan de Oro City, Branch XXV against NAPOCOR for the collection of real property tax and special education fund tax in the amounts of P11,105,008.10 and P11,104,658.10, respectively, covering the period 1978 to 1984. Petitioner NAPOCOR then defendant therein, filed a motion to dismiss

2

dated January 12, 1985 on the grounds that the court has

no jurisdiction over the action or suit and that it is not the proper forum for the adjudication of the case. In support of this motion NAPOCOR cited Presidential Decree No. 242 dated July 9, 1973 which provides that disputes between agencies of the government including govemment-owned or controlled

corporations shall be administratively settled or adjudicated by the Secretary of Justice.

The court through Judge Pablito C. Pielago issued an order

3

dated January

28, 1985 denying the motion to dismiss. NAPOCOR filed a supplemental motion to dismiss

4

on February 22, 1985 citing a resolution of the Fiscal

Incentive Review Board, No. 10-85 effective January 11, 1984, restoring the tax and duty exemption privileges of petitioner.

On March 27, 1985, NAPOCOR filed its answer to the complaint with counterclaim. Treating the same as a second motion to dismiss and finding the affirmative defenses therein stated to be unmeritorious, the court a quo issued an order on June 27, 1985, denying the second motion to dismiss and requiring both parties to appear before the court for the purpose of submitting a stipulation of facts.

On July 23, 1985, Barangay Aplaya, Municipality of Jasaan, Misamis Oriental filed a complaint in intervention

5

contending that non-payment by NAPOCOR

of real property taxes would adversely affect its interest since under the law, ten percent (10%) of the real property tax collected on properties within its jurisdiction shall accrue to the general fund of the barangay. Thereafter, the case was set for trial pursuant to the court's order dated August 20, 1985.

6

On October 30, 1985, petitioner NAPOCOR filed before this Court the present special civil action for certiorari

7

setting forth the following issues, to wit:

1) Respondent Court acted without or in excess of jurisdiction and with grave abuse of discretion when it issued the orders dated January 28, 1985, June 27, 1985 and August 20, 1985, denying petitioner's motions to have Civil Case No. 9901 dismissed on the grounds of lack of jurisdiction and/or improper venue.

2) Petitioner is exempt from payment of real property taxes.

Relied upon by NAPOCOR in assailing the jurisdiction of the lower court and/or the venue of the action are Sections 2 and 3 of Presidential Decree No. 242, entitled "PRESCRIBING THE PROCEDURE FOR ADMINISTRATIVE SETTLEMENT OR ADJUDICATION OF DISPUTES, CLAIMS AND CONTROVERSIES BETWEEN OR AMONG GOVERNMENT OFFICES, AGENCIES AND INSTRUMENTALITIES, INCLUDING GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS, AND FOR OTHER PURPOSES" dated on July 9, 1973. Sections 2 and 3 of this Decree provide:

Section 2. In all cases involving only questions of law, the same shall be submitted to and settled or adjudicated by the Secretary of Justice, as Attorney General and ex officio legal adviser of all government-owned or controlled corporations and entities, in consonance with section 83 of the Revised Administrative Code. His ruling or determination of the question in each case shall be conclusive and binding upon all the parties concerned.

Section 3. Cases involving mixed questions of law and of fact or only factual issues shall be submitted to and settled or adjudicated by:

(a) The Solicitor General, with respect to disputes or claims or controversies between or among the departments, bureaus, offices and other agencies of the National Government;

(b) The Govermnent Corporate Counsel, with respect to disputes or claims or controversies between or among the government-owned or controlled corporations or entities being served by the office of the Government Corporate Counsel and

(c) The Secretary of Justice, with respect to all other disputes or claims or controversies which do not fall under the categories mentioned in paragraphs (a) and (b). (Emphasis supplied)

In upholding the lower court's jurisdiction, respondent municipal corporations, on the other hand, rely on Presidential Decree No. 464, entitled "THE REAL PROPERTY TAX CODE" enacted on July 1, 1974, specifically Section 82 thereof which provides:

Section 82. Collection of real property tax through the courts. — The delinquent real property tax shall constitute a lawful indebtedness of the taxpayer to the province or city and collection of the tax may be enforced by civil action in any court of competent jurisdiction. The civil action shall be filed by the Provincial or City Fiscal within fifteen days after receipt of the statement of delinquency certified to by the provincial or city treasurer. This remedy shall be in addition to all other remedies provided by law.

It is indeed desirable and beneficial to the Judiciary's ongoing program of decongesting court dockets that intra-governmental disputes such as this be settled administratively. Unfortunately, our consideration of the legal provisions involved leads us to a different conclusion. In reconciling these two conflicting provisions of P.D. 242 and P.D. 464 on the matter of jurisdiction, we are guided by the basic rules on statutory construction.

An examination of these two decrees shows that P.D. 242 is a general law which deals with administrative settlement or adjudication of disputes, claims and controversies between or among government offices, agencies and instrumentalities, including government-owned or controlled corporations. The coverage is broad and sweeping, encompassing all disputes, claims and controversies.

P.D. 464 on the other hand, governs the appraisal and assessment of real property for purposes of taxation by provinces, cities and municipalities, as wen as the levy, collection and administration of real property tax. It is a special law which deals specifically with real property taxes.

It is a basic tenet in statutory construction that between a general law and a special law, the special law prevails. GENERALIA SPECIALIBUS NON DEROGANT.

8

Where a later special law on a particular subject is repugnant to, or inconsistent with, a prior general law on the same subject, a partial repeal of the latter win be implied to the extent of the repugnancy or an exception grafted upon the general law.

A special law must be intended to constitute an exception to the general law in the absence of special circumstances forcing a contrary conclusion.

9

The conflict in the provisions on jurisdiction between P.D. 242 and P.D. 464 should be resolved in favor of the latter law, since it is a special law and of later enactment. P.D. 242 must yield to P.D. 464 on the matter of who or which tribunal or agency has jurisdiction over the enforcement and collection of real property taxes. Therefore, respondent court has jurisdiction to hear and decide Civil Case No. 9901.

On the question of whether or not NAPOCOR is liable to pay real property taxes and special education fund taxes for the years 1978 to 1984, we rule in the affirmative.

Presidential Decree No. 1177, entitled "REVISING THE BUDGET PROCESS IN ORDER TO INSTITUTIONALIZE THE BUDGETARY INNOVATIONS OF THE NEW SOCIETY" was passed on July 30, 1977. Section 23 thereof provides:

Section 23. Tax and Duty Exemptions. — All units of govemment, including government-owned or controlled corporations, shall pay income taxes, customs duties and other taxes and fees as are imposed under revenue laws; provided, that organizations otherwise exempted by law from the payment of such taxes/duties may ask for a subsidy from the General Fund in the exact amount of taxes/duties due; provided, further, that a procedure shag be established by the Secretary of Finance and the Commissioner of the Budget, whereby such subsidies shall automatically be considered as both revenue and expenditure of the General Fund. (Emphasis supplied)

Petitioner alleges that what has been withdrawn is its exemption from taxes, duties, and fees which are payable to the national government while its exemption from taxes, duties and fees payable to government branches, agencies and instrumentalities remains unaffected. Considering that real property taxes are payable to the local government, NAPOCOR maintains that it is exempt therefrom.

We find the above argument untenable. It reads into the law a distinction that is not there. It is contrary to the clear intent of the law to withdraw from all units of government, including government-owned or controlled corporations their exemptions from all kinds of taxes. Had it been otherwise, then the law would have said so. Not having distinguished as to the kinds of tax exemptions withdrawn, the plain meaning is that all tax exemptions are covered. There the law does not distinguish, neither must we.

Moreover, Presidential Decree No. 1931 entitled "DIRECTING THE RATIONALIZATION OF DUTY AND TAX EXEMPTION PRIVILEGES GRANTED TO GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS AND ALL OTHER UNITS OF GOVERNMENT" which was passed on June 11, 1984, categorically states:

WHEREAS, Presidential Decree No. 1177 has already expressly repealed the grunt of tax privileges to any government-owned or controlled corporation and all other units of government. (Emphasis supplied )

Thus, any dubiety on NAPOCOR'S liability to pay taxes, duties and fees should be considered unequivocably resolved by the above provision.

In the case of National Power Corporation vs. The Province of Albay, et. al.,

10

herein petitioner was held liable for real property taxes to the provincial government of Albay for the period June 11, 1984 to March 10, 1987, when it claims to have been enjoying tax exemptions under Resolutions Nos. 10-85, 186 and 17-87 of the Fiscal Incentives Review Board (FIRB). It must be noted that Resolution 10-85 was the same resolution cited by petitioner in its supplemental motion to dismiss

11

inCivil Case No. 9901. If the attempt (found

ineffective for lack of authority in the above-cited case of NPC vs. The Province of Albay) to restore petitioner's tax exemptions began only in 1985 with the issuance of FIRB Resolution No. 10-85, it stands to reason that prior thereto, i.e., from 1977 when P.D. 1177 was promulgated up to 1984, petitioner did not enjoy any tax privilege as would exempt it from the payment of the taxes under consideration.

In the same case of NPC vs. The Province of Albay,

12

this Court had occasion

to state:

Actually, the State has no reason to decry the taxation of NAPOCOR's properties, as and by way of real property taxes. Real property taxes, after all, form part and parcel of the financing apparatus of the Government in development and nation-building, particularly in the local government level.

xxx xxx xxx

To all intents and purposes, real property taxes are funds taken by the State with one hand and given to the other. In no measure can the Government be said to have lost anything.

The proceeds of the real property tax are divided among the province, city or municipality where the property subject to the tax is situated and shall be applied by the respective local government unit for its own use and benefit. Even the barrio where the property is situated shares in the real property tax collections. Likewise, the entire proceeds of the additional one per cent (1%) real property tax levied for the Special Education Fund created under R.A. 5447, are divided among the province, city and municipalities where the property is situated.

WHEREFORE, the petition is DISMISSED. Petitioner having been found liable for the taxes being collected in Civil Case No. 9901, the respondent court is hereby directed to proceed with deliberate dispatch in hearing the case for the purpose of determining the exact liability of petitioner. No Costs.

SO ORDERED.

Gutierrez, Jr., Bidin and Cortes, JJ., concur.

Feliciano, J., is on leave.

Footnotes

1 Rollo, pp. 18-21.

2 Rollo, pp. 22-24.

3 Rollo, pp. 25-26; 28-30.

4 Rollo, pp. 31-33.

5 Rollo, pp. 65-66.

6 Rollo, pp. 72-73.

7 Rollo, pp. 2-16.

8 Lagman vs. City of Manila, G.R. No. 23305, June 30, 1966, 17 SCRA 579.

9 Baga vs. PNB, 99 Phil. 889, cited in Butuan Sawmill, Inc. vs. City of Butuan, et al., No. L-21516, April 29, 1966, 16 SCRA 755.

10 G.R. No. 87479, June 4, 1990.

11 Rollo, pp. 31-33.

12 Ibid.

EN BANC

G.R. No. L-18080

April 22, 1963

TAN KIM KEE, petitioner, vs. THE COURT OF TAX APPEALS, ET AL., respondents.

REYES, J.B.L., J.:

Appeal from the majority decision of the Court of Tax Appeals affirming the denial of a claim for refund of the fixed and sales taxes.

The case was submitted before the tax court under a stipulation of facts, as follows:

1. The petitioner is a producer of copra exporters in Davao City.

2. Petitioner produces copra in two ways, namely, the sun-dried method and the kiln-dried method.

3. Under the sun-dried method employed by petitioner, the nuts are first split into halves and are dried under the sun to partly loosen the meat from the shell. After one or two days of drying in that state, the meat is removed from the shell with an instrument designed for the purpose. To facilitate drying and handling, the meat so removed is chopped into small pieces and the same is dried under the sun for at least three days or until its moisture content is reduced to a minimum acceptable in the market.

4. The processes involved in copra-making under the kiln-dried method employed by the petitioner are the same as the sun-dried method described

above except that in the latter method, the nuts are first unhusked before being split into halves and the meat is dried in a kiln or oven heated with fuel. Further, the drying process (18-23 hours) under the kiln-dried method is shorter than the sun-dried method.

5. For the period from August 24, 1956 to December 31, 1956, petitioner's gross sales of copra produced by him amounted to P17,917.53 on which he paid to the treasurer of Davao City, on January 10, 1957, the sum of P1,254.24 as the 7% sales tax imposed by section 186 of the National Internal Revenue Code as amended by Republic Act No. 1612.

6. Petitioner paid also to the same official on the same date, fixed taxes(c-14) of P40.00 for the years 1956 and 1957, pursuant to section 182 of the said code.

7. For the payment of the above-mentioned sales and fixed taxes, BIR official receipts Nos. C-146545, respectively, were issued to the petitioner.

8. On September 6, 1957, petitioner filed with respondent a claim for the aforesaid taxes which claim was denied by the latter on November 22, 1957.

9. On February 7, 1958, petitioner filed with respondent a request for reconsideration of the denial of his claim for refund but said request was denied on February 13, 1958.

Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove their case not covered by this stipulation of facts. 1äwphï1.ñët

10. Petitioner filed on April 30, 1958 his second request for reconsideration which was denied on July 1, 1958.

11. On August 12, 1958 petitioner filed with this Honorable Court the present petition for review which was answered by respondent on September 26, 1958.

Not stipulated but nevertheless admitted in the pleadings is the additional fact that the petitioner is a producer of copra out of his coconut plantation in Sta. Cruz, Davao.

The petitioner ascribes the following errors against the lower court:

I. The Tax Appeals Court erred in holding that the mere drying out process by which the coconuts produced from petitioner's plantation are converted into copra (dried coconut), constitutes manufacturing as defined in section 194(x) of the Tax Code.

II. The Tax Appeals Court erred in failing to consider the absurd, illogical and mischievous results that would necessarily follow from its interpretation of section 194(x) of said code, contrary to the consistent legislative policy of encouraging farmers by exempting their products from taxation.

This case involves an interpretation of Section 188(b) of the Tax Code, as amended by the shortlived revenue statute, Republic Act No. 1612, when applied to copra making. Said Act took effect on 24 August 1956 until it was superseded by Republic Act 1856 on 22 June 1957. This section, as it stood before and during the effectivity of Republic Act No. 1612, and after subsequent amendment by Republic Act 1856, provides (all emphasis supplied):

Before effectivity of RA No. 1612

(b) Agricultural products and the ordinary salt when sold, bartered, or exchanged in this country by the producers or owner of the land where produced, as well as fish and its by-products when sold, bartered, or

exchanged by the fisherman or fishing operator, whether in their original state or not.

During the eleven-month effectivity of RA No. 1612

(b) Agricultural products and the ordinary salt in their original form when sold, bartered, or exchanged by the producer or owner of the land where produced. The term "agricultural products" as used herein shall not include cultured fish and other products raised or produced in fishponds, and those which have undergone the process of manufacturing as defined in section one hundred ninety-four (x) of this Code.

After repeal of RA No. 1612 by RA No. 1856

(b) Agricultural products and the ordinary salt whether in their original form or not when sold, bartered, or exchanged in this country by the producer or owner of the land where produced, as well as all kinds of fish and its byproducts when sold, bartered or exchanged by the fisherman or fishing operator whether in their original state or not.

The majority of the Tax Court was of the view that before the passage of Republic Act No. 1612, copra making was not taxable because the law then exempted agricultural products "whether in their original state or not" but that it became taxable during the effectivity of the Republic Act No. 1612 because the agricultural products that were exempted under it were those "in their original form", and said law excluded from the exemption "those which have undergone the process of manufacturing as defined in section one hundred ninety-four (x) of this Code", that provides:

(x) "Manufacturer" includes every person (1) who by physical or chemical process alters the exterior texture or form of inner substance of any raw material or manufactured or partially manufactured product in such a manner

as to prepare it for a special use or uses to which it could not have been put in its original condition, or (2) who by any such process alters the quality of any such raw material or manufactured or partially manufactured product so as to reduce it to marketable shape or prepare it for any of the uses of industry, or (3) who by any such process combines any such raw material or manufactured or partially manufactured products with other materials or products of the same or of different kinds and in such manner that the finished products of such process of manufacture can be put to a special use or uses to which such raw material or manufactured or partially manufactured products in their original condition could not have been put and who in addition alters such raw material or manufactured or partially manufactured products, or combines the same to produce such finished products for the purpose of their sale or distribution to others and for his own use or consumption.

The majority of the Tax Court further held that because of the unhusking and halving of the coconut fruit, removal and cutting into several pieces of its meat, and dehydrating by sun or kiln, the fruit in its original form underwent a process of manufacturing, and, therefore, became taxable; but after the repeal of Republic Act 1612 by Republic Act 1856, the exempt agricultural products included once more those products "whether in their original state or not". It decided, therefore, that the taxability of copra making under Republic Act No. 1612 is in accordance with the legislative intent to increase revenue by imposing taxes on "greater coverage of subjects of taxation", as expressed in the explanatory note of the House Bill 5809, the source of Republic Act 1612; and that the said section being an exempting provision, the same should be construed strictissimi juris against the party claiming exemption.

Contrary to the above views of the respondents, the petitioner would consider copra as the agricultural product in its original form and the coconut fruit merely the crop of the producer and because copra is the only product that may be produced from coconut lands while the process of manufacture

involved in the conversion of the coconut fruit to copra is a part of the genuine agricultural labor of the farmer. The petitioner adopted the dissenting opinion that the enactment of Republic Act 1612 did not change anything; because the processes that constitute manufacturing under Section 194 (x)have not been enlarged or extended, and that the ruling of the respondents would be a radical departure from the time-honored policy of Congress to give preferential treatment to farmers; furthermore, the respondents' interpretation would lead to absurd, illogical, and mischievous results, like the following: coconut planters, abaca planters and rice farmers would be liable for 7% tax while operators of coconut oil mills and dessicated coconut factories, rope factories, and rice mill operators are taxable only at 2% under Section 189 of the Code; likewise, the coconut planter is not taxable for producing coconuts, but the moment he unhusks them he is obliged to pay 7% on sales tax. The petitioner insists that the legislative intent in enacting Republic Act 1612 was to exclude copra making, as shown in the explanatory note of House Bill 6094, a bill intended to amend Republic Act 1612, and that this intention to exclude copra making is also reflected in the speeches and debates delivered in the floor of Congress in its session on 30 January 1957 (Congressional Records, Vol. IV, No. 3).

The flaw in petitioner-appellant's argument is that it ignores the legislative change in the phraseology of the exemption of agricultural products. The original statute excepted from the tax "Agricultural products xxx whether in their original state or not", but under the shortlived R.A. No. 1612 it was altered and reduced to "agricultural products in their original form" exclusively. The change in scope was further emphasized by the qualification in the same Act that "agricultural products xxx shall not include cultured fish . . . and those which have undergone the process of manufacturing . . . ." Plainly, R.A. No. 1612 was intended to restrict the exemption and broaden the subject of taxation, in order to increase the state revenues; and this purpose becomes

indubitable when we consider that ordinary salt and fish were also originally exempt, but the exemption was not restated in R.A. No. 1612.

If, as contended by the petitioner, there was no intention to limit the exemption of agricultural products, then it may well be wondered why the Legislature found it necessary to change at all the terms of the exemption; and even further, it may be asked why, barely a year later, it was found proper to restore (by R.A. No. 1856) the primitive terms of the exemption of agricultural products "whether in their original form or not". It is not to be presumed that the Legislature, in making such changes, was indulging in mere semantic exercise. There must have been some purpose in making them, and the rational explanation is that the coverage of the exemption was being broadened by R.A. No. 1612, as expressly stated in the original House Bill No. 5819 that later became said Act; and that the policy change was later found inadvisable, so that the statute was reworded by R.A. 1856 to corresponded to the original terminology so as to restore the original exemption..

Stress is laid on the explanatory note to House Bill No. 6094 that it was "never the intention of Congress to impose such heavy burden upon our agricultural producers"; but these statements did not go beyond a personal opinion of the proponents of House Bill No. 6094, since the true source of Republic Act 1856 (repealing R.A. No. 1612)was not Bill No. 6094, but House Bill No. 5819.

We find no weight in the argument that under the interpretation given to Republic Act 1612 the planters and farmers would pay a higher tax than rice mills and coconut factories. The rule of uniform taxation does not deprive Congress of the power to classify subjects of taxation, and only demands uniformity within the particular class.

The legislative intent to increase revenue by widening the coverage of taxable subjects is evident under Republic Act 1612, and by it the exempt agricultural

products were only those that remain in their original form, and have not undergone the process of manufacture. This Court has had occasion to observe that —

By the very nature of the changes made in the original statute, it is clear that the amendment is intended, not to clarify the doubtful meaning of the former law, xxx, but to withdraw from the scope of the former exemption the agricultural products that are no longer in their original form because they have undergone the process of manufacture." (Philippine Packing Corporation vs. Collector of Internal Revenue, L-9040, Res. of Jan. 22, 1957).

WHEREFORE, the decision appealed from is affirmed, with costs against petitioner-appellant.

EN BANC

G.R. No. L-28739 and L-28902 March 29, 1972

DAVAO LIGHT and POWER CO., INC., petitioner-appellant, vs. THE COMMISSIONER OF CUSTOMS and COURT OF TAX APPEALS, respondents-appellees.

REYES, J.B.L., J.:p

These are appeals from the decision of the Court of Tax Appeals in CTA Cases Nos. 1337 and 1551, denying the claim of Davao Light & Power Co., Inc., for refund of the amount paid by said company as customs duties, special import taxes, compensating taxes and wharfage fees on the importations of electrical supplies and materials for installation and use at its power plant.

The Davao Light & Power Co., Inc., hereafter referred to as Davao Light, is the grantee of a legislative franchise to install, operate and maintain an electric light, heat and power plant in the city (then Municipality) of Davao, for a period of 50 years. On two different occasions in 1962, it imported electrical supplies, materials and equipment for installation in its power plant. The importations arrived in the port of Cebu City, on which the Collector of Customs imposed, and Davao light paid under protest, customs duties and taxes in the total amount of P9,928.00. As the Collector of Customs later ruled unfavorably on the protests (Nos. 267, 268, 269 and 278) and denied its claim for refund of the taxes and duties paid on the imported articles, Davao Light appealed to the Commissioner of Customs. And when said official sued the

action of the Collector, Davao Light went to the Court of Tax Appeals, maintaining its claim to exemption from the taxes and duties imposable on the aforementioned motions.

In the Court of Tax Appeals, the parties entered into a stipulation of facts, the pertinent provisions of which read as follows:

6. — That the petitioner (Davao Light) is a grantee of a legislative franchise under Philippine Legislature Act No. 3760, ...;

7. — That the petitioner was granted by the Public Service Commission its Certificate of Public Convenience and Necessity in 1931 and by virtue of said franchise has established and has been maintaining and operating a power plant generating electric light, heat and power and distributing the same for sale within the municipality (now City) of Davao;

8. — That the National Power Corporation was created by virtue of Commonwealth Act No. 120, and under Section 2, par. (g) it was empowered and granted authority:

"To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs, pipes, mains, transmission lines, power stations and substations and other works, for the purpose of developing hydraulic power from any river, creek, lake, spring and waterfalls in the Philippines and supplying such power to the inhabitants thereof; to acquire, construct, install, maintain and operate and improve gas, oil or steam engines and/or other prime movers, generators and other machinery in plants and/or auxiliary plants for the production of electric power; to establish, develop, operate and maintain and administer power and lighting systems for the use of the Government and the general public; to sell electric power and to fix the rates and provide for the collection of the charges for any service rendered: Provided, that the rates of charges shall not be subject to revision by the Public Service Commission."

9. — That by virtue of this authority given the National Power Corporation, it established and constructed a power plant, power stations and transmission lines in Davao City, for the purpose of generating electric light, heat and power for the inhabitants of Davao City and its surrounding areas and that it is presently operating and maintaining said power plant, power station and transmission lines and selling electric power, heat and light in the City of Davao;

10. — That Section 17 of (pre-Commonwealth) Act No. 3636 (Standard Electric Power & Light Franchises Law) provides:

"In the event of any competing individual, association of persons or corporation receiving either a franchise or permission from the Government of the Philippine Islands, or from any province, city or municipality thereof, to conduct a similar business in all or any substantial portion of the territory covered by this franchise to that of the grantee, in which franchise or permission there shall be any term or terms more favorable than those herein granted or tending to place the herein grantee at any disadvantage, then such term or terms shall ipso facto become a part of the terms hereof and shall operate equally in favor of the grantee as in the case of said competing individual asssociation of persons or corporations."

xxx xxx xxx

12 — That under Section 2 of Republic Act No. 358, as amended by Republic Act No. 937, it is provided that "to facilitate payment of its indebtedness, the National Power Corporation shall exempt from all taxes, except real property tax, and from all duties, fees, imposts, charges and restrictions of the Republic of the Philippines, its provinces, cities and municipalities."

It was therein petitioner's contention that pursuant to Section 17 of Act 3636, the provision of Republic Act 987 granting tax exemption privileges to the

National Power Corporation ipso facto became part of its franchise; hence, its claim to exemption from taxes and customs duties on the importations in question.

In its decision of 15 December 1967, the Court of Tax Appeals affirmed the ruling of the Customs Commissioner, the Court holding that the tax exemption privileges granted to the National Power Corporation were intended to benefit only said government corporation and did not extend to other bodies or entities. Davao Light thus brought the present petition for review in this Court, raising the same issue of the correctness of the imposition of taxes and customs duties on its importations of electrical supplies and materials for use in its electric plant.

Petitioner in this instance reiterates the contention that is legislative franchise to construct, maintain and operate an electric light, heat and power system (granted by Act 3760) was specifically made subject to Act 3636, which Act, in its Section 17, provides that any favorable terms granted to any "competing individual, association of persons or corporation" shall ipso facto become part of a franchise earlier issued. As the National Power Corporation (NPC) is actually operating a power plant, power stations and transmission lines in Davao City and selling electric power, heat and light in said locality, and said corporation is enjoying exemption from all taxes, duties, fees, imposts and charges collectible by the government, it is argued that such tax exemption benefits ipso facto became part of its franchise and are not available to petitioner.

There is no merit in petitioner's contention. Firstly, the aforecited provision of Section 17 of Act 3636 makes mention of franchise or permit issued to "competing" individuals, associations or corporations. In short, by express provision of law favorable terms contained in a subsequent franchise issued to an individual, association, etc. shall automatically be considered incorporated

in the franchise or permit earlier issued to another individual, association, etc. engaged in the same business. The idea is to place both competing groups or entities on equal footing and not to give one an advantage over the other. This principle of fair play, which is the basic idea behind the provision, does not find operation in the present case.

It is undeniable that petitioner's purpose in securing a franchise to establish and operate an electric plant and power stations was to engage in a business or profit-making venture. The NPC, on the other hand, was specifically created to undertake the development of hydraulic power throughout the country and the production of power from other sources, for use of the government and the general public. 1 As envisioned by the law creating it, the activity to be pursued by the NPC can hardly be motivated by profit or income.

In operating and maintaining a power plant, power stations and transmission lines in Davao City, as duly authorized in its charter, the NPC can not be considered as posing competition to petitioner's business. In fact, there is evidence on record that the NPC does not sell electric lower directly to the general public; instead, it did sell lower to petitioner for resale to the latter's customers. 2 In other words, the NPC is even the source of petitioner's merchandise; it is aiding petitioner in its business operations, not competing with it.

Nor would the fact that the NPC supplies electric power to the National Development Company (NDC) plant in Davao justify the claim that the NPC is a competitor to petitioner's business, because Section 10 of Commonwealth Act 120 (NPC charter) made it NPC's duty to supply power to the NDC.

Sec. 10. At any time that the Board certifies that the Corporation is able to furnish electric power for lighting an other purposes to any office, shop, or establishment operated and/or owned or controlled by the National

Government or by any city, province, municipality or other political subdivision of the Commonwealth of the Philippines, the National Government and the government of said city, province, municipality or other political subdivision shall be compelled to secure from the Corporation as soon as practicable such electric power as it may need for lighting and the operation of its offices, shops or establishments or for any work undertaken by it.

The provisions of this section shall also apply to firms or business owned or controlled by the National Government or by the government of any city, province, municipality or other political subdivisions.

Be that as it may, such an isolated case of sale of electric power to one government-owned plant would not be enough to classify the NPC as a "competing" concern to petitioner's enterprise, which must be assumed to be catering to the general public to which the NPC has no dealing.

Secondly, petitioner can not rely on the provisions of Republic Act 358, as amended by Republic Act 987 3, to support its claim for tax exemption.

Section 1 of Republic Act 358, approved on 4 June 1949, amended Section 2 (k) of Commonwealth Act 120, which authorized the NPC to "contract indebtedness and issue bonds subject to the approval of the President of the Philippines, upon recommendation of the Secretary of Finance" in an amount not to exceed one hundred seventy million five hundred pesos. Then in its Section 2, the same law provided:

SEC 2. To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from all taxes, duties, fees, imposts, charges, and restrictions of the Republic of the Philippines, its provinces, cities, and municipalities." (emphasis supplied).

On the same day, 4 June 1949, Republic Act 357 was approved, authorizing the President of the Philippines to negotiate and contract loans from time to time from the International Bank for Reconstruction and Development, on behalf of the NPC, and to guarantee, absolutely and unconditionally, as primary obligator and not merely as surety, the payment of loans therefore contracted. 4 The provisions of Section 2 of Republic Act 358 granting tax exemption to the NPC, taken in the light of the existing legislation affecting the NPC, notably Republic Act 357, must be construed as intended to benefit only the NPC, the lawmakers expecting (as so unequivocally expressed in the law) that by relieving said corporation of tax obligations, the NPC would be enabled to pay easily its indebtedness or whatever indebtedness it is certain to incur. In granting such tax exemption, the government actually waived its right to collect taxes from the NPC in order to facilitate the liquidation by said corporation of its liabilities, and the consequential release by the government itself from its obligation (as principal obligor) in the transactions entered into by the President on behalf of the NPC. Such condition, peculiar only to the NPC, cannot be said to exist in petitioner's case; hence, the absolute lack of basis for awarding of equal privileges (granted to the NPC) to said petitioner.

Similarly, petitioner can not lay claim to the enjoyment of the tax exemption benefits given to NPC because said corporation happened to be operating a power plant in the same locality where petitioner has a franchise. The legal principle on the matter is firmly established and well-observed: exemption from taxation is never presumed; 5 for tax exemption to be recognized, the grant must be clear and expressed; it cannot be made to rest on vague implications. 6 The possession by petitioner of a perzmit to operate an electric plant in Davao City does not entitle it to the same exemption privileges enjoyed by another operator without an express provision of the law to that effect.

FOR THE FOREGOING CONSIDERATIONS, the decision of the Court of Tax Appeals is hereby affirmed, with costs against the petitioner.

Footnotes

1 Section 1, Commonwealth Act 120.

2 Page 135, CTA Record.

3 Section 2 of Republic Act 358 was amended so as to exclude from the exemption taxes due on real properties.

4 Section 3, Republic Act 357.

5 Resins, Inc. vs. Auditor General, L-17888, 29 Oct. 1968, 25 SCRA 754; Asturias Sugar Central, Inc. vs. Commissioner, L-19337, 30 September 1969, 25 SCRA 617; Commissioner vs. Visayan Electric Co., L-22611, 27 May 1968, 23 SCRA 715; Commissioner of Internal Revenue vs. Guerrero, L-20812, 22 Sept. 1967, 21 SCRA 180, and cases cited therein; Esso Standard Eastern, Inc. vs. Acting Commissioner, L-21841, 28 Oct. 1966, 18 SCRA 488, and cases cited therein.

6 Borja vs. Collector, L-12134, 30 November 1961, 3 SCRA 590.

EN BANC

G.R. No. L-20960-61

October 31, 1968

COMMlSSIONER OF INTERNAL REVENUE and COMMISSIONER OF CUSTOMS, petitioners-appellants, vs. PHILIPPINE ACE LINES, INC., respondent-appellee.

Office of the Solicitor General Antonio Barredo, Assistant Solicitor General Felicisimo R. Rosete and Special Attorney Francisco J. Malate, Jr. for petitionersappellants. Dakila F. Castro & Associates for respondent-appellee.

ANGELES, J.:

On appeal by the Government from the decision — rendered jointly in Tax Cases Nos. 964 & 984 — of the Court of Tax Appeals, reversing the rulings of the Commissioner of Internal Revenue holding the Philippine Ace Lines, Inc. liable to pay the aggregate amount of P1,407,724.57 as compensating taxes on four (4) ocean-going cargo vessels acquired by said company from the Reparations Commission of the Philippines, and of the Commissioner of Customs to place the four vessels under customs custody until the aforementioned amount claimed by the Government was first paid.

The antecedent facts of the case are not in dispute and may be summarized briefly as follows:

Under date of January 23, 1959, the Reparations Commission agreed to sell to the Philippine Ace Lines the cargo vessel M/S YAKAL and M/S MOLAVE which were procured by the former from Japan for the end-use of the latter under the Philippine- Japanese Reparations Agreement of May 9, 1956, at the agreed

prices of P4,283,241.48 and P4,292,457.48, respectively. Similar agreements involving two (2) other ocean-going cargo vessels were subsequently entered into by and between the same parties: one, dated November 11, 1959, referring to the purchase and sale of M/S TINDALO for the price of P7,054.177.78 and, the other, concerning the purchase and sale of M/S NARRA under date of December 14, 1959, for the price of P3,599,995.44. All these agreements — invariably denominated as "Contract of Conditional Purchase and Sale of Reparations Goods" — stipulated, among others, that the Reparations Commission retains title and ownership of the above-described vessels until they were fully paid for and that the purchase prices of the vessels were to be paid by Philippine Ace Lines to the Reparations Commission under deferred payment plans in ten (10) equal annual installments.

The four (4) vessels referred to were thereafter delivered to Philippine Ace Lines in Japan; they were taken to the Philippines where they were registered in the Bureau of Customs in the name of the Reparations Commission; and thereafter, the vessels were operated and utilized by Philippine Ace Lines in its shipping business, plying between ports of foreign countries and the Philippines.

Sometime later, however, the Commissioner of Internal Revenue assessed against the Philippine Ace lines the amounts of P304,428.00, P256,275.00, P499,948.10 and P305.073.47 as compensating taxes on the M/S YAKAL, M/S NARRA, M/S TINDALO and M/S MOLAVE, respectively, and demanded payment of the said amounts. The Commisioner of Customs, joining the Commissioner of Internal Revenue, then placed the vessels under customs custody at the different ports of the Philippines where they were found at the time, and refused to give due course to the "clearance" of said vessels as requested by their respective owner and operator — Reparations Commission and Philippine Ace Lines — unless the compensating taxes assessed against the latter were first paid to the Commissioner of Internal Revenue. Philippine

Ace Lines protested said actions of the Commissioners of Internal Revenue and of Customs, alleging that the legal title and ownership of the vessels operated by it were still vested with the Reparations Commission which, under Section 14 of the Reparations Act,1 was exempt from payment of all duties, fees and taxes on all reparations goods obtained by it; but the said officials rejected the protest and ruled that the compensating taxes should first be paid, per directive to that effect by the Secretary of Finance. Subsequent protests — calling the attention of the Commissioner of Internal Revenue and the Commissioner of Customs to the substantial loss and irreparable injury it has suffered by the tying up of the four ships in port — also proved futile. Offshoots of the controversy, Philippine Ace Lines interposed two (2) separate appeals (petitions for review) from the above rulings or decisions of the Commissioner of Internal Revenue and the Commissioner of Customs, to the Court of Tax Appeals where they were docketed as C.T.A. Case No. 964, involving M/S YAKAL and M/S NARRA, and C.T.A. Case No. 984, concerning M/S TINDALO and M/S MOLAVE.

While the cases were pending trial, Philippine Ace Lines petitioned the court a quo to enjoin the collection of the compensating tax assessed against it and after hearing, writs of preliminary injunction were issued upon the filing of surety bonds to guarantee payment of the amounts claimed.

In the meantime, Congress enacted Republic Act No. 3079 (effective June 17, 1961) which amended Republic Act No. 1789, otherwise known as the Reparations Act, and provided as follows:

SEC. 14. Exemption from tax. — All reparations goods obtained by the Government shall be exempt from the payment of all duties, fees and taxes. Reparations goods obtained by private parties shall be exempt from the payment of customs duties, compensating tax, consular fees and the special import tax.

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SEC. 20. This Act shall take effect upon its approval, except that the amendment contained in section seven hereof relating to the requirements for procurement orders including the requirement of downpayment by private applicant end-users shall not apply to procurement orders already duly issued and verified at the time of the passage of this amendatory Act, and except further that the amendment contained in section ten relating to the insurance of the reparations goods by the end-users upon delivery shall apply also to goods covered by contracts already entered into by the Commission and the end-user prior to the approval of this amendatory Act as well as goods already delivered to the end-user, and except further that the amendments contained in sections eleven and twelve hereof relating to the terms of the installment payments on capital goods disposed of to private parties, and the execution of a performance bond before delivery of reparations goods, shall not apply to contract for the utilization of reparations goods already entered into by the Commission and the end-users prior to the approval of this amendatory Act: Provided, That any end-user may apply the renovation of his utilization contract with the commission in order to avail of any provision of this amendatory Act which is more favorable to an applicant end-user than has heretofore been granted in like manner and to the same extent as an end-user filing his application after the approval of this amendatory Act, and the Commission may agree to such renovation on condition that the end-user shall voluntarily assume all the new obligations provided for in this amendatory Act. [Emphasis supplied]

Invoking the favorable provisions of the new law Republic Act No. 3079 above quoted Philippine Ace Lines then entered into "Renovated Contract(s) of Conditional Purchase and Sale of Reparations Goods" with the Reparations Commission, covering the four (4) cargo vessels. It had previously acquired from the latter under the Reparations Act. Thereafter, the said company filed a

"Supplement to the Petition for Review" in each of the above entitled cases before the Court of Tax Appeals, submitting therewith copies of the said renovated contracts it had entered with the Reparations Commission regarding the purchase and sale of M/S MOLAVE, M/S TINDALO, M/S YAKAL and M/S NARRA, with the allegation that "expressly implementing section 14 of Republic Act No. 3079 in the aforesaid renovated contracts," the Reparations Commission and the Philippine Ace Lines have agreed as follows:

NOW THEREFORE, for and in consideration of the premises above stated and of the payments to be made by the herein Conditional Vendee as stipulated in Annex "B" hereof which is made an integral part of this contract, the parties herein agree to execute this renovation of contract of Conditional Purchase and Sale and the Conditional Vendor hereby transfers and conveys unto the herein Conditional Vendee the ocean-going vessels above-described ...; subject further to the pertinent provisions of Republic Act No. 1789 as amended, including particularly the exempting provisions of Section 14 thereof relative to the exemption from payment of compensating tax which the herein Conditional Vendee, as an implemented machinery, do hereby, by these presents, implement. ...

In their "Answer to Supplement to Petition for Review" filed with the court below by counsel for the Commissioner of Internal Revenue and the Commissioner of Customs, the foregoing allegation was admitted. They claimed, however, that even if Philippine Ace Lines and the Reparations Commission have agreed to implement the provisions of Section 14 of Republic Act No. 1789, as amended by Republic Act No. 3079, in the "Renovated Contract of Conditional Purchase and Sale of Reparations Goods" entered into between them, such implementation did not relieve the Philippine Ace Lines from the payment of the compensating taxes in question. The parties thereafter submitted the cases for decision upon a stipulation of facts containing, substantially, the facts as above set forth.

On January 25, 1963, the Court of Tax Appeals rendered a joint decision in the two cases, reversing the rulings of the Commissioner of Internal Revenue and the Commissioner of Customs, in the following rationale:

The sole issue presented for our consideration is whether or not petitioner is liable for the compensating tax on the four ocean-going vessels in question. Petitioner claims that it is not liable on the grounds that said vessels are still owned by the Reparations Commission and that, assuming that it was liable therefor under Section 190 of the National Internal Revenue Code, in relation to Section 14 of Republic Act 1789 before its amendment, it is now exempt from said tax by virtue of Section 20 of Republic Act No. 3079 in relation to Section 14 of Republic Act No. 1789, as amended. On the other hand, respondent claims that petitioner is liable and that the latter's liability is not affected by the exemption provision of the new law.

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The Government does not deny the fact that petitioner has complied with all the requirements of law in order that it may avail itself of all the favorable provisions granted in Republic Act No. 3079. It is, however, contended that the favorable provisions mentioned in Section 20 of said Act which may be availed of by an applicant for renovation of his utilization contract with the Reparations Commission do not include exemption from compensating tax because such exemption is not expressly stated in the law. In providing that the favorable provisions of Republic Act No. 3079 shall be available to applicants for renovation of their utilization contracts, on condition that said applicants shall voluntarily assume all the new obligations provided in the new law, the law intends to place persons who acquired reparations goods before the enactment of the amendatory Act on the same footing as those who acquire reparations goods after its enactment. This is so because of the provision that once an application for renovation of a utilization contract has

been approved, the favorable provisions of said Act shall be available to the applicant "in like manner and to the same extent as an end-user filing his application after the approval of this amendatory Act." To deny exemption from compensating tax to one whose utilization contract has been renovated, while granting the exemption to one who files an application for acquisition of reparations goods after the approval of the new law, would be contrary to the express mandate of the law that they both be subject to the same obligations and they both enjoy the same privileges in like manner and to the same extent. It would be a manifest distortion of the literal meaning and purpose of the law.

FOR THE FOREGOING CONSIDERATIONS, the decisions appealed from in both cases are hereby reversed. Accordingly, the surety bonds filed by petitioner to guarantee payment of the tax in question are thereby cancelled. No pronouncement as to costs.

Not satisfied with the foregoing decision of the Court of Tax Appeals, the Government has interposed the instant appeal therefrom to this Court.

Appellant now charges that the lower court had erred in holding that the renovation of the contracts of purchase and sale of the vessels involved in these cases, after the approval of Republic Act No. 3079, entitled Philippine Ace Lines to the exemption from payment of compensating tax under the provisions of the said law, notwithstanding the fact that the vessels referred to were acquired from the Reparations Commission long before the approval of said amendatory Act which, by the way, did not expressly authorize such exemption. It is argued that the favorable provisions of Republic Act No. 3079 invoked by Philippine Ace Lines and relied upon by the decision of the court below cannot include exemption from compensating tax, otherwise, had Congress intended so, it would have provided for such exemption in clear and explicit terms; that the tax exemption contained in Section 14 of the amendatory Act cannot have retroactive application in the absence of any

provision for retroactivity; and that to grant such exemption to end-users who have acquired reparations goods before the approval of Republic Act No. 3079 would be prejudicial to the Government.

Appellant's position calls to mind Commissioner of Internal Revenue vs. Bothelo Shipping Corporation,2 the factual setting of which is on all fours with the case at bar, and where this Court, speaking through Chief Justice Roberto Concepcion, disposed of the same charge and contentions in clear and unequivocal terms, in the following wise:

The inherent weakness of the last ground becomes manifest when we consider that, if true, there could be no tax exemption of any kind whatsoever, even if Congress should wish to create one, because every such exemption implies a waiver of the right to collect what otherwise would be due to the Government, and, in this sense, is prejudicial thereto. In fact, however, tax exemptions may and do exist, such as the one prescribed in section 14 of Republic Act No. 1789, as amended by Republic Act No. 3079, which, by the way, is "clear and explicit," thus, meeting the first ground of appellant's contention. It may not be amiss to add that no tax exemption — like any other legal exemption or exception — is given without any reason therefor. In much the same way as other statutory commands, its avowed purpose is some public benefit or interest, which the law-making body considers sufficient to offset the monetary loss entailed in the grant of the exemption. Indeed, section 20 of Republic Act No. 3079 exacts a valuable consideration for the retroactivity of its favorable provision, namely, the voluntary assumption, by the end-user, who bought reparations goods prior to June 17, 1961, of "all the new obligations provided for in" said Act.

The argument adduced in support of the third ground is that the view adopted by the Tax Court would operate to grant exemption to particular persons, the Buyers therein. It should be noted, however, that there is no constitutional

injunction against granting tax exemptions to particular persons. In fact, it is not unusual to grant legislative franchises to specific individuals or entities, conferring tax exemptions thereto. What the fundamental law forbids is the denial of equal protection such as through unreasonable discrimination or classification.

Furthermore, Section 14 of the Law on Reparations, as amended, exempts from the compensating tax, not particular persons but persons belonging to a particular class. Indeed, appellants do not assail the Constitutionality of said section 14, insofar as it grants exemptions to end-users who, after the approval of Republic Act No. 3079, on June 17, 1961, purchased reparations goods procured by the Commission. From the view point of Constitutional Law, especially the equal protection clause, there is no difference between the grant of exemption to said end-users, and the extension of the grant to those whose contracts of purchase and sale were made before said date, under Republic Act No. 1789.

It is true that Republic Act No. 3079 does not explicitly declare that those who purchased reparations goods prior to June 17, 1961, are exempt from the compensating tax. It does not say so, because they do not really enjoy such exemption, unless they comply with the proviso in Section 20 of said Act, by applying for the renovation of their respective utilization contracts, "in order to avail of any provision of the Amendatory Act which is more favorable" to the applicant. In other words, it is manifest, from the language of said section 20, that the same intended to give such buyers the opportunity to be treated "in like manner and to the same extent as an end-user filing his application after the approval of this Amendatory Act." Like the "most favored nation clause" in international agreements, the aforementioned section 20 thus seeks, not to discriminate or to create an exemption or exceptions, but to abolish the discrimination, exemption or exception that would otherwise result, in favor of the end-user who bought after June 17, 1961 and against one who bought

prior thereto. Indeed, it is difficult to find substantial justification for the distinction between the one and the other. ...

We find no cogent reason to modify, much less depart from the conclusion reached in Bothelo, as expressed in the above-quoted opinion of the Court there, and the same should resolve the identical problem now brought before Us in this proceeding.

WHEREFORE, the decision of the Court of Tax Appeals appealed from in these cases is affirmed; no pronouncement as to costs.

Footnotes

1 Sec. 14, R.A. 1789. Exemption from tax.- All reparations goods obtained by the Government shall be exempt from the payment of all duties, fees and taxes. Reparations goods obtained by private parties shall be exempt only from the payment of customs duties, consular fees and special import tax.

2

L-21633, June 29, 1967.

FIRST DIVISION

G.R. No. 137377

December 18, 2001

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MARUBENI CORPORATION, respondent.

PUNO, J.:

In this petition for review, the Commissioner of Internal Revenue assails the decision dated January 15, 1999 of the Court of Appeals in CA-G.R. SP No. 42518 which affirmed the decision dated July 29, 1996 of the Court of Tax Appeals in CTA Case No. 4109. The tax court ordered the Commissioner of Internal Revenue to desist from collecting the 1985 deficiency income, branch profit remittance and contractor's taxes from Marubeni Corporation after finding the latter to have properly availed of the tax amnesty under Executive Orders Nos. 41 and 64, as amended.

Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws of Japan. It is engaged in general import and export trading, financing and the construction business. It is duly registered to engage in such business in the Philippines and maintains a branch office in Manila.

Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of authority to examine the books of accounts of the Manila branch office of respondent corporation for the fiscal year ending March 1985. In the course of the examination, petitioner found respondent to have undeclared income from two (2) contracts in the Philippines, both of which were completed in 1984. One of the contracts was with the National Development Company (NDC) in connection with the construction and

installation of a wharf/port complex at the Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte. The other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia storage complex also at the Leyte Industrial Development Estate.

On March 1, 1986, petitioner's revenue examiners recommended an assessment for deficiency income, branch profit remittance, contractor's and commercial broker's taxes. Respondent questioned this assessment in a letter dated June 5, 1986.

On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from petitioner assessing respondent several deficiency taxes. The assessed deficiency internal revenue taxes, inclusive of surcharge and interest, were as follows: I. DEFICIENCY INCOME TAX FY ended March 31, 1985 Undeclared gross income (Philphos and NDC construction projects)

P967,269,811.14

Less: Cost and expenses (50%)

483,634,905.57

Net undeclared income

483,634,905.57

Income tax due thereon

169,272,217.00

Add:

50% surcharge

84,636,108.50

20% int. p.a.fr. 7-15-85 to 8-15-86

36,675,646.90

TOTAL AMOUNT DUE

P290,583,972.40

II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX FY ended March 31, 1985 Undeclared gross income from Philphos and NDC construction projects Less: Income tax thereon

P483,634,905.57 169,272,217.00

Amount subject to Tax

314,362,688.57

Tax due thereon

47,154,403.00

Add:

50% surcharge

23,577,201.50

20% int. p.a.fr. 4-26-85 to 8-15-86

12,305,360.66

TOTAL AMOUNT DUE

P83,036,965.16

III. DEFICIENCY CONTRACTOR'S TAX FY ended March 31, 1985 Undeclared gross receipts/gross income from Philphos and NDC construction projects

P967,269,811.14

Contractor's tax due thereon (4%)

38,690,792.00

Add:

19,345,396.00

50% surcharge for non-declaration 20% surcharge for late payment

Sub-total Add:

9,672,698.00 67,708,886.00

20% int. p.a.fr. 4-21-85 to 8-15-86

TOTAL AMOUNT DUE

17,854,739.46 P85,563,625.46

IV. DEFICIENCY COMMERCIAL BROKER'S TAX FY ended March 31, 1985 Undeclared share from commission income (denominated as "subsidy from Home Office") Tax due thereon Add:

1,628,569.00

50% surcharge for non-declaration

814,284.50

20% surcharge for late payment

407,142.25

Sub-total Add:

P24,683,114.50

2,849,995.75 20% int. p.a.fr. 4-21-85 to 8-15-86

TOTAL AMOUNT DUE

751,539.98 P3,600,535.68

The 50% surcharge was imposed for your client's failure to report for tax purposes the aforesaid taxable revenues while the 25% surcharge was imposed because of your client's failure to pay on time the above deficiency percentage taxes.

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Petitioner found that the NDC and Philphos contracts were made on a "turnkey" basis and that the gross income from the two projects amounted to P967,269,811.14. Each contract was for a piece of work and since the projects called for the construction and installation of facilities in the Philippines, the entire income therefrom constituted income from Philippine sources, hence, subject to internal revenue taxes. The assessment letter further stated that the same was petitioner's final decision and that if respondent disagreed with it, respondent may file an appeal with the Court of Tax Appeals within thirty (30) days from receipt of the assessment.

On September 26, 1986, respondent filed two (2) petitions for review with the Court of Tax Appeals. The first petition, CTA Case No. 4109, questioned the deficiency income, branch profit remittance and contractor's tax assessments in petitioner's assessment letter. The second, CTA Case No. 4110, questioned the deficiency commercial broker's assessment in the same letter.

Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 2 declaring a onetime amnesty covering unpaid income taxes for the years 1981 to 1985 was issued. Under this E.O., a taxpayer who wished to avail of the income tax amnesty should, on or before October 31, 1986: (a) file a sworn statement declaring his net worth as of December 31, 1985; (b) file a certified true copy of his statement declaring his net worth as of December 31, 1980 on record with the Bureau of Internal Revenue (BIR), or if no such record exists, file a statement of said net worth subject to verification by the BIR; and (c) file a return and pay a tax equivalent to ten per cent (10%) of the increase in net worth from December 31, 1980 to December 31, 1985.

In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated October 30, 1986 and attached thereto its sworn statement of

assets and liabilities and net worth as of Fiscal Year (FY) 1981 and FY 1986. The return was received by the BIR on November 3, 1986 and respondent paid the amount of P2,891,273.00 equivalent to ten percent (10%) of its net worth increase between 1981 and 1986.

The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to December 5, 1986 by E.O. No. 54 dated November 4, 1986.

On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by Executive Order (E.O.) No. 64. In addition to the income tax amnesty granted by E.O. No. 41 for the years 1981 to 1985, E.O. No. 64 3 included estate and donor's taxes under Title III and the tax on business under Chapter II, Title V of the National Internal Revenue Code, also covering the years 1981 to 1985. E.O. No. 64 further provided that the immunities and privileges under E.O. No. 41 were extended to the foregoing tax liabilities, and the period within which the taxpayer could avail of the amnesty was extended to December 15, 1986. Those taxpayers who already filed their amnesty return under E.O. No. 41, as amended, could avail themselves of the benefits, immunities and privileges under the new E.O. by filing an amended return and paying an additional 5% on the increase in net worth to cover business, estate and donor's tax liabilities.

The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95 dated December 17, 1986.

On December 15, 1986, respondent filed a supplemental tax amnesty return under the benefit of E.O. No. 64 and paid a further amount of P1,445,637.00 to the BIR equivalent to five percent (5%) of the increase of its net worth between 1981 and 1986.

On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals rendered a decision in CTA Case No. 4109. The tax court found

that respondent had properly availed of the tax amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes subject of said case as deemed cancelled and withdrawn. The Court of Tax Appeals disposed of as follows:

"WHEREFORE, the respondent Commissioner of Internal Revenue is hereby ORDERED to DESIST from collecting the 1985 deficiency taxes it had assessed against petitioner and the same are deemed considered [sic] CANCELLED and WITHDRAWN by reason of the proper availment by petitioner of the amnesty under Executive Order No. 41, as amended." 4

Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with the Court of Appeals.

On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the decision of the Court of Tax Appeals. Hence, this recourse.

Before us, petitioner raises the following issues:

"(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of Tax Appeals which ruled that herein respondent's deficiency tax liabilities were extinguished upon respondent's availment of tax amnesty under Executive Orders Nos. 41 and 64.

(2) Whether or not respondent is liable to pay the income, branch profit remittance, and contractor's taxes assessed by petitioner." 5

The main controversy in this case lies in the interpretation of the exception to the amnesty coverage of E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein — income tax, branch profit remittance tax and contractor's tax. These taxes are covered by the amnesties granted by E.O. Nos. 41 and 64. Petitioner claims, however, that respondent is disqualified from availing of the said amnesties because the latter falls under the exception in Section 4 (b) of E.O. No. 41.

Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted thereunder, viz:

"Sec. 4. Exceptions. — The following taxpayers may not avail themselves of the amnesty herein granted:

a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;

b) Those with income tax cases already filed in Court as of the effectivity hereof;

c) Those with criminal cases involving violations of the income tax law already filed in court as of the effectivity hereof;

d) Those that have withholding tax liabilities under the National Internal Revenue Code, as amended, insofar as the said liabilities are concerned;

e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of the effectivity hereof as a result of information furnished under Section 316 of the National Internal Revenue Code, as amended;

f) Those with pending cases involving unexplained or unlawfully acquired wealth before the Sandiganbayan;

g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and Transactions) and Chapter Four (Malversation of Public Funds and Property) of the Revised Penal Code, as amended."

Petitioner argues that at the time respondent filed for income tax amnesty on October 30, 1986, CTA Case No. 4109 had already been filed and was pending; before the Court of Tax Appeals. Respondent therefore fell under the exception in Section 4 (b) of E.O. No. 41.

Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and unambiguous. It excepts from income tax amnesty those taxpayers

"with income tax cases already filed in court as of the effectivity hereof." The point of reference is the date of effectivity of E.O. No. 41. The filing of income tax cases in court must have been made before and as of the date of effectivity of E.O. No. 41. Thus, for a taxpayer not to be disqualified under Section 4 (b) there must have been no income tax cases filed in court against him when E.O. No. 41 took effect. This is regardless of when the taxpayer filed for income tax amnesty, provided of course he files it on or before the deadline for filing.

E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985 deficiency income, branch profit remittance and contractor's tax assessments was filed by respondent with the Court of Tax Appeals on September 26, 1986. When E.O. No. 41 became effective on August 22, 1986, CTA Case No. 4109 had not yet been filed in court. Respondent corporation did not fall under the said exception in Section 4 (b), hence, respondent was not disqualified from availing of the amnesty for income tax under E.O. No. 41.

The same ruling also applies to the deficiency branch profit remittance tax assessment. A branch profit remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II, Chapter III of the National Internal Revenue Code. 6 In the tax code, this tax falls under Title II on Income Tax. It is a tax on income. Respondent therefore did not fall under the exception in Section 4 (b) when it filed for amnesty of its deficiency branch profit remittance tax assessment.

The difficulty herein is with respect to the contractor's tax assessment and respondent's availment of the amnesty under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O. No. 41 by including estate and donor's taxes and tax on business. Estate and donor's taxes fall under Title III of the Tax Code while business taxes fall under Chapter II, Title V of the same. The contractor's tax is provided in Section 205, Chapter II, Title V of the Tax Code; it is defined and imposed under the title on business taxes, and is therefore a tax on business.7

When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to the coverage of the amnesty for business, estate and donor's taxes. Instead, Section 8 of E.O. No. 64 provided that:

"Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or inconsistent with this amendatory Executive Order shall remain in full force and effect."

By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or inconsistent with the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of E.O. No. 41 on the exceptions to amnesty coverage also applied to E.O. No. 64. With respect to Section 4 (b) in particular, this provision excepts from tax amnesty coverage a taxpayer who has "income tax cases already filed in court as of the effectivity hereof." As to what Executive Order the exception refers to, respondent argues that because of the words "income" and "hereof," they refer to Executive Order No. 41. 8

In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to refer to E.O. No. 41 and its date of effectivity. The general rule is that an amendatory act operates prospectively. 9 While an amendment is generally construed as becoming a part of the original act as if it had always been contained therein,10 it may not be given a retroactive effect unless it is so provided expressly or by necessary implication and no vested right or obligations of contract are thereby impaired. 11

There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity of E.O. No. 41, the original issuance. Neither is it necessarily implied from E.O. No. 64 that it or any of its provisions should apply retroactively. Executive Order No. 64 is a substantive amendment of E.O. No. 41. It does not merely change provisions in E.O. No. 41. It supplements the original act by adding other taxes not covered in the first. 12 It has been held

that where a statute amending a tax law is silent as to whether it operates retroactively, the amendment will not be given a retroactive effect so as to subject to tax past transactions not subject to tax under the original act. 13 In an amendatory act, every case of doubt must be resolved against its retroactive effect.14

Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law.15 It partakes of an absolute forgiveness or waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate.16 A tax amnesty, much like a tax exemption, is never favored nor presumed in law.17 If granted, the terms of the amnesty, like that of a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority. 18 For the right of taxation is inherent in government. The State cannot strip itself of the most essential power of taxation by doubtful words. He who claims an exemption (or an amnesty) from the common burden must justify his claim by the clearest grant of organic or state law. It cannot be allowed to exist upon a vague implication. If a doubt arises as to the intent of the legislature, that doubt must be resolved in favor of the state. 19

In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should therefore be construed strictly against the taxpayer. The term "income tax cases" should be read as to refer to estate and donor's taxes and taxes on business while the word "hereof," to E.O. No. 64. Since Executive Order No. 64 took effect on November 17, 1986, consequently, insofar as the taxes in E.O. No. 64 are concerned, the date of effectivity referred to in Section 4 (b) of E.O. No. 41 should be November 17, 1986.

Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect on November 17, 1986, CTA Case No. 4109 was already filed and pending in court. By the time respondent filed its supplementary tax amnesty return on December 15, 1986, respondent already fell under the exception in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified from availing of the business tax amnesty granted therein.

It is respondent's other argument that assuming it did not validly avail of the amnesty under the two Executive Orders, it is still not liable for the deficiency contractor's tax because the income from the projects came from the "Offshore Portion" of the contracts. The two contracts were divided into two parts, i.e., the Onshore Portion and the Offshore Portion. All materials and equipment in the contract under the "Offshore Portion" were manufactured and completed in Japan, not in the Philippines, and are therefore not subject to Philippine taxes.

Before going into respondent's arguments, it is necessary to discuss the background of the two contracts, examine their pertinent provisions and implementation.

The NDC and Philphos are two government corporations. In 1980, the NDC, as the corporate investment arm of the Philippine Government, established the Philphos to engage in the large-scale manufacture of phosphatic fertilizer for the local and foreign markets.20 The Philphos plant complex which was envisioned to be the largest phosphatic fertilizer operation in Asia, and among the largest in the world, covered an area of 180 hectares within the 435hectare Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte.

In 1982, the NDC opened for public bidding a project to construct and install a modern, reliable, efficient and integrated wharf/port complex at the Leyte

Industrial Development Estate. The wharf/port complex was intended to be one of the major facilities for the industrial plants at the Leyte Industrial Development Estate. It was to be specifically adapted to the site for the handling of phosphate rock, bagged or bulk fertilizer products, liquid materials and other products of Philphos, the Philippine Associated Smelting and Refining Corporation (Pasar),21 and other industrial plants within the Estate. The bidding was participated in by Marubeni Head Office in Japan.

Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered into an agreement entitled "Turn-Key Contract for Leyte Industrial Estate Port Development Project Between National Development Company and Marubeni Corporation."22 The Port Development Project would consist of a wharf, berths, causeways, mechanical and liquids unloading and loading systems, fuel oil depot, utilities systems, storage and service buildings, offsite facilities, harbor service vessels, navigational aid system, fire-fighting system, area lighting, mobile equipment, spare parts and other related facilities.23 The scope of the works under the contract covered turn-key supply, which included grants of licenses and the transfer of technology and knowhow,24 and:

". . . the design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning of the Wharf-Port Complex as set forth in Annex I of this Contract, as well as the coordination of tie-ins at boundaries and schedule of the use of a part or the whole of the Wharf/Port Complex through the Owner, with the design and construction of other facilities around the site. The scope of works shall also include any activity, work and supply necessary for, incidental to or appropriate under present international industrial port practice, for the timely and successful implementation of the object of this Contract, whether or not expressly referred to in the abovementioned Annex I."25

The contract price for the wharf/port complex was ¥12,790,389,000.00 and P44,327,940.00. In the contract, the price in Japanese currency was broken down into two portions: (1) the Japanese Yen Portion I; (2) the Japanese Yen Portion II, while the price in Philippine currency was referred to as the Philippine Pesos Portion. The Japanese Yen Portions I and II were financed in two (2) ways: (a) by yen credit loan provided by the Overseas Economic Cooperation Fund (OECF); and (b) by supplier's credit in favor of Marubeni from the Export-Import Bank of Japan. The OECF is a Fund under the Ministry of Finance of Japan extended by the Japanese government as assistance to foreign governments to promote economic development. 26 The OECF extended to the Philippine Government a loan of ¥7,560,000,000.00 for the Leyte Industrial Estate Port Development Project and authorized the NDC to implement the same.27 The other type of financing is an indirect type where the supplier, i.e., Marubeni, obtained a loan from the Export-Import Bank of Japan to advance payment to its sub-contractors.28

Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos Portion were further broken down and subdivided according to the materials, equipment and services rendered on the project. The price breakdown and the corresponding materials, equipment and services were contained in a list attached as Annex III to the contract. 29

A few months after execution of the NDC contract, Philphos opened for public bidding a project to construct and install two ammonia storage tanks in Isabel. Like the NDC contract, it was Marubeni Head Office in Japan that participated in and won the bidding. Thus, on May 2, 1982, Philphos and respondent corporation entered into an agreement entitled "Turn-Key Contract for Ammonia Storage Complex Between Philippine Phosphate Fertilizer Corporation and Marubeni Corporation."30 The object of the contract was to establish and place in operating condition a modern, reliable, efficient and integrated ammonia storage complex adapted to the site for the receipt and

storage of liquid anhydrous ammonia31 and for the delivery of ammonia to an integrated fertilizer plant adjacent to the storage complex and to vessels at the dock.32 The storage complex was to consist of ammonia storage tanks, refrigeration system, ship unloading system, transfer pumps, ammonia heating system, fire-fighting system, area lighting, spare parts, and other related facilities.33 The scope of the works required for the completion of the ammonia storage complex covered the supply, including grants of licenses and transfer of technology and know-how,34 and:

". . . the design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning of the Ammonia Storage Complex as set forth in Annex I of this Contract, as well as the coordination of tie-ins at boundaries and schedule of the use of a part or the whole of the Ammonia Storage Complex through the Owner with the design and construction of other facilities at and around the Site. The scope of works shall also include any activity, work and supply necessary for, incidental to or appropriate under present international industrial practice, for the timely and successful implementation of the object of this Contract, whether or not expressly referred to in the abovementioned Annex I."35

The contract price for the project was ¥3,255,751,000.00 and P17,406,000.00. Like the NDC contract, the price was divided into three portions. The price in Japanese currency was broken down into the Japanese Yen Portion I and Japanese Yen Portion II while the price in Philippine currency was classified as the Philippine Pesos Portion. Both Japanese Yen Portions I and II were financed by supplier's credit from the Export-Import Bank of Japan. The price stated in the three portions were further broken down into the corresponding materials, equipment and services required for the project and their individual prices. Like the NDC contract, the breakdown in the Philphos contract is contained in a list attached to the latter as Annex III. 36

The division of the price into Japanese Yen Portions I and II and the Philippine Pesos Portion under the two contracts corresponds to the two parts into which the contracts were classified — the Foreign Offshore Portion and the Philippine Onshore Portion. In both contracts, the Japanese Yen Portion I corresponds to the Foreign Offshore Portion.37 Japanese Yen Portion II and the Philippine Pesos Portion correspond to the Philippine Onshore Portion. 38

Under the Philippine Onshore Portion, respondent does not deny its liability for the contractor's tax on the income from the two projects. In fact respondent claims, which petitioner has not denied, that the income it derived from the Onshore Portion of the two projects had been declared for tax purposes and the taxes thereon already paid to the Philippine government. 39 It is with regard to the gross receipts from the Foreign Offshore Portion of the two contracts that the liabilities involved in the assessments subject of this case arose. Petitioner argues that since the two agreements are turn-key,40 they call for the supply of both materials and services to the client, they are contracts for a piece of work and are indivisible. The situs of the two projects is in the Philippines, and the materials provided and services rendered were all done and completed within the territorial jurisdiction of the Philippines. 41 Accordingly, respondent's entire receipts from the contracts, including its receipts from the Offshore Portion, constitute income from Philippine sources. The total gross receipts covering both labor and materials should be subjected to contractor's tax in accordance with the ruling in Commissioner of Internal Revenue v. Engineering Equipment & Supply Co.42

A contractor's tax is imposed in the National Internal Revenue Code (NIRC) as follows:

"Sec. 205. Contractors, proprietors or operators of dockyards, and others. —A contractor's tax of four percent of the gross receipts is hereby imposed on proprietors or operators of the following business establishments and/or

persons engaged in the business of selling or rendering the following services for a fee or compensation:

(a) General engineering, general building and specialty contractors, as defined in Republic Act No. 4566;

xxx

xxx

xxx

(q) Other independent contractors. The term "independent contractors" includes persons (juridical or natural) not enumerated above (but not including individuals subject to the occupation tax under the Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees. It does not include regional or area headquarters established in the Philippines by multinational corporations, including their alien executives, and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region.

xxx

xxx

xxx43

Under the afore-quoted provision, an independent contractor is a person whose activity consists essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees. The word "contractor" refers to a person who, in the pursuit of independent business, undertakes to do a specific job or piece of work for other persons, using his own means and methods without submitting himself to control as to the petty details.44

A contractor's tax is a tax imposed upon the privilege of engaging in business.45 It is generally in the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on products; 46 and is directly collectible from the person exercising the privilege. 47 Being an excise tax, it can be levied by the taxing authority only when the acts, privileges or business are done or performed within the jurisdiction of said authority. 48 Like property taxes, it cannot be imposed on an occupation or privilege outside the taxing district.49

In the case at bar, it is undisputed that respondent was an independent contractor under the terms of the two subject contracts. Respondent, however, argues that the work therein were not all performed in the Philippines because some of them were completed in Japan in accordance with the provisions of the contracts.

An examination of Annex III to the two contracts reveals that the materials and equipment to be made and the works and services to be performed by respondent are indeed classified into two. The first part, entitled "Breakdown of Japanese Yen Portion I" provides:

"Japanese Yen Portion I of the Contract Price has been subdivided according to discrete portions of materials and equipment which will be shipped to Leyte as units and lots. This subdivision of price is to be used by owner to verify invoice for Progress Payments under Article 19.2.1 of the Contract. The agreed subdivision of Japanese Yen Portion I is as follows:

xxx

xxx

xxx50

The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese Yen Portion II and the Philippine Pesos Portion enumerate other materials and equipment and the construction and installation work on the project. In other words, the supplies for the project are listed under Portion

I while labor and other supplies are listed under Portion II and the Philippine Pesos Portion. Mr. Takeshi Hojo, then General Manager of the Industrial Plant Section II of the Industrial Plant Department of Marubeni Corporation in Japan who supervised the implementation of the two projects, testified that all the machines and equipment listed under Japanese Yen Portion I in Annex III were manufactured in Japan.51 The machines and equipment were designed, engineered and fabricated by Japanese firms sub-contracted by Marubeni from the list of sub-contractors in the technical appendices to each contract. 52 Marubeni sub-contracted a majority of the equipment and supplies to Kawasaki Steel Corporation which did the design, fabrication, engineering and manufacture thereof;53 Yashima & Co. Ltd. which manufactured the mobile equipment; Bridgestone which provided the rubber fenders of the mobile equipment;54 and B.S. Japan for the supply of radio equipment. 55 The engineering and design works made by Kawasaki Steel Corporation included the lay-out of the plant facility and calculation of the design in accordance with the specifications given by respondent.56 All sub-contractors and manufacturers are Japanese corporations and are based in Japan and all engineering and design works were performed in that country.57

The materials and equipment under Portion I of the NDC Port Project is primarily composed of two (2) sets of ship unloader and loader; several boats and mobile equipment.58 The ship unloader unloads bags or bulk products from the ship to the port while the ship loader loads products from the port to the ship. The unloader and loader are big steel structures on top of each is a large crane and a compartment for operation of the crane. Two sets of these equipment were completely manufactured in Japan according to the specifications of the project. After manufacture, they were rolled on to a barge and transported to Isabel, Leyte.59 Upon reaching Isabel, the unloader and loader were rolled off the barge and pulled to the pier to the spot where they

were installed.60 Their installation simply consisted of bolting them onto the pier.61

Like the ship unloader and loader, the three tugboats and a line boat were completely manufactured in Japan. The boats sailed to Isabel on their own power. The mobile equipment, consisting of three to four sets of tractors, cranes and dozers, trailers and forklifts, were also manufactured and completed in Japan. They were loaded on to a shipping vessel and unloaded at the Isabel Port. These pieces of equipment were all on wheels and selfpropelled. Once unloaded at the port, they were ready to be driven and perform what they were designed to do. 62

In addition to the foregoing, there are other items listed in Japanese Yen Portion I in Annex III to the NDC contract. These other items consist of supplies and materials for five (5) berths, two (2) roads, a causeway, a warehouse, a transit shed, an administration building and a security building. Most of the materials consist of steel sheets, steel pipes, channels and beams and other steel structures, navigational and communication as well as electrical equipment.63

In connection with the Philphos contract, the major pieces of equipment supplied by respondent were the ammonia storage tanks and refrigeration units.64 The steel plates for the tank were manufactured and cut in Japan according to drawings and specifications and then shipped to Isabel. Once there, respondent's employees put the steel plates together to form the storage tank. As to the refrigeration units, they were completed and assembled in Japan and thereafter shipped to Isabel. The units were simply installed there. 65 Annex III to the Philphos contract lists down under the Japanese Yen Portion I the materials for the ammonia storage tank, incidental equipment, piping facilities, electrical and instrumental apparatus, foundation material and spare parts.

All the materials and equipment transported to the Philippines were inspected and tested in Japan prior to shipment in accordance with the terms of the contracts.66 The inspection was made by representatives of respondent corporation, of NDC and Philphos. NDC, in fact, contracted the services of a private consultancy firm to verify the correctness of the tests on the machines and equipment67 while Philphos sent a representative to Japan to inspect the storage equipment.68

The sub-contractors of the materials and equipment under Japanese Yen Portion I were all paid by respondent in Japan. In his deposition upon oral examination, Kenjiro Yamakawa, formerly the Assistant General Manager and Manager of the Steel Plant Marketing Department, Engineering & Construction Division, Kawasaki Steel Corporation, testified that the equipment and supplies for the two projects provided by Kawasaki under Japanese Yen Portion I were paid by Marubeni in Japan. Receipts for such payments were duly issued by Kawasaki in Japanese and English. 69 Yashima & Co. Ltd. and B.S. Japan were likewise paid by Marubeni in Japan. 70

Between Marubeni and the two Philippine corporations, payments for all materials and equipment under Japanese Yen Portion I were made to Marubeni by NDC and Philphos also in Japan. The NDC, through the Philippine National Bank, established letters of credit in favor of respondent through the Bank of Tokyo. The letters of credit were financed by letters of commitment issued by the OECF with the Bank of Tokyo. The Bank of Tokyo, upon respondent's submission of pertinent documents, released the amount in the letters of credit in favor of respondent and credited the amount therein to respondent's account within the same bank. 71

Clearly, the service of "design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning, coordination. . . " 72 of the two projects involved two

taxing jurisdictions. These acts occurred in two countries — Japan and the Philippines. While the construction and installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. The two sets of ship unloader and loader, the boats and mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units were made and completed in Japan. They were already finished products when shipped to the Philippines. The other construction supplies listed under the Offshore Portion such as the steel sheets, pipes and structures, electrical and instrumental apparatus, these were not finished products when shipped to the Philippines. They, however, were likewise fabricated and manufactured by the subcontractors in Japan. All services for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to contractor's tax.

Contrary to petitioner's claim, the case of Commissioner of Internal Revenue v. Engineering Equipment & Supply Co73 is not in point. In that case, the Court found that Engineering Equipment, although an independent contractor, was not engaged in the manufacture of air conditioning units in the Philippines. Engineering Equipment designed, supplied and installed centralized airconditioning systems for clients who contracted its services. Engineering, however, did not manufacture all the materials for the air-conditioning system. It imported some items for the system it designed and installed. 74 The issues in that case dealt with services performed within the local taxing jurisdiction. There was no foreign element involved in the supply of materials and services.

With the foregoing discussion, it is unnecessary to discuss the other issues raised by the parties.

IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is affirmed.

SO ORDERED.

Footnotes

1

Assessment Letter of the Commissioner of Internal Revenue, Rollo, pp. 73-74; also marked as Exhibit "C" Pet and Exhibit "2"

Resp, Folder No. 11, BIR Records, pp. 2072-2076.

2

Entitled "Declaring a One-Time Tax Amnesty Covering Unpaid Income Taxes for the Years 1981 to 1985."

3

Entitled "Declaring a One-Time Tax Amnesty Covering Income Taxes, Estate and Donor's Taxes Under Title III, And The Tax on

Business Under Chapter II, Title V, of the National Internal Revenue Code, As Amended, For the Years 1981-1985."

4

CTA Decision, Annex "B" to Petition, Rollo, p. 45.

5

Petition, p. 6; Rollo, p. 15.

6

1984 and 1986 NIRC.

7

Title V, 1984 and 1986 NIRC. Business taxes were replaced in 1988 by the Value-Added Tax under Executive Order No. 273.

8

Comment, pp. 14-15; Rollo, pp. 99-100.

9

Agpalo, Statutory Construction, p. 395 [1998]; Sutherland, Statutory Construction, vol. 1A (5th ed.) Sec. 22.36, p. 304 [1992-

1994].

10

People v. Garcia, 85 Phil. 651, 655 [1951]; Sutherland, supra, Sec. 22.35.

11

Buyco v. Philippine National Bank, 112 Phil. 588, 592 [1961]; Pacia v. Kapisanan ng mga Manggagawa sa MRR Co., 99 Phil. 45,

48 [1956]; Agpalo, supra, pp. 370, 395 [1998].

12

A supplementary act is an amendatory act that supplies a deficiency, adds to, completes or extends that which is already in

existence without changing or modifying the original — Sutherland, supra, Secs. 22.24 and 22.01.

13

Collector of Internal Revenue v. La Tondeña, Inc., 115 Phil. 841, 846-847 [1962].

14

Montilla v. Agustinian Corp., 24 Phil. 220, 222 [1913]; Agpalo, supra, at 370, 395.

15

Republic v. Intermediate Appellate Court, 196 SCRA 335, 340 [1991] citing Commissioner of Internal Revenue v. Botelho

Corporation & Shipping Co., Inc., 20 SCRA 487 [1967].

16

Ibid.

17

Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152, 171-172 [1999]; People v. Castañeda, 165 SCRA 327, 341

[1988].

18

People v. Castañeda, supra, at 341; E. Rodriguez Inc. v. Collector of Internal Revenue, 28 SCRA 1119, 1127-1128 [1969];

Commissioner of Internal Revenue v. A.D. Guerrero, 21 SCRA 180, 183-185 [1967]; Asiatic Petroleum v. Llanes, 49 Phil. 466, 471 [1926].

19

Asiatic Petroleum v. Llanes, supra, at 471-472.

20

Exh. "AA," Project Background, Philippine Phosphatic Fertilizer Corporation, Folder No. 5, CTA Case No. 4109.

21

Pasar is a copper smelter plant whose sulfuric acid by-product is used in manufacturing fertilizers — Exhibit "AA-1" Pet, Folder

No. 5, CTA Case No. 4109

22

Exhibit "J" Pet, "Wharf/Port Complex," Turn-Key Contract for Leyte Industrial Estate Port Project Between the National

Development Company [sic] and Marubeni Corporation (hereinafter to be referred to as the "NDC Contract"), Folder No. 2, CTA Case No. 4109 and CTA Case No. 4110.

23

Exhibit "J" Pet, NDC Contract, Article 1, supra.

24

Exhibit "J" Pet, NDC Contract, Article 2.1, supra.

25

"Scope of Work," Exhibit "J" Pet, NDC Contract, Article 2.2, supra.

26

Exhibit "JJJ" Pet, Exchange of Notes dated June 9, 1981 by and between the Japanese and Philippine Governments, Folder No.

8, CTA Case No. 4109 and CTA Case No. 4110.

27

Exhibit "JJJ-1" Pet, "Loan Agreement for the Leyte Industrial Estate Port Development Project," Folder No. 8, CTA Case No. 4109

and CTA Case No. 4110.

28

Takeshi Hojo, TSN of March 23, 1990, pp. 17-20.

29

Exhibit "J-2" Pet, Breakdown of Japanese Yen Portions I & II and Philippine Pesos Portion of Contract Price, Annex III to NDC

Contract, Folder No. 2, CTA Case No. 4109 and CTA Case No. 4110.

30

Exhibit "I" Pet, Folder No. 4, CTA Case No. 4109 and CTA Case No. 4110.

31

Ammonia is one of the raw materials for fertilizer production — Hojo, TSN of March 21, 1990, pp. 20-21.

32

Exhibit "I" Pet, Article 2.1, Turn-key Contract for Ammonia Storage Complex Between Philippine Phosphate Fertilizer Corporation

and Marubeni Corporation," (hereinafter referred to as Philphos Contract), supra.

33

Exhibit "I" Pet, Article I, "Ammonia Storage Complex," Philphos Contract, supra.

34

Exhibit "I" Pet, Article 2.1, Philphos Contract, supra.

35

"Scope of Work," Exhibit "I" Pet," Article 2.2, Philphos Contract, supra.

36

Exhibit "I-2 Pet," Breakdown of Japanese Yen Portions I & II and Philippine Pesos Portion of Contract Price, Annex III to Philphos

Contract, Folder No. 4, CTA Case No. 4109 and CTA Case No. 4110.

37

Hojo, TSN of March 22, 1990, pp. 6-7.

38

Id.

39

Footnote No. 2, Comment, p.16; Rollo, p. 19.

40

A "turn-key job" is defined as a job or contract in which the contractor agrees to complete the work of building and installation to

the point of readiness for operation or occupancy — Webster's Third New International Dictionary of the English Language, Unabridged [1993].

41

Exhibit "4" Resp, Memorandum of Head Revenue Examiner to the Commissioner of Internal Revenue, BIR Records, Folder No.

11, CTA Case No. 4109 and CTA Case No. 4110; Exhibit "2" Resp, Letter Assessment of Commissioner Tan, Rollo, pp. 73-77.

42

64 SCRA 590 [1975].

43

1984 NIRC; Sec. 170, 1986 NIRC. The contractor's tax was replaced in 1988 by the Value-Added Tax pursuant to Executive

Order No. 273.

44

Commissioner of Internal Revenue v. Engineering Equipment & Supply Co., 64 SCRA 590, 597-598 [1975].

45

Section 205 in relation to Section 188, 1984 NIRC; Aranas, National Internal Revenue Code, vol. 2, p. 134 [1983].

46

Commissioner of Internal Revenue v. Court of Tax Appeals and Avecilla Building Corp., 134 SCRA 49, 54 [1985];Celestino & Co.

v. Collector, 99 Phil. 841, 843 [1956]; E. Gonzales and C. Gonzales, National Internal Revenue Code, p. 527 [1984].

47

Gonzales and Gonzales, National Internal Revenue Code, p. 456 [1986].

48

Iloilo Bottlers, Inc. v. City of Iloilo, 164 SCRA 607, 615 [1988]; Commissioner of Internal Revenue v. British Overseas Airways Corp.,

149 SCRA 395, 410 [1987].

49

Gulf Refining Co. v. City of Knoxville, 136 Tenn 23, 188 SW 798, 799 [1916]; Robinson v. City of Norfolk, 108 Va. 14, 60 SE 762,

763-764, 15 LRA (N.S.) 294 [1908] — a license tax for revenue cannot be imposed by a city upon a circus exhibiting beyond its territorial limits; see also Cooley, The Law of Taxation, vol. 4, Secs. 1675, 1683; Cooley, vol. 1, Secs. 46, 94-95 [1924].

50

Exhibit "J-2" Pet, Annex III to NDC Contract, supra; Exhibit "I-2" Pet, Annex III to Philphos Contract, supra.

51

Hojo, TSN of March 22, 1990, pp. 11, 15.

52

Exhibits "J-8-a" to "J-8-d" Pet ,Vendor's List, Chapter 1.14, Leyte Industrial Estate Port Development Project, Technical

Appendices to the Contract, pp. 1-127 to 1-131, Folder No. 2, CTA Case No. 4109; Exhibits "I-13-a" to "I-13-i" Pet, Vendor's List for Main Items, Chapter II, Technical Appendices for Leyte Fertilizer Project, Ammonia Storage Complex, pp. II-5.7-1 to II-5.7-9, Folder No. 1, CTA Case No. 4109.

53

Hojo, TSN of March 22, 1990, p. 34; Kenjiro Yamakawa, TSN of Deposition Upon Oral Examination, January 31, 1992, p. 6;

Exhibit "OO" Pet, Plant Supply Contract between Marubeni and Kawasaki Steel Corporation for NDC Project, Folder No. 6, CTA Case No. 4109; Exhibit "BBB-1" Pet, Plant Supply Contract between Marubeni and Kawasaki Steel Corporation for Philphos Project, Folder No. 7, CTA Case No. 4109. Both contracts allow Marubeni to procure materials and equipment from an approved list of sub-contractors without need of further approval from the owner — Article 8.4, Philphos contract; Article 8.4, NDC contract, supra.

54

Hojo, TSN of March 22, 1990, p. 34.

55

Exhibit "AAA-1" to "AAA-1-b" Pet, Folder No. 7, CTA Case No. 4109.

56

Hojo, TSN of March 21, 1990, p. 32.

57

Hojo, TSN of March 21, 1990, pp. 33-34.

58

Exhibit "J-2" Pet, Annex III to NDC Contract, pp. 356-363, supra.

59

Exhibit "FF" Pet, Photograph of ship unloader and loader on a barge, Folder No. 5, CTA Case No. 4109.

60

Hojo, TSN of March 22, 1990, pp. 11-12; Exhibit "FF-1" Pet, Photograph of roll off works for ship unloader, Folder No. 5, CTA

Case No. 4109.

61

Hojo, TSN of March 22, 1990, pp. 11-12; TSN of March 23, 1990, pp. 39-40.

62

Hojo, TSN of March 23, 1990, pp. 38-39; Exhibits "II" and "JJ" Pet, Photographs of mobile equipment, Folder No. 5, supra.

63

Annex III to NDC Contract pp. 357-363, Exhibit "J-2" Pet, Folder No. 2, CTA Case No. 4109 and CTA Case No. 4110.

64

Hojo, TSN of March 23, 1990, pp. 42-43.

65

Hojo, TSN of March 23, 1990, pp. 42-43.

66

Exhibit "J" Pet, Article 11, pp. 45-47, NDC Contract, supra; Exhibit "I" Pet, Article 11.5, pp. 43-44, Philphos Contract, supra.

67

Exhibit "KK" Pet, NDC Board Resolution appointing Pacific Consultants, Int'l., Folder No. 3, CTA Case No. 4109.

68

Exhibit "LL" Pet, letter of Philphos VP appointing a representative to inspect storage equipment, Folder No. 5, CTA Case No.

4109.

69

Exhibits "VV," "VV-1" to "VV-50-a" Pet, Folder No. 7, CTA Case No. 4109; Exhibits "CCC-1" to "CCC-27-a" Pet, Folder No. 6, CTA

Case No. 4109.

70

Hisatsugu Yoshida, TSN of September 20, 1991, pp. 15-33; Exhibits "VV" Pet, "ZZ," "ZZ-2-d," "AAA" Pet, Folder No. 6, CTA Case

No. 4109.

71

Yoshida, TSN of Deposition Upon Oral Interrogatories, January 27, 1993, pp. 11-12; Exhibits "JJJ-3" to "JJJ-17-c" Pet, Folder

No. 10, CTA Case No. 4109.

72

"Scope of Work," Exhibit "J" Pet, Article 2.1, NDC Contract; Exhibit "I" Pet, Article 2.1 Philphos Contract.

73

64 SCRA 590 [1975].

74

Such as refrigeration compressors in complete set, heat exchangers or coils — Id., at 598.

FIRST DIVISION

G.R. No. 78133 October 18, 1988

MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners, vs. THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

GANCAYCO, J.:

The distinction between co-ownership and an unregistered partnership or joint venture for income tax purposes is the issue in this petition.

On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels of land were sold by petitioners in 1968 toMarenir Development Corporation, while the three parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioners realized a net profit in the sale made in 1968 in the amount of P165,224.70, while they realized a net profit of P60,000.00 in the sale made in 1970. The corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years.

However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners were assessed and required to pay a total amount of P107,101.70 as alleged deficiency corporate income taxes for the years 1968 and 1970.

Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of tax amnesties way back in 1974.

In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968 and 1970, petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint venture taxable as a corporation under Section 20(b) and its income was subject to the taxes prescribed under Section 24, both of the National Internal Revenue Code

1

that the unregistered partnership was subject to corporate income tax as distinguished from profits derived from the partnership by them which is subject to individual income tax; and that the availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income tax liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, the petitioners were required to pay the deficiency income tax assessed.

Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case No. 3045. In due course, the respondent court by a majority decision of March 30, 1987,

2

affirmed the decision and action taken

by respondent commissioner with costs against petitioners.

It ruled that on the basis of the principle enunciated in Evangelista

3

an

unregistered partnership was in fact formed by petitioners which like a corporation was subject to corporate income tax distinct from that imposed on the partners.

In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the circumstances of this case, although there might in fact be a co-ownership between the petitioners, there was no adequate basis for the conclusion that they thereby formed an unregistered partnership which made "hem liable for corporate income tax under the Tax Code.

Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the respondent court:

A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO RESTS UPON THE PETITIONERS.

B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.

C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.

D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13, Rollo.)

The petition is meritorious.

The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista.

4

In the said case, petitioners borrowed a sum of money from their father which together with their own personal funds they used in buying several real properties. They appointed their brother to manage their properties with full power to lease, collect, rent, issue receipts, etc. They had the real properties rented or leased to various tenants for several years and they gained net

profits from the rental income. Thus, the Collector of Internal Revenue demanded the payment of income tax on a corporation, among others, from them.

In resolving the issue, this Court held as follows:

The issue in this case is whether petitioners are subject to the tax on corporations provided for in section 24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code, as well as to the residence tax for corporations and the real estate dealers' fixed tax. With respect to the tax on corporations, the issue hinges on the meaning of the terms corporation and partnership as used in sections 24 and 84 of said Code, the pertinent parts of which read:

Sec. 24. Rate of the tax on corporations.—There shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, no matter how created or organized but not including duly registered general co-partnerships (companies collectives), a tax upon such income equal to the sum of the following: ...

Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participation), associations or insurance companies, but does not include duly registered general co-partnerships (companies colectivas).

Article 1767 of the Civil Code of the Philippines provides:

By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.

Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide the profits among the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves, because:

1. Said common fund was not something they found already in existence. It was not a property inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion thereof in order to establish said common fund.

2. They invested the same, not merely in one transaction, but in a series of transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.00. This was soon followed, on April 23, 1944, by the acquisition of another real estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and transcations undertaken, as well as the brief interregnum between each, particularly the last three purchases, is strongly indicative of a pattern or common design that was not limited to the conservation and preservation of the aforementioned common fund or even of the property acquired by petitioners in February, 1943. In other words, one cannot but perceive a character of habituality peculiar to business transactions engaged in for purposes of gain.

3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of petitioners herein. The properties were leased separately to several persons, who, from 1945 to 1948 inclusive, paid the total sum of

P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest that there has been any change in the utilization thereof.

4. Since August, 1945, the properties have been under the management of one person, namely, Simeon Evangelists, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have been handled as if the same belonged to a corporation or business enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15) years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelists became the manager.

6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up already adverted to, or on the causes for its continued existence. They did not even try to offer an explanation therefor.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the collective effect of these circumstances is such as to leave no room for doubt on the existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances were present in the cases cited by petitioners herein, and, hence, those cases are not in point.

5

In the present case, there is no evidence that petitioners entered into an agreement to contribute money, property or industry to a common fund, and that they intended to divide the profits among themselves. Respondent commissioner and/ or his representative just assumed these conditions to be present on the basis of the fact that petitioners purchased certain parcels of land and became co-owners thereof.

In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24) lots showing that the purpose was not limited to the conservation or preservation of the common fund or even the properties acquired by them. The character of habituality peculiar to business transactions engaged in for the purpose of gain was present.

In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make any improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was only 1968 when they sold the two (2) parcels of land after which they did not make any additional or new purchase. The remaining three (3) parcels were sold by them in 1970. The transactions were isolated. The character of habituality peculiar to business transactions for the purpose of gain was not present.

In Evangelista, the properties were leased out to tenants for several years. The business was under the management of one of the partners. Such condition existed for over fifteen (15) years. None of the circumstances are present in the case at bar. The co-ownership started only in 1965 and ended in 1970.

Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:

I wish however to make the following observation Article 1769 of the new Civil Code lays down the rule for determining when a transaction should be deemed a partnership or a co-ownership. Said article paragraphs 2 and 3, provides;

(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived;

From the above it appears that the fact that those who agree to form a coownership share or do not share any profits made by the use of the property held in common does not convert their venture into a partnership. Or the sharing of the gross returns does not of itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. This only means that, aside from the circumstance of profit, the presence of other elements constituting partnership is necessary, such as the clear intent to form a partnership, the existence of a juridical personality different from that of the individual partners, and the freedom to transfer or assign any interest in the property by one with the consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)

It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain real estate for profit in the absence of other circumstances showing a contrary intention cannot be considered a partnership.

Persons who contribute property or funds for a common enterprise and agree to share the gross returns of that enterprise in proportion to their contribution, but who severally retain the title to their respective contribution, are not thereby rendered partners. They have no common stock or capital, and no community of interest as principal proprietors in the business itself which the proceeds derived. (Elements of the Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)

A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does an agreement to share the profits and losses on the

sale of land create a partnership; the parties are only tenants in common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)

Where plaintiff, his brother, and another agreed to become owners of a single tract of realty, holding as tenants in common, and to divide the profits of disposing of it, the brother and the other not being entitled to share in plaintiffs commission, no partnership existed as between the three parties, whatever their relation may have been as to third parties. (Magee vs. Magee 123 N.E. 673, 233 Mass. 341.)

In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b) generally participating in both profits and losses; (c) and such a community of interest, as far as third persons are concerned as enables each party to make contract, manage the business, and dispose of the whole property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)

The common ownership of property does not itself create a partnership between the owners, though they may use it for the purpose of making gains; and they may, without becoming partners, agree among themselves as to the management, and use of such property and the application of the proceeds therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.)

6

The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate basis to support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby they purchased properties and sold the same a few years thereafter

did not thereby make them partners. They shared in the gross profits as coowners and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership which is thereby liable for corporate income tax, as the respondent commissioner proposes.

And even assuming for the sake of argument that such unregistered partnership appears to have been formed, since there is no such existing unregistered partnership with a distinct personality nor with assets that can be held liable for said deficiency corporate income tax, then petitioners can be held individually liable as partners for this unpaid obligation of the partnership p.

7

However, as petitioners have availed of the benefits of tax

amnesty as individual taxpayers in these transactions, they are thereby relieved of any further tax liability arising therefrom.

WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered relieving petitioners of the corporate income tax liability in this case, without pronouncement as to costs.

SO ORDERED.

Footnotes

1 Annex C of the Petition, citing Evangelista v. Collector, G.R. No. 9996, Oct. 15,1957,102 Phil. 140.

2 Penned by Presiding Judge Amante Filler, concurred in by Associate Judge Alex Z. Reyes, Associate Judge Roaquin dissented in a separate opinion.

3 Supra.

4 Supra.

5 Supra, pp. 144-146; italics supplied.

6 Supra, pp. 150-151; italics supplied.

7 Article 1816. All partners, including industrial ones, shall be liable pro rata with all their property and after all the partnership assets have been exhausted, for the contracts which may be entered into in the name and for the account of the partnership, under its signature and by a person authorized to act for the partnership. However, any partner may enter into a separate obligation to perform a partnership contract. (Civil Code of the Philippines)

See also Articles 1817 and 1818, Supra.

THIRD DIVISION

G.R. No. L-46881 September 15, 1988

PEOPLE OF THE PHILIPPINES, petitioner, vs. HON. MARIANO CASTAÑEDA JR., Judge of the Court of First Instance of Pampanga, Branch III, VICENTE LEE TENG, PRISCILLA CASTILLO VDA. DE CURA and FRANCISCO VALENCIA, respondents.

FELICIANO, J.:

In this Petition for certiorari and mandamus, the People seek the annulment of the Orders of respondent Judge quashing criminal informations against the accused upon the grounds that: (a) accused Francisco Valencia was entitled to tax amnesty under Presidential Decree No. 370; and (b) that the dismissal of the criminal cases against accused Valencia inured to the benefit of his coaccused Vicente Lee Teng and Priscilla Castillo de Cura, and denying the People's Motion for Reconsideration of said Orders.

Sometime in 1971, two (2) informants submitted sworn information under Republic Act No. 2338 (entitled "An Act to Provide for Reward to Informers of Violations of the Internal Revenue and Customs Laws," effective June 19, 1959) to the Bureau of Internal Revenue ("BIR"), concerning alleged violations of provisions of the Internal Revenue Code committed by the private respondents, The record of this case includes an affidavit executed on 27 December 1971 by Mr. William Chan, one of the said informers, describing the details of alleged violations of the tax code.

1

After conducting an investigation,

the BIR applied for and obtained search warrants from Executive Judge Malcolm Sarmiento. Following investigation and examination by the BIR of the

materials and documents yielded by service of such search warrants, criminal informations were filed in court against the private respondents.

In July 1973, State Prosecutor Estanislao L. Granados Department of Justice, filed with the Court of First Instance of Pampanga an information docketed as Criminal Case No. 439 for violation of Sec. 170 (2) of the National Internal Revenue Code, as amended, against Francisco Valencia, Apolonio G. Erespe y Comia and Priscilla Castillo de Cura, committed as follows:

That on or about the 19th day of January, 1972, in the premises of Valencia Distillery located at del Pilar Street, San Fernando, Pampanga, Philippines, and within the jurisdiction of the abovenamed Court, the accused FRANCISCO VALENCIA, APOLONIO ERESPE Y COMIA and PRISCILLA QUIAZON OR "QUIAPO" alias "MARY JO," conspiring and confederating with one another, did then and there willfully, unlawfully, and feloniously have in their possession, custody and control, false and counterfeit or fake internal revenue labels consisting of five (5) sheets containing ten (10) labels each purporting to be regular labels of the Tanduay Distillery, Inc. bearing Serial Nos. 2571891 to 2571901 to 2571910, 2571911 to 2571920, 05381 to 05390 and 05391 to 05400.

CONTRARY to the provisions of Section 170, paragraph 2 of the National Internal Revenue Code, as amended.

2

On the same date, another criminal information docketed as Criminal Case No. 440 was filed by the same State Prosecutor in the same court for violation of Section 174 (3) of the National Internal Revenue Code, as amended against the same persons, charging them as follows:

That on or about the 19th day of January 1972 in the premises of Valencia Distillery located at del Pilar Street, San Fernando, Pampanga, Philippines and within the jurisdiction of this Honorable Court, the accused FRANCISCO

VALENCIA, APOLONIO G. ERESPE y COMIA and PRISCILLA QUIAZON or QUIANO alias MARY JO, conspiring and confederating together, did then and there wilfully, unlawfully and feloniously, have in their possession, custody and control, locally manufactured articles subject to specific tax, the tax on which has not been paid in accordance with law, THIRTY THREE (33) boxes of 24 bottles each of alleged Anejo Rum, 375 cc., NINE (9) BOXES of alleged Tanduay Rum of TWELVE (12) BOTTLES each, 750 cc., TWENTY (20) BOXES of alleged Ginebra San Miguel Gin of TWENTY FOUR (24) BOTTLES each, 375 cc., THREE (3) BOXES OF TWENTY FOUR (24) BOTTLES each, 375 cc., of Ginebra San Miguel Gin, ONE (1) GALLON bottle of wine improver, NINE lbs. net with actual contents of 1/5 of the bottle, ONE (1) SMALL BOTTLE, 1 Ib, net, of Rum Jamaica, half-full, ONE (1) BOTTLE, 1 Ib. net of the wine improvers (full), TWELVE (12) BOTTLES of alleged Tanduay Rum, 750 cc., pale, FOUR (4) BOTTLES of Ginebra San Miguel (alleged) 350 cc. and TWO (2) BOTTLES of Tanduay Rum, 375 cc. the total specific tax due on which is P160.01.

CONTRARY to Section 174 of the National Internal Revenue Code, as amended.

3

As a result of further investigation of the sworn complaints filed by the informers with the BIR, on 14 March 1974, six (6) more criminal informations docketed as Criminal Cases Nos., 538-543 were filed in the Pampanga Court of First Instance against Vicente Lee Teng alias "Vicente Lee," alias "Lee Teng," and Francisco Valencia. These informations charged the two (2) with violations of Section 178, in relation to Sections 182 (A) (1) (3c) and 208 of the National Internal Revenue Code, as amended based on their failure to pay annual privilege taxes for each of the six (6) years from 1966 to 1972. The six (6) informations uniformly charged the accused as follows:

The undersigned State Prosecutor accuses VICENTE LEE TENG alias VICENTE LEE alias LEE TENG, and FRANCISCO VALENCIA of the crime of Violation of Sec. 178 in relation with Sec. 182 (A) (1) 3c and Sec. 208 of the National Internal Revenue Code as amended, committed as follows:

That on or about the 19th of January 1972, [also during the years 1967, 1968, 1969, 1970 and 1971] in the premises of Valencia Distillery located at del Pilar Street, San Fernando, Pampanga, Philippines and within the jurisdiction of this Honorable Court, the above-named accused, conspiring and confederating together and mutually helping one another, did then and there willfully, unlawfully and feloniously distill, rectify, repair compound or manufacture alcoholic products subject to specific tax without having paid the privilege tax therefor. CONTRARY TO LAW.

4

On 22 April 1974, after arraignment, accused Valencia filed a Motion to Quash Criminal Cases Nos. 538-543 inclusive, upon the grounds that the six (6) informations had been filed without conducting the necessary preliminary investigation and that he was entitled to the benefits of the tax amnesty provided by P.D. No. 370. The State Prosecutor opposed the Motion to Quash arguing that the necessary preliminary investigation in the six (6) criminal cases had in fact been conducted and that in any case, failure to hold the preliminary investigation was not a ground for a motion to quash. The State Prosecutor further argued that the accused Valencia was not entitled to avail himself of the benefits of P.D. No. 370 since his tax cases were the subject of valid information submitted under R.A. No. 2338 as of 31 December 1973.

The respondent Judge granted the Motion to Quash and issued an Order, dated 15 July 1974, dismissing not only Criminal Cases Nos. 538-543 but also Criminal Cases Nos. 439 and 440 insofar as accused Francisco Valencia was concerned. A Motion for Reconsideration by the People was similarly denied by respondent Judge.

On 14 December 1975, the remaining accused Vicente Lee Teng and Priscilla Castillo de Cura, having been arraigned, filed Motions to Quash Criminal Cases Nos. 538-543 and 439 and 440, upon the common ground that the dismissal of said cases insofar as accused Francisco Valencia was concerned, inured to their benefit. The People opposed the Motions to Quash upon the ground that the accused were not entitled to the benefits of the tax amnesty under P.D. No. 370 and that, assuming the dismissal of said criminal cases was valid insofar as accused Valencia was concerned, the resulting immunity from criminal prosecution was personal to accused Valencia.

The respondent Judge granted the Motions to Quash by Vicente Lee Teng and Priscilla Castillo de Cura, and denied the People's Motion for Reconsideration.

There are two (2) preliminary issues which need to be addressed before dealing with the questions of substantive law posed by this case. The first preliminary issue-whether or not the People of the Philippines are guilty of laches-was raised by private respondents in their Answer.

5

The respondent Judge denied

the People's Motion for Reconsideration of his Order granting Francisco Valencia's Motion to Quash the eight (8) criminal cases, on 18 November 1974. Vicente Lee Teng and Priscilla Castillo de Cura filed their respective Motions to Quash on 14 December 1975; respondent Judge granted their Motions to Quash on 31 March 1976. The People filed a Motion for Reconsideration which was denied on 17 February 1977. Approximately seven (7) months later, on 12 September 1977, the present Petition for certiorari and mandamus was filed by the People. Initially, the Court resolved to dismiss this Petition in a Resolution dated 5 July 1978. The People, however, filed a Motion for Reconsideration of that Order and the Court, in its Resolution of 1 October 1979, set aside its Resolution of dismissal and considered this case as submitted for decision.

Ordinarily, perhaps, a Petition for certiorari brought seven (7) months after rendition of the last order sought to be set aside might be regarded as barred

by laches. In the case at bar, however, the Court believes that the equitable principle of laches should not be applied to bar this Petition for certiorari and Mandamus. The effect of such application would not be the avoidance of an inequitable situation (the very raison d'etre of the laches principle), but rather the perpetuation of the state of facts brought about by the orders of the respondent Judge, a state of facts which, as will be seen later, is marked by a gross disregard of the legal rights of the People. The Court, in other words, is compelled to take into account both the importance of the substantive issues raised in this case and the nature of the result brought about by the respondent Judge's orders. Moreover, on a more practical level, the dismissal of the cases was resisted vigorously by the prosecution which filed both oppositions to the Motion to Dismiss and Motions for Reconsideration of the Orders granting the Motions to Quash. The private respondents, in other words, were under no illusion as to the position taken and urged by the People in this Case. We hold that, in the circumstances of this case, the Petition for certiorari and mandamus is not barred by laches.

The second preliminary issue was also raised by private respondents in their Answer, that is, whether or not the defense of double jeopardy became available to them with the dismissal by respondent Judge of the eight (8) criminal cases. This defense need not detain us for long for it is clearly premature in the present certiorari proceeding. In the certiorari petition at bar, the validity and legal effect of the orders of dismissal issued by the respondent Judge of the eight (8) criminal cases are precisely in issue. Should the Court uphold these dismissal orders as valid and effective and should a second prosecution be brought against the accused respondents, that second prosecution may be defended against with the plea of double jeopardy. If, upon the other hand, the Court finds the dismissal orders to be invalid and of no legal effect, the legal consequence would follow that the first jeopardy commenced by the eight (8) informations against the accused has not yet been

terminated and accordingly a plea of second jeopardy must be rejected both here and in the continuation of the criminal proceedings against the respondents-accused.

We turn, therefore, to the first substantive issue that needs to be resolved: whether or not the accused Valencia, Lee Teng and de Cura are entitled to the benefits available under P.D. No. 370.

The scope of application of the tax amnesty declared by P.D. No. 370 is marked out in the following broad terms:

1. A tax amnesty is hereby granted to any person, natural or juridical, who for any reason whatsoever failed to avail of Presidential Decree No. 23 and Presidential Decree No. 157; or, in so availing of the said Presidential Decrees failed to include all that were required to be declared therein if he now voluntarily discloses under this decree all his previously untaxed income and/or wealth such as earnings, receipts, gifts, bequests or any other acquisitions from any source whatsoever which are or were previously taxable under the National Internal Revenue Code, realized here or abroad by condoning all internal revenue taxes including the increments or penalties on account of non-payment as well as all civil, criminal or administrative liabilities, under the National Internal Revenue Code, the Revised Penal Code, the Anti-Graft and Corrupt Practices Act, the Revised Administrative Code, the Civil Service Laws and Regulations, laws and regulations on Immigration and Deportation, or any other applicable law or proclamation, as it is hereby condoned, provided a tax of fifteen (15%) per centum on such previously untaxed income and/or wealth is imposed subject to the following conditions:

a. Such previously untaxed income and/or wealth must have been earned or realized prior to 1973, except the following:

b. Capital gains transactions where the taxpayer has availed of Presidential Decree No. 16, as amended, but has not complied with the conditions thereof;

c. Tax liabilities with or without assessments, on withholding tax at source provided under Sections 53 and 54 of the National Internal Revenue Code, as amended;

d. Tax liabilities with assessment notices issued as of December 31, 1 973;

e. Tax cases which are the subject of a valid information under Republic Act No. 2338 as of December 31, 1973; and

f. Property transferred by reason of death or by donation during the year 1972.

xxx xxx xxx

The first point that should be made in respect of P.D. No. 370 is that compliance with all the requirements of availment of tax amnesty under P.D. No. 370 would have the effect of condoning not just income tax liabilities but also "all internal revenue taxes including the increments or penalties on account of non-payment as well as all civil, criminal or administrative liabilities, under the Internal Revenue Code, the Revised Penal Code, the Anti-Graft and Corrupt Practices Act, the Revised Administrative Code, the Civil Service Laws and Regulations, laws and regulations on Immigration and Deportation, or any other applicable law or proclamation." Thus, entitlement to benefits of P.D. No. 370 would have the effect of condoning or extinguishing the liabilities consequent upon possession of false and counterfeit internal revenue labels; the manufacture of alcoholic products subject to specific tax without having paid the annual privilege tax therefor, and the possession, custody and control of locally manufactured articles subject to specific tax on which the taxes had not been paid in accordance with law, in other words, the criminal liabilities

sought to be imposed upon the accused respondents by the several informations quoted above.

It should be underscored, secondly, that to be entitled to the extinction of liability provided by P.D. No. 370, the claimant must have voluntarily disclosed his previously untaxed income or wealth and paid the required fifteen percent (15%) tax on such previously untaxed income or wealth imposed by P.D. No.370. 6 Where the disclosure of such previously untaxed income or wealth was not voluntary but rather the accompaniment or result of tax cases or tax assessments already pending as of 31 December 1973, the claimant is not entitled to the benefits of P.D. No. 370. Section 1 (a) (4) of P.D. No. 370, expressly excluded from the coverage of P.D. No. 370: "tax cases which are the subject of a valid information under R.A. No. 2338 as of December 31, 1973." In the instant case, the violations of the National Internal Revenue Code with which the respondent accused were charged, had already been discovered by the BIR when P.D. No. 370 took effect on 9 January 1974, by reason of the sworn information or affidavit-complaints filed by informers with the BIR under Republic Act No. 2338 prior to 31 December 1973.

It is necessary to note that the "valid information under Republic Act No. 2338" referred to in Section 1 (a) (4) of P.D. No. 370, refers not to a criminal information filed in court by a fiscal or special prosecutor, but rather to the sworn information or complaint filed by an informer with the BIR under R.A. No. 2338 in the hope of earning an informer's reward. The sworn information or complaint filed with the BIR under R.A. No. 2338 may be considered "valid" where the following conditions are complied with:

(1) that the information was submitted by a person other than an internal revenue or customs official or employee or other public official, or a relative of such official or employee within the sixth degree of consanguinity;

7

(2) that the information must be definite and sworn to and must state the facts constituting the grounds for such information; and

(3) that such information was not yet in the possession of the BIR or the Bureau of Customs and does not refer to "a case already pending or previously investigated or examined by the Commissioner of Internal Revenue or the Commissioner of Customs, or any of their deputies, agents or examiners, as the case may be, or the Secretary of Finance or any of his deputies or agents. 8

In the instant case, not one but two (2) "informations' or affidavit-complaints concerning private respondents' operations said to be in violation of certain provisions of the National Internal Revenue Code, had been filed with the BIR as of 31 December 1973. In fact, those two (2) affidavit-complaints had matured into two (2) criminal informations in court -Criminal Cases Nos. 439 and 440 against the respondent accused, by 31 December 1973. The six (6) informations docketed as Criminal Cases Nos. 538-543, while filed in court only on 14 March 1974, had been based upon the sworn information previously submitted as of 31 December 1973 to the BIR.

It follows that, even assuming respondent accused Francisco Valencia was otherwise entitled to the benefits of P.D. No. 370, none of the informations filed against him could have been condoned under the express provisions of the tax amnesty statute.

Accused Valencia argued that the People were estopped from questioning his entitlement to the benefits of the tax amnesty, considering that agents of the BIR had already accepted his application for tax amnesty and his payment of the required fifteen percent (15%) special tax.

This contention does not persuade. At the time he paid the special fifteen percent (15%) tax under P.D. No. 370, accused Francisco Valencia had in fact already been subjected by the BIR to extensive investigation such that the

criminal charges against him could not be condoned under the provisions of the amnesty statute. Further, acceptance by the BIR agents of accused Valencia's application for tax amnesty and payment of the fifteen percent (15%) special tax was no more than a ministerial duty on the part of such agents. Accused Valencia does not pretend that the BIR had actually ruled that he was entitled to the benefits of the tax amnesty statute. In any case, even assuming, though only arguendo, that the BIR had so ruled, there is the long familiar rule that "erroneous application and enforcement of the law by public officers do not block, subsequent correct application of the statute and that the government is never estopped by mistake or error on the part of its agent."

9

which finds application in the case at bar. Still further, a tax

amnesty, much like to a tax exemption, is never favored nor presumed in law and if granted by statute, the terms of the amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing authority. 10 Valencia's payment of the special fifteen percent (15%) tax must be regarded as legally ineffective.

We turn to the second substantive issue which is whether or not the dismissal by the respondent court of the criminal informations against accused Valencia, inured to the benefit of Valencia's co-accused. Because of the conclusion reached above, that is, that accused Francisco Valencia was not legally entitled to the benefits of P.D. No. 370 and that the dismissal of the criminal information as against him was serious error on the part of the respondent Judge, it may not be strictly necessary to deal with this second issue. There was in fact nothing that could have inured to the benefit of Valencia's co-accused. It seems appropriate to stress, nonetheless, that coaccused and co-respondents Lee Teng and Priscilla Castillo de Cura, in order to enjoy the benefits of the tax amnesty statute here involved, must show that they have individually complied with and come within the terms of that statute.

11

The fact that conspiracy had been alleged in each of the criminal

informations here involved certainly could not result in an automatic exemption of Lee Teng and Priscilla Castillo de Cura from compliance with the requirements of the tax amnesty statute. In the second place, assuming, for present purposes only, that accused Francisco Valencia was (and he was not) legally entitled to the benefits of P.D. No. 370 the defense of amnesty which (hypothetically) became available to Valencia was personal to him. Once more, the allegation of conspiracy made in the several criminal informations here involved, did not have the effect of making a defense available to one coconspirator automatically available to the other co-conspirators. The defense of the tax amnesty under P.D. No. 370 is, like insanity, a personal defense; for that defense relates to the circumstances of a particular accused and not to the character of the acts charged in the criminal information. The statute makes the defense of extinguishment of liability available only under very specific circumstances and on the basis of reciprocity, as it were: the claimant must disclose his previously untaxed income or wealth (which then may be effectively subjected to future taxation) and surrender to the Government fifteen percent (15%) of such income or wealth; then, and only then, would the claimant's liability be extinguished. Lee Teng and Pricilla Castillo de Cura never pretended that they had complied with the requirements of PD No. 370, including that of reciprocity.

We conclude that the respondent Judge's error in respect of the first and second substantive issues considered above is so gross and palpable as to amount to arbitrary and capricious action and to grave abuse of discretion. Those orders effectively prevented the People from prosecuting and presenting evidence against the accused-respondents; they denied the People its day in court. It is well-settled that:

[a] purely capricious dismissal of an information as herein involved, moreover, deprives the State of fair opportunity to prosecute and convict. It denies the prosecution its day in court. Accordingly, it is a dismissal without due process

and, therefore, null and void. A dismissal invalid for lack of a fundamental requisite, such as due process, will not constitute a proper basis for the claim of double jeopardy.

12

WHEREFORE, the Orders of respondent Judge dated 15 July 1974, 18 November 1974, 31 March 1976 and 17 February 1977 are hereby SET ASIDE. Respondent Judge no longer being with the Judiciary, the branch of the Regional Trial Court of Pampanga seized of Criminal Cases Nos. 439 and 440, and 538-543 inclusive, against the surviving respondent accused, 13 is hereby ORDERED to proceed with the trial of these criminal cases. Costs against private respondents.

SO ORDERED.

Footnotes

1 Rollo, pp. 34-36; Annex "J" of Petition.

2 Rollo, p. 16; Annex "A" of Petition.

3 Rollo, p. 18,1 Annex "B" of Petition.

4 Rollo, pp. 20-31, Annexes "C," "D," "E," "F," "G", and "H" of Petition.

5 Rollo, p. 51.

6 Victor Nepomuceno, et al. v. Hon. Juan B. Montecillo, etc., et al., 118 SCRA 254 (1982).

7 The less than precise drafting of Section 1 (a) (1) to (4) of P.D. No. 370 is, fortunately, clarified by the implementing Rules of P.D. No. 370. Section 4 of Revenue Regulations No. 2- 74, dated 14 January 1974, entitled "Presidential Decree No. 370 enlarging the coverage of the tax amnesty on previously untaxed income and/or wealth subject to certain conditions' (70 Official Gazette, p. 1472 [25 February 1974]), provides as follows:

"Section 4. Cases not covered by amnesty. — The following cases are not covered by the amnesty subject of these regulations:

(1) Capital gains transactions where the taxpayer has availed of Presidential Decree No. 16, as amended, but has not complied with the conditions thereof,

(2) Tax liabilities with or without assessments, on withholding tax at source provided under Sections 53 and 54 of the National Internal Revenue Code, as amended;

(3) Tax liabilities with assessment notices issued as of December 31, 1973;

(4) Tax cases which are the subject of a valid information under Republic Act No. 2338 as of December 31, 1973; and

(5) Property transferred by reason of death or by donation during the year 1972." (emphasis supplied)

8 Section 1, R.A. No. 2338.

9 E. Rodriguez, Inc. v. Collector of Internal Revenue, 28 SCRA 11 1 9 (1969); Tan Guan v. Court of Tax Appeals, 19 SCRA 903 (1967); Visayan Cebu Terminal Co., Inc. v. Commissioner of Internal Revenue, 13 SCRA 357 (1965); Floro v. Philippine National Bank, 5 SCRA 906 (1962); The Collector of Internal Revenue v. Ellen Wood McGrath, et al., 111 Phil. 222 (1961); Gutierrez, et al. v. Court of Tax Appeals, 101 Phil. 713 (1957); and Atlas Consolidated Mining and Dev. Corp. v. Commissioner of Internal Revenue, 102 SCRA 246 (1981).

10 E. Rodriguez, Inc. v. The Collector of Internal Revenue, 28 SCRA 1119 (1969); Commissioner of Internal Revenue v. A.D. Guerrero, 21 SCRA 180 (1967).

11 See, in this connection, Barrioquinto et al. v. Fernandez, et al., 82 Phil. 642 (1949); Cf People v. Guillermo, 86 Phil. 395 (1960); and People v. Pasilan 122 Phil. 46 (1965); 14 SCRA 694.

Since the Government itself is bound by the terms and restrictions embodied in an amnesty statute Macaga-an v. People, 152 SCRA 430 [1987]), the claimant of amnesty must be similarly held bound by those terms.

12 People v. Balisacan 17 SCRA 1119 (1966); Serino v. Zosa, 40 SCRA 433 (1971); and People v. Surtida, 43 SCRA 29 (1972).

13 The case against Lee Teng became moot and academic by reason of his death on 14 January 1978.

FIRST DIVISION

G.R. No. L-69344 April 26, 1991

REPUBLIC OF THE PHILIPPINES, petitioner, vs. INTERMEDIATE APPELLATE COURT and SPOUSES ANTONIO and CLARA PASTOR, respondents.

GRIÑO-AQUINO, J.:p

The legal issue presented in this petition for review is whether or not the tax amnesty payments made by the private respondents on October 23, 1973 bar an action for recovery of deficiency income taxes under P.D.'s Nos. 23, 213 and 370.

On April 15, 1980, the Republic of the Philippines, through the Bureau of Internal Revenue, commenced an action in the Court of First Instance (now Regional Trial Court) of Manila, Branch XVI, to collect from the spouses Antonio Pastor and Clara Reyes-Pastor deficiency income taxes for the years 1955 to 1959 in the amount of P17,117.08 with a 5% surcharge and 1% monthly interest, and costs.

The Pastors filed a motion to dismiss the complaint, but the motion was denied. On August 2, 1975, they filed an answer admitting there was an assessment against them of P17,117.08 for income tax deficiency but denying liability therefor. They contended that they had availed of the tax amnesty under P.D.'s Nos. 23, 213 and 370 and had paid the corresponding amnesty taxes amounting to P10,400 or 10% of their reported untaxed income under P.D. 23, P2,951.20 or 20% of the reported untaxed income under P.D. 213,

and a final payment on October 26, 1973 under P.D. 370 evidenced by the Government's Official Receipt No. 1052388. Consequently, the Government is in estoppel to demand and compel further payment of income taxes by them.

The parties agreed that there were no issues of fact to be litigated, hence, the case was submitted for decision upon the pleadings and memoranda on the lone legal question of: whether or not the payment of deficiency income tax under the tax amnesty, P.D. 23, and its acceptance by the Government operated to divest the Government of the right to further recover from the taxpayer, even if there was an existing assessment against the latter at the time he paid the amnesty tax.

It is not disputed that as a result of an investigation made by the Bureau of Internal Revenue in 1963, it was found that the private respondents owed the Government P1,283,621.63 as income taxes for the years 1955 to 1959, inclusive of the 50% surcharge and 1% monthly interest. The defendants protested against the assessment. A reinvestigation was conducted resulting in the drastic reduction of the assessment to only P17,117.08.

It appears that on April 27, 1978, the private respondents offered to pay the Bureau of Internal Revenue the sum of P5,000 by way of compromise settlement of their income tax deficiency for the questioned years, but Assistant Commissioner Bernardo Carpio, in a letter addressed to the Pastor spouses, rejected the offer stating that there was no legal or factual justification for accepting it. The Government filed the action against the spouses in 1980, ten (10) years after the assessment of the income tax deficiency was made.

On a motion for judgment on the pleadings filed by the Government, which the spouses did not oppose, the trial court rendered a decision on February 28, 1980, holding that the defendants spouses had settled their income tax

deficiency for the years 1955 to 1959, not under P.D. 23 or P.D. 370, but under P.D. 213, as shown in the Amnesty Income Tax Returns' Summary Statement and the tax Payment Acceptance Order for P2,951.20 with its corresponding official receipt, which returns also contain the very assessment for the questioned years. By accepting the payment of the amnesty income taxes, the Government, therefore, waived its right to further recover deficiency incomes taxes "from the defendants under the existing assessment against them because:

1. the defendants' amnesty income tax returns' Summary Statement included therein the deficiency assessment for the years 1955 to 1959;

2. tax amnesty payment was made by the defendants under Presidential Decree No. 213, hence, it had the effect of remission of the income tax deficiency for the years 1955 to 1959;

3. P.D. No. 23 as well as P.D. No. 213 do not make any exceptions nor impose any conditions for their application, hence, Revenue Regulation No. 7-73 which excludes certain taxpayers from the coverage of P.D. No. 213 is null and void, and

4. the acceptance of tax amnesty payment by the plaintiff-appellant bars the recovery of deficiency taxes. (pp. 3-4, IAC Decision, pp. 031-032, Rollo.)

The Government appealed to the Intermediate Appellant Court (AC G.R. CV No. 68371 entitled, "Republic of the Philippines vs. Antonio Pastor, et al."), alleging that the private respondents were not qualified to avail of the tax amnesty under P.D. 213 for the benefits of that decree are available only to persons who had no pending assessment for unpaid taxes, as provided in Revenue Regulations Nos. 8-72 and 7-73. Since the Pastors did in fact have a pending assessment against them, they were precluded from availing of the amnesty granted in P.D.'s Nos. 23 and 213. The Government further argued

that "tax exemptions should be interpreted strictissimi juris against the taxpayer."

The respondent spouses, on the other hand, alleged that P.D. 213 contains no exemptions from its coverage and that, under Letter of Instruction LOI 129 dated September 18, 1973, the immunities granted by P.D. 213 include:

II-Immunities Granted.

Upon payment of the amounts specified in the Decree, the following shall be observed:

2. The taxpayer shall not be subject to any investigation, whether civil, criminal or administrative, insofar as his declarations in the income tax returns are concerned nor shall the same be used as evidence against, or to the prejudice of the declarant in any proceeding before any court of law or body, whether judicial, quasi-judicial or administrative, in which he is a defendant or respondent, and he shall be exempt from any liability arising from or incident to his failure to file his income tax return and to pay the tax due thereon, as well as to any liability for any other tax that may be due as a result of business transactions from which such income, now voluntarily declared may have been derived.

There is nothing in the LOI which can be construed as authority for the Bureau of Internal Revenue to introduce exceptions and/or conditions to the coverage of the law.

On November 23, 1984, the Intermediate Appellate Court (now Court of Appeals) rendered a decision dismissing the Government's appeal and holding that the payment of deficiency income taxes by the Pastors under PD. No. 213, and the acceptance thereof by the Government, operated to divest the latter of its right to further recover deficiency income taxes from the private

respondents pursuant to the existing deficiency tax assessment against them. The appellate court held that if Revenue Regulation No. 7-73 did provide an exception to the coverage of P.D. 213, such provision was null and void for being contrary to, or restrictive of, the clear mandate of P.D. No. 213 which the regulation should implement. Said revenue regulation may not prevail over the provisions of the decree, for it would then be an act of administrative legislation, not mere implementation, by the Bureau of Internal Revenue.

On February 4, 1986, the Republic of the Philippines, through the Solicitor General, filed this petition for review of the decision dated November 23, 1984 of the Intermediate Appellate Court affirming the dismissal, by the Court of First Instance of Manila, of the Government's complaint against the respondent spouses.

The petition is devoid of merit.

Even assuming that the deficiency tax assessment of P17,117.08 against the Pastor spouses were correct, since the latter have already paid almost the equivalent amount to the Government by way of amnesty taxes under P.D. No. 213, and were granted not merely an exemption, but an amnesty, for their past tax failings, the Government is estopped from collecting the difference between the deficiency tax assessment and the amount already paid by them as amnesty tax.

A tax amnesty, being a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law, partakes of an absolute forgiveness or waiver by the Government of its right to collect what otherwise would be due it, and in this sense, prejudicial thereto, particularly to give tax evaders, who wish to relent and are willing to reform a chance to do so and thereby become a part of

the new society with a clean slate (Commission of Internal Revenue vs. Botelho Corp. and Shipping Co., Inc., 20 SCRA 487).

The finding of the appellate court that the deficiency income taxes were paid by the Pastors, and accepted by the Government, under P.D. 213, granting amnesty to persons who are required by law to file income tax returns but who failed to do so, is entitled to the highest respect and may not be disturbed except under exceptional circumstances which have already become familiar (Rule 45, Sec. 4, Rules of Court; e.g., where: (1) the conclusion is a finding grounded entirely on speculation, surmise and conjecture; (2) the inference made is manifestly mistaken; (3) there is grave abuse of discretion; (4) the judgment is based on misapprehension of facts; (5) the Court of Appeals went beyond the issues of the case and its findings are contrary to the admissions of both the appellant and the appellee; (6) the findings of fact of the Court of Appeals are contrary to those of the trial court; (7) said findings of fact are conclusions without citation of specific evidence in which they are based; (8) the facts set forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the respondents; and (9) when the finding of fact of the Court of Appeals is premised on the absense of evidence and is contradicted by the evidence on record (Thelma Fernan vs. CA, et al., 181 SCRA 546, citing Tolentino vs. de Jesus, 56 SCRA 67; People vs. Traya, 147 SCRA 381), none of which is present in this case.

The rule is that in case of doubt, tax statutes are to be construed strictly against the Government and liberally in favor of the taxpayer, for taxes, being burdens, are not to be presumed beyond what the applicable statute (in this case P.D. 213) expressly and clearly declares (Commission of Internal Revenue vs. La Tondena, Inc. and CTA, 5 SCRA 665, citing Manila Railroad Company vs. Collector of Customs, 52 Phil, 950).

WHEREFORE, the petition for review is denied. No costs.

THIRD DIVISION

G.R. No. 108358 January 20, 1995

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE HON. COURT OF APPEALS, R.O.H. AUTO PRODUCTS PHILIPPINES, INC. and THE HON. COURT OF TAX APPEALS, respondents.

VITUG, J.:

On 22 August 1986, during the period when the President of the Republic still wielded legislative powers, Executive Order No. 41 was promulgated declaring a one-time tax amnesty on unpaid income taxes, later amended to include estate and donor's taxes and taxes on business, for the taxable years 1981 to 1985.

Availing itself of the amnesty, respondent R.O.H. Auto Products Philippines, Inc., filed, in October 1986 and November 1986, its Tax Amnesty Return No. 34-F-00146-41 and Supplemental Tax Amnesty Return No. 34-F-00146-64-B, respectively, and paid the corresponding amnesty taxes due.

Prior to this availment, petitioner Commissioner of Internal Revenue, in a communication received by private respondent on 13 August 1986, assessed the latter deficiency income and business taxes for its fiscal years ended 30 September 1981 and 30 September 1982 in an aggregate amount of P1,410,157.71. The taxpayer wrote back to state that since it had been able to avail itself of the tax amnesty, the deficiency tax notice should forthwith be

cancelled and withdrawn. The request was denied by the Commissioner, in his letter of 22 November 1988, on the ground that Revenue Memorandum Order No. 4-87, dated 09 February 1987, implementing Executive Order No. 41, had construed the amnesty coverage to include only assessments issued by the Bureau of Internal Revenue after the promulgation of the executive order on 22 August 1986 and not to assessments theretofore made. The invoked provisions of the memorandum order read:

TO: All Internal Revenue Officers and Others Concerned:

1.0. To give effect and substance to the immunity provisions of the tax amnesty under Executive Order No. 41, as expanded by Executive Order No. 64, the following instructions are hereby issued:

xxx xxx xxx

1.02. A certification by the Tax Amnesty Implementation Officer of the fact of availment of the said tax amnesty shall be a sufficient basis for:

xxx xxx xxx

1.02.3. In appropriate cases, the cancellation/withdrawal of assessment notices and letters of demand issued after August 21, 1986 for the collection of income, business, estate or donor's taxes due during the same taxable years. 1 (Emphasis supplied)

Private respondent appealed the Commissioner's denial to the Court of Tax Appeals. Ruling for the taxpayer, the tax court said:

Respondent (herein petitioner Commissioner) failed to present any case or law which proves that an assessment can withstand or negate the force and effects of a tax amnesty. This burden of proof on the petitioner (herein respondent taxpayer) was created by the clear and express terms of the executive order's

intention — qualified availers of the amnesty may pay an amnesty tax in lieu of said unpaid taxes which are forgiven (Section 2, Section 5, Executive Order No. 41, as amended). More specifically, the plain provisions in the statute granting tax amnesty for unpaid taxes for the period January 1, 1981 to December 31, 1985 shifted the burden of proof on respondent to show how the issuance of an assessment before the date of the promulgation of the executive order could have a reasonable relation with the objective periods of the amnesty, so as to make petitioner still answerable for a tax liability which, through the statute, should have been erased with the proper availment of the amnesty.

Additionally, the exceptions enumerated in Section 4 of Executive Order No. 41, as amended, do not indicate any reference to an assessment or pending investigation aside from one arising from information furnished by an informer. . . . Thus, we deem that the rule in Revenue Memorandum Order No. 4-87 promulgating that only assessments issued after August 21, 1986 shall be abated by the amnesty is beyond the contemplation of Executive Order No. 41, as amended. 2

On appeal by the Commissioner to the Court of Appeals, the decision of the tax court was affirmed. The appellate court further observed:

In the instant case, examining carefully the words used in Executive Order No. 41, as amended, we find nothing which justifies petitioner Commissioner's ground for denying respondent taxpayer's claim to the benefits of the amnesty law. Section 4 of the subject law enumerates, in no uncertain terms, taxpayers who may not avail of the amnesty granted,. . . .

Admittedly, respondent taxpayer does not fall under any of the . . . exceptions. The added exception urged by petitioner Commissioner based on Revenue Memorandum Order No. 4-87, further restricting the scope of the amnesty

clearly amounts to an act of administrative legislation quite contrary to the mandate of the law which the regulation ought to implement.

xxx xxx xxx

Lastly, by its very nature, a tax amnesty, being a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law, partakes of an absolute forgiveness or waiver by the Government of its right to collect what otherwise would be due it, and in this sense, prejudicial thereto, particularly to give tax evaders, who wish to relent and are willing to reform a chance to do so and thereby become a part of the new society with a clean slate. (Republic vs. Intermediate Appellate Court. 196 SCRA 335, 340 [1991] citing Commissioner of Internal Revenue vs. Botelho Shipping Corp., 20 SCRA 487) To follow [the restrictive application of Revenue Memorandum Order No. 4-87 pressed by petitioner Commissioner would be to work against the raison d'etre of E.O. 41, as amended, i.e., to raise government revenues by encouraging taxpayers to declare their untaxed income and pay the tax due thereon. (E.O. 41, first paragraph)] 3

In this petition for review, the Commissioner raises these related issues:

1. WHETHER OR NOT REVENUE MEMORANDUM ORDER NO. 4-87, PROMULGATED TO IMPLEMENT E.O. NO. 41, IS VALID;

2. WHETHER OR NOT SAID DEFICIENCY ASSESSMENTS IN QUESTION WERE EXTINGUISHED BY REASON OR PRIVATE RESPONDENT'S AVAILMENT OF EXECUTIVE ORDER NO. 41 AS AMENDED BY EXECUTIVE ORDER NO. 64;

3. WHETHER OR NOT PRIVATE RESPONDENT HAS OVERCOME THE PRESUMPTION OF VALIDITY OF ASSESSMENTS. 4

The authority of the Minister of Finance (now the Secretary of Finance), in conjunction with the Commissioner of Internal Revenue, to promulgate all needful rules and regulations for the effective enforcement of internal revenue laws cannot be controverted. Neither can it be disputed that such rules and regulations, as well as administrative opinions and rulings, ordinarily should deserve weight and respect by the courts. Much more fundamental than either of the above, however, is that all such issuances must not override, but must remain consistent and in harmony with, the law they seek to apply and implement. Administrative rules and regulations are intended to carry out, neither to supplant nor to modify, the law.

The real and only issue is whether or not the position taken by the Commissioner coincides with the meaning and intent of executive Order No. 41.

We agree with both the court of Appeals and court of Tax Appeals that Executive Order No. 41 is quite explicit and requires hardly anything beyond a simple application of its provisions. It reads:

Sec. 1. Scope of Amnesty. — A one-time tax amnesty covering unpaid income taxes for the years 1981 to 1985 is hereby declared.

Sec. 2. Conditions of the Amnesty. — A taxpayer who wishes to avail himself of the tax amnesty shall, on or before October 31, 1986;

a) file a sworn statement declaring his net worth as of December 31, 1985;

b) file a certified true copy of his statement declaring his net worth as of December 31, 1980 on record with the Bureau of Internal Revenue, or if no such record exists, file a statement of said net worth therewith, subject to verification by the Bureau of Internal Revenue;

c) file a return and pay a tax equivalent to ten per cent (10%) of the increase in net worth from December 31, 1980 to December 31, 1985: Provided, That in no case shall the tax be less than P5,000.00 for individuals and P10,000.00 for judicial persons.

Sec. 3. Computation of Net Worth. — In computing the net worths referred to in Section 2 hereof, the following rules shall govern:

a) Non-cash assets shall be valued at acquisition cost.

b) Foreign currencies shall be valued at the rates of exchange prevailing as of the date of the net worth statement.

Sec. 4. Exceptions. — The following taxpayers may not avail themselves of the amnesty herein granted:

a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;

b) Those with income tax cases already filed in Court as of the effectivity hereof;

c) Those with criminal cases involving violations of the income tax already filed in court as of the effectivity filed in court as of the effectivity hereof;

d) Those that have withholding tax liabilities under the National Internal Revenue Code, as amended, insofar as the said liabilities are concerned;

e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of the effectivity hereof as a result of information furnished under Section 316 of the National Internal Revenue Code, as amended;

f) Those with pending cases involving unexplained or unlawfully acquired wealth before the Sandiganbayan;

g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and Transactions) and Chapter Four (Malversation of Public Funds and Property) of the Revised Penal Code, as amended.

xxx xxx xxx

Sec. 9. The Minister of finance, upon the recommendation of the Commissioner of Internal Revenue, shall promulgate the necessary rules and regulations to implement this Executive Order.

xxx xxx xxx

Sec. 11. This Executive Order shall take effect immediately.

DONE in the City of Manila, this 22nd day of August in the year of Our Lord, nineteen hundred and eighty-six.

The period of the amnesty was later extended to 05 December 1986 from 31 October 1986 by Executive Order No. 54, dated 04 November 1986, and, its coverage expanded, under Executive Order No. 64, dated 17 November 1986, to include estate and honors taxes and taxes on business.

If, as the Commissioner argues, Executive Order No. 41 had not been intended to include 1981-1985 tax liabilities already assessed (administratively) prior to 22 August 1986, the law could have simply so provided in its exclusionary clauses. It did not. The conclusion is unavoidable, and it is that the executive order has been designed to be in the nature of a general grant of tax amnesty subject only to the cases specifically excepted by it.

It might not be amiss to recall that the taxable periods covered by the amnesty include the years immediately preceding the 1986 revolution during which time there had been persistent calls, all too vivid to be easily forgotten, for civil disobedience, most particularly in the payment of taxes, to the martial law

regime. It should be understandable then that those who ultimately took over the reigns of government following the successful revolution would promptly provide for abroad, and not a confined, tax amnesty.

Relative to the two other issued raised by the Commissioner, we need only quote from Executive Order No. 41 itself; thus:

Sec. 6. Immunities and Privileges. — Upon full compliance with the conditions of the tax amnesty and the rules and regulations issued pursuant to this Executive order, the taxpayer shall enjoy the following immunities and privileges:

a) The taxpayer shall be relieved of any income tax liability on any untaxed income from January 1, 1981 to December 31, 1985, including increments thereto and penalties on account of the non-payment of the said tax. Civil, criminal or administrative liability arising from the non-payment of the said tax, which are actionable under the National Internal Revenue Code, as amended, are likewise deemed extinguished.

b) The taxpayer's tax amnesty declaration shall not be admissible in evidence in all proceedings before judicial, quasi-judicial or administrative bodies, in which he is a defendant or respondent, and the same shall not be examined, inquired or looked into by any person, government official, bureau or office.

c) The books of account and other records of the taxpayer for the period from January 1, 1981 to December 31, 1985 shall not be examined for income tax purposes: Provided, That the Commissioner of Internal Revenue may authorize in writing the examination of the said books of accounts and other records to verify the validity or correctness of a claim for grant of any tax refund, tax credit (other than refund on credit of withheld taxes on wages), tax incentives, and/or exemptions under existing laws.

There is no pretension that the tax amnesty returns and due payments made by the taxpayer did not conform with the conditions expressed in the amnesty order.

WHEREFORE, the decision of the court of Appeals, sustaining that of the court of Tax Appeals, is hereby AFFIRMED in toto. No costs.

SO ORDERED.

Feliciano, Bidin, Romero and Melo, JJ., concur.

Footnotes

1 Rollo, p. 29.

2 Rollo, pp. 28-29.

3 Rollo, pp. 30-31, 33.

4 Rollo, p. 12.

EN BANC

G.R. No. L-3538

May 28, 1952

JUAN LUNA SUBDIVISION, INC., plaintiff-appellee, vs. M. SARMIENTO, ET AL., defendants-appellants.

Gibbs, Gibbs, Chuidian and Quasha for appellee. City Fiscal Eugenio Angeles and Assistant Fiscal Cornelio S. Ruperto for appellant. La O and Feria for defendant Philippine Trust Co.

TUASON, J.:

This is an appeal by the City Treasure of the City of Manila from the following judgment handed down in the above-entitled cause:

POR TODAS CONSIDERACIONES, el Jugado dicta sentencia ordenado: que el demandado Tesorero de la Ciudad de Manila pague a la demandante la cantidad de P2,210.52 sin intereses; que la demandada Philippine Trust Companypague a la demandante la suma de P105 sin intereses.

The Philippine Trust Company did not appeal.

The facts of the case, in so far as they are not in controversy, are these: The plaintiff was a corporation duly organized and existing under the laws of the Philippines with principal office in Manila. On December 29, 1941 it issued to the City Treasurer of Manila, and the City Treasurer accepted checks No. 628334 for P2,210.52 drawn upon the Philippine Trust Company with which it had a credit balance of P4,940.17 on its account. This check was to be applied to plaintiff's land tax for the second semester of 1941 the exact amount of

which was yet undetermine and so it was entered in the ledger, Exhibit "F", as deposit by the taxpayer. On February 20, 1942, presumably after the exact amount had been verified, which was P341.60, the balance of P1,868.92, covered by voucher No. 1487 of the City Treasure's office, was noted in the ledger as a credit to the Juan Luna Subdivision, Inc.

Further than this, the records of the City Treasurer's office do not show what was done with the check. But the books of the Philippine Trust Company do reveal that it was deposited with the Philippine National Bank, the City Treasurer's sole depository, on December 29, 1941, and that it was presented by that Bank to the Philippine Trust Company on May 1, 1944 and was cashed by the drawee. Manuel F. Garcia, Assistant Treasurer of the Philippine Trust Company, testified that soon after his bank was authorized in March, 1942, to reopen for business (it had been closed by order of the Japanese military authorities,) it received from the Philippine National Bank a bundle of checks, including appellees check No. 628334, drawn upon the Philippine Trust Company before the Japanese occupation and held in abeyance by the Philippine National Bank pending resumption of operation by the Philippine Trust Company; that these checks, including the appellee's check, were accepted and the amounts thereof debited against the respective drawer's accounts; that with respect to check No. 628334, the operation was effected on May 1, 1944.

The City refused after liberation to refund the plaintiff's deposit or apply it to such future taxes as might be found due, while the Philippine Trust Company was unwilling to reverse its debit entry against the Juan Luna Subdivision, Inc. It was upon this predicament that the Juan Luna Subdivision, Inc. brought this suit against the City Treasurer and the Philippine Trust Company as defendants in the alternative. The purpose of the action is determine which of the two defendants is liable for plaintiff's check. There is a separate cause of action which concerns the plaintiff and the City Treasurer alone.

On the main cause of action the burden of the City Treasurer's defense is that his office was not benefited why the check. He denies that the said check was cashed "or rather there was no proof that it was." It is pointed out that Mr. Gibbs, testifying in open court, admitted that he had never received nor could he have received the cancelled checks;" that "the courts finding that sum P2,210.52 was in fact and in truth added to the actual cash of the Treasurer of the City of Manila is based on conjectures and surprises without any support of pertinent and competent proof;" that "special ledger sheet of the City Treasurer . . . simply showed that some accounting transaction in the book value was done or accomplished but these accounting processes did not show that actual payment had been made (by the Philippine National Bank) to the City Treasurer, and that the City Treasurer had in effect received said amount represented by said checks;" that "the burden of proving that the check in question was in fact paid rest on the defendant Philippine Trust Company." It is further argued that "there is a lot of difference between the book value and the cash value of this check," that the acceptance by the City Treasurer and the issuance of the Official Receipt No. 755402 on December 29, 1941 in favor of Juan Luna Subdivision, Inc. did not simultaneously and automatically place in the hands of the City Treasurer the cash value represented by the said checks in the amount of P2,210.52".

That the plaintiff's check was deposited by the City Treasurer with the Philippine National Bank, and the latter was paid the cash equivalent thereof by the Philippine Trust Company, admits of no doubt. The entries in the books of the latter bank are not in the least impugned. Whether the City Treasurer was paid that amount by the Philippine National Bank or given credit for it, the City Treasurer would neither admit nor deny. He said:

A. Not that I am not willing (to admit); I am willing, but I am not the right party to admit that the check was actually collected by the City of Manila from the Philippine Trust Company, The Philippine Trust Company never submitted

any financial statement. To my knowledge, the City Treasurer of Manila has never been informed by the Philippine Trust Company or by the Philippine National Bank, which is the depository of the City of Manila, that same check was collected by the City Manila from the Philippine National Bank; by that I am not trying to say that the check was not actually collected by the City.

xxx

xxx

xxx

Q. This particular check in question pertains to the revenue account of the City of Manila, is that right?

A. Yes, sir.

Q. Ordinarily it would be deposited with the Philippine National Bank, is that right?

A. That is right.

Q. And the Philippine National Bank has not rendered you any account of its collections?

A. I would not say that; they probably gave us statement, but as we have lost our records pertaining to the occupation and the pre-war years, I could not make a categorial statement.

From the fact that the Philippine National Bank was open throughout the Japanese occupation and the other facts heretofore admitted or not denied, it is to be presumed that the Philippine National Bank credited the City Treasurer with the amount of the check in question, and that the City Treasurer, taking ordinary care of his concerns, withdrew that amount. This is in accordance with the presumption that things happened according to the ordinary course of business and habits. The burden is on the City Treasurer, not on the plaintiff, to rebut these presumptions.

But the point is not material at all as far as the plaintiff is concerned. What became of the check or where the money went is a matter between the City Treasurer and the Philippine National Bank. The drawer of the check had funds on deposit to meet it; the City Treasurer accepted it and deposited it with the Philippine National Bank, and the Philippine National Bank, collected the equivalent amount from the drawee Bank. In the light of these circumstances, the City Treasurer became the Philippine National Bank's creditor and the Juan Luna Subdivision, Inc. was released from liability on its checks. If the City Treasurer did not collect his credit from the Philippine National Bank or otherwise make use of it, he alone was to blame and should suffer the consequences of his neglect. That the City Treasurer held the check merely in trust for plaintiff does not alter the situation as far as his branch of the case goes.

The amount to be refunded to the plaintiff is the subject of another disagreement between the Juan Luna Subdivision, Inc. and the City Treasurer. This is the ground of other cause of action heretofore referred to.

The plaintiff claims the whole amount of the check contending that taxes for the last semester of 1941 have been remitted by Commonwealth Act No. 703.

Section 1 of this Act, which was approved on November 1, 1945, provides:

All land taxes and penalties due and payable for the years nineteen hundred and forty-two nineteen hundred and forty-three nineteen hundred and fortyfour and fifty per cent of the tax due for nineteen hundred and forty-five, are hereby remitted. The land taxes and penalties due and payable for the second semester of the year nineteen hundred and forty-one shall also be remitted the if the remaining fifty per cent corresponding to the year nineteen hundred and forty-five shall been paid on or before December thirty-first, nineteen hundred and forty-five.

Does this provision cover taxes paid before its enactment as the plaintiff maintains and the court below held, or does it refer, as the City Treasurer believes, only to taxes which were still unpaid?

There is no ambiguity in the language of the law. It says "taxes and penalties due and payable," the literal meaning of which taxes owned or owing. (See Webster's New International Dictionary) Note that the provision speaks of penalties, and note that penalties accrue only when taxes are not paid on time. The word "remit" underlined by the appellant does not help its theory, for to remit to desist or refrain from exacting, inflicting, or enforcing something as well as to restore what has already been taken. (Webster's New International Dictionary.)

We do not see that literal interpretation of Commonwealth Act No. 703 runs counter and does violence to its spirit and intention , nor do we think that such interpretation would be "constitutionally bad" in that "it would unduly discriminate against taxpayers who had paid in favor of delinquent taxpayers."

The remission of taxes due and payable to the exclusion of taxes already collected does not constitute unfair discrimination. Each set of taxes is a class by itself, and the law would be open to attack as class legislation only if all taxpayers belonging to one class were not treated alike. They are not.

As to the justice of the measure, the confinement of the condonation to deliquent taxes was not without good reason. The property owners who had paid their taxes before liberation and those who had not were not on the same footing on the need of material relief. It is true that the ravages and devastations wrought by was operations had rendered the bulk of the people destitute or impoverished and that it was this situation which prompted the passage of Commonwealth Act No. 703. But it is also true that the taxpayers who had been in arrears in their obligation would have to satisfy their liability

with genuine currency, while the taxes paid during the occupation had been satisfied in Japanese military notes, many of them at a time when those notes were well-nigh worthless. To refund those taxes with the restored currency, even if the Government could afford to do so, would be unduly to enrich many of the payers at a greater expense to the people at large. What is more, the process of refunding would entail a tremendous amount of work and difficulties, what with the destruction of tax records and the great number of claimants who would take advantage of such grace.

It is said that the plaintiff's check was in the nature of deposit, held trust by the City Treasurer, and that for this reason, plaintiff's taxes are to be regarded as still due and payable. This argument is well taken but only to the extent of P1,868.92. The amount of P341.60 as early as February 20, 1942, had been applied to the second half of plaintiff's 1941 tax and become part of the general funds of the city treasury. From that date that tax was legally and actually paid and settled.

The appealed judgment should, therefore, be modified so that the defendant City Treasurer shall refund to the plaintiff the sum of P1,868.92 instead P2,210.52, without costs. It is so ordered.

EN BANC

G.R. No. L-14878

December 26, 1963

SURIGAO CONSOLIDATED MINING CO., INC., petitioner, vs. COLLECTOR OF INTERNAL REVENUE and COURT OF APPEALS, respondents.

Leido, Angeles and Valladolid for petitioner. Office of the Solicitor General for respondents.

REGALA, J.:

This is a petition to review the decision of the Court of Tax Appeals in Manila Civil Case No. 4770 dismissing for lack of merit the action of the Surigao Consolidated Mining Company for the refund of the total amount of P17,051.14 allegedly representing overpayment of ad valorem tax for the fourth quarter of 1941.

The record shows that before the outbreak of World War II, the Surigao Consolidated Mining Company (called SURIGAO CONSOLIDATED, for short), a domestic corporation which then had its principal office in the City of Iloilo, was operating its mining concessions in Mainit, Surigao. Pursuant to section 246 of the Internal Revenue Code, which prescribes the time and manner of payment of royalties or ad valorem taxes, it filed a bond and had been regularly filing its returns for minerals removed from its mines during each calendar quarter and paying ad valorem tax thereon within 20 days after the close of every quarter. In each case, computation of the ad valorem tax was based on the market value of the minerals set forth in the returns, subject to adjustment upon the receipt of the smelter showing the actual market value of the minerals to the United States.

Due to the interruption, of the communications outbreak of the war, the principal office of Surigao Consolidated lost contact with its mines and never received the production reports for the fourth quarter of 1941. In order to avoid incurring any tax penalty, said company, on January 19, 1942, deposited a check amount of P27,000.00 payable to and "indorsed in favor of the City Treasurer (of Iloilo) in payment of the ad valorem taxes (approximate adjustment to be made when circumstances allow it) for the fourth quarter of 1941."

After the termination of the war, Commonwealth Act No. 722 was enacted, which provided for the filing of returns for minerals removed during the last quarter of 1941 up to December 31, 1945 and the payment of ad valorem tax on said minerals to February 28, 1946.

Availing of the provisions of the aforementioned Act, the Surigao Consolidated, on December 28, 1945, ad valorem tax returns for the fourth quarter declaring as its tax liability the amount of P43,486.54. Applying the amount of P27,000.00 previously deposited with the City Treasurer of Iloilo, the returns indicated an unpaid balance of P16,486.54 as the " tax subject to revision."

However, on February 26, 1946, the Surigao Consolidated filed an amended ad valorem tax returns under which amendment it declared a reduced ad valorem tax in the amount of P37,189.00. And crediting itself with the amount of P27,000.00 previously deposited with the City Treasurer of Iloilo, it paid the remaining balance of P10,189.00.

On September 24, 1946, the Surigao Consolidated again filed a statement of adjustment allegedly containing figures and data of the complete smelter returns for minerals shipped to the United States. In the accompanying letter, a request was made, this time not only for the reduction of tax, but for the refund of the amount of P18,107.87. On October 19, 1946, another statement

of adjustment was filed reducing the claim for refund to P17,158.01. Finally, on March 15, 1947, a third statement of adjustment was submitted further reducing the claim for refund to the amount of P 17,051.14.

As the Collector of Internal Revenue denied the request for the refund of the said P17,051.14 on the ground that the money already paid as ad valorem tax was legally due to the Government, the Surigao Consolidated instituted with the Court of First Instance of Manila civil action for its recovery. However, upon the enactment of Republic Act No. 1125 creating the Court of Tax Appeals, the case was remanded to the latter court for proper disposition.

After hearing, the Court of Tax Appeals, on July 16, 1958, finding that the amount sought to be refunded been lawfully collected, rendered its decision denying the claim for refund. The Surigao Consolidated in due time filed a motion for new trial on the ground that the decision was "not justified by the overwhelming weight of evidence" and that it was contrary to law. The tax court, however, denied the motion. Hence, this petition for review.

The question to be resolved is whether or not Surigao Consolidated, petitioner herein, is entitled to the refund of ad valorem tax in the total amount of P17,051.14, itemized as follows: 1.

Ad valorem tax on minerals removed from the

P1,191.46

mines but allegedly lost in transit on account of war 2.

Ad valorem tax on minerals extracted from the

15,609.73

mines but allegedly looted during the Japanese occupation

3.

Alleged overpayment of ad valorem tax on minerals shipped to the United States

249.95

P17,051.14

The first, item in petitioner's claim for refund in the amount of P1,191.46 represents the amount of ad valorem tax paid on minerals removed from the mines but alleged to have been lost in transit on account of the war. The refund is sought under section 1 (d) of Republic Act No. 81, which provides as follows:

SECTION 1. Any provision of existing law to the contrary notwithstanding:

(d) All unpaid royalties, ad valorem or specific taxes on all minerals mined from mining claims or concessions existing and in force on January first, nineteen hundred and forty-two, and which minerals were lost by reason of the war or circumstances arising therefrom, are hereby condoned: Provided, That if said minerals had been or shall be recovered by the miner or producer, such royalties, ad valorem or specific taxes on the same shall be immediately due and demandable.

Petitioner argues that since the law condones the taxes due from taxpayers who failed to pay their taxes, it would be unfair to deny this benefit to those taxpayers who had been prompt in paying theirs. The argument merits careful consideration. At first it would seem to be sound and logical. But the aforequoted section clearly refers to the condonation of unpaid taxes only. The condonation of a tax liability is equivalent and is in the nature of a tax exemption. Being so, it should be sustained only when expressed in explicit terms, and it can not be extended beyond the plain meaning of those terms. It is the universal rule that he who claims an exemption from his share of the common burden of taxation must justify his claim by showing that the

Legislature intended to exempt him by words too plain to be mistaken. (Statutory Construction by Francisco, citing Government of P. I. v. Monte de Piedad, 25 Phil. 42.)

The application of a statute creating an exemption for taxation to taxes already assessed depends upon whether it is retrospective in its operation. Such a statute has no retrospective operation, unless by the terms thereof it clearly appears to be the intention of the legislature that the exemption shall relate back to taxes which have already become fixed, as a statute which releases a person or corporation from a burden common to the whole community should be strictly (Louisville Water Co. v. Hamilton, 81 Ky. 517, ... cited 6 American and English Ann. Cases, p. 438).

Petitioner having failed to point to Us any portion of the law that explicitly provides for a refund of those taxpayers who had paid their taxes on the items and under circumstances mentioned in the abovequoted provision, We are constrained to hold that the benefits of said provision does not extend to it.

Even assuming arguendo that the provisions of Republic Act No. 81 authorizes the refund of taxes already paid by petitioner, the latter would not still be entitled to the refund sought for under the first item. It is to be noted that petitioner's evidence of the alleged loss in transit as observed by the Court of Tax Appeals, merely of testimony of witnesses who did not have personal knowledge of the circumstances which gave rise to the loss. Such evidence cannot, of course be considered sufficient to establish that the minerals were in fact lost. Judge Luciano of the Court of Tax Appeals during the trial, would be to create a dangerous precendent.

Under the second item, petitioner seeks to recover the amount of P15,609.73 representing the ad valorem tax paid on minerals extracted from its mines but

alleged to have been looted during the enemy occupation. In connection with the alleged looting of the minerals, the Tax Court has this to say:

We are again confronted with the case where plaintiff has, to our mind, failed to present adequate evidence to prove such loss. The evidence, if at all, is merely limited to the general and uncorroborated statements of plaintiff's officers that the same were lost in the mines. These testimonies cannot be taken on their full face value, especially because they had no direct supervision over the handling of such minerals at the time of the alleged loss. Much less had these officers have personal knowledge of the loss. Under the circumstances, we can not make the finding that the minerals were in fact lost.

Going over the record, We find no reason to disturb the above findings of the Court of Tax Appeals, there being no showing that they are not substantiated by the evidence. With this observation, it would be useless ceremony to delve into the issue of whether ad valorem tax should be or should not be paid on minerals extracted from the mines but not removed therefrom.

One more item in petitioner's claim is the alleged overpayment of ad valorem tax in the amount of P249.95 on the minerals shipped to the United States. It is that an ad valorem tax in the amount of P20,387.81 was originally paid on the minerals shipped to the United States with a gross value of P410,299.49; that the smelter returns from the United States show that the actual market value of the minerals shipped to the States was P416,895.28; and that after deducting all allowable deductions amounting in all to P1,828,34, the true and correct amount of ad valorem tax on said minerals was P20,137.86. Petitioner, therefore, claims difference between the amount of P20,387.81 and P20,137.86 is an overpayment.

It is not disputed that, as indicated above, the amount of ad valorem tax on the minerals shipped to the United States is subject to adjustment upon the receipt of the smelter returns showing their actual market value Petitioner contends that the statements of adjustment alleged to contain the figures and data set forth in the smelter returns are adequate evidence of the actual market value of the minerals shipped to the United States.

The best evidence of the actual market value minerals shipped to the United States are the smelter returns themselves. These returns are admittedly petitioner's possession, but for unknown reasons, petitioner failed to produce them during the trial. As there is no credible and satisfactory explanation for the non-production of said returns, there arises the presumption that if produced they would be adverse to petitioner. Under the circumstances, the Court of Tax Appeals cannot be said to have committed error, much less abused its discretion, in refusing to give any probative value statements of adjustment.

It is a settled doctrine that in a suit for the recovery of the payment of taxes or any portion thereof as having been illegally or erroneously collected, the burden is upon the taxpayer to establish the facts which show the illegality of the tax or that the determination thereof is erroneous. In this case, petitioner failed to show that the amount of taxes sought to be refunded have been erroneously collected.

Conformably to the above, We are of the opinion that the Court of Tax Appeals did not commit any error in denying petitioner's claim.

WHEREFORE, the decision appealed from is hereby affirmed. Costs against petitioner.

FIRST DIVISION

G.R. No. 147188

September 14, 2004

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Coadministrators Lorna Kapunan and Mario Luza Bautista, respondents.

DECISION

DAVIDE, JR., C.J.:

This Court is called upon to determine in this case whether the tax planning scheme adopted by a corporation constitutes tax evasion that would justify an assessment of deficiency income tax.

The petitioner seeks the reversal of the Decision1 of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 affirming the 3 January 2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5328, 3 which held that the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount of P79,099,999.22 for the year 1989, and ordered the cancellation and setting aside of the assessment issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995.

The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey commercial building known as Cibeles Building, situated on two parcels of land on Ayala Avenue, Makati City.

On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not less than P90 million.4

On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 million. These two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same notary public.5

For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.6

On 16 April 1990, CIC filed its corporate annual income tax return7 for the year 1989, declaring, among other things, its gain from the sale of real property in the amount of P75,728.021. After crediting withholding taxes of P254,497.00, it paid P26,341,2078 for its net taxable income of P75,987,725.

On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as evidenced by a Deed of Sale of Shares of Stocks. 9 Three and a half years later, or on 16 January 1994, Toda died.

On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice10 and demand letter to the CIC for deficiency income tax for the year 1989 in the amount of P79,099,999.22.

The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC, and not against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989.11

On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna Kapunan and Mario Luza Bautista, received a Notice of Assessment 12 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

100,000,000.00

but were substituted with individual capital gains(P200M – 100M) Total Net Taxable Income per investigation Tax Due thereof at 35%

P175,987,725.00 P 61,595,703.75

Less: Payment already made 1. Per return

P26,595,704.00

2. Thru Capital Gains Tax made by R.A. Altonaga

10,000,000.00

36,595,704.00

P 24,999,999.75 Add: 50% Surcharge

12,499,999.88

25% Surcharge

6,249,999.94

Total

P 43,749,999.57

Add: Interest 20% from 4/16/90-4/30/94 (.808)

35,349,999.65

TOTAL AMT. DUE & COLLECTIBLE

P 79,099,999.22 ==============

The Estate thereafter filed a letter of protest. 13

In the letter dated 19 October 1995, 14 the Commissioner dismissed the protest, stating that a fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain of

P100 million, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of land and the building thereon to an individual capital gains, thus evading the higher corporate income tax rate of 35%.

On 15 February 1996, the Estate filed a petition for review 15 with the CTA alleging that the Commissioner erred in holding the Estate liable for income tax deficiency; that the inference of fraud of the sale of the properties is unreasonable and unsupported; and that the right of the Commissioner to assess CIC had already prescribed.

In his Answer16 and Amended Answer,17 the Commissioner argued that the two transactions actually constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the property from CIC nor the seller of the same property to RMI. The additional gain of P100 million (the difference between the second simulated sale for P200 million and the first simulated sale for P100 million) realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The income tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent. Since such falsity or fraud was discovered by the BIR only on 8 March 1991, the assessment issued on 9 January 1995 was well within the prescriptive period prescribed by Section 223 (a) of the National Internal Revenue Code of 1986, which provides that tax may be assessed within ten years from the discovery of the falsity or fraud. With the sale being tainted with fraud, the separate corporate personality of CIC should be disregarded. Toda, being the registered owner of the 99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009% shares registered in the name of the individual directors of CIC, should be held liable for the deficiency income tax, especially because the gains realized from the sale were withdrawn by him as cash advances or paid

to him as cash dividends. Since he is already dead, his estate shall answer for his liability.

In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a pre-conceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax evasion. There being no proof of fraudulent transaction, the applicable period for the BIR to assess CIC is that prescribed in Section 203 of the NIRC of 1986, which is three years after the last day prescribed by law for the filing of the return. Thus, the government‘s right to assess CIC prescribed on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer valid. The CTA also ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC was not in itself sufficient ground for piercing the separate corporate personality of CIC. Hence, the CTA declared that the Estate is not liable for deficiency income tax of P79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by the Commissioner on 9 January 1995.

In its motion for reconsideration, 19 the Commissioner insisted that the sale of the property owned by CIC was the result of the connivance between Toda and Altonaga. She further alleged that the latter was a representative, dummy, and a close business associate of the former, having held his office in a property owned by CIC and derived his salary from a foreign corporation (Aerobin, Inc.) duly owned by Toda for representation services rendered. The CTA denied20 the motion for reconsideration, prompting the Commissioner to file a petition for review21 with the Court of Appeals.

In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA, reasoning that the CTA, being more advantageously situated and having the necessary expertise in matters of taxation, is "better

situated to determine the correctness, propriety, and legality of the income tax assessments assailed by the Toda Estate."22

Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition invoking the following grounds:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION.

II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE PERSONALITY OF CIBELES INSURANCE CORPORATION.

III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD PRESCRIBED.

The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of the Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially incapable of purchasing it. She further points out that the documents themselves prove the fact of fraud in that (1) the two sales were done simultaneously on the same date, 30 August 1989; (2) the Deed of Absolute Sale between Altonaga and RMI was notarized ahead of the alleged sale between CIC and Altonaga, with the former registered in the Notarial Register of Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20, Book I, Series of 1989, of the same Notary Public; (3) as early as 4 May 1989, CIC received P40 million from RMI, and not from Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989 as investment in Cibeles Building. The substantial portion of P40 million was withdrawn by Toda through the declaration of cash dividends to all its stockholders.

For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of Altonaga to prove that the latter is financially incapable of purchasing the Cibeles property.

To resolve the grounds raised by the Commissioner, the following questions are pertinent:

1. Is this a case of tax evasion or tax avoidance?

2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and

3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any?

We shall discuss these questions in seriatim.

Is this a case of tax evasion or tax avoidance?

Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. 23

Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or "deliberate and not accidental"; and (3) a course of action or failure of action which is unlawful.24

All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received P40 million from RMI,25 and not from Altonaga. That P40 million was debited by RMI and reflected in its trial balance26 as "other inv. – Cibeles Bldg." Also, as of 31 July 1989, another P40 million was debited and reflected in RMI‘s trial balance as "other inv. – Cibeles Bldg." This would show that the real buyer of the properties was RMI, and not the intermediary Altonaga.lavvphi1.net

The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of the many trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the assistant accountant of CIC and an old timer in the company. 27 But Mr. Prieto did not testify on this matter, hence, that information remains to be hearsay and is thus inadmissible in evidence. It was not verified either, since the letter-request for investigation of Altonaga was unserved, 28 Altonaga having left for the United States of America in January 1990. Nevertheless, that Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale to him was part of the tax planning scheme of CIC. That admission is borne by the records. In its Memorandum, respondent Estate declared:

Petitioner, however, claims there was a "change of structure" of the proceeds of sale. Admitted one hundred percent. But isn‘t this precisely the definition of tax planning? Change the structure of the funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of property for stock, changing the structure of the property and the tax to be paid. As long as it is done legally, changing the structure of a transaction to achieve a lower tax is not against the law. It is absolutely allowed.

Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot be faulted for wanting to reduce the tax from 35% to 5%.29 [Underscoring supplied].

The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud.

Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is taken of another."30

Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. Altonaga‘s sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the consequent income tax liability.lavvphi1.net

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion. 31

Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated.32 The incidence of taxation depends upon the

substance of a transaction. The tax consequences arising from gains from a sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step from the commencement of negotiations to the consummation of the sale is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title. To permit the true nature of the transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress. 33

To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes. 34 The two sale transactions should be treated as a single direct sale by CIC to RMI.

Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27 (A) of the Tax Reform Act of 1997), which stated as follows:

Sec. 24. Rates of tax on corporations. – (a) Tax on domestic corporations.- A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, and partnerships, no matter how created or organized but not including general professional partnerships, in accordance with the following:

Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred thousand pesos; and

Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand pesos.

CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual capital gains tax provided for in Section 34 (h) of the NIRC of 198635 (now 6% under Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the deficiency income tax issued by the BIR must be upheld.

Has the period of assessment prescribed?

No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:

Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court after the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for collection thereof… .

Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a return, the period within which to assess tax is ten years from discovery of the fraud, falsification or omission, as the case may be.

It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the BIR on the tax consequence of the two sale transactions.36 Thus, the BIR was amply informed of the transactions even prior to the execution of the necessary documents to effect the transfer. Subsequently, the two sales were openly made with the execution of public documents and the declaration of taxes for 1989. However, these circumstances do not negate the existence of fraud. As earlier discussed those

two transactions were tainted with fraud. And even assuming arguendo that there was no fraud, we find that the income tax return filed by CIC for the year 1989 was false. It did not reflect the true or actual amount gained from the sale of the Cibeles property. Obviously, such was done with intent to evade or reduce tax liability.

As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was claimed to have been discovered only on 8 March 1991.37 The assessment for the 1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct assessment for deficiency income tax was well within the prescriptive period.

Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance Corporation?

A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the owners or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and vice versa. There are, however, certain instances in which personal liability may arise. It has been held in a number of cases that personal liability of a corporate director, trustee, or officer along, albeit not necessarily, with the corporation may validly attach when:

1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or other persons;

2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation; or

4. He is made, by specific provision of law, to personally answer for his corporate action.38

It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987, 1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically provides:

g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or obligations, contingent or otherwise, for taxes, sums of money or insurance claims other than those reported in its audited financial statement as of December 31, 1989, attached hereto as "Annex B" and made a part hereof. The business of Cibeles has at all times been conducted in full compliance with all applicable laws, rules and regulations. SELLER undertakes and agrees to hold the BUYER and Cibeles free from any and all income tax liabilities of Cibeles for the fiscal years 1987, 1988 and 1989.39 [Underscoring Supplied].

When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarily held himself personally liable therefor. Respondent estate cannot, therefore, deny liability for CIC‘s deficiency income tax for the year 1989 by invoking the separate corporate personality of CIC, since its obligation arose from Toda‘s contractual undertaking, as contained in the Deed of Sale of Shares of Stock.

WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is hereby rendered

ordering respondent Estate of Benigno P. Toda Jr. to pay P79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the year 1989, plus legal interest from 1 May 1994 until the amount is fully paid.

Costs against respondent. SO ORDERED.

Footnotes

1

Rollo, 22-31. Per Associate Justice Rodrigo V. Cosico, with Associate Justices Ramon A. Barcelona and Alicia J. Santos

concurring.

2

Id., 32-41; CTA Records, 524-533. Per Presiding Judge Ernesto D. Acosta, with Associate Judges Ramon O. De Veyra and

Amancio Q. Saga concurring.

3

Entitled "The Estate of Benigno P. Toda, Jr., represented by Special Co-Administrators Lorna Patajo-Kapunan and Mario Luza

Bautista versus Commissioner of Internal Revenue."

4

CA Rollo, 73.

5

CA Rollo, 74-78; 88-92.

6

Exh. "E," CTA Records, 306.

7

Exh. "L," CTA Records, 340.

8

Exh. "M," "M-1," "N" and "N-1," CTA Records, 316-317.

9

Exh. "P," CTA Records, 357-365.

10

BIR Records, 448-449.

11

Id., 446-447.

12

Id., 474-475.

13

Exh. "H," CTA Records, 314-315.

14

Exh. "G," CTA Records, 311-312.

15

CTA Records, 1-15.

16

CTA Records, 104-111.

17

Id., 121-128.

18

CTA Records 535-540.

19

Id., 534, 539.

20

Id., 550; CA Rollo, 32.

21

CA Rollo, 7-20.

22

Rollo, 30.

23

Jose C. Vitug and Ernesto D. Acosta, Tax Law and Jurisprudence 44 (2nd ed., 2000) (hereafter Vitug).

24

De Leon, Fundamentals of Taxation 53 (1988 ed.), citing Batter, Fraud under Federal Tax Law 15 (1953 ed.).

25

Exh. "3," CTA Records, 476.

26

Exh. "6," CTA Records, 470.

27

Exh. "1," CTA Records, 461.

28

CTA Records, 466.

29

Respondent‘s Memorandum, 4-5; Rollo, 78-79.

30

Commissioner of Internal Revenue v. Court of Appeals, 327 Phil. 1, 33 (1996).

31

See Commissioner of Internal Revenue v. Norton Harrison Co., 120 Phil. 684, 691 (1964); Commissioner of Internal Revenue v.

Rufino, G.R. No. L-33665-68, 27 February 1987, 148 SCRA 42.

32

Vitug, 138.

33

Commissioner v. Court Holding Co., 324 U.S. 334 (1945) .

34

See Gregory v. Helvering, 293 U.S. 465 (1935); Frank Lyon Co. v. United States, 435 U.S. 561 (1978); Commissioner of Internal

Revenue v. Court of Appeals, 361 Phil. 103, 126 (1999) citing Asmussen v. CIR, 36 B.T.A. (F) 878; See also Neff v. U.S., 301 F2d 330; Cohen v. U.S., 192 F Supp 216; Herman v. Comm., 283 F2d 227; Kessner v. Comm., 248 F2d 943; Comm. V. Pope, 239 F2d 881; U.S. v. Fewel, 255 F2d 396.

35

Sec. 34. Capital gains and loses.

...

(h) The provisions of paragraph (b) of this section to the contrary notwithstanding, sales, exchanges or other dispositions of real property classified as capital assets, including pacto-de-retro sales and other forms of conditional sale, by individuals, including estates and trusts, shall be taxed at the rate of 5% based on the gross selling price or the fair market value prevailing at the time of sale, whichever is higher.

36

Exh. "A," CTA Records, 296.

37

Exh. "2," CTA Records, 464.

38

Atrium Management Corporation v. Court of Appeals, G.R. Nos. 109491 and 121794, 28 February 2001, 353 SCRA 23, 31, citing

FCY Construction Group Inc. v. Court of Appeals, G.R. No. 123358, 1 February 2000, 324 SCRA 270.

39

CTA Records, 200-201.

THIRD DIVISION

G.R. No. L-69259 January 26, 1988

DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners, vs. INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.

GUTIERREZ, JR., J.:

The petitioners question the decision of the Intermediate Appellate Court which sustained the private respondent's contention that the deed of exchange whereby Delfin Pacheco and Pelagia Pacheco conveyed a parcel of land to Delpher Trades Corporation in exchange for 2,500 shares of stock was actually a deed of sale which violated a right of first refusal under a lease contract.

Briefly, the facts of the case are summarized as follows:

In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters of real estate Identified as Lot. No. 1095, Malinta Estate, in the Municipality of Polo (now Valenzuela), Province of Bulacan (now Metro Manila) which is covered by Transfer Certificate of Title No. T-4240 of the Bulacan land registry.

On April 3, 1974, the said co-owners leased to Construction Components International Inc. the same property and providing that during the existence or after the term of this lease the lessor should he decide to sell the property leased shall first offer the same to the lessee and the letter has the priority to buy under similar conditions (Exhibits A to A-5)

On August 3, 1974, lessee Construction Components International, Inc. assigned its rights and obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed conformity and consent of lessors Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-6 inclusive)

The contract of lease, as well as the assignment of lease were annotated at he back of the title, as per stipulation of the parties (Exhs. A to D-3 inclusive)

On January 3, 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco and defendant Delpher Trades Corporation whereby the former conveyed to the latter the leased property (TCT No.T-4240) together with another parcel of land also located in Malinta Estate, Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of stock of defendant corporation with a total value of P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)

On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for reconveyance of Lot. No. 1095 in its favor under conditions similar to those whereby Delpher Trades Corporation acquired the property from Pelagia Pacheco and Delphin Pacheco.

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

ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the plaintiffs preferential right to acquire the subject property (right of first refusal) and ordering the defendants and all persons deriving rights therefrom to convey the said property to plaintiff who may offer to acquire the same at the rate of P14.00 per square meter, more or less, for Lot 1095 whose area is 27,169 square meters only. Without pronouncement as to attorney's fees and costs. (Appendix I; Rec., pp. 246- 247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)

The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.

The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate court's decision.

We initially denied the petition but upon motion for reconsideration, we set aside the resolution denying the petition and gave it due course.

The petitioners allege that:

The denial of the petition will work great injustice to the petitioners, in that:

1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from petitioners a parcel of industrial land consisting of 27,169 square meters or 2.7 hectares (located right after the Valenzuela, Bulacan exit of the toll expressway) for only P14/sq. meter, or a total of P380,366, although the prevailing value thereof is approximately P300/sq. meter or P8.1 Million;

2. Private respondent is allowed to exercise its right of first refusal even if there is no "sale" or transfer of actual ownership interests by petitioners to third parties; and

3. Assuming arguendo that there has been a transfer of actual ownership interests, private respondent will acquire the land not under "similar conditions" by which it was transferred to petitioner Delpher Trades Corporation, as provided in the same contractual provision invoked by private respondent. (pp. 251-252, Rollo)

The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties executed by the Pachecos on the one hand and the Delpher Trades Corporation on the other was meant to be a contract of sale which, in

effect, prejudiced the private respondent's right of first refusal over the leased property included in the "deed of exchange."

Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that Delpher Trades Corporation is a family corporation; that the corporation was organized by the children of the two spouses (spouses Pelagia Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles) who owned in common the parcel of land leased to Hydro Pipes Philippines in order to perpetuate their control over the property through the corporation and to avoid taxes; that in order to accomplish this end, two pieces of real estate, including Lot No. 1095 which had been leased to Hydro Pipes Philippines, were transferred to the corporation; that the leased property was transferred to the corporation by virtue of a deed of exchange of property; that in exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value shares of stock which are equivalent to a 55% majority in the corporation because the other owners only owned 2,000 shares; and that at the time of incorporation, he knew all about the contract of lease of Lot. No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration, they refer to this scheme as "estate planning." (p. 252, Rollo)

Under this factual backdrop, the petitioners contend that there was actually no transfer of ownership of the subject parcel of land since the Pachecos remained in control of the property. Thus, the petitioners allege: "Considering that the beneficial ownership and control of petitioner corporation remained in the hands of the original co-owners, there was no transfer of actual ownership interests over the land when the same was transferred to petitioner corporation in exchange for the latter's shares of stock. The transfer of ownership, if anything, was merely in form but not in substance. In reality, petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners; hence the corporation and the co-owners should be deemed to be the same, there being in substance and in effect an Identity of interest." (p. 254, Rollo)

The petitioners maintain that the Pachecos did not sell the property. They argue that there was no sale and that they exchanged the land for shares of stocks in their own corporation. "Hence, such transfer is not within the letter, or even spirit of the contract. There is a sale when ownership is transferred for a price certain in money or its equivalent (Art. 1468, Civil Code) while there is a barter or exchange when one thing is given in consideration of another thing (Art. 1638, Civil Code)." (pp. 254-255, Rollo)

On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity separate and distinct from the Pachecos. Thus, it contends that it cannot be said that Delpher Trades Corporation is the Pacheco's same alter ego or conduit; that petitioner Delfin Pacheco, having treated Delpher Trades Corporation as such a separate and distinct corporate entity, is not a party who may allege that this separate corporate existence should be disregarded. It maintains that there was actual transfer of ownership interests over the leased property when the same was transferred to Delpher Trades Corporation in exchange for the latter's shares of stock.

We rule for the petitioners.

After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from the corporation or from individual owners thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609). In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original unissued no par value shares of stocks of the Delpher Trades Corporation. Consequently, the Pachecos became stockholders of the corporation by subscription "The essence of the stock subscription is an agreement to take and pay for original unissued shares of a corporation, formed or to be formed." (Rohrlich 243, cited in Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the

Philippines, Vol. III, 1980 Edition, p. 430) It is significant that the Pachecos took no par value shares in exchange for their properties.

A no-par value share does not purport to represent any stated proportionate interest in the capital stock measured by value, but only an aliquot part of the whole number of such shares of the issuing corporation. The holder of no-par shares may see from the certificate itself that he is only an aliquot sharer in the assets of the corporation. But this character of proportionate interest is not hidden beneath a false appearance of a given sum in money, as in the case of par value shares. The capital stock of a corporation issuing only no-par value shares is not set forth by a stated amount of money, but instead is expressed to be divided into a stated number of shares, such as, 1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot sharer in the assets of the corporation, no matter what value they may have, to the extent of 100/1,000 or 1/10. Thus, by removing the par value of shares, the attention of persons interested in the financial condition of a corporation is focused upon the value of assets and the amount of its debts. (Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 107).

Moreover, there was no attempt to state the true or current market value of the real estate. Land valued at P300.00 a square meter was turned over to the family's corporation for only P14.00 a square meter.

It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family group.

In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their properties and change the

nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes.

As explained by Eduardo Neria:

xxx xxx xxx

ATTY. LINSANGAN:

Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses Hernandez and Pacheco in connection with their execution of a deed of exchange on the properties for no par value shares of the defendant corporation?

A Yes, sir.

COURT:

Q What do you mean by "point of view"?

A To take advantage for both spouses and corporation in entering in the deed of exchange.

ATTY. LINSANGAN:

Q (What do you mean by "point of view"?) What are these benefits to the spouses of this deed of exchange?

A Continuous control of the property, tax exemption benefits, and other inherent benefits in a corporation.

Q What are these advantages to the said spouses from the point of view of taxation in entering in the deed of exchange?

A Having fulfilled the conditions in the income tax law, providing for tax free exchange of property, they were able to execute the deed of exchange free from income tax and acquire a corporation.

Q What provision in the income tax law are you referring to?

A I refer to Section 35 of the National Internal Revenue Code under par. Csub-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-V79 of the then Court of First Instance of Bulacan is DISMISSED. No costs.

SO ORDERED.

EN BANC

G.R. No. L-13203

January 28, 1961

YUTIVO SONS HARDWARE COMPANY, petitioner, vs. COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents.

GUTIERREZ DAVID, J.:

This is a petition for review of a decision of the Court of Tax Appeals ordering petitioner to pay to respondent Collector of Internal Revenue the sum of P1,266,176.73 as sales tax deficiency for the third quarter of 1947 to the fourth quarter of 1950; inclusive, plus 75% surcharge thereon, equivalent to P349,632.54, or a sum total of P2,215,809.27, plus costs of the suit.

From the stipulation of facts and the evidence adduced by both parties, it appears that petitioner Yutivo Sons Hardware Co. (hereafter referred to as Yutivo) is a domestic corporation, organized under the laws of the Philippines, with principal office at 404 Dasmariñas St., Manila. Incorporated in 1916, it was engaged, prior to the last world war, in the importation and sale of hardware supplies and equipment. After the liberation, it resumed its business and until June of 1946 bought a number of cars and trucks from General Motors Overseas Corporation (hereafter referred to as GM for short), an American corporation licensed to do business in the Philippines. As importer, GM paid sales tax prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its selling price to Yutivo. Said tax being collected only once on original sales, Yutivo paid no further sales tax on its sales to the public.

On June 13, 1946, the Southern Motors, Inc. (hereafter referred to as SM) was organized to engage in the business of selling cars, trucks and spare parts. Its original authorized capital stock was P1,000,000 divided into 10,000 shares with a par value of P100 each.

At the time of its incorporation 2,500 shares worth P250,000 appear to have been subscribed into equal proportions by Yu Khe Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng Poh, and Washington Sycip. The first three named subscribers are brothers, being sons of Yu Tiong Yee, one of Yutivo's founders. The latter two are respectively sons of Yu Tiong Sin and Albino Sycip, who are among the founders of Yutivo.

After the incorporation of SM and until the withdrawal of GM from the Philippines in the middle of 1947, the cars and tracks purchased by Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to the public in the Visayas and Mindanao.

When GM decided to withdraw from the Philippines in the middle of 1947, the U.S. manufacturer of GM cars and trucks appointed Yutivo as importer for the Visayas and Mindanao, and Yutivo continued its previous arrangement of selling exclusively to SM. In the same way that GM used to pay sales taxes based on its sales to Yutivo, the latter, as importer, paid sales tax prescribed on the basis of its selling price to SM, and since such sales tax, as already stated, is collected only once on original sales, SM paid no sales tax on its sales to the public.

On November 7, 1950, after several months of investigation by revenue officers started in July, 1948, the Collector of Internal Revenue made an assessment upon Yutivo and demanded from the latter P1,804,769.85 as deficiency sales tax plus surcharge covering the period from the third quarter of 1947 to the fourth quarter of 1949; or from July 1, 1947 to December 31, 1949, claiming

that the taxable sales were the retail sales by SM to the public and not the sales at wholesale made by, Yutivo to the latter inasmuch as SM and Yutivo were one and the same corporation, the former being the subsidiary of the latter.

The assessment was disputed by the petitioner, and a reinvestigation of the case having been made by the agents of the Bureau of Internal Revenue, the respondent Collector in his letter dated November 15, 1952 countermanded his demand for sales tax deficiency on the ground that "after several investigations conducted into the matter no sufficient evidence could be gathered to sustain the assessment of this Office based on the theory that Southern Motors is a mere instrumentality or subsidiary of Yutivo." The withdrawal was subject, however, to the general power of review by the now defunct Board of Tax Appeals. The Secretary of Finance to whom the papers relative to the case were endorsed, apparently not agreeing with the withdrawal of the assessment, returned them to the respondent Collector for reinvestigation.

After another investigation, the respondent Collector, in a letter to petitioner dated December 16, 1954, redetermined that the aforementioned tax assessment was lawfully due the government and in addition assessed deficiency sales tax due from petitioner for the four quarters of 1950; the respondents' last demand was in the total sum of P2,215,809.27 detailed as follows:

Deficiency Sales

75%

Total Amount

Tax

Surcharge

Due

Assessment (First) of November 7, 1950 for deficiency sales Tax for the period from 3rd Qrtr

P1,031,296.60

P773,473.45

P1,804,769.0

1947 to 4th Qrtr 1949 inclusive Additional Assessment for period from 1st to 4th Qrtr 1950, inclusive

234,880.13

176,160.09

411,040.2

P1,266,176.73

P949,632.54

P2,215,809.2

Total amount demanded per letter of December 16, 1954

This second assessment was contested by the petitioner Yutivo before the Court of Tax Appeals, alleging that there is no valid ground to disregard the corporate personality of SM and to hold that it is an adjunct of petitioner Yutivo; (2) that assuming the separate personality of SM may be disregarded, the sales tax already paid by Yutivo should first be deducted from the selling price of SM in computing the sales tax due on each vehicle; and (3) that the surcharge has been erroneously imposed by respondent. Finding against Yutivo and sustaining the respondent Collector's theory that there was no legitimate or bona fide purpose in the organization of SM — the apparent objective of its organization being to evade the payment of taxes — and that it was owned (or the majority of the stocks thereof are owned) and controlled by Yutivo and is a mere subsidiary, branch, adjunct, conduit, instrumentality or alter ego of the latter, the Court of Tax Appeals — with Judge Roman Umali not taking part — disregarded its separate corporate existence and on April 27, 1957, rendered the decision now complained of. Of the two Judges who signed the decision, one voted for the modification of the computation of the sales tax as determined by the respondent Collector in his decision so as to give allowance for the reduction of the tax already paid (resulting in the reduction of the assessment to P820,509.91 exclusive of surcharges), while the other voted for affirmance. The dispositive part of the decision, however, affirmed the assessment made by the Collector. Reconsideration of this decision having been denied, Yutivo brought the case to this Court thru the present petition for review.

It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporation petitions to which it may be connected. However, "when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime," the law will regard the corporation as an association of persons, or in the case of two corporations merge them into one. (Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 496, citing I Fletcher Cyclopedia of Corporation, Perm Ed., pp. 135 136; United States vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn, J.) Another rule is that, when the corporation is the "mere alter ego or business conduit of a person, it may be disregarded." (Koppel [Phil.], Inc. vs. Yatco, supra.)

After going over the voluminous record of the present case, we are inclined to rule that the Court of Tax Appeals was not justified in finding that SM was organized for no other purpose than to defraud the Government of its lawful revenues. In the first place, this corporation was organized in June, 1946 when it could not have caused Yutivo any tax savings. From that date up to June 30, 1947, or a period of more than one year, GM was the importer of the cars and trucks sold to Yutivo, which, in turn resold them to SM. During that period, it is not disputed that GM as importer, was the one solely liable for sales taxes. Neither Yutivo or SM was subject to the sales taxes on their sales of cars and trucks. The sales tax liability of Yutivo did not arise until July 1, 1947 when it became the importer and simply continued its practice of selling to SM. The decision, therefore, of the Tax Court that SM was organized purposely as a tax evasion device runs counter to the fact that there was no tax to evade.

Making the observation from a newspaper clipping (Exh. "T") that "as early as 1945 it was known that GM was preparing to leave the Philippines and terminate its business of importing vehicles," the court below speculated that Yutivo anticipated the withdrawal of GM from business in the Philippines in

June, 1947. This observation, which was made only in the resolution on the motion for reconsideration, however, finds no basis in the record. On the other hand, GM had been an importer of cars in the Philippines even before the war and had but recently resumed its operation in the Philippines in 1946 under an ambitious plan to expand its operation by establishing an assembly plant here, so that it could not have been expected to make so drastic a turnabout of not merely abandoning the assembly plant project but also totally ceasing to do business as an importer. Moreover, the newspaper clipping, Exh. "T", was published on March 24, 1947, and clipping, merely reported a rumored plan that GM would abandon the assembly plant project in the Philippines. There was no mention of the cessation of business by GM which must not be confused with the abandonment of the assembly plant project. Even as respect the assembly plant, the newspaper clipping was quite explicit in saying that the Acting Manager refused to confirm that rumor as late as March 24, 1947, almost a year after SM was organized.

At this juncture, it should be stated that the intention to minimize taxes, when used in the context of fraud, must be proved to exist by clear and convincing evidence amounting to more than mere preponderance, and cannot be justified by a mere speculation. This is because fraud is never lightly to be presumed. (Vitelli & Sons vs. U.S 250 U.S. 355; Duffin vs. Lucas, 55 F (2d) 786; Budd vs. Commr., 43 F (2d) 509; Maryland Casualty Co. vs. Palmette Coal Co., 40 F (2d) 374; Schoonfield Bros., Inc. vs. Commr., 38 BTA 943; Charles Heiss vs. Commr 36 BTA 833; Kerbaugh vs. Commr 74 F (2d) 749; Maddas vs. Commr., 114 F. (2d) 548; Moore vs. Commr., 37 BTA 378; National City Bank of New York vs. Commr., 98 (2d) 93; Richard vs. Commr., 15 BTA 316; Rea Gane vs. Commr., 19 BTA 518). (See also Balter, Fraud Under Federal Law, pp. 301-302, citing numerous authorities: Arroyo vs. Granada, et al., 18 Phil. 484.) Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at the most, create only

suspicion. (Haygood Lumber & Mining Co. vs. Commr., 178 F (2d) 769; Dalone vs. Commr., 100 F (2d) 507).

In the second place, SM was organized and it operated, under circumstance that belied any intention to evade sales taxes. "Tax evasion" is a term that connotes fraud thru the use of pretenses and forbidden devices to lessen or defeat taxes. The transactions between Yutivo and SM, however, have always been in the open, embodied in private and public documents, constantly subject to inspection by the tax authorities. As a matter of fact, after Yutivo became the importer of GM cars and trucks for Visayas and Mindanao, it merely continued the method of distribution that it had initiated long before GM withdrew from the Philippines.

On the other hand, if tax saving was the only justification for the organization of SM, such justification certainly ceased with the passage of Republic Act No. 594 on February 16, 1951, governing payment of advance sales tax by the importer based on the landed cost of the imported article, increased by markups of 25%, 50%, and 100%, depending on whether the imported article is taxed under sections 186, 185 and 184, respectively, of the Tax Code. Under Republic Act No. 594, the amount at which the article is sold is immaterial to the amount of the sales tax. And yet after the passage of that Act, SM continued to exist up to the present and operates as it did many years past in the promotion and pursuit of the business purposes for which it was organized.

In the third place, sections 184 to 186 of the said Code provides that the sales tax shall be collected "once only on every original sale, barter, exchange . . , to be paid by the manufacturer, producer or importer." The use of the word "original" and the express provision that the tax was collectible "once only" evidently has made the provisions susceptible of different interpretations. In this connection, it should be stated that a taxpayer has the legal right to

decrease the amount of what otherwise would be his taxes or altogether avoid them by means which the law permits. (U.S. vs. Isham 17 Wall. 496, 506; Gregory vs. Helvering 293 U.S. 465, 469; Commr. vs. Tower, 327 U.S. 280; Lawton vs. Commr 194 F (2d) 380). Any legal means by the taxpayer to reduce taxes are all right Benry vs. Commr. 25 T. Cl. 78). A man may, therefore, perform an act that he honestly believes to be sufficient to exempt him from taxes. He does not incur fraud thereby even if the act is thereafter found to be insufficient. Thus in the case of Court Holding Co. vs. Commr. 2 T. Cl. 531, it was held that though an incorrect position in law had been taken by the corporation there was no suppression of the facts, and a fraud penalty was not justified.

The evidence for the Collector, in our opinion, falls short of the standard of clear and convincing proof of fraud. As a matter of fact, the respondent Collector himself showed a great deal of doubt or hesitancy as to the existence of fraud. He even doubted the validity of his first assessment dated November 7, 1959. It must be remembered that the fraud which respondent Collector imputed to Yutivo must be related to its filing of sales tax returns of less taxes than were legally due. The allegation of fraud, however, cannot be sustained without the showing that Yutivo, in filing said returns, did so fully knowing that the taxes called for therein called for therein were less than what were legally due. Considering that respondent Collector himself with the aid of his legal staff, and after some two years of investigation and duty of investigation and study concluded in 1952 that Yutivo's sales tax returns were correct — only to reverse himself after another two years — it would seem harsh and unfair for him to say in 1954 that Yutivo fully knew in October 1947 that its sales tax returns were inaccurate.

On this point, one other consideration would show that the intent to save taxes could not have existed in the minds of the organizers of SM. The sales tax imposed, in theory and in practice, is passed on to the vendee, and is

usually billed separately as such in the sales invoice. As pointed out by petitioner Yutivo, had not SM handled the retail, the additional tax that would have been payable by it, could have been easily passed off to the consumer, especially since the period covered by the assessment was a "seller's market" due to the post-war scarcity up to late 1948, and the imposition of controls in the late 1949.

It is true that the arrastre charges constitute expenses of Yutivo and its noninclusion in the selling price by Yutivo cost the Government P4.00 per vehicle, but said non-inclusion was explained to have been due to an inadvertent accounting omission, and could hardly be considered as proof of willful channelling and fraudulent evasion of sales tax. Mere understatement of tax in itself does not prove fraud. (James Nicholson, 32 BTA 377, affirmed 90 F. (2) 978, cited in Merten's Sec. 55.11 p. 21) The amount involved, moreover, is extremely small inducement for Yutivo to go thru all the trouble of organizing SM. Besides, the non-inclusion of these small arrastre charges in the sales tax returns of Yutivo is clearly shown in the records of Yutivo, which is uncharacteristic of fraud (See Insular Lumber Co. vs. Collector, G.R. No. L719, April 28, 1956.)

We are, however, inclined to agree with the court below that SM was actually owned and controlled by petitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles at retail and maintaining stores for spare parts as well as service repair shops. It is not disputed that the petitioner, which is engaged principally in hardware supplies and equipment, is completely controlled by the Yutivo, Young or Yu family. The founders of the corporation are closely related to each other either by blood or affinity, and most of its stockholders are members of the Yu (Yutivo or Young) family. It is, likewise, admitted that SM was organized by the leading stockholders of Yutivo headed by Yu Khe Thai. At the time of its incorporation 2,500 shares worth P250,000.00 appear to have been subscribed in five equal

proportions by Yu Khe Thai, Yu Khe Siong, Yu Khe Jin, Yu Eng Poh and Washington Sycip. The first three named subscribers are brothers, being the sons of Yu Tien Yee, one of Yutivo's founders. Yu Eng Poh and Washington Sycip are respectively sons of Yu Tiong Sing and Alberto Sycip who are cofounders of Yutivo. According to the Articles of Incorporation of the said subscriptions, the amount of P62,500 was paid by the aforenamed subscribers, but actually the said sum was advanced by Yutivo. The additional subscriptions to the capital stock of SM and subsequent transfers thereof were paid by Yutivo itself. The payments were made, however, without any transfer of funds from Yutivo to SM. Yutivo simply charged the accounts of the subscribers for the amount allegedly advanced by Yutivo in payment of the shares. Whether a charge was to be made against the accounts of the subscribers or said subscribers were to subscribe shares appears to constitute a unilateral act on the part of Yutivo, there being no showing that the former initiated the subscription.

The transactions were made solely by and between SM and Yutivo. In effect, it was Yutivo who undertook the subscription of shares, employing the persons named or "charged" with corresponding account as nominal stockholders. Of course, Yu Khe Thai, Yu Khe Jin, Yu Khe Siong and Yu Eng Poh were manifestly aware of these subscriptions, but considering that they were the principal officers and constituted the majority of the Board of Directors of both Yutivo and SM, their subscriptions could readily or easily be that of Yutivo's Moreover, these persons were related to death other as brothers or first cousins. There was every reason for them to agree in order to protect their common interest in Yutivo and SM.

The issued capital stock of SM was increased by additional subscriptions made by various person's but except Ng Sam Bak and David Sycip, "payments" thereof were effected by merely debiting 'or charging the accounts of said stockholders and crediting the corresponding amounts in favor of SM,

without actually transferring cash from Yutivo. Again, in this instance, the "payments" were Yutivo, by effected by the mere unilateral act of Yutivo a accounts of the virtue of its control over the individual persons charged, would necessarily exercise preferential rights and control directly or indirectly, over the shares, it being the party which really undertook to pay or underwrite payment thereof.

The shareholders in SM are mere nominal stockholders holding the shares for and in behalf of Yutivo, so even conceding that the original subscribers were stockholders bona fide Yutivo was at all times in control of the majority of the stock of SM and that the latter was a mere subsidiary of the former.

True, petitioner and other recorded stockholders transferred their shareholdings, but the transfers were made to their immediate relatives, either to their respective spouses and children or sometimes brothers or sisters. Yutivo's shares in SM were transferred to immediate relatives of persons who constituted its controlling stockholders, directors and officers. Despite these purported changes in stock ownership in both corporations, the Board of Directors and officers of both corporations remained unchanged and Messrs. Yu Khe Thai, Yu Khe Siong Hu Khe Jin and Yu Eng Poll (all of the Yu or Young family) continued to constitute the majority in both boards. All these, as observed by the Court of Tax Appeals, merely serve to corroborate the fact that there was a common ownership and interest in the two corporations.

SM is under the management and control of Yutivo by virtue of a management contract entered into between the two parties. In fact, the controlling majority of the Board of Directors of Yutivo is also the controlling majority of the Board of Directors of SM. At the same time the principal officers of both corporations are identical. In addition both corporations have a common comptroller in the person of Simeon Sy, who is a brother-in-law of Yutivo's president, Yu Khe Thai. There is therefore no doubt that by virtue of such control, the business,

financial and management policies of both corporations could be directed towards common ends.

Another aspect relative to Yutivo's control over SM operations relates to its cash transactions. All cash assets of SM were handled by Yutivo and all cash transactions of SM were actually maintained thru Yutivo. Any and all receipts of cash by SM including its branches were transmitted or transferred immediately and directly to Yutivo in Manila upon receipt thereof. Likewise, all expenses, purchases or other obligations incurred by SM are referred to Yutivo which in turn prepares the corresponding disbursement vouchers and payments in relation there, the payment being made out of the cash deposits of SM with Yutivo, if any, or in the absence thereof which occurs generally, a corresponding charge is made against the account of SM in Yutivo's books. The payments for and charges against SM are made by Yutivo as a matter of course and without need of any further request, the latter would advance all such cash requirements for the benefit of SM. Any and all payments and cash vouchers are made on Yutivo stationery and made under authority of Yutivo's corporate officers, without any copy thereof being furnished to SM. All detailed records such as cash disbursements, such as expenses, purchases, etc. for the account of SM, are kept by Yutivo and SM merely keeps a summary record thereof on the basis of information received from Yutivo.

All the above plainly show that cash or funds of SM, including those of its branches which are directly remitted to Yutivo, are placed in the custody and control of Yutivo, resources and subject to withdrawal only by Yutivo. SM's being under Yutivo's control, the former's operations and existence became dependent upon the latter.

Consideration of various other circumstances, especially when taken together, indicates that Yutivo treated SM merely as its department or adjunct. For one thing, the accounting system maintained by Yutivo shows that it maintained a

high degree of control over SM accounts. All transactions between Yutivo and SM are recorded and effected by mere debit or credit entries against the reciprocal account maintained in their respective books of accounts and indicate the dependency of SM as branch upon Yutivo.

Apart from the accounting system, other facts corroborate or independently show that SM is a branch or department of Yutivo. Even the branches of SM in Bacolod, Iloilo, Cebu, and Davao treat Yutivo — Manila as their "Head Office" or "Home Office" as shown by their letters of remittances or other correspondences. These correspondences were actually received by Yutivo and the reference to Yutivo as the head or home office is obvious from the fact that all cash collections of the SM's branches are remitted directly to Yutivo. Added to this fact, is that SM may freely use forms or stationery of Yutivo

The fact that SM is a mere department or adjunct of Yutivo is made more patent by the fact that arrastre conveying, and charges paid for the "operation of receiving, loading or unloading" of imported cars and trucks on piers and wharves, were charged against SM. Overtime charges for the unloading of cars and trucks as requested by Yutivo and incurred as part of its acquisition cost thereof, were likewise charged against and treated as expenses of SM. If Yutivo were the importer, these arrastre and overtime charges were Yutivo's expenses in importing goods and not SM's. But since those charges were made against SM, it plainly appears that Yutivo had sole authority to allocate its expenses even as against SM in the sense that the latter is a mere adjunct, branch or department of the former.

Proceeding to another aspect of the relation of the parties, the management fees due from SM to Yutivo were taken up as expenses of SM and credited to the account of Yutivo. If it were to be assumed that the two organizations are separate juridical entities, the corresponding receipts or receivables should have been treated as income on the part of Yutivo. But such management fees

were recorded as "Reserve for Bonus" and were therefore a liability reserve and not an income account. This reserve for bonus were subsequently distributed directly to and credited in favor of the employees and directors of Yutivo, thereby clearly showing that the management fees were paid directly to Yutivo officers and employees.

Briefly stated, Yutivo financed principally, if not wholly, the business of SM and actually extended all the credit to the latter not only in the form of starting capital but also in the form of credits extended for the cars and vehicles allegedly sold by Yutivo to SM as well as advances or loans for the expenses of the latter when the capital had been exhausted. Thus, the increases in the capital stock were made in advances or "Guarantee" payments by Yutivo and credited in favor of SM. The funds of SM were all merged in the cash fund of Yutivo. At all times Yutivo thru officers and directors common to it and SM, exercised full control over the cash funds, policies, expenditures and obligations of the latter.

Southern Motors being but a mere instrumentality, or adjunct of Yutivo, the Court of Tax Appeals correctly disregarded the technical defense of separate corporate entity in order to arrive at the true tax liability of Yutivo.

Petitioner contends that the respondent Collector had lost his right or authority to issue the disputed assessment by reason of prescription. The contention, in our opinion, cannot be sustained. It will be noted that the first assessment was made on November 7, 1950 for deficiency sales tax from 1947 to 1949. The corresponding returns filed by petitioner covering the said period was made at the earliest on October 1, as regards the third quarter of 1947, so that it cannot be claimed that the assessment was not made within the fiveyear period prescribed in section 331 of the Tax Code invoked by petitioner. The assessment, it is admitted, was withdrawn by the Collector on insufficiency of evidence, but November 15, 1952 due to insufficiency of

evidence, but the withdrawal was made subject to the approval of the Secretary of Finance and the Board of Tax Appeals, pursuant to the provisions of section 9 of Executive Order No. 401-A, series of 1951. The decision of the previous assessment of November 7, Collector countermanding the as 1950 was forwarded to the Board of Tax Appeals through the Secretary of Finance but that official, apparently disagreeing with the decision, sent it back for reinvestigation. Consequently, the assessment of November 7, 1950 cannot be considered to have been finally withdrawn. That the assessment was subsequently reiterated in the decision of respondent Collector on December 16, 1954 did not alter the fact that it was made seasonably. In this connection, it would appear that a warrant of distraint and levy had been issued on March 28, 1951 in relation with this case and by virtue thereof the properties of Yutivo were placed under constructive distraint. Said warrant and constructive distraint have not been lifted up to the present, which shows that the assessment of November 7, 1950 has always been valid and subsisting.

Anent the deficiency sale tax for 1950, considering that the assessment thereof was made on December 16, 1954, the same was assessed well within the prescribed five-year period.

Petitioner argues that the original assessment of November 7, 1950 did not extend the prescriptive period on assessment. The argument is untenable, for, as already seen, the assessment was never finally withdrawn, since it was not approved by the Secretary of Finance or of the Board of Tax Appeals. The authority of the Secretary to act upon the assessment cannot be questioned, for he is expressly granted such authority under section 9 of Executive Order No. 401-And under section 79 (c) of the Revised Administrative Code, he has "direct control, direction and supervision over all bureaus and offices under his jurisdiction and may, any provision of existing law to the contrary not

withstanding, repeal or modify the decision of the chief of said Bureaus or offices when advisable in public interest."

It should here also be stated that the assessment in question was consistently protested by petitioner, making several requests for reinvestigation thereof. Under the circumstances, petitioner may be considered to have waived the defense of prescription.

"Estoppel has been employed to prevent the application of the statute of limitations against the government in certain instances in which the taxpayer has taken some affirmative action to prevent the collection of the tax within the statutory period. It is generally held that a taxpayer is estopped to repudiate waivers of the statute of limitations upon which the government relied. The cases frequently involve dissolved corporations. If no waiver has been given, the cases usually show come conduct directed to a postponement of collection, such, for example, as some variety of request to apply an overassessment. The taxpayer has 'benefited' and 'is not in a position to contest' his tax liability. A definite representation of implied authority may be involved, and in many cases the taxpayer has received the 'benefit' of being saved from the inconvenience, if not hardship of immediate collection. "

Conceivably even in these cases a fully informed Commissioner may err to the sorrow of the revenues, but generally speaking, the cases present a strong combination of equities against the taxpayer, and few will seriously quarrel with their application of the doctrine of estoppel." (Mertens Law of Federal Income Taxation, Vol. 10-A, pp. 159-160.)

It is also claimed that section 9 of Executive Order No. 401-A, series of 1951 — es involving an original assessment of more than P5,000 — refers only to compromises and refunds of taxes, but not to total withdrawal of the assessment. The contention is without merit. A careful examination of the

provisions of both sections 8 and 9 of Executive Order No. 401-A, series of 1951, reveals the procedure prescribed therein is intended as a check or control upon the powers of the Collector of Internal Revenue in respect to assessment and refunds of taxes. If it be conceded that a decision of the Collector of Internal Revenue on partial remission of taxes is subject to review by the Secretary of Finance and the Board of Tax Appeals, then with more reason should the power of the Collector to withdraw totally an assessment be subject to such review.

We find merit, however, in petitioner's contention that the Court of Tax Appeals erred in the imposition of the 5% fraud surcharge. As already shown in the early part of this decision, no element of fraud is present.

Pursuant to Section 183 of the National Internal Revenue Code the 50% surcharge should be added to the deficiency sales tax "in case a false or fraudulent return is willfully made." Although the sales made by SM are in substance by Yutivo this does not necessarily establish fraud nor the willful filing of a false or fraudulent return.

The case of Court Holding Co. v. Commissioner of Internal Revenue (August 9, 1943, 2 TC 531, 541-549) is in point. The petitioner Court Holding Co. was a corporation consisting of only two stockholders, to wit: Minnie Miller and her husband Louis Miller. The only assets of third husband and wife corporation consisted of an apartment building which had been acquired for a very low price at a judicial sale. Louis Miller, the husband, who directed the company's business, verbally agreed to sell this property to Abe C. Fine and Margaret Fine, husband and wife, for the sum of $54,000.00, payable in various installments. He received $1,000.00 as down payment. The sale of this property for the price mentioned would have netted the corporation a handsome profit on which a large corporate income tax would have to be paid. On the afternoon of February 23, 1940, when the Millers and the Fines got

together for the execution of the document of sale, the Millers announced that their attorney had called their attention to the large corporate tax which would have to be paid if the sale was made by the corporation itself. So instead of proceeding with the sale as planned, the Millers approved a resolution to declare a dividend to themselves "payable in the assets of the corporation, in complete liquidation and surrender of all the outstanding corporate stock." The building, which as above stated was the only property of the corporation, was then transferred to Mr. and Mrs. Miller who in turn sold it to Mr. and Mrs. Fine for exactly the same price and under the same terms as had been previously agreed upon between the corporation and the Fines.

The return filed by the Court Holding Co. with the respondent Commissioner of Internal Revenue reported no taxable gain as having been received from the sale of its assets. The Millers, of course, reported a long term capital gain on the exchange of their corporate stock with the corporate property. The Commissioner of Internal Revenue contended that the liquidating dividend to stockholders had no purpose other than that of tax avoidance and that, therefore, the sale by the Millers to the Fines of the corporation's property was in substance a sale by the corporation itself, for which the corporation is subject to the taxable profit thereon. In requiring the corporation to pay the taxable profit on account of the sale, the Commissioner of Internal Revenue, imposed a surcharge of 25% for delinquency, plus an additional surcharge as fraud penalties.

The U. S. Court of Tax Appeals held that the sale by the Millers was for no other purpose than to avoid the tax and was, in substance, a sale by the Court Holding Co., and that, therefore, the said corporation should be liable for the assessed taxable profit thereon. The Court of Tax Appeals also sustained the Commissioner of Internal Revenue on the delinquency penalty of 25%. However, the Court of Tax Appeals disapproved the fraud penalties, holding that an attempt to avoid a tax does not necessarily establish fraud; that it is a

settled principle that a taxpayer may diminish his tax liability by means which the law permits; that if the petitioner, the Court Holding Co., was of the opinion that the method by which it attempted to effect the sale in question was legally sufficient to avoid the imposition of a tax upon it, its adoption of that methods not subject to censure; and that in taking a position with respect to a question of law, the substance of which was disclosed by the statement indorsed on it return, it may not be said that that position was taken fraudulently. We quote in full the pertinent portion of the decision of the Court of Tax Appeals: .

". . . The respondent's answer alleges that the petitioner's failure to report as income the taxable profit on the real estate sale was fraudulent and with intent to evade the tax. The petitioner filed a reply denying fraud and averring that the loss reported on its return was correct to the best of its knowledge and belief. We think the respondent has not sustained the burden of proving a fraudulent intent. We have concluded that the sale of the petitioner's property was in substance a sale by the petitioner, and that the liquidating dividend to stockholders had no purpose other than that of tax avoidance. But the attempt to avoid tax does not necessarily establish fraud. It is a settled principle that a taxpayer may diminish his liability by any means which the law permits. United States v. Isham, 17 Wall. 496; Gregory v. Helvering, supra; Chrisholm v. Commissioner, 79 Fed. (2d) 14. If the petitioner here was of the opinion that the method by which it attempted to effect the sale in question was legally sufficient to avoid the imposition of tax upon it, its adoption of that method is not subject to censure. Petitioner took a position with respect to a question of law, the substance of which was disclosed by the statement endorsed on its return. We can not say, under the record before us, that that position was taken fraudulently. The determination of the fraud penalties is reversed."

When GM was the importer and Yutivo, the wholesaler, of the cars and trucks, the sales tax was paid only once and on the original sales by the former and neither the latter nor SM paid taxes on their subsequent sales. Yutivo might have, therefore, honestly believed that the payment by it, as importer, of the sales tax was enough as in the case of GM Consequently, in filing its return on the basis of its sales to SM and not on those by the latter to the public, it cannot be said that Yutivo deliberately made a false return for the purpose of defrauding the government of its revenues which will justify the imposition of the surcharge penalty.

We likewise find meritorious the contention that the Tax Court erred in computing the alleged deficiency sales tax on the selling price of SM without previously deducting therefrom the sales tax due thereon. The sales tax provisions (sees. 184.186, Tax Code) impose a tax on original sales measured by "gross selling price" or "gross value in money". These terms, as interpreted by the respondent Collector, do not include the amount of the sales tax, if invoiced separately. Thus, General Circular No. 431 of the Bureau of Internal Revenue dated July 29, 1939, which implements sections 184.186 of the Tax Code provides: "

. . .'Gross selling price' or gross value in money' of the articles sold, bartered, exchanged, transferred as the term is used in the aforecited sections (sections 184, 185 and 186) of the National Internal Revenue Code, is the total amount of money or its equivalent which the purchaser pays to the vendor to receive or get the goods. However, if a manufacturer, producer, or importer, in fixing the gross selling price of an article sold by him has included an amount intended to cover the sales tax in the gross selling price of the articles, the sales tax shall be based on the gross selling price less the amount intended to cover the tax, if the same is billed to the purchaser as a separate item.

General Circular No. 440 of the same Bureau reads:

Amount intended to cover the tax must be billed as a separate em so as not to pay a tax on the tax. — On sales made after he third quarter of 1939, the amount intended to cover the sales tax must be billed to the purchaser as separate items in the, invoices in order that the reduction thereof from the gross ailing price may be allowed in the computation of the merchants' percentage tax on the sales. Unless billed to the purchaser as a separate item in the invoice, the amounts intended to cover the sales tax shall be considered as part of the gross selling price of the articles sold, and deductions thereof will not be allowed, (Cited in Dalupan, Nat. Int. Rev. Code, Annotated, Vol. II, pp. 52-53.)

Yutivo complied with the above circulars on its sales to SM, and as separately billed, the sales taxes did not form part of the "gross selling price" as the measure of the tax. Since Yutivo had previously billed the sales tax separately in its sales invoices to SM General Circulars Nos. 431 and 440 should be deemed to have been complied. Respondent Collector's method of computation, as opined by Judge Nable in the decision complained of —

. . . is unfair, because . . .(it is) practically imposing tax on a tax already paid. Besides, the adoption of the procedure would in certain cases elevate the bracket under which the tax is based. The late payment is already penalized, thru the imposition of surcharges, by adopting the theory of the Collector, we will be creating an additional penalty not contemplated by law."

If the taxes based on the sales of SM are computed in accordance with Gen. Circulars Nos. 431 and 440 the total deficiency sales taxes, exclusive of the 25% and 50% surcharges for late payment and for fraud, would amount only to P820,549.91 as shown in the following computation: Rates

Gross Sales of

Sales Taxes Due

Total Gross Selling

of

Vehicles Exclusive

and Computed

Price Charged to

Sales

of Sales Tax

under Gen. Cir

Tax

the Public

Nos. 431 & 400

5%

P11,912,219.57

P595,610.98

P12,507,83055

7%

909,559.50

63,669.16

973,228.66

10%

2,618,695.28

261,869.53

2,880,564.81

15%

3,602,397.65

540,359.65

4,142,757.30

20%

267,150.50

53,430.10

320,580.60

30%

837,146.97

251,114.09

1,088,291.06

50%

74,244.30

37,122.16

111,366.46

75%

8,000.00

6,000.00

14,000.00

TOTAL

P20,220,413.77

P1,809,205.67

P22,038,619.44

Less Taxes Paid by Yutivo Deficiency Tax still due

988,655.76 P820,549.91

This is the exact amount which, according to Presiding Judge Nable of the Court of Tax Appeals, Yutivo would pay, exclusive of the surcharges.

Petitioner finally contends that the Court of Tax Appeals erred or acted in excess of its jurisdiction in promulgating judgment for the affirmance of the decision of respondent Collector by less than the statutory requirement of at least two votes of its judges. Anent this contention, section 2 of Republic Act No. 1125, creating the Court of Tax Appeals, provides that "Any two judges of the Court of Tax Appeals shall constitute a quorum, and the concurrence of two judges shall be necessary to promulgate decision thereof. . . . " It is on record that the present case was heard by two judges of the lower court. And while Judge Nable expressed his opinion on the issue of whether or not the amount of the sales tax should be excluded from the gross selling price in computing the deficiency sales tax due from the petitioner, the opinion,

apparently, is merely an expression of his general or "private sentiment" on the particular issue, for he concurred the dispositive part of the decision. At any rate, assuming that there is no valid decision for lack of concurrence of two judges, the case was submitted for decision of the court below on March 28, 1957 and under section 13 of Republic Act 1125, cases brought before said court hall be decided within 30 days after submission thereof. "If no decision is rendered by the Court within thirty days from the date a case is submitted for decision, the party adversely affected by said ruling, order or decision, may file with said Court a notice of his intention to appeal to the Supreme Court, and if no decision has as yet been rendered by the Court, the aggrieved party may file directly with the Supreme Court an appeal from said ruling, order or decision, notwithstanding the foregoing provisions of this section." The case having been brought before us on appeal, the question raised by petitioner as become purely academic.

IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals under review is hereby modified in that petitioner shall be ordered to pay to respondent the sum of P820,549.91, plus 25% surcharge thereon for late payment.

So ordered without costs.

FIRST DIVISION

G.R. No. 119176

March 19, 2002

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LINCOLN PHILIPPINE LIFE INSURANCE COMPANY, INC. (now JARDINECMA LIFE INSURANCE COMPANY, INC.) and THE COURT OF APPEALS, respondents.

KAPUNAN, J.:

This is a petition for review on certiorari filed by the Commission on Internal Revenue of the decision of the Court of Appeals dated November 18, 1994 in C.A. G.R. SP No. 31224 which reversed in part the decision of the Court of Tax Appeals in C.T.A. Case No. 4583.

The facts of the case are undisputed.

Private respondent Lincoln Philippine Life Insurance Co., Inc., (now JardineCMA Life Insurance Company, Inc.) is a domestic corporation registered with the Securities and Exchange Commission and engaged in life insurance business. In the years prior to 1984, private respondent issued a special kind of life insurance policy known as the "Junior Estate Builder Policy," the distinguishing feature of which is a clause providing for an automatic increase in the amount of life insurance coverage upon attainment of a certain age by the insured without the need of issuing a new policy. The clause was to take effect in the year 1984. Documentary stamp taxes due on the policy were paid by petitioner only on the initial sum assured.

In 1984, private respondent also issued 50,000 shares of stock dividends with a par value of P100.00 per share or a total par value of P5,000,000.00. The

actual value of said shares, represented by its book value, was P19,307,500.00. Documentary stamp taxes were paid based only on the par value of P5,000,000.00 and not on the book value.1âwphi1.nêt

Subsequently, petitioner issued deficiency documentary stamps tax assessment for the year 1984 in the amounts of (a) P464,898.75, corresponding to the amount of automatic increase of the sum assured on the policy issued by respondent, and (b) P78,991.25 corresponding to the book value in excess of the par value of the stock dividends. The computation of the deficiency documentary stamp taxes is as follows:

On Policies Issued: Total policy issued during the year

P1,360,054,000.00

Documentary stamp tax due thereon (P1,360,054,000.00 divided by P200.00 P 2,380,094.50

multiplied by P0.35) Less: Payment

P 1,915,495.75

Deficiency

P 464,598.75

Add: Compromise Penalty

300.00

----------------------TOTAL AMOUNT DUE & COLLECTIBLE

P 464,898.75

Private respondent questioned the deficiency assessments and sought their cancellation in a petition filed in the Court of Tax Appeals, docketed as CTA Case No. 4583.

On March 30, 1993, the Court of Tax Appeals found no valid basis for the deficiency tax assessment on the stock dividends, as well as on the insurance policy. The dispositive portion of the CTA‘s decision reads:

WHEREFORE, the deficiency documentary stamp tax assessments in the amount of P464,898.76 and P78,991.25 or a total of P543,890.01 are hereby cancelled for lack of merit. Respondent Commissioner of Internal Revenue is ordered to desist from collecting said deficiency documentary stamp taxes for the same are considered withdrawn.

SO ORDERED.1

Petitioner appealed the CTA‘s decision to the Court of Appeals. On November 18, 1994, the Court of Appeals promulgated a decision affirming the CTA‘s decision insofar as it nullified the deficiency assessment on the insurance policy, but reversing the same with regard to the deficiency assessment on the stock dividends. The CTA ruled that the correct basis of the documentary stamp tax due on the stock dividends is the actual value or book value represented by the shares. The dispositive portion of the Court of Appeals‘ decision states:

IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby REVERSED with respect to the deficiency tax assessment on the stock dividends, but AFFIRMED with regards to the assessment on the Insurance Policies. Consequently, private respondent is ordered to pay the petitioner herein the sum of P78,991.25, representing documentary stamp tax on the stock dividends it issued. No costs pronouncement.

SO ORDERED.2

A motion for reconsideration of the decision having been denied, 3 both the Commissioner of Internal Revenue and private respondent appealed to this Court, docketed as G.R. No. 118043 and G.R. No. 119176, respectively. In G.R. No. 118043, private respondent appealed the decision of the Court of Appeals insofar as it upheld the validity of the deficiency tax assessment on the stock dividends. The Commissioner of Internal Revenue, on his part, filed

the present petition questioning that portion of the Court of Appeals‘ decision which invalidated the deficiency assessment on the insurance policy, attributing the following errors:

THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE IS A SINGLE AGREEMENT EMBODIED IN THE POLICY AND THAT THE AUTOMATIC INCREASE CLAUSE IS NOT A SEPARATE AGREEMENT, CONTRARY TO SECTION 49 OF THE INSURANCE CODE AND SECTION 183 OF THE REVENUE CODE THAT A RIDER, A CLAUSE IS PART OF THE POLICY.

THE HONORABLE COURT OF APPEALS ERRED IN NOT COMPUTING THE AMOUNT OF TAX ON THE TOTAL VALUE OF THE INSURANCE ASSURED IN THE POLICY INCLUDING THE ADDITIONAL INCREASE ASSURED BY THE AUTOMATIC INCREASE CLAUSE DESPITE ITS RULING THAT THE ORIGINAL POLICY AND THE AUTOMATIC CLAUSE CONSTITUTED ONLY A SINGULAR TRANSACTION.4

Section 173 of the National Internal Revenue Code on documentary stamp taxes provides:

Sec. 173. Stamp taxes upon documents, instruments and papers. - Upon documents, instruments, loan agreements, and papers, and upon acceptances, assignments, sales, and transfers of the obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following section of this Title, by the person making, signing, issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted, or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines, and at the same time such act is done or

transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax. (As amended by PD No. 1994) The basis for the value of documentary stamp taxes to be paid on the insurance policy is Section 183 of the National Internal Revenue Code which states in part:

The basis for the value of documentary stamp taxes to be paid on the insurance policy is Section 183 of the National Internal Revenue Code which states in part:

Sec. 183. Stamp tax on life insurance policies. - On all policies of insurance or other instruments by whatever name the same may be called, whereby any insurance shall be made or renewed upon any life or lives, there shall be collected a documentary stamp tax of thirty (now 50c) centavos on each Two hundred pesos per fractional part thereof, of the amount insured by any such policy.

Petitioner claims that the "automatic increase clause" in the subject insurance policy is separate and distinct from the main agreement and involves another transaction; and that, while no new policy was issued, the original policy was essentially re-issued when the additional obligation was assumed upon the effectivity of this "automatic increase clause" in 1984; hence, a deficiency assessment based on the additional insurance not covered in the main policy is in order.

The Court of Appeals sustained the CTA‘s ruling that there was only one transaction involved in the issuance of the insurance policy and that the "automatic increase clause" is an integral part of that policy.

The petition is impressed with merit.

Section 49, Title VI of the Insurance Code defines an insurance policy as the written instrument in which a contract of insurance is set forth. 5 Section 50 of the same Code provides that the policy, which is required to be in printed form, may contain any word, phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the contract of insurance.6 It is thus clear that any rider, clause, warranty or endorsement pasted or attached to the policy is considered part of such policy or contract of insurance.

The subject insurance policy at the time it was issued contained an "automatic increase clause." Although the clause was to take effect only in 1984, it was written into the policy at the time of its issuance. The distinctive feature of the "junior estate builder policy" called the "automatic increase clause" already formed part and parcel of the insurance contract, hence, there was no need for an execution of a separate agreement for the increase in the coverage that took effect in 1984 when the assured reached a certain age.

It is clear from Section 173 that the payment of documentary stamp taxes is done at the time the act is done or transaction had and the tax base for the computation of documentary stamp taxes on life insurance policies under Section 183 is the amount fixed in policy, unless the interest of a person insured is susceptible of exact pecuniary measurement. 7 What then is the amount fixed in the policy? Logically, we believe that the amount fixed in the policy is the figure written on its face and whatever increases will take effect in the future by reason of the "automatic increase clause" embodied in the policy without the need of another contract.

Here, although the automatic increase in the amount of life insurance coverage was to take effect later on, the date of its effectivity, as well as the amount of the increase, was already definite at the time of the issuance of the policy. Thus, the amount insured by the policy at the time of its issuance necessarily included the additional sum covered by the automatic increase

clause because it was already determinable at the time the transaction was entered into and formed part of the policy.

The "automatic increase clause" in the policy is in the nature of a conditional obligation under Article 1181,8 by which the increase of the insurance coverage shall depend upon the happening of the event which constitutes the obligation. In the instant case, the additional insurance that took effect in 1984 was an obligation subject to a suspensive obligation, 9 but still a part of the insurance sold to which private respondent was liable for the payment of the documentary stamp tax.

The deficiency of documentary stamp tax imposed on private respondent is definitely not on the amount of the original insurance coverage, but on the increase of the amount insured upon the effectivity of the "Junior Estate Builder Policy."

Finally, it should be emphasized that while tax avoidance schemes and arrangements are not prohibited,10 tax laws cannot be circumvented in order to evade the payment of just taxes. In the case at bar, to claim that the increase in the amount insured (by virtue of the automatic increase clause incorporated into the policy at the time of issuance) should not be included in the computation of the documentary stamp taxes due on the policy would be a clear evasion of the law requiring that the tax be computed on the basis of the amount insured by the policy.

WHEREFORE, the petition is hereby given DUE COURSE. The decision of the Court of Appeals is SET ASIDE insofar as it affirmed the decision of the Court of Tax Appeals nullifying the deficiency stamp tax assessment petitioner imposed on private respondent in the amount of P464,898.75 corresponding to the increase in 1984 of the sum under the policy issued by respondent.1âwphi1.nêt

SO ORDERED.

Footnotes

1

Court of Appeals (CA) Rollo. p. 16, Annex "B."

2

Rollo, p. 47.

3

CA Rollo, p. 218.

4

Rollo, p. 19.

5

SEC. 49. The written instrument in which a contract of insurance is set forth, is called a policy of insurance.

6

SEC. 50. The policy shall be in printed form which may contain blank spaces; and any word, phrase, clause, mark, sign, symbol,

signature, number, or word necessary to complete the contract of insurance shall be written on the blank spaces provided therein.

Any rider, clause, warranty or endorsement purporting to be part of the contract of insurance and which is pasted or attached to said policy is not binding on the insured, unless the descriptive title or name of the rider, clause, warranty, or endorsement is also mentioned and written on the blank spaces provided in the policy.

Unless applied for by the insured or owner, any rider, clause, warranty or endorsement issued after the original policy shall be countersigned by the insured or owner, which counter-signature shall be taken as his agreement to the contents of such rider, clause, warranty or endorsement.

Group insurance and group annuity policies, however, may be typewritten and need not be in printed form.

7

Sec. 183. Insurance Code of the Phils. – Unless the interest of a person insured is capable of exact pecuniary measurement, the

measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy.

8

Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired,

shall depend upon the happening of the event which constitutes the condition.

9

Article 18 of the Civil Code provides that "on matters which are governed by the Code of Commerce and special laws, their

deficiency shall be supplied by the provision of this Code."

10

Delpher Trades Corporation vs. Intermediate Appellate Court, 157 SCRA 349 (1988).

EN BANC

G.R. No. 156

September 27, 1946

MILTON GREENFIELD, plaintiff-appellant, vs. BIBIANO L. MEER, defendant-appellee.

FERIA, J.:

This is an appeal from the decision of the Court of First Instance of Manila which dismisses the complaint of the plaintiff and appellant containing two causes of action; one to recover the sum of P9,008.14 paid as income tax for the year 1939 by plaintiff to defendant under protest, by reason of defendant having disallowed a deduction of P67,307.80 alleged by plaintiff to be losses in his trade or business; and the other to reclaim, in the event the first cause of action is dismissed, the sum of P475 collected by defendant from plaintiff illegally according to the latter, because the former has erroneously computed the tax on personal and additional exemptions.

The following are the pertinent facts stipulated and submitted by the parties to the lower court:

2. That since the year 1933 up to the present time, the plaintiff has been continuously engaged in the embroidery business located at 385 Cristobal, City of Manila and carried on under his name;

3. That in 1935 the plaintiff began engaging in buying and selling mining stocks and securities for his own exclusive account and not for the account of others . . .;

4. That Exhibit A attached to the complaint and made a part hereof represents plaintiff's purchases and sales of each class of stock and security as well as the profits and losses resulting on each class during the year 1939;

5. That the plaintiff has not been a dealer in securities as defined in section 84 (t) of Commonwealth Act No. 466; that he has no established place of business for the purchase and sale of mining stocks and securities; and that he was never a member of any stock exchange;

6. That the plaintiff filed an income tax return for the calendar year 1939 showing that he made a net profit amounting to P52,449.29 on embroidery business and P17,850 on dividends from various corporations; and that from the purchase and sales of mining stocks and securities he made a profit of P10,741.30 and incurred losses in the amount of P78,049.10, thereby sustaining a net loss of P67,307.80, which income tax return is hereto attached and marked Exhibit B;

7. That in said income tax return for 1939, the plaintiff declared the results of his stock transactions under Schedule B (Income from Business);but the defendant ruled that they should be declared in the income tax return, Exhibit B, under Schedule D (Gains and Losses from Sales or Exchanges of Capital Assets, real or personal);

8. That in said income tax return, said plaintiff claims his deduction of P67,307.80 representing the net loss sustained by him in mining stocks securities during the year 1939; and that the defendant disallowed said item of deduction on the ground that said losses were sustained by the plaintiff from the sale of mining stocks and securities which are capital assets, and that the loss arising from the sale of the same should be allowed only to the extent of the gains from such sales, which gains were already taken into consideration in the computation of the alleged net loss of P67,307.80;

9. That the defendant assessed plaintiff's income tax return for the year 1939 at P13,771.06 as shown in the following computation appearing in the audit sheet of the defendant hereto attached and marked Exhibit C; Net income as per return of plaintiff for 1939

P70,299.29

Add: Net Loss on sale of mining stocks and securities 67,307.80

disallowed in audit

P137,607.09 Total net income as per office audit

=========

Amount of tax on net income as per office audit

P13,821.06

Less: Tax on exemptions: Personal exemption Additional exemption Total

P2,500.00 1,000.00 P3,500.00 50.00

Tax on exemption

P13,771.06 Net amount of tax due

=========

10. That the defendant computed the graduated rate of income tax due on the entire net income as per office audit, without first deducting therefrom the amount of personal and additional exemptions to which the plaintiff is entitled, allowing said plaintiff a deduction from the assessed tax the amount of P50 corresponding to the exemption of P3,500;

11. That the plaintiff, objecting and excepting to all the ruling of the defendant above mentioned and in assessing plaintiff with P13,771.06, claimed from the defendant the refund of P9,008.14 or in the alternative case P475, which claim of plaintiff was overruled by the defendant;

The questions raised by appellant in his four (4) assignments of error may be reduced into the following: (1) Whether the losses sustained by the plaintiff from the buying and selling of mining securities during the year 1939 are

losses incurred in trade and business, deductible under section 30 (d) (1)(A) of Commonwealth Act No. 466 from his gains in his embroidery business and other income; or whether they are capital losses from sales of capital assets which shall be allowed only to the extent of the gains from such sales under section 34 of the same Commonwealth Act No. 466. And (2) whether, under the present law, the personal and additional exemptions granted by section 23 of the same Act, should be considered as a credit against or be deducted from the net income, or whether it is the tax on such exemptions that should be deducted from the tax on the total net income.

1. As to the first question, it is agreed in the above-quoted stipulation of facts that the plaintiff was not a dealer in securities or share of stock as defined in section 84 (t) of Commonwealth Act No. 466. The question for determination is whether appellant, though not a dealer in mining securities, may be considered as engaged in the business of buying and selling them under section 30 (d), (1) (A) of said Act No. 466.

It is evident that, taking into consideration the nature of mining securities, which may be bought or sold either as a business or for speculation purposes only, the National Assembly of the Philippines has deemed it necessary to define or determine beforehand in section 84 (t) of Commonwealth Act No. 466 who may be considered as persons engaged in the trade or business of buying and selling securities within the meaning of the phrase "incurred in trade or business" used in section 30 (d) (1) (A) of the same Act, in order to avoid any question or doubt as to deductibility of all losses incurred by a merchant in securities from his net income from whatever source. The definition of dealer or merchant in securities given in said section 84 (t) includes persons, natural or juridical, who are engaged in the purchase and sale of securities whether for his their own account or for others, provided they have a place of business and are regularly engaged therein. There was formerly some doubt or question as to whether a person engaged in buying or selling securities for his own

account might be considered as engaged in that trade or business, and several cases involving such question had been submitted to the United States Federal Courts for ruling, and to the Income Tax Units of the United States Bureau of Internal Revenue for opinion. But with the inclusive definition of the term "dealer" or merchant of securities given in section 84 (t) of Act No. 466, such doubt can no longer arise.

Said section 84 (t) reads as follows:

(t) The term "dealer in securities" means a merchant of stocks or securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale of customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom.

Appellant assumes, however, that the above-quoted definition does not cover or include all persons engaged in the trade or business of buying and selling securities within the meaning of said section 30 (d) (1) (A). He contends that, although he is not a dealer in mining securities, he may be considered as having been engaged in the trade or business of buying and selling securities. And in support of his contention appellant quotes Opinion No. 1818 of the Income Tax Unit of the United States Bureau of Internal Revenue(I.T. No. 1818, C.B. II, pp. 39-41), in which opinion the following was said:

The taxpayer is not a member of any stock exchange, has no place of business, and does not make purchase and sales of securities for customers. Much of his trading is done on margin. He devotes the greater part of the time in his broker's office keeping in touch with the market. He has no other trade or business, his income consisting entirely of interest bonds, dividends on stocks, and profits from the sale or disposition of securities.

Advice is requested (1) whether this taxpayer is entitled to the benefit of section 204 of the Revenue Act of 1921, with reference to a net loss incurred in 1921, from the sale of stocks; (2) whether he is entitled to the benefit of section 206 of the Revenue Act of 1921, with regard to gains derived in 1922 from the sale of two blocks of stock held more than two years.

1. Section 204 (a) provides in part:

That as used in this section the term "net loss" means only net losses resulting from the operation of any trade or business regularly carried on by the taxpayer . . .

The question is, than, whether the taxpayer was regularly engaged in the trade or business of buying and selling securities.

The interpretation placed upon the term "business or trade" by the courts and the department may be indicated by a few illustrative decisions. In two early cases (In re Marson [1871], Fed. Cas. No. 9142, and In re Woodward [1876], Fed. Cas. No. 18001) it was held that a speculator in stocks was not a "merchant or tradesman" within the meaning of the Bankruptcy Act of 1867. It was said in the former case:

"The only business he was engaged in was what is called speculating in stocks, that is, buying and selling them, with a view to his own profit, to be made by the excess of the selling price over the buying price . . . The fact that the bankrupt was engaged in no other business can not have the effect to make him a merchant or a tradesman, because he carried on the business he did carry on in the way which he carried it on."

That is, although his business was buying and selling, since this business was simply with a view to his own profit and not for others, has was not a

merchant or tradesman. Compare In re Surety Guarantee & Trust Co. ([1902], 121 Fed., 73) and In re H.R. Leighton & Co. ([1906], 147 Fed., 311).

With this background, the Department, in Treasury Decisions 1989, 2005, 2090, and 2135 (not published in Bulletin service), held that the provision of paragraph B of the 1913 Act, allowing as a deduction for the purpose of the normal tax "losses actually sustained during the year, incurred in trade . . .", did not include losses from isolated transactions; for instance, in stocks and bonds. In Mente vs. Eisner ([1920], 266 Fed., 161) (certiorari denied, 254 U.S., 635), these rulings were upheld in a case in which a manufacturer of bagging was denied deductions for losses in buying and selling cotton on the cotton exchange for his individual account, not connected with his manufacturing business. (Cf. Black vs. Bolen [1920], 268 Fed., 427.) Likewise, in L.O. 601 (not published in Bulletin service), it was held that "losses sustained by a person in buying and selling securities in his own account, he not being a licensed stock and bond broker buying and selling for others as well as for himself, are not deductible as losses in trade within the meaning of paragraph B of the Act of October 3, 1913." The basis of these opinions is thus seen to be (1) that dealing in securities on one's own account is not technically a "trade"; (2) that isolated transactions in securities, not connected with the tax payer's regular business do not constitute a "trade."

In the Act of September 8, 1916, the wording of the 1913 Act was slightly changed (section 5 [a], fourth) to permit a deduction of "losses actually sustained during the year, incurred in his business or trade . . ." Under this more liberal provision, it has been uniformly held that where a taxpayer devoted all his time, or the major portion of it, to buying and selling securities on his own account, this occupation was his "business"; and therefore he was permitted to deduct losses sustained in such dealings as being "incurred in his business." A. R. R. 404 (C.B. 4, p. 157); semble L. O.601. These rulings are inferentially supported by the definitions of trade or business to comprehend

"all his activities for gain, profit, or livelihood, entered into with sufficient frequency, or occupying such portion of his time or attention as to constitute a vocation," contained in article 8 of Regulations 41, relative to the war excessprofits tax (approved in Woods vs. Lewellyn [1921], 289 Fed., 498). . .

It is submitted that these decisions are a sound interpretation of the accepted definition of business: "Business is a very comprehensive term and embraces everything about which a person can be employed." Black's Law Dictionary, 158, citing People vs. Commissioners of Taxes (23 New York, 242, 244). "That which occupies the time, attention and labor of men for the purpose of a livelihood or profit." Bouvier's Law Dictionary, Vol. 1, p. 273. Fling vs. Stone Tracy Co. (1910), 220 U. S., 107 at 171; 31 Sup Ct., 342; 55 Law. ed., 389; Ann. Cas. 1912-B, 1312; cited with approval in Von Baumbach vs. Sargent Land Company (1916), 242 U. S., 503, at 515. If they are sound, the facts of the instant case require a ruling that the taxpayer was regularly engaged in the business of buying and selling securities on his own account and was, therefore, entitled to the benefit of the provisions of section 204(a). (I. T. No. 1818; C. B. II-2, pp. 39-41.)

But, assuming arguendo that the above-quoted opinion may be applied to the present case, it is evident that the appellant can not be considered as having been engaged in the business of buying and selling securities within the meaning of section 30 (d) (1) (A) of Act No. 466 According to said opinion, in order that he may so be considered, it is necessary that he must devote all his time or at least a major portion thereof to said business and that the latter must be regularly carried on by him.

In the stipulation of facts presented in this case it is agreed that "since the year 1933 up to the present time, the plaintiff has been continuously engaged in the embroidery business," and that "in 1935, the plaintiff began engaging in buying and selling mining stocks and securities for his own exclusive account."

There is nothing therein to show that plaintiff and appellant has regularly devoted all his time or the major portion thereof to the business of buying and selling mining securities for his own account. On the contrary, it having been stipulated that he has been continuously engaged in the embroidery business during the same time, it necessarily follows that he has not and could not have devoted regularly all his time or a major portion thereof to the buying and selling of mining securities.

Furthermore, from Exhibit A attached to the complaint and made a part of said stipulation of facts, which represents plaintiff's purchases and sales of each class of stocks and securities as well as the profits and losses resulting therefrom during the year 1939, it appears that he made purchases and sales of securities only on several days of some months and nothing on others. As shown in said exhibit, during the month of January, 1939, appellant purchased shares of stock of different mining corporations on January 2, 3, 4, 6, 13, 19, 20, 25, 30, and sold some of them on January 4, 10, 13 and 31. During February he made purchases on the dates 1, 8, 13, 14, 25, and 27; and sales on 6, 9, 10, 16, 22, and 30, and sold some on March 9 only. During April he made two purchases on April 3 and 5, and one sale on April 4. During May he purchased mining shares of stock on May 9, 10, 13, 19, 24, and 25; and sold some of them on May 9, 10, 12, 13, and 31. During June appellant made purchases on 1, 3, 5, 8, 13, 15, and 17, and sales on 22, 23, 24, and 28. During July, purchases on 1, 3, 6, 19; and sales on July 24, 25, 26, and 27. During August he purchased shares of stock on some mining corporations on 5,7, 16, and 18 and sold shares of one mining corporation on August 10 only. During September appellant did not purchase or sell any securities. During October he sold securities only on the 12th of said month, and he made no purchase at all. And during November and December he did not purchase or sell any.

Appellant contends that as from Exhibit A it appears that the mining securities were inventoried in order to arrive at his profits and losses, they cannot be considered as capital assets, because, according to section 34, the term capital assets does not include property which would properly be included in the inventory. But it is to be observed that the law refers not to property merely included, but to that which would be properly included in the inventory. Section 148 of the Income Tax Regulations No. 2 of February 10, 1940 (39 Off. Gaz., 325), provides that "the securities (to be) inventoried as here provided may include only those held for purposes of resale and not for investment," and that "the taxpayers who buy and sell or hold securities for investment or speculation, . . . are not dealers insecurities within the meaning of this rule." And the General Counsel of the Federal Bureau of Internal Revenue, after quoting Article 105 of United States Regulations 74 from which said section 148 of our Income Tax Regulations was taken, said that a person not a dealer in securities is precluded from the use of inventories in computing his net income."(C. B. X-2, p. 128, G. C. M., 9656.)

The lower court has not therefore erred in dismissing appellant's first cause of action, on the ground that the losses sustained by appellant from the buying and selling of mining securities are not losses incurred in business or trade but are capital losses from sales of capital assets, as contended by appellee.

2. With regard to the second point, the lower court held that, as the new law does not provide that the personal exemptions shall be allowed in the nature of a deduction from the net income, as prescribed in the old law, and there is a distinction between exemption and deduction, the tax due on said exemptions must be deducted from the tax due on the whole net income, instead of deducting the total amount of the exemptions from the net income.

The argument of the appellee in support of the lower court's decision is that the omission in section 23 of Act No. 466 of the phrase "in the nature of a

deduction" found in section 7 of the old law, shows that it was the intention of the National Assembly to adopt the innovation proposed by the Tax Commission which prepared the draft of the new law, an innovation based on what is known as the "Wisconsin Plan" now in operation in several American states. Under said plan, the cumulative amount of the tax is fixed on any given amount of net income without regard to the status of the taxpayer, and then this amount is reduced by the tax credit fixed in the law according to the status of the taxpayer and the number of his dependents as follows: for single individuals, there is allowed a tax credit of P10; for married persons or heads of family, P30; and for each dependent below 21 years of age, P10.

Section 7 of the old law provided: "For the purpose of the normal tax only, there shall be allowed as an exemption in the nature of a deduction from the amount of the net income . . ."; while section 23 of the new law provides: "For the purpose of the tax provided for in this Title there shall be allowed the following exemptions." Now, the question to be determined or answered is: Does this change in the phraseology of the law show the intention of the National Assembly to change the theory or policy of the old law so as to deduct now the tax on the personal and additional exemptions from the tax fixed on the amount of the net income, instead of deducting the amount of personal and additional exemptions from that of the net income, before determining the tax due on the latter?

It is a well-settled rule of statutory construction that where a statue has been enacted which is susceptible of several interpretations there is no better means for ascertaining the will and intention of the legislature than that which is afforded by the history of the statue. Taking into consideration the history of section 23 of the Commonwealth Act No. 466, the answer to the abovepropounded question must obviously be in the negative. Section 22 of the bill entitled "An Act to revise, amend and codify the Internal Revenue Laws of the Philippines," prepared by the Tax Commission and submitted to the National

Assembly of the Philippines, in substitution of section 7 of the old Income Tax Law, reads as follows:

SEC. 22. Amount of tax credit allowable to individuals.—There shall be allowed as a credit in the nature of a deduction from the amount of the tax payable by each citizen or resident of the Philippines under section 20:

(a) Tax credit of single individuals.—The sum of P10 if the person making the return is a single person or a married person legally separated from his or her spouse.

(b) Tax credit of a married person or head of family.—The sum of P30 if the person making the return is a married man with a wife not legally separated from him, or a married woman with a husband not legally separated from her, or the head of the family; Provided, That from the tax due on the aggregate income of both husband and wife when not legally separated only one tax credit of P30 shall be deducted. For the purpose of this section, the term "head of a family" includes an unmarried man or a woman with one or both parents, or one or more brothers or sisters, or one or more legitimate, recognized natural or adopted children dependent upon him or her for their chief support where such brothers, sisters, or children are less than twenty-one years of age.

(c) Additional tax credit for dependents.—The sum of P10 for each legitimate, recognized natural, or adopted child wholly dependent upon the taxpayer, if such dependents are under twenty-one years of age, or incapable of selfsupport because mentally or physically defective. The additional tax credit under this paragraph shall be allowed only if the person making the return is the head of the family.

But the National Assembly, instead of adopting or incorporating said proposed section 22 in the National Internal Revenue Code, C. A. No. 466, copied substantially in section 23 of the latter provision of section 7 of the old law

relating to personal and additional exemptions, with the only modification that the amount of personal exemption of single individuals has been reduced from two thousand to one thousand pesos, and that of married persons or heads of family from four thousand to two thousand five hundred pesos.

If it were the intention of the National Assembly to adopt the "Wisconsin plan" proposed by the tax Commission, it would have adopted literally, or at least substantially, the provisions of said section 22 as section 23 of Commonwealth Act No. 466, instead of substantially incorporating section 7 of the old Income Tax Law as section 23 of the new, except the first paragraph thereof which reads: "For the purpose of the normal tax only, there shall be allowed as an exemption in the nature of a deduction from the amount of the net income." This was changed in said section 23, which provides: "For the purpose of the tax provided for in this Title, there shall be allowed the following exemptions:" From the fact that the National Assembly discarded completely section 22 of the bill drafted in accordance with the "Wisconsin Plan" and submitted by the Tax Commission, it is to be presumed that the National Assembly of the Philippines did not intend to introduce any substantial change in the old law in so far as the effect of personal and additional exemptions on the income tax is concerned.

The mere fact that the phrase "in the nature of a deduction" found in section 7 of the old law was omitted in section 23 of the new or National Internal Revenue Code did not and could not effect any change in the law. It is evident that said phrase was added or inserted in said section 7 only out of extreme caution, because, even without it, the exemption would have to be deducted from the gross income in order to determine the net income subject to tax. Had the provision in the old law been drafted in exactly the same term as that of said section 23, the same construction should have been adopted. Because "Exception is an immunity or privilege; it is freedom from a charge or burden to which others are subjected." (Florar vs. Sherifan, 137 Ind., 28; 36 N. E.,

365, 369.) If the amounts of personal and additional exemptions fixed in section 23 are exempt from taxation, they should not be included as part of the net income, which is taxable. There is nothing in said section 23 to justify the contention that the tax on personal exemptions (which are exempt from taxation) should first be fixed, and then deducted from the tax on the net income.

The change of phraseology alone does not lead to the conclusion that it was the intention of the lawmaker to amend or change the constructions of the old law as contended by the appellee. For it is a well-established rule, recognized by the Supreme Court of Ohio in the case of Conger vs. Barker's Adm'r (11 Ohio St., 1); "that in the revision of statutes, neither an alteration in phraseology nor the omission or addition of words in the latter statute, shall be held, necessarily, to alter the construction of the former act. And the court is only warranted in holding the construction of a statute, when revised, to be changed, where the intent of the legislature to make such change is clear, or the language used in the new act plainly requires such change of construction. It should be remembered that condensation is a necessity in the work of compilation or codification. Very frequently words which do not materially affect the sense will be omitted from the statutes as incorporated in the code, or that same general idea will be expressed in briefer phrases. No design of altering the law itself could rightly be predicated upon such modifications of the language." (Emphasis ours.) (See Black on the construction and Interpretation of the Laws, Second Edition, pp. 594, 595.)

Our Income Tax Law is patterned after the United States Revenue or Income Tax Laws. the United States Revenue Laws of 1916, 1918, 1921, 1924, 1926, 1928 and 1932 considered the personal and additional exemptions as credits against the net income for the purpose of the normal tax; and subsequently, the United States Revenue Acts of 1934, 1936 and 1938 amended the former acts by making said exemptions as credits against the net income for the

purpose of both the normal tax and surtax. Section 7 of our old Income Tax Law, instead of providing that the personal and additional exemptions shall be allowed as a credit against the net income, as in the United States Revenue Acts, prescribed that the amounts specified therein shall be allowed as an exemption in a nature of deduction from the amount of the net income. Which has exactly the same effect as the provision regarding personal and additional exemptions in the said United States Revenue Acts. For, as it was explained in the Ways and Means Committee Report No. 764, 73d Congress, 2d Session, pages 6, 23:

To carry out the policy of retaining practically the same tax burden on ordinary income, it is necessary in connection with the proposed plan to allow the personal exemption and credits for dependents as an offset against surtax as well as normal tax. The personal exemption and credits for defendants would appear to be in lieu of deductions for necessary living expenses. They may well apply to both taxes as do all other ordinary deductions.

And Paul and Mertens, Law of Federal Taxation, Vol. 3, p. 509, state regarding the change in the United States Revenue Act of 1934: "The practical effect of this statutory change is to convert the personal exemption and credit for dependents into deductions . . ." (Emphasis ours.)

The lower court, therefore, erred in not declaring that personal and additional exemptions claimed by appellant should be credited against or deducted from the net income, and consequently in not sentencing appellee to refund to appellant the sum of P475.

In view of all the foregoing, the decision of the lower court is affirmed in so far as it dismisses appellant's first cause of action, and is reversed in so far as it dismissed his second cause of action. Appellee is sentenced to refund to

appellant the sum of P475 claimed in the second cause of action of the complaint. Without pronouncement as to costs. So ordered.

EN BANC

G.R. No. L-17962

April 30, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. BLAS GONZALES, defendant-appellant.

Office of the Solicitor General for plaintiff-appellee. Cesar C. Cruz for defendant-appellant.

REGALA, J.:

This is an appeal from the decision of the Court of First Instance of Manila under Civil Case No. 42912 the dispositive portion of which provided:

IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the plaintiff and against the defendant, ordering said defendant to pay plaintiff the sums of P106,226.75 and P37,849.58 as deficiency income taxes for the years 1946 and 1947, respectively, (each inclusive of the 50% surcharge) plus the 50% surcharge and 1% monthly interest on the aforesaid amount from June 15, 1957 until the whole amount is fully paid, and costs of this suit.

The records of this case disclose that since 1946, the defendant-appellant, Blas Gonzales, has been a private concessionaire in the U.S. Military Base at Clark Field, Angeles City: He was engaged in the manufacture of furniture and, per agreement with base authorities, supplied them with his manufactured articles.

On March 1, 1947 and March 1, 1948, the appellant filed his income tax returns for the years 1946 and 1947, respectively, with the then Municipal Treasurer of Angeles, Pampanga. In the return for 1946, he declared a net

income of P9,352.84 and income tax liability of P111.17 while for the year 1947, he declared as net income the amount of P16,829.10 and a tax liability therefor in the sum of P1,395.95. In the above two returns, he declared the sums of P80,459.75 and P1,707,355.57 as his total sales for the said two years, respectively, or an aggregate sales of P1,787,848.32 for both years.

Upon investigation, however, the Bureau of Internal Revenue discovered that for the years 1946 and 1947, the appellant had been paid a total of P2,199,920.50 for furniture delivered by him to the base authorities. The appellant do not deny the above amount which, for the record, was furnished by the Purchasing Officer of the Clark Field Air Base on the Bureau of Internal Revenue's representation.

Compared against the sales figure provided by the base authorities, therefore, the amount of P1,787,848.32 declared by the appellant as his total sales for the two tax years in question was short or underdeclared by some P412,072.18. Accordingly, the appellee considered this last mentioned amount as unreported item of income of the appellant for 1946. Further investigation into the appellant's 1946 profit and loss statement disclosed "local sales," that is, sales to persons other than the United States Army, in the amount of P124,510.43. As a result, the appellee likewise considered the said amount as unreported income for the said year. The full amount of P124,510.43 was considered as taxable income because the appellant could not produce the books of account on the same upon which any deduction could be based.

Adding up the above two items considered as unreported income the appellee assessed the appellant the total sum of P340,179.84, broken down as follows: Net income as per return

P9,352.84

Add: Sales, US Army

P492,531.93

Local Sales

124,510.43

536,582.61

Net income as per investigation

545,935.45

Less: Personal & additional exemptions

4,500.00

Net taxable income

P541,435.45

Tax due thereon

P226,897.73

Less: Tax already assessed

111.17

Deficiency tax due

P226,786.56

50% surcharge

113,393.28

TOTAL AMOUNT DUE & COLLECTIBLE

P340,179.84

==========

On November 14, 1953, the Bureau of Internal Revenue sent a letter of demand to the appellant for the above amount as deficiency income tax, the sum of P300.00 as compromise for his failure to keep the required journal and ledger, and finally, the sum of P153.75 as additional residence tax, all for the year 1946.

On March 31, 1954, on request of the appellant, the Bureau of Internal Revenue reinvestigated the case. At the end of this new inquest, however, the appellee, thru, the then Collector of Internal Revenue, insisted on the payment of the original assessment of P340,179.84. It suggested, though, that if the appellant disagreed with the said finding he could submit the same for study, review and decision by the Conference Staff of the Bureau of Internal Revenue. In due time, the above assessment was heard before the said body which, subsequently, recommended a reduction of the same to P249,289.26, as deficiency income tax for the year 1946. After the recommendation was approved by the Bureau, the corresponding assessment notice for the sum of P249,289.26 as deficiency income tax and 50% surcharge for the year 1946 and 1% monthly interest and penalty incident to delinquency was forthwith issued to the appellant.

On May 21, 1957, the above assessment was further revised by segregating the appellant's tax liability for the two years in question. Pursuant to a memorandum of the BIR Regional Director of San Fernando, Pampanga,

another demand was made upon the appellant for the payment of P106,226.75 and P37,849.58 as income taxes due from him for the years 1946 and 1947, respectively, or a total of P144,076.33.

When the appellant failed to pay the above demand, the appellee instituted the present suit on April 7, 1960. The appellant filed his answer on July 7, 1960 and amended it on July 19, 1960.

Prior to the trial of the case, the appellant filed with the court below a motion to dismiss grounded on prescription and lack of jurisdiction. The same was, however, denied by the lower court as unmeritorious. Moreover, for failure of the appellant or his counsel to appear at the scheduled hearing, the defendant-appellant was declared in default. The motion for reconsideration of this last order declaring the appellant in default for failure to appear was also denied by the trial court for lack of merit.

On November 7, 1960, after the appellee had presented its documentary evidence against the appellant, the lower court rendered the decision under appeal.

The appellant ascribes several errors to the decision of the court a quo, the more fundamental of which is the claim that as a concessionaire in an American Air Base, he is not subject to Philippine tax laws pursuant to the United States-Philippine Military Bases Agreement. In support of the claim, the following provision of the above Bases Agreement is invoked:

ARTICLE XVIII.—Sales and Services within the Bases

1. It is mutually agreed that the United States shall have the right to establish on bases, free of all license; fees; sales excise or other taxes or imposts; Government agencies including concessions, such as sales commissaries and post exchanges, messes and social clubs, for the exclusive use of the United

States military forces and authorized civilian personnel and their families. The merchandise or services sold or dispensed by such agencies shall be free of all taxes, duties and inspection by the Philippine authorities. Administrative measures shall be taken by the appropriate authorities of the United States to prevent the sale of goods which are sold under the provisions of this Article to persons not entitled to buy goods at such agencies, and, generally, to prevent abuse of the privileges granted under this Article. There shall be cooperation between such authorities and the Philippines to this end.

2. Except as may be provided in any other agreements, no persons shall habitually render any professional services in a base except to or for the United States or to or for the persons mentioned in the preceding paragraph. No business shall be established in a base, it being understood that the Government agencies mentioned in the preceding paragraph shall not be regarded as businesses for the purpose of this Article.

The contention is clearly unmeritorious.

The above provision of the Military Bases Agreement has already been interpreted by this Court in at least two cases, namely: Canlas v. Republic, G.R. No. 1,11035, May 31, 1958 and Naguiat v. J. A. Araneta, G.R. No. L11594, December 22, 1958. In the latter case this Court said:

The provision relied upon by the appellant plainly contemplates limiting the exemption from the licenses, fees and taxes enumerated therein to the right to establish Government agencies, including concessions, and to the merchandise or services sold or dispensed by such agencies. The income tax, which is certainly not on the right to establish agencies or on the merchandise or services sold or dispensed thereby, but on the owner or operator of such agencies, is logically excluded. The payment by the latter of the income tax is perfectly content with and would not frustrate the obvious objective of the

agreement, namely, to enable the members of the United States Military Forces and authorized civilian personnel and their families to procure merchandise or services within the bases at reduced prices. This construction is unmistakably borne out by the fact that, in dealing particularly with the matter of income tax, the Military Bases Agreement provides as follows:

INTERNAL REVENUE TAX EXEMPTION

1. No member of the United States armed forces, except Filipino citizens, serving in the Philippines in connection with the bases and residing in the Philippines by reason only of such services, or his dependents, shall be liable to pay income tax in the Philippines except in respect of income derived from Philippine sources.

It is urged for the applicant that no opposition has been registered against his petition on the issues above-discussed. Absence of opposition, however, does not preclude the scanning of the whole record by the appellate court, with a view to preventing the conferment of citizenship to persons not fully qualified therefor (Lee Ng Len vs. Republic, G.R. No. L-20151, March 31, 1965). The applicant's complaint of unfairness could have some weight if the objections on appeal had been on points not previously passed upon. But the deficiencies here in question are not new but well-known, having been ruled upon repeatedly by this Court, and we see no excuse for failing to take them into account.1äwphï1.ñët

2. No national of the United State serving or employed in the Philippines in connection with the maintenance, operation or defense of the bases and residing in the Philippines by reason only of such employment, or his spouse, and minor children and dependent parents of either spouses, shall be liable to pay income tax in the Philippines except in respect of income derived from Philippine source or sources than the United States source.

3. No persons referred to in paragraphs 1 and 2 of this article shall be liable to pay the Government or local authorities of the Philippines any poll or residence tax, or any import or export duty, or any other tax on personal property imported for his own use; provided that privately ovned vehicles shall be subject to the payment of the following only, when certified as being used for military purposes by appropriate United States authorities, the normal license plate and registration fees.

4. No national of the United States, or corporation organized under the laws of the United States, resident in the United States, shall be liable to pay income tax in the Philippines in respect to any profits derived under a contract made in the United States in connection with the construction, maintenance, operation and defense of the bases, or any tax in the nature of a license in respect of any service or work for the United States in connection with the construction, maintenance, operation and defense of the bases.

None of the above-quoted covenants shields a concessionaire, like the appellant, from the payment of the income tax. For one thing, even the exemption in favor of members of the United States Armed Forces and nationals of the United States does not include income derived from Philippine sources.

The appellant cannot seek refuge in the use of "excise" or "other taxes or imposts" in paragraph 1 of Article XVIII of the Military Bases Agreement, because, as already stated, said terms are employed with specific application to the right to establish agencies and concessions within the bases and to the merchandise or services sold or dispensed by such agencies or concessions.

The same conclusion was reached in the case of Canlas v. Republic, supra.

The appellant maintains, however, that the rulings in the above two cases are inapplicable to the suit at bar because the said cases involved the income of

public utility operators in the Air Base who were not "concessionaires" like him.

The above contention is as unmeritorious as it is untrue. In the case of Araneta v. Manila Pencil Company Ins., G.R. No. L-8182, June 29, 1957, this Court already ruled that operators of freight and bus services are within the meaning of the word "concession" appearing in the Military Bases agreement. Thus, in the Canlas case above, We said:

There is no dispute as to the fact that defendant Manila Pencil Company, as successor-in-interest of the Philippine Consolidated Freight Lines, Inc., was engaged in and duly licensed by the U.S. Military authorities to operate a freight and bus service within the Clark Field Air Base, a military reservation established in conformity with the agreement concluded between the Government of the Philippines and the United States on March 14, 1947 (43 O.G. No. 3, p. 1020). And as such grantee of a franchise, which this Court was held to be embraced within the meaning of the word "concession" appearing in the treaty and was declared exempted from the payment of the contractor's tax (Araneta v. Manila Pencil Company, G.R. No. L-10507, May 30, 1958) ... .

It is very clear, therefore, that the rulings of this Court in the two cases above cited are applicable to this appeal under consideration.

The other point raised by the appellant on this appeal pertains to the refusal of the trial court to reconsider its order declaring him in default for the failure of his counsel to appear at the scheduled trial despite due notice. He complains that when the trial proceeded in his absence, he was denied his day in court. In the premises, his counsel insists that this absence then was for a good and reasonable cause.

Suffice it to say in regard to the above that the matter complained of is beyond this Court to disturb. The matter of adjournments, postponements,

continuances and reconsideration of orders of default lies within the discretion of courts and will not be interfered with either by mandamus or appeal (Samson v. Naval, 41 Phil. 838) unless a showing of grave abuse can be made against said courts. Moreover, where the absence of a party from the trial was due to his own fault, he should not be heard to complain that he was deprived of his day in court. (Sandejas v. Robles, 81 Phil. 421; Siojo v. Tecson, 88 Phil. 531)

The-counsel's excuse for his absence at the trial was alleged "lack of transportation facilities in his place of residence at Gagalangin, Tondo, Manila, on that morning of August 8, when torrential rain poured down in his locality." The lower court did not deem this as a sufficiently valid explanation because it observed that despite such torrential rain, the counsel for the plaintiffappellee, a lady attorney who was then a resident of a usually inundated area of Sampaloc, Manila, somehow made it to the court. Under these circumstances, the trial court's ruling can hardly be considered as an abuse of his discretion.

Finally, the appellant disputes the lower court's finding of fraud against him in this incident. He argues that the facts invoked by the lower court do not sufficiently establish the same.

As rightly argued by the Solicitor General's office, since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the circumstances of the case. The failure of the appellant to declare for taxation purposes his true and actual income derived from his furniture business at the Clark Field Air Base for two consecutive years is an indication of his fraudulent intent to cheat the Government of its due taxes.

The substantial undeclaration of income in the income tax returns of the appellant for four consecutive years, coupled with his intentional

overstatement of deductions made the imposition of the fraud penalty proper. (Eugenio Perez v. Court of Tax Appeals and Collector of Internal Revenue, G. R. No. L-10507, May 30, 1958.)

IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered affirming in full the decision here appealed from, with costs against the defendantappellant. So ordered.

FIRST DIVISION

[G.R. No. 119761. August 29, 1996]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. HON. COURT OF APPEALS, HON. COURT OF TAX APPEALS and FORTUNE TOBACCO CORPORATION, respondents.

DECISION

VITUG, J.:

The Commissioner of Internal Revenue ("CIR") disputes the decision, dated 31 March 1995, of respondent Court of Appeals[i][1] affirming the 10th August 1994 decision and the 11th October 1994 resolution of the Court of Tax Appeals[ii][2] ("CTA") in C.T.A. Case No. 5015, entitled "Fortune Tobacco Corporation vs. Liwayway Vinzons-Chato in her capacity as Commissioner of Internal Revenue."

The facts, by and large, are not in dispute.

Fortune Tobacco Corporation ("Fortune Tobacco") is engaged in the manufacture of different brands of cigarettes.

On various dates, the Philippine Patent Office issued to the corporation separate certificates of trademark registration over "Champion," "Hope," and "More" cigarettes. In a letter, dated 06 January 1987, of then Commissioner of Internal Revenue Bienvenido A. Tan, Jr., to Deputy Minister Ramon Diaz of the Presidential Commission on Good Government, "the initial position of the Commission was to classify 'Champion,' 'Hope,' and 'More' as foreign brands since they were listed in the World Tobacco Directory as belonging to foreign companies. However, Fortune Tobacco changed the names of 'Hope' to Hope

Luxury' and 'More' to 'Premium More,' thereby removing the said brands from the foreign brand category. Proof was also submitted to the Bureau (of Internal Revenue ['BIR']) that 'Champion' was an original Fortune Tobacco Corporation register and therefore a local brand."[iii][3] Ad Valorem taxes were imposed on these brands,[iv][4] at the following rates:

"BRAND

AD VALOREM TAX RATE

E.O. 22

06-23-86

07-01-86

and E.O. 273

07-25-87

01-01-88

RA 6956

06-18-90

07-05-90

Hope Luxury M. 100's

Sec. 142, (c), (2)

40%

45%

40%

45%

Hope Luxury M. King

Sec. 142, (c), (2)

More Premium M. 100's

Sec. 142, (c), (2)

40%

45%

40%

45%

40%

45%

40%

45%

15%

20%

15%

20%"[v][5]

More Premium International

Sec. 142, (c), (2)

Champion Int'l. M. 100's

Sec. 142, (c), (2)

Champion M. 100's

Sec. 142, (c), (2)

Champion M. King

Sec. 142, (c), last par.

Champion Lights

Sec. 142, (c), last par.

A bill, which later became Republic Act ("RA") No. 7654, [vi][6] was enacted, on 10 June 1993, by the legislature and signed into law, on 14 June 1993, by the President of the Philippines. The new law became effective on 03 July 1993. It amended Section 142(c)(1) of the National Internal Revenue Code ("NIRC") to read; as follows:

"SEC. 142. Cigars and Cigarettes. -

"x x x

"(c)

xxx

x x x.

Cigarettes packed by machine. - There shall be levied, assessed and

collected on cigarettes packed by machine a tax at the rates prescribed below

based on the constructive manufacturer's wholesale price or the actual manufacturer's wholesale price, whichever is higher:

"(1)

On locally manufactured cigarettes which are currently classified and

taxed at fifty-five percent (55%) or the exportation of which is not authorized by contract or otherwise, fifty-five (55%) provided that the minimum tax shall not be less than Five Pesos (P5.00) per pack.

"(2).

On other locally manufactured cigarettes, forty-five percent (45%)

provided that the minimum tax shall not be less than Three Pesos (P3.00) per pack.

"x x x

xxx

x x x.

"When the registered manufacturer's wholesale price or the actual manufacturer's wholesale price whichever is higher of existing brands of cigarettes, including the amounts intended to cover the taxes, of cigarettes packed in twenties does not exceed Four Pesos and eighty centavos (P4.80) per pack, the rate shall be twenty percent (20%)."[vii][7] (Italics supplied.)

About a month after the enactment and two (2) days before the effectivity of RA 7654, Revenue Memorandum Circular No. 37-93 ("RMC 37-93"), was issued by the BIR the full text of which expressed:

"REPUBLIKA NG PILIPINAS KAGAWARAN NG PANANALAPI KAWANIHAN NG RENTAS INTERNAS

July 1, 1993

REVENUE MEMORANDUM CIRCULAR NO. 37-93

SUBJECT : Reclassification of Cigarettes Subject to Excise Tax

TO

: All Internal Revenue Officers and Others Concerned.

"In view of the issues raised on whether 'HOPE,' 'MORE' and 'CHAMPION' cigarettes which are locally manufactured are appropriately considered as locally manufactured cigarettes bearing a foreign brand, this Office is compelled to review the previous rulings on the matter.

"Section 142(c)(1) National Internal Revenue Code, as amended by R.A. No. 6956, provides:

"'On locally manufactured cigarettes bearing a foreign brand, fifty-five percent (55%) Provided, That this rate shall apply regardless of whether or not the right to use or title to the foreign brand was sold or transferred by its owner to the local manufacturer. Whenever it has to be determined whether or not a cigarette bears a foreign brand, the listing of brands manufactured in foreign countries appearing in the current World Tobacco Directory shall govern."

"Under the foregoing, the test for imposition of the 55% ad valorem tax on cigarettes is that the locally manufactured cigarettes bear a foreign brand regardless of whether or not the right to use or title to the foreign brand was sold or transferred by its owner to the local manufacturer. The brand must be originally owned by a foreign manufacturer or producer. If ownership of the cigarette brand is, however, not definitely determinable, 'x x x the listing of brands manufactured in foreign countries appearing in the current World Tobacco Directory shall govern. x x x'

"'HOPE' is listed in the World Tobacco Directory as being manufactured by (a) Japan Tobacco, Japan and (b) Fortune Tobacco, Philippines. 'MORE' is listed in the said directory as being manufactured by: (a) Fills de Julia Reig, Andorra; (b) Rothmans, Australia; (c) RJR-Macdonald, Canada; (d) RettigStrenberg, Finland; (e) Karellas, Greece; (f) R.J. Reynolds, Malaysia; (g) Rothmans, New Zealand; (h) Fortune Tobacco, Philippines; (i) R.J. Reynolds,

Puerto Rico; (j) R.J. Reynolds, Spain; (k) Tabacalera, Spain; (l) R.J. Reynolds, Switzerland; and (m) R.J. Reynolds, USA. 'Champion' is registered in the said directory as being manufactured by (a) Commonwealth Bangladesh; (b) Sudan, Brazil; (c) Japan Tobacco, Japan; (d) Fortune Tobacco, Philippines; (e) Haggar, Sudan; and (f) Tabac Reunies, Switzerland.

"Since there is no showing who among the above-listed manufacturers of the cigarettes bearing the said brands are the real owner/s thereof, then it follows that the same shall be considered foreign brand for purposes of determining the ad valorem tax pursuant to Section 142 of the National Internal Revenue Code. As held in BIR Ruling No. 410-88, dated August 24, 1988, 'in cases where it cannot be established or there is dearth of evidence as to whether a brand is foreign or not, resort to the World Tobacco Directory should be made.'

"In view of the foregoing, the aforesaid brands of cigarettes, viz: 'HOPE,' 'MORE' and 'CHAMPION' being manufactured by Fortune Tobacco Corporation are hereby considered locally manufactured cigarettes bearing a foreign brand subject to the 55% ad valorem tax on cigarettes.

"Any ruling inconsistent herewith is revoked or modified accordingly.

(SGD) LIWAYWAY VINZONS-CHATO Commissioner"

On 02 July 1993, at about 17:50 hours, BIR Deputy Commissioner Victor A. Deoferio, Jr., sent via telefax a copy of RMC 37-93 to Fortune Tobacco but it was addressed to no one in particular. On 15 July 1993, Fortune Tobacco received, by ordinary mail, a certified xerox copy of RMC 37-93.

In a letter, dated 19 July 1993, addressed to the appellate division of the BIR, Fortune Tobacco, requested for a review, reconsideration and recall of RMC 37-93. The request was denied on 29 July 1993. The following day, or on 30

July 1993, the CIR assessed Fortune Tobacco for ad valorem tax deficiency amounting to P9,598,334.00.

On 03 August 1993, Fortune Tobacco filed a petition for review with the CTA. [viii][8]

On 10 August 1994, the CTA upheld the position of Fortune Tobacco and adjudged:

"WHEREFORE, Revenue Memorandum Circular No. 37-93 reclassifying the brands of cigarettes, viz: `HOPE,' `MORE' and `CHAMPION' being manufactured by Fortune Tobacco Corporation as locally manufactured cigarettes bearing a foreign brand subject to the 55% ad valorem tax on cigarettes is found to be defective, invalid and unenforceable, such that when R.A. No. 7654 took effect on July 3, 1993, the brands in question were not CURRENTLY CLASSIFIED AND TAXED at 55% pursuant to Section 1142(c)(1) of the Tax Code, as amended by R.A. No. 7654 and were therefore still classified as other locally manufactured cigarettes and taxed at 45% or 20% as the case may be.

"Accordingly, the deficiency ad valorem tax assessment issued on petitioner Fortune Tobacco Corporation in the amount of P9,598,334.00, exclusive of surcharge and interest, is hereby canceled for lack of legal basis.

"Respondent Commissioner of Internal Revenue is hereby enjoined from collecting the deficiency tax assessment made and issued on petitioner in relation to the implementation of RMC No. 37-93.

"SO ORDERED." [ix][9]

In its resolution, dated 11 October 1994, the CTA dismissed for lack of merit the motion for reconsideration.

The CIR forthwith filed a petition for review with the Court of Appeals, questioning the CTA's 10th August 1994 decision and 11th October 1994 resolution. On 31 March 1993, the appellate court's Special Thirteenth Division affirmed in all respects the assailed decision and resolution.

In the instant petition, the Solicitor General argues: That -

"I.

RMC 37-93 IS A RULING OR OPINION OF THE COMMISSIONER OF

INTERNAL REVENUE INTERPRETING THE PROVISIONS OF THE TAX CODE.

"II.

BEING AN INTERPRETATIVE RULING OR OPINION, THE

PUBLICATION OF RMC 37-93, FILING OF COPIES THEREOF WITH THE UP LAW CENTER AND PRIOR HEARING ARE NOT NECESSARY TO ITS VALIDITY, EFFECTIVITY AND ENFORCEABILITY.

"III.

PRIVATE RESPONDENT IS DEEMED TO HAVE BEEN NOTIFIED OR

RMC 37-93 ON JULY 2, 1993.

“IV.

RMC 37-93 IS NOT DISCRIMINATORY SINCE IT APPLIES TO ALL

LOCALLY MANUFACTURED CIGARETTES SIMILARLY SITUATED AS 'HOPE,' 'MORE' AND 'CHAMPION' CIGARETTES.

"V.

PETITIONER WAS NOT LEGALLY PROSCRIBED FROM

RECLASSIFYING ‗HOPE,‘ ‗MORE‘ AND ‗CHAMPION‘ CIGARETTES BEFORE THE EFFECTIVITY OF R.A. NO. 7654.

“VI.

SINCE RMC 37-93 IS AN INTERPRETATIVE RULE, THE INQUIRY IS

NOT INTO ITS VALIDITY, EFFECTIVITY OR ENFORCEABILITY BUT INTO ITS CORRECTNESS OR PROPRIETY; RMC 37-93 IS CORRECT." [x][10]

In fine, petitioner opines that RMC 37-93 is merely an interpretative ruling of the BIR which can thus become effective without any prior need for notice and hearing, nor publication, and that its issuance is not discriminatory since it

would apply under similar circumstances to all locally manufactured cigarettes.

The Court must sustain both the appellate court and the tax court.

Petitioner stresses on the wide and ample authority of the BIR in the issuance of rulings for the effective implementation of the provisions of the National Internal Revenue Code. Let it be made clear that such authority of the Commissioner is not here doubted. Like any other government agency, however, the CIR may not disregard legal requirements or applicable principles in the exercise of its quasi-legislative powers.

Let us first distinguish between two kinds of administrative issuances - a legislative rule and an interpretative rule.

In Misamis Oriental Association of Coco Traders, Inc., vs. Department of Finance Secretary, [xi][11] the Court expressed:

"x x x a legislative rule is in the nature of subordinate legislation, designed to implement a primary legislation by providing the details thereof. In the same way that laws must have the benefit of public hearing, it is generally required that before a legislative rule is adopted there must be hearing. In this connection, the Administrative Code of 1987 provides:

"Public Participation. - If not otherwise required by law, an agency shall, as far as practicable, publish or circulate notices of proposed rules and afford interested parties the opportunity to submit their views prior to the adoption of any rule.

"(2)

In the fixing of rates, no rule or final order shall be valid unless the

proposed rates shall have been published in a newspaper of general circulation at least two (2) weeks before the first hearing thereon.

"(3)

In case of opposition, the rules on contested cases shall be observed.

"In addition such rule must be published. On the other hand, interpretative rules are designed to provide guidelines to the law which the administrative agency is in charge of enforcing." [xii][12]

It should be understandable that when an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance for it gives no real consequence more than what the law itself has already prescribed. When, upon the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially adds to or increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law.

A reading of RMC 37-93, particularly considering the circumstances under which it has been issued, convinces us that the circular cannot be viewed simply as a corrective measure (revoking in the process the previous holdings of past Commissioners) or merely as construing Section 142(c)(1) of the NIRC, as amended, but has, in fact and most importantly, been made in order to place "Hope Luxury," "Premium More" and "Champion" within the classification of locally manufactured cigarettes bearing foreign brands and to thereby have them covered by RA 7654. Specifically, the new law would have its amendatory provisions applied to locally manufactured cigarettes which at the time of its effectivity were not so classified as bearing foreign brands. Prior to the issuance of the questioned circular, "Hope Luxury," "Premium More," and "Champion" cigarettes were in the category of locally manufactured cigarettes not bearing foreign brand subject to 45% ad valorem tax. Hence, without RMC 37-93, the enactment of RA 7654, would have had no new tax rate consequence on private respondent's products.

Evidently, in order to

place "Hope Luxury," "Premium More," and "Champion" cigarettes within the scope of the amendatory law and subject them to an increased tax rate, the now disputed RMC 37-93 had to be issued. In so doing, the BIR not simply interpreted the law; verily, it legislated under its quasi-legislative authority. The due observance of the requirements of notice, of hearing, and of publication should not have been then ignored.

Indeed, the BIR itself, in its RMC 10-86, has observed and provided:

"RMC NO. 10-86

Effectivity of Internal Revenue Rules and Regulations

"It has been observed that one of the problem areas bearing on compliance with Internal Revenue Tax rules and regulations is lack or insufficiency of due notice to the tax paying public. Unless there is due notice, due compliance therewith may not be reasonably expected. And most importantly, their strict enforcement could possibly suffer from legal infirmity in the light of the constitutional provision on `due process of law' and the essence of the Civil Code provision concerning effectivity of laws, whereby due notice is a basic requirement (Sec. 1, Art. IV, Constitution; Art. 2, New Civil Code).

"In order that there shall be a just enforcement of rules and regulations, in conformity with the basic element of due process, the following procedures are hereby prescribed for the drafting, issuance and implementation of the said Revenue Tax Issuances:

"(1). This Circular shall apply only to (a) Revenue Regulations; (b) Revenue Audit Memorandum Orders; and (c) Revenue Memorandum Circulars and Revenue Memorandum Orders bearing on internal revenue tax rules and regulations.

"(2). Except when the law otherwise expressly provides, the aforesaid internal revenue tax issuances shall not begin to be operative until after due notice thereof may be fairly presumed.

"Due notice of the said issuances may be fairly presumed only after the following procedures have been taken:

"xxx

xxx

xxx

"(5). Strict compliance with the foregoing procedures is enjoined." [xiii][13]

Nothing on record could tell us that it was either impossible or impracticable for the BIR to observe and comply with the above requirements before giving effect to its questioned circular.

Not insignificantly, RMC 37-93 might have likewise infringed on uniformity of taxation.

Article VI, Section 28, paragraph 1, of the 1987 Constitution mandates taxation to be uniform and equitable. Uniformity requires that all subjects or objects of taxation, similarly situated, are to be treated alike or put on equal footing both in privileges and liabilities.[xiv][14] Thus, all taxable articles or kinds of property of the same class must be taxed at the same rate[xv][15] and the tax must operate with the same force and effect in every place where the subject may be found.

Apparently, RMC 37-93 would only apply to "Hope Luxury," Premium More" and "Champion" cigarettes and, unless petitioner would be willing to concede to the submission of private respondent that the circular should, as in fact my esteemed colleague Mr. Justice Bellosillo so expresses in his separate opinion, be considered adjudicatory in nature and thus violative of due process following the Ang Tibay[xvi][16] doctrine, the measure suffers from lack of uniformity of taxation. In its decision, the CTA has keenly noted that other

cigarettes bearing foreign brands have not been similarly included within the scope of the circular, such as -

"1. Locally manufactured by ALHAMBRA INDUSTRIES, INC.

(a) `PALM TREE' is listed as manufactured by office of Monopoly, Korea (Exhibit `R')

"2. Locally manufactured by LA SUERTE CIGAR and CIGARETTE COMPANY

(a) `GOLDEN KEY' is listed being manufactured by United Tobacco, Pakistan (Exhibit `S')

(b) `CANNON' is listed as being manufactured by Alpha Tobacco, Bangladesh (Exhibit `T')

"3. Locally manufactured by LA PERLA INDUSTRIES, INC.

(a) `WHITE HORSE' is listed as being manufactured by Rothman's, Malaysia (Exhibit `U')

(b) `RIGHT' is listed as being manufactured by SVENSKA, Tobaks, Sweden (Exhibit `V-1')

"4. Locally manufactured by MIGHTY CORPORATION

(a) 'WHITE HORSE' is listed as being manufactured by Rothman's, Malaysia (Exhibit 'U-1')

"5. Locally manufactured by STERLING TOBACCO CORPORATION

(a) ‗UNION' is listed as being manufactured by Sumatra Tobacco, Indonesia and Brown and Williamson, USA (Exhibit 'U-3')

(b) ‗WINNER' is listed as being manufactured by Alpha Tobacco, Bangladesh; Nanyang, Hongkong; Joo Lan, Malaysia; Pakistan Tobacco Co., Pakistan; Premier Tobacco, Pakistan and Haggar, Sudan (Exhibit 'U-4')." [xvii][17]

The court quoted at length from the transcript of the hearing conducted on 10 August 1993 by the Committee on Ways and Means of the House of Representatives; viz:

"THE CHAIRMAN. So you have specific information on Fortune Tobacco alone. You don't have specific information on other tobacco manufacturers. Now, there are other brands which are similarly situated. They are locally manufactured bearing foreign brands. And may I enumerate to you all these brands, which are also listed in the World Tobacco Directory x x x. Why were these brands not reclassified at 55 if your want to give a level playing field to foreign manufacturers?

"MS. CHATO. Mr. Chairman, in fact, we have already prepared a Revenue Memorandum Circular that was supposed to come after RMC No. 37-93 which have really named specifically the list of locally manufactured cigarettes bearing a foreign brand for excise tax purposes and includes all these brands that you mentioned at 55 percent except that at that time, when we had to come up with this, we were forced to study the brands of Hope, More and Champion because we were given documents that would indicate the that these brands were actually being claimed or patented in other countries because we went by Revenue Memorandum Circular 1488 and we wanted to give some rationality to how it came about but we couldn't find the rationale there. And we really found based on our own interpretation that the only test that is given by that existing law would be registration in the World Tobacco Directory. So we came out with this proposed revenue memorandum circular which we forwarded to the Secretary of Finance except that at that point in time, we went by the Republic Act 7654 in Section 1 which amended Section 142, C-1, it said, that

on locally manufactured cigarettes which are currently classified and taxed at 55 percent. So we were saying that when this law took effect in July 3 and if we are going to come up with this revenue circular thereafter, then I think our action would really be subject to question but we feel that . . . Memorandum Circular Number 37-93 would really cover even similarly situated brands. And in fact, it was really because of the study, the short time that we were given to study the matter that we could not include all the rest of the other brands that would have been really classified as foreign brand if we went by the law itself. I am sure that by the reading of the law, you would without that ruling by Commissioner Tan they would really have been included in the definition or in the classification of foregoing brands. These brands that you referred to or just read to us and in fact just for your information, we really came out with a proposed revenue memorandum circular for those brands. (Italics supplied)

"Exhibit 'FF-2-C', pp. V-5 TO V-6, VI-1 to VI-3).

"x x x

xxx

x x x.

"MS. CHATO. x x x But I do agree with you now that it cannot and in fact that is why I felt that we . . . I wanted to come up with a more extensive coverage and precisely why I asked that revenue memorandum circular that would cover all those similarly situated would be prepared but because of the lack of time and I came out with a study of RA 7654, it would not have been possible to really come up with the reclassification or the proper classification of all brands that are listed there. x x x' (italics supplied) (Exhibit 'FF-2d', page IX-1)

"x x x

xxx

x x x.

"HON. DIAZ. But did you not consider that there are similarly situated?

"MS. CHATO. That is precisely why, Sir, after we have come up with this Revenue Memorandum Circular No. 37-93, the other brands came about the would have also clarified RMC 37-93 by I was saying really because of the fact that I was just recently appointed and the lack of time, the period that was allotted to us to come up with the right actions on the matter, we were really caught by the July 3 deadline. But in fact, We have already prepared a revenue memorandum circular clarifying with the other . . . does not yet, would have been a list of locally manufactured cigarettes bearing a foreign brand for excise tax purposes which would include all the other brands that were mentioned by the Honorable Chairman. (Italics supplied) (Exhibit 'FF-2-d,' par. IX-4)."18

All taken, the Court is convinced that the hastily promulgated RMC 37-93 has fallen short of a valid and effective administrative issuance.

WHEREFORE, the decision of the Court of Appeals, sustaining that of the Court of Tax Appeals, is AFFIRMED. No costs.

SO ORDERED.

[1][1]

Rollo, pp. 45-66. Penned by Associate Justice Erlinda P. Uy with Presiding Justice Ernesto D. Acosta and Associate

Justices Juanito C. Castañeda, Jr., Lovell R. Bautista, Caesar A. Casanova and Olga Palanca-Enriquez concurring.

[2][2]

Id. at 68-71.

[3][3]

Id. at 117-133. Penned by Associate Justice Caesar A. Casanova with Presiding Justice Ernesto D. Acosta and Lovell R.

Bautista concurring.

[4][4]

Id. at 153-156.

[5][5]

Joint Stipulation of Facts and Issues, records (CTA Case No. 6839), p. 206.

[6][6]

Rollo, p. 119.

[7][7]

CTA Case No. 6554, November 28, 2006, rollo, pp. 125-126.

[8][8]

G.R. No. 88291, June 8, 1993, 223 SCRA 217.

[9][9]

No. L-19707, August 17, 1967, 20 SCRA 1056.

[10][10]

Rollo, pp. 17-18.

[11][11]

Id. at 274.

[12][12]

Supra note 8.

[13][13]

Supra note 9.

[14][14]

G.R. No. 66416, March 21, 1990, 183 SCRA 402.

[15][15]

Silkair (Sigapore) Pte. Ltd. v. Commissioner of Internal Revenue, G.R. No. 166482, January 25, 2012; Exxonmobil

Petroleum and Chemical Holdings, Inc.-Philippine Branch v. Commissioner of Internal Revenue, G.R. No. 180909, January 19, 2011, 640 SCRA 203; Silkair (Singapore) Pte. Ltd. v. Commissioner of Internal Revenue, G.R. No. 184398, February 25, 2010, 613 SCRA 639; Silkair (Singapore) Pte. Ltd. v. Commissioner of Internal Revenue, G.R. Nos. 171383 & 172379, November 14, 2008, 571 SCRA 141; and Silkair (Singapore), Pte. Ltd. v. Commissioner of Internal Revenue, G.R. No. 173594, February 6, 2008, 544 SCRA 100.

[16][16]

Sec. 129, NIRC (1997).

[17][17]

Sec. 130, par. (2).

[18][18]

REVENUE REGULATIONS IMPLEMENTING REPUBLIC ACT NO. 8184, AN ACT RESTRUCTURING THE EXCISE TAX ON

PETROLEUM PRODUCTS, AMENDING FOR THIS PURPOSE PERTINENT SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED.

[19][19]

Sec. 5, id.

[20][20]

BLACK‘S LAW DICTIONARY, Fifth Edition, p. 486.

[21][21]

Commissioner of Internal Revenue v. Mirant Pagbilao Corporation, G.R. No. 172129, September 12, 2008, 565 SCRA 154,

165, citing Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G.R. Nos. 167274-75, July 21, 2008, 559 SCRA 160, 183 and Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue, G.R. No. 159490, February 18, 2008, 546 SCRA 150, 163.

[22][22]

Supra note 9.

[23][23]

Sec. 148, par. 1.

[24][24]

G.R. No. 88291, May 31, 1991, 197 SCRA 771, 791, cited in Silkair (Singapore) Pte. Ltd. v. Commissioner of Internal

Revenue, G.R. Nos. 171383 & 172379, November 14, 2008, supra note 15, at 155-156.

[25][25]

Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G.R. No. 140230, December 15,

2005, 478 SCRA 61, 72, citing Commissioner of Internal Revenue v. Tours Specialists Inc., supra note 14, at 413.

[26][26]

Supra note 8, at 256.

[27][27]

Antony Seely, ―Taxing Aviation Fuel‖ House of Commons Library, accessed at www.parliament.uk/briefing -

papers/SN00523.pdf , citing ―Indirect Taxes on International Aviation,” by Michael Keen & John Strand, Fiscal Studies, Vol. 28 No. 1 2007 (pp. 6-7) and HM Treasury/Dept for Transport, Aviation and the Environment: Using Economic Instruments, March 2003 (p. 10).

[28][28]

―Prohibition Against Taxes On International Airlines‖, prepared by The International Air Transport Association

(IATA), globalwarming.house.gov/files/LTTR/ACES/IntlAirTransport...

[29][29]

Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, G.R. No. 166786, May 3, 2006, 489 SCRA 147,

155, citing Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, supra note 25, at 74 and Commissioner of Internal Revenue v. Mitsubishi Metal Corporation, G.R. Nos. 54908 & 80041, January 22, 1990, 181 SCRA 214, 224.

[30][30]

Province of Abra v. Hernando, No. L-49336, August 31, 1981, 107 SCRA 104, 109, citing early cases.

[31][31]

Commissioner of Internal Revenue v. Court of Appeals, G.R. Nos. 122161 & 120991, February 1, 1999, 302 SCRA 442,

453, citing Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue, G.R. No. 117359, July 23, 1998, 293 SCRA 76, 91.

[32][32]

Silkair(Singapore) PTE. Ltd. v. Commissioner of Internal Revenue, G.R. No. 184398, February 25, 2010, supra note 15, at

659, citing Commissioner of Internal Revenue v. Solidbank Corporation, G.R. No. 148191, November 25, 2003, 416 SCRA 436, 461.

*

Associate Justice Antonio T. Carpio was designated to sit as additional member, replacing Associate Justice Antonio

Eduardo B. Nachura per raffle dated 22 June 2009.

[33][1]

Penned by Associate Justice Erlinda P. Uy with Presiding Justice Ernesto D. Acosta and Associate Justices Juanito

Castañeda, Jr., Lovell R. Bautista, Caesar A. Casanova and Olga Palanca-Enriquez, concurring; rollo, pp. 39-50.

[34][2]

Penned by Associate Justice Caesar A. Casanova; records, pp. 201-210.

[35][3]

An Act Granting a New Franchise to Philippine Airlines, Inc. to Establish, Operate, and Maintain Air-Transport Services

in the Philippines and Other Countries.

[36][4]

Section 1 of Presidential Decree No. 1590.

[37][5]

Records, p. 202.

[38][6]

Id. at 27.

[39][7]

Id. at 34-35.

[40][8]

In BIR Ruling No. 97-94, then CIR Liwayway Vinzons-Chato ruled that the ―in lieu of all taxes‖ clause in Section 13 of

Presidential Decree No. 1590 exempted PAL from all taxes, including documentary stamp tax. In accordance with Section 173 of the NIRC, the Philippine National Bank, the Landbank and other banks in whose favor the promissory notes and other documents are executed by PAL, shall be liable for the payment of the documentary stamp tax. (Records, p. 26.)

[41][9]

Records. p. 205.

[42][10] Id. at 201-210.

[43][11] Id. at 208-210.

[44][12] Rollo, p. 53.

[45][13] Id. at 42-50.

[46][14] G.R. No. 160528, 9 October 2006, 504 SCRA 90.

[47][15] Id. at 51.

[48][16] Rollo, pp. 28-29.

[49][17] Id. at 8.

[50][18] Id. at 100-101.

[51][19] Sanciangco v. Roño, G.R. No. L-68709, 19 July 1985, 137 SCRA 671, 676; Commissioner of Customs v. Esso Standard Eastern, Inc., 160 Phil. 805, 812 (1975).

[52][20] Supra note 14 at 101.

[53][21] Far East Bank & Trust Company v. Commissioner of Internal Revenue, G.R. No. 149589, 15 September 2006, 502 SCRA 87, 91; Insular Lumber Co. v. Court of Tax Appeals, 192 Phil. 221, 231 (1981); Commissioner of Internal Revenue v. Rio Tuba Nickel Mining Corp., G.R. Nos. 83583-84, 25 March 1992, 207 SCRA 549, 552-553.

[54][22] Benguet Corporation v. Commissioner of Internal Revenue, G.R. No. 141212, 22 June 2006, 492 SCRA 133, 142.

[i][1] Through Associate Justices Justo P. Torres, Jr. (ponente), Corona Ibay-Somera and Conrado M. Vasquez, Jr. (members).

[ii][2] Penned by Presiding Judge Ernesto D. Acosta and concurred in by Associate Judges

Ramon O. De Veyra and Manuel K.

Gruba.

[iii][3] Underscoring supplied.

Rollo, pp. 55-56.

[iv][4] Since the institution of Executive Order No. 22 on 23 June 1986.

[v][5] Rollo, p. 56

[vi][6] An Act Revising The Excise Tax Base, Allocating a Portion Of The Incremental Revenue Collected For The Emergency Employment Program For Certain Workers Amending For The Purpose Section 142 Of The National Internal Revenue Code, As Amended, And For Other Purposes.

[vii][7] Official Gazette, Vol. 89., No. 32, 09 August 1993, p. 4476.

[viii][8] The petition was subsequently amended on 12 August 1993.

[ix][9] Rollo, pp. 115-116.

[x][10] Rollo, pp. 21-22.

[xi][11] 238 SCRA 63.

[xii][12] Italics supplied. At p. 69.

[xiii][13] Rollo, pp. 65-66.

[xiv][14] See Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371.

[xv][15] City of Baguio vs. De Leon, 25 SCRA 938.

[xvi][16] Ang Tibay vs. Court of Industrial Relations, 69 Phil. 635.

[xvii][17] Rollo, pp. 97-98.

18 Rollo, pp. 98-100.

EN BANC G.R. No. L-2678

December 29, 1949

ANTONIO C. ARAGON, petitioner-appellant, vs. MARCOS JORGE, Provincial Treasurer of Zambales, respondent-appellee.

OZAETA, J.: This is an appeal from a judgment of the Court of First Instance of Zambales denying appellant's petition for mandamus to compel the respondent provincial treasurer to issue final bills of sale covering numerous parcels of land situated in the municipalities of Santa Cruz and Candelaria, Zambales, which

the petitioner alleged to have purchased at auction sales made by the respective municipal treasurers of said municipalities for tax delinquencies and which had not been redeemed by the owners within one year. The provincial treasurer, supported by an opinion of the provincial fiscal, held the sales void for irregularities and refused to issue the final bills of sale, but in his answer he alleged that he had offered to refund the purchase price but that the petitioner thru his counsel refused to accept it. The trial court sustained the opinion of the fiscal and the provincial treasurer. The real properties located in the municipality of Santa Cruz were advertised for sale "at public auction to be held at the main entrance of the municipal building of said municipality from March 24, 1947, at 10 a.m. until all sold, to satisfy all taxes and penalties due thereon and the cost of the sale, pursuant to the provisions of section 35 of Commonwealth Act No. 470, subject to the conditions provided in section 36 of said Act." The sale did not take place on the date above fixed but on May 12, 13, 14, and 15, 1947, without a new advertisement and without a new notice to the owners concerned. On the dates last mentioned 253 parcels with an aggregate assessed value of P67, 150 were sold for only P1,471.

The real properties located in the municipality of Candelaria were originally advertised for sale "at public auction to be held at the main entrance of the municipal building of said municipality from May 5, 1947, at 10 A. M. until sold, to satisfy all taxes and penalties due thereon and the cost of sale, pursuant to the provisions of section 35 of Commonwealth Act No. 470, subject to the conditions provided in section 36 of said Act." Likewise the sale did not take place on the date above fixed but on June 12, 1947, without a new advertisement and without a new notice to the owners concerned. On said date 71 lots with an aggregate assessed value of P32,250 were sold for only P820.19. It was not the petitioner who bid at both auction sales but one Pedro Porras; and it was not the latter who paid the purchase price but Public Defender Moises Ma. Buhain, who caused the official receipts to be issued in the name of the herein petitioner Antonio c. Aragon. The latter is a Manila resident who had no house and no interest any kind in Zambales. Public defender Buhain was the one who appeared in the trial court as counsel and attorney-in-fact of the petitioner. The trial court intimated that the petitioner was a dummy of the public defender, who as a public official was prohibited by section 579 of the revised Administrative Code "from purchasing, directly or indirectly, from the Government, any property sold by the Government for the

nonpayment of any public tax. Any such purchase by a public official or employee shall be void." While there is ground for suspension that said provision of the revised Administrative Code may have been violated, in the absence of categorical finding by the trial court on that point we must decide this case on the alleged nullity of sale for lack of notice. Notice of such sale to the delinquent taxpayers and landowners in particular and to the public in general is an essential and indispensable requirement of the law, the nonfulfilment of which vitiates and nullifies the sale. (Section 35, Commonwealth Act No. 470, known as the Assessment Law; Cabrera vs. Provincial Treasurer of Tayabas, 42 O. G. 1492.) 1 The sale should have been made on a fixed date as originally advertised, or if that was not practicable and if it was desired to postpone the sale indefinitely "to give a chance to the taxpayers to pay their delinquent taxes," as was done in this case, new notices to the taxpayers and to the public should have been made. The sales in question being void for lack of due notice, the respondent provincial treasurer cannot be compelled to issue the final bills of sale demanded by the petitioner. The judgment is affirmed, with costs against the appellants.

Footnotes 1 75 Phil., 780.

FIRST DIVISION

G.R. No. 105360 May 25, 1993 PEDRO P. PECSON, petitioner, vs. THE HON. COURT OF APPEALS, ERLINDA TAN, JUAN NUGUID, MAMERTO G. NEPOMUCENO, ANSELMO O. REGIS and REGISTER OF DEEDS OF QUEZON CITY, respondents.

QUIASON, J.: This is an appeal by certiorari under Rule 45 of the Revised Rules of Court from the decision of the Court of Appeals (8th Division) in CA-G.R. CV No. 23910, entitled "Pedro Pecson v. Erlinda Tan, et al." The said decision affirmed in toto the decision of the Regional Trial Court, Quezon City, dismissing the complaint in Civil Case No. Q-41471. In Civil Case No. Q-41471, petitioner filed a complaint to annul the sale at a public auction conducted by respondent, Anselmo O. Regis, (City Treasurer of Quezon City) of petitioner's property for non-payment of real estate taxes, alleging that the sale was

made without prior notice to him. The complaint further alleged that petitioner was not notified of his right to redeem the property, that the title to the property was transferred by respondent Register of Deeds of Quezon City to respondent Mamerto G. Nepomuceno (the buyer at the public auction) and that the latter sold the property to respondents Erlinda Tan and Juan Nuguid. The major issue before the trial court was whether the sale of the property by respondent Regis was valid, which in turn depended on whether petitioner was duly notified of the public auction. In its decision, the trial court upheld the validity of the public auction, saying that the notices of the auction sale published in a newspaper of general circulation were notices in rem; that the fact that the notices to the petitioner were sent to "No. 79 Paquita Street, Sampaloc, Manila" instead of "No. 1009 Paquita St., Sampaloc, Manila," which petitioner claimed to be the proper address to send the notices to him, was inconsequential; and that petitioner failed to pay the real estate taxes on the property. In an Order dated February 8, 1989, the trial court amended its decision by adding the statement: The 4-door edifice of the plaintiff on the subject lot is, however, another thing which is not a subject of the instant litigation.

On a motion for reconsideration by respondents Tan and Nuguid, the trial court in its order dated June 16, 1989, reiterated its previous ruling that the 4-door building constructed by petitioner on the lot in controversy was not covered by the tax sale but awarded said respondents the amount of P10,000.00 as attorney's fees. Failing to get any relief from the Court of Appeals, petitioner went to this Court wherein he reiterates the issue of the validity of the public auction of his property for non-payment of taxes on the ground that the notices to him were sent to the wrong postal address. The records show that petitioner was the registered owner of a parcel of land in Quezon City consisting of 256 sq. meters and covered by TCT No. 79912 of the Registry of Deeds of Quezon City. For non-payment of realty taxes, petitioner's property was sold at public auction on November 12, 1980 by respondent Regis. Notices of sale were sent to petitioner at "No. 79 Paquita Street, Sampaloc, Manila," and were published in the Times Journal on October 6, 13, and 30, 1980.

A final notice to exercise the right of redemption dated September 14, 1981 was sent to petitioner at "No. 79 Paquita Street, Sampaloc, Manila." There being no redemption made after one-year from the date of the auction sale, a Final Bill of Sale was executed on April 19, 1982 by respondent Regis in favor of respondent Nepomuceno. In an order dated July 12, 1982, the Regional Trial Court, Quezon City, consolidated title in favor of respondent Nepomuceno and directed the Register of Deeds of Quezon City to cancel TCT No. 79912 and issue a new one in lieu thereof, in the name of respondent Nepomuceno. On February 3, 1983, respondent Register of Deeds canceled TCT No. 79912 in the name of petitioner and issued TCT No. 302292 in the name of respondent Nepomuceno. On October 25, 1983, respondent Nepomuceno executed a Deed of Absolute Sale on the subject property in favor of respondents Tan and Nuguid for P103,000.00. On December 8, 1983, the Register of Deeds of Quezon City cancelled Nepomuceno's title to the property and issued TCT No. 308506 in the names of respondents Tan and Nuguid.

In a Rule 45 appeal, as in this case, this Court can only pass upon questions of law. The issues raised by the petition involve only questions of fact. These are: (1) Were the notices required under Section 73 of the Real Property Tax Code properly sent to the delinquent taxpayer? (Petition, pp. 4-12; Rollo, pp. 5-13) (2) Were respondents Erlinda Tan and Juan Nuguid buyers in good faith? (Petition, pp. 13-14; Rollo, pp. 14-15) (3) Were the requirements of posting and announcement of the sale under the Real Property Tax Code complied with? (Petition, pp. 12-13; Rollo, pp. 13-14) Petitioner argues that respondent Regis sent the notices to him at "No. 79 Paquita St., Sampaloc, Manila" which was not his address. He claims that his correct Manila address is "No. 1009 Paquita St., Sampaloc" and his correct Quezon City address is "No. 79, Kamias Road, Quezon City." He admits that on the dates the notices were mailed, he was no longer residing in Manila but in Quezon City. The governing law in this case is P.D. No. 464, known as the Real Property Tax Code. Section 73 thereof, with the epigraph "Advertisement of sale of real property at public auction," in pertinent part, provides:

xxx xxx xxx Copy of notices shall forthwith be sent either by registered mail or by messenger, or through the barrio captain, to the delinquent taxpayer, at the address as shown in the tax rolls or property tax record cards of the municipality or city where the property is located, or at his residence, if known to said treasurer or barrio captain. Provided, however, that a return of the proof of service under oath shall be filed by the person making the service with the provincial or city treasurer concerned. Under the said provisions of the law, notices of the sale of the public auction may be sent to the delinquent taxpayer, either (i) at the address as shown in the tax rolls or property tax record cards of the municipality or city where the property is located or (ii) at his residence, if known to such treasurer or barrio captain. Petitioner does not claim that the notices issued from 1980 to 1983 should have been sent to him at his residence in "No. 79 Kamias Road, Quezon City," his residence since 1965 and where the property in litigation is located. What he claims is that the notices should have been sent to him at his address at "No. 1009 Paquita St., Sampaloc" even if he was no longer residing there because letters sent to him at the said address were forwarded to him by the occupants of his former house. As found by the Court of Appeals, what appeared in the records of the Office of the City

Treasurer of Quezon City as the address of petitioner was "1009 Paquita, Manila," and below the number 1009 was the number "79". From this entry, one can deduce that the taxpayer had transferred his residence to "No. 79 Paquita, Sampaloc, Manila" from "No. 1009 Paquita, Sampaloc, Manila". In the register for the tax years starting from 1982 (Exh. S; also Exh. 3), the address of petitioner was recorded as "79 Paquita, Mla." The Court of Appeals advanced the theory that the number "79" was furnished by petitioner himself, basing its conclusion on the address given by petitioner in his complaint, which was "No. 79 Kamias Road, Quezon City." The Court of Appeals concluded that the employees in charge of sending notices in the Treasurer's Office were not blameworthy in relying on the available tax records. Petitioner's contention that he would have received the notices had they been sent to "No. 1009 Paquita, Sampaloc, Manila," because the occupants thereof forwarded the letters addressed to him to his Quezon City residence, loses force when one considers that the Court of First Instance of Quezon City sent him a notice, in connection with the proceedings for the consolidation of title, at "No. 1009 Paquita St., Sampaloc, Manila," which remained "unclaimed".

For this misfortune that befell petitioner, he has nobody to blame but himself. As a property owner and a school teacher at that, he should know that if an owner fails to pay the real estate taxes on property, the said property shall be sold at public auction to recover the delinquent taxes. When petitioner's property was sold at a public auction in December 1980, the tax delinquency must have accumulated for several years. It was only on July 12, 1982 that the order for consolidation of title in the name of respondent Nepomuceno was issued and it was only on December 8, 1983 that the title over the property was transferred to respondents Tan and Nuguid. All throughout these years, petitioner never displayed an interest in paying the real estate taxes on the property. Worse, he introduced improvements thereon without reporting the same for tax purposes. Had he reported the improvements he had introduced on the property, the Office of the Treasurer of Quezon City could have been informed of petitioner's new address in Quezon City. Petitioner also questions the evidence presented by respondent Regis regarding his compliance with the requirements of the Real Property Tax Code on the posting and announcement of notices of the sale. (Petition, pp. 9-13; Rollo, pp. 10-14) In this regard, said respondent presented the certificates-affidavits of eight employees under the supervision of the Market Superintendent and two employees of the City Treasurer's Office. Like the issue of

whether respondents Tan and Nuguid were buyers in good faith, the issue on the compliance with the posting of the notices and announcement of the sale, is a question of fact which this Court will not inquire into and review the evidence relied upon by the lower courts to support their findings (Banaag v. Bartolome, 204 SCRA 924 [1991]; Ching Sui Yong v. Intermediate Appellate Court, 191 SCRA 187 [1990]). WHEREFORE, the petition is DENIED and the decision of the Court of Appeals appealed from is AFFIRMED. SECOND DIVISION G.R. No. 118900

February 27, 2003

JARDINE DAVIES INSURANCE BROKERS, INC., petitioner, vs. HON. ERNA ALIPOSA, in her capacity as Presiding Judge of Branch 150 of the Makati Regional Trial Court, CITY (previously Municipality) OF MAKATI and ROLANDO M. CARLOS, in his capacity as Acting Treasurer of Makati, respondents. DECISION CALLEJO, SR., J.:

Pursuant to Republic Act No. 7160, otherwise known as the Local Government Code of 1991, the then Sangguniang Bayan of Makati enacted Municipal Ordinance No. 92-072, otherwise known as the Makati Revenue Code, which provides, inter alia, for the schedule of real estate, business and franchise taxes in the Municipality of Makati at rates higher than those in the Metro Manila Revenue Code. On May 10, 1993, the Philippine Racing Club, Inc. ("PRCI" for brevity), a taxpayer of Makati, appealed to the Department of Justice ("DOJ" for brevity) for the nullification of said ordinance, alleging that it was approved without previous public hearings, in violation of the Local Government Code and Article 276 of its Implementing Rules, and that some of the ordinance‘s provisions were unconstitutional: (2) "The ‗in-lieu-of-all-taxes‘ clause of the franchise of the Philippine Racing Club, Inc. exempts it from payment of the real property tax, annual business tax and other new taxes imposed by the ordinance here in question. To withdraw the exemption would impair the obligation of contract in violation of its constitutional right as franchise holder. (3) "The imposition of the franchise tax is not within the scope of the taxing powers of the Municipality of Makati (Sections 134, 137 and 142 of Republic Act No. 7160 and Articles 223, 226 and

231 of Rule XXX of the Implementing Rules and Regulations of the Local Government Code of 1991). and (4) "The Municipality of Makati already shares 5 of the 25% franchise tax provided for in Section 8 of the franchise of the Philippine Racing Club, Inc. To allow the said municipality to impose another franchise tax and to base the tax on the gross annual receipts, as it does in the ordinance, would certainly be unjust, excessive, oppressive or confiscatory (Section 130 of Republic Act No. 7160 and Article 219 of Rule XXX of the Implementing Rules and Regulations).1 Although required by the DOJ to comment on the appeal, respondent Makati failed to do so. On July 5, 1993, the DOJ came out with a resolution2 declaring "null and void and without legal effect" the said ordinance for having been enacted in contravention of Section 187 of the Local Government Code of 1991 and its implementing rules and regulations.3 On August 19, 1993, respondent Makati sought a reconsideration of the ruling of the DOJ. Pending resolution of its motion, said respondent filed a petition ad cautelam4 with the Regional Trial Court (RTC) of Makati, entitled Hon. Jejomar C. Binay and the Municipality of Makati, Petitioners, v. Hon. Franklin M. Drilon, Department of Justice and Philippine Racing Club, Inc.,

Respondents, and docketed as Case No. 93-2844. The case was raffled to Branch 148 of the Makati RTC. Respondent Makati alleged, inter alia, that public hearings were conducted before the approval of the ordinance and hence the ordinance was valid. It prayed that after due proceedings judgment be rendered in its favor, thus: WHEREFORE, petitioners respectfully pray that this Honorable Court promulgate judgment: (a) declaring null and void the DOJ Decision dated July 5, 1993; and (b) allowing the full implementation of Makati Municipal Ordinance No. 92-072. Petitioners pray for such further or other reliefs as this Honorable Court may deem just and equitable.5 In the meantime, respondent Makati continued to implement the ordinance. Petitioner Jardine Davies Insurance Brokers, Inc., a duly-organized corporation with principal place of business at No. 222 Sen. Gil J. Puyat Avenue, Makati, Metro Manila, was assessed and billed by Makati the amount of P63,822.47 for taxes, fees and charges under the ordinance for the second quarter of 1993. It was again billed by respondent Makati the same amount for the third quarter of 1993 and the same amount

for the fourth quarter of 1993. Petitioner did not protest the assessment for its quarterly business taxes for the second, third and fourth quarters of 1993 based on said ordinance effective April 1, 1993. Petitioner, in fact, paid the said amounts on April 26, 1993 (for the second quarter), July 12, 1993 (for the third quarter) and October 19, 1993 (for the fourth quarter), respectively, without any protest. Respondent Makati issued the corresponding receipts in favor of petitioner.6 On January 30, 1994, petitioner wrote the municipal treasurer of Makati requesting that respondent Makati compute its business tax liabilities in accordance with the Metro Manila Revenue Code and not under the ordinance considering that said ordinance was already declared by the DOJ null and void. Petitioner likewise requested that respondent Makati credit the overpayment in the total amount of P27,854.91 for the second to fourth quarters of 1993 against its 1994 liabilities for 1994, or in the alternative, for Makati to refund the said amount to petitioner. In a Letter7 dated February 4, 1994, respondent Makati, through Maximo L. Paulino Jr., Acting Chief of its Municipal License Division, denied the request of petitioner for tax credit/refund. Respondent Makati insisted that the questioned ordinance code was valid and enforceable pending the final outcome of its petition ad cautelam with the Regional Trial Court of Makati.

In the meantime, on October 26, 1993, the RTC rendered judgment in Case No. 93-2844 granting the petition of Makati and declaring the ordinance valid. On November 9, 1993, the DOJ issued a memorandum to the Chief State Counsel directing the latter to refrain from accepting any appeal or to act on pending appeals on the validity/constitutionality of the ordinance until the same shall have been finally resolved by courts of competent jurisdiction. When informed of the denial by respondent Makati of its letterrequest, petitioner filed a complaint on March 7, 1994 with the RTC of Makati against respondents Makati and its Acting Municipal Treasurer. The case was raffled to Branch 150 of said court. Petitioner alleged in its complaint that in view of the resolution of the DOJ declaring the Makati Revenue Code "null and void and without legal effect," the provisions of the Metro Manila Revenue Code continued to remain in full force and effect; however, petitioner was assessed and billed by respondent Makati for taxes, fees and charges for second, third and fourth quarters for 1993 beginning on April 4, 1993 up to October 14, 1994 at rates fixed in the ordinance despite the nullity thereof. Petitioner prayed that after due proceedings judgment be rendered as follows: 1. Declaring as NULL AND VOID Municipal Ordinance No. 92072, (Makati Revenue Code) of the Municipality of Makati and

ordering Defendants to refund or issue as tax credit in favor of Plaintiff the sum of P27,854.91 plus interest. 2. Assuming without admitting that the Municipal Ordinance No. 92-072 (Makati Revenue Code) is valid, declaring that the rates imposed by said ordinance accrue only on July 1, 1993 and ordering Defendants to refund or issue as tax credit in favor of Plaintiff the sum of P9,284.97.8 On May 18, 1994, respondents Makati and its Acting Municipal Treasurer filed a motion to dismiss9 the complaint on the ground of prematurity. They argued that petitioner‘s cause of action was predicated on the appealed resolution of the DOJ, and unless and until nullified by final judgment of a competent court, the ordinance remained in full force and effect. On May 26, 1994, petitioner opposed the motion to dismiss of respondents, contending that its complaint was not predicated solely on the invalidity and unconstitutionality of the ordinance but also on its claim that the ordinance took effect only in July 1, 1993 but Makati applied the ordinance effective April 1, 1993. Petitioner further averred that under Section 166 of the Local Government Code, new taxes, fees or charges or charges provided for in the ordinance shall accrue on the first day of the quarter following the effectivity of the new ordinance. Hence, assuming that the tax ordinance was valid, the same should have been

enforced only from the "first (1st) day of the quarter following next the effectivity of the ordinance imposing such new levies or rates" as provided for in Section 166 of the Local Government Code. On August 29, 1994, the RTC issued an order granting the motion to dismiss of respondent and ordering the dismissal of the complaint. The trial court ruled that plaintiff‘s cause of action, if any, had prescribed. Citing Sections 187 and 195 of the Local Government Code of 1991, the trial court ratiocinated that petitioner failed to file an opposition or protest to the written notice of assessment of Makati for taxes, fees and charges at rates provided for in the ordinance within 60 days from the notice of said assessment as required by Section 195 of the Local Government Code. Hence, petitioner was barred from demanding a refund of its payment or that it be credited for said amounts. Petitioner received a copy of said order on October 7, 1994. On October 13, 1994, petitioner filed with the trial court a motion for reconsideration10 of the order of dismissal, arguing that the trial court erred in applying Section 195 of the Local Government Code of 1991 as its complaint did not involve an assessment for deficiency taxes but one for refund/tax credit. Petitioner further claimed that it was never served with any notice of assessment from respondents and hence there was no need for petitioner to protest. Petitioner argued that what was applicable was Section

196 of the Local Government Code in conjunction with Article 286 of its Implementing Rules and Regulations, both of which simply require the filing of a written claim for refund or tax credit within two years from the date of payment. On December 28, 1994, the trial court issued an order11 denying the motion for reconsideration of petitioner, a copy of which was served on petitioner on February 13, 1995. The trial court declared that Section 195 of the Local Government Code covers all kinds of assessments and not merely deficiency assessments for taxes, fees or charges. The trial court further ruled that the issue of the validity and constitutionality of the ordinance was still pending resolution by Branch 148 of the RTC in Civil Case No. 93-2844 and until declared null and void, otherwise by final judgment, the ordinance remained valid. Petitioner filed on February 20, 1995 a petition for review on certiorari under Rule 45 of the Rules of Court, contending that: RESPONDENT JUDGE ERRED IN HOLDING THAT THE INSTANT CASE IS NOT A CLAIM FOR REFUND UNDER SECTION 196 OF THE LGC IN RELATION TO ARTICLE 286 OF ITS IMPLEMENTING RULES, BUT A DEFICIENCY ASSESSMENT THAT HAS TO BE PROTESTED UNDER SECTION 195 OF THE SAME CODE.

RESPONDENT JUDGE ERRED IN DISMISSING THE CASE ON THE GROUND OF PENDENCY OF ANOTHER ACTION CONTESTING THE LEGALITY OR CONSTITUTIONALITY OF THE MAKATI REVENUE CODE IS STILL BEING DETERMINED IN BRANCH 148 OF THE REGIONAL TRIAL COURT OF MAKATI.12 Anent the first assignment of errors, petitioner avers that its action in the RTC was one for a refund of its overpayments governed by Article 196 of the Local Government Code implemented by Article 286 of the Implementing Rules and Regulations of the Code and not one involving an assessment for deficiency taxes governed by Section 195 of the said Code. Petitioner contends that it was not mandated to first file a protest with respondents before instituting its action for a refund of its overpayments or for it to be credited for said overpayments. For its part, respondent Makati avers that petitioner was proscribed from filing its complaint with the RTC and for a refund of its alleged overpayment, petitioner having paid without any protest the taxes due to respondent Makati under the ordinance. It is further asserted by respondent Makati that until declared null and void by a competent court, the ordinance was valid and should be enforced. The petition has no merit.

The Court agrees with petitioner that as a general precept, a taxpayer may file a complaint assailing the validity of the ordinance and praying for a refund of its perceived overpayments without first filing a protest to the payment of taxes due under the ordinance. This was our ruling in Ty v. Judge Trampe:13 . . . Hence, if a taxpayer disputes the reasonableness of an increase in a real estate tax assessment, he is required to "first pay the tax" under protest. Otherwise, the city or municipal treasurer will not act on his protest. In the case at bench, however, the petitioners are questioning the very authority and power of the assessor, acting solely and independently, to impose the assessment and of the treasurer to collect the tax. These are not questions merely of amounts of the increase in the tax but attacks on the very validity of any increase. In this case, petitioner, relying on the resolution of the Secretary of Justice in The Philippine Racing Club, Inc. v. Municipality of Makati case, posited in its complaint that the ordinance which was the basis of respondent Makati for the collection of taxes from petitioner was null and void. However, the Court agrees with the contention of respondents that petitioner was proscribed from filing its complaint with the RTC of Makati for the reason that petitioner failed to appeal to the Secretary of Justice within 30 days from the effectivity date of the ordinance as mandated by Section 187 of the Local Government Code which reads:

Sec. 187-Procedure for Approval and Effectivity of Tax Ordinances and Revenue Measures; Mandatory Public Hearings.- The procedure for approval of local tax ordinances and revenue measures shall be in accordance with the provisions of this Code: Provided, That public hearings shall be conducted for the purpose prior to the enactment thereof: Provided further, That any question on the constitutionality or legality of tax ordinances or revenue measures may be raised on appeal within thirty (30) days from the effectivity thereof to the Secretary of Justice who shall render a decision within sixty (60) days from the date of receipt of the appeal: Provided, however, That such appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and payment of the tax, fee, or charge levied therein: Provided, finally, That within thirty (30) days after receipt of the decision or the lapse of the sixty-day period without the Secretary of Justice acting upon the appeal, the aggrieved party may file appropriate proceedings with a court of competent jurisdiction. In Reyes v. Court of Appeals,14 we ruled that failure of a taxpayer to interpose the requisite appeal to the Secretary of Justice is fatal to its complaint for a refund: Clearly, the law requires that the dissatisfied taxpayer who questions the validity or legality of a tax ordinance must file his appeal to the Secretary of Justice, within 30 days from effectivity

thereof. In case the Secretary decides the appeal, a period also of 30 days is allowed for an aggrieved party to go to court. But if the Secretary does not act thereon, after the lapse of 60 days, a party could already proceed to seek relief in court. These three separate periods are clearly given for compliance as a prerequisite before seeking redress in a competent court. Such statutory periods are set to prevent delays as well as enhance the orderly and speedy discharge of judicial functions. For this reason the courts construe these provisions of statutes as mandatory. A municipal tax ordinance empowers a local government unit to impose taxes. The power to tax is the most effective instrument to raise needed revenues to finance and support the myriad activities of local government units for the delivery of basic services essential to the promotion of the general welfare and enhancement of peace, progress, and prosperity of the people. Consequently, any delay in implementing tax measures would be to the detriment of the public. It is for this reason that protests over tax ordinances are required to be done within certain time frames. In the instant case, it is our view that the failure of petitioners to appeal to the Secretary of Justice within 30 days as required by Sec. 187 of R.A. 7160 is fatal to their cause. Moreover, petitioner even paid without any protest the amounts of taxes assessed by respondents Makati and Acting Treasurer as provided for in the ordinance. Evidently, the complaint of

petitioner with the Regional Trial Court was merely an afterthought. In view of our foregoing disquisitions, the Court no longer deems it necessary to resolve other issues posed by petitioner. IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The order of the Regional Trial Court dismissing the complaint of petitioner is AFFIRMED. SO ORDERED.

Footnotes 1

Original Records, pp. 16- 17.

2

Id. at 15.

3

SECTION 187. Procedure for Approval and Effectivity of Tax

Ordinances and Revenue Measures; Mandatory Public Hearings. ¾The procedure for approval of local tax ordinances and revenue measures shall be in accordance with the provisions of this code: Provided, That public hearings shall be conducted for the purpose prior to the enactment thereof: Provided, further, That any question on the constitutionality or legality of tax ordinances or revenue measures may be raised on appeal within thirty (30) days from the effectivity thereof to the Secretary of Justice who

shall render a decision within sixty (60) days from the date of receipt of the appeal: Provided, however, That such appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and payment of the tax, fee, or charge levied therein: Provided, finally, That within thirty (30) days after receipt of the decision or the lapse of the sixty-day period without the Secretary of Justice acting upon the appeal, the aggrieved party may file appropriate proceedings with a court of competent jurisdiction. 4

Vide note 1, pp. 33-45.

5

Original Records, p. 43.

6

Id. at 9-14.

7

Id. at 21-22.

8

Id. at 6-7.

9

Id. at 30-32.

10

Id. at 61.

11

Original Records, pp. 75-76.

12

Rollo, p. 6.

13

250 SCRA 500 (1995).

14

320 SCRA 486 (1999).

EN BANC G.R. No. L-12182

March 27, 1918

VIUDA E HIJOS DE PEDRO P. ROXAS, plaintiffs-appellees, vs. JAMES J. RAFFERTY, Collector of Internal Revenue, ex officio city assessor and collector of Manila, defendantappellant.

MALCOLM, J.: This appeal presents the question of whether or not taxes can be collected on the Roxas Building in the city of Manila for the year 1915. FACTS. Plaintiffs own a parcel of land located on the Escolta in the city of Manila. In the latter part of 1913, the improvements of this land were demolished, and the construction of a reinforced concrete building was begun. No taxes on the improvements were levied or paid for the year 1914. Accepting the findings of fact by the trial court, the Roxas building in December, 1914, when the city assessor and collector attempted to assess it for taxation, still lacked the pavement of the entrances, the floors of some of the

stores the dividing partitions between the stores, the dividing partitions between the greater part of the rooms in the upper stories, sanitary installation, the elevators, electrical installation, the roof of the building, the concrete covering and towers of the elevator shaft, and the doors and windows of many rooms. It was finished in all respects on February 15, 1915. The city assessor and collector of Manila, under the date of December 1, 1914, sent plaintiffs notice, received by them on December 25, 1914, requiring them to declare the new improvements for assessments for the year 1915. Prior to this, in November, the city assessor and collector had the building inspected and had assessed the new improvements for taxation for 1915 at P300,000. On January 15, 1915, plaintiffs were notified of this assessment. Plaintiffs paid the amount of the taxes, which amounted to P3,000, under protest on June 30, 1915. Suit was begun in the Court of First Instance of Manila to recover this sum with interest at the legal rate from the date of payment. The court, the Honorable Simplicio del Rosario, found with plaintiffs without express finding as to costs. Defendant, by the city attorney of Manila, appealed, making five assignments of error which we combine for purposes of convenience into three issues. LEGAL ISSUES.

1. Jurisdiction. — The first assignment of error, concerning the jurisdiction of the lower court, presents a question of primary importance for obviously if the lower court had no right to take cognizance of this case, we should not burden ourselves with the consideration of its merits. This question appellee emphasizes, is argued for the first time on appeal. In the trial court, defendant appeared, demurred, and answered without assailing jurisdiction. However, as jurisdiction is the power of a court to act at all, we should even now resolve the question. Objection for want of jurisdiction may be raised for the first time on appeal. The local law, as elsewhere, provides an administrative procedure for the assessment of realty. An assessor to fix the value of the property in the first instance, and a board of tax appeals to review the action of the assessor in the second instance are constituted. Proceedings before this board are quasi-judicial in nature. To it the citizen must apply for relief against excessive and irregular taxation. Here must be aggrieved party go for the correction of errors in assessments. Administrative remedies must be exhausted before resort can be had to the courts. It is a condition precedent to the exercise of the taxpayer's right of action in a court of justice that previous and timely effort shall have been made on his part to have the board of tax appeals correct an alleged error while the matter was yet in their hands and under their control. Even when the courts assume

jurisdiction, they will not presume to interfere with the intelligent exercise of the judgement of men specially trained in appraising property. (See Stanley vs. Supervisors of Albany [1887], 121 U. S., 535) This is hardly our case. We do not have before us merely a dispute as to an excessive or unequal assessment. The assessment is claimed to be wholly void. The contention is that the assessor has attempted to levy a tax upon property, which is by law exempt, and that in this attempt the assessor has violated the provisions of law which exist for the protection of the taxpayer. Not the correctness of the assessment, but the legality of the assessment is involved. The rule of taxation is that where there tax is illegal, the taxpayer may bring an action directly in the courts to recover back the tax. (Roman Catholic Church vs. Cooley on Taxation, 3rd ed., p. 1382, and Stanley vs. Supervisors of Albany, supra.) This court has taken cognizance of questions concerning assessments of and improvements on reality in a number of cases. (See Fernandez vs. Shearer [1911], 19 Phil., 75; Ayala de Roxas vs. City of Manila [1914], 27 Phil., 336; Young Men's Christians Association of Manila vs. Collector of Internal Revenue [1916], 33 Phil. Rep., 217.) The distinction is between a void and an erroneous tax. The first identifies the existing situation and gives jurisdiction to the courts.

The situation in its simplest terms may be described as follows: The citizens is forced to pay the alleged tax. As will hereafter appear, he had no appropriate opportunity to present his grievance to the board of tax appeals. He did all that was required by protesting at the time of paying the tax. The citizen can therefore in turn be permitted to bring suit to recover the amount which he claims was unlawfully collected. Appeal to the board of tax appeals is not a necessary prerequisite. Nor is the decision of the assessor as to the right to tax property of such a judicial or discretionary character as to be free from collateral attack. When the state (here the city of Manila) makes the assessment, and when the citizen stand on reasonably equal terms. The power of the state and the remedy of the citizen are and should be reciprocal. It is for the courts to arbitrate the controversy between the state and the citizen. The Court of First Instance of the city of Manila had jurisdiction over this suit and the Supreme Court of the Philippine Islands now possesses similar appellate jurisdiction. 2. Legality of assessment. — The second, third, and fourth assignment of error concern the point of when an improvement can be said to be completed within the meaning of the Manila Charter. We feel it unnecessary to decide this question for even more basic in aspect is the point raised by the fifth assignment of error concerning the legality of the assessment, particularly as

relating to notification. The exact situation can be more vividly pictured by quoting the provisions of the law and then applying these provisions to the facts. The Manila Charter provides: "It shall be the duty of each person who at any time acquires real estate in the city,, and of any person who constructs or adds to any improvement on real estate owned by him within the city, to prepare and present to the city assessor and collector, within a period of sixty days next succeeding the completion of such acquisition, construction or addition, a sworn declaration setting forth the value of the real estate acquired or the improvement constructed or addition made by him and containing a description of such property sufficient to enable the city assessor and collector readily to identify the same. . . ." (Section 2484, Administrative Code of 1917.) Plaintiffs were under obligation too present a declaration of their improvements within sixty days succeeding completion, i. e. on or before April 15, 1915. Under an attempted assessment in November and December, 1914, the plaintiffs had and could have had no opportunity to comply with the law. The Charter continues: "The city assessor and collector shall, during the first fifteen days of December of each year, add to his list of taxable real estate in the city the value of the improvements placed upon such property during the preceding year, and any property which is taxable and which has therefore escaped

taxation. . . ." (Sec. 2487, Administrative Code of 1917.) Between December 1 and December 15, 1915, the city assessor and collector was under the obligation and adding the improvements on the Roxas property to the assessment list. Between December 1 and December 15, 1914, the city assessor and collector could not prematurely and by anticipation perform this duty on improvements not yet completed. There may be doubt as to the exact meaning which should be given to the words "during the preceding year." The common sense construction would be that the phrase includes December of the previous year and the current year to December. The city assessor and collector perforce could not in 1914 levy a tax on incomplete improvements made during the current year, when the statute only authorized him to make such levy upon completed improvements made during the year. The Charter continues: "He (the city assessor and collector) shall give notice by publication for ten days prior to December first in two newspapers of general circulation published in the city, one printed in English and one in Spanish, that he will be present in his office for that purpose on said days, and he shall further notify in writing each person the amount of whose tax will be changed by such action or such proposed change, by delivering or mailing such notification to such person or his authorized agent at the last known address of such owner or agent in the

Philippine Islands some time in the month of November." (Sec. 2487, Administrative Code of 1917.) And finally the Charter provides that, "No court shall entertain any suit assailing the validity of a tax assessed under this article until the taxpayer shall have paid, under protest, the taxes assessed against him, nor shall any court declare any tax invalid by reason of irregularities or informalities in the proceedings of the officer in charged with the assessment or collection of taxes, or of failure to perform their duties within the times herein specified for their performance, unless such irregularities, informalities, or failures shall have impaired the substantial rights of the taxpayer; nor shall any court declare any tax assessed under the provisions of article invalid except upon condition that the taxpayer shall pay the just amount of his tax as determined by the court in the pending proceeding." (Sec. 2504, Administrative Code of 1917.) It is a general rule that those provisions of a statute relating to the assessment of taxes, which are intended for the security of the citizen, or to insure the equality of taxation, or certainty as to the nature and amount of each person's tax, are mandatory; but those designed merely for the information or direction of officers or to secure methodical and systematic modes of proceedings are merely directory. In the language of the United States Supreme Court, "When the regulations prescribed are intended for the protection of the citizen and to prevent a sacrifice of his property, and by a disregard of which his right might be, and generally

would be, injuriously affected, they are not directory but mandatory." (French vs. Edwards [1871], 13 Wall., 506.) Sometimes statutes requiring the assessor to notify the taxpayer have been held merely directory. But in the majority of jurisdictions this requirement is held to be mandatory, so that the assessor cannot make a valid assessment unless he has given proper notice. (37 Cyc., pp. 988, 991, citing cases.) Applied to our facts, the assessor should have notified the plaintiffs during November, 1915. His attempted notification on December 25, 1914, was not given during the time fixed by statute and was no more than a reminder to plaintiffs to present a sworn declaration of the value of the new improvements on their property. In this instance there was no such substantial compliance with the law as amounts to due process of law. There was no legal assessment of the Roxas Building for the year 1915. 3. Interest. — To narrow our discussion and to avoid misunderstanding, let us set down a few principles which every one knows. The United States of America, a State of the Islands cannot be sued without their consent. Whether interest could bee adjudged to a taxpayer against any of these entities, is beside the our question. But what is of moment is that the city of Manila is not sovereign but is a public corporation with certain delegated powers, including that of suing and being sued.

Turning to the American authorities, which are controlling, we find the following: The basic case is Erskine vs. Van Arsdale ([1872], 15 Wall., 68-75). Suit as brought against a collecting officer to recover back certain taxes claimed to be exempt under a Federal statute. Interest was added to the judgment for the plaintiff. The United States Supreme Court, through the Chief Justice, said that "Where an illegal tax has been collected, the citizen who has paid it, and has been obliged to bring suit against the collector, is, we think, entitled too interest in the event of recovery, from time of the illegal exaction." This case should not be confused with others which hold that the United States cannot be subjected to the payment of interest unless there be an authorized engagement to pay it, or a statute permitting its recovery. (Angarica vs. Bayard [1888] 127 U. S., 251; United States vs. State of North Carolina [1890], 136 U. S., 211; National Home for Disabled Volunteer Soldiers vs. Parrish [1912], 229 U. S., 494.) The distinction appears to be between suits to recover moneys illegally exacted as taxes and paid under protest, brought against collectors, although the judgment is not to be paid by the collector but directly from the Treasury, and suits against the United States. A late decision of the United States Supreme Court (National Home for Disabled Volunteer Soldiers vs. Parrish, supra), which reviews the previous cases, held that the National Home for Disabled Volunteer Soldiers was not exempt from the payment of interest on a judgment for the recovery of taxes. The

court said that the exemption in favor of the United States "has never as yet been applied to subordinate governmental agencies." Some States hold that a municipal corporation is not liable for interest unless so required by special contract or by statute. In other States, however, it is held that notwithstanding a municipal corporation has delegated to it certain powers of government, it is to be regarded as a private person with respect to its contracts, which are to be considered in the manner and with a like effect as those of natural persons. (See 15 R. C. L., 18.) Even where the stricter rule is observed, as Illinois, it is nevertheless settled that a municipal corporation which wrongfully exacts money and holds the same without just claim or right is liable for the interest thereon. (City of Chicago vs. N. W. Mutual Ins. Co. [1905], 218 Ill., 40. See also In re O'Berry [1904], 179 N. Y., 285.) Laches on the part of the plaintiff would, of course, defeat the right to recover interest. (Redfield vs. Ystefera Iron Co. [1884], 110 U. S., 174.) The city of Manila, a public corporation, even in the absence of statute, is liable to pay interest at the legal rate, from the date of exaction, in the amount of taxes illegally collected. CONCLUSION. In conclusion, as an authority which is on all fours with the prominent issues before us, we invite attention to the decision of

a United States Circuit Court, in Powder River Cattle Co. vs. Board of Commissioners of Custer County ([1891], 45 Fed., 232). The Revised Statutes of Montana provided that the assessor shall demand of each taxpayer in the district a list of his personal property and on his refusing to give it, the assessor shall list his property on information and belief. The assessor listed the property of the defendant without demanding a list from the taxpayer. The court held that the taxpayer may recover the illegal taxes paid under compulsion and is not required to apply to the board of equalization for an abatement. The court, finally adjudged legal interest on the sum illegally exacted from the date collection was made. We think the court below took the correct view of the case, and, while resolving the appeal on somewhat different grounds, believe that the judgment should stand. Accordingly, the judgment is affirmed, without special finding as to costs. So ordered.

FIRST DIVISION [G.R. No. 137621. February 6, 2002] HAGONOY MARKET VENDOR ASSOCIATION, petitioner, vs. MUNICIPALITY OF HAGONOY, BULACAN, respondent.

DECISION

PUNO, J.: Laws are of two (2) kinds: substantive and procedural. Substantive laws, insofar as their provisions are unambiguous, are rigorously applied to resolve legal issues on the merits. In contrast, courts generally frown upon an uncompromising application of procedural laws so as not to subvert substantial justice. Nonetheless, it is not totally uncommon for courts to decide cases based on a rigid application of the so-called technical rules of procedure as these rules exist for the orderly administration of justice. Interestingly, the case at bar singularly illustrates both instances, i.e., when procedural rules are unbendingly applied and when their rigid application may be relaxed.

This is a petition for review of the Resolution[xviii][1] of the Court of Appeals, dated February 15, 1999, dismissing the appeal of petitioner Hagonoy Market Vendor Association from the Resolutions of the Secretary of Justice for being formally deficient. The facts: On October 1, 1996, the Sangguniang Bayan of Hagonoy, Bulacan, enacted an ordinance, Kautusan Blg. 28,[xviii][2] which increased the stall rentals of the market vendors in Hagonoy. Article 3 provided that it shall take effect upon approval. The subject ordinance was posted from November 4-25, 1996.[xviii][3] In the last week of November, 1997, the petitioner‘s members were personally given copies of the approved Ordinance and were informed that it shall be enforced in January, 1998. On December 8, 1997, the petitioner‘s President filed an appeal with the Secretary of Justice assailing the constitutionality of the tax ordinance. Petitioner claimed it was unaware of the posting of the ordinance. Respondent opposed the appeal. It contended that the ordinance took effect on October 6, 1996 and that the ordinance, as approved, was posted as required by law. Hence, it was pointed out that petitioner‘s appeal, made over a year later, was already time-barred.

The Secretary of Justice dismissed the appeal on the ground that it was filed out of time, i.e., beyond thirty (30) days from the effectivity of the Ordinance on October 1, 1996, as prescribed under Section 187 of the 1991 Local Government Code. Citing the case of Tañada vs. Tuvera,[xviii][4] the Secretary of Justice held that the date of effectivity of the subject ordinance retroacted to the date of its approval in October 1996, after the required publication or posting has been complied with, pursuant to Section 3 of said ordinance.[xviii][5] After its motion for reconsideration was denied, petitioner appealed to the Court of Appeals. Petitioner did not assail the finding of the Secretary of Justice that their appeal was filed beyond the reglementary period. Instead, it urged that the Secretary of Justice should have overlooked this ―mere technicality‖ and ruled on its petition on the merits. Unfortunately, its petition for review was dismissed by the Court of Appeals for being formally deficient as it was not accompanied by certified true copies of the assailed Resolutions of the Secretary of Justice.[xviii][6] Undaunted, the petitioner moved for reconsideration but it was denied.[xviii][7] Hence, this appeal, where petitioner contends that: I

THE HONORABLE COURT OF APPEALS, WITH DUE RESPECT, ERRED IN ITS STRICT, RIGID AND TECHNICAL ADHERENCE TO SECTION 6, RULE 43 OF THE 1997 RULES OF COURT AND THIS, IN EFFECT, FRUSTRATED THE VALID LEGAL ISSUES RAISED BY THE PETITIONER THAT ORDINANCE (KAUTUSAN) NO. 28 WAS NOT VALIDLY ENACTED, IS CONTRARY TO LAW AND IS UNCONSTITUTIONAL, TANTAMOUNT TO AN ILLEGAL EXACTION IF ENFORCED RETROACTIVELY FROM THE DATE OF ITS APPROVAL ON OCTOBER 1, 1996. II THE HONORABLE COURT OF APPEALS, WITH DUE RESPECT, ERRED IN DENYING THE MOTION FOR RECONSIDERATION NOTWITHSTANDING PETITIONER‘S EXPLANATION THAT ITS FAILURE TO SECURE THE CERTIFIED TRUE COPIES OF THE RESOLUTIONS OF THE DEPARTMENT OF JUSTICE WAS DUE TO THE INTERVENTION OF AN ACT OF GOD – TYPHOON ―LOLENG,‖ AND THAT THE ACTUAL COPIES RECEIVED BY THE PETITIONER MAY BE CONSIDERED AS SUBSTANTIAL COMPLIANCE WITH THE RULES. III PETITIONER WILL SUFFER IRREPARABLE DAMAGE IF ORDINANCE/KAUTUSAN NO. 28 BE NOT DECLARED NULL AND VOID AND IS ALLOWED TO BE ENFORCED RETROACTIVELY

FROM OCTOBER 1, 1996, CONTRARY TO THE GENERAL RULE, ARTICLE 4 OF THE CIVIL CODE, THAT NO LAW SHALL HAVE RETROACTIVE EFFECT. The first and second assigned errors impugn the dismissal by the Court of Appeals of its petition for review for petitioner‘s failure to attach certified true copies of the assailed Resolutions of the Secretary of Justice. The petitioner insists that it had good reasons for its failure to comply with the rule and the Court of Appeals erred in refusing to accept its explanation. We agree. In its Motion for Reconsideration before the Court of Appeals,[xviii][8] the petitioner satisfactorily explained the circumstances relative to its failure to attach to its appeal certified true copies of the assailed Resolutions of the Secretary of Justice, thus: “x

x x (D)uring the preparation of the petition on October 21,

1998, it was raining very hard due to (t)yphoon ―Loleng.‖ When the petition was completed, copy was served on the Department of Justice at about (sic) past 4:00 p.m. of October 21, 1998, with (the) instruction to have the Resolutions of the Department of Justice be stamped as ―certified true copies. However, due to bad weather, the person in charge (at the Department of

Justice) was no longer available to certify to (sic) the Resolutions. “The

following day, October 22, 1998, was declared a non-

working holiday because of (t)yphoon “Loleng.” Thus, petitioner was again unable to have the Resolutions of the Department of Justice stamped ―certified true copies.‖ In the morning of October 23, 1998, due to time constraint(s), herein counsel served a copy by personal service on (r)espondent‘s lawyer at (sic) Malolos, Bulacan, despite the flooded roads and heavy rains. However, as the herein counsel went back to Manila, (official business in) government offices were suspended in the afternoon and the personnel of the Department of Justice tasked with issuing or stamping ―certified true copies‖ of their Resolutions were no longer available. “To

avoid being time-barred in the filing of the (p)etition, the same

was filed with the Court of Appeals ―as is.‖ We find that the Court of Appeals erred in dismissing petitioner’s appeal on the ground that it was formally deficient. It is clear from the records that the petitioner exerted due diligence to get the copies of its appealed Resolutions certified by the Department of Justice, but failed to do so on account of typhoon ―Loleng.‖ Under the circumstances, respondent appellate court should have tempered its strict

application of procedural rules in view of the fortuitous event considering that litigation is not a game of technicalities.[xviii][9] Nonetheless, we hold that the petition should be dismissed as the appeal of the petitioner with the Secretary of Justice is already time-barred. The applicable law is Section 187 of the 1991 Local Government Code which provides: “SEC.

187. Procedure for Approval and Effectivity of Tax

Ordinances and Revenue Measures; Mandatory Public Hearings. - The procedure for the approval of local tax ordinances and revenue measures shall be in accordance with the provisions of this Code: Provided, That public hearings shall be conducted for the purpose prior to the enactment thereof: Provided, further, That any question on the constitutionality or legality of tax ordinances or revenue measures may be raised on appeal within thirty (30) days from the effectivity thereof to the Secretary of Justice who shall render a decision within sixty (60) days from the receipt of the appeal: Provided, however, That such appeal shall not have the effect of suspending the effectivity of the ordinance and accrual and payment of the tax, fee or charge levied therein: Provided, finally, That within thirty (30) days after receipt of the decision or the lapse of the sixty-day period without the Secretary of Justice acting upon the appeal, the aggrieved party may file appropriate proceedings.

The aforecited law requires that an appeal of a tax ordinance or revenue measure should be made to the Secretary of Justice within thirty (30) days from effectivity of the ordinance and even during its pendency, the effectivity of the assailed ordinance shall not be suspended. In the case at bar, Municipal Ordinance No. 28 took effect in October 1996. Petitioner filed its appeal only in December 1997, more than a year after the effectivity of the ordinance in 1996. Clearly, the Secretary of Justice correctly dismissed it for being time-barred. At this point, it is apropos to state that the timeframe fixed by law for parties to avail of their legal remedies before competent courts is not a ―mere technicality‖ that can be easily brushed aside. The periods stated in Section 187 of the Local Government Code are mandatory.[xviii][10] Ordinance No. 28 is a revenue measure adopted by the municipality of Hagonoy to fix and collect public market stall rentals. Being its lifeblood, collection of revenues by the government is of paramount importance. The funds for the operation of its agencies and provision of basic services to its inhabitants are largely derived from its revenues and collections. Thus, it is essential that the validity of revenue measures is not left uncertain for a considerable length of time.[xviii][11] Hence, the law provided a time limit for an aggrieved party to assail the legality of revenue measures and tax ordinances.

In a last ditch effort to justify its failure to file a timely appeal with the Secretary of Justice, the petitioner contends that its period to appeal should be counted not from the time the ordinance took effect in 1996 but from the time its members were personally given copies of the approved ordinance in November 1997. It insists that it was unaware of the approval and effectivity of the subject ordinance in 1996 on two (2) grounds: first, no public hearing was conducted prior to the passage of the ordinance and, second, the approved ordinance was not posted. We do not agree. Petitioner’s bold assertion that there was no public hearing conducted prior to the passage of Kautusan Blg. 28 is belied by its own evidence. In petitioner‘s two (2) communications with the Secretary of Justice,[xviii][12] it enumerated the various objections raised by its members before the passage of the ordinance in several meetings called by the Sanggunian for the purpose. These show beyond doubt that petitioner was aware of the proposed increase and in fact participated in the public hearings therefor. The respondent municipality likewise submitted the Minutes and Report of the public hearings conducted by the Sangguniang Bayan‘s Committee on Appropriations and Market on February 6, July 15 and August 19, all in 1996, for the proposed increase in the stall rentals.[xviii][13]

Petitioner cannot gripe that there was practically no public hearing conducted as its objections to the proposed measure were not considered by the Sangguniang Bayan. To be sure, public hearings are conducted by legislative bodies to allow interested parties to ventilate their views on a proposed law or ordinance.

These views, however, are not binding on the

legislative body and it is not compelled by law to adopt the same. Sanggunian members are elected by the people to make laws that will promote the general interest of their constituents. They are mandated to use their discretion and best judgment in serving the people. Parties who participate in public hearings to give their opinions on a proposed ordinance should not expect that their views would be patronized by their lawmakers. On the issue of publication or posting, Section 188 of the Local Government Code provides: “Section

188. Publication of Tax Ordinance and Revenue

Measures. Within ten (10) days after their approval, certified true copies of all provincial, city, and municipal tax ordinances or revenue measures shall be published in full for three (3) consecutive days in a newspaper of local circulation; Provided, however, That in provinces, cities and municipalities where there are no newspapers of local circulation, the same may

be posted in at least two (2) conspicuous and publicly accessible places.‖ (emphasis supplied) The records is bereft of any evidence to prove petitioner‘s negative allegation that the subject ordinance was not posted as required by law. In contrast, the respondent Sangguniang Bayan of the Municipality of Hagonoy, Bulacan, presented evidence which clearly shows that the procedure for the enactment of the assailed ordinance was complied with. Municipal Ordinance No. 28 was enacted by the Sangguniang Bayan of Hagonoy on October 1, 1996. Then Acting Municipal Mayor Maria Garcia Santos approved the Ordinance on October 7, 1996. After its approval, copies of the Ordinance were given to the Municipal Treasurer on the same day.

On November 9, 1996, the

Ordinance was approved by the Sangguniang Panlalawigan. The Ordinance was posted during the period from November 4 - 25, 1996 in three (3) public places, viz: in front of the municipal building, at the bulletin board of the Sta. Ana Parish Church and on the front door of the Office of the Market Master in the public market.[xviii][14] Posting was validly made in lieu of publication as there was no newspaper of local circulation in the municipality of Hagonoy. This fact was known to and admitted by petitioner. Thus, petitioner‘s ambiguous and unsupported claim that it was only ―sometime in November 1997‖ that the Provincial Board approved Municipal

Ordinance No. 28 and so the posting could not have been made in November 1996[xviii][15] was sufficiently disproved by the positive evidence of respondent municipality. Given the foregoing circumstances, petitioner cannot validly claim lack of knowledge of the approved ordinance. The filing of its appeal a year after the effectivity of the subject ordinance is fatal to its cause. Finally, even on the substantive points raised, the petition must fail. Section 6c.04 of the 1993 Municipal Revenue Code and Section 191 of the Local Government Code limiting the percentage of increase that can be imposed apply to tax rates, not rentals. Neither can it be said that the rates were not uniformly imposed or that the public markets included in the Ordinance were unreasonably determined or classified. To be sure, the Ordinance covered the three (3) concrete public markets: the two-storey Bagong Palengke, the burnt but reconstructed Lumang Palengke and the more recent Lumang Palengke with wet market. However, the Palengkeng Bagong Munisipyo or Gabaldon was excluded from the increase in rentals as it is only a makeshift, dilapidated place, with no doors or protection for security, intended for transient peddlers who used to sell their goods along the sidewalk.[xviii][16] IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No pronouncement as to costs.

SO ORDERED.

FIRST DIVISION G.R. No. 150947

July 15, 2003

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MICHEL J. LHUILLIER PAWNSHOP, INC., respondent.

DAVIDE, JR., C.J.:

Are pawnshops included in the term lending investors for the purpose of imposing the 5% percentage tax under then Section 116 of the National Internal Revenue Code (NIRC) of 1977, as amended by Executive Order No. 273? Petitioner Commissioner of Internal Revenue (CIR) filed the instant petition for review to set aside the decision1 of 20 November 2001 of the Court of Appeals in CA G.R. SP No. 62463, which affirmed the decision of 13 December 2000 of the Court of Tax Appeals (CTA) in CTA Case No. 5690 cancelling the assessment issued against respondent Michel J. Lhuillier Pawnshop, Inc. (hereafter Lhuillier) in the amount of P3,360,335.11 as deficiency percentage tax for 1994, inclusive of interest and surcharges.

The facts are as follows: On 11 March 1991, CIR Jose U. Ong issued Revenue Memorandum Order (RMO) No. 15-91 imposing a 5% lending investor‘s tax on pawnshops; thus: A restudy of P.D. [No.] 114 shows that the principal activity of pawnshops is lending money at interest and incidentally accepting a "pawn" of personal property delivered by the pawner to the pawnee as security for the loan.(Sec. 3, Ibid). Clearly, this makes pawnshop business akin to lending investor‘s business activity which is broad enough to encompass the business of lending money at interest by any person whether natural or juridical. Such being the case, pawnshops shall be subject to the 5% lending investor‘s tax based on their gross income pursuant to Section 116 of the Tax Code, as amended. This RMO was clarified by Revenue Memorandum Circular (RMC) No. 43-91 on 27 May 1991, which reads: 1. RM[O] 15-91 dated March 11, 1991. This Circular subjects to the 5% lending investor‘s tax the gross income of pawnshops pursuant to Section 116 of the Tax Code, and it thus revokes BIR Ruling No[]. 6-90, and VAT Ruling Nos. 22-90 and 67-90. In order to have a uniform cut-off date, avoid unfairness on the part of tax- payers if they are required to pay

the tax on past transactions, and so as to give meaning to the express provisions of Section 246 of the Tax Code, pawnshop owners or operators shall become liable to the lending investor‘s tax on their gross income beginning January 1, 1991. Since the deadline for the filing of percentage tax return (BIR Form No. 2529A-0) and the payment of the tax on lending investors covering the first calendar quarter of 1991 has already lapsed, taxpayers are given up to June 30, 1991 within which to pay the said tax without penalty. If the tax is paid after June 30, 1991, the corresponding penalties shall be assessed and computed from April 21, 1991. Since pawnshops are considered as lending investors effective January 1, 1991, they also become subject to documentary stamp taxes prescribed in Title VII of the Tax Code. BIR Ruling No. 325-88 dated July 13, 1988 is hereby revoked. On 11 September 1997, pursuant to these issuances, the Bureau of Internal Revenue (BIR) issued Assessment Notice No. 81-PT13-94-97-9-118 against Lhuillier demanding payment of deficiency percentage tax in the sum of P3,360,335.11 for 1994 inclusive of interest and surcharges. On 3 October 1997, Lhuillier filed an administrative protest with the Office of the Revenue Regional Director contending that (1) neither the Tax Code nor the VAT Law expressly imposes 5%

percentage tax on the gross income of pawnshops; (2) pawnshops are different from lending investors, which are subject to the 5% percentage tax under the specific provision of the Tax Code; (3) RMO No. 15-91 is not implementing any provision of the Internal Revenue laws but is a new and additional tax measure on pawnshops, which only Congress could enact; (4) RMO No. 15-91 impliedly amends the Tax Code and is therefore taxation by implication, which is proscribed by law; and (5) RMO No. 15-91 is a "class legislation" because it singles out pawnshops among other lending and financial operations. On 12 October 1998, Deputy BIR Commissioner Romeo S. Panganiban issued Warrant of Distraint and/or Levy No. 81-04398 against Lhuillier‘s property for the enforcement and payment of the assessed percentage tax. Its protest having been unacted upon, Lhuillier, in a letter dated 3 March 1998, elevated the matter to the CIR. Still, the protest was not acted upon by the CIR. Thus, on 11 November 1998, Lhuillier filed a "Notice and Memorandum on Appeal" with the Court of Tax Appeals invoking Section 228 of Republic Act No. 8424, otherwise known as the Tax Reform Act of 1997, which provides: Section 228. Protesting of Assessment. …

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable. The case was docketed as CTA Case No. 5690. On 19 November 1998, the CIR filed with the CTA a motion to dismiss Lhuillier‘s petition on the ground that it did not state a cause of action, as there was no action yet on the protest. Lhuillier opposed the motion to dismiss and moved for the issuance of a writ of preliminary injunction praying that the BIR be enjoined from enforcing the warrant of distraint and levy. For Lhuillier‘s failure to appear on the scheduled date of hearing, the CTA denied the motion for the issuance of a writ of preliminary injunction. However, on Lhuillier‘s motion for reconsideration, said denial was set aside and a hearing on the motion for the issuance of a writ of preliminary injunction was set.

On 30 June 1999, after due hearing, the CTA denied the CIR‘s motion to dismiss and granted Lhuillier‘s motion for the issuance of a writ of preliminary injunction. On 13 December 2000, the CTA rendered a decision declaring (1) RMO No. 15-91 and RMC No. 43-91 null and void insofar as they classify pawnshops as lending investors subject to 5% percentage tax; and (2) Assessment Notice No. 81-PT-13-94-97-9-118 as cancelled, withdrawn, and with no force and effect.2 Dissatisfied, the CIR filed a petition for review with the Court of Appeals praying that the aforesaid decision be reversed and set aside and another one be rendered ordering Lhuillier to pay the 5% lending investor‘s tax for 1994 with interests and surcharges. Upon due consideration of the issues presented by the parties in their respective memoranda, the Court of Appeals affirmed the CTA decision on 20 November 2001. The CIR is now before this Court via this petition for review on certiorari, alleging that the Court of Appeals erred in holding that pawnshops are not subject to the 5% lending investor‘s tax. He invokes then Section 116 of the Tax Code, which imposed a 5% percentage tax on lending investors. He argues that the legal definition of lending investors provided in Section 157 (u) of the Tax Code is broad enough to include pawnshop operators. Section 3 of Presidential Decree No. 114 states that the principal

business activity of a pawnshop is lending money; thus, a pawnshop easily falls under the legal definition of lending investors. RMO No. 15-91 and RMC No. 43-91, which subject pawnshops to the 5% lending investor‘s tax based on their gross income, are valid. Being mere interpretations of the NIRC, they need not be published. Lastly, the CIR invokes the case of Commissioner of Internal Revenue vs. Agencia Exquisite of Bohol, Inc.,3 where the Court of Appeals‘ Special Fourteenth Division ruled that a pawnshop is subject to the 5% lending investor‘s tax.4 Lhuillier, on the other hand, maintains that before and after the amendment of the Tax Code by E.O. No. 273, which took effect on 1 January 1988, pawnshops and lending investors were subjected to different tax treatments. Pawnshops were required to pay an annual fixed tax of only P1,000, while lending investors were subject to a 5% percentage tax on their gross income in addition to their fixed annual taxes. Accordingly, during the period from April 1982 up to December 1990, the CIR consistently ruled that a pawnshop is not a lending investor and should not therefore be required to pay percentage tax on its gross income. Lhuillier likewise asserts that RMO No. 15-91 and RMC No. 4391 are not implementing rules but are new and additional tax measures, which only Congress is empowered to enact. Besides,

they are invalid because they have never been published in the Official Gazette or any newspaper of general circulation. Lhuillier further points out that pawnshops are strictly regulated by the Central Bank pursuant to P.D. No. 114, otherwise known as The Pawnshop Regulation Act. On the other hand, there is no special law governing lending investors. Due to the wide differences between the two, pawnshops had never been considered as lending investors for tax purposes. In fact, in 1994, Congress passed House Bill No. 11197,5 which attempted to amend Section 116 of the NIRC, as amended, to include owners of pawnshops as among those subject to percentage tax. However, the Senate Bill and the subsequent Bicameral Committee version, which eventually became the E-VAT Law, did not incorporate such proposed amendment. Lastly, Lhuillier argues that following the maxim in statutory construction "expressio unius est exclusio alterius," it was not the intention of the Legislature to impose percentage taxes on pawnshops because if it were so, pawnshops would have been included as among the businesses subject to the said tax. Inasmuch as revenue laws impose special burdens upon taxpayers, the enforcement of such laws should not be extended by implication beyond the clear import of the language used.

We are therefore called upon to resolve the issue of whether pawnshops are subject to the 5% lending investor‘s tax. Corollary to this issue are the following questions: (1) Are RMO No. 15-91 and RMC No. 43-91 valid? (2) Were they issued to implement Section 116 of the NIRC of 1977, as amended? (3) Are pawnshops considered "lending investors" for the purpose of the imposition of the lending investor‘s tax? (4) Is publication necessary for the validity of RMO No. 15-91 and RMC No. 43-91. RMO No. 15-91 and RMC No. 43-91 were issued in accordance with the power of the CIR to make rulings and opinions in connection with the implementation of internal revenue laws, which was bestowed by then Section 245 of the NIRC of 1977, as amended by E.O. No. 273.6 Such power of the CIR cannot be controverted. However, the CIR cannot, in the exercise of such power, issue administrative rulings or circulars not consistent with the law sought to be applied. Indeed, administrative issuances must not override, supplant or modify the law, but must remain consistent with the law they intend to carry out. Only Congress can repeal or amend the law.7 The CIR argues that both issuances are mere rules and regulations implementing then Section 116 of the NIRC, as amended, which provided:

SEC. 116. Percentage tax on dealers in securities; lending investors. - Dealers in securities and lending investors shall pay a tax equivalent to six (6) per centum of their gross income. Lending investors shall pay a tax equivalent to five (5%) percent of their gross income. It is clear from the aforequoted provision that pawnshops are not specifically included. Thus, the question is whether pawnshops are considered lending investors for the purpose of imposing percentage tax. We rule in the negative. Incidentally, we observe that both parties, as well as the Court of Tax Appeals and the Court of Appeals, refer to the National Internal Revenue Code as the Tax Code. They did not specify whether the provisions they cited were taken from the NIRC of 1977, as amended, or the NIRC of 1986, as amended. For clarity, it must be pointed out that the NIRC of 1977 as renumbered and rearranged by E.O. No. 273 is a later law than the NIRC of 1986, as amended by P.D. Nos. 1991, 1994, 2006 and 2031. The citation of the specific Code is important for us to determine the intent of the law. Under Section 157(u) of the NIRC of 1986, as amended, the term lending investor includes "all persons who make a practice of lending money for themselves or others at interest." A pawnshop,

on the other hand, is defined under Section 3 of P.D. No. 114 as "a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably, with pawnbroker or pawn brokerage." While it is true that pawnshops are engaged in the business of lending money, they are not considered "lending investors" for the purpose of imposing the 5% percentage taxes for the following reasons: First. Under Section 192, paragraph 3, sub-paragraphs (dd) and (ff), of the NIRC of 1977, prior to its amendment by E.O. No. 273, as well as Section 161, paragraph 2, sub-paragraphs (dd) and (ff), of the NIRC of 1986, pawnshops and lending investors were subjected to different tax treatments; thus: (3) Other Fixed Taxes. – The following fixed taxes shall be collected as follows, the amount stated being for the whole year, when not otherwise specified: ….

(dd) Lending investors – 1. In chartered cities and first class municipalities, one thousand pesos;

2. In second and third class municipalities, five hundred pesos; 3. In fourth and fifth class municipalities and municipal districts, two hundred fifty pesos: Provided, That lending investors who do business as such in more than one province shall pay a tax of one thousand pesos. ….

(ff) Pawnshops, one thousand pesos (underscoring ours) Second. Congress never intended pawnshops to be treated in the same way as lending investors. Section 116 of the NIRC of 1977, as renumbered and rearranged by E.O. No. 273, was basically lifted from Section 1758 of the NIRC of 1986, which treated both tax subjects differently. Section 175 of the latter Code read as follows: Sec. 175. Percentage tax on dealers in securities, lending investors. -- Dealers in securities shall pay a tax equivalent to six (6%) percent of their gross income. Lending investors shall pay a tax equivalent to five (5%) percent of their gross income. (As amended by P.D. No. 1739, P.D. No. 1959 and P.D. No. 1994). We note that the definition of lending investors found in Section 157 (u) of the NIRC of 1986 is not found in the NIRC of 1977, as amended by E.O. No. 273, where Section 116 invoked by the CIR is found. However, as emphasized earlier, both the NIRC of 1986

and the NIRC of 1977 dealt with pawnshops and lending investors differently. Verily then, it was the intent of Congress to deal with both subjects differently. Hence, we must likewise interpret the statute to conform with such legislative intent. Third. Section 116 of the NIRC of 1977, as amended by E.O. No. 273, subjects to percentage tax dealers in securities and lending investors only. There is no mention of pawnshops. Under the maxim expressio unius est exclusio alterius, the mention of one thing implies the exclusion of another thing not mentioned. Thus, if a statute enumerates the things upon which it is to operate, everything else must necessarily and by implication be excluded from its operation and effect.9 This rule, as a guide to probable legislative intent, is based upon the rules of logic and natural workings of the human mind.10 Fourth. The BIR had ruled several times prior to the issuance of RMO No. 15-91 and RMC 43-91 that pawnshops were not subject to the 5% percentage tax imposed by Section 116 of the NIRC of 1977, as amended by E.O. No. 273. This was even admitted by the CIR in RMO No. 15-91 itself. Considering that Section 116 of the NIRC of 1977, as amended, was practically lifted from Section 175 of the NIRC of 1986, as amended, and there being no change in the law, the interpretation thereof should not have been altered.

It may not be amiss to state that, as pointed out by the respondent, pawnshops was sought to be included as among those subject to 5% percentage tax by House Bill No. 11197 in 1994. Section 13 thereof reads: Section 13. Section 116 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows: "SEC. 116. Percentage tax on dealers in securities; lending investors; OWNERS OF PAWNSHOPS; FOREIGN CURRENCY DEALERS AND/OR MONEY CHANGERS. – Dealers in securities shall pay a tax equivalent to Six (6%) per centum of their gross income. Lending investors, OWNERS OF PAWNSHOPS AND FOREIGN CURRENCY DEALERS AND/OR MONEY CHANGERS shall pay a tax equivalent to Five (5%) percent of their gross income." If pawnshops were covered within the term lending investor, there would have been no need to introduce such amendment to include owners of pawnshops. At any rate, such proposed amendment was not adopted. Instead, the approved bill which became R.A. No. 771611 repealed Section 116 of NIRC of 1977, as amended, which was the basis of RMO No. 15-91 and RMC No. 43-91; thus: SEC. 20. Repealing Clauses. -- The provisions of any special law relative to the rate of franchise taxes are hereby expressly

repealed. Sections 113, 114 and 116 of the National Internal Revenue Code are hereby repealed. Section 21 of the same law provides that the law shall take effect fifteen (15) days after its complete publication in the Official Gazette or in at least two (2) national newspapers of general circulation whichever comes earlier. R.A. No. 7716 was published in the Official Gazette on 1 August 199412; in the Journal and Malaya newspapers, on 12 May 1994; and in the Manila Bulletin, on 5 June 1994. Thus, R.A. No. 7716 is deemed effective on 27 May 1994. Since Section 116 of the NIRC of 1977, which breathed life on the questioned administrative issuances, had already been repealed, RMO 15-91 and RMC 43-91, which depended upon it, are deemed automatically repealed. Hence, even granting that pawnshops are included within the term lending investors, the assessment from 27 May 1994 onward would have no leg to stand on. Adding to the invalidity of the RMC No. 43-91 and RMO No. 1591 is the absence of publication. While the rule-making authority of the CIR is not doubted, like any other government agency, the CIR may not disregard legal requirements or applicable principles in the exercise of quasi-legislative powers.

Let us first distinguish between two kinds of administrative issuances: the legislative rule and the interpretative rule. A legislative rule is in the nature of subordinate legislation, designed to implement a primary legislation by providing the details thereof. An interpretative rule, on the other hand, is designed to provide guidelines to the law which the administrative agency is in charge of enforcing.13 In Misamis Oriental Association of Coco Traders, Inc. vs. Department of Finance Secretary,14 this Tribunal ruled: … In

the same way that laws must have the benefit of public

hearing, it is generally required that before a legislative rule is adopted there must be hearing. In this connection, the Administrative Code of 1987 provides: Public Participation. - If not otherwise required by law, an agency shall, as far as practicable, publish or circulate notices of proposed rules and afford interested parties the opportunity to submit their views prior to the adoption of any rule. (2) In the fixing of rates, no rule or final order shall be valid unless the proposed rates shall have been published in a newspaper of general circulation at least two weeks before the first hearing thereon.

(3) In case of opposition, the rules on contested cases shall be observed. In addition, such rule must be published. When an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance, for it gives no real consequence more than what the law itself has already prescribed. When, on the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law.15 RMO No. 15-91 and RMC No. 43-91 cannot be viewed simply as implementing rules or corrective measures revoking in the process the previous rulings of past Commissioners. Specifically, they would have been amendatory provisions applicable to pawnshops. Without these disputed CIR issuances, pawnshops would not be liable to pay the 5% percentage tax, considering that they were not specifically included in Section 116 of the NIRC of 1977, as amended. In so doing, the CIR did not simply interpret the law. The due observance of the requirements of notice, hearing, and publication should not have been ignored.

There is no need for us to discuss the ruling in CA-G.R. SP No. 59282 entitled Commissioner of Internal Revenue v. Agencia Exquisite of Bohol Inc., which upheld the validity of RMO No. 1591 and RMC No. 43-91. Suffice it to say that the judgment in that case cannot be binding upon the Supreme Court because it is only a decision of the Court of Appeals. The Supreme Court, by tradition and in our system of judicial administration, has the last word on what the law is; it is the final arbiter of any justifiable controversy. There is only one Supreme Court from whose decisions all other courts should take their bearings.16 In view of the foregoing, RMO No. 15-91 and RMC No. 43-91 are hereby declared null and void. Consequently, Lhuillier is not liable to pay the 5% lending investor‘s tax. WHEREFORE, the petition is hereby DISMISSED for lack of merit. The decision of the Court of Appeals of 20 November 2001 in CA-G.R. SP No. 62463 is AFFIRMED. SO ORDERED.

Footnotes 1

Rollo, 18-24. Per Associate Justice Edgardo P. Cruz, with then

Presiding Justice (now Supreme Court Associate Justice) Alicia

Austria-Martinez and Associate Justice Hilarion L. Aquino concurring. 2

Rollo, 25-33. Per Associate Judge Ramon O. de Veyra, with

Presiding Judge Ernesto D. Acosta and Associate Judge Amancio Q. Saga concurring. 3

CA-G.R. SP No. 59282, 23 March 2001.

4

Rollo, 35-44.

5

Entitled An Act Restructuring the Value-Added Tax (VAT)

System to Widen its Tax Base and Enhance its Administration, Amending for These Purposes Sections … 116 of Title V … of the National Internal Revenue Code, as Amended. 6

Now Sections 244 and 245 of R.A. No. 8424, otherwise known

as the Tax Reform Act of 1997. 7

Commissioner of Internal Revenue v. Court of Appeals, G.R. No.

108358, 20 January 1995, 240 SCRA 368, 372; Romulo, Mabanta, Buenaventura, Sayoc & De los Angeles v. Home Development Mutual Fund, G.R. No. 131082, 19 June 2000; 333 SCRA 777, 786. 8

Formerly Section 209 of the NIRC of 1977, as amended by P.D.

No. 1739 of 17 September 1980, which read:

Section 209. – Percentage tax on dealers in securities, lending investors. – Dealers in securities and lending investors shall pay a tax equivalent to five per centum on their gross income. 9

Vera v. Fernandez, L-31364, 30 March 1979; 89 SCRA 199,

203. 10

Republic v. Estenzo, L-35376, 11 September 1980; 99 SCRA

651, 656. 11

Entitled An Act Restructuring the Value-added Tax (VAT)

System, Widening Its Tax Base and Enhancing Its Administration, and for These Purposes Amending and Repealing the Relevant Provisions of the National Internal Revenue Code, as amended, and for Other Purposes. 12

90 O.G. 31, 4489.

13

Misamis Oriental Association of Coco Traders, Inc. v.

Department of Finance Secretary, G.R. No. 108524, 10 November 1994, 238 SCRA 63, 69. 14

Supra.

15

Commissioner of Internal Revenue v. Court of Appeals, 329

Phil. 987, 1007 [1996]. 16

GSIS v. Court of Appeals, 334 Phil. 163, 175 [1997], citing Ang

Ping v. RTC of Manila, Br. 40, G.R. No. L-75860, 17 September

1987, 154 SCRA 77 and Tugade v. Court of Appeals, G.R. L47772, 31 August 1978, 85 SCRA 226.

THIRD DIVISION

G.R. No. 103915 October 23, 1995 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TELEFUNKEN SEMICONDUCTOR PHILIPPINES, INC., COURT OF TAX APPEALS, AND THE COURT OF APPEALS, respondents.

ROMERO, J.: This is a petition for review on certiorari of the decision 1 of the Court of Appeals affirming the decision of the Court of Tax Appeals which ordered petitioner to grant a tax credit to private respondent Telefunken Semiconductors Philippines, Inc. (TELEFUNKEN) in the amount of P2,482,042.35 representing contractor's tax allegedly paid erroneously for the period October 1979 to September 1981. The undisputed facts, as found by respondent Court of Tax Appeals (CTA), are as follows: Private respondent Telefunken is a domestic corporation registered with the Board of Investments (BOI) as an export

producer on a preferred pioneer status under Republic Act No. 6135. From October 1979 to September 1981, Telefunken produced semi-conductor devices amounting to P92,843,774.00 which were entirely sold to foreign markets. It filed percentage tax returns on the said exportation declaring a total of P2,482,042.35 as contractor's tax, which was paid and verified to have been received by the government. Telefunken wrote a letter to the Appellate Division of the Bureau of Internal Revenue (BIR) dated January 19, 1982 stating that the payment of contractor's tax of P2,482,042.35 was erroneous and requested its refund or tax credit thereof. Telefunken contended that under the provisions of Section 7 of Republic Act No. 6135 in relation to Section 8 (a) of Republic Act No. 5186 (The Investment Act), it was exempted from the payment of all national internal revenue taxes for the period in question, except for income tax. The sole issue raised by petitioner is whether or not Telefunken, a corporation registered under Republic Act No. 6135 as a pioneer export producer, was exempted from payment of the 3% contractor's tax from October 1979 to September 1981.

The controlling statute is Section 205 (16) of the 1977 National Internal Revenue Code (NLRC), which states: Sec. 205. Contractors, proprietors or operators of dockyards and others. A contractor's tax of three percentum of gross receipts is hereby imposed on the following: xxx xxx xxx (16) Business agents and other independent contractors including private detective or watchman agencies, except gross receipts of a pioneer enterprise registered with the Board of Investments under Republic Act 5186. (As amended by P.D. No. 1457 , June 11, 1978) Petitioner argues that the law speaks of firms registered under Republic Act No. 5186 and thus, the privilege of tax exemption cannot be made to apply to firms registered under Republic Act No. 6135. Specifically, he states that Telefunken is not covered by the Tax Code exemption because "exemption from contractor's tax is extended to pioneer enterprises registered with the Board of Investments under Republic Act No. 5186 in relation to Section 205 of the Tax Code." Firms, such as Telefunken, registered under Section 7 of Republic Act No. 6135 were entitled to a tax exemption, except

income tax, only on a graduated basis. This graduated scale is set out in section 8 (a) of Republic Act No. 5186: Sec. 8. Incentives to a Pioneer Enterprise. In addition to the incentives provided in the preceding section, pioneer enterprises shall be granted the following incentive benefits: (a) Tax Exemption — Exemption from all taxes under the National Internal Revenue Code, except income tax, from the date the area of investment is included in the Investment Priorities Plan , to the following extent: (1) One hundred per cent (100%) for the first five years; (2) Seventy-five per cent (75%) for the sixth through the eighth year; (3) Fifty per cent (50%) for the ninth and tenth years; (4) Twenty per cent (20%) for the eleventh and twelfth years; and (5) Ten per cent (10%) for the thirteenth through the fifteenth year. Provided, That the above schedule shall apply only to enterprises registered in areas included for the first time in the sixth or subsequent Investment Priorities Plan or therein carried over from the previous Investment Priorities Plan. Provided, however, That in areas previously declared preferred and/or carried over

the sixth or subsequent Investment Priorities Plan and wherein enterprises have already registered, the exemption herein provided shall be as follows: (1) One hundred per cent up to December 31, 1972; (2) Seventy-five percent up to December 31, 1975; (3) Fifty per cent up to December 31, 1977; (4) Twenty per cent up to December 31, 1979; (5) Ten per cent up to December 31, 1981. Provided, further, That subject to the approval of the National Economic and Development Authority, the Board may extend the duration of the tax exemption provided in any bracket for pioneer projects whose total costs would exceed one hundred million pesos (P100,000,000.00), subject to the condition that in no case shall the total period of exemption herein exceed twenty (20) years. (As amended by Presidential Decree No. 92 of January 6, 1973) Petitioner contends that for Telefunken to gualify for total exemption, aside from its reqistration under Republic Act No. 6135, it must also be registered with the BOI under Republic Act No. 5186. We find petitioner's contentions to be devoid of merit.

Section 7 of Republic Act No. 6135 (the law under which Telefunken is registered) provides that registered export producers in a pioneer status are entitled to the incentives provided insection 8 (a) of Republic Act No. 5186. It states: Sec. 7. Incentives to registered export producers — Registered export producers. — Registered export producers unless they already enjoy the same privileges under other laws shall be entitled to the incentives set forth in parahraphs (h), (i) and (j) of Section 7 of Republic Act Numbered Fifty-one hundred eigthy-six, known as the Investment Incentives Act; and registered export producers that are pioneer enterprises shall be entitled also to the incentives set forth in paragraphs (a), (b) and (c) of Section 8 of the said Act. In addition to the said incentives, and in lieu of other incentives provided in Section 7 and in Section 9 of that Act, registered export producer shall be entitled to benefits and incentives as enumerated hereunder: xxx xxx xxx (Emphasis supplied) We find no ambiguity in the law. When construed together, the above-quoted provisions yield no other conclusion but that gross receipts of a pioneer enterprise registered with the Board of

Investments, such as Telefunken, are exempt from the contractor's tax. This is in accordance with the policy of the government, as declared in Section 2 of Republic Act No. 6135: . . . to actively encourage, promote, and diversify exports of services and of manufacturers utilizing domestic raw materials to the fullest extent possible, and to develop new markets for Philippine products, in order to attain a rising level of production and employment, increase foreign exchange earnings, hasten the economic development of the nation, and ensure that the benefits of development accrue to the Filipino people. There is no difference between the gross receipts of pioneer enterprises registered with the Board of Investments under Republic Act No. 6135 and the gross receipts of registered pioneer enterprises under Republic Act No. 5186. In fact, petitioner himself had ruled in this vein on February 4, 1974 in the case of Asian Transmission Corporation. 2 Petitioner, in that case, said: This refers to your letters dated November 29 and December 19, 1973 requesting a ruling as to whether your contractors namely, C.E. Construction Corporation and Marsteel Corporation are exempt from the payment of the 3% contractor's tax prescribed under Section 191(16) of the Tax Code. It appears that your application for registration as export producer under Republic

Act No. 6135 has been approved by the Board of Investments on January 8, 1974 on a pioneer status. In reply, I have the honor to inform you that under the last paragraph of Section 191(16) of the Tax Code, gross receipts . . . from a pioneer industry registered with the Board of Investments under the provisions of Republic Act Numbered Five Thousand One Hundred and eighty-six', are exempt from the contractor's tax. It is clear that the intention of the law is to relieve the pioneer industry from ultimately shouldering the contractor's tax which could be passed on to it legally by its contractor. Pursuant to Section 7 of Republic Act No. 6135, that corporation as a registered export producer on a pioneer status is entitled to the same tax incentives granted to a pioneer industry set forth in section 8(a) of republic Act No. 5186. Under this latter provision, a pioneer industry is exempt from all taxes under the National Internal Revenue Code, except income tax. In other words, both a registered export producer on a pioneer status under Republic Act No. 6135 and a pioneer industry under Republic Act No. 5186 are entitled to the same tax exemption benefits under the Tax Code. Such being the case, like the latter, the former should not also shoulder the contractor's tax which could be passed on it legally by its contractor.

In view thereof, the gross receipts derived by C.E. Construction Corporation and Marsteel Corporation from the construction of your transmission plant in Canlubang, Laguna, are exempt from the 3% contractor's tax. (Emphasis supplied) Petitioner now maintains that this 1974 ruling has been abrogated with the passage of the 1977 Tax Code, Section 205(16) which expressly mentions only pioneer enterprises registered with the Board of Investments under Republic Act No. 5186 as exempt from the contractor's tax, with no reference being made regarding pioneer enterprises registered under Republic Act No. 6135. When petitioner made his 1974 ruling, he based the same on Section 191(16) of the Tax Code which states: Sec. 191. Contractors, proprietors or operators of dockyards, and others. — A contractor's tax of three per centum of the gross receipts is hereby imposed on the following: xxx xxx xxx (16) Business agents and other independent contractors except persons, associations and corporations under contract for embroidery and apparel for export, as well as their agents and contractors and except gross receipts of or from a pioneer industry registered with the Board of Investments under the provisions of

Republic Act Numbered Five Thousand one hundred and eightysix. (Emphasis supplied) A comparison of the above with the previously quoted Section 205(16) of the 1977 Tax Code reveals that both provisions specifically mention pioneer industries registered with the Board of Investments under Republic Act No. 5186 as exempt from payment of the contractor's tax. In fact, the wording of the relevant part at both provisions are the same. Clearly, Telefunken falls under the category of "pioneer industries" contemplated under Section 205(16) and should be entitled to the exemption provided for. Lastly, under Sec. 246 of the National Internal Revenue Code, rulings of the BIR may not be given retroactive effect, if the same is prejudicial to the taxpayer. 3 WHEREFORE, the decision of the Court of Appeals is hereby AFFIRMED. No costs. SO ORDERED.

Footnotes

1 CA-G.R. SP No. 22910, Luis A. Javellana, J., ponente, Serafin V.C. Guingona and Cancio C. Garcia, JJ., concurring; Rollo, p. 23. 2 Rollo, p. 28-30. 3 Sec. 246. Non-retroactivity of rulings. — Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers except in the following cases: (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith.

SECOND DIVISION

COMMISSIONER OF

G.R. Nos. 134587 & 134588

INTERNAL REVENUE, Petitioner,

Present:

PUNO, J., Chairman, - versus -

AUSTRIA-MARTINEZ, CALLEJO, SR., TINGA, and

CHICO-NAZARIO, JJ. BENGUET CORPORATION, Respondent. Promulgated:

July 8, 2005

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

DECISION

TINGA, J.:

This is a petition for the review of a consolidated Decision of the Former Fourteenth Division of the Court of Appeals[1] ordering the Commissioner of Internal Revenue to award tax credits to Benguet Corporation in the amount corresponding to the input value added taxes that the latter had incurred in relation to its sale of gold to the Central Bank during the period of 01 August 1989 to 31 July 1991.

Petitioner is the Commissioner of Internal Revenue (―petitioner‖) acting in his official capacity as head of the Bureau of Internal Revenue (BIR), an attached agency of the Department of Finance,[2] with the authority, inter alia, to determine claims for refunds or tax credits as provided by law.[3]

Respondent Benguet Corporation (―respondent‖) is a domestic corporation organized and existing by virtue of Philippine laws, engaged in the exploration, development and operation of mineral resources, and the sale or marketing thereof to various entities.[4] Respondent is a value added tax (VAT) registered enterprise.[5] The transactions in question occurred during the period between 1988 and 1991. Under Sec. 99 of the National Internal Revenue Code (NIRC),[6] as amended by Executive Order (E.O.) No. 273 s. 1987, then in effect, any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar transactions and any person who imports goods is liable for output VAT at rates of either 10% or 0% (―zerorated‖) depending on the classification of the transaction under Sec. 100 of the NIRC. Persons registered under the VAT system[7] are allowed to recognize input VAT, or the VAT due from or paid by it in the course of its trade or business on importation of goods or local purchases of goods or service, including lease or use of properties, from a VAT-registered person.[8]

In January of 1988, respondent applied for and was granted by the BIR zero-rated status on its sale of gold to Central Bank.[9]

On 28 August 1988, Deputy Commissioner of Internal Revenue Eufracio D. Santos issued VAT Ruling No. 3788-88, which declared that ―[t]he sale of gold to Central Bank is considered as export sale subject to zero-rate pursuant to Section 100[[10]] of the Tax Code, as amended by Executive Order No. 273.” The BIR came out with at least six (6) other issuances[11] reiterating the zero-rating of sale of gold to the Central Bank, the latest of which is VAT Ruling No. 036-90 dated 14 February 1990.[12]

Relying on its zero-rated status and the above issuances, respondent sold gold to the Central Bank during the period of 1 August 1989 to 31 July 1991 and entered into transactions that resulted in input VAT incurred in relation to the subject sales of gold. It then filed applications for tax refunds/credits corresponding to input VAT for the amounts[13] of P46,177,861.12,[14]

P19,218,738.44,[15] and P84,909,247.96.[16] Respondent‘s applications were either unacted upon or expressly disallowed by petitioner.[17] In addition, petitioner issued a deficiency assessment against respondent when, after applying respondent‘s creditable input VAT costs against the retroactive 10% VAT levy, there resulted a balance of excess output VAT.[18]

The express disallowance of respondent‘s application for refunds/credits and the issuance of deficiency assessments against it were based on a BIR ruling-BIR VAT Ruling No. 008-92 dated 23 January 1992-that was issued subsequent to the consummation of the subject sales of gold to the Central Bank which provides that sales of gold to the Central Bank shall not be considered as export sales and thus, shall be subject to 10% VAT. In addition, BIR VAT Ruling No. 008-92 withdrew, modified, and superseded all inconsistent BIR issuances. The relevant portions of the ruling provides, thus:

1. In general, for purposes of the term ―export sales‖ only direct export sales and foreign currency denominated sales, shall be qualified for zero-rating.

....

4. Local sales of goods, which by fiction of law are considered export sales (e.g., the Export Duty Law considers sales of gold to the Central Bank of the Philippines, as export sale). This transaction shall not be considered as export sale for VAT purposes.

....

[A]ll Orders and Memoranda issued by this Office inconsistent herewith are considered withdrawn, modified or superseded.‖ (Emphasis supplied)

The BIR also issued VAT Ruling No. 059-92 dated 28 April 1992 and Revenue Memorandum Order No. 22-92 which decreed that the revocation of VAT Ruling No. 3788-88 by VAT Ruling No. 008-92 would not unduly prejudice mining companies and, thus, could be applied retroactively.[19]

Respondent filed three separate petitions for review with the Court of Tax Appeals (CTA), docketed as CTA Case No. 4945, CTA Case No. 4627, and the consolidated cases of CTA Case Nos. 4686 and 4829.

In the three cases, respondent argued that a retroactive application of BIR VAT Ruling No. 008-92 would violate Sec. 246 of the NIRC, which mandates the non-retroactivity of rulings or circulars issued by the Commissioner of Internal Revenue that would operate to prejudice the taxpayer. Respondent then discussed in detail the manner and extent by which it was prejudiced by this retroactive application.[20] Petitioner on the other hand, maintained that BIR VAT Ruling No. 008-92 is, firstly, not void and entitled to great respect, having been issued by the body charged with the duty of administering the VAT law, and secondly, it may validly be given retroactive effect since it was not prejudicial to respondent.

In three separate decisions,[21] the CTA dismissed respondent‘s respective petitions. It held, with Presiding Judge Ernesto D. Acosta dissenting, that no prejudice had befallen respondent by virtue of the retroactive application of BIR VAT Ruling No. 008-

92, and that, consequently, the application did not violate Sec. 246 of the NIRC.[22]

The CTA decisions were appealed by respondent to the Court of Appeals. The cases were docketed therein as CA-G.R. SP Nos. 37205, 38958, and 39435, and thereafter consolidated. The Court of Appeals, after evaluating the arguments of the parties, rendered the questioned Decision reversing the Court of Tax Appeals insofar as the latter had ruled that BIR VAT Ruling No. 008-92 did not prejudice the respondent and that the same could be given retroactive effect.

In its Decision, the appellate court held that respondent suffered financial damage equivalent to the sum of the disapproved claims. It stated that had respondent known that such sales were subject to 10% VAT, which rate was not the prevailing rate at the time of the transactions, respondent would have passed on the cost of the input taxes to the Central Bank.

It also ruled that

the remedies which the CTA supposed would eliminate any resultant prejudice to respondent were not sufficient palliatives as the monetary values provided in the supposed remedies do not approximate the monetary values of the tax credits that

respondent lost after the implementation of the VAT ruling in question.

It

cited

Manila Mining Corporation v. Commissioner of Internal Revenue,[23] in which the Court of Appeals held[24] that BIR VAT Ruling No. 008-92 cannot be given retroactive effect. Lastly, the Court of Appeals observed that R.A. 7716, the ―The New Expanded VAT Law,‖ reveals the intent of the lawmakers with regard to the treatment of sale of gold to the Central Bank since the amended version therein of Sec. 100 of the NIRC expressly provides that the sale of gold to the Bangko Sentral ng Pilipinas is an export sale subject to 0% VAT rate. The appellate court thus allowed respondent‘s claims, decreeing in its dispositive portion, viz:

WHEREFORE, the appealed decision is hereby REVERSED. The respondent Commissioner of Internal Revenue is ordered to award the following tax credits to petitioner. 1)

In CA-G.R. SP No. 37209 – P49,611,914.00

2)

in CA-G.R. SP No. 38958 - P19,218,738.44

3)

in CA-G.R. SP No. 39435 - P84,909,247.96[25]

Dissatisfied with the above ruling, petitioner filed the instant Petition for Review questioning the determination of the Court of Appeals that the retroactive application of the subject issuance was prejudicial to respondent and could not be applied retroactively.

Apart from the central issue on the validity of the retroactive application of VAT Ruling No. 008-92, the question of the validity of the issuance itself has been touched upon in the pleadings, including a reference made by respondent to a Court of Appeals Decision holding that the VAT Ruling had no legal basis.[26] For its part, as the party that raised this issue, petitioner spiritedly defends the validity of the issuance.[27] Effectively, however, the question is a non-issue and delving into it would be a needless exercise for, as respondent emphatically pointed out in its Comment, ―unlike petitioner‘s formulation of the issues, the only real issue in this case is whether VAT Ruling No. 008-92 which revoked previous rulings of the petitioner which respondent heavily relied upon . . . may be legally applied retroactively to respondent.‖[28] This Court need not invalidate the BIR issuances, which have the force and effect of law, unless the issue of validity is so crucially at the heart of the controversy that the Court cannot resolve the case without having to strike down

the issuances.

Clearly, whether the subject VAT ruling may

validly be given retrospective effect is the lis mota in the case. Put in another but specific fashion, the sole issue to be addressed is whether respondent‘s sale of gold to the Central Bank during the period when such was classified by BIR issuances as zero-rated could be taxed validly at a 10% rate after the consummation of the transactions involved.

In a long line of cases,[29] this Court has affirmed that the rulings, circular, rules and regulations promulgated by the Commissioner of Internal Revenue would have no retroactive application if to so apply them would be prejudicial to the taxpayers. In fact, both petitioner[30] and respondent[31] agree that the retroactive application of VAT Ruling No. 008-92 is valid only if such application would not be prejudicial to the respondent– pursuant to the explicit mandate under Sec. 246 of the NIRC, thus:

Sec. 246. Non-retroactivity of rulings.- Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification

or reversal will be prejudicial to the taxpayers except in the following cases: (a) where the taxpayer deliberately misstates or omits material facts from his return on any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different form the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith. (Emphasis supplied)

In that regard, petitioner submits that respondent would not be prejudiced by a retroactive application; respondent maintains the contrary. Consequently, the determination of the issue of retroactivity hinges on whether respondent would suffer prejudice from the retroactive application of VAT Ruling No. 00892.

We agree with the Court of Appeals and the respondent.

To begin with, the determination of whether respondent had suffered prejudice is a factual issue. It is an established rule that in the exercise of its power of review, the Supreme Court is not a trier of facts. Moreover, in the exercise of the Supreme Court‘s

power of review, the findings of facts of the Court of Appeals are conclusive and binding on the Supreme Court.[32] An exception to this rule is when the findings of fact a quo are conflicting,[33] as is in this case.

VAT is a percentage tax imposed at every stage of the distribution process on the sale, barter, exchange or lease of goods or properties and rendition of services in the course of trade or business, or the importation of goods.[34] It is an indirect tax, which may be shifted to the buyer, transferee, or lessee of the goods, properties, or services.[35] However, the party directly liable for the payment of the tax is the seller.[36]

In transactions taxed at a 10% rate, when at the end of any given taxable quarter the output VAT exceeds the input VAT, the excess shall be paid to the government; when the input VAT exceeds the output VAT, the excess would be carried over to VAT liabilities for the succeeding quarter or quarters.[37] On the other hand, transactions which are taxed at zero-rate do not result in any output tax. Input VAT attributable to zero-rated sales could be refunded or credited against other internal revenue taxes at the option of the taxpayer.[38]

To illustrate, in a zero-rated transaction, when a VAT-registered person (―taxpayer‖) purchases materials from his supplier at P80.00, P7.30[39] of which was passed on to him by his supplier as the latter‘s 10% output VAT, the taxpayer is allowed to recover P7.30 from the BIR, in addition to other input VAT he had incurred in relation to the zero-rated transaction, through tax credits or refunds. When the taxpayer sells his finished product in a zero-rated transaction, say, for P110.00, he is not required to pay any output VAT thereon. In the case of a transaction subject to 10% VAT, the taxpayer is allowed to recover both the input VAT of P7.30 which he paid to his supplier and his output VAT of P2.70 (10% the P30.00 value he has added to the P80.00 material) by passing on both costs to the buyer.

Thus, the buyer

pays the total 10% VAT cost, in this case P10.00 on the product.

In both situations, the taxpayer has the option not to carry any VAT cost because in the zero-rated transaction, the taxpayer is allowed to recover input tax from the BIR without need to pay output tax, while in 10% rated VAT, the taxpayer is allowed to pass on both input and output VAT to the buyer. Thus, there is an elemental similarity between the two types of VAT ratings in that the taxpayer has the option not to take on any VAT payment for his transactions by simply exercising his right to pass on the VAT costs in the manner discussed above.

Proceeding from the foregoing, there appears to be no upfront economic difference in changing the sale of gold to the Central Bank from a 0% to 10% VAT rate provided that respondent would be allowed the choice to pass on its VAT costs to the Central Bank.

In the instant case, the retroactive application of VAT

Ruling No. 008-92 unilaterally forfeited or withdrew this option of respondent. The adverse effect is that respondent became the unexpected and unwilling debtor to the BIR of the amount equivalent to the total VAT cost of its product, a liability it previously could have recovered from the BIR in a zero-rated scenario or at least passed on to the Central Bank had it known it would have been taxed at a 10% rate.

Thus, it is clear that

respondent suffered economic prejudice when its consummated sales of gold to the Central Bank were taken out of the zero-rated category. The change in the VAT rating of respondent‘s transactions with the Central Bank resulted in the twin loss of its exemption from payment of output VAT and its opportunity to recover input VAT, and at the same time subjected it to the 10% VAT sans the option to pass on this cost to the Central Bank, with the total prejudice in money terms being equivalent to the 10% VAT levied on its sales of gold to the Central Bank.

Petitioner had made its position hopelessly untenable by arguing that ―the deficiency 10% that may be assessable will only be equal to 1/11th of the amount billed to the [Central Bank] rather than 10% thereof. In short, [respondent] may only be charged based on the tax amount actually and technically passed on to the [Central Bank] as part of the invoiced price.”[40] To the Court, the aforequoted statement is a clear recognition that respondent would suffer prejudice in the ―amount actually and technically passed on to the [Central Bank] as part of the invoiced price.‖ In determining the prejudice suffered by respondent, it matters little how the amount charged against respondent is computed,[41] the point is that the amount (equal to 1/11th of the amount billed to the Central Bank) was charged against respondent, resulting in damage to the latter.

Petitioner posits that the retroactive application of BIR VAT Ruling No. 008-92 is stripped of any prejudicial effect when viewed in relation to several available options to recoup whatever liabilities respondent may have incurred, i.e., respondent‘s input VAT may still be used (1) to offset its output VAT on the sales of gold to the Central Bank or on its output VAT on other sales subject to 10% VAT, and (2) as deductions on its income tax under Sec. 29 of the Tax Code.[42]

On petitioner‘s first suggested recoupment modality, respondent counters that its other sales subject to 10% VAT are so minimal that this mode is of little value. Indeed, what use would a credit be where there is nothing to set it off against? Moreover, respondent points out that after having been imposed with 10% VAT sans the opportunity to pass on the same to the Central Bank, it was issued a deficiency tax assessment because its input VAT tax credits were not enough to offset the retroactive 10% output VAT. The prejudice then experienced by respondent lies in the fact that the tax refunds/credits that it expected to receive had effectively disappeared by virtue of its newfound output VAT liability against which petitioner had offset the expected refund/credit. Additionally, the prejudice to respondent would not simply disappear, as petitioner claims, when a liability (which liability was not there to begin with) is imposed concurrently with an opportunity to reduce, not totally eradicate, the newfound liability. In sum, contrary to petitioner‘s suggestion, respondent‘s net income still decreased corresponding to the amount it expected as its refunds/credits and the deficiency assessments against it, which when summed up would be the total cost of the 10% retroactive VAT levied on respondent.

Respondent claims to have incurred further prejudice. In computing its income taxes for the relevant years, the input VAT cost that respondent had paid to its suppliers was not treated by respondent as part of its cost of goods sold, which is deductible from gross income for income tax purposes, but as an asset which could be refunded or applied as payment for other internal revenue taxes. In fact, Revenue Regulation No. 5-87 (VAT Implementing Guidelines), requires input VAT to be recorded not as part of the cost of materials or inventory purchased but as a separate entry called ―input taxes,‖ which may then be applied against output VAT, other internal revenue taxes, or refunded as the case may be.[43] In being denied the opportunity to deduct the input VAT from its gross income, respondent‘s net income was overstated by the amount of its input VAT. This overstatement was assessed tax at the 32% corporate income tax rate, resulting in respondent‘s overpayment of income taxes in the corresponding amount. Thus, respondent not only lost its right to refund/ credit its input VAT and became liable for deficiency VAT, it also overpaid its income tax in the amount of 32% of its input VAT.

This leads us to the second recourse that petitioner has suggested to offset any resulting prejudice to respondent as a consequence of giving retroactive effect to BIR VAT Ruling No.

008-92. Petitioner submits that granting that respondent has no other sale subject to 10% VAT against which its input taxes may be used in payment, then respondent is constituted as the final entity against which the costs of the tax passes-on shall legally stop; hence, the input taxes may be converted as costs available as deduction for income tax purposes.[44]

Even assuming that the right to recover respondent‘s excess payment of income tax has not yet prescribed, this relief would only address respondent‘s overpayment of income tax but not the other burdens discussed above. Verily, this remedy is not a feasible option for respondent because the very reason why it was issued a deficiency tax assessment is that its input VAT was not enough to offset its retroactive output VAT. Indeed, the burden of having to go through an unnecessary and cumbersome refund process is prejudice enough. Moreover, there is in fact nothing left to claim as a deduction from income taxes.

From the foregoing it is clear that petitioner‘s suggested options by which prejudice would be eliminated from a retroactive application of VAT Ruling No. 008-92 are either simply inadequate or grossly unrealistic.

At the time when the subject transactions were consummated, the prevailing BIR regulations relied upon by respondent ordained that gold sales to the Central Bank were zerorated. The BIR interpreted Sec. 100 of the NIRC in relation to Sec. 2 of E.O. No. 581 s. 1980 which prescribed that gold sold to the Central Bank shall be considered export and therefore shall be subject to the export and premium duties. In coming out with this interpretation, the BIR also considered Sec. 169 of Central Bank Circular No. 960 which states that all sales

of

gold

to

the

Central

Bank

are

considered

constructive exports.[45] Respondent should not be faulted for relying on the BIR‘s interpretation of the said laws and regulations.[46] While it is true, as petitioner alleges, that government is not estopped from collecting taxes which remain unpaid on account of the errors or mistakes of its agents and/or officials and there could be no vested right arising from an erroneous interpretation of law, these principles must give way to exceptions based on and in keeping with the interest of justice and fairplay, as has been done in the instant matter. For, it is primordial that every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.[47]

The case of ABS-CBN Broadcasting Corporation v. Court of Tax Appeals[48] involved a similar factual milieu. There the Commissioner of Internal Revenue issued Memorandum Circular No. 4-71 revoking an earlier circular for being ―erroneous for lack of legal basis.‖ When the prior circular was still in effect, petitioner therein relied on it and consummated its transactions on the basis thereof. We held, thus:

. . . .Petitioner was no longer in a position to withhold taxes due from foreign corporations because it had already remitted all film rentals and no longer had any control over them when the new Circular was issued. . . .

....

This Court is not unaware of the well-entrenched principle that the [g]overnment is never estopped from collecting taxes because of mistakes or errors on the part of its agents. But, like other principles of law, this also admits of exceptions in the interest of justice and fairplay. . . .In fact, in the United States, . . . it has been held that the Commissioner [of Internal Revenue] is precluded from adopting a position inconsistent with one

previously taken where injustice would result therefrom or where there has been a misrepresentation to the taxpayer.[49]

Respondent, in this case, has similarly been put on the receiving end of a grossly unfair deal. Before respondent was entitled to tax refunds or credits based on petitioner‘s own issuances. Then suddenly, it found itself instead being made to pay deficiency taxes with petitioner‘s retroactive change in the VAT categorization of respondent‘s transactions with the Central Bank. This is the sort of unjust treatment of a taxpayer which the law in Sec. 246 of the NIRC abhors and forbids.

WHEREFORE, the petition is DENIED for lack of merit. The Decision of the Court of Appeals is AFFIRMED. No pronouncement as to costs. SO ORDERED.

[1]Resolving CA-G.R. SP Nos. 37205, 38958, and 39435, promulgated on 10 July 1998; penned by Justice Buenaventura J. Guerrero, concurred in by Justice Portia Aliño-Hormachuelos and Justice Renato C. Dacudao of the Former Fourteenth

Division. Rollo in G.R. No. 134588, pp. 38-52. N.B.: The two docket numbers assigned to this single petition were the result of petitioner‘s filing of two motions for extension of time to file petition for review on certiorari, the first, for CA-G.R. No. 38598 by Assistant Solicitor General Azucena Balanon-Corpuz and Associate Solicitor Sarah Jane T. Fernandez docketed herein as G.R. No. 134587, the second for CA-GR No. 37205 by Assistant Solicitor General Ramon G. del Rosario and Solicitor Ma. Theresa G. San Juan, docketed as G.R. No. 134588. There is only one petition, however, since the subject cases of the two motions for extension of time were consolidated at the level of the Court of Appeals and subject of the assailed Decision. [2]See E.O. 292 s. 1987, Book IV Title II, Chapter 4, Sec. 16. [3]Rollo in G.R. No. 134588, pp. 7-8. [4]Id. at 190. [5]With VAT Registration No. 311-9-000027 issued on 1 January 1988, id. at 39. [6]P.D. No. 1158, s. 1977, prior to its amendment by R.A. No. 7716 (1994) and the enactment of R.A. No. 8284 (1997). [7]Sec. 107 of the NIRC, as amended by E.O. No. 273 s. 1987. [8]Sec. 104 of the NIRC, as amended by E.O. No. 273 s. 1987.

[9]Rollo in G.R. No. 134588, p. 39. [10]Section 100. . . . . [T]he following sales by VAT-registered persons shall be subject to 0%: (1) export sales; and (2) sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate. “Export

sales‖ means the sale and shipment or exportation of

goods in the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported, or foreign currency denominated sales. . . . [11]Memorandum Circular No. 59-88 dated 14 December 1988; VAT Ruling No. 074-88 dated 24 March 1988; VAT Ruling No. 075-88 dated 29 March 1988; VAT Ruling No. 379-88 dated 28 August 1988; and VAT Ruling No. 239-89 dated 20 September 1989. Per respondent‘s Comment, Rollo in G.R. No. 134588, pp. 192-193. [12]Rollo in G.R. No. 134588, p. 192. [13]Other amounts not related to the instant petition are no longer discussed.

[14]For the periods of 1 February 1991 to 30 April 1991 and 1 May 1991 to 31 July 1991, subjects of CTA Case No. 4945, and, on appeal, of CA-G.R. SP No. 37209. [15]For the periods of 1 August 1989 to 31 October 1989 and 1 November 1989 to 31 January 1990, subject of CTA Case No. 4627, and, on appeal, of CA-G.R. SP No. 38958. [16]For the periods of 1 February 1991 to 30 April 1991; 1 May 1991 to 31 July 1991; 1 February 1990 to 30 April 1990; 1 May 1990 to 31 July 1990; 1 August 1990 to 31 October 1990; 1 November 1991 to 31 January 1991 subjects of CTA Case No. 4686 and CTA Case No. 4829, consolidated on appeal of CA-G.R. SP No. 39435. [17]Rollo in G.R. No. 134588, pp. 39-44. [18]Totaling P555,486,073.38 for the period of 1988 to 1991, per respondent‘s Comment, Rollo, p. 194. Although it is uncertain whether the deficiency assessments specified therein correspond to the particular transactions subject of the present petition. [19]Rollo in G.R. No. 134588, p. 195. Petitioner relies heavily on VAT Ruling No. 059-92 which contains a discourse on why the retroactive application of VAT Ruling No. 3788-88 is not prejudicial to mining companies. [20]CA Decision, Rollo in G.R. No. 134588, pp. 44-45.

[21]The Decision in CTA Case No. 4945, promulgated on 26 January 1995, was penned by Associate Judge Ramon O. De Vera, concurred in by Associate Judge Manuel K. Gruba with Dissenting and Concurring Opinion by Presiding Judge Ernesto D. Acosta. The Decision in CTA Case No. 4627, promulgated on 23 June 1995, was penned by Associate Judge Ramon O. De Vera and concurred in by Associate Judge Manuel K. Gruba and Presiding Judge Ernesto D. Acosta. (N.B.: The issue in this case was on substantiation of tax credits. Consequently, this case was not decided on the issue of retroactive application of VAT Ruling No. 008-92.) The Decision in the consolidated cases of CTA Case Nos. 4686 and 4829, promulgated on 27 September 1992, was penned by Associate Judge Ramon O. De Vera, concurred in by Associate Judge Manuel K. Gruba with Dissenting Opinion by Presiding Judge Ernesto D. Acosta. [22]Other matters unrelated to the matter subject of the petition are no longer discussed. [23]CA-G.R. SP No. 38287. [24]Promulgated by the Special Fifth Division composed of Justice Pedro Ramirez, Justice Maximo Asuncion, and ponente Justice Eduardo Montenegro. [25]Rollo in G.R. No. 134588, p. 52.

[26]Respondent‘s Memorandum, Rollo in G.R. No. 134587, p. 41. [27]Rollo in G.R. No. 134588, pp. 18-25. [28]Id. at 199. [29]Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 117982, 06 February 1997, 267 SCRA 557, 564, citing Commissioner of Internal Revenue v. Telefunken Semiconductor Philippines, Inc., G.R. No. 103915, 23 October 1995, 249 SCRA 401; Bank of America v. Court of Appeals, G.R. No. 103092, 21 July 1994, 234 SCRA 302; Commissioner of Internal Revenue v. CTA, G.R. No. L-44007, 20 March 1991, 195 SCRA 444; Commissioner of Internal Revenue v. Mega General Merchandising Corp., G.R. No. 69136, 30 September 1988, 166 SCRA 166; Commissioner of Internal Revenue v. Burroughs, G.R. No. 66653, 19 June 1986, 142 SCRA 324; ABS-CBN v. CTA, G.R. No. 52306, 12 October 1981, 108 SCRA 142. [30]Rollo in G.R. No. 134588, p. 21. [31]Id. at 197. [32]The Philippine American Life and General Insurance Co. v. Gramaje, G.R. No. 156963, 11 November 2004 citing Pestaño v. Sumayang, G.R. No. 139875, 04 December 2000, 346 SCRA 870, 879.

[33]Ibid. [34]H. DE LEON, THE LAW ON TRANSFER AND BUSINESS TAXATION (2000 ed.), p. 135. [35]Sec. 4.99-2, Revenue Regulation No. 7-95 (1995). [36]Supra note 34 at 143. [37]Sec. 112 (B) of the NIRC, as amended. [38]Sec. 112 (B) of the NIRC, as amended. [39]Rounded off to the first decimal for purposes of simplicity. [40]Rollo, p. 29. [41]Whether it is at 10% of invoice price for instances when VAT is billed separately in the invoice or 1/11 of the invoice price for instances when the VAT is not billed by the seller separately in the invoice, in which case the invoice price is deemed to have included the VAT. [42]Rollo in G.R. No. 134588, p. 26. [43]Thus, per the illustration in Revenue Regulation No. 5-87, where ―A‖ sold on account to ―B‖ 100 pieces of merchandise ―X‖ for P1,000.00 plus VAT of P100.00, B should record in his subsidiary purchase book the purchases in the amount of

P1,000.00 and input taxes amounting to P100.00. The journal entry should be: Dr.

Purchase

Input Taxes

P1,000.00 P

Cr.

100.00

Accounts payable

P1,100.00

[44]Rollo in G.R. No. 134588, p. 28. [45]Circular No. 960 dated January 30, 1984. “Sec.

169. Privilege of export oriented firms. Gold producers shall

qualify as export-oriented firms even if their entire output is sold to the Central Bank. “CIRCULAR

No. 1301 Series of 1991 dated August 7, 1991

With reference to Section 169 of Central Bank Circular No. 960 dated October 21, 1983, it is hereby stated, for clarification purposes, that all sales of gold to the Central Bank are considered constructive exports.‖ Section 107(c), C.B. Circular No. 1318 dated January 3, 1992 “All

gold sold to Central Bank by primary and secondary gold

producers and small scale miners are considered constructive when appropriate.‖

[46]In his dissenting opinion in CTA Cases Nos. 4686 & 4829, Presiding Judge (now Justice) Ernesto D. Acosta elucidated on the rationale underlying the CB Circulars, thus: The policy of the Central Bank is to conserve this metal (gold) through purchase at competitive prices, giving incentives to producers and its prudent use through regulations (Section 162, CB Circular No. 960). Towards this end, certain gold producers are required to sell their entire production of gold to the Central Bank (Section 171, CB Circular No. 960) and no person shall export or bring out, or attempt to export or bring out of the Philippines, gold and/or gold-bearing materials, in any shape, form and quantity without prior approval from the CB Export Department. (Section 107, CB Circular No. 1318). It is also in line with aforementioned policy that gold producers are given incentives such as considering their sales to CB as exports. [47]Article 19, Civil Code. [48]195 Phil. 33 (1981). [49]Id. at 41, 43-44.

Tax 1 cases - PDFCOFFEE.COM (2024)

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