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G.R. No. L-18384 September 20, 1965 REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,vs.HEIRS OF CESAR JALANDONI, ET AL., defendants-appellants.Office of the Solicitor General for plaintiff-appellee.Jaime R. Nuevas for defendants-appellants heirs of Cesar Jalandoni.Filemon Flores and Aniano Bagabaldo for defendants-appellants Angeles Jalandoni,et al.

BAUTISTA ANGELO, J .: Isabel Ledesma died intestate on June 23, 1948 leaving real properties situatedin the provinces of Negros Occidental and Rizal and in the cities of Manila andBaguio, and personal properties consisting of shares of stock in various domesticcorporations. She left as heirs her husband Bernardino Jalandoni and three children,namely, Cesar, Angeles and Delfin, all surnamed Jalandoni.

On November 19, 1948, Cesar Jalandoni, one of the heirs, filed an estate andinheritance tax return reporting the following: (1) that the real and personal propertiesowned by the deceased and her surviving husband had a total market value of P1,324,555.80; (2) that after deducting therefrom the conjugal share of her husbandand some expenses the net estate subject to estate tax was P28,148.04; and (3) thatthe amount subject to inheritance tax was P542,225.83. This return also shows thatno testamentary or intestate proceedings were instituted.

On the basis of this return the Bureau of Internal Revenue made an

assessment on November 20, 1948 calling for the payment of the amounts of P31,435.95 and P58,863.52 as estate and inheritance taxes, respectively, statingtherein that the assessment was "to be considered partial pending investigation of thereturn." These sums were paid by Cesar Jalandoni.

After a preliminary investigation was made of the properties reported in theabovementioned return, a second assessment was made on January 27, 1953 by theBureau of Internal Revenue showing that there was due from the estate the amountsof P5,539.67 and P9,899.37 as deficiency estate and inheritance taxes, respectively,for which reason a demand was made on Bernardino Jalandoni stating therein thatthe same was still "to be considered partial pending further investigation of thereturn," which amounts were paid by Bernardino Jalandoni on February 28, 1953.

True to the foregoing reservation, the Bureau of Internal Revenue conductedanother investigation and this time it found (1) that the market value of the lands

reported in the return filed by Cesar Jalandoni was underdeclared in the amount of P365,149.50; (2) that seven lots which were registered in the Talisay-Silay cadastreof Negros Occidental as belonging to the deceased, including their improvements,were omitted from the return the same having a market value of P100,200.00; and (3)the shares of stock owned by the deceased in the Victorias Milling Company,Hawaiian-Philippine Company and Central Azucarera de la Carlota, though includedin the return, were however underdeclared in the amount of P16,355.36, and on thebasis of these findings a third assessment was made against the estate on May 9,1956 wherein the heirs were required to pay the amounts of P29,995.30 andP49,842.05 as deficiency estate and inheritance taxes, respectively, includingaccrued interests, with the warning that failure on their part to pay the same wouldsubject them to the payment of surcharge, interest, and penalty for late payment of the tax.

In answer to this third assessment after notice was served on the administrator

of the estate, Bernardino Jalandoni, Lorenzo J. Teves, in his capacity as counsel of the heirs of the deceased, wrote a letter to the Collector of Internal Revenue setting

up the defense of prescription in the sense that the deficiency in the estate andinheritance taxes payment of which was required therein can no longer be collectedsince more than five years had already elapsed from the filing of the return invoking inhis favor Section 331 of the National Internal Revenue Code. To this defense, theCollector retorted claiming that the stand of counsel cannot be entertained for thereason that, it appearing that the estate and inheritance tax return which was filed bythe administrator or by the heirs contained omissions which amount to fraud indicativeof an intention to evade payment of the proper tax due the government, the taxesthen being collected could still be demanded within ten years from the discovery of

the falsity or omission pursuant to Section 332(a) of said Code, which period had notyet expired, and as a consequence, the assessment notice was reiterated with therequest that the deficiency estate and inheritance taxes therein demanded be settledas soon as possible. And noting that the 30-day period within which the heirs couldappeal the Collector's assessment to the Court of Tax Appeals had already elapsed,while on the other hand they indicated their unwillingness to settle the claim, theCollector of Internal Revenue filed the present case before the Court of First Instanceof Manila pressing the collection of the deficiency estate and inheritance taxesassessed against the heirs of the deceased Isabel Ledesma Jalandoni.

While this case was pending hearing on the merits, the lower court set a datefor pre-trial in an effort to have the parties agree on a stipulation of facts, and thishaving failed, upon request of defendants, the lower court ordered the Collector of Internal Revenue to verify the allegation that the seven lots in Negros Occidentalwhich were claimed not to have been included in the return filed by Cesar Jalandoni

were in fact included therein, and to this effect the Collector designated Examiner Genaro Butas to conduct the examination. In his report Examiner Butas stated that of the seven lots that were previously reported not included in the return, two wereactually declared therein, though he reaffirmed his previous finding as regards theother five lots and the market value of the sugar lands and rice lands left by thedeceased and the value of the shares of stock owned by her in several domesticcorporations.

There being no additional evidence, oral or documentary, submitted by theparties, and passing solely on the allegations appearing in the pleadings whichappear to be undisputed, the trial court rendered its decision on February 16, 1960ordering defendants, jointly and severally, to pay plaintiff the sum of P79,837.35 asestate and inheritance taxes, plus the interest that had accrued thereon as a result of their delinquency. Defendants interposed the present appeal.

It is claimed that the lower court erred in finding that the return submitted byCesar Jalandoni in behalf of the heirs concerning the estate of the deceased for thepurpose of the payment of the required estate and inheritance taxes is false andfraudulent there being no evidence on record showing that said return was filed in badfaith for which reason fraud cannot be imputed to appellants. As against this claimappellee advances the theory that since fraudulent intent is a state of mind whichcannot be proven by direct evidence, the same may be inferred from facts andcircumstances that appear to be undisputed as was done by the court a quo asfollows:

The difference between the amounts appearing in the returns filed andthe undeclared properties of the estate of the deceased is a substantialunderstatement of the true value of the estate in question. The court is of theopinion, and so holds that the tax returns filed were false. A substantialunderstatement of stocks and the omission of seven (7) parcels of land

belonging to the estate of the deceased, makes it impossible for the court tobelieve that the omission or understatements were due to inadvertence,

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negligence, or honest statement of error. Circumstances such as this arecompetent to base a finding of willful intent.1awphîl.nèt

And to bolster up this finding appellee submits the following facts which, itcontends, appear in the record: (1) among the real properties belonging to thedeceased five lots in Negros Occidental, including improvements thereon, with amarket value of P58,570.00 were not included in the return filed by a representative of appellants; (2) the value of the sugar and rice lands that were reported in the returnwere underdeclared in the amount of P365,149.50; and (3) the market value of theshares of stock owned by the deceased in the Victorias Milling Company, Hawaiian-

Philippine Company and the Central Azucarera de la Carlota was underdeclared inthe amount of P16,355.36. In other words, it is claimed that a total amount of P440,074.86 which constitutes real asset of the estate has been deliberately omittedfrom the return thereby evincing an intention to evade the payment of the correctamount of tax due to the government.

We are of the opinion that this finding is neither fair nor reasonable. To beginwith, it should be here noted that when this case was pending hearing on the meritsbefore the lower court, the latter, upon request of appellants, ordered the Collector of Internal Revenue to verify the allegation that there were seven lots in NegrosOccidental which were claimed not to have been included in the return filed by Cesar Jalandoni, and to this effect the Collector designated Examiner Genaro Butas toconduct the examination. Examiner Butas, after conducting the examination,submitted his report the pertinent of which reads:

Lot No. Classification Assessed Value Fair Market Value

493 Sugarland P15,140.00 P21,630.00

710 390.00 550.00

521 21,000.00 30,000.00

954 820.00 1,230.00

939 1,210.00 1,720.00

229Lot 6,080.00 6,080.00

House 12,000.00 12,000.00

228

Commercial 6,400.00 6,400.00

Concrete House 10,000.00 10,000.00

Camarin 500.00 500.00

TOTALP73,650.00 P90,110.00

In other words, from the report of Examiner Butas the following may begleaned: that of the seven lots alleged to have been excluded from the return, threewere actually included, with the particularity that they were the most valuable, to wit:Lot 493 with a market value of P21,630.00; Lot 521 with a market value of P30,000.00; and Lot 229 with a market value of P12,000.00, while another lot was notalso included because it belonged to Delfin Jalandoni, or Lot 228 which, includingimprovements, has a market value of P16,900.00. Hence, from the foregoing we findthat the aggregate value of the aforesaid four lots is P86,610.00 which, if deductedfrom the total value of the seven lots amounting to P90,110.00, gives a balance of P3,500.00 as the value of the three remaining lots. These three lots being conjugalproperty, one-half thereof belonging to the deceased's spouse should still be

deducted, thus leaving a small balance of P1,750.00. If to this we add that, as therecord shows, these three lots were already declared in the return submitted by

Bernardino Jalandoni as part of his property and his wife for purposes of income tax,there is reason to believe that their omission from the return submitted by Cesar Jalandoni was merely due to an honest mistake or inadvertence as properlyexplained by appellants. We can hardly dispute this conclusion as it would bestretching too much the imagination if we would find that, because of suchinadvertence, which appears to be inconsequential, the heirs of the deceaseddeliberately omitted from the return the three lots with the only purpose of defraudingthe government after declaring therein as asset of the estate property worthP1,324,555.80.

The same thing may be said with regard to the alleged undervaluation of certain sugar and rice lands reported by Cesar Jalandoni which appellee fixes atP365,149.50, for the same can at most be considered as the result of an honestdifference of opinion and not necessarily an intention to commit fraud. It should bestated that in the estate and inheritance tax returns submitted by Cesar Jalandoni onNovember 19, 1948 he reported said lands as belonging to the deceased with astatement of what in his opinion represent their reasonable actual value but whichhappened not to tally with the valuation made by the Collector of Internal Revenue.Certainly if there is any mistake in the valuation made by Jalandoni the same can onlybe considered as honest mistake, or one based on excusable inadvertence, he beingnot an expert in appraising real estate. The deficiency assessment, moreover, wasmade by the Collector of Internal Revenue more than five years from the filing of thereturn, and experience shows that such an intervening period is sufficiently long to,warrant an increase in value of real estate which is precisely what was found by the

Collector of Internal Revenue with regard to the lands in question. It is certainly anerror to impute fraud based on an honest difference of opinion.

Finally, we find unreasonable to impute with regard to the appraisal made byappellants of the shares of stock of the deceased in Victorias Milling Company,Hawaiian-Philippine Company and Central Azucarera de la Carlota, simply becauseCesar Jalandoni placed in his return an aggregate market value of P95,480.00,instead of mentioning the book value declared by said corporations in the returns filedby them with the Bureau of Internal Revenue. The fact that the value given in thereturns did not tally with the book value appearing in the corporate books is not initself indicative of fraud especially when we take into consideration the circumstancethat said book value only became known several months after the death of thedeceased. Moreover, it is a known fact that stock securities frequently fluctuate invalue and a mere difference of opinion in relation thereto cannot serve as proper

basis for assessing an intention to defraud the government.Having reached the conclusion that the heirs of the deceased have notcommitted any act indicative of an intention to evade the payment of the inheritanceor estate taxes due the government, as evidenced by their willingness in the past topay all the taxes properly assessed against them, i t is evident that the instant claim of appellee has already prescribed under Section 331 of the National Internal RevenueCode. And with this conclusion, a discussion of the other errors assigned byappellants would seem to be unnecessary.

WHEREFORE, the decision appealed from is reversed and the complaint of appellee is dismissed. No pronouncement as to costs.Bengzon, C.J., Concepcion, Dizon, Makalintal, Bengzon, J.P., and Zaldivar, JJ.,concur.Reyes, J.B.L. and Regala, JJ., took no part.

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G.R. No. L-17618 August 31, 1964 COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.NORTON and HARRISON COMPANY, respondent.Office of the Solicitor General for petitioner.Pio Joven for respondent. PAREDES, J. : This is an appeal interposed by the Commissioner of Internal Revenue against thefollowing judgment of the Court of Tax Appeals:

IN VIEW OF THE FOREGOING, we find no legal basis to support the

assessment in question against petitioner. If at all, the assessment should havebeen directed against JACKBILT, the manufacturer. Accordingly, the decisionappealed from is reversed, and the surety bond filed to guarantee payment of said assessment is ordered cancelled. No pronouncement as to costs.

Norton and Harrison is a corporation organized in 1911, (1) to buy and sell at wholesaleand retail, all kinds of goods, wares, and merchandise; (2) to act as agents of manufacturers in the United States and foreign countries; and (3) to carry on and conducta general wholesale and retail mercantile establishment in the Philippines. Jackbilt is,likewise, a corporation organized on February 16, 1948 primarily for the purpose of making, producing and manufacturing concrete blocks. Under date of July 27, 1948.Norton and Jackbilt entered into an agreement whereby Norton was made the sole andexclusive distributor of concrete blocks manufactured by Jackbilt. Pursuant to thisagreement, whenever an order for concrete blocks was received by the Norton & HarrisonCo. from a customer, the order was transmitted to Jackbilt which delivered the

merchandise direct to the customer. Payment for the goods is, however, made to Norton,which in turn pays Jackbilt the amount charged the customer less a certain amount, as itscompensation or profit. To exemplify the sales procedures adopted by the Norton andJackbilt, the following may be cited. In the case of the sale of 420 pieces of concreteblocks to the American Builders on April 1, 1952, the purchaser paid to Norton the sum of P189.00 the purchase price. Out of this amount Norton paid Jackbilt P168.00, thedifference obviously being its compensation. As per records of Jackbilt, the transactionwas considered a sale to Norton. It was under this procedure that the sale of concreteblocks manufactured by Jackbilt was conducted until May 1, 1953, when the agencyagreement was terminated and a management agreement between the parties wasentered into. The management agreement provided that Norton would sell concrete blocksfor Jackbilt, for a fixed monthly fee of P2,000.00, which was later increased to P5,000.00.During the existence of the distribution or agency agreement, or on June 10, 1949, Norton& Harrison acquired by purchase all the outstanding shares of stock of Jackbilt.

Apparently, due to this transaction, the Commissioner of Internal Revenue, after conducting an investigation, assessed the respondent Norton & Harrison for deficiencysales tax and surcharges in the amount of P32,662.90, making as basis thereof the salesof Norton to the Public. In other words, the Commissioner considered the sale of Norton tothe public as the original sale and not the transaction from Jackbilt. The period covered bythe assessment was from July 1, 1949 to May 31, 1953. As Norton and Harrison did notconform with the assessment, the matter was brought to the Court of Tax Appeals.The Commissioner of Internal Revenue contends that since Jackbilt was owned andcontrolled by Norton & Harrison, the corporate personality of the former (Jackbilt) shouldbe disregarded for sales tax purposes, and the sale of Jackbilt blocks by petitioner to thepublic must be considered as the original sales from which the sales tax should becomputed. The Norton & Harrison Company contended otherwise — that is, thetransaction subject to tax is the sale from Jackbilt to Norton.Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admittedand 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

The majority of the Tax Court, in relieving Norton & Harrison of liability under theassessment, made the following observations:

The law applicable to the case is Section 186 of the National Internal RevenueCode which imposes a percentage tax of 7% on every original sale of goods,wares or merchandise, such tax to be based on the gross selling price of suchgoods, wares or merchandise. The term "original sale" has been defined as thefirst sale by every manufacturer, producer or importer. (Sec. 5, Com. Act No.503.) Subsequent sales by persons other than the manufacturer, producer or importer are not subject to the sales tax.If JACKBILT actually sold concrete blocks manufactured by it to petitioner under

the distributorship or agency agreement of July 27, 1948, such sales constitutedthe original sales which are taxable under Section 186 of the Revenue Code,while the sales made to the public by petitioner are subsequent sales which arenot taxable. But it appears to us that there was no such sale by JACKBILT topetitioner. Petitioner merely acted as agent for JACKBILT in the marketing of itsproducts. This is shown by the fact that petitioner merely accepted orders fromthe public for the purchase of JACKBILT blocks. The purchase orders weretransmitted to JACKBILT which delivered the blocks to the purchaser directly.There was no instance in which the blocks ordered by the purchasers weredelivered to the petitioner. Petitioner never purchased concrete blocks fromJACKBILT so that it never acquired ownership of such concrete blocks. Thisbeing so, petitioner could not have sold JACKBILT blocks for its own account. Itdid so merely as agent of JACKBILT. The distributorship agreement of July 27,1948, is denominated by the parties themselves as an "agency for marketing"

JACKBILT products. ... .x x x x x x x x xTherefore, the taxable selling price of JACKBILT blocks under the aforesaidagreement is the price charged to the public and not the amount billed byJACKBILT to petitioner. The deficiency sales tax should have been assessedagainst JACKBILT and not against petitioner which merely acted as the former'sagent.x x x x x x x x x

Presiding Judge Nable of the same Court expressed a partial dissent, stating:Upon the aforestated circumstances, which disclose Norton's control over anddirection of Jackbilt's affairs, the corporate personality of Jackbilt should bedisregarded, and the transactions between these two corporations relative to theconcrete blocks should be ignored in determining the percentage tax for whichNorton is liable. Consequently, the percentage tax should be computed on thebasis of the sales of Jackbilt blocks to the public.

The majority opinion is now before Us on appeal by the Commissioner of InternalRevenue, on four (4) assigned errors, all of which pose the following propositions: (1)whether the acquisition of all the stocks of the Jackbilt by the Norton & Harrison Co.,merged the two corporations into a single corporation; (2) whether the basis of thecomputation of the deficiency sales tax should be the sale of the blocks to the public andnot to Norton.It has been settled that the ownership of all the stocks of a corporation by another corporation does not necessarily breed an identity of corporate interest between the twocompanies and be considered as a sufficient ground for disregarding the distinctpersonalities (Liddell & Co., Inc. v. Coll. of Int. Rev. L-9687, June 30, 1961). However, inthe case at bar, we find sufficient grounds to support the theory that the separate identitiesof the two companies should be disregarded. Among these circumstances, which we findnot successfully refuted by appellee Norton are: (a) Norton and Harrison owned all theoutstanding stocks of Jackbilt; of the 15,000 authorized shares of Jackbilt on March 31,

1958, 14,993 shares belonged to Norton and Harrison and one each to seven others; (b)Norton constituted Jackbilt's board of directors in such a way as to enable it to actually

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direct and manage the other's affairs by making the same officers of the board for bothcompanies. For instance, James E. Norton is the President, Treasurer, Director andStockholder of Norton. He also occupies the same positions in Jackbilt corporation, theonly change being, in the Jackbilt, he is merely a nominal stockholder. The same is truewith Mr. Jordan, F. M. Domingo, Mr. Mantaring, Gilbert Golden and Gerardo Garcia, whilethey are merely employees of the North they are Directors and nominal stockholders of theJackbilt (c) Norton financed the operations of the Jackbilt, and this is shown by the fact thatthe loans obtained from the RFC and Bank of America were used in the expansionprogram of Jackbilt, to pay advances for the purchase of equipment, materials rations andsalaries of employees of Jackbilt and other sundry expenses. There was no limit to the

advances given to Jackbilt so much so that as of May 31, 1956, the unpaid advancesamounted to P757,652.45, which were not paid in cash by Jackbilt, but was offset byshares of stock issued to Norton, the absolute and sole owner of Jackbilt; (d) Norton treatsJackbilt employees as its own. Evidence shows that Norton paid the salaries of Jackbiltemployees and gave the same privileges as Norton employees, an indication that Jackbiltemployees were also Norton's employees. Furthermore service rendered in any one of thetwo companies were taken into account for purposes of promotion; (e) Compensationgiven to board members of Jackbilt, indicate that Jackbilt is merely a department of Norton.The income tax return of Norton for 1954 shows that as President and Treasurer of Nortonand Jackbilt, he received from Norton P56,929.95, but received from Jackbilt the measlyamount of P150.00, a circumstance which points out that remuneration of purportedofficials of Jackbilt are deemed included in the salaries they received from Norton. Thesame is true in the case of Eduardo Garcia, an employee of Norton but a member of theBoard of Jackbilt. His Income tax return for 1956 reveals that he received from Norton in

salaries and bonuses P4,220.00, but received from Jackbilt, by way of entertainment,representation, travelling and transportation allowances P3,000.00. However, in thewithholding statement (Exh. 28-A), it was shown that the total of P4,200.00 and P3,000.00(P7,220.00) was received by Garcia from Norton, thus portraying the oneness of the twocompanies. The Income Tax Returns of Albert Golden and Dioscoro Ramos bothemployees of Norton but board members of Jackbilt, also disclose the game method of payment of compensation and allowances. The offices of Norton and Jackbilt are locatedin the same compound. Payments were effected by Norton of accounts for Jackbilt andvice versa. Payments were also made to Norton of accounts due or payable to Jackbilt andvice versa.Norton and Harrison, while not denying the presence of the set up stated above, tried toexplain that the control over the affairs of Jackbilt was not made in order to evade paymentof taxes; that the loans obtained by it which were given to Jackbilt, were necessary for theexpansion of its business in the manufacture of concrete blocks, which would ultimatelybenefit both corporations; that the transactions and practices just mentioned, are notunusual and extraordinary, but pursued in the regular course of business and trade; thatthere could be no confusion in the present set up of the two corporations, because theyhave separate Boards, their cash assets are entirely and strictly separate; cashiers andofficial receipts and bank accounts are distinct and different; they have separate incometax returns, separate balance sheets and profit and loss statements. These explanationsnotwithstanding an over-all appraisal of the circumstances presented by the facts of thecase, yields to the conclusion that the Jackbilt is merely an adjunct, business conduit or alter ego, of Norton and Harrison and that the fiction of corporate entities, separate anddistinct from each, should be disregarded. This is a case where the doctrine of piercing theveil of corporate fiction, should be made to apply. In the case of Liddell & Co. Inc. v. Coll.of Int. Rev ., supra, it was held:

There are quite a series of conspicuous circumstances that militates against theseparate and distinct personality of Liddell Motors Inc., from Liddell & Co. Wenotice that the bulk of the business of Liddell & Co. was channel Red through

Liddell Motors, Inc. On the other hand, Liddell Motors Inc. pursued no activitiesexcept to secure cars, trucks, and spare parts from Liddell & Co., Inc. and then

sell them to the general public. These sales of vehicles by Liddell & Co, to LiddellMotors. Inc. for the most part were shown to have taken place on the same daythat Liddell Motors, Inc. sold such vehicles to the public. We may even say thatthe cars and trucks merely touched the hands of Liddell Motors, Inc. as a matter of formality.x x x x x x x x x

Accordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc. arecorporations owned and controlled by Frank Liddell directly or indirectly is not byitself sufficient to justify the disregard of the separate corporate identity of onefrom the other. There is however, in this instant case, a peculiar sequence of the

organization and activities of Liddell Motors, Inc. As opined in the case of Gregory v. Helvering "the legal right of a tax payer todecrease the amount of what otherwise would be his taxes, or altogether avoidthem, by means which the law permits, cannot be doubted". But as held inanother case, "where a corporation is a dummy, is unreal or a sham and servesno business purpose and is intended only as a blind, the corporate form may beignored for the law cannot countenance a form that is bald and a mischievousfictions".... a taxpayer may gain advantage of doing business thru a corporation if hepleases, but the revenue officers in proper cases, may disregard the separatecorporate entity where it serves but as a shield for tax evasion and treat theperson who actually may take benefits of the transactions as the personaccordingly taxable.... to allow a taxpayer to deny tax liability on the ground that the sales were made

through another and distinct corporation when it is proved that the latter isvirtually owned by the former or that they are practically one and the same is tosanction a circumvention of our tax laws. (and cases cited therein.)

In the case of Yutivo Sons Hardware Co. v. Court of Tax Appeals, L-13203, Jan. 28, 1961,this Court made a similar ruling where the circumstances of unity of corporate identitieshave been shown and which are identical to those obtaining in the case under consideration. Therein, this Court said:

We are, however, inclined to agree with the court below that SM was actuallyowned 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 (here concreteblocks) ... .

It may not be amiss to state in this connection, the advantages to Norton in maintaining asemblance of separate entities. If the income of Norton should be considered separatefrom the income of Jackbilt, then each would declare such earning separately for incometax purposes and thus pay lesser income tax. The combined taxable Norton-Jackbiltincome would subject Norton to a higher tax. Based upon the 1954-1955 income tax returnof Norton and Jackbilt (Exhs. 7 & 8), and assuming that both of them are operating on thesame fiscal basis and their returns are accurate, we would have the following result:Jackbilt declared a taxable net income of P161,202.31 in which the income tax due wascomputed at P37,137.00 (Exh. 8); whereas Norton declared as taxable, a net income of P120,101.59, on which the income tax due was computed at P25,628.00. The total of these liabilities is P50,764.84. On the other hand, if the net taxable earnings of bothcorporations are combined, during the same taxable year, the tax due on their total whichis P281,303.90 would be P70,764.00. So that, even on the question of income tax alone, itwould be to the advantages of Norton that the corporations should be regarded asseparate entities.WHEREFORE, the decision appealed from should be as it is hereby reversed and another entered making the appellee Norton & Harrison liable for the deficiency sales taxesassessed against it by the appellant Commissioner of Internal Revenue, plus 25%

surcharge thereon. Costs against appellee Norton & Harrison.Bengzon, C.J., Bautista Angelo, Concepcion, Reyes J.B.L., Regala and Makalintal, JJ., concur.

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G.R. No. L-19707 August 17, 1967 PHILIPPINE ACETYLENE CO., INC., petitioner,vs.COMMISSIONER OF INTERNAL REVENUE and COURT OF TAXAPPEALS, respondents.Ponce Enrile, Siguion Reyna, Montecillo and Belo, for petitioner.Office of the Solicitor General for respondents. CASTRO, J .: The petitioner is a corporation engaged in the manufacture and sale of oxygen andacetylene gases. During the period from June 2, 1953 to June 30, 1958, it madevarious sales of its products to the National Power Corporation, an agency of thePhilippine Government, and to the Voice of America an agency of the United StatesGovernment. The sales to the NPC amounted to P145,866.70, while those to theVOA amounted to P1,683, on account of which the respondent Commission of Internal Revenue assessed against, and demanded from, the petitioner the paymentof P12,910.60 as deficiency sales tax and surcharge, pursuant to the following-provisions of the National Internal Revenue Code:

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 insections one hundred and eighty-four and one hundred and eighty-five a taxequivalent to seven per centum of the gross selling price or gross value in

money of the articles so sold, bartered exchanged, or transferred, such taxto be paid by the manufacturer or producer: . . . .Sec. 183. Payment of percentage taxes.—(a) In general .—It shall be theduty of every person conducting business on which a percentage tax isimposed under this Title, to make a true and complete return of the amountof 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 twentydays after the end of each month, pay the tax due thereon: Provided , Thatany person retiring from a business subject to the percentage tax shall notifythe nearest internal revenue officer thereof, file his return or declaration andpay the tax due thereon within twenty days after closing his business.If the percentage tax on any business is not paid within the time specifiedabove, the amount of the tax shall be increased by twenty-five per centum,

the increment to be a part of the tax.The petitioner denied liability for the payment of the tax on the ground that both theNPC and the VOA are exempt from taxation. It asked for a reconsideration of theassessment and, failing to secure one, appealed to the Court of Tax Appeals.The court ruled that the tax on the sale of articles or goods in section 186 of the Codeis a tax on the manufacturer and not on the buyer with the result that the "petitioner Philippine Acetylene Company, the manufacturer or producer of oxygen andacetylene gases sold to the National Power Corporation, cannot claim exemptionfrom the payment of sales tax simply because its buyer — the National Power Corporation — is exempt from the payment of all taxes." With respect to the salesmade to the VOA, the court held that goods purchased by the American Governmentor its agencies from manufacturers or producers are exempt from the payment of thesales tax under the agreement between the Government of the Philippines and that of the United States, provided the purchases are supported by certificates of exemption,

and since purchases amounting to only P558, out of a total of P1,683, were notcovered by certificates of exemption, only the sales in the sum of P558 were subject

to the payment of tax. Accordingly, the assessment was revised and the petitioner'sliability was reduced from P12,910.60, as assessed by the respondent commission, toP12,812.16.

1

The petitioner appealed to this Court. Its position is that it is not liable for the paymentof tax on the sales it made to the NPC and the VOA because both entities are exemptfrom taxation.IThe NPC enjoys tax exemption by virtue of an act2 of Congress which provides asfollows:

Sec. 2. To facilitate the payment of its indebtedness, the National Power Corporation shall be exempt from all taxes, except real property tax, andfrom all duties, fees, imposts, charges, and restrictions of the Republic of thePhilippines, its provinces, cities and municipalities.

It is contended that the immunity thus given to the NPC would be impaired by theimposition of a tax on sales made to it because while the tax is paid by themanufacturer or producer, the tax is ultimately shifted by the latter to the former. Thepetitioner invokes in support of its position a 1954 opinion of the Secretary of Justicewhich ruled that the NPC is exempt from the payment of all taxes "whether direct or indirect."We begin with an analysis of the nature of the percentage (sales) tax imposed bysection 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,"

3as they apparently have two faces — one that

of a vendor tax, the other, a vendee tax. Fortunately for us the provisions of the Codethrow some light on the problem. The Code states that the sales tax "shall be paid bythe manufacturer or producer,"

4who 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 daysafter the end of each month, pay the tax due thereon."

5

But it is argued that a sales tax is ultimately passed on to the purchaser, and that, sofar as the purchaser is an entity like the NPC which is exempt from the payment of "alltaxes, except real property tax," the tax cannot be collected from sales.Many years ago, Mr. Justice Oliver Wendell Holmes expressed dissatisfaction withthe use of the phrase "pass the tax on." Writing the opinion of the U.S. SupremeCourt in Lash's Products v. United States,

6he said: "The phrase 'passed the tax on' is

inaccurate, as obviously the tax is laid and remains on the manufacturer and on him

alone. The purchaser does not really pay the tax. He pays or may pay the seller morefor the goods because of the seller's obligation, but that is all. . . . The price is the sumtotal paid for the goods. The amount added because of the tax is paid to get thegoods and for nothing else. Therefore it is part of the price . . .".It may indeed be that the incidence of the tax ultimately settles on the purchaser, butit is not for that reason alone that one may validly argue that it is a tax on thepurchaser. The exemption granted to the NPC may be likened to the immunity of theFederal Government from state taxation and vice versa in the federal system of government of the United States. In the early case of Panhandle Oil Co. v.Mississippi

7 the doctrine of intergovernment mental tax immunity was held asprohibiting the imposition of a tax on sales of gasoline made to the FederalGovernment. Said the Supreme court of the United States:

A charge at the prescribed. rate is made on account of every gallon acquiredby the United States. It is immaterial that the seller and not the purchaser is

required to report and make payment to the state. Sale and purchaseconstitute a transaction by which the tax is measured and on which the

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We therefore hold that the tax imposed by section 186 of the National InternalRevenue Code is a tax on the manufacturer or producer and not a tax on thepurchaser except probably in a very remote and inconsequential sense. Accordinglyits levy on the sales made to tax-exempt entities like the NPC is permissible.IIThis conclusion should dispose of the same issue with respect to sales made to theVOA, except that a claim is here made that the exemption of such sales from taxationrests on stronger grounds. Even the Court of Tax Appeals appears to share this viewas is evident from the following portion of its decision:

With regard to petitioner's sales to the Voice of America, it appears that thepetitioner and the respondent are in agreement that the Voice of America isan agency of the United States Government and as such, all goodspurchased locally by it directly from manufacturers or producers are exemptfrom the payment of the sales tax under the provisions of the agreementbetween the Government of the Philippines and the Government of theUnited States, (See Commonwealth Act No. 733) provided such purchasesare supported by serially numbered Certificates of Tax Exemption issued bythe vendee-agency, as required by General Circular No. V-41, datedOctober 16, 1947. . . .

The circular referred to reads:Goods purchased locally by U.S. civilian agencies directly frommanufacturers, producers or importers shall be exempt from the sales tax.

It was issued purportedly to implement the Agreement between the Republic of the

Philippines and the United States of America Concerning Military Bases,16 but we findnothing in the language of the Agreement to warrant the general exemption grantedby that circular.The pertinent provisions of the Agreement read:

ARTICLE V. — Exemption from Customs and Other Duties No import, excise, consumption or other tax, duty or impost shall be chargedon material, equipment, supplies or goods, including food stores andclothing, for exclusive use in the construction, maintenance, operation or defense of the bases, consigned to, or destined for, the United Statesauthorities and certified by them to be for such purposes. ARTICLE XVIII.—Sales and Services Within the Bases 1. It is mutually agreed that the United States Shall have the right toestablish on bases, free of all licenses; fees; sales, excise or other taxes, or

imposts; Government agencies, including concessions, such as salescommissaries and post exchanges, messes and social clubs, for theexclusive use of the United States military forces and authorized civilianpersonnel and their families. The merchandise or services sold or dispensedby such agencies shall be free of all taxes, duties and inspection by thePhilippine authorities. . . .

Thus only sales made "for exclusive use in the construction, maintenance, operationor defense of the bases," in a word, only sales to the quartermaster, are exemptunder article V from taxation. Sales of goods to any other party even if it be anagency of the United States, such as the VOA, or even to the quartermaster but for adifferent purpose, are not free from the payment of the tax.On the other hand, article XVIII exempts from the payment of the tax sales madewithin the base by (not sales to) commissaries and the like in recognition of theprinciple that a sales tax is a tax on the seller and not on the purchaser.

It is a familiar learning in the American law of taxation that tax exemption must bestrictly construed and that the exemption will not be held to be conferred unless the

terms under which it is granted clearly and distinctly show that such was the intentionof the parties.

17Hence, in so far as the circular of the Bureau of Internal Revenue

would give the tax exemptions in the Agreement an expansive construction it is void.We hold, therefore, that sales to the VOA are subject to the payment of percentagetaxes under section 186 of the Code. The petitioner is thus liable for P12,910.60,computed as follows:

Sales to NPC P145,866.70

Sales to VOA P 1,683.00

Total sales subject to tax P147,549.70

7% sales tax due thereon P 10,328.48

Add: 25% surcharge P 2,582.12

Total amount due and collectible P 12,910.60

Accordingly, the decision a quo is modified by ordering the petitioner to pay to therespondent Commission the amount of P12,910.60 as sales tax and surcharge, withcosts against the petitioner.Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Angeles and Fernando,JJ., concur.Concepcion, C.J., and Dizon, J., took no part.

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G.R. No. L-19667 November 29, 1966 COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.AMERICAN RUBBER COMPANY and COURT OF TAX APPEALS, respondents.G.R. No. L-19801-03 November 29, 1966 AMERICAN RUBBER COMPANY, petitioner,vs.THE COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents.Nos. L-19667:Office of the Solicitor General for petitioner.Ozaeta, Gibbs and Ozaeta for respondents. Nos. L-19801-03:Ozaeta, Gibbs and Ozaeta for petitioner.Office of the Solicitor General for respondents. REYES, J.B.L., J. : These cases are brought on appeal from the Court of Tax Appeals by the State (G.R.No. L-19667) as well as by the American Rubber Company (G.R. Nos. L-19801,19802, 19803).The factual background is the same in all four cases, and is not in controversy, havingbeen stipulated between the parties.Petitioner, American Rubber Company, a domestic corporation, from January 1, 1955to December 1, 1958, was engaged in producing rubber from its approximately 900hectare rubber tree plantation, which it owned and operated in Latuan, Isabela, City of

Basilan. Its products, known in the market as Preserved Latex, Pale Crepe No. 1,Pale Crepe No. 2, Ribbed Smoked Sheets Nos. 1 and 2, Flat Bark Rubber, 2X BrownCrepe and 3X Brown Crepe, are turned out in the following manner:The initial step common to the production of all the foregoing rubber products istapping, i.e., the collection of latex (rubber juice) from rubber trees. This is done bythe daily cutting, early in the morning, of a spiral incision in the bark of rubber treesand placing a cup below the lower end of the incision to receive the flow of latex. Thecollecting cup is filled after two hours. The tapper then collects the latex into bucketsand carries them to the collecting shed. The tapper subsequently pours the latexcollected into big milk cans. The filled milk cans are then taken in motor vehicles to acoagulating shed, also within the premises of petitioner's plantation, where the latex isstrained into coagulating tanks to remove foreign matter such as leaves and dirt. After these initial steps, the processes vary in the production of the various rubber products

mentioned above. Said processes are described hereunder.Preserved Rubber Latex Fresh latex is diluted with 5 to 5-1/4 ounces of ammonia per gallon of latex. Themixture is thoroughly stirred and then poured into metal drums. The addition of ammonia preserves the latex in liquid form and prevents its deterioration or itsacquisition of a repulsive smell, and at the same time preserves its uniform color.Latex which has been thus artificially preserved in its liquid form generally lasts for about a month without spoiling. On the other hand, fresh latex in its original state lastsfor only about two hours, after which it becomes spoiled.Petitioner sells preserved latex only upon previous orders of customers who supplyempty metal drum containers.Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2 To produce Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2, thepetitioner adds to the latex in the coagulating tank about 15 or 16 ounces of glacial

acetic acid per gallon of latex. The mixture is stirred thoroughly. Thereafter aluminumpartitions are placed crosswise inside the tank so that the latex will coagulate into

uniform slabs. Acetic acid is added to the latex to hasten coagulation which otherwisetakes place naturally, and to preserve its fresh state and color. The similarity in theproduction of Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2ends at the point of removing the coagulum (coagulated rubber sheets) from thecoagulating tanks.To produce Pale Crepe No. 1, the coagulum is passed through a series of rollers untilthe desired thickness is attained, whereupon it is removed to the air-drying housesituated inside petitioner's plantation and hung for a period of about twelve or thirteendays to dry. There are no mechanical driers used; the air-drying is done naturally. Assoon as the Pale Crepe is dried, the sheets are sorted; those which are of uniformpale color are classified as Pale Crepe No. 2, whereupon they are baled and stored,ready for market.Ribbed & Smoked Sheets Nos. 1 and 2 are produced practically in the same manner as Pale Crepe, except that the coagulum is passed only once through a roller provided with ribs after which the flattened and ribbed coagulum is removed topetitioner's smoke-house where it is hung and cured by exposure to heat and smokefrom wood fires for about six or seven days. The resulting smoked sheets are sortedand classified dependent upon color and opaqueness into ribbed smoked sheets(RSS) No. 1 and No. 2, baled, and stored ready for the market. No mechanicalequipment is used in generating the smoke in the smoke-house.The petitioner's rollers are powered by engines although they could be turned byhand as it is done in small rubber plantations. If Pale Crepe Nos. 1 and 2 and RibbedSmoked Sheets Nos. 1 and 2 are not air-dried and smoked they deteriorate, get

spoiled, and the color varies.Flat Bark Rubber Each morning after a tapper makes a fresh incision in the bark of a rubber tree, hegathers the latex dripping from the ground around the tree, called "ground rubber", aswell as the dried latex from the incisions made the previous day, called "bark rubber".Ground and bark rubber are not intentionally produced. No chemicals are added tothe latex transformed into ground and bark rubber. This kind of dried latex is spoiledand has a bad odor.Ground and bark rubber when gathered in sufficient quantities are passed numeroustimes through the rollers or mills until they form a uniform mass or sheet which, finallyis called Flat Bark Rubber. No chemical is used to coagulate the dried ground andbark rubber because they are already coagulated. They are formed into sheets bymeans only of pressure of the mills or rollers through which they are passed. Flat

Bark Rubber commands the lowest prices in the rubber market.3X Brown Crepe Every morning, before a fresh incision is made in the bark of the rubber trees, thetapper collects not only ground and bark rubber but removes and collects the latex inthe cups, known as "cup rubber". The cup rubber coagulates and dries throughnatural processes and, when gathered in sufficient quantities, is milled and rolledthrough a series of rollers until by force of pressure it is formed into a mass of thedesired thickness called "3X Brown Crepe." Like ground and bark rubber, nochemicals are added to cup rubber to produce 3X Brown Crepe. Cup rubber in itsoriginal form, like ground and bark rubber, is spoiled and has a bad odor.2X Brown Crepe 2X Brown Crepe is obtained by milling or rolling the excess pieces of coagulatedrubber latex which had been cut or trimmed from the from the ribbed smoked sheetsNo. 2 into a uniform mass. 2X Brown Crepe is produced in the same manner as the

other sheets of crepe rubber, i.e., without the addition of any chemicals.

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Petitioner during the said period sold its foregoing rubber products locally and asprescribed by the respondent's regulations declared same for tax purposes whichrespondent accordingly assessed. Petitioner paid, under protest, the correspondingsales taxes thereon claiming exemption therefrom under Section 188 (b) of theNational Internal Revenue Code.The following sales taxes on the aforementioned rubber products were paid under protest —

From Jan. 1, 1955 to Dec. 31, 1956 P83,193.48

From Jan. 1, 1957 to June 30, 1957 P20,504.99

From July 1, 1957 to Dec. 31, 1958 P52,378.90

It is further stipulated that the sales tax collected from petitioner American Rubber Company on the local sales of its rubber products, following Internal RevenueGeneral Circulars Nos. 431 and 440, had been separately itemized and billed bypetitioner Company in the invoices issued to the customers, that paid both the valueof the rubber articles and the separately itemized sales tax, from January 1, 1955 to August 2, 1957. After paying under protest, the petitioner claimed refund of the sales taxes paid by iton the ground that under section 188, paragraph b, of the Internal Revenue Code, asamended,

1its rubber products were agricultural products exempt from sales tax, and

upon refusal of the Commissioner of Internal Revenue, brought the case on appeal to

the Court of Tax Appeals (C.T.A. Nos. 356, 440,, 632). The respondentCommissioner interposed defenses, denying that petitioner's products wereagricultural ones within the exemption; claiming that there had been no exhaustion of administrative remedies; and argued that the sales tax having been passed to thebuyers during the period that elapsed from January 1, 1955 to August 2, 1957, thepetitioner did not have personality to demand, sue for and recover the aforesaid salestaxes, plus interest.In its decision, now under appeal, the Tax Court held Preserved Latex, Flat BarkRubber, and 3X Brown Crepe to be agricultural products, "because the labor employed in the processing thereof is agricultural labor", and hence, the sales of suchproducts were exempt from sales tax, but declared Pale Crepe No. 1, RibbedSmoked Sheets Nos. 1 and 3, as well as 2X Brown Crepe (which is obtained fromrolling excess pieces of Smoked Sheets) to be manufactured products, sales of which

were subject to the tax. It overruled the defense of non-exhaustion of administrativeremedies and upheld the Revenue Commissioner's stand that petitioner Companywas not entitled to recover the sales tax that had been separately billed to itscustomers, and paid by the latter. Hence, it dismissed the appeal in C.T.A. Nos. 356and 440 and ordered respondent Commissioner to refund only P3,916.49 withoutinterest, or costs.Both parties then duly appealed to this.The issues posed on these appeals are:

(1) Whether the plaintiff's rubber products above described should beconsidered agricultural or manufactured for purposes of their subjection tothe sales tax;(2) Whether plaintiff is or is not entitled to recover the sales tax paid by it, butpassed on to and paid by the buyers of its products; and(3) Whether plaintiff is or is not entitled to interest on the sales tax paid by it

under protest, in case recovery thereof is al lowed.

The first issue, in our opinion, is governed by the principles laid down by this Court inPhilippine Packing Corporation vs. Collector of Internal Revenue, 100 Phil. 545 et seq. We there ruled that the exemption from sales tax established in section 188 (b)of the Internal Revenue Tax Code in favor of sales of agricultural products, whether intheir original form or not, made by the producer or owner of the land where producedis not taken away merely because the produce undergoes processing at the hand of said producer or owner for the purpose of working his product into a more convenientand valuable form suited to meet the demand of an expanded market; that theexemption was not designed in favor of the small agricultural producer, alreadyexempted by the subsequent paragraphs of the same section 188, but that saidexemption is not incompatible with large scale agricultural production that incidentallyrequired resort to preservative processes designed to increase or prolongmarketability of the product.In the case before us, the parties have stipulated that fresh latex directly obtainedfrom the rubber tree, which is clearly an agricultural product, becomes spoiled after only two hours. It has, therefore, a severely limited marketability. The addition of ammonia prevents its deterioration for about a month, and we see no reason why thispreservative process should wrest away from the preserved latex the protectivemantle of the tax exemption.Taking also into account the great distance that separates the plaintiff's plantationfrom the main rubber processing centers in Japan, the United States and Europe, andthe difficulty in handling products in liquid form, it can be discerned without difficultythat preserved, latex, with its 30-day spoilage limit, is still severely handicapped for

export and dollar earning purposes.To overcome these shortcomings, and extend its useful life almost indefinitely, itbecomes necessary to separate and solidify the rubber granules diffused in the latex,and hence, according to the stipulation of facts and the evidence, acetic acid is addedto hasten coagulation. There is nothing on record to show that the acetic acid in wayproduces anything that was not originally in the source, the liquid latex. The coagulumis then rolled and compacted and afterwards air dried to make Pale Crepe(1 and 2),or else cured and smoked to produce rubber sheets. Once again we see nothing inthis processing to alter the agricultural nature of the result; what takes place is merelyan accelerated coagulation and dessication that would naturally occur anyway, onlywithin a longer period of time, coupled with greater spoilage of the product.Thus the operations carried out by plaintiff appear to be purely preservative in nature,made necessary, by its production of fresh rubber latex in a large scale. they are

purely incidental to the latter, just as the canning of skinned and cored pineapples insyrup was held to be incidental to the large-scale cultivation of the fruit in thePhilippine Packing Corporation case (ante). Being necessary to suit the product to thedemands of the market, the operations in both cases should lead to the same result,non-taxability of the sales of the respective agricultural products. In not so holding,the Tax Court was in error.Even less justifiable is the position taken by the Revenue Commissioner in his appealagainst the finding of the Tax Court that Flat Bark 3X Brown Crepe rubber areagricultural products. According to the record, these sheets result from the drippingsand waste rubber that have dried naturally, that are rolled and compacted into thedesired thickness, without any other processing. As to 2X Brown Crepe which is compacted out of the trimmings and waste left over from the production of ribbed smoked sheets, no reason is seen why it should betreated differently from the ribbed smoked sheets themselves.

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In his appeal, the Revenue Commissioner contends that all of plaintiff's productsshould be deemed manufactured articles, on the strength of section 194 (n) of theRevenue Code defining a "manufacturer" as

every person who by physical or chemical process alters the exterior textureor form or inner substances of any raw material or manufactured or partiallymanufactured product in such manner as to prepare it for a special use or uses to which it could not have been put to in its original condition, or who . .. alters the quality of any such raw material . . . as to reduce it to marketableshape . . . .

But, as pointed out in the Philippine Packing Corporation case, this definition is notapplicable to the exemption of agricultural products, "whether in their original form or not". The use of this last phrase in the statute clearly indicates that the agriculturalproduct may be altered in texture or form without being divested of the exemption(cas cit. 100 Phil., p. 548). The exception would be sales of agricultural products whileRepublic Act No. 1612 was in effect because under this Act the freedom from salestax became restricted to agricultural products "in their original form" only. So thatplaintiff's sales from August 24, 1956 (approval of Republic Act 1612) to June 22,1957 (when Republic Act 1856 became effective and restored the exemption toagricultural products "whether in their original form or not") became properly taxable.Under paragraphs (A)2 and B(4) of the additional stipulation of facts (CTA Rec. pp.261-262, G.R. L-19801), the sales tax properly collected during this period of plaintiff's transactions amounted to P18,187.19 from August 24 to December 31,1956; and P18,888.28 from January 1 to June 21, 1957, or a total of P37,075.47. This

last amount is, therefore non-recoverable.2

The second issue in this appeal concerns the holding of the Court of Tax Appeals thatthe plaintiff Company is not entitled to recover the sales tax paid by it from January,1955 to August 2, 1957, because during that period the plaintiff had separatelyinvoiced and billed the corresponding sales tax to the buyers of its products. In soholding, the Tax Court relied on our decisions in Medina vs. City of Baguio, 91 Phil.854; Mendoza, Santos & Co. vs. Municipality of Meycawayan, L-6069-6070, April 30,1954 (94 Phil. 1047); and Zosimo Rojas & Bros. vs. City of Cavite, L-10730, May 27,1958.The basic ruling is that of Medina vs. City of Baguio, supra, where this Court affirmedthe ruling of the court of First Instance to the effect that —

"The amount collected from the theatergoers as additional price of admissiontickets is not the property of plaintiffs or any of them. It is paid by the public.

If anybody has the right to claim it, it is those who paid it. Only owners of property has the right to claim said property. The cine owner acted as mereagents of the city in collecting additional price charged in the sale of admission tickets." (Medina vs. City of Baguio, 91 Phil. 854) (Emphasissupplied)

We agree with the plaintiff-appellant that the Medina ruling is not applicable to thepresent case, since the municipal taxes therein imposed were taxes on the admissiontickets sold, so that, in effect, they were levies upon the theatergoers who boughtthem; so much so that (as the decision expressly ruled) the tax was collected by thetheater owners as agents of the respective municipal treasurers. This does not obtainin the case at bar. The Medina ruling was merely followed in Rojas & Bros. vs. Cavite,supra; and in Mendoza, Santos & Co. vs. Municipality of Meycawayan, 94 Phil. 1047.By contrast with the municipal taxes involved in the preceding cases, the sales tax isby law imposed directly, not on the thing sold, but on the act (sale) of the

manufacturer, producer or importer (Op. of the Secretary of Justice, June 15, 1946;47 C.J.S., p. 1141), who is exclusively made liable for its timely payment. There is no

proof that the tax paid by plaintiff is the very money paid by its customers. Where thetax money paid by the plaintiff came from is really no concern of the Government, butsolely a matter between the plaintiff and its customers. Anyway, once recovered, theplaintiff must hold the refund taxes in trust for the individual purchasers whoadvanced payment thereof, and whose names must appear in plaintiff's records.Moreover, the separate billing of the sales tax in appellant's invoices was a directresult of the respondent Commissioner's General Circular No. 440, providing that —

if a manufacturer, producer, or importer, in fixing the gross selling price of anarticle sold by him, has included an amount intended to cover the sales taxin the gross selling price of the article, the sales tax shall be based on thegross selling price less the amount intended to cover the tax, if the same isbilled to the purchaser as a separate item in the invoice. . . . (Emphasissupplied)

In other words, the separate itemization of the sales tax in the invoices was permittedto avoid the taxpayer being compelled to pay a sales tax on the tax itself. It does notseem either just or proper that a step suggested by the Internal Revenue authoritiesthemselves to protect the taxpayer from paying a double tax should now be used toblock his action to recover taxes collected without legal sanction.Finally, a more important reason that militates against extensive and indiscriminateapplication of the Medina vs. City of Baguio ruling is that it would tend to perpetuateillegal taxation; for the individual customers to whom the tax is ultimately shifted willordinarily not care to sue for its recovery, in view of the small amount paid by eachand the high cost of litigation for the reclaiming of an illegal tax. In so far, therefore, as

it favors the imposition, collection and retention of illegal taxes, and encourages amultiplicity of suits, the Tax Court's ruling under appeal violates morals and publicpolicy.The plaintiff Company also urges that the refund of the taxes should include interestthereon. While this Court has allowed recovery of interest in some cases, it has doneso only in cases of patent arbitrariness on the part of the Revenue authorities; and inthis instance we agree with the Tax Court that no such patent arbitrariness has beenshown.IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals is affirmedin Case G.R. No. L-19667 and modified in cases G.R. Nos. L-19801, L-19802 and L-19803, by declaring the sales taxes therein involved to have been improperly deniedlevied and collected and ordering respondent Commissioner of Internal Revenue torefund the same, except the taxes corresponding to the period from August 24, 1956

to June 22, 1957, during which Republic Act No. 1612 was in force. The amount of P37,075.47 paid by the taxpayer for this period is hereby declared properly collectedand not refundable. Without special pronouncement as to costs.Concepcion, C.J., Barrera, Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ., concur.

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G.R. No. L-31092 February 27, 1987COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.JOHN GOTAMCO & SONS, INC. and THE COURT OF TAXAPPEALS, respondents.

YAP, J .: The question involved in this petition is whether respondent John

Gotamco & Sons, Inc. should pay the 3% contractor's tax under Section191 of the National Internal Revenue Code on the gross receipts itrealized from the construction of the World Health Organization officebuilding in Manila.The World Health Organization (WHO for short) is an internationalorganization which has a regional office in Manila. As an internationalorganization, it enjoys privileges and immunities which are defined morespecifically in the Host Agreement entered into between the Republic of the Philippines and the said Organization on July 22, 1951. Section 11 of that Agreement provides, inter alia, that "the Organization, its assets,income and other properties shall be: (a) exempt from all direct andindirect taxes. It is understood, however, that the Organization will notclaim exemption from taxes which are, in fact, no more than charges for public utility services; . . .When the WHO decided to construct a building to house its own offices,as well as the other United Nations offices stationed in Manila, it enteredinto a further agreement with the Govermment of the Republic of thePhilippines on November 26, 1957. This agreement contained thefollowing provision (Article III, paragraph 2):

The Organization may import into the country materialsand fixtures required for the construction free from allduties and taxes and agrees not to utilize any portion of the international reserves of the Government.

Article VIII of the above-mentioned agreement referred to the Host Agreement concluded on July 22, 1951 which granted the Organizationexemption from all direct and indirect taxes.In inviting bids for the construction of the building, the WHO informed thebidders that the building to be constructed belonged to an internationalorganization with diplomatic status and thus exempt from the payment of all fees, licenses, and taxes, and that therefore their bids "must take thisinto account and should not include items for such taxes, licenses andother payments to Government agencies."The construction contract was awarded to respondent John Gotamco &Sons, Inc. (Gotamco for short) on February 10, 1958 for the stipulatedprice of P370,000.00, but when the building was completed the price

reached a total of P452,544.00.

Sometime in May 1958, the WHO received an opinion from theCommissioner of the Bureau of Internal Revenue stating that "as the 3%contractor's tax is an indirect tax on the assets and income of theOrganization, the gross receipts derived by contractors from their contracts with the WHO for the construction of its new building, areexempt from tax in accordance with . . . the Host Agreement."Subsequently, however, on June 3, 1958, the Commissioner of InternalRevenue reversed his opinion and stated that "as the 3% contractor's tax

is not a direct nor an indirect tax on the WHO, but a tax that is primarilydue from the contractor, the same is not covered by . . . the Host

Agreement."On January 2, 1960, the WHO issued a certification state 91 inter alia,:

When the request for bids for the construction of theWorld Health Organization office building was called for,contractors were informed that there would be no taxes or fees levied upon them for their work in connection withthe construction of the building as this will be consideredan indirect tax to the Organization caused by the increaseof the contractor's bid in order to cover these taxes. Thiswas upheld by the Bureau of Internal Revenue and it canbe stated that the contractors submitted their bids in goodfaith with the exemption in mind.The undersigned, therefore, certifies that the bid of JohnGotamco & Sons, made under the condition stated above,should be exempted from any taxes in connection withthe construction of the World Health Organization officebuilding.

On January 17, 1961, the Commissioner of Internal Revenue sent a letter of demand to Gotamco demanding payment of P 16,970.40, representingthe 3% contractor's tax plus surcharges on the gross receipts it receivedfrom the WHO in the construction of the latter's building.

Respondent Gotamco appealed the Commissioner's decision to theCourt of Tax Appeals, which after trial rendered a decision, in favor of Gotamco and reversed the Commissioner's decision. The Court of Tax

Appeal's decision is now before us for review on certiorari.In his first assignment of error, petitioner questions the entitlement of theWHO to tax exemption, contending that the Host Agreement is null andvoid, not having been ratified by the Philippine Senate as required by theConstitution. We find no merit in this contention. While treaties arerequired to be ratified by the Senate under the Constitution, less formaltypes of international agreements may be entered into by the Chief Executive and become binding without the concurrence of the legislativebody. 1 The Host Agreement comes within the latter category; it is a valid

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and binding international agreement even without the concurrence of thePhilippine Senate.The privileges and immunities granted to the WHO under the Host

Agreement have been recognized by this Court as legally binding onPhilippine authorities. 2 Petitioner maintains that even assuming that the Host Agreementgranting tax exemption to the WHO is valid and enforceable, the 3%contractor's tax assessed on Gotamco is not an "indirect tax" within its

purview. Petitioner's position is that the contractor's tax "is in the natureof an excise tax which is a charge imposed upon the performance of anact, the enjoyment of a privilege or the engaging in an occupation. . . It isa tax due primarily and directly on the contractor, not on the owner of thebuilding. Since this tax has no bearing upon the WHO, it cannot bedeemed an indirect taxation upon it."We agree with the Court of Tax Appeals in rejecting this contention of thepetitioner. Said the respondent court:

In context, direct taxes are those that are demanded fromthe very person who, it is intended or desired, should paythem; while indirect taxes are those that are demanded inthe first instance from one person in the expectation andintention that he can shift the burden to someone else.(Pollock vs. Farmers, L & T Co., 1957 US 429, 15 S. Ct.673, 39 Law. Ed. 759.) The contractor's tax is of coursepayable by the contractor but in the last analysis it is theowner of the building that shoulders the burden of the taxbecause the same is shifted by the contractor to theowner as a matter of self-preservation. Thus, it is anindirect tax. And it is an indirect tax on the WHO because,although it is payable by the petitioner, the latter can shiftits burden on the WHO. In the last analysis it is the WHOthat will pay the tax indirectly through the contractor and it

certainly cannot be said that 'this tax has no bearing uponthe World Health Organization.Petitioner claims that under the authority of the Philippine AcetyleneCompany versus Commissioner of Internal Revenue, et al., 3 the 3%contractor's tax fans directly on Gotamco and cannot be shifted to theWHO. The Court of Tax Appeals, however, held that the said case is notcontrolling in this case, since the Host Agreement specifically exemptsthe WHO from "indirect taxes." We agree. The Philippine Acetylene caseinvolved a tax on sales of goods which under the law had to be paid bythe manufacturer or producer; the fact that the manufacturer or producer might have added the amount of the tax to the price of the goods did notmake the sales tax "a tax on the purchaser." The Court held that the

sales tax must be paid by the manufacturer or producer even if the sale is

made to tax-exempt entities like the National Power Corporation, anagency of the Philippine Government, and to the Voice of America, anagency of the United States Government.The Host Agreement, in specifically exempting the WHO from "indirecttaxes," contemplates taxes which, although not imposed upon or paid bythe Organization directly, form part of the price paid or to be paid by it.This is made clear in Section 12 of the Host Agreement which provides:

While the Organization will not, as a general rule, in the

case of minor purchases, claim exemption from exciseduties, and from taxes on the sale of movable andimmovable property which form part of the price to bepaid, nevertheless, when the Organization ismaking important purchases for official use of property onwhich such duties and taxes have been charged or arechargeable the Government of the Republic of thePhilippines shall make appropriate administrativearrangements for the remission or return of the amount of duty or tax. (Emphasis supplied).

The above-quoted provision, although referring only to purchases madeby the WHO, elucidates the clear intention of the Agreement to exemptthe WHO from "indirect" taxation.The certification issued by the WHO, dated January 20, 1960, soughtexemption of the contractor, Gotamco, from any taxes in connection withthe construction of the WHO office building. The 3% contractor's taxwould be within this category and should be viewed as a form of an"indirect tax" On the Organization, as the payment thereof or its inclusionin the bid price would have meant an increase in the construction cost of the building.

Accordingly, finding no reversible error committed by the respondentCourt of Tax Appeals, the appealed decision is hereby affirmed.SO ORDERED.

Narvasa, Melencio-Herrera, Cruz, Feliciano, Gancayco and Sarmiento,JJ., concur.

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G.R. No. 88291 June 8, 1993ERNESTO M. MACEDA, petitioner,vs.HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office of thePresident, HON. VICENTE JAYME, ETC., ET AL., respondents.

Angara, Abello, Concepcion & Cruz for respondent Pilipinas Shell Petroleum Corporation.Siguion Reyna, Montecillo & Ongsiako for Caltex.

NOCON, J. : Just like lightning which does strike the same place twice in some instances, this matter of indirect tax exemption of the private respondent National Power Corporation (NPC) is brought to

this Court a second time. Unfazed by the Decision We promulgated on May 31, 1991 1 petitioner Ernesto Maceda asks this Court to reconsider said Decision. Lest We be criticized for denyingdue process to the petitioner. We have decided to take a second look at the issues. In theprocess, a hearing was held on July 9, 1992 where all parties presented their respectivearguments. Etched in this Court's mind are the paradoxical claims by both petitioner and privaterespondents that their respective positions are for the benefit of the Filipino people.

I A Chronological review of the relevant NPC laws, specially with respect to its tax exemptionprovisions, at the risk of being repetitious is, therefore, in order.On November 3, 1936, Commonwealth Act No. 120 was enacted creating the National Power Corporation, a public corporation, mainly to develop hydraulic power from all water sources inthe Philippines. 2 The sum of P250,000.00 was appropriated out of the funds in the PhilippineTreasury for the purpose of organizing the NPC and conducting its preliminary work. 3 The mainsource of funds for the NPC was the flotation of bonds in the capital markets 4 and these bonds

. . . issued under the authority of this Act shall be exempt from the payment

of all taxes by the Commonwealth of the Philippines, or by any authority,branch, division or political subdivision thereof and subject to the provisionsof the Act of Congress, approved March 24, 1934, otherwise known as theTydings McDuffle Law, which facts shall be stated upon the face of saidbonds. . . . . 5

On June 24, 1938, C.A. No. 344 was enacted increasing to P550,000.00 the funds needed for the initial operations of the NPC and reiterating the provision of the flotation of bonds as soon asthe first construction of any hydraulic power project was to be decided by the NPC Board. 6 Theprovision on tax exemption in relation to the issuance of the NPC bonds was neither amendednor deleted.On September 30, 1939, C.A. No. 495 was enacted removing the provision on the payment of the bond's principal and interest in "gold coins" but adding that payment could be made in UnitedStates dollars. 7 The provision on tax exemption in relation to the issuance of the NPC bondswas neither amended nor deleted.On June 4, 1949, Republic Act No. 357 was enacted authorizing the President of the Philippines

to guarantee, absolutely and unconditionally, as primary obligor, the payment of any and all NPCloans. 8 He was also authorized to contract on behalf of the NPC with the International Bank for Reconstruction and Development (IBRD) for NPC loans for the accomplishment of NPC'scorporate objectives 9 and for the reconstruction and development of the economy of thecountry. 10 It was expressly stated that:

Any such loan or loans shall be exempt from taxes, duties, fees, imposts,charges, contributions and restrictions of the Republic of the Philippines, itsprovinces, cities and municipalities. 11

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

To facilitate payment of its indebtedness, the National Power Corporationshall be exempt from all taxes, duties, fees, imposts, charges, andrestrictions of the Republic of the Philippines, its provinces, cities andmunicipalities. 13

On July 10, 1952, R.A. No. 813 was enacted amending R.A. No. 357 in that, aside from theIBRD, the President of the Philippines was authorized to negotiate, contract and guarantee loans

with the Export-Import Bank of of Washigton, D.C., U.S.A., or any other international financialinstitution. 14 The tax provision for repayment of these loans, as stated in R.A. No. 357, was notamended.On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's tax exemption for real estate taxes. As enacted, the law states as follows:

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

On September 8, 1955, R.A. No. 1397 was enacted directing that the NPC projects to be fundedby the increased indebtedness 16 should bear the National Economic Council's stamp of

approval. The tax exemption provision related to the payment of this total indebtedness was notamended nor deleted.On June 13, 1958, R.A. No. 2055 was enacted increasing the total amount of foreign loans NPCwas authorized to incur to US$100,000,000.00 from the US$50,000,000.00 ceiling in R.A. No.357. 17 The tax provision related to the repayment of these loans was not amended nor deleted.On June 13, 1958, R.A. No. 2058 was enacting fixing the corporate life of NPC to December 31,2000. 18 All laws or provisions of laws and executive orders contrary to said R.A. No. 2058 wereexpressly repealed. 19 On June 18, 1960, R.A. No 2641 was enacted converting the NPC from a public corporation intoa stock corporation with an authorized capital stock of P100,000,000.00 divided into 1,000.000shares having a par value of P100.00 each, with said capital stock wholly subscribed to by theGovernment. 20 No tax exemption was incorporated in said Act.On June 17, 1961, R.A. No. 3043 was enacted increasing the above-mentioned authorizedcapital stock to P250,000,000.00 with the increase to be wholly subscribed by theGovernment. 21 No tax provision was incorporated in said Act.

On June 17, 1967, R.A. No 4897 was enacted. NPC's capital stock was increased again toP300,000,000.00, the increase to be wholly subscribed by the Government. No tax provisionwas incorporated in said Act. 22 On September 10, 1971, R.A. No. 6395 was enacted revising the charter of the NPC, C.A. No.120, as amended. Declared as primary objectives of the nation were:

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

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

As to the issuance of bonds by the NPC, Paragraph No. 3 of Section 8(a), states as follows:The bonds issued under the authority of this subsection shall be exemptfrom the payment of all taxes by the Republic of the Philippines, or by anyauthority, branch, division or political subdivision thereof which facts shall bestated upon the face of said bonds. . . . 24

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

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

A new section was added to the charter, now known as Section 13, R.A. No. 6395, which

declares the non-profit character and tax exemptions of NPC as follows:

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The Corporation shall be non-profit and shall devote all its returns from itscapital investment, as well as excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness andobligations and in furtherance and effective implementation of the policyenunciated in Section one of this Act, the Corporation is hereby declaredexempt:(a) From the payment of all taxes, duties, fees, imposts, charges costs andservice fees in any court or administrative proceedings in which it may be aparty, restrictions and duties to the Republic of the Philippines, its provinces,cities, and municipalities and other government agencies andinstrumentalities;

(b) From all income taxes, franchise taxes and realty taxes to be paid to theNational Government, its provinces, cities, municipalities and other government agencies and instrumentalities;(c) From all import duties, compensating taxes and advanced sales tax, andwharfage fees on import of foreign goods required for its operations andprojects; and(d) From all taxes, duties, fees, imposts and all other charges its provinces,cities, municipalities and other government agencies and instrumentalities,on all petroleum products used by the Corporation in the generation,transmission, utilization, and sale of electric power. 26 On November 7, 1972, Presidential Decree No. 40 was issued declaringthat the electrification of the entire country was one of the primary concernsof the country. And in connection with this, it was specifically stated that:The setting up of transmission line grids and the construction of associatedgeneration facilities in Luzon, Mindanao and major islands of the country,

including the Visayas, shall be the responsibility of the National Power Corporation (NPC) as the authorized implementing agency of the State. 27 xxx xxx xxxIt is the ultimate objective of the State for the NPC to own and operate as asingle integrated system all generating facilities supplying electric power tothe entire area embraced by any grid set up by the NPC. 28

On January 22, 1974, P.D. No. 380 was issued giving extra powers to the NPC to enable it tofulfill its role under aforesaid P.D. No. 40. Its authorized capital stock was raised toP2,000,000,000.00, 29 its total domestic indebtedness was pegged at a maximum of P3,000,000,000.00 at any one time, 30 and the NPC was authorized to borrow a total of US$1,000,000,000.00 31 in foreign loans.The relevant tax exemption provision for these foreign loans states as follows:

The loans, credits and indebtedness contracted under this subsection andthe payment of the principal, interest and other charges thereon, as well asthe importation of machinery, equipment, materials, supplies and services,

by the Corporation, paid from the proceeds of any loan, credit or indebtedness incurred under this Act, shall also be exempt from all direct and indirect taxes, fees, imposts, other charges and restrictions, includingimport restrictions previously and presently imposed, and to be imposed bythe Republic of the Philippines, or any of its agencies and politicalsubdivisions. 32 (Emphasis supplied)

Section 13(a) and 13(d) of R.A. No 6395 were amended to read as follows:(a) From the payment of all taxes, duties, fees, imposts, charges andrestrictions to the Republic of the Philippines, its provinces, cities,municipalities and other government agencies and instrumentalitiesincluding the taxes, duties, fees, imposts and other charges provided for under the Tariff and Customs Code of the Philippines, Republic ActNumbered Nineteen Hundred Thirty-Seven, as amended, and as further amended by Presidential Decree No. 34 dated October 27, 1972, andPresidential Decree No. 69, dated November 24, 1972, and costs and

service fees in any court or administrative proceedings in which it may be aparty;

xxx xxx xxx(d) From all taxes, duties, fees, imposts, and all other chargesimposed directly or indirectly by the Republic of the Philippines, itsprovinces, cities, municipalities and other government agencies andinstrumentalities, on all petroleum products used by the Corporation in thegeneration, transmission, utilization and sale of electric power. 33 (Emphasissupplied)

On February 26, 1970, P.D. No. 395 was issued removing certain restrictions in the NPC's saleof electricity to its different customers. 34 No tax exemption provision was amended, deleted or added.On July 31, 1975, P.D. No. 758 was issued directing that P200,000,000.00 would be

appropriated annually to cover the unpaid subscription of the Government in the NPC authorizedcapital stock, which amount would be taken from taxes accruing to the General Funds of theGovernment, proceeds from loans, issuance of bonds, treasury bills or notes to be issued by theSecretary of Finance for this particular purpose. 35 On May 27, 1976 P.D. No. 938 was issued

(I)n view of the accelerated expansion programs for generation andtransmission facilities which includes nuclear power generation, the presentcapitalization of National Power Corporation (NPC) and the ceilings for domestic and foreign borrowings are deemed insufficient; 36 xxx xxx xxx(I)n the application of the tax exemption provisions of the Revised Charter,the non-profit character of NPC has not been fully utilized because of restrictive interpretation of the taxing agencies of the government on saidprovisions; 37 xxx xxx xxx

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

Thus NPC's capital stock was raised to P8,000,000,000.00, 39 the total domestic indebtednessceiling was increased to P12,000,000,000.00, 40 the total foreign loan ceiling was raised toUS$4,000,000,000.0041 and Section 13 of R.A. No. 6395, was amended to read as follows:

The Corporation shall be non-profit and shall devote all its returns from itscapital investment as well as excess revenues from its operation, for expansion. To enable the Corporation to pay to its indebtedness andobligations and in furtherance and effective implementation of the policyenunciated in Section one of this Act, the Corporation, including itssubsidiaries, is hereby declared exempt from the payment of all forms of taxes, duties, fees, imposts as well as costs and service fees including filingfees, appeal bonds, supersedeas bonds, in any court or administrative

proceedings.42

II

On the other hand, the pertinent tax laws involved in this controversy are P.D. Nos. 882, 1177,1931 and Executive Order No. 93 (S'86).On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of NPC withregard to imports as follows:

WHEREAS, importations by certain government agencies, includinggovernment-owned or controlled corporation, are exempt from the paymentof customs duties and compensating tax; andWHEREAS, in order to reduce foreign exchange spending and to protectdomestic industries, it is necessary to restrict and regulate such tax-freeimportations.NOW THEREFORE, I, FERDINAND E. MARCOS, President of thePhilippines, by virtue of the powers vested in me by the Constitution, and dohereby decree and order the following:

Sec. 1. All importations of any government agency, including government-owned or controlled corporations which are exempt from the payment of

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[I]t must be borne in mind that Presidential Decree Nos. 380and 938 were issued by one man, acting as such the Executive andLegislative. 53 xxx xxx xxx[S]ince both presidential decrees were made by the same person, it wouldhave been very easy for him to retain the same or s imilar language used inP.D. No. 380 P.D. No. 938 if his intention were to preserve the indirect taxexemption of NPC. 54

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

13(a) : court or administrative proceedings;13(b) : income, franchise, realty taxes;13(c) : import of foreign goods required for its operations and projects;13(d) : petroleum products used in generation of electric power.

P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into the phrase "ALL FORMS OF TAXES,ETC.,", included 13(a) under the "as well as" clause and added PNOC subsidiaries as qualifiedfor tax exemptions.This is the only conclusion one can arrive at if he has read all the NPC laws in the order of enactment or issuance as narrated above in part I hereof. President Marcos must haveconsidered all the NPC statutes from C.A. No. 120 up to its latest amendments, P.D. No. 380,P.D. No. 395 and P.D. No. 759, AND came up 55 with a very simple Section 13, R.A. No. 6395,as amended by P.D. No. 938.One common theme in all these laws is that the NPC must be enable to pay itsindebtedness 56 which, as of P.D. No. 938, was P12 Billion in total domestic indebtedness, atany one time, and U$4 Billion in total foreign loans at any one time. The NPC must be and has

to be exempt from all forms of taxes if this goal is to be achieved.By virtue of P.D. No. 938 NPC's capital stock was raised to P8 Billion. It must be rememberedthat to pay the government share in its capital stock P.D. No. 758 was issued mandating thatP200 Million would be appropriated annually to cover the said unpaid subscription of theGovernment in NPC's authorized capital stock. And significantly one of the sources of thisannual appropriation of P200 million is TAX MONEY accruing to the General Fund of theGovernment. It does not stand to reason then that former President Marcos would order P200Million to be taken partially or totally from tax money to be used to pay the Governmentsubscription in the NPC, on one hand, and then order the NPC to pay all its indirect taxes, on theother.The above conclusion that then President Marcos lumped up Sections 13 (b), 13 (c) and (d) intothe phrase "All FORMS OF" is supported by the fact that he did not do the same for the taxexemption provision for the foreign loans to be incurred.The tax exemption on foreign loans found in Section 8(b), R.A. No. 6395, reads as follows:

The loans, credits and indebtedness contracted under this subsection and

the payment of the principal, interest and other charges thereon, as well asthe importation of machinery, equipment, materials and supplies by theCorporation, paid from the proceeds of any loan, credit or indebtednessincurred under this Act, shall also be exempt from all taxes, fees, imposts,other charges and restrictions, including import restrictions, by the Republicof the Philippines, or any of its agencies and political subdivisions. 57

The same was amended by P.D. No. 380 as follows:The loans, credits and indebtedness contracted this subsection and thepayment of the principal, interest and other charges thereon, as well as theimportation of machinery, equipment, materials, supplies and services, bythe Corporation, paid from the proceeds of any loan, credit or indebtednessincurred under this Act, shall also be exempt from all direct and indirect taxes, fees, imposts, other charges and restrictions, including importrestrictions previously and presently imposed , and to be imposed by theRepublic of the Philippines, or any of its agencies and political

subdivisions.

58

(Emphasis supplied)

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

VI

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

Actually, much earlier, P.D. No. 882 had already repealed NPC's tax-free importation privileges.It allowed, however, NPC to appeal said repeal with the Office of the President and to avail of tax-free importation privileges under its Section 1, subject to the prior approval of an Inter-

Agency Committed created by virtue of said P.D. No. 882. It is presumed that the NPC, beingthe special creation of the State, was allowed to continue its tax-free importations.This Court notes that petitioner brought to the attention of this Court, the matter of the abolitionof NPC's tax exemption privileges by P.D. No. 1177 61 only in his Common Reply/Comment toprivate Respondents' "Opposition" and "Comment" to Motion for Reconsideration, four (4)months AFTER the motion for Reconsideration had been filed. During oral arguments heard onJuly 9, 1992, he proceeded to discuss this tax exemption withdrawal as explained by then

Secretary of Justice Vicente Abad Santos in opinion No. 133 (S '77).62

A careful perusal of petitioner's senate Blue Ribbon Committee Report No. 474, the basis of the petition at bar, failsto yield any mention of said P.D. No. 1177's effect on NPC's tax exemptionprivileges. 63 Applying by analogy Pulido vs. Pablo,64 the court declares that the matter of P.D.No. 1177 abolishing NPC's tax exemption privileges was not seasonably invoked 65 by thepetitioner.Be that as it may, the Court still has to discuss the effect of P.D. No. 1177 on the NPC taxexemption privileges as this statute has been reiterated twice in P.D. No. 1931. The expressrepeal of tax privileges of any government-owned or controlled corporation (GOCC). NPCincluded, was reiterated in the fourth whereas clause of P.D. No. 1931's preamble. The subsidyprovided for in Section 23, P.D. No. 1177, being inconsistent with Section 2, P.D. No. 1931, wasdeemed repealed as the Fiscal Incentives Revenue Board was tasked with recommending thepartial or total restoration of tax exemptions withdrawn by Section 1, P.D. No. 1931.The records before Us do not indicate whether or not NPC asked for the subsidy contemplatedin Section 23, P.D. No. 1177. Considering, however, that under Section 16 of P.D. No. 1177,

NPC had to submit to the Office of the President its request for the P200 million mandated byP.D. No. 758 to be appropriated annually by the Government to cover its unpaid subscription tothe NPC authorized capital stock and that under Section 22, of the same P.D. No. NPC had tolikewise submit to the Office of the President its internal operating budget for review due tocapital inputs of the government (P.D. No. 758) and to the national government's guarantee of the domestic and foreign indebtedness of the NPC, it is clear that NPC was covered by P.D. No.1177.There is reason to believe that NPC availed of subsidy granted to exempt GOCC's that suddenlyfound themselves having to pay taxes. It will be noted that Section 23, P.D. No. 1177, mandatedthat the Secretary of Finance and the Commissioner of the Budget had to establish thenecessary procedure to accomplish the tax payment/tax subsidy scheme of the Government. Ineffect, NPC, did not put any cash to pay any tax as it got from the General Fund the amountsnecessary to pay different revenue collectors for the taxes it had to pay.In his memorandum filed July 16, 1992, petitioner submits:

[T]hat with the enactment of P.D. No. 1177 on July 30, 1977, the NPC lost

all its duty and tax exemptions, whether direct or indirect. And so there wasnothing to be withdrawn or to be restored under P.D. No. 1931, issued on

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June 11, 1984. This is evident from sections 1 and 2 of said P.D. No. 1931,which reads:

"Section 1. The provisions of special or general law tothe contrary notwithstanding, all exemptions from thepayment of duties, taxes, fees, imports and other charges heretofore granted in favor of government-owned or controlled corporations including their subsidiaries are hereby withdrawn."Sec. 2. The President of the Philippines and/or theMinister of Finance, upon the recommendation of theFiscal Incentives Review Board created under P.D. No.

776, is hereby empowered to restore partially or totally,the exemptions withdrawn by section 1 above. . . .

Hence, P.D. No. 1931 did not have any effect or did it change NPC's status.Since it had already lost all its tax exemptions privilege with the issuance of P.D. No. 1177 seven (7) years earlier or on July 30, 1977, there were no taxexemptions to be withdrawn by section 1 which could later be restored bythe Minister of Finance upon the recommendation of the FIRB under Section 2 of P.D. No. 1931. Consequently, FIRB resolutions No. 10-85, and1-86, were all illegally and validly issued since FIRB acted beyond their statutory authority by creating and not merely restoring the tax exemptstatus of NPC. The same is true for FIRB Res. No. 17-87 which restoredNPC's tax exemption under E.O. No. 93 which likewise abolished all dutiesand tax exemptions but allowed the President upon recommendation of theFIRB to restore those abolished.

The Court disagrees.

Applying by analogy the weight of authority that:When a revised and consolidated act re-enacts in the same or substantiallythe same terms the provisions of the act or acts so revised andconsolidated, the revision and consolidation shall be taken to be acontinuation of the former act or acts, although the former act or acts maybe expressly repealed by the revised and consolidated act; and all rightsand liabilities under the former act or acts are preserved and may beenforced. 66

the Court rules that when P.D. No. 1931 basically reenacted in its Section 1 the first half of Section 23, P.D. No. 1177, on withdrawal of tax exemption privileges of all GOCC's said Section1, P.D. No. 1931 was deemed to be a continuation of the first half of Section 23, P.D. No. 1177,although the second half of Section 23, P.D. No. 177, on the subsidy scheme for former taxexempt GOCCs had been expressly repealed by Section 2 with its institution of the FIRBrecommendation of partial/total restoration of tax exemption privileges.The NPC tax privileges withdrawn by Section 1. P.D. No. 1931, were, therefore, the same NPC

tax exemption privileges withdrawn by Section 23, P.D. No. 1177. NPC could no longer obtain asubsidy for the taxes it had to pay. It could, however, under P.D. No. 1931, ask for a totalrestoration of its tax exemption privileges, which, it did, and the same were granted under FIRBResolutions Nos. 10-85 67 and 1-86 68 as approved by the Minister of Finance.Consequently, contrary to petitioner's submission, FIRB Resolutions Nos. 10-85 and 1-86 wereboth legally and validly issued by the FIRB pursuant to P.D. No. 1931. FIRB did not createdNPC's tax exemption status but merely restored it. 69 Some quarters have expressed the view that P.D. No. 1931 was illegally issued under the nowrather infamous Amendment No. 6 70 as there was no showing that President Marcos'encroachment on legislative prerogatives was justified under the then prevailing condition thathe could legislate "only if the Batasang Pambansa 'failed or was unable to act inadequately onany matter that in his judgment required immediate action' to meet the 'exigency'. 71

Actually under said Amendment No. 6, then President Marcos could issue decrees not onlywhen the Interim Batasang Pambansa failed or was unable to act adequately on any matter for any reason that in his (Marcos') judgment required immediate action, but also when there

existed a grave emergency or a threat or thereof. It must be remembered that said PresidentialDecree was issued only around nine (9) months after the Philippines unilaterally declared a

moratorium on its foreign debt payments 72 as a result of the economic crisis triggered by loss of confidence in the government brought about by the Aquino assassination. The Philippines wasthen trying to reschedule its debt payments. 73 One of the big borrowers was the NPC 74 whichhad a US$ 2.1 billion white elephant of a Bataan Nuclear Power Plant on its back. 75 From allindications, it must have been this grave emergency of a debt rescheduling which compelledMarcos to issue P.D. No. 1931, under his Amendment 6 power.76 The rule, therefore, that under the 1973 Constitution "no law granting a tax exemption shall bepassed without the concurrence of a majority of all the members of the BatasangPambansa" 77 does not apply as said P.D. No. 1931 was not passed by the Interim BatasangPambansa but by then President Marcos under His Amendment No. 6 power.P.D. No. 1931 was, therefore, validly issued by then President Marcos under his Amendment

No. 6 authority.Under E.O No. 93 (S'86) NPC's tax exemption privileges were again clipped by, this time,President Aquino. Its section 2 allowed the NPC to apply for the restoration of its tax exemptionprivileges. The same was granted under FIRB Resolution No. 17-87 78 dated June 24, 1987which restored NPC's tax exemption privileges effective, starting March 10, 1987, the date of effectivity of E.O. No. 93 (S'86).FIRB Resolution No. 17-87 was approved by the President on October 5, 1987. 79 There is noindication, however, from the records of the case whether or not similar approvals were given bythen President Marcos for FIRB Resolutions Nos. 10-85 and 1- 86. This has led some quartersto believe that a "travesty of justice" might have occurred when the Minister of Finance approvedhis own recommendation as Chairman of the Fiscal Incentives Review Board as what happenedin Zambales Chromate vs. Court of Appeals 80 when the Secretary of Agriculture and NaturalResources approved a decision earlier rendered by him when he was the Director of Mines, 81 and in Anzaldo vs. Clave

82 where Presidential Executive Assistant Clave affirmed, onappeal to Malacañang, his own decision as Chairman of the Civil Service Commission. 83

Upon deeper analysis, the question arises as to whether one can talk about "due process" beingviolated when FIRB Resolutions Nos. 10-85 and 1-86 were approved by the Minister of Financewhen the same were recommended by him in his capacity as Chairman of the Fiscal IncentivesReview Board. 84 In Zambales Chromite and Anzaldo, two (2) different parties were involved: mining groups andscientist-doctors, respectively. Thus, there was a need for procedural due process to befollowed.In the case of the tax exemption restoration of NPC, there is no other comparable entity — noteven a single public or private corporation — whose rights would be violated if NPC's taxexemption privileges were to be restored. While there might have been a MERALCO beforeMartial Law, it is of public knowledge that the MERALCO generating plants were sold to the NPCin line with the State policy that NPC was to be the State implementing arm for the electrificationof the entire country. Besides, MERALCO was limited to Manila and its environs. And as of 1984, there was no more MERALCO — as a producer of electricity — which could haveobjected to the restoration of NPC's tax exemption privileges.

It should be noted that NPC was not asking to be granted tax exemption privileges for the firsttime. It was just asking that its tax exemption privileges be restored. It is for these reasons that,at least in NPC's case, the recommendation and approval of NPC's tax exemption privilegesunder FIRB Resolution Nos. 10-85 and 1-86, done by the same person acting in his dualcapacities as Chairman of the Fiscal Incentives Review Board and Minister of Finance,respectively, do not violate procedural due process.While as above-mentioned, FIRB Resolution No. 17-87 was approved by President Aquino onOctober 5, 1987, the view has been expressed that President Aquino, at least with regard toE.O. 93 (S'86), had no authority to sub-delegate to the FIRB, which was allegedly not a delegateof the legislature, the power delegated to her thereunder.

A misconception must be cleared up.When E.O No. 93 (S'86) was issued, President Aquino was exercising both Executive andLegislative powers. Thus, there was no power delegated to her, rather it was she who wasdelegating her power. She delegated it to the FIRB, which, for purposes of E.O No. 93 (S'86), isa delegate of the legislature. Clearly, she was not sub-delegating her power.

And E.O. No. 93 (S'86), as a delegating law, was complete in itself — it set forth the policy to becarried out 85 and it fixed the standard to which the delegate had to conform in the performance

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of his functions, 86 both qualities having been enunciated by this Court in Pelaez vs. Auditor General . 87 Thus, after all has been said, it is clear that the NPC had its tax exemption privileges restoredfrom June 11, 1984 up to the present.

VIIThe next question that projects itself is — who pays the tax?The answer to the question could be gleamed from the manner by which the Commissaries of the Armed Forces of the Philippines sell their goods.By virtue of P.D. No. 83, 88 veterans, members of the Armed of the Philippines, and their defendants but groceries and other goods free of all taxes and duties if bought from any AFPCommissaries.

In practice, the AFP Commissary suppliers probably treat the unchargeable specific, ad valorem and other taxes on the goods earmarked for AFP Commissaries as an added cost of operation and distribute it over the total units of goods sold as it would any other cost. Thus,even the ordinary supermarket buyer probably pays for the specific,ad valorem and other taxeswhich theses suppliers do not charge the AFP Commissaries. 89 IN MUCH THE SAME MANNER, it is clear that private respondents-oil companies have toabsorb the taxes they add to the bunker fuel oil they sell to NPC.It should be stated at this juncture that, as early as May 14, 1954, the Secretary of Justicerenders an opinion, 90wherein he stated and We quote:

xxx xxx xxxRepublic Act No. 358 exempts the National Power Corporation from "alltaxes, duties, fees, imposts, charges, and restrictions of the Republic of thePhilippines and its provinces, cities, and municipalities." This exemption isbroad enough to include all taxes, whether direct or indirect, which theNational Power Corporation may be required to pay, such as the specific tax

on petroleum products. That it is indirect or is of no amount [should be of nomoment], for it is the corporation that ultimately pays it. The view whichrefuses to accord the exemption because the tax is first paid by the seller disregards realities and gives more importance to form than to substance.Equity and law always exalt substance over from.xxx xxx xxxTax exemptions are undoubtedly to be construed strictly but not sogrudgingly as knowledge that many impositions taxpayers have to pay arein the nature of indirect taxes. To limit the exemption granted the NationalPower Corporation to direct taxes notwithstanding the general and broadlanguage of the statue will be to thwrat the legislative intention in givingexemption from all forms of taxes and impositions without distinguishingbetween those that are direct and those that are not. (Emphasis supplied)

In view of all the foregoing, the Court rules and declares that the oil companies which supplybunker 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 bepassed 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 NPCmust beheld exempted from absorbing the economic burden of indirect taxation. This means, onthe one hand, that the oil companies which wish to sell to NPC absorb all or part of the economicburden of the taxes previously paid to BIR, which could they shift to NPC if NPC did not enjoyexemption from indirect taxes. This means also, on the other hand, that the NPC may refuse topay the part of the "normal" purchase price of bunker fuel oil which represents all or part of thetaxes previously paid by the oil companies to BIR. If NPC nonetheless purchases such oil fromthe 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 entitledto be reimbursed by the BIR for that part of the buying price of NPC which verifiably representsthe tax already paid by the oil company-vendor to the BIR.It should be noted at this point in time that the whole issue of who WILL pay these indirect taxesHAS BEEN RENDERED moot and academic by E.O. No. 195 issued on June 16, 1987 by virtue

of which the ad valorem tax rate on bunker fuel oil was reduced to ZERO (0%) PER CENTUM.Said E.O. no. 195 reads as follows:

EXECUTIVE ORDER NO. 195 AMENDING PARAGRAPH (b) OF SECTION 128 OF THE NATIONALINTERNAL REVENUE CODE, AS AMENDED BY REVISING THE EXCISETAX RATES OF CERTAIN PETROLEUM PRODUCTS.xxx xxx xxxSec. 1. Paragraph (b) of Section 128 of the National Internal RevenueCode, as amended, is hereby amended to read as follows:Par. (b) — For products subject to ad valorem tax only:PRODUCT AD VALOREM TAX RATE1. . . .2. . . .

3. . . .4. Fuel oil, commercially known as bunker oil and on similar fuel oils havingmore or less the same generating power 0%xxx xxx xxxSec. 3. This Executive Order shall take effect immediately.Done in the city of Manila, this 17th day of June, in the year of Our Lord,nineteen hundred and eighty-seven. (Emphasis supplied)

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

A case in point is the Tax Credit Memo issued by the Bureau of Internal Revenue in favor of theNPC last July 7, 1986 for P58.020.110.79 which were for "erroneously paid specific and ad valorem taxes during the period from October 31, 1984 to April 27, 1985. 91 Petitioner asks Us to

declare this Tax Credit Memo illegal as the PNC did not have indirect tax exemptions with theenactment of P.D. No. 938. As We have already ruled otherwise, the only questions left arewhether NPC Is entitled to a tax refund for the tax component of the price of the bunker fuel oilpurchased from Caltex (Phils.) Inc. and whether the Bureau of Internal Revenue properlyrefunded the amount to NPC.

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

Inc.94

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

Sec. 230. Recover of tax erroneously or illegally collected . — No suit or proceeding shall be maintained in any court for the recovery of any nationalinternal revenue tax hereafter alleged to have been erroneously or illegallyassessed or collected, or of any penalty claimed to have been collectedwithout authority, or of any sum alleged to have been excessive or in anyManner wrongfully collected. until a claim for refund or credit has been dulyfiled with the Commissioner; but such suit or proceeding may bemaintained, 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 expirationof two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment; Provided, however,

That the Commissioner may, even without a written claim therefor, refund or

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credit any tax, where on the face of the return upon which payment wasmade, such payment appears clearly, to have been erroneously paid.xxx xxx xxx

Inasmuch as NPC filled its claim for P58.020,110.79 on September 11, 1985, 95 theCommissioner correctly issued the Tax Credit Memo in view of NPC's indirect tax exemption.Petitioner, however, asks Us to restrain the Commissioner from acting favorably on NPC's claimfor P410.580,000.00 which represents specific and ad valorem taxes paid by the oil companiesto the BIR from June 11, 1984 to the early part of 1986. 96

A careful examination of petitioner's pleadings and annexes attached thereto does not revealwhen the alleged claim for a P410,580,000.00 tax refund was filed. It is only stated In paragraphNo. 2 of the Deed of Assignment 97executed by and between NPC and Caltex (Phils.) Inc., as

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

Actually, as the Court sees it, this is a clear case of a "Mexican standoff." We cannot restrain theBIR from refunding said amount because of Our ruling that NPC has both direct and indirect taxexemption privileges. Neither can We order the BIR to refund said amount to NPC as there is nopending petition for review on certiorari of a suit for its collection before Us. At any rate, at thispoint in time, NPC can no longer file any suit to collect said amount EVEN IF lt has previouslyfiled a claim with the BIR because it is time-barred under Section 230 of the National InternalRevenue Code of 1977. as amended, which states:

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

supplied)The date of the Deed of Assignment is June 6. 1986. Even if We were to assume that paymentby NPC for the amount of P410,580,000.00 had been made on said date. it is clear that morethan two (2) years had already elapsed from said date. At the same time, We should note thatthere is no legal obstacle to the BIR granting, even without a suit by NPC, the tax credit or refund claimed by NPC, assuming that NPC's claim had been made seasonably, and assumingthe amounts covered had actually been paid previously by the oil companies to the BIR.WHEREFORE, in view of all the foregoing, the Motion for Reconsideration of petitioner is herebyDENIED for lack of merit and the decision of this Court promulgated on May 31, 1991 is hereby

AFFIRMED.SO ORDERED.Narvasa, C.J., Feliciano, Bidin, Regalado, Romero, Bellosillo and Melo, JJ., concur.Padilla and Quiason, JJ. took no part.

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G.R. No. 140230 December 15, 2005 COMMISSIONER OF INTERNAL REVENUE, Petitioner,vs.PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, Respondent.D E C I S I O NGARCIA, J .: In this petition for review on certiorari , the Commissioner of Internal Revenue (Commissioner)seeks the review and reversal of the September 17, 1999 Decision1 of the Court of Appeals (CA)in CA-G.R. No. SP 47895 , affirming, in effect, the February 18, 1998 decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5178, a claim for tax refund/credit instituted byrespondent Philippine Long Distance Company (PLDT) against petitioner for taxes i t paid to the

Bureau of Internal Revenue (BIR) in connection with its importation in 1992 to 1994 of equipment, machineries and spare parts.The facts:PLDT is a grantee of a franchise under Republic Act (R.A.) No. 7082 to install, operate andmaintain a telecommunications system throughout the Philippines.For equipment, machineries and spare parts it imported for its business on different dates fromOctober 1, 1992 to May 31, 1994, PLDT paid the BIR the amount of P164,510,953.00, brokendown as follows: (a) compensating tax of P126,713,037.00; advance sales taxof P12,460,219.00 and other internal revenue taxes of P25,337,697.00. For similar importationsmade between March 1994 to May 31, 1994, PLDT paid P116,041,333.00 value-added tax(VAT).On March 15, 1994, PLDT addressed a letter to the BIR seeking a confirmatory ruling on its taxexemption privilege under Section 12 of R.A. 7082, which reads:Sec. 12. The gr antee … 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, … shal l pay a franchisetax 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 earningsthereof : Provided, That the grantee … shall continue to be liable for income taxes payableunder Title II of the National Internal Revenue Code pursuant to Sec. 2 of Executive Order No.72 unless the latter enactment is amended or repealed, in which case the amendment or repealshall be applicable thereto. (Emphasis supplied).Responding, the BIR issued on April 19, 1994 Ruling No. UN-140-94 ,

3 pertinently reading, as

follows:PLDT shall be subject only to the following taxes, to wit:xxx xxx xxx7. The 3% franchise tax on gross receipts which shall be in lieu of all taxes on its franchise or earnings thereof.xxx xxx xxx

The "in lieu of all taxes" provision under Section 12 of RA 7082 clearly exempts PLDT from alltaxes including the 10% value-added tax (VAT) prescribed by Section 101 (a) of the same Codeon its importations of equipment, machineries and spare parts necessary in the conduct of itsbusiness covered by the franchise, except the aforementioned enumerated taxes for whichPLDT is expressly made liable.xxx xxx xxxIn view thereof, this Office … hereby holds that PLDT, is exempt from VAT on its importation of

equipment, machineries and spare parts … needed in its franchise operations. Armed with the foregoing BIR ruling, PLDT filed on December 2, 1994 a claim

4 for tax

credit/refund of the VAT, compensating taxes, advance sales taxes and other taxes it had beenpaying "in connection with its importation of various equipment, machineries and spare partsneeded for its operations" . With its claim not having been acted upon by the BIR, and obviouslyto forestall the running of the prescriptive period therefor, PLDT filed with the CTA a petition for review,5 therein seeking a refund of, or the issuance of a tax credit certificate in, the amountofP280,552,286.00, representing compensating taxes, advance sales taxes, VAT and other

internal revenue taxes alleged to have been erroneously paid on its importations from October 1992 to May 1994. The petition was docketed in said court as CTA Case No. 5178 .

On February 18, 1998, the CTA rendered a decision6 granting PLDT‘s petition, pertinentlysaying:This Court has noted that petitioner has included in its claim receipts covering the period prior toDecember 16, 1992, thus, prescribed and barred from recovery. In conclusion, We find that thepetitioner is entitled to the reduced amount of P223,265,276.00 after excluding from the finalcomputation those taxes that were paid prior to December 16, 1992 as they fall outside the two-year prescriptive period for claiming for a refund as provided by law. The computation of therefundable amount is summarized as follows:COMPENSATING TAXTotal amount claimed P126,713.037.00Less:

a) Amount already prescribed: xxxTotal P 38,015,132.00b) Waived by petitioner (Exh. B-216) P 1,440,874.00 P39,456,006.00

Amount refundable P87,257,031.00 ADVANCE SALES TAXTotal amount claimed P12,460.219.00Less amount already prescribed: P5,043,828.00

Amount refundable P7,416,391.00OTHER BIR TAXESTotal amount claimed P25,337,697.00Less amount already prescribed: 11,187,740.00

Amount refundable P14,149,957.00VALUE ADDED TAXTotal amount claimed P116.041,333.00

Less amount waived by petitioner (unaccounted receipts) 1,599,436.00

Amount refundable P114,441,897.00TOTAL AMOUNT REFUNDABLE P223,265,276.00,============(Breakdown omitted)and accordingly disposed, as follows:WHEREFORE, in view of all the foregoing, this Court finds the instant petition meritorious and inaccordance with law. Accordingly, respondent is hereby ordered to REFUND or to ISSUE infavor of petitioner a Tax Credit Certificate in the reduced amount of P223,265,276.00representing erroneously paid value-added taxes, compensating taxes, advance sales taxes andother BIR taxes on its importation of equipments (sic), machineries and spare parts for theperiod covering the taxable years 1992 to 1994.Noticeably, the CTA decision, penned by then Associate Justice Ramon O. de Veyra, with thenCTA Presiding Judge Ernesto D. Acosta, concurring, is punctuated by a dissenting opinion7 of

Associate Judge Amancio Q. Saga who maintained that the phrase "in lieu of all taxes" found inSection 12 of R.A. No. 7082, supra, refers to exemption from "direct taxes only " and does notcover "indirect taxes", such as VAT, compensating tax and advance sales tax.In time, the BIR Commissioner moved for a reconsideration but the CTA, in its Resolution

8 of

May 7, 1998, denied the motion, with Judge Amancio Q. Saga reiterating his dissent.9 Unable to accept the CTA decision, the BIR Commissioner elevated the matter to the Court of

Appeals (CA) by way of petition for review, thereat docketed as CA-G.R. No. 47895 . As stated at the outset hereof, the appellate court, in the herein challenged Decision

10 dated

September 17, 1999, dismissed the BIR‘s petition, thereby effectively affirming the CTA‘s judgment.Relying on its ruling in an earlier case between the same parties and involving the same issue – CA-G.R. SP No. 40811, decided 16 February 1998 – the appellate court partly wrote in itsassailed decision:This Court has already spoken on the issue of what taxes are referred to in the phrase "in lieu of all taxes" found in Section 12 of R.A. 7082. There are no reasons to deviate from the ruling and

the same must be followed pursuant to the doctrine of stare decisis. xxx. "Stare decisis et nonquieta movere. Stand by the decision and disturb not what is settled."

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Hence, this recourse by the BIR Commissioner on the lone assigned error that:THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT IS EXEMPT FROMTHE PAYMENT OF VALUE-ADDED TAXES, COMPENSATING TAXES, ADVANCE SALESTAXES AND OTHER BIR TAXES ON ITS IMPORTATIONS, BY VIRTUE OF THE PROVISIONIN ITS FRANCHISE THAT THE 3% FRANCHISE TAX ON ITS GROSS RECEIPTS SHALL BEIN LIEU OF ALL TAXES ON ITS FRANCHISE OR EARNINGS THEREOF.There is no doubt that, insofar as the Court of Appeals is concerned, the issue petitioner presently raises had been resolved by that court in CA-G.R. SP No. 40811,entitled Commissioner of Internal Revenue vs. Philippine Long Distance Company. There, theSixteenth Division of the appellate court declared that under the express provision of Section 12of R.A. 7082, supra, "the payment [by PLDT] of the 3% franchise tax of [its] gross receipts shall

be in lieu of all taxes" exempts PLDT from payment of compensating tax, advance sales tax,VAT and other internal revenue taxes on its importation of various equipment, machinery andspare parts for the use of its telecommunications system.Dissatisfied with the CA decision in that case, the BIR Commissioner initially filed with this Courta motion for time to file a petition for review, docketed in this Court as G.R. No. 134386 .However, on the last day for the filing of the intended petition, the then BIR Commissioner had achange of heart and instead manifested11 that he will no longer pursue G.R. No. 134386, therebeing no compelling grounds to disagree with the Court of Appeals‘ decision in CA-G.R. 40811.Consequently, on September 28, 1998, the Court issued a Resolutio n12 in G.R. No. 134386notifying the parties that "no petition" was filed in said case and that the CA judgment sought tobe reviewed therein "has now become final and executory ". Pursuant to said Resolution, anEntry of Judgment13 was issued by the Court of Appeals in CA-G.R. SP No. 40811. Hence, theCA‘s dismissal of CA-G.R. No. 47895 on the additional ground of stare decisis.Under the doctrine of stare decisis et non quieta movere, a point of law already es tablished will,generally, be followed by the same determining court and by all courts of lower rank in

subsequent cases where the same legal issue is raised.14

For reasons needing no belaboring,however, the Court is not at all concluded by the ruling of the Court of Appeals in its earlier CA-G.R. SP No. 47895.The Court has time and again stated that the rule on stare decisis promotes stability in the lawand should, therefore, be accorded respect. However, blind adherence to precedents, simply asprecedent, no longer rules. More important than anything else is that the court is right,15 thus itsduty to abandon any doctrine found to be in violation of the law in force .16

As it were, the former BIR Commissioner‘s decision not to pursue his petition in G.R. No.134386 denied the BIR, at least as early as in that case, the opportunity to obtain from the Courtan authoritative interpretation of Section 12 of R.A. 7082. All is, however, not lost. For, thegovernment is not estopped by acts or errors of its agents, particularly on matters involvingtaxes. Corollarily, the erroneous application of tax laws by public officers does not preclude thesubsequent correct application thereof .17 Withal, the errors of certain administrative officers, if that be the case, should never be allowed to jeopardize the government‘s financial position .18 Hence, the need to address the main issue tendered herein.

According to the Court of Appeals, the "in lieu of all taxes" clause found in Section 12 of PLDT‘sfranchise (R.A. 7082) covers all taxes, whether direct or indirect; and that said section states, inno uncertain terms, that PLDT‘s payment of the 3% franchise tax on all its gross receipts from

businesses transacted by it under its franchise is in lieu of all taxes on the franchise or earningsthereof. In fine, the appellate court, agreeing with PLDT, posits the view that the word"all" encompasses any and all taxes collectible under the National Internal Revenue Code(NIRC), save those specifically mentioned in PLDT‘s franchise, such as income and real

property taxes.The BIR Commissioner excepts. He submits that the exempting " in lieu of all taxes" clausecovers direct taxes only, adding that for indirect taxes to be included in the exemption, theintention to include must be specific and unmistakable. He thus faults the Court of Appeals for erroneously declaring PLDT exempt from payment of VAT and other indirect taxes on itsimportations. To the Commissioner, PLDT‘s claimed entitlement to tax refund/credit is withoutbasis inasmuch as the 3% franchise tax being imposed on PLDT is not a substitute for or in lieuof indirect taxes.

The sole issue at hand is whether or not PLDT, given the tax component of its franchise, isexempt from paying VAT, compensating taxes, advance sales taxes and internal revenue taxeson its importations.Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burdenof taxation, taxes may be classified into either direct tax or indirect tax.In context, direct taxes are those that are exacted from the very person who, it is intended or desired, should pay them;19 they are impositions for which a taxpayer is directly liable on thetransaction or business he is engaged in.20 On the other hand, indirect taxes are those that are demanded, in the first instance, from, or arepaid by, one person in the expectation and intention that he can shift the burden to someoneelse.

21 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, suchas 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 liabilityto pay it, to the purchaser as part of the price of goods sold or services rendered.To put the situation in graphic terms, by tacking the VAT due to the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is shifted only tothe intermediate buyer and ultimately to the final purchaser is the burden of the tax.22 Stateddifferently, a seller who is directly and legally liable for payment of an indirect tax, such as theVAT on goods or services, is not necessarily the person who ultimately bears the burden of thesame tax. It is the final purchaser or end-user of such goods or services who, although notdirectly and legally liable for the payment thereof, ultimately bears the burden of the tax.23 There can be no serious argument that PLDT, vis-à-vis its payment of internal revenue taxes onits importations in question, is effectively claiming exemption from taxes not falling under thecategory of direct taxes. The claim covers VAT, advance sales tax and compensating tax.The NIRC classifies VAT as "an indirect tax … the amount of [which] may be shifted or passed

on to the buyer, transferee or lessee of the goods" .24

As aptly pointed out by Judge Amancio Q.Saga in his dissent in C.T.A. Case No. 5178, the 10% VAT on importation of goods partakes of an excise tax levied on the privilege of importing articles. It is not a tax on the franchise of abusiness enterprise or on its earnings. It is imposed on all taxpayers who import goods (unlesssuch importation falls under the category of an exempt transaction under Sec. 109 of theRevenue Code) whether or not the goods will eventually be sold, bartered, exchanged or utilizedfor personal consumption. The VAT on importation replaces the advance sales tax payable byregular importers who import articles for sale or as raw materials in the manufacture of finishedarticles for sale.

25

Advance sales tax has the attributes of an indirect tax because the tax-paying importer of goodsfor sale or of raw materials to be processed into merchandise can shift the tax or, to borrowfrom Philippine Acetylene Co, Inc. vs. Commissioner of Internal Revenue,26 lay the "economicburden of the tax", on the purchaser, by subsequently adding the tax to the selling price of theimported article or finished product.Compensating tax also partakes of the nature of an excise tax payable by all persons who

import articles, whether in the course of business or not.

27

The rationale for compensating tax isto place, for tax purposes, persons purchasing from merchants in the Philippines on a more or less equal basis with those who buy directly from foreign countries.28 It bears to stress that the liability for the payment of the indirect taxes lies only with the seller of the goods or services, not in the buyer thereof. Thu s, one cannot invoke one‘s exemptionprivilege to avoid the passing on or the shifting of the VAT to him by the manufacturers/suppliersof the goods he purchased.29 Hence, it is important to determine if the tax exemption granted toa taxpayer specifically includes the indirect tax which is shifted to him as part of the purchaseprice, otherwise it is presumed that the tax exemption embraces only those taxes for which thebuyer is directly liable.30 Time and again, the Court has stated that taxation is the rule, exemption is the exception.

Accordingly, statutes granting tax exemptions must be construed in strictissimi juris against thetaxpayer and liberally in favor of the taxing authority.31 To him, therefore, who claims a refund or exemption from tax payments rests the burden of justifying the exemption by words too plain tobe mistaken and too categorical to be misinterpreted.32

As may be noted, the clause "in lieu of all taxes" in Section 12 of RA 7082 is immediatelyfollowed by the limiting or qualifying clause "on this franchise or earnings thereof" , suggesting

























































































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that the exemption is limited to taxes imposed directly on PLDT since taxes pertaining to PLDT‘sfranchise or earnings are its direct liability. Accordingly, indirect taxes, not being taxes onPLDT‘s franchise or earnings, are outside the purview of the "in lieu" provision.If we were to adhere to the appellate court‘s in terpretation of the law that the "in lieu of all taxes" clauseencompasses the totality of all taxes collectible under the Revenue Code, then, theimmediately following limiting clause "on this franchise and its earnings" would be nothing morethan a pure jargon bereft of effect and meaning whatsoever. Needless to stress, this kind of interpretation cannot be accorded a governing sway following the familiar legal maxim redendosingula singulis meaning, take the words distributively and apply the reference. Under thisprinciple, each word or phrase must be given its proper connection in order to give it proper force and effect, rendering none of them useless or superfluous.

33

Significantly, in Manila Electric Company [Meralco] vs. Vera,34

the Court declared the relativelybroader exempting clause "shall be in lieu of all taxes and assessments of whatsoever nature …upon the privileges earnings, income franchise ... of the grantee " written in par. # 9 of Meralco‘sfranchise as not so all encompassing as to embrace indirect tax, like compensating tax. There,the Court said:It is a well-settled rule or principle in taxation that a compensating tax … is an excise tax … onethat is imposed on the performance of an act, the engaging in an occupation, or the enjoymentof a privilege. A tax levied upon property because of its ownership is a direct tax, whereas onelevied upon property because of its use is an excise duty. …. The compensating tax being imposed upon … MERALCO, is an impost on its use of importedarticles and is not in the nature of a direct tax on the articles themselves, the latter tax fallingwithin the exemption. Thus, inInternational Business Machine Corporation vs. Collector of Internal Revenue, … 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 isnot the act of importation that is taxed under section 190 but the uses of imported goods not

subjected to a sales tax" because the "compensating tax was expressly designated as asubstitute to make up or compensate for the revenue lost to the government through theavoidance of sales taxes by means of direct purchases abroad.xxx xxx xxxxxx 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 provisionof paragraph 9 and adding to the exemption such words as "compensating tax" or "purchasesfrom abroad for use in its business," and the like.It may be so that in Maceda vs. Macaraig, Jr .

35 the Court held that an exemption from "all taxes"

granted to the National Power Corporation (NPC) under its charter 36 includes both direct andindirect taxes. But far from providing PLDT comfort, Maceda in fact supports the case of hereinpetitioner, the correct lesson of Macedabeing that an exemption from "all taxes" excludesindirect taxes, unless the exempting statute, like NPC‘s charter, is so couched as to includeindirect tax from the exemption. Wrote the Court:xxx However, the amendment under Republic Act No. 6395 enumerated the details covered by

the exemption. Subsequently, P.D. 380, made even more specific the details of the exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum products used in itsoperation. Presidential Decree No. 938 [NPC‘s amended charter) amended the tax exemption bysimplifying the same law in general terms. It succinctly exempts NPC from "all forms of taxes,duties fees …." The use of the phrase "all forms" of taxes demonstrate the intention of the law to give NPC allthe tax exemptions it has been enjoying before. …. xxx xxx xxxIt is evident from the provisions of P.D. No. 938 that its purpose is to maintain the tax exemptionof NPC from all forms of taxes including indirect taxes as provided under R.A. No. 6395 and P.D.380 if it is to attain its goals. (Italics in the original; words in bracket added)Of similar import is what we said in Borja vs. Collector of Internal Revenue.37 There, the Courtupheld the decision of the CTA denying a claim for refund of the compensating taxes paid on theimportation of materials and equipment by a grantee of a heat and power legislative franchisecontaining an "in lieu" provision, rationalizing as follows:

xxx Moreover, the petitioner‘s alleged exemption from the payment of compensating tax in thepresent case is not clear or expressed; unlike the exemption from the payment of income tax

which was clear and expressed in the Carcar case. Unless it appears clearly and manifestly thatan exemption is intended, the provision is to be construed strictly against the party claimingexemption. xxx.Jurisprudence thus teaches that imparting the " in lieu of all taxes" clause a literal meaning, asdid the Court of Appeals and the CTA before it, is fallacious. It is basic that in construing astatute, it is the duty of courts to seek the real intent of the legislature, even if, by so doing, theymay limit the literal meaning of the broad language.38 It cannot be over-emphasized that tax exemption represents a loss of revenue to thegovernment and must, therefore, not rest on vague inference. When claimed, it must be strictlyconstrued against the taxpayer who must prove that he falls under the exception. And, if anexemption is found to exist, it must not be enlarged by construction, since the reasonable

presumption is that the state has granted in express terms all it intended to grant at all, and that,unless the privilege is limited to the very terms of the statute the favor would be extendedbeyond dispute in ordinary cases.39

All told, we fail to see how Section 12 of RA 7082 operates as granting PLDT blanket exemptionfrom payment of indirect taxes, which, in the ultimate analysis, are not taxes on its franchise or earnings. PLDT has not shown its eligibility for the desired exemption. None should be granted.

As a final consideration, the Court takes particular stock, as the CTA earlier did, of PLDT‘s

allegation that the Bureau of Customs assessed the company for advance sales tax andcompensating tax for importations entered between October 1, 1992 and May 31, 1994 whenthe value-added tax system already replaced, if not totally eliminated, advance sales andcompensating taxes.40 Indeed, pursuant to Executive Order No. 27341 which took effect onJanuary 1, 1988, a multi-stage value-added tax was put into place to replace the tax on originaland subsequent sales tax.42 It stands to reason then, as urged by PLDT, that compensating taxand advance sales tax were no longer collectible internal revenue taxes under the NILRC whenthe Bureau of Customs made the assessments in question and collected the corresponding tax.

Stated a bit differently, PLDT was no longer under legal obligation to pay compensating tax andadvance sales tax on its importation from 1992 to 1994.Parenthetically, petitioner has not made an issue about PLDT‘s allegations concerning theabolition of the provisions of the Tax Code imposing the payment of compensating and advancesales tax on importations and the non-existence of these taxes during the period under review.On the contrary, petitioner admits that the VAT on importation of goods has " replace[d] thecompensating tax and advance sales tax under the old Tax Code".43 Given the above perspective, the amount PLDT paid in the concept of advance sales tax andcompensating tax on the 1992 to 1994 importations were, in context, erroneous tax paymentsand would theoretically be refundable. It should be emphasized, however, that, suchimportations were, when made, already subject to VAT.Factoring in the fact that a portion of the claim was barred by prescription, the CTA haddetermined that PLDT is entitled to a total refundable amount of P94,673,422.00(P87,257,031.00 of compensating tax + P7,416,391.00 =P94,673,422.00). Accordingly, itbehooves the BIR to grant a refund of the advance sales tax and compensating tax in the total

amount of P94,673,422.00, subject to the condition that PLDT present proof of payment of thecorresponding VAT on said transactions.WHEREFORE, the petition is partially GRANTED. The Decision of the Court of Appeals in CA-G.R. No. 47895 dated September 17, 1999 is MODIFIED. The Commissioner of InternalRevenue is ORDERED to issue a Tax Credit Certificate or to refund to PLDT only theof P94,673,422.00 advance sales tax and compensating tax erroneously collected by theBureau of Customs from October 1, 1992 to May 31, 1994, less the VAT which may have beendue on the importations in question, but have otherwise remained uncollected.SO ORDERED.













































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G.R. No. 173594 February 6, 2008 SILKAIR (SINGAPORE) PTE, LTD., petitioner,vs.COMMISSIONER OF INTERNAL REVENUE, respondent.D E C I S I O N CARPIO MORALES, J. : Petitioner, Silkair (Singapore) Pte. Ltd. (Silkair), a corporation organized under thelaws of Singapore which has a Philippine representative office, is an onlineinternational air carrier operating the Singapore-Cebu-Davao-Singapore, Singapore-Davao-Cebu-Singapore, and Singapore-Cebu-Singapore routes.

On December 19, 2001, Silkair filed with the Bureau of Internal Revenue (BIR) awritten application for the refund of P4,567,450.79 excise taxes it claimed to havepaid on its purchases of jet fuel from Petron Corporation from January to June 2000.

1

As the BIR had not yet acted on the application as of December 26, 2001, Silkair fileda Petition for Review2before the CTA following Commissioner of Internal Revenue v.Victorias Milling Co., Inc., et al .

3

Opposing the petition, respondent Commissioner on Internal Revenue (CIR) allegedin his Answer that, among other things,

Petitioner failed to prove that the sale of the petroleum products was directlymade from a domestic oil company to the international carrier. The excisetax on petroleum products is the direct liability of the manufacturer/producer,and when added to the cost of the goods sold to the buyer, it is no longer atax but part of the price which the buyer has to pay to obtain the

article.4

(Emphasis and underscoring supplied)By Decision of May 27, 2005, the Second Division of the CTA denied Silkair‘s petitionon the ground that as the excise tax was imposed on Petron Corporation as themanufacturer of petroleum products, any claim for refund should be filed by the latter;and where the burden of tax is shifted to the purchaser, the amount passed on to it isno longer a tax but becomes an added cost of the goods purchased. Thus the CTAdiscoursed:

The liability for excise tax on petroleum products that are being removedfrom its refinery is imposed on the manufacturer/producer (Section 130 of the NIRC of 1997). x x xx x x xWhile it is true that in the case of excise tax imposed on petroleum products,the seller thereof may shift the tax burden to the buyer, the latter is theproper party to claim for the refund in the case of exemption from excisetax. Since the excise tax was imposed upon Petron Corporation as themanufacturer of petroleum products, pursuant to Section 130(A)(2), andthat the corresponding excise taxes were indeed, paid by it, . . . any claimfor refund of the subject excise taxes should be filed by PetronCorporation as the taxpayer contemplated under the law. Petitioner cannotbe considered as the taxpayer because it merely shouldered the burden of the excise tax and not the excise tax itself.Therefore, the right to claim for the refund of excise taxes paid on petroleumproducts lies with Petron Corporation who paid and remitted the excise taxto the BIR. Respondent, on the other hand, may only claim from PetronCorporation the reimbursement of the tax burden shifted to the former by thelatter. The excise tax partaking the nature of an indirect tax, is clearly theliability of the manufacturer or seller who has the option whether or not to

shift the burden of the tax to the purchaser. Where the burden of the tax isshifted to the [purchaser], the amount passed on to it is no longer a

tax but becomes an added cost on the goods purchased whichconstitutes a part of the purchase price. The incidence of taxation or theperson statutorily liable to pay the tax falls on Petron Corporation though theimpact of taxation or the burden of taxation falls on another person, which inthis case is petitioner Silkair .5 (Italics in the original; emphasis andunderscoring supplied)

Silkair filed a Motion for Reconsideration6 during the pendency of which or on

September 12, 2005 the Bengzon Law Firm entered its appearance ascounsel,

7 without Silkair‘s then-counsel of record (Jimenez Gonzales Liwanag Bello

Valdez Caluya & Fernandez or "JGLaw") having withdrawn as such.

By Resolution8 of September 22, 2005, the CTA Second Division denied Silkair‘smotion for reconsideration. A copy of the Resolution was furnished Silkair‘s counselJGLaw which received it on October 3, 2005.

9

On October 13, 2005, JGLaw, with the conformity of Silkair, filed its Notice of Withdrawal of Appearance.10 On even date, Silkair, through the Bengzon Law Firm,filed a Manifestation/Motion

11 stating:

Petitioner was formerly represented xxx by JIMENEZ GONZALESLIWANAG BELLO VALDEZ CALUYA & FERNANDEZ (JGLaw).

1. On 24 August 2005, petitioner served notice to JGLaw of itsdecision to cease all legal representation handled by the latter onbehalf of the petitioner. Petitioner also requested JGLaw to makearrangements for the transfer of all files relating to its legalrepresentation on behalf of petitioner to the undersigned counsel. x

x x2. The undersigned counsel was engaged to act as counsel for thepetitioner in the above-entitled case; and thus, filed its entry of appearance on 12 September 2005. x x x3. The undersigned counsel, through petitioner, has receivedinformation that the Honorable Court promulgated a Resolution onpetitioner‘s Motion for Reconsideration. To date, the undersignedcounsel has yet to receive an official copy of the above-mentionedResolution. In light of the foregoing, undersigned counsel herebyrespectfully requests for an official copy of the Honorable Court‘sResolution on petitioner‘s Motion for Reconsideration x xx.12 (Underscoring supplied)

On October 14, 2005, the Bengzon Law Firm received its requested copy of theSeptember 22, 200513 CTA Second Division Resolution. Thirty-seven days later or onOctober 28, 2005, Silkair, through said counsel, filed a Motion for Extension of Timeto File Petition for Review

14 before the CTA En Banc which gave it until November 14,

2005 to file a petition for review.On November 11, 2005, Silkair filed another Motion for Extension of Time.15 On evendate, the Bengzon Law Firm informed the CTA of its withdrawal of appearance ascounsel for Silkair with the information, that Silkair would continue to be representedby Atty. Teodoro A. Pastrana, who used to be with the firm but who had become apartner of the Pastrana and Fallar Law Offices.

16

The CTA En Banc granted Silkair‘s second Motion for Extension of Time, givingSilkair until November 24, 2005 to file its petition for review. On November 17, 2005,Silkair filed its Petition for Review17 before the CTA En Banc.By Resolution of May 19,2006, the CTA En Banc dismissed

18 Silkair‘s petition for

review for having been filed out of time in this wise:

A petitioner is given a period of fifteen (15) days from notice of award, judgment, final order or resolution, or denial of motion for new trial or

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reconsideration to appeal to the proper forum, in this case, the CTA EnBanc . This is clear from both Section 11 and Section 9 of Republic ActNo. 9282 x x x.x x x xThe petitioner, through its counsel of record Jimenez, Gonzalez, L[iwanag],Bello, Valdez, Caluya & Fernandez Law Offices, received the Resolutiondated September 22, 2005 on October 3, 2005. At that time, the petitioner had two counsels of record, namely, Jimenez, Gonzales, L[iwanag], Bello,Valdez, Caluya & Fernandez Law Offices and The Bengzon Law Firm whichfiled its Entry of Appearance on September 12, 2005. However, as of said

date, Atty. Mary Jane B. Austria-Delgado of Jimenez, Gonzales, L[iwanag],Bello, Valdez, Caluya & Fernandez Law Offices was still the counsel of record considering that the Notice of Withdrawal of Appearance signed by Atty. Mary Jane B. Austria-Delgado was filed only on October 13, 2005 or ten (10) days after receipt of the September 22, 2005 Resolution of theCourt‘s Second Division. This notwithstanding, Section 2 of Rule 13 of theRules of Court provides that if any party has appeared by counsel, serviceupon him shall be made upon his counsel or one of them, unless serviceupon the party himself is ordered by the Court. Where a party is representedby more than one counsel of record, "notice to any one of the severalcounsel on record is equivalent to notice to all the counsel (Damasco vs.Arrieta, et. al., 7 SCRA 224)." Considering that petitioner, through itscounsel of record, had received the September 22, 2005 Resolution as early

as October 3, 2005, it had only until October 18, 2005 within which to file itsPetition for Review. Petitioner only managed to file the Petition for Reviewwith the Court En Banc on November 17, 2005 or [after] thirty (30) days hadlapsed from the final date of October 18, 2005 to appeal.The argument that it requested Motions for Extension of Time on October 28, 2005 or ten (10) days from the appeal period and the second Motion for Extension of Time to file its Petition for Review on November 11, 2005 andits allowance by the CTA En Banc notwithstanding, the questioned Decisionis no longer appealable for failure to timely file the necessary Petition for Review.

19 (Emphasis in the original)

In a Separate Concurring Opinion,20 CTA Associate Justice Juanito C. Castañeda, Jr.posited that Silkair is not the proper party to claim the tax refund.Silkair filed a Motion for Reconsideration

21 which the CTA En Banc denied.

22 Hence,

the present Petition for Review23 which raises the following issues:

I. WHETHER OR NOT THE PETITION FOR REVIEW FILED WITH THEHONORABLE COURT OF TAX APPEALS EN BANC WAS TIMELY FILED.II. APPEAL BEING AN ESSENTIAL PART OF OUR JUDICIAL SYSTEM,WHETHER OR NOT PETITIONER SHOULD BE DEPRIVED OF ITS RIGHTTO APPEAL ON THE BASIS OF TECHNICALITY.III. ASSUMING THE HONORABLE SUPREME COURT WOULD HOLDTHAT THE FILING OF THE PETITITON FOR REVIEW WITH THEHONORABLE COURT OF TAX APPEALS EN BANC WAS TIMELY,WHETHER OR NOT THE PETITIONER IS THE PROPER PARTY TOCLAIM FOR REFUND OR TAX CREDIT.

24(Underscoring supplied)

Silkair posits that "the instant case does not involve a situation where the petitioner was represented by two (2) counsels on record, such that notice to the former counsel would be held binding on the petitioner, as in the case of Damasco v. Arrieta,

etc., et al .25

x x x heavily relied upon by the respondent";26

and that "the case

of Dolores De Mesa Abad v. Court of Appeal s27

has more appropriate application tothe present case."

28

In Dolores De Mesa Abad , the trial court issued an order of November 19, 1974granting the therein private respondents‘ Motion for Annulment of documents andtitles. The order was received by the therein petitioner‘s counsel of record, Atty.Escolastico R. Viola, on November 22, 1974 prior to which or on July 17, 1974, Atty.Vicente Millora of the Millora, Tobias and Calimlim Law Office had filed an"Appearance and Manifestation." Atty. Millora received a copy of the trial court‘s order on December 9, 1974. On January 4, 1975, the therein petitioners, through Atty.Ernesto D. Tobias also of the Millora, Tobias and Calimlim Law Office, filed their

Notice of Appeal and Cash Appeal Bond as well as a Motion for Extension of theperiod to file a Record on Appeal. They filed the Record on Appeal on January 24,1975. The trial court dismissed the appeal for having been filed out of time, which wasupheld by the Court of Appeals on the ground that the period within which to appealshould be counted from November 22, 1974, the date Atty. Viola received a copy of the November 19, 1974 order. The appellate court held that Atty. Viola was still thecounsel of record, he not having yet withdrawn his appearance as counsel for thetherein petitioners. On petition for certiorari,29 this Court held

x x x [R]espondent Court reckoned the period of appeal from the timepetitioners‘ original counsel, Atty. Escolastico R. Viola, received the Order granting the Motion for Annulment of documents and titles on November 22,1974. But as petitioners stress, Atty. Vicente Millora of the Millora, Tobiasand Calimlim Law Office had filed an "Appearance and Manifestation" on

July 16, 1974. Where there may have been no specific withdrawal by Atty.Escolastico R. Viola, for which he should be admonished, by the appearanceof a new counsel, it can be said that Atty. Viola had ceased as counsel for petitioners. In fact, Orders subsequent to the aforesaid date were alreadysent by the trial Court to the Millora, Tobias and Calimlim Law Office and notto Atty. Viola.Under the circumstances, December 9, 1974 is the controlling date of receiptby petitioners‘ counsel and from which the period of appeal from the Order of November 19, 1974 should be reckoned. That being the case, petitioner‘s xx x appeal filed on January 4, 1975 was timely filed.

30 (Underscoring

supplied)The facts of Dolores De Mesa Abad are not on all fours with those of the presentcase. In any event, more recent jurisprudence holds that in case of failure to complywith the procedure established by Section 26, Rule 13831 of the Rules of Court re the

withdrawal of a lawyer as a counsel in a case, the attorney of record is regarded asthe counsel who should be served with copies of the judgments, orders andpleadings.

32 Thus, where no notice of withdrawal or substitution of counsel has been

shown, notice to counsel of record is, for all purposes, notice to the client.33 The courtcannot be expected to itself ascertain whether the counsel of record has beenchanged.

34

In the case at bar, JGLaw filed i ts Notice of Withdrawal of Appearance on October 13,2005

35 after the Bengzon Law Firm had entered its appearance. While Silkair claims it

dismissed JGLaw as its counsel as early as August 24, 2005, the same wascommunicated to the CTA only on October 13, 2005.

36 Thus, JGLaw was still Silkair‘s

counsel of record as of October 3, 2005 when a copy of the September 22, 2005resolution of the CTA Second Division was served on it. The service upon JGLaw onOctober 3, 2005 of the September 22, 2005 resolution of CTA Second Division was,

therefore, for all legal intents and purposes, service to Silkair, and the CTA correctlyreckoned the period of appeal from such date.








































































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TECHNICALITY ASIDE, on the merits, the petition just the same fails.Silkair bases its claim for refund or tax credit on Section 135 (b) of the NIRC of 1997which reads

Sec. 135. Petroleum Products sold to International Carriers and ExemptEntities of Agencies. – Petroleum products sold to the following are exemptfrom excise tax:x x x x(b) Exempt entities or agencies covered by tax treaties, conventions, andother international agreements for their use and consumption: Provided,however, That the country of said foreign international carrier or exempt

entities or agencies exempts from similar taxes petroleum products sold toPhilippine carriers, entities or agencies; x x xx x x x,

and Article 4(2) of the Air Transport Agreement between the Government of theRepublic of the Philippines and the Government of the Republic of Singapore (Air Transport Agreement between RP and Singapore) which reads

Fuel, lubricants, spare parts, regular equipment and aircraft storesintroduced into, or taken on board aircraft in the territory of one Contractingparty by, or on behalf of, a designated airline of the other Contracting Partyand intended solely for use in the operation of the agreed services shall, withthe exception of charges corresponding to the service performed, be exemptfrom the same customs duties, inspection fees and other duties or taxesimposed in the territories of the first Contracting Party , even when these

supplies are to be used on the parts of the journey performed over theterritory of the Contracting Party in which they are introduced into or takenon board. The materials referred to above may be required to be kept under customs supervision and control.

The proper party to question, or seek a refund of, an indirect tax is the statutorytaxpayer, the person on whom the tax is imposed by law and who paid the same evenif he shifts the burden thereof to another .

37 Section 130 (A) (2) of the NIRC provides

that "[u]nless otherwise specifically allowed, the return shall be filed and the excisetax paid by the manufacturer or producer before removal of domestic products fromplace of production." Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore.Even if Petron Corporation passed on to Silkair the burden of the tax, the additionalamount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to

pay as a purchaser .38 Silkair nevertheless argues that it is exempt from indirect taxes because the Air Transport Agreement between RP and Singapore grants exemption "from the samecustoms duties, inspection fees and other duties or taxes imposed in the territory of the first Contracting Party."39 It invokes Maceda v. Macaraig, Jr .

40 which upheld theclaim for tax credit or refund by the National Power Corporation (NPC) on the groundthat the NPC is exempt even from the payment of indirect taxes.Silkairs‘s argument does not persuade. In Commissioner of Internal Revenue v.Philippine Long Distance Telephone Company ,

41 this Court clarified the rulingin Maceda v. Macaraig, Jr., viz :

It may be so that in Maceda vs. Macaraig, Jr., the Court held that anexemption from "all taxes" granted to the National Power Corporation (NPC)under its charter includes both direct and indirect taxes. But far from

providing PLDT comfort, Maceda in fact supports the case of hereinpetitioner, the correct lesson of Maceda being that an exemption from "all

taxes" excludes indirect taxes, unless the exempting statute, like NPC‘scharter, is so couched as to include indirect tax from the exemption. Wrotethe Court:

x x x However, the amendment under Republic Act No. 6395enumerated the details covered by the exemption. Subsequently,P.D. 380, made even more specific the details of the exemption of NPC to cover, among others, both direct and indirect taxes on allpetroleum products used in its operation. Presidential Decree No.938 [NPC‘s amended charter] amended the tax exemption bysimplifying the same law in general terms. It succinctly exempts

NPC from "all forms of taxes, duties[,] fees…" The use of the phrase "all forms" of taxes demonstrates theintention of the law to give NPC all the tax exemptions it has beenenjoying before… x x x xIt is evident from the provisions of P.D. No. 938 that its purpose isto maintain the tax exemption of NPC from al l forms of taxesincluding indirect taxes as provided under R.A. No. 6395 and P.D.380 if it is to attain its goals. (Italics in the original; emphasissupplied)

42

The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore cannot, without a clear showing of legislative intent, be construed as including indirect taxes. Statutes

granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority, 43

and if an exemption is found to exist, itmust not be enlarged by construction.

44

WHEREFORE, the petition is DENIED.Costs against petitioner.SO ORDERED.

































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G.R. No. 151135 July 2, 2004 CONTEX CORPORATION, petitioner,vs.HON. COMMISSIONER OF INTERNAL REVENUE, respondent.

D E C I S I O N

QUISUMBING, J .: For review is the Decision

1 dated September 3, 2001, of the Court of Appeals, in CA-G.R. SP

No. 62823, which reversed and set aside the decision2

dated October 13, 2000, of the Court of Tax Appeals (CTA). The CTA had ordered the Commissioner of Internal Revenue (CIR) torefund the sum of P683,061.90 to petitioner as erroneously paid input value-added tax (VAT) or in the alternative, to issue a tax credit certificate for said amount. Petitioner also assails theappellate court‘s Resolution,

3 dated December 19, 2001, denying the motion for reconsideration.Petitioner is a domestic corporation engaged in the business of manufacturing hospital textilesand garments and other hospital supplies for export. Petitioner‘s place of business is at the

Subic Bay Freeport Zone (SBFZ). It is duly registered with the Subic Bay Metropolitan Authority(SBMA) as a Subic Bay Freeport Enterprise, pursuant to the provisions of Republic Act No.7227.4 As an SBMA-registered firm, petitioner is exempt from all local and national internalrevenue taxes except for the preferential tax provided for in Section 12 (c )5 of Rep. Act No.7227. Petitioner also registered with the Bureau of Internal Revenue (BIR) as a non-VATtaxpayer under Certificate of Registration RDO Control No. 95-180-000133.From January 1, 1997 to December 31, 1998, petitioner purchased various supplies andmaterials necessary in the conduct of its manufacturing business. The suppliers of these goods

shifted unto petitioner the 10% VAT on the purchased items, which led the petitioner to pay inputtaxes in the amounts of P539,411.88 and P504,057.49 for 1997 and 1998, respectively.6 Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuantto Rep. Act No. 7227, petitioner filed two applications for tax refund or tax credit of the VAT itpaid. Mr. Edilberto Carlos, revenue district officer of BIR RDO No. 19, denied the first applicationletter, dated December 29, 1998.Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit,this time directly with Atty. Alberto Pagabao, the regional director of BIR Revenue Region No. 4.The second letter sought a refund or issuance of a tax credit certificate in the amountof P1,108,307.72, representing erroneously paid input VAT for the period January 1, 1997 toNovember 30, 1998.When no response was forthcoming from the BIR Regional Director, petitioner then elevated thematter to the Court of Tax Appeals, in a petition for review docketed as CTA Case No. 5895.Petitioner stressed that Section 112(A)7 if read in relation to Section 106(A)(2)(a)8 of the NationalInternal Revenue Code, as amended and Section 12(b)9 and (c) of Rep. Act No. 7227 would

show that it was not liable in any way for any value-added tax.In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule thatclaims for refund are strictly construed against the taxpayer. Since petitioner failed to establishboth its right to a tax refund or tax credit and its compliance with the rules on tax refund asprovided for in Sections 20410 and 22911 of the Tax Code, its claim should be denied, accordingto the BIR.On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:

WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLYGRANTED. Respondent is hereby ORDERED to REFUND or in the alternative toISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the sum of P683,061.90,representing erroneously paid input VAT.SO ORDERED.12

In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a) and112(A) of the Tax Code. The tax court stressed that these provisions apply only to those entitiesregistered as VAT taxpayers whose sales are zero-rated. Petitioner does not fall under thiscategory, since it is a non-VAT taxpayer as evidenced by the Certificate of Registration RDOControl No. 95-180-000133 issued by RDO Rosemarie Ragasa of BIR RDO No. 18 of the Subic

Bay Freeport Zone and thus it is exempt from VAT, pursuant to Rep. Act No. 7227, said theCTA.Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on itspurchases of supplies and materials. It pointed out that under Section 12(c) of Rep. Act No.7227 and the Implementing Rules and Regulations of the Bases Conversion and Development

Act of 1992, all that petitioner is required to pay as a SBFZ-registered enterprise is a 5%preferential tax.The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29, 1997 for being barred by the two-year prescriptive period under Section 229 of the Tax Code. The taxcourt also limited the refund only to the input VAT paid by the petitioner on the supplies andmaterials directly used by the petitioner in the manufacture of its goods. It struck down all claims

for input VAT paid on maintenance, office supplies, freight charges, and all materials andsupplies shipped or delivered to the petitioner‘s Makati and Pasay City offices. Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the CTAdecision by the Court of Appeals. Respondent maintained that the exemption of Contex Corp.under Rep. Act No. 7227 was limited only to direct taxes and not to indirect taxes such as theinput component of the VAT. The Commissioner pointed out that from its very nature, the value-added tax is a burden passed on by a VAT registered person to the end users; hence, the directliability for the tax lies with the suppliers and not Contex.Finding merit in the CIR‘s arguments, the appellate court decided CA -G.R. SP No. 62823 in hisfavor, thus:

WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND SET ASIDE. Contex‘s claim for refund of erroneously paid taxes is DENIEDaccordingly.SO ORDERED.13

In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on the

importation of raw materials, capital, and equipment of SBFZ-registered enterprises under Rep. Act No. 7227 and its implementing rules covers only "the VAT imposable under Section 107 of the [Tax Code], which is a direct liability of the importer, and in no way includes the value-addedtax of the seller-exporter the burden of which was passed on to the importer as an additionalcosts of the goods."14 This was because the exemption granted by Rep. Act No. 7227 relates tothe act of importation and Section 10715 of the Tax Code specifically imposes the VAT onimportations. The appellate court applied the principle that tax exemptions are strictly construedagainst the taxpayer. The Court of Appeals pointed out that under the implementing rules of Rep. Act No. 7227, the exemption of SBFZ-registered enterprises from internal revenue taxes isqualified as pertaining only to those for which they may be directly liable. It then stated thatapparently, the legislative intent behind Rep. Act No. 7227 was to grant exemptions only todirect taxes, which SBFZ-registered enterprise may be liable for and only in connection with their importation of raw materials, capital, and equipment as well as the sale of their goods andservices.Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion was

denied.Hence, the instant petition raising as issues for our resolution the following: A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONALINTERNAL REVENUE TAXES PROVIDED IN REPUBLIC ACT NO. 7227 COVERSTHE VALUE ADDED TAX PAID BY PETITIONER, A SUBIC BAY FREEPORTENTERPRISE ON ITS PURCHASES OF SUPPLIES AND MATERIALS.B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THATPETITIONER IS ENTITLED TO A TAX CREDIT OR REFUND OF THE VAT PAID ONITS PURCHASES OF SUPPLIES AND RAW MATERIALS FOR THE YEARS 1997

AND 1998.16 Simply stated, we shall resolve now the issues concerning: (1) the correctness of the finding of the Court of Appeals that the VAT exemption embodied in Rep. Act No. 7227 does not apply topetitioner as a purchaser; and (2) the entitlement of the petitioner to a tax refund on itspurchases of supplies and raw materials for 1997 and 1998.On the first issue, petitioner argues that the appellate court‘s restrictive interpretation of petitioner‘s VAT exemption as limited to those covered by Section 107 of the Tax Code iserroneous and devoid of legal basis. It contends that the provisions of Rep. Act No. 7227 clearly

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and unambiguously mandate that no local and national taxes shall be imposed upon SBFZ-registered firms and hence, said law should govern the case. Petitioner calls our attention toregulations issued by both the SBMA and BIR clearly and categorically providing that the taxexemption provided for by Rep. Act No. 7227 includes exemption from the imposition of VAT onpurchases of supplies and materials.The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does granttax exemptions, such grant is not all-encompassing but is limited only to those taxes for which aSBFZ-registered business may be directly liable. Hence, SBFZ locators are not relieved from theindirect taxes that may be shifted to them by a VAT-registered seller.

At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of taxpaid on the goods, properties or services bought, transferred, or leased may be shifted or

passed on by the seller, transferor, or lessor to the buyer, transferee or lessee.17

Unlike a directtax, such as the income tax, which primarily taxes an individual‘s ability to pay based on hisincome or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods,services, or certain transactions involving the same. The VAT, thus, forms a substantial portionof consumer expenditures.Further, in indirect taxation, there is a need to distinguish between the liability for the tax and theburden of the tax. As earlier pointed out, the amount of tax paid may be shifted or passed on bythe seller to the buyer. What is transferred in such instances is not the liability for the tax, but thetax burden. In adding or including the VAT due to the selling price, the seller remains the personprimarily and legally liable for the payment of the tax. What is shifted only to the intermediatebuyer and ultimately to the final purchaser is the burden of the tax.18 Stated differently, a seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services is not necessarily the person who ultimately bears the burden of the same tax. It is thefinal purchaser or consumer of such goods or services who, although not directly and legallyliable for the payment thereof, ultimately bears the burden of the tax.

19

Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under VAT, the transaction can have preferential treatment in the following ways:(a) VAT Exemption. An exemption means that the sale of goods or properties and/or services and the use or lease of properties is not subject to VAT (output tax) and theseller is not allowed any tax credit on VAT (input tax) previously paid.20 This is a casewherein the VAT is removed at the exempt stage (i.e., at the point of the sale, barter or exchange of the goods or properties).The person making the exempt sale of goods, properties or services shall not bill anyoutput tax to his customers because the said transaction is not subject to VAT. On theother hand, a VAT-registered purchaser of VAT-exempt goods/properties or serviceswhich are exempt from VAT is not entitled to any input tax on such purchase despitethe issuance of a VAT invoice or receipt.21 (b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to0% rate, meaning the tax burden is not passed on to the purchaser. A zero-rated saleby a VAT-registered person, which is a taxable transaction for VAT purposes, shall not

result in any output tax. However, the input tax on his purchases of goods, propertiesor services related to such zero-rated sale shall be available as tax credit or refund inaccordance with these regulations.22

Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast,exemption only removes the VAT at the exempt stage, and it will actually increase, rather thanreduce the total taxes paid by the exempt firm‘s business or non -retail customers. It is for thisreason that a sharp distinction must be made between zero-rating and exemption in designatinga value-added tax.

23

Apropos, the petitioner‘s claim to VAT exemption in the instant case for its purchases of suppliesand raw materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, whichbasically exempts them from all national and local internal revenue taxes, including VAT andSection 4 (A)(a) of BIR Revenue Regulations No. 1-95.24 On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is notcontroverted by the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of Registration25 issued by the BIR. As such, it is exempt from VAT on all its salesand importations of goods and services.

Petitioner‘s claim, however, for exemption from VAT for its purchases of supplies and rawmaterials is incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entitiescan claim Input VAT Credit/Refund.The point of contention here is whether or not the petitioner may claim a refund on the Input VATerroneously passed on to it by its suppliers.While it is true that the petitioner should not have been liable for the VAT inadvertently passedon to it by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner isnot the proper party to claim such VAT refund.Section 4.100-2 of BIR‘s Revenue Regulations 7-95, as amended, or the "Consolidated Value-

Added Tax Regulations" provide:Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which

is a taxable transaction for VAT purposes, shall not result in any output tax. However,the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with theseregulations.The following sales by VAT-registered persons shall be subject to 0%:(a) Export Sales

"Export Sales" shall mean. . .(5) Those considered export sales under Articles 23 and 77 of ExecutiveOrder No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws, e.g. Republic Act No. 7227, otherwise knownas the Bases Conversion and Development Act of 1992.. . .

(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No.7227 duly registered and accredited enterprises with Subic Bay Metropolitan Authority

(SBMA) and Clark Development Authority (CDA), R. A. No. 7916, Philippine EconomicZone Authority (PEZA), or international agreements, e.g. Asian Development Bank(ADB), International Rice Research Institute (IRRI), etc. to which the Philippines is asignatory effectively subject such sales to zero-rate."

Since the transaction is deemed a zero-rated sale, petitioner‘s supplier may claim an Input VATcredit with no corresponding Output VAT liability. Congruently, no Output VAT may be passedon to the petitioner.On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as aNON-VAT taxpayer and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowedany tax credit on VAT (input tax) previously paid. In fine, even if we are to assume thatexemption from the burden of VAT on petitioner‘s purchases did exist, petitioner is still notentitled to any tax credit or refund on the input tax previously paid as petitioner is an exemptVAT taxpayer.Rather, it is the petitioner ‘s suppliers who are the proper parties to claim the tax credit andaccordingly refund the petitioner of the VAT erroneously passed on to the latter.

Accordingly, we find that the Court of Appeals did not commit any reversible error of law inholding that petitioner‘s VAT exemption under Rep. Act No. 7227 is limited to the VAT on whichit is directly liable as a seller and hence, it cannot claim any refund or exemption for any inputVAT it paid, if any, on its purchases of raw materials and supplies.WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3, 2001,of the Court of Appeals in CA-G.R. SP No. 62823, as well as its Resolution of December 19,2001 are AFFIRMED. No pronouncement as to costs.SO ORDERED. Puno, (Chairman), Callejo, Sr., and Tinga, JJ., concur.

Austria-Martinez, J., on leave.





































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G.R. No. 153866 February 11, 2005 COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.SEAGATE TECHNOLOGY (PHILIPPINES), respondent.D E C I S I O NPANGANIBAN, 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 andthe implementing rules relevant thereto, including the value-added taxes or VAT. Althoughexport sales are not deemed exempt transactions, they are nonetheless zero-rated.Hence, in the present case, the distinction between exempt entities andexempttransactions has little significance, because the net result is that the taxpayer is notliable for the VAT. Respondent, a VAT-registered enterprise, has complied with allrequisites for claiming a tax refund of or credit for the input VAT it paid on capital goods itpurchased. Thus, the Court of Tax Appeals and the Court of Appeals did not err in rulingthat it is entitled to such refund or credit.The CaseBefore us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to setaside the May 27, 2002 Decision2 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 lackof merit."3 The FactsThe 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 andExchange Commission to do business in the Philippines, with principal office address atthe 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 empoweredto perform the duties of his office, including, among others, the duty to act and approveclaims for refund or tax credit;3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and hasbeen issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, asamended, to engage in the manufacture of recording components primarily used incomputers for export. Such registration was made on 6 June 1997;4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VATRegistration 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 P28,369,226.38with supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of thisPetition 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 actedupon by the [petitioner] prompting the [respondent] to elevate the case to [the CTA] on July21, 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 routinaryinvestigation/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 refundedwere erroneously or illegally collected x x x;

3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruledthat:"A claimant has the burden of proof to establish the factual basis of his or her claim for taxcredit/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 exemptionfrom tax. Thus, it is incumbent upon the [respondent] to prove that it is indeed entitled tothe refund/credit sought. Failure on the part of the [respondent] to prove the same is fatalto its claim for tax credit. He who claims exemption must be able to justify his claim by theclearest grant of organic or statutory law. An exemption from the common burden cannotbe 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 toSection 24 of Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax Code, asamended. As [respondent‘s] business is not subject to VAT, the capital goods and servicesit 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 toSection 4.106.1 of Revenue Regulations No. ([RR])7-95, and of input taxes on servicespursuant 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 dateof payment of tax.‘ "On July 19, 2001, the Tax Court rendered a decision granting the claim for refund."4 Ruling of the Court of AppealsThe 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 goodspurchased for the period covering April 1, 1998 to June 30, 1999.The appellate court reasoned that respondent had availed itself only of the fiscal incentivesunder Executive Order No. (EO) 226 (otherwise known as the Omnibus Investment Codeof 1987), not of those under both Presidential Decree No. (PD) 66, as amended, andSection 24 of RA 7916. Respondent was, therefore, considered exempt only from thepayment of income tax when it opted for the income tax holiday in lieu of the 5 percentpreferential tax on gross income earned. As a VAT-registered entity, though, it was stillsubject 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 and4.103-1 of RR 7-95 were applicable. Having paid the input VAT on the capital goods itpurchased, respondent correctly filed the administrative and judicial claims for its refundwithin 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 yetoffset against any output VAT liability.Hence this Petition.5 Sole IssuePetitioner submits this sole issue for our consideration:"Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate inthe amount ofP12,122,922.66 representing alleged unutilized input VAT paid on capitalgoods 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 isentitled to the fiscal incentives and benefits8 provided for in either PD 669 or EO 226.10 It

shall, moreover, enjoy all privileges, benefits, advantages or exemptions under bothRepublic Act Nos. (RA) 722711 and 7844.12
















































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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 prohibitedby 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 financialassistance; and exemption from export taxes, local taxes and licenses.14 Comparatively, the same exemption from internal revenue laws and regulations applies if EO 22615 is chosen. Under this law, respondent shall further be entitled to an income taxholiday; additional deduction for labor expense; simplification of customs procedure;unrestricted use of consigned equipment; access to a bonded manufacturing warehousesystem; privileges for foreign nationals employed; tax credits on domestic capitalequipment, as well as for taxes and duties on raw materials; and exemption fromcontractors‘ taxes, wharfage dues, taxes and duties on imported capital equipment andspare parts, export taxes, duties, imposts and fees,16local taxes and licenses, and realproperty taxes.17

A privilege available to respondent under the provision in RA 7227 on tax and duty-freeimportation of raw materials, capital and equipment18 -- is, ipso facto, also accorded to thezone19 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 nolocal or national taxes shall be imposed therein.21 No exchange control policy shall beapplied; and free markets for foreign exchange, gold, securities and future shall be allowedand maintained.22Banking and finance shall also be liberalized under minimum Bangko

Sentral regulation with the establishment of foreign currency depository units of localcommercial banks and offshore banking units of foreign banks.23 In the same vein, respondent benefits under RA 7844 from negotiable tax credits24 for locally-produced materials used as inputs. Aside from the other incentives possibly alreadygranted to it by the Board of Investments, it also enjoys preferential credit facilities 25 andexemption from PD 1853.26 From the above-cited laws, it is immediately clear that petitioner enjoys preferential taxtreatment.27 It is not subject to internal revenue laws and regulations and is even entitled totax credits. The VAT on capital goods is an internal revenue tax from which petitioner asan entity is exempt. Although the transactions involving such tax are not exempt, petitioner as a VAT-registered person,28 however, is entitled to their credits.Nature of the VAT and the Tax Credit Method Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percentlevied 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 eachrendition of services in the course of trade or business29 as they pass along the productionand distribution chain, the tax being limited only to the value adde d30 to such goods,properties or services by the seller, transferor or lessor. 31 It is an indirect tax that may beshifted 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 thatis primarily, directly and legally liable for its payment, but in terms of its nature as a tax onconsumption.33 In either case, though, the same conclusion is arrived at.The law34 that originally imposed the VAT in the country, as well as the subsequentamendments of that law, has been drawn from the tax credit method .35 Such methodadopted the mechanics and self-enforcement features of the VAT as first implemented andpracticed in Europe and subsequently adopted in New Zealand and Canada.36Under thepresent method that relies on invoices, an entity can credit against or subtract from theVAT 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 taxes38

charged by a seller 39

are equal to theinput taxes40 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 taxesexceed 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-ratedtransactions or from the acquisition of capital goods,43 any excess over the output taxesshall instead be refunded44 to the taxpayer or credited45 against other internal revenuetaxes.46 Zero-Rated and Effectively Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ fromeffectively 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 obviouslyresults in no tax chargeable against the purchaser. The seller of such transactions chargesno output tax,49 but can claim a refund of or a tax credit certificate for the VAT previouslycharged by suppliers.Effectively zero-rated transactions, however, refer to the sale of goods50 or supply of services51 to persons or entities whose exemption under special laws or internationalagreements to which the Philippines is a signatory effectively subjects such transactions toa zero rate.52 Again, as applied to the tax base, such rate does not yield any taxchargeable against the purchaser. The seller who charges zero output tax on suchtransactions can also claim a refund of or a tax credit certificate for the VAT previouslycharged 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 principl e53 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 taxesthat are attributable to export sales.55 Effective zero rating, on the contrary, is intended tobenefit 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 thetax.56 But in an exemption there is only partial relief ,57 because the purchaser is notallowed 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 theparties 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 notallowed 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 asignatory, and by virtue of which its taxable transactions become exempt from theVAT.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 beshifted or passed on by the seller to the purchaser of the goods, properties or services.62 While the liability is imposed on one person, theburden may be passed on toanother. Therefore, if a special law merely exempts a party as a seller from its directliability for payment of the VAT, but does not relieve the same party as a purchaser from itsindirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchasetransaction is not exempt. Applying this principle to the case at bar, the purchase

transactions entered into by respondent are not VAT-exempt.

































































































































































































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Special laws may certainly exempt transactions from the VAT.63 However, the Tax Codeprovides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- thespecial law under which respondent was registered. The purchase transactions it enteredinto are, therefore, not VAT-exempt. These are subject to the VAT; respondent is requiredto register.Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10percent,64 depending again on the application of the destination principle.65 If respondent enters into such sales transactions with a purchaser -- usually in a foreigncountry -- for use or consumption outside the Philippines, these shall be subject to 0percent.66 If entered into with a purchaser for use or consumption in the Philippines, thenthese shall be subject to 10 percent,67 unless the purchaser is exempt from the indirectburden 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 iszero. Its exemption under both PD 66 and RA 7916 effectively subjects such transactionsto a zero rate,68 because the ecozone within which it is registered is managed andoperated by the PEZA as a separate customs territory .69 This means that in such zone iscreated the legal fiction of foreign territory.70 Under the cross-border principl e

71 of the VATsystem being enforced by the Bureau of Internal Revenue (BIR) ,72 no VAT shall beimposed to form part of the cost of goods destined for consumption outside of the territorialborder of the taxing authority. If exports of goods and services from the Philippines to aforeign country are free of the VAT,73 then the same rule holds for such exports from thenational territory -- except specifically declared areas -- to an ecozone.Sales made by a VAT-registered person in the customs territory to a PEZA-registeredentity are considered exports to a foreign country; conversely, sales by a PEZA-registeredentity 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 givemeaningful effect to the policies of the special law creating the zone .76 If respondent islocated in an export processing zone77within that ecozone, sales to the export processingzone, 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 byrespondent 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 exemptfrom internal revenue laws and regulations.This exemption covers both direct and indirect taxes, stemming from the very nature of theVAT as a tax on consumption, for which the direct liability is imposed on one person butthe 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 nosdistinguere 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 businessestablishments operating within the ecozone."81 Since this law does not exclude the VATfrom 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 exceptedmust 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 maystill be passed on and, therefore, indirectly imposed on the same entity -- a patentcircumvention of the law. That no VAT shall be imposed directly upon businessestablishments operating within the ecozone under RA 7916 also means that no VAT maybe 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 thelaw‘s intent in not imposing local or national taxes on business enterprises within theecozone.Third , foreign and domestic merchandise, raw materials, equipment and the like "shall notbe subject to x x x internal revenue laws and regulations" under PD 66 83 -- the originalcharter of PEZA (then EPZA) that was later amended by RA 7916 .84 No provisions in thelatter law modify such exemption.

Although this exemption puts the government at an initial disadvantage, the reduced taxcollection ultimately redounds to the benefit of the national economy by enticing morebusiness 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 andregulations x x x"86 if brought to the ecozone‘s restricted area87 for manufacturing byregistered export enterprises,88 of which respondent is one. These rules also apply to allenterprises registered with the EPZA prior to the effectivity of such rules.89 Fifth, export processing zone enterprises registered90 with the Board of Investments (BOI)under EO 226 patently enjoy exemption from national internal revenue taxes on importedcapital 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 foreignand domestic merchandise, raw materials, equipment and the like -- except thoseprohibited by law -- brought into the zone for manufacturing.93 In addition, they are givencredits for the value of the national internal revenue taxes imposed on domestic capitalequipment 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 andsupplies 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 722796 are ipso factoaccorded to ecozones.97 In case of doubt, conflicts with respect to such tax exemptionprivilege shall be resolved in favor of the ecozone.98

And seventh, the tax credits under RA 7844 -- given for imported raw materials primarilyused in the production of export goods,99 and for locally produced raw materials, capitalequipment and spare parts used by exporters of non-traditional products100 -- shall also becontinuously enjoyed by similar exporters within the ecozone.101Indeed, the latter exportersare likewise entitled to such tax exemptions and credits.Tax Refund as Tax Exemption To be sure, statutes that grant tax exemptions are construed strictissimi juri s

102 against thetaxpayer 103 and liberally in favor of the taxing authority.104 Tax refunds are in the nature of such exemptions.105 Accordingly, the claimants of thoserefunds 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 thepresent 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 thechallenge.Respondent, which as an entity is exempt, is different from its transactions which are notexempt. 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 exemptionconferred by law upon it as an entity, not upon the transactionsthemselves.108 Nonetheless, its exemption as an entity and the non-exemption of itstransactions lead to the same result for the following considerations:First , the contemporaneous construction of our tax laws by BIR authorities who are calledupon to execute or administer such laws109 will have to be adopted. Their prior taxissuances have held inconsistent positions brought about by their probable failure tocomprehend 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





























































































































































































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Therefore, respondent can be considered exempt, not from the VAT, but only from thepayment of income tax for a certain number of years, depending on its registration as apioneer 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 businessestablishments within the ecozone cannot outrightly determine a VAT exemption. Beingsubject 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 RA7916, Section 24 thereof does not preclude the VAT. One can, therefore, counterarguethat such provision merely exempts respondent from taxes imposed on business. Torepeat, the VAT is a tax imposed on consumption, not on business. Although respondentas an entity is exempt, the transactions it enters into are not necessarily so. The VATpayments 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 casefrom Contex, in which this Court held that the petitioner therein was registered as a non-VAT taxpayer .151 Hence, for being merely VAT-exempt, the petitioner in that case cannotclaim any VAT refund or credit.Second, the input taxes paid on the capital goods of respondent are duly supported byVAT invoices and have not been offset against any output taxes. Although enterprisesregistered with the BOI after December 31, 1994 would no longer enjoy the tax creditincentives on domestic capital equipment -- as provided for under Article 39(d), Title III,Book I of EO 226152 -- 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 RA7916.There was a very clear intent on the part of our legislators, not only to exempt investors inecozones from national and local taxes, but also to grant them tax credits. This fact wasrevealed by the sponsorship speeches in Congress during the second reading of HouseBill 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 fromnational and local taxes; x x x tax credit for locally-sourced inputs x x x."x x x x x x x x x"MR. DEL MAR. x x x To advance its cause in encouraging investments and creating anenvironment conducive for investors, the bill offers incentives such as the exemption fromlocal 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, thetax exemption under all the special laws cited above is broad enough to cover even theenforcement of internal revenue laws, including prescription.154 SummaryTo summarize, special laws expressly grant preferential tax treatment to businessestablishments registered and operating within an ecozone, which by law is considered asa separate customs territory . As such, respondent is exempt from all internal revenuetaxes, including the VAT, and regulations pertaining thereto. It has opted for the incometax holiday regime, instead of the 5 percent preferential tax regime. As a matter of law andprocedure, its registration status entitling it to such tax holiday can no longer bequestioned. Its sales transactions intended for export may not be exempt, but like itspurchase transactions, they are zero-rated. No prior application for the effective zero ratingof its transactions is necessary. Being VAT-registered and having satisfactorily compliedwith 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 pronouncementas to costs.SO ORDERED.Sandoval-Gutierrez, Corona, Carpio-Morales and Garcia, JJ., concur.





















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G.R. No. 115349 April 18, 1997COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DEMANILA UNIVERSITY,respondents.

PANGANIBAN, J. : In conducting researches and studies of social organizations and cultural values thruits Institute of Philippine Culture, is the Ateneo de Manila University performing thework of an independent contractor and thus taxable within the purview of then Section

205 of the National Internal Revenue Code levying a three percent contractor's tax?This question is answer by the Court in the negative as it resolves this petitionassailing the Decision 1 of the Respondent Court of Appeals 2 in CA-G.R. SP No.31790 promulgated on April 27, 1994 affirming that of the Court of Tax Appeals. 3

The Antecedent FactsThe antecedents as found by the Court of Appeals are reproduced hereinbelow, thesame being largely undisputed by the parties.

Private respondent is a non-stock, non-profit educational institutionwith auxiliary units and branches all over the Philippines. One suchauxiliary unit is the Institute of Philippine Culture (IPC), which hasno legal personality separate and distinct from that of privaterespondent. The IPC is a Philippine unit engaged in social sciencestudies of Philippine society and culture. Occasionally, it accepts

sponsorships for its research activities from internationalorganizations, private foundations and government agencies.On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue a demand letter dated June 3,1983, assessing private respondent the sum of P174,043.97 for alleged deficiency contractor's tax, and an assessment dated June27, 1983 in the sum of P1,141,837 for alleged deficiency incometax, both for the fiscal year ended March 31, 1978. Denying said taxliabilities, private respondent sent petitioner a letter-protest andsubsequently filed with the latter a memorandum contesting thevalidity of the assessments.On March 17, 1988, petitioner rendered a letter-decision cancelingthe assessment for deficiency income tax but modifying theassessment for deficiency contractor's tax by increasing the amount

due to P193,475.55. Unsatisfied, private respondent requested for a reconsideration or reinvestigation of the modified assessment. Atthe same time, it filed in the respondent court a petition for reviewof the said letter-decision of the petitioner. While the petition waspending before the respondent court, petitioner issued a finaldecision dated August 3, 1988 reducing the assessment for deficiency contractor's tax from P193,475.55 to P46,516.41,exclusive of surcharge and interest.On July 12, 1993, the respondent court rendered the questioneddecision which dispositively reads:

WHEREFORE, in view of the foregoing,respondent's decision is SET ASIDE. Thedeficiency contractor's tax assessment in the

amount of P46,516.41 exclusive of surchargeand interest for the fiscal year ended March 31,

1978 is hereby CANCELED. No pronouncementas to cost.SO ORDERED.

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

1) WHETHER OR NOT PRIVATERESPONDENT FALLS UNDER THE PURVIEWOF INDEPENDENT CONTRACTOR PURSUANTTO SECTION 205 OF THE TAX CODE; and2) WHETHER OR NOT PRIVATE

RESPONDENT IS SUBJECT TO 3%CONTRACTOR'S TAX UNDER SECTION 205OF THE TAX CODE.

The pertinent portions of Section 205 of the National Internal Revenue Code, asamended, provide:

Sec. 205. Contractor, proprietors or operators of dockyards, andothers. — A contractor's tax of three per centum of the grossreceipts is hereby imposed on the following:xxx xxx xxx

(16) Business agents and other independentcontractors except persons, associations andcorporations under contract for embroidery andapparel for export, as well as their agents and

contractors and except gross receipts of or froma pioneer industry registered with the Board of Investments under Republic Act No. 5186:

xxx xxx xxxThe term "independent contractors" includepersons (juridical or natural) not enumeratedabove (but not including individuals subject to theoccupation tax under Section 12 of the Local TaxCode) whose activity consists essentially of thesale of all kinds of services for a fee regardless of whether or not the performance of the servicecalls for the exercise or use of the physical or mental faculties of such contractors or their employees.

xxx xxx xxxPetitioner contends that the respondent court erred in holding thatprivate respondent is not an "independent contractor" within thepurview of Section 205 of the Tax Code. To petitioner, the term"independent contractor", as defined by the Code, encompasses allkinds of services rendered for a fee and that the only exceptionsare the following:a. Persons, association and corporations under contract for embroidery and apparel for export and gross receipts of or frompioneer industry registered with the Board of Investment under R.A.No. 5186;b. Individuals occupation tax under Section 12 of the Local TaxCode (under the old Section 182 [b] of the Tax Code); and

c. Regional or area headquarters established in the Philippines bymultinational corporations, including their alien executives, and

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which headquarters do not earn or derive income from thePhilippines and which act as supervisory, communication andcoordinating centers for their affiliates, subsidiaries or branches inthe Asia Pacific Region (Section 205 of the Tax Code).Petitioner thus submits that since private respondent falls under thedefinition of an "independent contractor" and is not among theaforementioned exceptions, private respondent is therefore subjectto the 3% contractor's tax imposed under the same Code. 4

The Court of Appeals disagreed with the Petitioner Commissioner of InternalRevenue and affirmed the assailed decision of the Court of Tax Appeals. Unfazed,

petitioner now asks us to reverse the CA through this petition for review.The Issues

Petitioner submits before us the following issues:1) Whether or not private respondent falls under the purview of independent contractor pursuant to Section 205 of the Tax Code.2) Whether or not private respondent is subject to 3% contractor'stax under Section 205 of the Tax Code. 5

In fine, these may be reduced to a single issue: Is Ateneo de Manila University,through its auxiliary unit or branch — the Institute of Philippine Culture — performingthe work of an independent contractor and, thus, subject to the three percentcontractor's tax levied by then Section 205 of the National Internal Revenue Code?

The Court's Ruling The petition is unmeritorious.

Interpretation of Tax LawsThe parts of then Section 205 of the National Internal Revenue Code germane to thecase before us read:

Sec. 205. Contractors, proprietors or operators of dockyards, and others. — A contractor's tax of three per centum of the grossreceipts is hereby imposed on the following:xxx xxx xxx(16) Business agents and other independent contractors, exceptpersons, associations and corporations under contract for embroidery and apparel for export, as well as their agents andcontractors, and except gross receipts of or from a pioneer industryregistered with the Board of Investments under the provisions of Republic Act No. 5186;xxx xxx xxx

The term "independent contractors" include persons (juridical or natural) not enumerated above (but not including individuals subjectto the occupation tax under Section 12 of the Local Tax Code)whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of the service calls for the exercise or use of the physical or mentalfaculties of such contractors or their employees.The term "independent contractor" shall not include regional or areaheadquarters established in the Philippines by multinationalcorporations, including their alien executives, and whichheadquarters do not earn or derive income from the Philippines andwhich act as supervisory, communications and coordinating centersfor their affiliates, subsidiaries or branches in the Asia-Pacific

Region.

The term "gross receipts" means all amounts received by the primeor principal contractor as the total contract price, undiminished byamount paid to the subcontractor, shall be excluded from thetaxable gross receipts of the subcontractor.

Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila University "falls within the definition" of an independent contractor and "is not one of those mentioned as excepted"; hence, it is properly a subject of thethree percent contractor's tax levied by the foregoing provision of law. 6 Petitioner states that the "term 'independent contractor' is not specifically defined so as todelimit the scope thereof, so much so that any person who . . . renders physical and

mental service for a fee, is now indubitably considered an independent contractor liable to 3% contractor's tax." 7 According to petitioner, Ateneo has the burden of proof to show its exemption from the coverage of the law .We disagree. Petitioner Commissioner of Internal Revenue erred in applying theprinciples of tax exemption without first applying the well-settled doctrine of strictinterpretation in the imposition of taxes. It is obviously both illogical and impractical todetermine who are exempted without first determining who are covered by theaforesaid provision. The Commissioner should have determined first if privaterespondent was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo toprove its exemption therefrom. The Court takes this occasion to reiterate thehornbook doctrine in the interpretation of tax laws that "(a) statute will not beconstrued as imposing a tax unless it does so clearly, expressly, and unambiguously .

. . (A) tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutesapplies with peculiar strictness to tax lawsand the provisions of a taxing act are not tobe extended by implication." 8 Parenthetically, in answering the question of who issubject to tax statutes, it is basic that "in case of doubt, such statutes are to beconstrued most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyondwhat statutes expressly and clearly import." 9 To fall under its coverage, Section 205 of the National Internal Revenue Coderequires that the independent contractor be engaged in the business of selling itsservices. Hence, to impose the three percent contractor's tax on Ateneo's Institute of Philippine Culture, it should be sufficiently proven that the private respondent isindeed selling its services for a fee in pursuit of an independent business. And it isonly after private respondent has been found clearly to be subject to the provisions of

Sec. 205 that the question of exemption therefrom would arise. Only after suchcoverage is shown does the rule of construction — that tax exemptions are to bestrictly construed against the taxpayer — come into play, contrary to petitioner'sposition. This is the main line of reasoning of the Court of Tax Appeals in itsdecision, 10 which was affirmed by the CA.

The Ateneo de Manila University Did Not Contract for the Sale of the Service of its Institute of Philippine Culture

After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine Culture ever sold its services for a fee to anyone or was ever engaged in abusiness apart from and independently of the academic purposes of the university.Stressing that "it is not the Ateneo de Manila University per se which is being taxed,"Petitioner Commissioner of Internal Revenue contends that " the tax is due on itsactivity of conducting researches for a fee. The tax is due on the gross receipts made

in favor of IPC pursuant to the contracts the latter entered to conduct researches for the benefit primarily of its clients. The tax is imposed on the exercise of a taxable

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activity. . . . [T]he sale of services of private respondent is made under a contract andthe various contracts entered into between private respondent and its clients arealmost of the same terms, showing, among others, the compensation and terms of payment." 11(Emphasis supplied.)In theory, the Commissioner of Internal Revenue may be correct. However, therecords do not show that Ateneo's IPC in fact contracted to sell its research servicesfor a fee. Clearly then, as found by the Court of Appeals and the Court of Tax Appeals, petitioner's theory is inapplicable to the established factual milieu obtainingin the instant case.In the first place, the petitioner has presented no evidence to prove its bare

contention that, indeed, contracts for sale of services were ever entered into by theprivate respondent. As appropriately pointed out by the latter:

An examination of the Commissioner's Written Formal Offer of Evidence in the Court of Tax Appeals shows that only the followingdocumentary evidence was presented:Exhibit 1 BIR letter of authority no. 331844

2 Examiner's Field AuditReport3 Adjustments toSales/Receipts4 Letter-decision of BIRCommissioner Bienvenido A.Tan Jr.

None of the foregoing evidence even comes close to purport to becontracts between private respondent and third parties. 12 Moreover, the Court of Tax Appeals accurately and correctly declared that the " fundsreceived by the Ateneo de Manila University are technically not a fee. They mayhowever fall as gifts or donations which are tax-exempt" as shown by privaterespondent's compliance with the requirement of Section 123 of the National InternalRevenue Code providing for the exemption of such gifts to an educationalinstitution. 13 Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:

To our mind, private respondent hardly fits into the definition of an"independent contractor".For one, the established facts show that IPC, as a unit of theprivate respondent, is not engaged in business. Undisputedly,private respondent is mandated by law to undertake research

activities to maintain its university status. In fact, the researchactivities being carried out by the IPC is focused not on business or profit but on social sciences studies of Philippine society andculture. Since it can only finance a limited number of IPC's research projects, private respondent occasionally accepts sponsorship for unfunded IPC research projects from international organizations, private foundations and governmental agencies. However, suchsponsorships are subject to private respondent's terms and conditions, among which are, that the research is confined to topicsconsistent with the private respondent's academic agenda; that no proprietary or commercial purpose research is done; and that private respondent retains not only the absolute right to publish but also the ownership of the results of the research conducted by the

IPC . Quite clearly, the aforementioned terms and conditions belie

the allegation that private respondent is a contractor or is engaged in business.For another, it bears stressing that private respondent is a non-stock, non-profit educational corporation. The fact that it acceptedsponsorship for IPC's unfunded projects is merely incidental. For,the main function of the IPC is to undertake research projects under the academic agenda of the private respondent. Moreover therecords do not show that in accepting sponsorship of researchwork, IPC realized profits from such work. On the contrary, theevidence shows that for about 30 years, IPC had continuously

operated at a loss, which means that sponsored funds are less thanactual expenses for its research projects. That IPC has beenoperating at a loss loudly bespeaks of the fact that education andnot profit is the motive for undertaking the research projects.Then, too, granting arguendo that IPC made profits from thesponsored research projects, the fact still remains that there is noproof that part of such earnings or profits was ever distributed asdividends to any stockholder, as in fact none was so distributedbecause they accrued to the benefit of the private respondentwhich is a non-profit educational institution. 14

Therefore, it is clear that the funds received by Ateneo's Institute of Philippine Cultureare not given in the concept of a fee or price in exchange for the performance of aservice or delivery of an object. Rather, the amounts are in the nature of an

endowment or donation given by IPC's benefactors solely for the purpose of sponsoring or funding the research with no strings attached . As found by the twocourts below, such sponsorships are subject to IPC's terms and conditions. Noproprietary or commercial research is done, and IPC retains the ownership of theresults of the research, including the absolute right to publish the same. Thecopyrights over the results of the research are owned by Ateneo and, consequently, no portion thereof may be reproduced without itspermission. 15 The amounts given to IPC, therefore, may not be deemed, it bearsstressing as fees or gross receipts that can be subjected to the three percentcontractor's tax.It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture cannot be deemed either as a contract of sale or a contract of apiece of work. "By the contract of sale, one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay

therefor a price certain in money or its equivalent." 16 By its very nature, a contract of sale requires a transfer of ownership. Thus, Article 1458 of the Civil Code "expresslymakes the obligation to transfer ownership as an essential element of the contract of sale, following modern codes, such as the German and the Swiss. Even in theabsence of this express requirement, however, most writers, including SanchezRoman, Gayoso, Valverde, Ruggiero, Colin and Capitant, have considered suchtransfer of ownership as the primary purpose of sale. Perez and Alguer follow thesame view, stating that the delivery of the thing does not mean a mere physicaltransfer, but is a means of transmitting ownership. Transfer of title or an agreement totransfer it for a price paid or promised to be paid is the essence of sale." 17 In thecase of a contract for a piece of work, "the contractor binds himself to execute a pieceof work for the employer, in consideration of a certain price or compensation. . . . If the contractor agrees to produce the work from materials furnished by him, he shall

deliver the thing produced to the employer and transfer dominion over the thing, . .." 18 Ineludably, whether the contract be one of sale or one for a piece of work, a

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transfer of ownership is involved and a party necessarily walks away with anobject. 19 In the case at bench, it is clear from the evidence on record that there wasno sale either of objects or services because, as adverted to earlier, there was notransfer of ownership over the research data obtained or the results of researchprojects undertaken by the Institute of Philippine Culture.Furthermore, it is clear that the research activity of the Institute of Philippine Culture isdone in pursuance of maintaining Ateneo's university status and not in the course of an independent business of selling such research with profit in mind. This is clear from a reading of the regulations governing universities:

31. In addition to the legal requisites an institution must meet,

among others, the following requirements before an application for university status shall be considered :xxx xxx xxx(e) The institution must undertake research and operate with acompetent qualified staff at least three graduate departments inaccordance with the rules and standards for graduate education.One of the departments shall be science and technology. Thecompetence of the staff shall be judged by their effective teaching,scholarly publications and research activities published in its school journal as well as their leadership activities in the profession.(f) The institution must show evidence of adequate and stablefinancial resources and support, a reasonable portion of whichshould be devoted to institutional development and research.

(emphasis supplied)xxx xxx xxx32. University status may be withdrawn, after due notice andhearing, for failure to maintain satisfactorily the standards andrequirements therefor. 20

Petitioner's contention that it is the Institute of Philippine Culture that is being taxedand not the Ateneo is patently erroneous because the former is not an independent juridical entity that is separate and distinct form the latter.

Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the Court of Appeals Generally Conclusive

In addition, we reiterate that the "Court of Tax Appeals is a highly specialized bodyspecifically created for the purpose of reviewing tax cases. Through its expertise, it isundeniably competent to determine the issue of whether" 21 Ateneo de ManilaUniversity may be deemed a subject of the three percent contractor's tax "through the

evidence presented before it." Consequently, "as a matter of principle, this Court willnot set aside the conclusion reached by . . . the Court of Tax Appeals which is, by thevery nature of its function, dedicated exclusively to the study and consideration of taxproblems and has necessarily developed an expertise on the subject unless there hasbeen an abuse or improvident exercise of authority . . ." 22 This point becomes moreevident in the case before us where the findings and conclusions of both the Court of Tax Appeals and the Court of Appeals appear untainted by any abuse of authority,much less grave abuse of discretion. Thus, we find the decision of the latter affirmingthat of the former free from any palpable error.

Public Service, Not Profit, is the MotiveThe records show that the Institute of Philippine Culture conducted its researchactivities at a huge deficit of P1,624,014.00 as shown in its statements of fund anddisbursements for the period 1972 to 1985. 23 In fact, it was Ateneo de Manila

University itself that had funded the research projects of the institute, and it was onlywhen Ateneo could no longer produce the needed funds that the institute sought

funding from outside. The testimony of Ateneo's Director for Accounting Services, Ms.Leonor Wijangco, provides significant insight on the academic and nonprofit nature of the institute's research activities done in furtherance of the university's purposes, asfollows:

Q Now it was testified to earlier by Miss Thelma Padero (OfficeManager of the Institute of Philippine Culture) that as far as grantsfrom sponsored research it is possible that the grant sometimes isless than the actual cost. Will you please tell us in this case whenthe actual cost is a lot less than the grant who shoulders theadditional cost?

A The University.Q Now, why is this done by the University? A Because of our faculty development program as a university,because a university has to have its own research institute. 24

So, why is it that Ateneo continues to operate and conduct researches through itsInstitute of Philippine Culture when it undisputedly loses not an insignificant amount inthe process? The plain and simple answer is that private respondent is not acontractor selling its services for a fee but an academic institution conducting theseresearches pursuant to its commitments to education and, ultimately, to publicservice. For the institute to have tenaciously continued operating for so long despiteits accumulation of significant losses, we can only agree with both the Court of Tax Appeals and the Court of Appeals that "education and not profit is [IPC's] motive fo r undertaking the researchprojects." 25 WHEREFORE, premises considered, the petition is DENIED and the assailedDecision of the Court of Appeals is hereby AFFIRMED in full.SO ORDERED.Narvasa, C.J., Davide, Jr., Melo and Francisco JJ., concur.

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G.R. No. 112024 January 28, 1999PHILIPPINE BANK OF COMMUNICATIONS, petitioner,vs.COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OFAPPEALS, respondent.

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

IN VIEW OF ALL, THE FOREGOING, the instant petition for review, is

DENIED due course. The Decision of the Court of Tax Appeals dated May20, 1993 and its resolution dated July 20, 1993, are hereby AFFIRMED intoto.SO ORDERED. 4

The Court of Tax Appeals earlier ruled as follows:WHEREFORE, Petitioner's claim for refund/tax credits of overpaid incometax for 1985 in the amount of P5,299,749.95 is hereby denied for havingbeen filed beyond the reglementary period. The 1986 claim for refundamounting to P234,077.69 is likewise denied since petitioner has opted andin all likelihood automatically credited the same to the succeeding year. Thepetition for review is dismissed for lack of merit.SO ORDERED. 5

The facts on record show the antecedent circumstances pertinent to this case.Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation dulyorganized under Philippine laws, filed its quarterly income tax returns for the first and secondquarters of 1985, reported profits, and paid the total income tax of P5,016,954.00. The taxes duewere settled by applying PBCom's tax credit memos and accordingly, the Bureau of InternalRevenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00 andP1,615,253.00, respectively.Subsequently, however, PBCom suffered losses so that when it filed its Annual Income TaxReturns for the year-ended December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax payable for the year.But during these two years, PBCom earned rental income from leased properties. The lesseeswithheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 andP234,077.69 in 1986.On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others,for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first and secondquarters of 1985.Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld bytheir lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA).The petition was docketed as CTA Case No. 4309 entitled: "Philippine Bank of Communicationsvs. Commissioner of Internal Revenue."The losses petitioner incurred as per the summary of petitioner's claims for refund and tax creditfor 1985 and 1986, filed before the Court of Tax Appeals, are as follows:

1985 1986——— ——— Net Income (Loss) (P25,317,288.00) (P14,129,602.00)Tax Due NIL NILQuarterly tax.Payments Made 5,016,954.00 — Tax Withheld at Source 282,795.50 234,077.69———————— ——————— Excess Tax Payments P5,299,749.50* P234,077.69=============== =============

* CTA's decision reflects PBCom's 1985 tax claim asP5,299,749.95. A forty five centavo difference wasnoted.

On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied therequest of petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on theground that it was filed beyond the two-year reglementary period provided for by law. Thepetitioner's claim for refund in 1986 amounting to P234,077.69 was likewise denied on theassumption that it was automatically credited by PBCom against its tax payment in thesucceeding year.On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTA's decision but thesame was denied due course for lack of merit. 6

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

I. Whether taxpayer PBCom — which relied in goodfaith on the formal assurances of BIR in RMC No. 7-85and did not immediately file with the CTA a petition for review asking for the refund/tax credit of its 1985-86excess quarterly income tax payments — can beprejudiced by the subsequent BIR rejection, appliedretroactivity, of its assurances in RMC No. 7-85 that theprescriptive period for the refund/tax credit of excessquarterly income tax payments is not two years but ten(10). 7 II. Whether the Court of Appeals seriously erred inaffirming the CTA decision which denied PBCom'sclaim for the refund of P234,077.69 income taxoverpaid in 1986 on the mere speculation, withoutproof, that there were taxes due in 1987 and thatPBCom availed of tax-crediting that year. 8

Simply stated, the main question is: Whether or not the Court of Appeals erred in denying theplea for tax refund or tax credits on the ground of prescription, despite petitioner's reliance onRMC No. 7-85, changing the prescriptive period of two years to ten years?Petitioner argues that its claims for refund and tax credits are not yet barred by prescriptionrelying on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985.The circular states that overpaid income taxes are not covered by the two-year prescriptiveperiod under the tax Code and that taxpayers may claim refund or tax credits for the excessquarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil Code. Thepertinent portions of the circular reads:

REVENUE MEMORANDUM CIRCULAR NO. 7-85SUBJECT: PROCESSING OFREFUND OR TAX CREDIT OFEXCESS CORPORATE INCOMETAX RESULTING FROM THEFILING OF THE FINAL

ADJUSTMENT RETURN.TO: All Internal Revenue Officers and Others Concerned.Sec. 85 And 86 Of the National Internal Revenue Code provide:xxx xxx xxxThe foregoing provisions are implemented by Section 7 of RevenueRegulations Nos. 10-77 which provide;xxx xxx xxxIt has been observed, however, that because of the excess tax payments,corporations file claims for recovery of overpaid income tax with the Court of Tax Appeals within the two-year period from the date of payment, inaccordance with sections 292 and 295 of the National Internal Revenue

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Code. It is obvious that the filing of the case in court is to preserve the judicial right of the corporation to claim the refund or tax credit.It should he noted, however, that this is not a case of erroneously or illegallypaid tax under the provisions of Sections 292 and 295 of the Tax Code.In the above provision of the Regulations the corporation may request for the refund of the overpaid income tax or claim for automatic tax credit. Toinsure prompt action on corporate annual income tax returns showingrefundable amounts arising from overpaid quarterly income taxes, thisOffice has promulgated Revenue Memorandum Order No. 32-76 datedJune 11, 1976, containing the procedure in processing said returns. Under these procedures, the returns are merely pre-audited which consist mainly

of checking mathematical accuracy of the figures of the return. After which,the refund or tax credit is granted, and, this procedure was adopted tofacilitate immediate action on cases like this.In this regard, therefore, there is no need to file petitions for review in theCourt of Tax Appeals in order to preserve the right to claim refund or taxcredit the two year period. As already stated, actions hereon by the Bureauare immediate after only a cursory pre-audit of the income tax returns.Moreover, a taxpayer may recover from the Bureau of Internal Revenueexcess income tax paid under the provisions of Section 86 of the Tax Codewithin 10 years from the date of payment considering that it is an obligationcreated by law (Article 1144 of the Civil Code). 9 (Emphasis supplied.)

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

10 petitioner claims that rulings or circulars promulgated by theCommissioner of Internal Revenue have no retroactive effect if it would be prejudicial totaxpayers, In ABS-CBN case, the Court held that the government is precluded from adopting aposition inconsistent with one previously taken where injustice would result therefrom or wherethere has been a misrepresentation to the taxpayer.Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for this rules as follows:

Sec. 246 Non-retroactivity of rulings— Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance withthe preceding section or any of the rulings or circulars promulgated by theCommissioner shall not be given retroactive application if the revocation,modification or reversal will be prejudicial to the taxpayers except in thefollowing cases:

a). where the taxpayer deliberatelymisstates or omits material factsfrom his return or in any documentrequired of him by the Bureau of Internal Revenue;b). where the facts subsequentlygathered by the Bureau of InternalRevenue are materially differentfrom the facts on which the ruling isbased;c). where the taxpayer acted in badfaith.

Respondent Commissioner of Internal Revenue, through Solicitor General, argues that the two-year prescriptive period for filing tax cases in court concerning income tax payments of Corporations is reckoned from the date of filing the Final Adjusted Income Tax Return, which isgenerally done on April 15 following the close of the calendar year. As precedents, respondentCommissioner cited cases which adhered to this principle, to wit ACCRA Investments Corp. vs.Court of Appeals, et al.,

11 and Commissioner of Internal Revenue vs. TMX Sales, Inc ., et al .. 12 Respondent Commissioner also states that since the Final Adjusted Income Tax Return of the petitioner for the taxable year 1985 was supposed to be filed on April 15, 1986, the latter had

only until April 15, 1988 to seek relief from the court. Further, respondent Commissioner

stresses that when the petitioner filed the case before the CTA on November 18, 1988, the samewas filed beyond the time fixed by law, and such failure is fatal to petitioner's cause of action.

After a careful study of the records and applicable jurisprudence on the matter, we find that,contrary to the petitioner's contention, the relaxation of revenue regulations by RMC 7-85 is notwarranted as it disregards the two-year prescriptive period set by law.Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is togenerate funds for the State to finance the needs of the citizenry and to advance the commonweal. 13 Due process of law under the Constitution does not require judicial proceedings in taxcases. This must necessarily be so because it is upon taxation that the government chiefly reliesto obtain the means to carry on its operations and it is of utmost importance that the modesadopted to enforce the collection of taxes levied should be summary and interfered with as little

as possible.

14

From the same perspective, claims for refund or tax credit should be exercised within the timefixed by law because the BIR being an administrative body enforced to collect taxes, itsfunctions should not be unduly delayed or hampered by incidental matters.Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997)provides for the prescriptive period for filing a court proceeding for the recovery of taxerroneously or illegally collected, viz .:

Sec. 230. Recovery of tax erroneously or illegally collected . — No suit or proceeding shall be maintained in any court for the recovery of any nationalinternal revenue tax hereafter alleged to have been erroneously or illegallyassessed or collected, or of any penalty claimed to have been collectedwithout authority, or of any sum alleged to have been excessive or in anymanner wrongfully collected, until a claim for refund or credit has been dulyfiled with the Commissioner; but such suit or proceeding may bemaintained, whether or not such tax, penalty, or sum has been paid under protest or duress.In any case, no such suit or proceedings shall begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment ;Provided however , Thatthe Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment wasmade, such payment appears clearly to have been erroneously paid.(Emphasis supplied)

The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal Revenue, within two (2) years after payment of tax, before any suit in CTA iscommenced. The two-year prescriptive period provided, should be computed from the time of filing the Adjustment Return and final payment of the tax for the year.In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co ., 15 this Courtexplained the application of Sec. 230 of 1977 NIRC, as follows:

Clearly, the prescriptive period of two years should commence to run onlyfrom the time that the refund is ascertained, which can only be determinedafter a final adjustment return is accomplished. In the present case, thisdate is April 16, 1984, and two years from this date would be April 16, 1986.. . . As we have earlier said in the TMX Sales case, Sections68. 16 69, 17 and 70 18 on Quarterly Corporate Income Tax Payment andSection 321 should be considered in conjunction with it 19

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptiveperiod of two years to ten years on claims of excess quarterly income tax payments, suchcircular created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing,the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statutepassed by Congress.It bears repeating that Revenue memorandum-circulars are considered administrative rulings (inthe sense of more specific and less general interpretations of tax laws) which are issued fromtime to time by the Commissioner of Internal Revenue. It is widely accepted that theinterpretation placed upon a statute by the executive officers, whose duty is to enforce it, isentitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and

will be ignored if judicially found to be erroneous. 20 Thus, courts will not countenance

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administrative issuances that override, instead of remaining consistent and in harmony with thelaw they seek to apply and implement. 21 In the case of People vs. Lim, 22 it was held that rules and regulations issued by administrativeofficials to implement a law cannot go beyond the terms and provisions of the latter.

Appellant contends that Section 2 of FAO No. 37-1 is void because it is notonly inconsistent with but is contrary to the provisions and spirit of Act. No4003 as amended, because whereas the prohibition prescribed in saidFisheries Act was for any single period of time not exceeding five yearsduration, FAO No 37-1 fixed no period, that is to say, it establishes anabsolute ban for all time. This discrepancy between Act No. 4003 and FAONo. 37-1 was probably due to an oversight on the part of Secretary of

Agriculture and Natural Resources. Of course, in case of discrepancy, thebasic Act prevails, for the reason that the regulation or rule issued toimplement a law cannot go beyond the terms and provisions of thelatter. . . . In this connection, the attention of the technical men in the officesof Department Heads who draft rules and regulation is called to theimportance and necessity of closely following the terms and provisions of the law which they intended to implement, this to avoid any possiblemisunderstanding or confusion as in the present case. 23

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

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

Art. 8 of the Civil Code 26 recognizes judicial decisions, applying or interpreting statutes as partof the legal system of the country. But administrative decisions do not enjoy that level of recognition. A memorandum-circular of a bureau head could not operate to vest a taxpayer withshield against judicial action. For there are no vested rights to speak of respecting a wrongconstruction of the law by the administrative officials and such wrong interpretation could notplace the Government in estoppel to correct or overrule the same. 27 Moreover, the non-retroactivity of rulings by the Commissioner of Internal Revenue is not applicable in this casebecause the nullity of RMC No. 7-85 was declared by respondent courts and not by theCommissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held by thisCourt, a claim for refund is in the nature of a claim for exemption and should be construedin strictissimi juris against the taxpayer. 28

On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirmingCTA's decision denying its claim for refund of P234,077.69 (tax overpaid in 1986), based onmere speculation, without proof, that PBCom availed of the automatic tax credit in 1987.Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides that any excess of thetotal quarterly payments over the actual income tax computed in the adjustment or finalcorporate income tax return, shall either(a) be refunded to the corporation, or (b) may becredited against the estimated quarterly income tax liabilities for the quarters of the succeedingtaxable year.The corporation must signify in its annual corporate adjustment return (by marking the optionbox provided in the BIR form) its intention, whether to request for a refund or claim for anautomatic tax credit for the succeeding taxable year. To ease the administration of tax collection,

these remedies are in the alternative, and the choice of one precludes the other. As stated by respondent Court of Appeals:Finally, as to the claimed refund of income tax over-paid in 1986 — theCourt of Tax Appeals, after examining the adjusted final corporate annualincome tax return for taxable year 1986, found out that petitioner opted toapply for automatic tax credit. This was the basis used (vis-avis the fact thatthe 1987 annual corporate tax return was not offered by the petitioner asevidence) by the CTA in concluding that petitioner had indeed availed of and applied the automatic tax credit to the succeeding year, hence it can nolonger ask for refund, as to [sic ] the two remedies of refund and tax creditare alternative. 30

That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977NIRC, as specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which wemust respect. Moreover, the 1987 annual corporate tax return of the petitioner was not offeredas evidence to contovert said fact. Thus, we are bound by the findings of fact by respondentcourts, there being no showing of gross error or abuse on their part to disturb our reliancethereon. 31 WHEREFORE, the, petition is hereby DENIED, The decision of the Court of Appeals appealedfrom is AFFIRMED, with COSTS against the petitioner.1âwphi1.nêt SO ORDERED.Bellosillo, Puno, Mendoza, and Buena, JJ., concur.

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A parcel of land, situated in the City of Baguio, Province of Benguet, Island of Luzon, andparticularly described in survey plans Psd-131102-002639 and Ccs-131102-000030 asapproved on 16 August 1993 and 26 August 1993, respectively, by the Department of Environment and Natural Resources, in detail containing :Lot 1, Lot 2, Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 13, Lot 14, Lot 15, and Lot 20 of Ccs-131102-000030-and-Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 8, Lot 9, Lot 10, Lot 11, Lot 14, Lot 15, Lot 16, Lot 17,and Lot 18 of Psd-131102-002639 being portions of TCT No. T-3812, LRC Rec. No. 87.With a combined area of TWO HUNDRED EIGHTY EIGHT AND ONE/TENTH HECTARES(288.1 hectares); Provided that the area consisting of approximately Six and two/tenth

(6.2) hectares, more or less, presently occupied by the VOA and the residence of the Ambassador of the United States, shall be considered as part of the SEZ only uponturnover of the properties to the government of the Republic of the Philippines.Sec. 2. Governing Body of the John Hay Special Economic Zone. – Pursuant to Section15 of Republic Act No. 7227, the Bases Conversion and Development Authority is herebyestablished as the governing body of the John Hay Special Economic Zone and, as such,authorized to determine the utilization and disposition of the lands comprising it, subject toprivate rights, if any, and in consultation and coordination with the City Government of Baguio after consultation with its inhabitants, and to promulgate the necessary policies,rules, and regulations to govern and regulate the zone thru the John Hay Poro PointDevelopment Corporation, which is its implementing arm for its economic developmentand optimum utilization.Sec. 3. Investment Climate in John Hay Special Economic Zone. – Pursuant to Section5(m) and Section 15 of Republic Act No. 7227, the John Hay Poro Point Development

Corporation shall implement all necessary policies, rules, and regulations governing thezone, including investment incentives, in consultation with pertinent governmentdepartments. Among others, the zone shall have all the applicable incentives of theSpecial Economic Zone under Section 12 of Republic Act No. 7227 and those applicableincentives granted in the Export Processing Zones, the Omnibus Investment Code of 1987, the Foreign Investment Act of 1991, and new investment laws that may hereinafter be enacted.Sec. 4. Role of Departments, Bureaus, Offices, Agencies and Instrumentalities . – AllHeads of departments, bureaus, offices, agencies, and instrumentalities of thegovernment are hereby directed to give full support to Bases Conversion and Development

Authority and/or its implementing subsidiary or joint venture to facilitate the necessaryapprovals to expedite the implementation of various projects of the conversion program.Sec. 5. Local Authority. – Except as herein provided, the affected local government unitsshall retain their basic autonomy and identity.

Sec. 6. Repealing Clause. – All orders, rules, and regulations, or parts thereof, which areinconsistent with the provisions of this Proclamation, are hereby repealed, amended, or modified accordingly.Sec. 7. Effectivity. This proclamation shall take effect immediately.Done in the City of Manila, this 5th day of July, in the year of Our Lord, nineteen hundredand ninety-four.

The issuance of Proclamation No. 420 spawned the present petition[17] for prohibition, mandamus and declaratory relief which was filed on April 25, 1995 challenging,in the main, its constitutionality or validity as well as the legality of the Memorandum of

Agreement and Joint Venture Agreement between public respondent BCDA and privaterespondents TUNTEX andASIAWORLD.

Petitioners allege as grounds for the allowance of the petition the following:I. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1990 (sic) IN SO

FAR AS IT GRANTS TAX EXEMPTIONS IS INVALID AND ILLEGAL AS IT

IS AN UNCONSTITUTIONAL EXERCISE BY THE PRESIDENT OF APOWER GRANTED ONLY TO THE LEGISLATURE.

II. PRESIDENTIAL PROCLAMATION NO. 420, IN SO FAR AS IT LIMITS THEPOWERS AND INTERFERES WITH THE AUTONOMY OF THE CITY OFBAGUIO IS INVALID, ILLEGAL AND UNCONSTITUTIONAL.

III. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1994 ISUNCONSTITUTIONAL IN THAT IT VIOLATES THE RULE THAT ALLTAXES SHOULD BE UNIFORM AND EQUITABLE.

IV. THE MEMORANDUM OF AGREEMENT ENTERED INTO BY ANDBETWEEN PRIVATE AND PUBLIC RESPONDENTS BASESCONVERSION DEVELOPMENT AUTHORITY HAVING BEENENTEREDINTO ONLY BY DIRECT NEGOTIATION IS ILLEGAL.

V. THE TERMS AND CONDITIONS OF THE MEMORANDUM OF

AGREEMENT ENTERED INTO BY AND BETWEEN PRIVATE ANDPUBLIC RESPONDENT BASES CONVERSION DEVELOPMENT

AUTHORITY IS (sic) ILLEGAL.VI. THE CONCEPTUAL DEVELOPMENT PLAN OF RESPONDENTS NOT

HAVING UNDERGONE ENVIRONMENTAL IMPACT ASSESSMENT ISBEING ILLEGALLY CONSIDERED WITHOUT A VALIDENVIRONMENTAL IMPACT ASSESSMENT.

A temporary restraining order and/or writ of preliminary injunction was prayed for toenjoin BCDA, John Hay Poro Point Development Corporation and the city governmentfrom implementing Proclamation No. 420, and TUNTEX and ASIAWORLD fromproceeding with their plan respecting Camp John Hay‘s development pursuant to their Joint Venture Agreement with BCDA.[18]

Public respondents, by their separate Comments, allege as moot and academic theissues raised by the petition, the questioned Memorandum of Agreement and Joint

Venture Agreement having already been deemed abandoned by the inaction of the partiesthereto prior to the filing of the petition as in fact, by letter of November 21, 1995, BCDAformally notified TUNTEX and ASIAWORLD of the revocation of their said agreements.[19]

In maintaining the validity of Proclamation No. 420, respondents contend that byextending to the John Hay SEZ economic incentives similar to those enjoyed by the SubicSEZ which was established under R.A. No. 7227, the proclamation is merelyimplementing the legislative intent of said law to turn the US military bases into hubs of business activity or investment. They underscore the point that the government‘s policy of bases conversion can not be achieved without extending the same tax exemptions grantedby R.A. No. 7227 to Subic SEZ to other SEZs.

Denying that Proclamation No. 420 is in derogation of the local autonomy of BaguioCity or that it is violative of the constitutional guarantee of equal protection, respondentsassail petitioners‘ lack of standing to bring the present suit even as taxpayers and in theabsence of any actual case or controversy to warrant this Court‘s exercise of its power of

judicial review over the proclamation.Finally, respondents seek the outright dismissal of the petition for having been filed indisregard of the hierarchy of courts and of the doctrine of exhaustion of administrativeremedies.

Replying,[20] petitioners aver that the doctrine of exhaustion of administrativeremedies finds no application herein since they are invoking the exclusive authority of thisCourt under Section 21 of R.A. No. 7227 to enjoin or restrain implementation of projects for conversion of the base areas; that the established exceptions to the aforesaid doctrineobtain in the present petition; and that they possess the standing to bring the petitionwhich is a taxpayer‘s suit.

Public respondents have filed their Rejoinder [21] and the parties have filed their respective memoranda.

Before dwelling on the core issues, this Court shall first address the preliminaryprocedural questions confronting the petition.

The judicial policy is and has always been that this Court will not entertain directresort to it except when the redress sought cannot be obtained in the proper courts, or

http://sc.judiciary.gov.ph/jurisprudence/2003/oct2003/119775.htm#_ftn17



















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when exceptional and compelling circumstances warrant availment of a remedy within andcalling for the exercise of this Court‘s primary jurisdiction.

[22] Neither will it entertain anaction for declaratory relief, which is partly the nature of this petition, over which it has nooriginal jurisdiction.

Nonetheless, as it is only this Court which has the power under Section 21 [23] of R.A. No. 7227 to enjoin implementation of projects for the development of the former USmilitary reservations, the issuance of which injunction petitioners pray for, petitioners‘ directfiling of the present petition with it is allowed. Over and above this procedural objection tothe present suit, this Court retains full discretionary power to take cognizance of a petitionfiled directly to it if compelling reasons, or the nature and importance of the issues raised,warrant.[24] Besides, remanding the case to the lower courts now would just unduly prolong

adjudication of the issues.The transformation of a portion of the area covered by Camp John Hay into a SE Z is

not simply a re-classification of an area, a mere ascription of a status to a place. Itinvolves turning the former US military reservation into a focal point for investments byboth local and foreign entities. It is to be made a site of vigorous business activity,ultimately serving as a spur to the country‘s long awaited economic growth. For, as R.A.No. 7227 unequivocally declares, it is the government‘s policy to enhance the benefits tobe derived from the base areas in order to promote the economic and social developmentof Central Luzon in particular and the country in general .[25] Like the Subic SEZ, the JohnHay SEZ should also be turned into a ―self -sustaining, industrial, commercial, financial andinvestment center.‖[26]

More than the economic interests at stake, the development of Camp John Hay aswell as of the other base areas unquestionably has critical links to a host of environmentaland social concerns. Whatever use to which these lands will be devoted will set a chain of

events that can affect one way or another the social and economic way of life of thecommunities where the bases are located, and ultimately the nation in general.

Underscoring the fragility of Baguio City‘s ecology with its problem on the scarcity of its water supply, petitioners point out that the local and national government are faced withthe challenge of how to provide for an ecologically sustainable, environmentally sound,equitable transition for the city in the wake of Camp John Hay‘s reversion to the mass of government property.[27] But that is why R.A. No. 7227 emphasizes the ―sound andbalanced conversion of the Clark and Subic military reservations and their extensions consistent with ecological and environmental standards.‖

[28] It cannot thus begainsaid that the matter of conversion of the US bases into SEZs, in this case Camp JohnHay, assumes importance of a national magnitude.

Convinced then that the present petition embodies crucial issues, this Court assumes jurisdiction over the petition.

As far as the questioned agreements between BCDA

and TUNTEX and ASIAWORLD are concerned, the legal questions being raised thereonby petitioners have indeed been rendered moot and academic by the revocation of suchagreements. There are, however, other issues posed by the petition, those which center on the constitutionality of Proclamation No. 420, which have not been mooted by the saidsupervening event upon application of the rules for the judicial scrutiny of constitutionalcases. The issues boil down to:

(1) Whether the present petition complies with the requirements for thisCourt‘s exercise of jurisdiction over constitutional issues;

(2) Whether Proclamation No. 420 is constitutional by providing for nationaland local tax exemption within and granting other economic incentivesto the John Hay Special Economic Zone; and

(3) Whether Proclamation No. 420 is constitutional for limiting or interferingwith the local autonomy of Baguio City;

It is settled that when questions of constitutional significance are raised, the court

can exercise its power of judicial review only if the following requisites are present: (1) theexistence of an actual and appropriate case; (2) a personal and substantial interest of the

party raising the constitutional question; (3) the exercise of judicial review is pleaded at theearliest opportunity; and (4) the constitutional question is the lis mota of the case.[29]

An actual case or controversy refers to an existing case or controversy that isappropriate or ripe for determination, not conjectural or anticipatory .[30] The controversyneeds to be definite and concrete, bearing upon the legal relations of parties who arepitted against each other due to their adverse legal interests .[31] There is in the presentcase a real clash of interests and rights between petitioners and respondents arising fromthe issuance of a presidential proclamation that converts a portion of the area covered byCamp John Hay into a SEZ, the former insisting that such proclamation containsunconstitutional provisions, the latter claiming otherwise.

R.A. No. 7227 expressly requires the concurrence of the affected local government

units to the creation of SEZs out of all the base areas in the country .[32] The grant by thelaw on local government units of the right of concurrence on the bases‘ conversion isequivalent to vesting a legal standing on them, for it is in effect a recognition of the realinterests that communities nearby or surrounding a particular base area have in itsutilization. Thus, the interest of petitioners, being inhabitants of Baguio, in assailing thelegality of Proclamation No. 420, is personal and substantial such that they have sustainedor will sustain direct injury as a result of the government act being challenged .[33] Theirs isa material interest, an interest in issue affected by the proclamation and not merely aninterest in the question involved or an incidental interest ,[34] for what is at stake in theenforcement of Proclamation No. 420 is the very economic and social existence of thepeople of Baguio City.

Petitioners‘ locus standi parallels that of the petitioner and other residents of Bataan,specially of the town of Limay, in Garcia v. Board of Investment s

[35] where this Courtcharacterized their interest in the establishment of a petrochemical plant in their place as

actual, real, vital and legal, for it would affect not only their economic life but even the air they breathe.

Moreover, petitioners Edilberto T. Claravall and Lilia G. Yaranon were duly electedcouncilors of Baguio at the time, engaged in the local governance of Baguio City andwhose duties included deciding for and on behalf of their constituents the question of whether to concur with the declaration of a portion of the area covered by Camp John Hayas a SEZ. Certainly then, petitioners Claravall and Yaranon, as city officials who votedagainst[36] the sanggunian Resolution No. 255 (Series of 1994) supporting the issuance of the now challenged Proclamation No. 420, have legal standing to bring the presentpetition.

That there is herein a dispute on legal rights and interests is thus beyond doubt. Themootness of the issues concerning the questioned agreements between public and privaterespondents is of no moment.―By the mere enactment of the questioned law or the approval of the challenged act, the

dispute is deemed to have ripened into a judicial controversy even without any other overtact. Indeed, even a singular violation of the Constitution and/or the law is enough toawaken judicial duty.‖[37]

As to the third and fourth requisites of a judicial inquiry, there is likewise no questionthat they have been complied with in the case at bar. This is an action filed purposely tobring forth constitutional issues, ruling on which this Court must take up. Besides,respondents never raised issues with respect to these requisites, hence, they are deemedwaived.

Having cleared the way for judicial review, the constitutionality of Proclamation No.420, as framed in the second and third issues above, must now be addressed squarely.

The second issue refers to petitioners‘ objection against the creation by ProclamationNo. 420 of a regime of tax exemption within the John Hay SEZ. Petitioners argue thatnowhere in R. A. No. 7227 is there a grant of tax exemption to SEZs yet to beestablished in base areas, unlike the grant under Section 12 thereof of tax exemption and

investment incentives to the therein established Subic SEZ. The grant of tax exemption tothe John Hay SEZ, petitioners conclude, thus contravenes Article VI, Section 28 (4) of the
































































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Constitution which provides that ―No law granting any tax exemption shall be passedwithout the concurrence of a majority of all the members of Congress.‖

Section 3 of Proclamation No. 420, the challenged provision, reads:Sec. 3. Investment Climate in John Hay Special Economic Zone. – Pursuant to Section5(m) and Section 15 of Republic Act No. 7227, the John Hay Poro Point DevelopmentCorporation shall implement all necessary policies, rules, and regulations governing thezone, including investment incentives, in consultation with pertinent governmentdepartments. Among others, the zone shall have all the applicable incentives of theSpecial Economic Zone under Section 12 of Republic Act No. 7227 and thoseapplicable incentives granted in the Export Processing Zones, the OmnibusInvestment Code of 1987, the Foreign Investment Act of 1991, and new investment

laws that may hereinafter be enacted. (Emphasis and underscoring supplied)Upon the other hand, Section 12 of R.A. No. 7227 provides:

x x x(a) Within the framework and subject to the mandate and limitations of the Constitutionand the pertinent provisions of the Local Government Code, the Subic Special EconomicZone shall be developed into a self-sustaining, industrial, commercial, financial andinvestment center to generate employment opportunities in and around the zone and toattract and promote productive foreign investments;b) The Subic Special Economic Zone shall be operated and managed as a separatecustoms territory ensuring free flow or movement of goods and capital within, into andexported out of the Subic Special Economic Zone, as well as provide incentives such astax 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 tothe 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;(c) The provisions 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 businessesand enterprises within the Subic Special Economic Zone shall be remitted to the NationalGovernment, one percent (1%) each to the local government units affected by thedeclaration of the zone in proportion to their population area, and other factors. Inaddition, there is hereby established a development fund of one percent (1%) of the grossincome earned by all businesses and enterprises within the Subic Special Economic Zoneto be utilized for the Municipality of Subic, and other municipalities contiguous to be baseareas. In case of conflict between national and local laws with respect to tax exemptionprivileges in the Subic Special Economic Zone, the same shall be resolved in favor of thelatter;(d) No exchange control policy shall be applied and free markets for foreign exchange,

gold, securities and futures shall be allowed and maintained in the Subic SpecialEconomic Zone;(e) The Central Bank, through the Monetary Board, shall supervise and regulate theoperations of banks and other financial institutions within the Subic Special EconomicZone;(f) Banking and Finance shall be liberalized with the establishment of foreign currencydepository units of local commercial banks and offshore banking units of foreign bankswith minimum Central Bank regulation;(g) Any investor within the Subic Special Economic Zone whose continuinginvestment shall not be less than Two Hundred fifty thousand dollars ($250,000), his/her spouse and dependent children under twenty-one (21) years of age, shall be grantedpermanent resident status within the Subic Special Economic Zone. They shall havefreedom of ingress and egress to and from the Subic Special Economic Zone without anyneed of special authorization from the Bureau of Immigration and Deportation. The Subic

Bay Metropolitan Authority referred to in Section 13 of this Act may also issue workingvisas renewable every two (2) years to foreign executives and other aliens possessing

highly-technical skills which no Filipino within the Subic Special Economic Zonepossesses, as certified by the Department of Labor and Employment. The names of aliensgranted permanent residence status and working visas by the Subic Bay Metropolitan

Authority shall be reported to the Bureau of Immigration and Deportation within thirty (30)days after issuance thereof;x x x (Emphasis supplied)

It is clear that under Section 12 of R.A. No. 7227 it is only the Subic SEZ which wasgranted by Congress with tax exemption, investment incentives and the like. There is noexpress extension of the aforesaid benefits to other SEZs still to be created at the timevia presidential proclamation.

The deliberations of the Senate confirm the exclusivity to Subic SEZ of the tax and

investment privileges accorded it under the law, as the following exchanges between our lawmakers show during the second reading of the precursor bill of R.A. No. 7227 withrespect to the investment policies that would govern Subic SEZ which are now embodiedin the aforesaid Section 12 thereof:x x xSenator Maceda: This is what I was talking about. We get into problems here becauseall of these following policies are centered around the concept of free port. And in themain paragraph above, we have declared both Clark and Subic as special economiczones, subject to these policies which are, in effect, a free-port arrangement.Senator Angara: The Gentleman is absolutely correct, Mr. President. So we mustconfine these policies only to Subic.May I withdraw then my amendment, and instead provide that ―THE SPECIAL ECONOMICZONE OF SUBIC SHALL BE ESTABLISHED IN ACCORDANCE WITH THE FOLLOWINGPOLICIES.‖ Subject to style, Mr. President.

Thus, it is very clear that these principles and policies are applicable only to Subic as afree port.Senator Paterno: Mr. President.The President: Senator Paterno is recognized.Senator Paterno: I take it that the amendment suggested by Senator Angara would thenprevent the establishment of other special economic zones observing these policies.Senator Angara: No, Mr. President, because during our short caucus, Senator Laurelraised the point that if we give this delegation to the President to establish other economiczones, that may be an unwarranted delegation.So we agreed that we will simply limit the definition of powers and description of the zoneto Subic, but that does not exclude the possibility of creating other economic zones withinthe baselands.Senator Paterno: But if that amendment is followed, no other special economic zone maybe created under authority of this particular bill. Is that correct, Mr. President?

Senator Angara: Under this specific provision, yes, Mr. President. This provision now willbe confined only to Subic.[38] x x x (Underscoring supplied).

As gathered from the earlier-quoted Section 12 of R.A. No. 7227, the privileges givento Subic SEZ consist principally of exemption from tariff or customs duties, national andlocal taxes of business entities therein (paragraphs (b) and (c)), free market and trade of specified goods or properties (paragraph d), liberalized banking and finance (paragraph f),and relaxed immigration rules for foreign investors (paragraph g). Yet, apart from these,Proclamation No. 420 also makes available to the John Hay SEZ benefits existing in other laws such as the privilege of export processing zone-based businesses of importing capitalequipment and raw materials free fr om taxes, duties and other restrictions;[39] tax and dutyexemptions, tax holiday, tax credit, and other incentives under the Omnibus InvestmentsCode of 1987;[40] and the applicability to the subject zone of rules governing foreigninvestments in the Philippines.[41]

While the grant of economic incentives may be essential to the creation and successof SEZs, free trade zones and the like, the grant thereof to the John Hay SEZ cannot be

















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sustained. The incentives under R.A. No. 7227 are exclusive only to the Subic SEZ,hence, the extension of the same to the John Hay SEZ finds no support therein. Neither does the same grant of privileges to the John Hay SEZ find support in the other lawsspecified under Section 3 of Proclamation No. 420, which laws were already extant beforethe issuance of the proclamation or the enactment of R.A. No. 7227.

More importantly, the nature of most of the assailed privileges is one of taxexemption. It is the legislature, unless limited by a provision of the state constitution, thathas full power to exempt any person or corporation or class of property from taxation, itspower to exempt being as broad as its power to tax .[42] Other than Congress, theConstitution may itself provide for specific tax exemptions ,[43] or local governments maypass ordinances on exemption only from local taxes.[44]

The challenged grant of tax exemption would circumvent the Constitution‘simposition that a law granting any tax exemption must have the concurrence of a majorityof all the members of Congress.[45] In the same vein, the other kinds of privileges extendedto the John Hay SEZ are by tradition and usage for Congress to legislate upon.

Contrary to public respondents‘ suggestions, the claimed statutory exemption of theJohn 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 languagetoo clear to be mistaken.[46] Tax exemption cannot be implied as it must be categoricallyand unmistakably expressed.[47]

If it were the intent of the legislature to grant to the John Hay SEZ the same taxexemption and incentives given to the Subic SEZ, it would have so expressly provided inthe R.A. No. 7227.

This Court no doubt can void an act or policy of the political departments of thegovernment on either of two grounds –infringement of the Constitution or grave abuse of

discretion.[48]

This Court then declares that the grant by Proclamation No. 420 of tax exemption

and other privileges to the John Hay SEZ is void for being violative of the Constitution.This renders it unnecessary to still dwell on petitioners‘ claim that the same grant violatesthe equal protection guarantee.

With respect to the final issue raised by petitioners — that Proclamation No. 420 isunconstitutional for being in derogation of Baguio City‘s local autonomy, objection isspecifically mounted against Section 2 thereof in which BCDA is set up as the governingbody of the John Hay SEZ.[49]

Petitioners argue that there is no authority of the President to subject the John HaySEZ to the governance of BCDA which has just oversight functions over SEZ; and that todo so is to diminish the city government‘s power over an area within its jurisdiction, hence,Proclamation No. 420 unlawfully gives the President power of control over the localgovernment instead of just mere supervision.

Petitioners‘ arguments are bereft of merit. Under R.A. No. 7227, the BCDA isentrusted with, among other things, the following purpose:[50] x x x(a) To own, hold and/or administer the military reservations of John Hay Air Station,Wallace Air Station, O‘Donnell Transmitter Station, San Miguel Naval CommunicationsStation, Mt. Sta. Rita Station (Hermosa, Bataan) and those portions of Metro ManilaCamps which may be transferred to it by the President;x x x (Underscoring supplied)With such broad rights of ownership and administration vested in BCDA over Camp JohnHay, BCDA virtually has control over it, subject to certain limitations provided for by law.By designating BCDA as the governing agency of the John Hay SEZ, the law merelyemphasizes or reiterates the statutory role or functions it has been granted.

The unconstitutionality of the grant of tax immunity and financial incentives ascontained in the second sentence of Section 3 of Proclamation No. 420 notwithstanding,the entire assailed proclamation cannot be declared unconstitutional, the other partsthereof not being repugnant to law or the Constitution. The delineation and declaration of

a portion of the area covered by Camp John Hay as a SEZ was well within the powers of the President to do so by means of a proclamation.[51] The requisite prior concurrence bythe Baguio City government to such proclamation appears to have been given in the formof a duly enacted resolution by the sanggunian. The other provisions of the proclamationhad been proven to be consistent with R.A. No. 7227.

Where part of a statute is void as contrary to the Constitution, while another part isvalid, the valid portion, if separable from the invalid, may stand and be enforced .[52] ThisCourt finds that the other provisions in Proclamation No. 420 converting a delineatedportion of Camp John Hay into the John Hay SEZ are separable from the invalid secondsentence of Section 3 thereof, hence they stand.

WHEREFORE, the second sentence of Section 3 of Proclamation No. 420 is hereby

declared NULL AND VOID and is accordingly declared of no legal force and effect. Publicrespondents are hereby enjoined from implementing the aforesaid void provision.

Proclamation No. 420, without the invalidated portion, remains valid and effective.SO ORDERED.













































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G.R. No. 127105 June 25, 1999COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.

GONZAGA-REYES, J. : This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to setaside the decision of the Court of Appeals dated November 7, 1996 in CA-GR SP No.40802 affirming the decision of the Court of Tax Appeals in CTA Case No. 5136.The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:

[Respondent], a domestic corporation organized and operating under

the Philippine laws, entered into a license agreement with SC Johnsonand Son, United States of America (USA), a non-resident foreigncorporation based in the U.S.A. pursuant to which the [respondent] wasgranted the right to use the trademark, patents and technology ownedby the latter including the right to manufacture, package and distributethe products covered by the Agreement and secure assistance inmanagement, marketing and production from SC Johnson and Son, U.S. A.The said License Agreement was duly registered with the TechnologyTransfer Board of the Bureau of Patents, Trade Marks and TechnologyTransfer under Certificate of Registration No. 8064 (Exh. "A").For the use of the trademark or technology, [respondent] was obliged topay SC Johnson and Son, USA royalties based on a percentage of netsales and subjected the same to 25% withholding tax on royalty

payments which [respondent] paid for the period covering July 1992 toMay 1993 in the total amount of P1,603,443.00 (Exhs. "B" to "L" andsubmarkings).On October 29, 1993, [respondent] filed with the International Tax

Affairs Division (ITAD) of the BIR a claim for refund of overpaidwithholding tax on royalties arguing that, "the antecedent factsattending [respondent's] case fall squarely within the samecircumstances under which said MacGeorge and Gillete rulings wereissued. Since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the [respondent].We therefore submit that royalties paid by the [respondent] to SCJohnson and Son, USA is only subject to 10% withholding tax pursuantto the most-favored nation clause of the RP-US Tax Treaty [Article 13Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax Treaty

[Article 12 (2) (b)]" (Petition for Review [filed with the Court of Appeals],par. 12). [Respondent's] claim for there fund of P963,266.00 wascomputed as follows:

Gross 25% 10%Month/ Royalty Withholding WithholdingYear Fee Tax Paid Tax Balance——— ——— ——— ——— ——— July 1992 559,878 139,970 55,988 83,982

August 567,935 141,984 56,794 85,190September 595,956 148,989 59,596 89,393October 634,405 158,601 63,441 95,161November 620,885 155,221 62,089 93,133December 383,276 95,819 36,328 57,491Jan 1993 602,451 170,630 68,245 102,368February 565,845 141,461 56,585 84,877March 547,253 136,813 54,725 82,088

April 660,810 165,203 66,081 99,122May 603,076 150,769 60,308 90,461———— ———— ———— ——— P6,421,770 P1,605,443 P642,177 P963,266 1 ======== ======== ======== ========

The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson &Son, Inc. (S.C. Johnson) then filed a petition for review before the Court of Tax Appeals(CTA) where the case was docketed as CTA Case No. 5136, to claim a refund of theoverpaid withholding tax on royalty payments from July 1992 to May 1993.On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnsonand ordered the Commissioner of Internal Revenue to issue a tax credit certificate in the

amount of P963,266.00 representing overpaid withholding tax on royalty payments,beginning July, 1992 to May, 1993. 2 The Commissioner of Internal Revenue thus filed a petition for review with the Court of

Appeals which rendered the decision subject of this appeal on November 7, 1996 findingno merit in the petition and affirming in toto the CTA ruling. 3 This petition for review was filed by the Commissioner of Internal Revenue raising thefollowing issue:

THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA IS ENTITLED TO THE "MOST FAVORED NATION"TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP-USTAX TREATY IN RELATION TO THE RP-WEST GERMANY TAXTREATY.

Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which isknown as the "most favored nation" clause, the lowest rate of the Philippine tax at 10%

may be imposed on royalties derived by a resident of the United States from sourceswithin the Philippines only if the circumstances of the resident of the United States aresimilar to those of the resident of West Germany. Since the RP-US Tax Treaty contains no"matching credit" provision as that provided under Article 24 of the RP-West Germany TaxTreaty, the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Even assumingthat the phrase "paid under similar circumstances" refers to the payment of royalties, andnot taxes, as held by the Court of Appeals, still, the "most favored nation" clause cannot beinvoked for the reason that when a tax treaty contemplates circumstances attendant to thepayment of a tax, or royalty remittances for that matter, these must necessarily refer tocircumstances that are tax-related. Finally, petitioner argues that since S.C. Johnson'sinvocation of the "most favored nation" clause is in the nature of a claim for exemption fromthe application of the regular tax rate of 25% for royalties, the provisions of the treaty mustbe construed strictly against it.

In its Comment, private respondent S.C. Johnson avers that the instant petition should bedenied (1) because it contains a defective certification against forum shopping as requiredunder SC Circular No. 28-91, that is, the certification was not executed by the petitioner herself but by her counsel; and (2) that the "most favored nation" clause under the RP-USTax Treaty refers to royalties paid under similar circumstances as those royalties subject totax in other treaties; that the phrase "paid under similar circumstances" does not refer topayment of the tax but to the subject matter of the tax, that is, royalties, because the "mostfavored nation" clause is intended to allow the taxpayer in one state to avail of more liberalprovisions contained in another tax treaty wherein the country of residence of suchtaxpayer is also a party thereto, subject to the basic condition that the subject matter of taxation in that other tax treaty is the same as that in the original tax treaty under which thetaxpayer is liable; thus, the RP-US Tax Treaty speaks of "royalties of the same kind paidunder similar circumstances". S.C. Johnson also contends that the Commissioner isestopped from insisting on her interpretation that the phrase "paid under similar circumstances" refers to the manner in which the tax is paid, for the reason that saidinterpretation is embodied in Revenue Memorandum Circular ("RMC") 39-92 which was

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already abandoned by the Commissioner's predecessor in 1993; and was expresslyrevoked in BIR Ruling No. 052-95 which stated that royalties paid to an American licensor are subject only to 10% withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US TaxTreaty in relation to the RP-West Germany Tax Treaty. Said ruling should be givenretroactive effect except if such is prejudicial to the taxpayer pursuant to Section 246 of theNational Internal Revenue Code.Petitioner filed Reply alleging that the fact that the certification against forum shopping wassigned by petitioner's counsel is not a fatal defect as to warrant the dismissal of thispetition since Circular No. 28-91 applies only to original actions and not to appeals, as inthe instant case. Moreover, the requirement that the certification should be signed bypetitioner and not by counsel does not apply to petitioner who has only the Office of the

Solicitor General as statutory counsel. Petitioner reiterates that even if the phrase "paidunder similar circumstances" embodied in the most favored nation clause of the RP-USTax Treaty refers to the payment of royalties and not taxes, still the presence or absenceof a "matching credit" provision in the said RP-US Tax Treaty would constitute a materialcircumstance to such payment and would be determinative of the said clause'sapplication.1âwphi1.nêt We address first the objection raised by private respondent that the certification againstforum shopping was not executed by the petitioner herself but by her counsel, the Office of the Solicitor General (O.S.G.) through one of its Solicitors, Atty. Tomas M. Navarro.SC Circular No. 28-91 provides:

SUBJECT: ADDITIONALREQUISITESFOR

PETITIONSFILED WITHTHESUPREMECOURT ANDTHE COURTOF APPEALSTOPREVENTFORUMSHOPPINGORMULTIPLEFILING OF

PETITIONS ANDCOMPLAINTSTO: xxx xxxxxx

The attention of the Court has been called to the filing of multiplepetitions and complaints involving the same issues in the SupremeCourt, the Court of Appeals or other tribunals or agencies, with theresult that said courts, tribunals or agencies have to resolve the sameissues.(1) To avoid the foregoing, in every petition filed with the SupremeCourt or the Court of Appeals, the petitioner aside from complying withpertinent provisions of the Rules of Court and existing circulars, mustcertify under oath to all of the following facts or undertakings: (a) he hasnot theretofore commenced any other action or proceeding involving

the same issues in the Supreme Court, the Court of Appeals, or anytribunal or agency; . . .(2) Any violation of this revised Circular will entail the followingsanctions: (a) it shall be a cause for the summary dismissal of themultiple petitions or complaints; . . .

The circular expressly requires that a certificate of non-forum shopping should be attachedto petitions filed before this Court and the Court of Appeals. Petitioner's allegation thatCircular No. 28-91 applies only to original actions and not to appeals as in the instant caseis not supported by the text nor by the obvious intent of the Circular which is to preventmultiple petitions that will result in the same issue being resolved by different courts.

Anent the requirement that the party, not counsel, must certify under oath that he has notcommenced any other action involving the same issues in this Court or the Court of

Appeals or any other tribunal or agency, we are inclined to accept petitioner's submissionthat since the OSG is the only lawyer for the petitioner, which is a government agencymandated under Section 35, Chapter 12, title III, Book IV of the 1987 AdministrativeCode 4 to be represented only by the Solicitor General, the certification executed by theOSG in this case constitutes substantial compliance with Circular No. 28-91.With respect to the merits of this petition, the main point of contention in this appeal is theinterpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax tobe imposed by the Philippines upon royalties received by a non-resident foreigncorporation. The provision states insofar as pertinentthat —

1) Royalties derived by a resident of one of theContracting States from sources within the other

Contracting State may be taxed by both ContractingStates.2) However, the tax imposed by that ContractingState shall not exceed.

a) In the case of the UnitedStates, 15 percent of the grossamount of the royalties, andb) In the case of the Philippines,the least of:

(i) 25 percentof the grossamount of theroyalties;(ii) 15 percent

of the grossamount of theroyalties,where theroyalties arepaid by acorporationregisteredwith thePhilippineBoard of Investmentsand engagedin preferredareas of activities; and

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(iii) the lowest rate of Philippine tax that may beimposed onroyalties of the same kind

paid under similar circumstances to a resident

of a third State.

xxx xxx xxx(emphasis supplied)

Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision,it is entitled to the concessional tax rate of 10 percent on royalties based on Article 12 (2)(b) of the RP-Germany Tax Treaty which provides:

(2) However, such royalties may also be taxed in theContracting State in which they arise, and accordingto the law of that State, but the tax so charged shallnot exceed:

xxx xxx xxxb) 10 percent of the grossamount of royalties arising from

the use of, or the right to use,any patent, trademark, design or model, plan, secret formula or process, or from the use of or theright to use, industrial,commercial, or scientificequipment, or for informationconcerning industrial,commercial or scientificexperience.

For as long as the transfer of technology, under Philippine law, issubject to approval, the limitation of the tax rate mentioned under b)shall, in the case of royalties arising in the Republic of the Philippines,only apply if the contract giving rise to such royalties has been

approved by the Philippine competent authorities.Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20percent of the gross amount of such royalties against German income and corporation taxfor the taxes payable in the Philippines on such royalties where the tax rate is reduced to10 or 15 percent under such treaty. Article 24 of the RP-Germany Tax Treaty states —

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

xxx xxx xxxb) Subject to the provisions of German tax law regarding creditfor foreign tax, there shall beallowed as a credit againstGerman income and corporationtax payable in respect of thefollowing items of income arisingin the Republic of the Philippines,

the tax paid under the laws of thePhilippines in accordance withthis Agreement on:

xxx xxx xxxdd) royalties,as defined inparagraph 3of Article 12;

xxx xxx xxxc) For the purpose of the creditreferred in subparagraph; b) the

Philippine tax shall be deemed tobe

xxx xxx xxxcc) in thecase of royalties for which the taxis reduced to10 or 15 per centaccording toparagraph 2of Article 12,20 percent of

the grossamount of suchroyalties.

xxx xxx xxx According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paidunder circumstances similar to those in the RP-West Germany Tax Treaty since there isno provision for a 20 percent matching credit in the former convention and privaterespondent cannot invoke the concessional tax rate on the strength of the most favorednation clause in the RP-US Tax Treaty. Petitioner's position is explained thus:

Under the foregoing provision of the RP-West Germany Tax Treaty, thePhilippine tax paid on income from sources within the Philippines isallowed as a credit against German income and corporation tax on thesame income. In the case of royalties for which the tax is reduced to 10

or 15 percent according to paragraph 2 of Article 12 of the RP-WestGermany Tax Treaty, the credit shall be 20% of the gross amount of such royalty. To illustrate, the royalty income of a German resident fromsources within the Philippines arising from the use of, or the right touse, any patent, trade mark, design or model, plan, secret formula or process, is taxed at 10% of the gross amount of said royalty under certain conditions. The rate of 10% is imposed if credit against theGerman income and corporation tax on said royalty is allowed in favor of the German resident. That means the rate of 10% is granted to theGerman taxpayer if he is similarly granted a credit against the incomeand corporation tax of West Germany. The clear intent of the "matchingcredit" is to soften the impact of double taxation by different

jurisdictions.The RP-US Tax Treaty contains no similar "matching credit" as thatprovided under the RP-West Germany Tax Treaty. Hence, the tax onroyalties under the RP-US Tax Treaty is not paid under similar

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circumstances as those obtaining in the RP-West Germany Tax Treaty.Therefore, the "most favored nation" clause in the RP-West GermanyTax Treaty cannot be availed of in interpreting the provisions of the RP-US Tax Treaty. 5 The petition is meritorious.

We are unable to sustain the position of the Court of Tax Appeals, which was upheld bythe Court of Appeals, that the phrase "paid under similar circumstances in Article 13 (2)(b), (iii) of the RP-US Tax Treaty should be interpreted to refer to payment of royalty, andnot to the payment of the tax, for the reason that the phrase "paid under similar circumstances" is followed by the phrase "to a resident of a third state". The respondentcourt held that "Words are to be understood in the context in which they are used", and

since what is paid to a resident of a third state is not a tax but a royalty "logic instructs" thatthe treaty provision in question should refer to royalties of the same kind paid under similar circumstances.The above construction is based principally on syntax or sentence structure but fails totake into account the purpose animating the treaty provisions in point. To begin with, weare not aware of any law or rule pertinent to the payment of royalties, and none has beenbrought to our attention, which provides for the payment of royalties under dissimilar circumstances. The tax rates on royalties and the circumstances of payment thereof arethe same for all the recipients of such royalties and there is no disparity based onnationality in the circumstances of such payment. 6 On the other hand, a cursory reading of the various tax treaties will show that there is no similarity in the provisions on relief from or avoidance of double taxation 7 as this is a matter of negotiation between the contractingparties. 8 As will be shown later, this dissimilarity is true particularly in the treaties betweenthe Philippines and the United States and between the Philippines and West Germany.

The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippineshas entered into for the avoidance of double taxation. 9 The purpose of these internationalagreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. 10 Moreprecisely, the tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparabletaxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. 11 The apparent rationale for doing away with double taxation isof encourage the free flow of goods and services and the movement of capital, technologyand persons between countries, conditions deemed vital in creating robust and dynamiceconomies. 12 Foreign investments will only thrive in a fairly predictable and reasonableinternational investment climate and the protection against double taxation is crucial increating such a climate. 13 Double taxation usually takes place when a person is resident of a contracting state and

derives income from, or owns capital in, the other contracting state and both states imposetax on that income or capital. In order to eliminate double taxation, a tax treaty resorts toseveral methods. First, it sets out the respective rights to tax of the state of source or situsand of the state of residence with regard to certain classes of income or capital. In somecases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amountof tax that may be imposed by the state of source is limited. 14 The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case,the treaties make it incumbent upon the state of residence to allow relief in order to avoiddouble taxation. There are two methods of relief — the exemption method and the creditmethod. In the exemption method, the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may betaken into account in determining the rate of tax applicable to the taxpayer's remainingincome or capital. On the other hand, in the credit method, although the income or capitalwhich is taxed in the state of source is still taxable in the state of residence, the tax paid in

the former is credited against the tax levied in the latter. The basic difference between thetwo methods is that in the exemption method, the focus is on the income or capital itself,whereas the credit method focuses upon the tax. 15 In negotiating tax treaties, the underlying rationale for reducing the tax rate is that thePhilippines will give up a part of the tax in the expectation that the tax given up for thisparticular investment is not taxed by the other country. 16 Thus the petitioner correctly opined that the phrase "royalties paid under similar circumstances" in the most favored nation clause of the US-RP Tax Treaty necessarilycontemplated "circumstances that are tax-related".In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use property or rights, i .e. trademarks, patents and technology, located within

the Philippines. 17 The United States is the state of residence since the taxpayer, S. C.Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of residence and the state of source are both permitted to tax the royalties, with a restraint onthe tax that may be collected by the state of source. 18 Furthermore, the method employedto give relief from double taxation is the allowance of a tax credit to citizens or residents of the United States (in an appropriate amount based upon the taxes paid or accrued to thePhilippines) against the United States tax, but such amount shall not exceed the limitationsprovided by United States law for the taxable year. 19 Under Article 13 thereof, thePhilippines may impose one of three rates — 25 percent of the gross amount of theroyalties; 15 percent when the royalties are paid by a corporation registered with thePhilippine Board of Investments and engaged in preferred areas of activities; or the lowestrate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third state.Given the purpose underlying tax treaties and the rationale for the most favored nation

clause, the concessional tax rate of 10 percent provided for in the RP-Germany Tax Treatyshould apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in theRP-Germany Tax Treaty are paid under similar circumstances. This would mean thatprivate respondent must prove that the RP-US Tax Treaty grants similar tax reliefs toresidents of the United States in respect of the taxes imposable upon royalties earned fromsources within the Philippines as those allowed to their German counterparts under theRP-Germany Tax Treaty.The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions ontax crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows creditingagainst German income and corporation tax of 20% of the gross amount of royalties paidunder the law of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty,which is the counterpart provision with respect to relief for double taxation, does notprovide for similar crediting of 20% of the gross amount of royalties paid. Said Article 23reads:

Article 23Relief from double taxationDouble taxation of income shall be avoided in the following manner:

1) In accordance with the provisions and subject tothe limitations of the law of the United States (as itmay be amended from time to time without changingthe general principle thereof), the United States shallallow to a citizen or resident of the United States asa credit against the United States tax theappropriate amount of taxes paid or accrued to thePhilippines and, in the case of a United Statescorporation owning at least 10 percent of the votingstock of a Philippine corporation from which itreceives dividends in any taxable year, shall allowcredit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine

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corporation paying such dividends with respect tothe profits out of which such dividends are paid.Such appropriate amount shall be based upon theamount of tax paid or accrued to the Philippines, butthe credit shall not exceed the limitations (for thepurpose of limiting the credit to the United States taxon income from sources within the Philippines or onincome from sources outside the United States)provided by United States law for the taxable year. .. .

The reason for construing the phrase "paid under similar circumstances" as used in Article

13 (2) (b) (iii) of the RP-US Tax Treaty as referring to taxes is anchored upon a logicalreading of the text in the light of the fundamental purpose of such treaty which is to grantan incentive to the foreign investor by lowering the tax and at the same time creditingagainst the domestic tax abroad a figure higher than what was collected in the Philippines.In one case, the Supreme Court pointed out that laws are not just mere compositions, buthave ends to be achieved and that the general purpose is a more important aid to themeaning of a law than any rule which grammar may lay down. 20 It is the duty of the courtsto look to the object to be accomplished, the evils to be remedied, or the purpose to besubserved, and should give the law a reasonable or liberal construction which will besteffectuate its purpose. 21 The Vienna Convention on the Law of Treaties states that atreaty shall be interpreted in good faith in accordance with the ordinary meaning to begiven to the terms of the treaty in their context and in the light of its object andpurpose. 22

As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign

investors to invest in the Philippines — a crucial economic goal for developingcountries. 23 The goal of double taxation conventions would be thwarted if such treaties didnot provide for effective measures to minimize, if not completely eliminate, the tax burdenlaid upon the income or capital of the investor. Thus, if the rates of tax are lowered by thestate of source, in this case, by the Philippines, there should be a concomitant commitmenton the part of the state of residence to grant some form of tax relief, whether this be in theform of a tax credit or exemption. 24 Otherwise, the tax which could have been collected bythe Philippine government will simply be collected by another state, defeating the object of the tax treaty since the tax burden imposed upon the investor would remain unrelieved. If the state of residence does not grant some form of tax relief to the investor, no benefitwould redound to the Philippines, i .e., increased investment resulting from a favorable taxregime, should it impose a lower tax rate on the royalty earnings of the investor, and itwould be better to impose the regular rate rather than lose much-needed revenues toanother country.

At the same time, the intention behind the adoption of the provision on "relief from doubletaxation" in the two tax treaties in question should be considered in light of the purposebehind the most favored nation clause.The purpose of a most favored nation clause is to grant to the contracting party treatmentnot less favorable than that which has been or may be granted to the "most favored"among other countries. 25 The most favored nation clause is intended to establish theprinciple of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of themost favored nation. 26 The essence of the principle is to allow the taxpayer in one state toavail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, inthis case royalty income, is the same as that in the tax treaty under which the taxpayer isliable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-WestGermany Tax Treaty, above-quoted, speaks of tax on royalties for the use of trademark,patent, and technology. The entitlement of the 10% rate by U.S. firms despite the absenceof a matching credit (20% for royalties) would derogate from the design behind the most

grant equality of international treatment since the tax burden laid upon the income of theinvestor is not the same in the two countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation treatmentprecisely to underscore the need for equality of treatment.We accordingly agree with petitioner that since the RP-US Tax Treaty does not give amatching tax credit of 20 percent for the taxes paid to the Philippines on royalties asallowed under the RP-West Germany Tax Treaty, private respondent cannot be deemedentitled to the 10 percent rate granted under the latter treaty for the reason that there is nopayment of taxes on royalties under similar circumstances.It bears stress that tax refunds are in the nature of tax exemptions. As such they areregarded as in derogation of sovereign authority and to be construed strictissimi

juris against the person or entity claiming the exemption. 27The burden of proof is upon himwho claims the exemption in his favor and he must be able to justify his claim by theclearest grant of organic or statute law. 28 Private respondent is claiming for a refund of thealleged overpayment of tax on royalties; however, there is nothing on record to support aclaim that the tax on royalties under the RP-US Tax Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision datedMay 7, 1996 of the Court of Tax Appeals and the decision dated November 7, 1996 of theCourt of Appeals are hereby SET ASIDE.SO ORDERED.Vitug, Panganiban and Purisima, JJ., concur.Romero, J., abroad, on official business leave.

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G.R. No. 154068 August 3, 2007 COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.ROSEMARIE ACOSTA, as represented by Virgilio A.Abogado, respondent.D E C I S I O N QUISUMBING, J .:

Assailed in this petition for review are the Decision1 andResolution2 dated February 13, 2002 and May 29, 2002, respectively, of

the Court of Appeals in CA-G.R. SP No. 55572 which had reversed theResolution3 dated August 4, 1999 of the Court of Tax Appeals in C.T.A.Case No. 5828 and ordered the latter to resolve respondent‘s petition for review.The facts are as follows:Respondent is an employee of Intel Manufacturing Phils., Inc. (Intel). For the period January 1, 1996 to December 31, 1996, respondent wasassigned in a foreign country. During that period, Intel withheld the taxesdue on respondent‘s compensation income and remitted to the Bureau of Internal Revenue (BIR) the amount ofP308,084.56.On March 21, 1997, respondent and her husband filed with the BIR their

Joint Individual Income Tax Return for the year 1996. Later, on June 17,1997, respondent, through her representative, filed an amended returnand a Non-Resident Citizen Income Tax Return, and paid theBIR P17,693.37 plus interests in the amount of P14,455.76. On October 8, 1997, she filed another amended return indicating an overpaymentof P358,274.63.Claiming that the income taxes withheld and paid by Intel and respondentresulted in an overpayment ofP340,918.92,4 respondent filed on April 15,1999 a petition for review docketed as C.T.A. Case No. 5828 with theCourt of Tax Appeals (CTA). The Commissioner of Internal Revenue(CIR) moved to dismiss the petition for failure of respondent to file themandatory written claim for refund before the CIR.

In its Resolution dated August 4, 1999, the CTA dismissed respondent‘spetition. For one, the CTA ruled that respondent failed to file a writtenclaim for refund with the CIR, a condition precedent to the filing of apetition for review before the CTA.5 Second, the CTA noted thatrespondent‘s omission, inadvertently or otherwise, to allege in her petitionthe date of filing the final adjustment return, deprived the court of its

jurisdiction over the subject matter of the case.6 The decretal portion of the CTA‘s resolution states:

WHEREFORE, in view of all the foregoing, Respondent‘s Motionto Dismiss is GRANTED. Accordingly[,] the Petition for Review ishereby DISMISSED.

SO ORDERED.

7

Upon review, the Court of Appeals reversed the CTA and directed thelatter to resolve respondent‘s petition for review. Applying Section204(c)8 of the 1997 National Internal Revenue Code (NIRC), the Court of

Appeals ruled that respondent‘s filing of an amended return indicating anoverpayment was sufficient compliance with the requirement of a writtenclaim for refund.9 The decretal portion of the Court of Appeals‘ decisionreads:

WHEREFORE, finding the petition to be meritorious, thisCourt GRANTS it due course and REVERSES the appealed

Resolutions and DIRECTS the Court of Tax Appeal[s] to resolvethe petition for review on the merits.SO ORDERED.10

Petitioner sought reconsideration, but it was denied. Hence, the instantpetition raising the following questions of law:

I.WHETHER OR NOT THE 1997 TAX REFORM ACT CAN BE

APPLIED RETROACTIVELY.II.WHETHER OR NOT THE CTA HAS JURISDICTION TO TAKE[COGNIZANCE] OF RESPONDENT‘S PETITION FOR

REVIEW.11

While the main concern in this controversy is the CTA‘s jurisdiction, wemust first resolve two issues. First, does the amended return filed byrespondent indicating an overpayment constitute the written claim for refund required by law, thereby vesting the CTA with jurisdiction over thiscase? Second, can the 1997 NIRC be applied retroactively?Petitioner avers that an amended return showing an overpayment doesnot constitute the written claim for refund required under Section 23012 of the 1993 NIRC13 (old Tax Code). He claims that an actual written claimfor refund is necessary before a suit for its recovery may proceed in anycourt.On the other hand, respondent contends that the filing of an amended

return indicating an overpayment ofP358,274.63 constitutes a writtenclaim for refund pursuant to the clear proviso stated in the last sentenceof Section 204(c) of the 1997 NIRC (new Tax Code), to wit:

x x x x…Provided, however , That a return filed showing an overpaymentshall be considered as a written claim for credit or refund.x x x x

Along the same vein, respondent invokes the liberal application of technicalities in tax refund cases, conformably with our ruling in BPI-Family Savings Bank, Inc. v. Court of Appeals.

14 We are, however,unable to agree with respondent‘s submission on this score.

Th li bl l f d f i i h 1996 l d i ff h S i 204( ) h ld l d i h f h

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The applicable law on refund of taxes pertaining to the 1996compensation income is Section 230 of the old Tax Code, which was thelaw then in effect, and not Section 204(c) of the new Tax Code, whichwas effective starting only on January 1, 1998.Noteworthy, the requirements under Section 230 for refund claims are asfollows:

1. A written claim for refund or tax credit must be filed by thetaxpayer with the Commissioner;2. The claim for refund must be a categorical demand for

reimbursement;3. The claim for refund or tax credit must be filed, or the suit or proceeding therefor must be commenced in court within two (2)years from date of payment of the tax or penalty regardlessof any supervening cause.15 (Emphasis ours.)

In our view, the law is clear. A claimant must first file a written claim for refund, categorically demanding recovery of overpaid taxes with the CIR,before resorting to an action in court. This obviously is intended, first, toafford the CIR an opportunity to correct the action of subordinate officers;and second, to notify the government that such taxes have beenquestioned, and the notice should then be borne in mind in estimating the

revenue available for expenditure.16

Thus, on the first issue, we rule against respondent‘s contention.Entrenched in our jurisprudence is the principle that tax refunds are in thenature of tax exemptions which are construed strictissimi juris against thetaxpayer and liberally in favor of the government. As tax refunds involve areturn of revenue from the government, the claimant must showindubitably the specific provision of law from which her right arises; itcannot be allowed to exist upon a mere vague implication or inference17 nor can it be extended beyond the ordinary and reasonableintendment of the language actually used by the legislature in grantingthe refund.18 To repeat, strict compliance with the conditions imposed for the return of revenue collected is a doctrine consistently applied in this

jurisdiction.19 Under the circumstances of this case, we cannot agree that the amendedreturn filed by respondent constitutes the written claim for refund requiredby the old Tax Code, the law prevailing at that time. Neither can we applythe liberal interpretation of the law based on our pronouncement in thecase of BPI-Family Savings Bank, Inc. v. Court of Appeals, as thetaxpayer therein filed a written claim for refund aside from presentingother evidence to prove its claim, unlike this case before us.On the second issue, petitioner argues that the 1997 NIRC cannot beapplied retroactively as the instant case involved refund of taxes withheldon a 1996 income. Respondent, however, points out that when the

petition was filed with the CTA on April 15, 1999, the 1997 NIRC was

already in effect, hence, Section 204(c) should apply, despite the fact thatthe refund being sought pertains to a 1996 income tax. Note that theissue on the retroactivity of Section 204(c) of the 1997 NIRC arosebecause the last paragraph of Section 204(c) was not found in Section230 of the old Code. After a thorough consideration of this matter, we findthat we cannot give retroactive application to Section 204(c) abovecited.We have to stress that tax laws are prospective in operation, unless thelanguage of the statute clearly provides otherwise.20 Moreover, it should be emphasized that a party seeking an administrative

remedy must not merely initiate the prescribed administrative procedureto obtain relief, but also pursue it to its appropriate conclusion beforeseeking judicial intervention in order to give the administrative agency anopportunity to decide the matter itself correctly and prevent unnecessaryand premature resort to court action.21 This the respondent did not followthrough. Additionally, it could not escape notice that at the timerespondent filed her amended return, the 1997 NIRC was not yet ineffect. Hence, respondent had no reason at that time to think that thefiling of an amended return would constitute the written claim for refundrequired by applicable law.Furthermore, as the CTA stressed, even the date of filing of the Final

Adjustment Return was omitted, inadvertently or otherwise, byrespondent in her petition for review. This omission was fatal torespondent‘s claim, for it deprived the CTA of its jurisdiction over thesubject matter of the case.Finally, we cannot agree with the Court of Appeals‘ finding that the natureof the instant case calls for the application of remedial laws. Revenuestatutes are substantive laws and in no sense must their application beequated with that of remedial laws. As well said in a prior case, revenuelaws are not intended to be liberally construed.22 Considering that taxesare the lifeblood of the government and in Holmes‘s memorablemetaphor, the price we pay for civilization, tax laws must be faithfully andstrictly implemented.

WHEREFORE, the petition is GRANTED. Both the assailed Decision andResolution dated February 13, 2002 and May 29, 2002, respectively, of the Court of Appeals in CA-G.R. SP No. 55572 are REVERSED and SETASIDE. The Resolution dated August 4, 1999 of the Court of Tax

Appeals in C.T.A. Case No. 5828 is herebyREINSTATED.No pronouncement as to costs.SO ORDERED.

G R N 125704 A t 28 1998 Phili i A t t d V l IV Ni th Editi 259) I th i t t

































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G.R. No. 125704 August 28, 1998PHILEX MINING CORPORATION, petitioner,vs.COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE COURTOF TAX APPEALS,respondents.

ROMERO, J. : Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on

April 8, 1996 in CA-G.R. SP No. 36975 1 affirming the Court of Tax Appeals decision inCTA Case No. 4872 dated March 16, 1995 2 ordering it to pay the amount of P110,677,668.52 as excise tax liability for the period from the 2nd quarter of 1991 to the

2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuantto Sections 248 and 249 of the Tax Code of 1977.The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle itstax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in the total amount of P123,821.982.52 computed as follows:

PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTALEXCISETAX DUE2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.913rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.604th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88————— ————— —————— ——————

47,312,353.94 11,828,088.48 8,988,362.9768,128,805.39

————— ————— —————— —————— 1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.252nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88————— ————— —————— ——————

43,013,541.70 10,753,385.43 1,926,250.0055,693,177.13

————— ————— —————— —————— 90,325,895.64 22,581,473.91 10,914,612.97123,821,982.52 3 ========= ========= ========= =========

In a letter dated August 20, 1992, 4 Philex protested the demand for payment of the taxliabilities stating that it has pending claims for VAT input credit/refund for the taxes it paidfor the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Thereforethese claims for tax credit/refund should be applied against the tax liabilities, citing our

ruling inCommissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc .

5

In reply, the BIR, in a letter dated September 7, 1992, 6 found no merit in Philex's position.Since these pending claims have not yet been established or determined with certainty, itfollows that no legal compensation can take place. Hence, the BIR reiterated its demandthat Philex settle the amount plus interest within 30 days from the receipt of the letter.In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refundagainst its excise tax obligation, Philex raised the issue to the Court of Tax Appeals onNovember 6, 1992. 7 In the course of the proceedings, the BIR issued Tax CreditCertificate SN 001795 in the amount of P13,144,313.88 which, applied to the total taxliabilities of Philex of P123,821,982.52; effectively lowered the latter's tax obligation toP110,677,688.52.Despite the reduction of its tax l iabilities, the CTA still ordered Philex to pay the remainingbalance of P110,677,688.52 plus interest, elucidating its reason, to wit:

Thus, for legal compensation to take place, both obligations mustbe liquidated and demandable. "Liquidated" debts are those where theexact amount has already been determined (PARAS, Civil Code of the

Philippines, Annotated, Vol. IV, Ninth Edition, p. 259). In the instantcase, the claims of the Petitioner for VAT refund is still pendinglitigation, and still has to be determined by this Court (C.T.A. Case No.4707). A fortiori, the liquidated debt of the Petitioner to the governmentcannot, therefore, be set-off against the unliquidated claim whichPetitioner conceived to exist in its favor (see Compañia General deTabacos vs. French and Unson, No. 14027, November 8, 1918, 39 Phil.34). 8

Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to set-off oncompensation since claim for taxes is not a debt or contract." 9 The dispositive portion of the CTA decision 10 provides:

In all the foregoing, this Petition for Review is hereby DENIED for lackof merit and Petitioner is hereby ORDERED to PAY the Respondentthe amount of P110,677,668.52 representing excise tax liability for theperiod from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus20% annual interest from August 6, 1994 until fully paid pursuant toSection 248 and 249 of the Tax Code, as amended.

Aggrieved with the decision, Philex appealed the case before the Court of Appealsdocketed as CA-GR. CV No. 36975. 11Nonetheless, on April 8, 1996, the Court of Appealsa Affirmed the Court of Tax Appeals observation. The pertinent portion of which reads: 12

WHEREFORE, the appeal by way of petition for review is herebyDISMISSED and the decision dated March 16, 1995 is AFFIRMED.

Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolutiondated July 11, 1996. 13 However, a few days after the denial of its motion for reconsideration, Philex was able to

obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but also for 1992 and 1994, computed as follows: 14

Period Covered Tax Credit DateBy Claims For Certificate of VAT refund/credit Number Issue Amount1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.011994 (4th Quarter) 007731 11 July 1996 P21,791,020.611989 007732 11 July 1996 P37,322,799.191990-1991 007751 16 July 1996 P84,662,787.461992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95

In view of the grant of its VAT input credit/refund, Philex now contends that the sameshould, ipso jure, off-set its excise tax liabilities 15 since both had already become "due anddemandable, as well as fully liquidated;" 16 hence, legal compensation can properly takeplace.

We see no merit in this contention.In several instances prior to the instant case, we have already made the pronouncementthat taxes cannot be subject to compensation for the simple reason that the governmentand the taxpayer are not creditors and debtors of each other. 17There is a materialdistinction between a tax and debt. Debts are due to the Government in its corporatecapacity, while taxes are due to the Government in its sovereign capacity. 18 We find nocogent reason to deviate from the aforementioned distinction.Prescinding from this premise, in Francia v. Intermediate Appellate Court , 19 wecategorically held that taxes cannot be subject to set-off or compensation, thus:

We have consistently ruled that there can be no off-setting of taxesagainst the claims that the taxpayer may have against the government.

A person cannot refuse to pay a tax on the ground that the governmentowes him an amount equal to or greater than the tax being collected.The collection of a tax cannot await the results of a lawsuit against thegovernment.

The ruling in Francia has been applied to the subsequent case of Caltex Philippines Inc v diligent and judicious with their duty it could have granted the refund earlier We need not

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The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v.Commission on Audit , 20 which reiterated that:

. . . a taxpayer may not offset taxes due from the claims that he mayhave against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutuallycreditors and debtors of each other and a claim for taxes is not such adebt, demand, contract or judgment as is allowed to be set-off.

Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc Mines Inc ., wherein we ruled that a pending refund may be set off against anexisting tax liability even though the refund has not yet been approved by theCommissioner, 21 is no longer without any support in statutory law.

It is important to note, that the premise of our ruling in the aforementioned case wasanchored on Section 51 (d) of the National Revenue Code of 1939. However, when theNational Internal Revenue Code of 1977 was enacted, the same provision upon whichthe Itogon-Suyoc pronouncement was based was omitted. 22 Accordingly, the doctrineenunciated in Itogon-Suyoc cannot be invoked by Philex.Despite the foregoing rulings clearly adverse to Philex's position, it asserts that theimposition of surcharge and interest for the non-payment of the excise taxes within thetime prescribed was unjustified. Philex posits the theory that it had no obligation to pay theexcise tax liabilities within the prescribed period since, after all, it still has pending claimsfor VAT input credit/refund with BIR. 23 We fail to see the logic of Philex's claim for this is an outright disregard of the basicprinciple in tax law that taxes are the lifeblood of the government and so should becollected without unnecessary hindrance. 24 Evidently, to countenance Philex's whimsicalreason would render ineffective our tax collection system. Too simplistic, it finds no support

in law or in jurisprudence.To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the groundthat it has a pending tax claim for refund or credit against the government which has notyet been granted. It must be noted that a distinguishing feature of a tax is that it iscompulsory rather than a matter of bargain. 25 Hence, a tax does not depend upon theconsent of the taxpayer. 26 If any taxpayer can defer the payment of taxes by raising thedefense that it still has a pending claim for refund or credit, this would adversely affect thegovernment revenue system. A taxpayer cannot refuse to pay his taxes when they fall duesimply because he has a claim against the government or that the collection of the tax iscontingent on the result of the lawsuit it filed against the government. 27 Moreover, Philex'stheory that would automatically apply its VAT input credit/refund against its tax liabilitiescan easily give rise to confusion and abuse, depriving the government of authority over themanner by which taxpayers credit and offset their tax liabilities.Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the

government is immaterial for the imposition of charges and penalties prescribed under Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatoryand the BIR is not vested with any authority to waive the collection thereof. 28 The samecannot be condoned for flimsy reasons, 29 similar to the one advanced by Philex in

justifying its non-payment of its tax liabilities.Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the National InternalRevenue Code of 1977, which requires the refund of input taxes within 60 days, 31 when ittook five years for the latter to grant its tax claim for VAT input credit/refund. 32 In this regard, we agree with Philex. While there is no dispute that a claimant has theburden of proof to establish the factual basis of his or her claim for tax credit or refund, 33 however, once the claimant has submitted all the required documents it is thefunction of the BIR to assess these documents with purposeful dispatch. After all, sincetaxpayers owe honestly to government it is but just that government render fair service tothe taxpayers. 34 In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more

diligent and judicious with their duty, it could have granted the refund earlier. We need notremind the BIR that simple justice requires the speedy refund of wrongly-held taxes. 35 Fair dealing and nothing less, is expected by the taxpayer from the BIR in the latter's dischargeof its function. As aptly held in Roxas v. Court of Tax Appeals: 36

The power of taxation is sometimes called also the power to destroy.Therefore it should be exercised with caution to minimize injury to theproprietary rights of a taxpayer. It must be exercised fairly, equally anduniformly, lest the tax collector kill the "hen that lays the golden egg"

And, in order to maintain the general public's trust and confidence inthe Government this power must be used justly and not treacherously.

Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim,

it is a settled rule that in the performance of governmental function, the State is not boundby the neglect of its agents and officers. Nowhere is this more true than in the field of taxation. 37 Again, while we understand Philex's predicament, it must be stressed that thesame is not a valid reason for the non-payment of its tax liabilities.To be sure, this is not to state that the taxpayer is devoid of remedy against publicservants or employees, especially BIR examiners who, in investigating tax claims are seento drag their feet needlessly. First, if the BIR takes time in acting upon the taxpayer's claimfor refund, the latter can seek judicial remedy before the Court of Tax Appeals in themanner prescribed by law. 38 Second, if the inaction can be characterized as willful neglectof duty, then recourse under the Civil Code and the Tax Code can also be availed of.

Art. 27 of the Civil Code provides: Art. 27. Any person suffering material or moral loss because a publicservant or employee refuses or neglects, without just cause, to performhis official duty may file an action for damages and other relief against

the latter, without prejudice to any disciplinary action that may be taken.More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states:xxx xxx xxx(c) Wilfully neglecting to give receipts, as by law required for any sumcollected in the performance of duty or wilfully neglecting to perform,any other duties enjoyed by law .

Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay inthe performance of official duties.39 In no uncertain terms must we stress that every publicemployee or servant must strive to render service to the people with utmost diligence andefficiency. Insolence and delay have no place in government service. The BIR, being thegovernment collecting arm, must and should do no less. It simply cannot be apathetic andlaggard in rendering service to the taxpayer if it wishes to remain true to its mission of hastening the country's development. We take judicial notice of the taxpayer's generallynegative perception towards the BIR; hence, it is up to the latter to prove its detractors

wrong.In sum, while we can never condone the BIR's apparent callousness in performing itsduties, still, the same cannot justify Philex's non-payment of its tax liabilities. The adage"no one should take the law into his own hands" should have guided Philex's action.WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. Theassailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED.SO ORDERED.

G R No L 13203 January 28 1961 D fi i 75% T t l A t

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G.R. No. L-13203 January 28, 1961 YUTIVO SONS HARDWARE COMPANY, petitioner,vs.COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents.Sycip, Quisumbing, Salazar & Associates for petitioner.Office of the Solicitor General for respondents. GUTIERREZ DAVID, J .: This is a petition for review of a decision of the Court of Tax Appeals ordering petitioner to pay torespondent 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, organizedunder 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 thebasis of its selling price to Yutivo. Said tax being collected only once on original sales, Yutivopaid no further sales tax on i ts sales to the public.On June 13, 1946, the Southern Motors, Inc. (hereafter referred to as SM) was organized toengage in the business of selling cars, trucks and spare parts. Its original authorized capitalstock 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 subscribedinto equal proportions by Yu Khe Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng Poh, and WashingtonSycip. 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, whoare 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, inturn, 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 Yutivocontinued its previous arrangement of selling exclusively to SM. In the same way that GM usedto pay sales taxes based on its sales to Yutivo, the latter, as importer, paid sales tax prescribedon the basis of its selling price to SM, and since such sales tax, as already stated, is collectedonly 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 fromthe latter P1,804,769.85 as deficiency sales tax plus surcharge covering the period from the thirdquarter 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 atwholesale made by, Yutivo to the latter inasmuch as SM and Yutivo were one and the samecorporation, the former being the subsidiary of the latter.The assessment was disputed by the petitioner, and a reinvestigation of the case having beenmade 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 groundthat "after several investigations conducted into the matter no sufficient evidence could begathered to sustain the assessment of this Office based on the theory that Southern Motors is amere instrumentality or subsidiary of Yutivo." The withdrawal was subject, however, to thegeneral power of review by the now defunct Board of Tax Appeals. The Secretary of Finance towhom the papers relative to the case were endorsed, apparently not agreeing with thewithdrawal 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 governmentand 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:

DeficiencySales Tax

75%Surcharge

Total AmountDue

Assessment (First) of November 7, 1950 for deficiency sales Tax for theperiod from 3rd Qrtr 1947 to4th Qrtr 1949 inclusive P1,031,296.60 P773,473.45 P1,804,769.05

Additional Assessment for period from 1st to 4th Qrtr 1950, inclusive 234,880.13 176,160.09 411,040.22

Total amount demanded per letter of December 16, 1954 P1,266,176.73 P949,632.54 P2,215,809.27

This second assessment was contested by the petitioner Yutivo before the Court of Tax Appeals, alleging that there is no valid ground to disregard the corporate personality of SM andto hold that it is an adjunct of petitioner Yutivo; (2) that assuming the separate personality of SMmay be disregarded, the sales tax already paid by Yutivo should first be deducted from theselling price of SM in computing the sales tax due on each vehicle; and (3) that the surchargehas been erroneously imposed by respondent. Finding against Yutivo and sustaining therespondent Collector's theory that there was no legitimate or bona fide purpose in theorganization 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 controlledby Yutivo and is a mere subsidiary, branch, adjunct, conduit, instrumentality or alter ego of thelatter, the Court of Tax Appeals — with Judge Roman Umali not taking part — disregarded itsseparate 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 allowancefor the reduction of the tax already paid (resulting in the reduction of the assessment toP820,509.91 exclusive of surcharges), while the other voted for affirmance. The dispositive partof 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 petitionfor review.It is an elementary and fundamental principle of corporation law that a corporation is an entityseparate and distinct from its stockholders and from other corporation petitions to which it maybe 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 anassociation 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 Courtof Tax Appeals was not justified in finding that SM was organized for no other purpose than todefraud the Government of its lawful revenues. In the first place, this corporation was organizedin June, 1946 when it could not have caused Yutivo any tax savings. From that date up to June30, 1947, or a period of more than one year, GM was the importer of the cars and trucks sold toYutivo, which, in turn resold them to SM. During that period, it is not disputed that GM asimporter, was the one solely liable for sales taxes. Neither Yutivo or SM was subject to the salestaxes 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. Thedecision, therefore, of the Tax Court that SM was organized purposely as a tax evasion deviceruns 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 wasknown that GM was preparing to leave the Philippines and terminate its business of importingvehicles," the court below speculated that Yutivo anticipated the withdrawal of GM from businessin 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 filing said returns did so fully knowing that the taxes called for therein called for therein were

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been an importer of cars in the Philippines even before the war and had but recently resumed itsoperation in the Philippines in 1946 under an ambitious plan to expand its operation byestablishing an assembly plant here, so that it could not have been expected to make so drastica turnabout of not merely abandoning the assembly plant project but also totally ceasing to dobusiness as an importer. Moreover, the newspaper clipping, Exh. "T", was published on March24, 1947, and clipping, merely reported a rumored plan that GM would abandon the assemblyplant project in the Philippines. There was no mention of the cessation of business by GM whichmust not be confused with the abandonment of the assembly plant project. Even as respect theassembly 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 contextof 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., 15BTA 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 anyintention 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 andSM, 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 becamethe 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 theimported article, increased by mark-ups of 25%, 50%, and 100%, depending on whether theimported 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 thesales tax. And yet after the passage of that Act, SM continued to exist up to the present andoperates 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 becollected "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 amountof 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 reducetaxes are all right Benry vs. Commr. 25 T. Cl. 78). A man may, therefore, perform an act that hehonestly believes to be sufficient to exempt him from taxes. He does not incur fraud therebyeven 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 thecorporation 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 convincingproof of fraud. As a matter of fact, the respondent Collector himself showed a great deal of doubtor hesitancy as to the existence of fraud. He even doubted the validity of his first assessmentdated November 7, 1959. It must be remembered that the fraud which respondent Collector imputed to Yutivo must be related to its fili ng 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 wereless than what were legally due. Considering that respondent Collector himself with the aid of hislegal staff, and after some two years of investigation and duty of investigation and studyconcluded 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 knewin 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 haveexisted in the minds of the organizers of SM. The sales tax imposed, in theory and in practice, ispassed on to the vendee, and is usually billed separately as such in the sales invoice. Aspointed out by petitioner Yutivo, had not SM handled the retail, the additional tax that wouldhave been payable by it, could have been easily passed off to the consumer, especially sincethe period covered by the assessment was a "seller's market" due to the post-war scarcity up to

late 1948, and the imposition of controls in the late 1949.It is true that the arrastre charges constitute expenses of Yutivo and its non-inclusion in theselling price by Yutivo cost the Government P4.00 per vehicle, but said non-inclusion wasexplained to have been due to an inadvertent accounting omission, and could hardly beconsidered as proof of willful channelling and fraudulent evasion of sales tax. Mereunderstatement of tax in itself does not prove fraud. (James Nicholson, 32 BTA 377, affirmed 90F. (2) 978, cited in Merten's Sec. 55.11 p. 21) The amount involved, moreover, is extremelysmall 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 therecords of Yutivo, which is uncharacteristic of fraud (See Insular Lumber Co. vs. Collector, G.R.No. L-719, April 28, 1956.)We are, however, inclined to agree with the court below that SM was actually owned andcontrolled by petitioner as to make it a mere subsidiary or branch of the latter created for thepurpose of selling the vehicles at retail and maintaining stores for spare parts as well as servicerepair 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. Thefounders of the corporation are closely related to each other either by blood or affinity, and mostof its stockholders are members of the Yu (Yutivo or Young) family. It is, likewise, admitted thatSM 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 equalproportions by Yu Khe Thai, Yu Khe Siong, Yu Khe Jin, Yu Eng Poh and Washington Sycip. Thefirst three named subscribers are brothers, being the sons of Yu Tien Yee, one of Yutivo'sfounders. Yu Eng Poh and Washington Sycip are respectively sons of Yu Tiong Sing and AlbertoSycip who are co-founders of Yutivo. According to the Articles of Incorporation of the saidsubscriptions, the amount of P62,500 was paid by the aforenamed subscribers, but actually thesaid sum was advanced by Yutivo. The additional subscriptions to the capital stock of SM andsubsequent 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 thesubscribers for the amount allegedly advanced by Yutivo in payment of the shares. Whether acharge 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 noshowing that the former initiated the subscription.The transactions were made solely by and between SM and Yutivo. In effect, it was Yutivo whoundertook the subscription of shares, employing the persons named or "charged" withcorresponding account as nominal stockholders. Of course, Yu Khe Thai, Yu Khe Jin, Yu KheSiong and Yu Eng Poh were manifestly aware of these subscriptions, but considering that theywere the principal officers and constituted the majority of the Board of Directors of both Yutivoand SM, their subscriptions could readily or easily be that of Yutivo's Moreover, these personswere related to death other as brothers or first cousins. There was every reason for them toagree in order to protect their common interest in Yutivo and SM.The issued capital stock of SM was increased by additional subscriptions made by variousperson's but except Ng Sam Bak and David Sycip, "payments" thereof were effected by merelydebiting 'or charging the accounts of said stockholders and crediting the corresponding amountsin 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 cost thereof were likewise charged against and treated as expenses of SM If Yutivo were the

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and control directly or indirectly, over the shares, it being the party which really undertook to payor 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 wasat all times in control of the majority of the stock of SM and that the latter was a mere subsidiaryof the former.True, petitioner and other recorded stockholders transferred their shareholdings, but thetransfers were made to their immediate relatives, either to their respective spouses and childrenor sometimes brothers or sisters. Yutivo's shares in SM were transferred to immediate relativesof persons who constituted its controlling stockholders, directors and officers. Despite thesepurported 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. Allthese, as observed by the Court of Tax Appeals, merely serve to corroborate the fact that therewas a common ownership and interest in the two corporations.SM is under the management and control of Yutivo by virtue of a management contract enteredinto between the two parties. In fact, the controlling majority of the Board of Directors of Yutivo isalso the controlling majority of the Board of Directors of SM. At the same time the principalofficers of both corporations are identical. In addition both corporations have a commoncomptroller in the person of Simeon Sy, who is a brother-in-law of Yutivo's president, Yu KheThai. There is therefore no doubt that by virtue of such control, the business, financial andmanagement 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. Allcash assets of SM were handled by Yutivo and all cash transactions of SM were actuallymaintained thru Yutivo. Any and all receipts of cash by SM including its branches weretransmitted 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 absencethereof which occurs generally, a corresponding charge is made against the account of SM inYutivo'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 cashrequirements for the benefit of SM. Any and all payments and cash vouchers are made onYutivo stationery and made under authority of Yutivo's corporate officers, without any copythereof being furnished to SM. All detailed records such as cash disbursements, such asexpenses, purchases, etc. for the account of SM, are kept by Yutivo and SM merely keeps asummary 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 aredirectly remitted to Yutivo, are placed in the custody and control of Yutivo, resources and subjectto withdrawal only by Yutivo. SM's being under Yutivo's control, the former's operations andexistence 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 systemmaintained by Yutivo shows that it maintained a high degree of control over SM accounts. Alltransactions between Yutivo and SM are recorded and effected by mere debit or credit entriesagainst the reciprocal account maintained in their respective books of accounts and indicate thedependency of SM as branch upon Yutivo.

Apart from the accounting system, other facts corroborate or independently show that SM is abranch or department of Yutivo. Even the branches of SM in Bacolod, Iloilo, Cebu, and Davaotreat 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 Yutivoand the reference to Yutivo as the head or home office is obvious from the fact that all cashcollections of the SM's branches are remitted directly to Yutivo. Added to this fact, is that SMmay freely use forms or stationery of YutivoThe fact that SM is a mere department or adjunct of Yutivo is made more patent by the fact thatarrastre 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 theimporter, these arrastre and overtime charges were Yutivo's expenses in importing goods andnot SM's. But since those charges were made against SM, i t plainly appears that Yutivo had soleauthority to allocate its expenses even as against SM in the sense that the latter is a mereadjunct, branch or department of the former.Proceeding to another aspect of the relation of the parties, the management fees due from SMto Yutivo were taken up as expenses of SM and credited to the account of Yutivo. If it were to beassumed 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 managementfees were recorded as "Reserve for Bonus" and were therefore a liability reserve and not anincome account. This reserve for bonus were subsequently distributed directly to and credited infavor 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 extendedall the credit to the latter not only in the form of starting capital but also in the form of creditsextended for the cars and vehicles allegedly sold by Yutivo to SM as well as advances or loansfor the expenses of the latter when the capital had been exhausted. Thus, the increases in thecapital 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 officersand 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 Appealscorrectly disregarded the technical defense of separate corporate entity in order to arrive at thetrue tax liability of Yutivo.Petitioner contends that the respondent Collector had lost his right or authority to issue thedisputed assessment by reason of prescription. The contention, in our opinion, cannot besustained. 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 coveringthe said period was made at the earliest on October 1, as regards the third quarter of 1947, sothat it cannot be claimed that the assessment was not made within the five-year periodprescribed 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 toinsufficiency of evidence, but the withdrawal was made subject to the approval of the Secretaryof Finance and the Board of Tax Appeals, pursuant to the provisions of section 9 of ExecutiveOrder 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 theSecretary of Finance but that official, apparently disagreeing with the decision, sent it back for re-investigation. Consequently, the assessment of November 7, 1950 cannot be considered tohave 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 March28, 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 thepresent, which shows that the assessment of November 7, 1950 has always been valid andsubsisting.

Anent the deficiency sale tax for 1950, considering that the assessment thereof was made onDecember 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 theprescriptive period on assessment. The argument is untenable, for, as already seen, theassessment was never finally withdrawn, since it was not approved by the Secretary of Financeor of the Board of Tax Appeals. The authority of the Secretary to act upon the assessmentcannot be questioned, for he is expressly granted such authority under section 9 of ExecutiveOrder No. 401-And under section 79 (c) of the Revised Administrative Code, he has "directcontrol, 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 thechief 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 dividend to stockholders had no purpose other than that of tax avoidance and that, therefore, the

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It should here also be stated that the assessment in question was consistently protested bypetitioner, 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 limitationsagainst the government in certain instances in which the taxpayer has taken someaffirmative action to prevent the collection of the tax within the statutory period. It isgenerally held that a taxpayer is estopped to repudiate waivers of the statute of limitations upon which the government relied. The cases frequently involve dissolvedcorporations. If no waiver has been given, the cases usually show come conductdirected 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 aposition 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 savedfrom the inconvenience, if not hardship of immediate collection. "Conceivably even in these cases a fully informed Commissioner may err to the sorrowof 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 thedoctrine 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 anoriginal 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 carefulexamination 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 thepowers of the Collector of Internal Revenue in respect to assessment and refunds of taxes. If itbe conceded that a decision of the Collector of Internal Revenue on partial remission of taxes issubject 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 suchreview.We find merit, however, in petitioner's contention that the Court of Tax Appeals erred in theimposition of the 5% fraud surcharge. As already shown in the early part of this decision, noelement of fraud is present.Pursuant to Section 183 of the National Internal Revenue Code the 50% surcharge should beadded to the deficiency sales tax "in case a false or fraudulent return is willfully made." Althoughthe 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 twostockholders, to wit: Minnie Miller and her husband Louis Miller. The only assets of thirdhusband and wife corporation consisted of an apartment building which had been acquired for avery 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 handsomeprofit 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 thedocument of sale, the Millers announced that their attorney had called their attention to the largecorporate tax which would have to be paid if the sale was made by the corporation itself. Soinstead of proceeding with the sale as planned, the Millers approved a resolution to declare adividend to themselves "payable in the assets of the corporation, in complete liquidation andsurrender of all the outstanding corporate stock." The building, which as above stated was theonly property of the corporation, was then transferred to Mr. and Mrs. Miller who in turn sold it toMr. and Mrs. Fine for exactly the same price and under the same terms as had been previouslyagreed upon between the corporation and the Fines.The return filed by the Court Holding Co. with the respondent Commissioner of Internal Revenuereported 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, thesale by the Millers to the Fines of the corporation's property was in substance a sale by thecorporation itself, for which the corporation is subject to the taxable profit thereon. In requiringthe corporation to pay the taxable profit on account of the sale, the Commissioner of InternalRevenue, imposed a surcharge of 25% for delinquency, plus an additional surcharge as fraudpenalties.The U. S. Court of Tax Appeals held that the sale by the Millers was for no other purpose than toavoid the tax and was, in substance, a sale by the Court Holding Co., and that, therefore, thesaid 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 anattempt 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, theCourt Holding Co., was of the opinion that the method by which it attempted to effect the sale inquestion was legally sufficient to avoid the imposition of a tax upon it, its adoption of thatmethods 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 saidthat 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 incomethe taxable profit on the real estate sale was fraudulent and with intent to evade thetax. The petitioner filed a reply denying fraud and averring that the loss reported on itsreturn was correct to the best of its knowledge and belief. We think the respondenthas not sustained the burden of proving a fraudulent intent. We have concluded thatthe sale of the petitioner's property was in substance a sale by the petitioner, and thatthe liquidating dividend to stockholders had no purpose other than that of taxavoidance. 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 lawpermits. United States v. Isham, 17 Wall. 496; Gregory v. Helvering, supra; Chrisholmv. Commissioner, 79 Fed. (2d) 14. If the petitioner here was of the opinion that themethod by which it attempted to effect the sale in question was legally sufficient toavoid the imposition of tax upon it, its adoption of that method is not subject tocensure. 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 waspaid only once and on the original sales by the former and neither the latter nor SM paid taxeson their subsequent sales. Yutivo might have, therefore, honestly believed that the payment byit, as importer, of the sales tax was enough as in the case of GM Consequently, in filing its returnon the basis of its sales to SM and not on those by the latter to the public, it cannot be said thatYutivo 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 allegeddeficiency sales tax on the selling price of SM without previously deducting therefrom the salestax due thereon. The sales tax provisions (sees. 184.186, Tax Code) impose a tax on originalsales measured by "gross selling price" or "gross value in money". These terms, as interpretedby 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, whichimplements 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 thegross 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 price in computing the deficiency sales tax due from the petitioner, the opinion, apparently, is

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p , pas 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 atax on the tax. — On sales made after he third quarter of 1939, the amount intendedto 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 allowedin the computation of the merchants' percentage tax on the sales. Unless billed to thepurchaser as a separate item in the invoice, the amounts intended to cover the salestax shall be considered as part of the gross selling price of the articles sold, anddeductions 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 salestaxes did not form part of the "gross selling price" as the measure of the tax. Since Yutivo hadpreviously billed the sales tax separately in its sales invoices to SM General Circulars Nos. 431and 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 whichthe 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 additionalpenalty not contemplated by law."

If the taxes based on the sales of SM are computed in accordance with Gen. Circulars Nos. 431and 440 the total deficiency sales taxes, exclusive of the 25% and 50% surcharges for latepayment and for fraud, would amount only to P820,549.91 as shown in the followingcomputation:

Rates of Sales Tax

Gross Sales of Vehicles Exclusiveof Sales Tax

Sales Taxes Dueand Computedunder Gen. Cir Nos.431 & 400

Total Gross SellingPrice Charged tothe Public

5 % P11,912,219.57 P595,610.98 P12,507,83055

7% 909,559.50 63,669.16 973,228.66

10% 2,618,695.28 261,869.53 2,880,564.81

15% 3,602,397.65 540,359.65 4,142,757.30

20% 267,150.50 53,430.10 320,580.60

30% 837,146.97 251,114.09 1,088,291.06

50% 74,244.30 37,122.16 111,366.46

75% 8,000.00 6,000.00 14,000.00

TOTAL P20,220,413.77 P1,809,205.67 P22,038,619.44

Less Taxes Paid by Yutivo 988,655.76

Deficiency Tax still due P820,549.91

This is the exact amount which, according to Presiding Judge Nable of the Court of Tax Appeals,Yutivo would pay, exclusive of the surcharges.Petitioner finally contends that the Court of Tax Appeals erred or acted in excess of its

jurisdiction in promulgating judgment for the affirmance of the decision of respondent Collector by less than the statutory requirement of at least two votes of its judges. Anent this contention,section 2 of Republic Act No. 1125, creating the Court of Tax Appeals, provides that "Any two

judges of the Court of Tax Appeals shall constitute a quorum, and the concurrence of two judgesshall be necessary to promulgate decision thereof. . . . " It is on record that the present case washeard 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

p p g y p , p , pp y,merely an expression of his general or "private sentiment" on the particular issue, for heconcurred the dispositive part of the decision. At any rate, assuming that there is no validdecision for lack of concurrence of two judges, the case was submitted for decision of the courtbelow on March 28, 1957 and under section 13 of Republic Act 1125, cases brought before saidcourt hall be decided within 30 days after submission thereof. "If no decision is rendered by theCourt within thirty days from the date a case is submitted for decision, the party adverselyaffected by said ruling, order or decision, may file with said Court a notice of his intention toappeal to the Supreme Court, and if no decision has as yet been rendered by the Court, theaggrieved 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 beenbrought 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 ishereby 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.Bengzon, Labrador, Concepcion, Reyes, J.B.L., Barrera and Paredes, JJ., concur.Padilla, J., took no part.

G.R. No. 48532 August 31, 1992 computing and paying the corresponding income tax due from

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G o 853 ugust 3 , 99HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA,BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO,EDUARDO A. RIALP, LEANDRO G. SANTILLAN, and JAIME A.SOQUES, petitioners,vs.THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OFINTERNAL REVENUE, respondents.G.R. No. 48533 August 31, 1992ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA,

JAIME E. DY-LIACCO, MELQUIADES J. GAMBOA, JR., MANUEL L. GUZMAN,VICENTE D. HERRERA, BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR.,ADRIAN O. MICIANO, EDUARDO A. RIALP and JAIME A. SOQUES, petitioners,vs.THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OFINTERNAL REVENUE, respondents. Angara, Abello, Concepcion, Regala & Cruz for petitioners.

NOCON, J .: Petitioners pray that his Court reverse the Decision of the public respondent Court of Tax Appeals, promulgated September 26, 1977 1 denying petitioners' claim for taxrefunds, and order the Commissioner of Internal Revenue to refund to them their income taxes which they claim to have been erroneously or illegally paid or collected. As summarized by the Solicitor General, the facts of the cases are as follows:

Petitioners are Filipino citizens and employees of Procter andGamble, Philippine Manufacturing Corporation, with offices atSarmiento Building, Ayala Avenue, Makati, Rizal. Said corporationis a subsidiary of Procter & Gamble, a foreign corporation based inCincinnati, Ohio, U.S.A. During the years 1970 and 1971 petitionerswere assigned, for certain periods, to other subsidiaries of Procter & Gamble, outside of the Philippines, during which petitioners werepaid U.S. dollars as compensation for services in their foreignassignments. (Paragraphs III, Petitions for Review, C.T.A. CasesNos. 2511 and 2594, Exhs. D, D-1 to D-19). When petitioners inC.T.A. Case No. 2511 filed their income tax returns for the year 1970, they computed the tax due by applying the dollar-to-pesoconversion on the basis of the floating rate ordained under B.I.R.

Ruling No. 70-027 dated May 14, 1970, as follows:From January 1 to February 20, 1970 at theconversion rate of P3.90 to U.S. $1.00;From February 21 to December 31, 1970 at theconversion rate of P6.25 to U.S. $1.00

Petitioners in C.T.A. Case No. 2594 likewise used the aboveconversion rate in converting their dollar income for 1971 toPhilippine peso. However, on February 8, 1973 and October 8,1973, petitioners in said cases filed with the office of therespondent Commissioner, amended income tax returns for theabove-mentioned years, this time using the par value of the pesoas prescribed in Section 48 of Republic Act No. 265 in relation toSection 6 of Commonwealth Act No. 265 in relation to Section 6 of Commonwealth Act No. 699 as the basis for converting their

respective dollar income into Philippine pesos for purposes of

computing and paying the corresponding income tax due fromthem. The aforesaid computation as shown in the amended incometax returns resulted in the alleged overpayments, refund and/or taxcredit. Accordingly, claims for refund of said over-payments werefiled with respondent Commissioner. Without awaiting theresolution of the Commissioner of the Internal Revenue on their claims, petitioners filed their petitioner for review in the above-mentioned cases.Respondent Commissioner filed his Answer to petitioners' petitionfor review in C.T.A. Case No. 2511 on July 31, 1973, while his

Answer in C.T.A. Case No. 2594 was filed on August 7, 1974.Upon joint motion of the parties on the ground that these two casesinvolve common question of law and facts, that respondent Court of Tax Appeals heard the cases jointly. In its decision datedSeptember 26, 1977, the respondent Court of Tax Appeals heldthat the proper conversion rate for the purpose of reporting andpaying the Philippine income tax on the dollar earnings of petitioners are the rates prescribed under Revenue MemorandumCirculars Nos. 7-71 and 41-71. Accordingly, the claim for refundand/or tax credit of petitioners in the above-entitled cases wasdenied and the petitions for review dismissed, with costs againstpetitioners. Hence, this petition for review on certiorari . 2

Petitioners claim that public respondent Court of Tax Appeals erred in holding:1. That petitioners' dollar earnings are receipts derived from foreign exchange

transactions.2. That the proper rate of conversion of petitioners' dollar earnings for tax purposes inthe prevailing free market rate of exchange and not the par value of the peso; and3. That the use of the par value of the peso to convert petitioners' dollar earnings for tax purposes into Philippine pesos is "unrealistic" and, therefore, the prevailing freemarket rate should be the rate used.Respondent Commissioner of Internal Revenue, on the other hand, refutespetitioners' claims as follows:

At the outset, it is submitted that the subject matter of these twocases are Philippine income tax for the calendar years 1970 (CTACase No. 2511) and 1971 (CTA Case No. 2594) and, therefore,should be governed by the provisions of the National InternalRevenue Code and its implementing rules and regulations, and not

by the provisions of Central Bank Circular No. 42 dated May 21,1953, as contended by petitioners.Section 21 of the National Internal Revenue Code, before itsamendment by Presidential Decrees Nos. 69 and 323 which tookeffect on January 1, 1973 and January 1, 1974, respectively,imposed a tax upon the taxable net income received during eachtaxable year from all sources by a citizen of the Philippines,whether residing here or abroad.Petitioners are citizens of the Philippines temporarily residingabroad by virtue of their employment. Thus, in their tax returns for the period involved herein, they gave their legal residence/addressas c/o Procter & Gamble PMC, Ayala Ave., Makati, Rizal (Annexes"A" to "A-8" and Annexes "C" to "C-8", Petition for Review, CTANos. 2511 and 2594).

Petitioners being subject to Philippine income tax, their dollar The dollar earnings of petitioners are the fruits of their labors in the foreign

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g j pp ,earnings should be converted into Philippine pesos in computingthe income tax due therefrom, in accordance with the provisions of Revenue Memorandum Circular No. 7-71 dated February 11, 1971for 1970 income and Revenue Memorandum Circular No. 41-71dated December 21, 1971 for 1971 income, which reiterated BIRRuling No. 70-027 dated May 4, 1970, to wit:

For internal revenue tax purposes, the freemarker rate of conversion (Revenue CircularsNos. 7-71 and 41-71) should be applied in order

to determine the true and correct value inPhilippine pesos of the income of petitioners. 3 After a careful examination of the records, the laws involved and the jurisprudence onthe matter, We are inclined to agree with respondents Court of Tax Appeals andCommissioner of Internal Revenue and thus vote to deny the petition.This basically an income tax case. For the proper resolution of these cases incomemay be defined as an amount of money coming to a person or corporation within aspecified time, whether as payment for services, interest or profit from investment.Unless otherwise specified, it means cash or its equivalent. 4 Income can also bethough of as flow of the fruits of one's labor. 5 Petitioners are correct as to their claim that their dollar earnings are not receiptsderived from foreign exchange transactions. For a foreign exchange transaction issimply that — a transaction in foreign exchange, foreign exchange being "theconversion of an amount of money or currency of one country into an equivalent

amount of money or currency of another." 6 When petitioners were assigned to theforeign subsidiaries of Procter & Gamble, they were earning in their assigned nation'scurrency and were ALSO spending in said currency. There was no conversion,therefore, from one currency to another.Public respondent Court of Tax Appeals did err when it concluded that the dollar incomes of petitioner fell under Section 2(f)(g) and (m) of C.B. Circular No. 42. 7 The issue now is, what exchange rate should be used to determine the pesoequivalent of the foreign earnings of petitioners for income tax purposes. Petitionersclaim that since the dollar earnings do not fall within the classification of foreignexchange transactions, there occurred no actual inward remittances, and, therefore,they are not included in the coverage of Central Bank Circular No. 289 which providesfor the specific instances when the par value of the peso shall not be the conversionrate used. They conclude that their earnings should be converted for income tax

purposes using the par value of the Philippine peso.Respondent Commissioner argues that CB Circular No. 289 speaks of receipts for export products, receipts of sale of foreign exchange or foreign borrowings andinvestments but not income tax. He also claims that he had to use the prevailing freemarket rate of exchange in these cases because of the need to ascertain the true andcorrect amount of income in Philippine peso of dollar earners for Philippine incometax purposes. A careful reading of said CB Circular No. 289 8 shows that the subject mattersinvolved therein are export products, invisibles, receipts of foreign exchange, foreignexchange payments, new foreign borrowing andinvestments — nothing by way of income tax payments. Thus, petitioners are in error by concluding that since C.B. Circular No. 289 does not apply to them, the par valueof the peso should be the guiding rate used for income tax purposes.

g p gsubsidiaries of Procter & Gamble. It was a definite amount of money which came tothem within a specified period of time of two yeas as payment for their services.Section 21 of the National Internal Revenue Code, amended up to August 4, 1969,states as follows:

Sec. 21. Rates of tax on citizens or residents. — A tax is herebyimposed upon the taxable net income received during each taxableyear from all sources by every individual, whether a citizen of thePhilippines residing therein or abroad or an alien residing in thePhilippines, determined in accordance with the following schedule:

xxx xxx xxx And in the implementation for the proper enforcement of the National InternalRevenue Code, Section 338 thereof empowers the Secretary of Finance to"promulgate all needful rules and regulations" to effectively enforce its provisions. 9 Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 were issued to prescribed a uniform rate of exchange from US dollars toPhilippine pesos for INTERNAL REVENUE TAX PURPOSES for the years 1970 and1971, respectively. Said revenue circulars were a valid exercise of the authority givento the Secretary of Finance by the Legislature which enacted the Internal RevenueCode. And these are presumed to be a valid interpretation of said code until revokedby the Secretary of Finance himself. 12 Petitioners argue that since there were no remittances and acceptances of their salaries and wages in US dollars into the Philippines, they are exempt from thecoverage of such circulars. Petitioners forget that they are citizens of the Philippines,

and their income, within or without, and in these cases wholly without, are subject toincome tax. Sec. 21, NIRC, as amended, does not brook any exemption.Since petitioners have already paid their 1970 and 1971 income taxes under theuniform rate of exchange prescribed under the aforestated Revenue MemorandumCirculars, there is no reason for respondent Commissioner to refund any taxes topetitioner as said Revenue Memorandum Circulars, being of long standing and notcontrary to law, are valid. 13 Although it has become a worn-out cliche, the fact still remains that "taxes are thelifeblood of the government" and one of the duties of a Filipino citizen is to pay hisincome tax.WHEREFORE, the petitioners are denied for lack of merit. The dismissal by therespondent Court of Tax Appeals of petitioners' claims for tax refunds for the incometax period for 1970 and 1971 is AFFIRMED. Costs against petitioners.

SO ORDERED.Narvasa, C.J., Padilla and Regalado, JJ., concur .Melo, J., took no part .

August 7, 1918 The contentions of plaintiffs and appellants having to do solely with the additional income tax, is

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G.R. No. L-12287VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants,vs.JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO CONCEPCION,Deputy Collector of Internal Revenue, defendants-appellees.Gregorio Araneta for appellants.

Assistant Attorney Round for appellees. Malcolm, J. : This appeal calls for consideration of the Income Tax Law, a law of American origin, withreference to the Civil Code, a law of Spanish origin.STATEMENT OF THE CASE.

Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. Themarriage was contracted under the provisions of law concerning conjugal partnerships (sociedadde gananciales). On February 25, 1915, Vicente Madrigal filed sworn declaration on theprescribed form with the Collector of Internal Revenue, showing, as his total net income for theyear 1914, the sum of P296,302.73. Subsequently Madrigal submitted the claim that the saidP296,302.73 did not represent his income for the year 1914, but was in fact the income of theconjugal partnership existing between himself and his wife Susana Paterno, and that incomputing and assessing the additional income tax provided by the Act of Congress of October 3, 1913, the income declared by Vicente Madrigal should be divided into two equal parts, one-half to be considered the income of Vicente Madrigal and the other half of Susana Paterno. Thegeneral question had in the meantime been submitted to the Attorney-General of the PhilippineIslands who in an opinion dated March 17, 1915, held with the petitioner Madrigal. The revenueofficers being still unsatisfied, the correspondence together with this opinion was forwarded toWashington for a decision by the United States Treasury Department. The United StatesCommissioner of Internal Revenue reversed the opinion of the Attorney-General, and thus

decided against the claim of Madrigal. After payment under protest, and after the protest of Madrigal had been decided adversely bythe Collector of Internal Revenue, action was begun by Vicente Madrigal and his wife SusanaPaterno in the Court of First Instance of the city of Manila against Collector of Internal Revenueand the Deputy Collector of Internal Revenue for the recovery of the sum of P3,786.08, allegedto have been wrongfully and illegally collected by the defendants from the plaintiff, VicenteMadrigal, under the provisions of the Act of Congress known as the Income Tax Law. Theburden of the complaint was that if the income tax for the year 1914 had been correctly andlawfully computed there would have been due payable by each of the plaintiffs the sum of P2,921.09, which taken together amounts of a total of P5,842.18 instead of P9,668.21,erroneously and unlawfully collected from the plaintiff Vicente Madrigal, with the result thatplaintiff Madrigal has paid as income tax for the year 1914, P3,786.08, in excess of the sumlawfully due and payable.The answer of the defendants, together with an analysis of the tax declaration, the pleadings,and the stipulation, sets forth the basis of defendants‘ stand in the following way: The income of

Vicente Madrigal and his wife Susana Paterno of the year 1914 was made up of three items: (1)P362,407.67, the profits made by Vicente Madrigal in his coal and shipping business; (2)P4,086.50, the profits made by Susana Paterno in her embroidery business; (3) P16,687.80, theprofits made by Vicente Madrigal in a pawnshop company. The sum of these three items isP383,181.97, the gross income of Vicente Madrigal and Susana Paterno for the year 1914.General deductions were claimed and allowed in the sum of P86,879.24. The resulting netincome was P296,302.73. For the purpose of assessing the normal tax of one per cent on thenet income there were allowed as specific deductions the following: (1) P16,687.80, the tax uponwhich was to be paid at source, and (2) P8,000, the specific exemption granted to VicenteMadrigal and Susana Paterno, husband and wife. The remainder, P271,614.93 was the sumupon which the normal tax of one per cent was assessed. The normal tax thus arrived at wasP2,716.15.The dispute between the plaintiffs and the defendants concerned the additional tax provided for in the Income Tax Law. The trial court in an exhausted decision found in favor of defendants,without costs.

ISSUES.

that is should be divided into two equal parts, because of the conjugal partnership existingbetween them. The learned argument of counsel is mostly based upon the provisions of the CivilCode establishing the sociedad de gananciales. The counter contentions of appellees are thatthe taxes imposed by the Income Tax Law are as the name implies taxes upon income tax andnot upon capital and property; that the fact that Madrigal was a married man, and his marriagecontracted under the provisions governing the conjugal partnership, has no bearing on incomeconsidered as income, and that the distinction must be drawn between the ordinary form of commercial partnership and the conjugal partnership of spouses resulting from the relation of marriage.DECISION.From the point of view of test of faculty in taxation, no less than five answers have been given

the course of history. The final stage has been the selection of income as the norm of taxation.(See Seligman, ―The Income Tax,‖ Introduction.) The Income Tax Law of the United States,extended to the Philippine Islands, is the result of an effect on the part of the legislators to putinto statutory form this canon of taxation and of social reform. The aim has been to mitigate theevils arising from inequalities of wealth by a progressive scheme of taxation, which places theburden on those best able to pay. To carry out this idea, public considerations have demandedan exemption roughly equivalent to the minimum of subsistence. With these exceptions, theincome tax is supposed to reach the earnings of the entire non-governmental property of thecountry. Such is the background of the Income Tax Law.Income as contrasted with capital or property is to be the test. The essential difference betweencapital and income is that capital is a fund; income is a flow. A fund of property existing at aninstant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through aperiod of time is called an income. Capital is wealth, while income is the service of wealth. (SeeFisher, ―The Nature of Capital and Income.‖) The Supreme Court of Georgia expresses the

thought in the following figurative language: ―The fact is that property is a tree, income is thefruit; labor is a tree, income the fruit; capital is a tree, income the fruit.‖ (Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on income is not a tax on property. ―Income,‖ as here used,can be defined as ―profits or gains.‖ (London County Council vs. At torney-General [1901], A. C.,26; 70 L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See further Foster‘s Income Tax, second edition [1915], Chapter IV; Black on Income Taxes, second edition

[1915], Chapter VIII; Gibbons vs. Mahon [1890], 136 U.S., 549; and Towne vs. Eisner, decidedby the United States Supreme Court, January 7, 1918.)

A regulation of the United States Treasury Department relative to returns by the husband andwife not living apart, contains the following:The husband, as the head and legal representative of the household and general custodian of its income, should make and render the return of the aggregate income of himself and wife, andfor the purpose of levying the income tax it is assumed that he can ascertain the total amount of said income. If a wife has a separate estate managed by herself as her own separate property,and receives an income of more than $3,000, she may make return of her own income, and if

the husband has other net income, making the aggregate of both incomes more than $4,000,the wife‘s return should be attached to the return of her husband, or his income should be

included in her return, in order that a deduction of $4,000 may be made from the aggregate of both incomes. The tax in such case, however, will be imposed only upon so much of theaggregate income of both shall exceed $4,000. If either husband or wife separately has anincome equal to or in excess of $3,000, a return of annual net income is required under the law,and such return must include the income of both, and in such case the return must be madeeven though the combined income of both be less than $4,000. If the aggregate net income of both exceeds $4,000, an annual return of their combined incomes must be made in the manner stated, although neither one separately has an income of $3,000 per annum. They are jointlyand separately liable for such return and for the payment of the tax. The single or married statusof the person claiming the specific exemption shall be determined as one of the time of claimingsuch exemption which return is made, otherwise the status at the close of the year.‖ With these general observations relative to the Income Tax Law in force in the PhilippineIslands, we turn for a moment to consider the provisions of the Civil Code dealing with the

conjugal partnership. Recently in two elaborate decisions in which a long line of Spanish

authorities were cited, this court in speaking of the conjugal partnership, decided that ―prior to The separate estate of a married woman within the contemplation of the Income Tax Law is that

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the liquidation the interest of the wife and in case of her death, of her heirs, is an interestinchoate, a mere expectancy, which constitutes neither a legal nor an equitable estate, and doesnot ripen into title until there appears that there are assets in the community as a result of theliquidation and settlement.‖ (Nable Jose vs. Nable Jose [1916], 15 Off. Gaz., 871; Manuel andLaxamana vs. Losano [1918], 16 Off. Gaz., 1265.)Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husbandVicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimateproperty rights and in the ultimate ownership of property acquired as income after such incomehas become capital. Susana Paterno has no absolute right to one-half the income of theconjugal partnership. Not being seized of a separate estate, Susana Paterno cannot make aseparate return in order to receive the benefit of the exemption which would arise by reason of

the additional tax. As she has no estate and income, actually and legally vested in her andentirely distinct from her husband‘s property, the income cannot properly be considered theseparate income of the wife for the purposes of the additional tax. Moreover, the Income TaxLaw does not look on the spouses as individual partners in an ordinary partnership. Thehusband and wife are only entitled to the exemption of P8,000 specifically granted by the law.The higher schedules of the additional tax directed at the incomes of the wealthy may not bepartially defeated by reliance on provisions in our Civil Code dealing with the conjugalpartnership and having no application to the Income Tax Law. The aims and purposes of theIncome Tax Law must be given effect.The point we are discussing has heretofore been considered by the Attorney-General of thePhilippine Islands and the United States Treasury Department. The decision of the latter overruling the opinion of the Attorney-General is as follows:TREASURY DEPARTMENT, Washington.Income Tax.FRANK MCINTYRE,

Chief, Bureau of Insular Affairs, War Department,Washington, D. C.SIR: This office is in receipt of your letter of June 22, 1915, transmitting copy of correspondence―from the Philippine authorities relative to the method of submission of income tax returns bymarred person.‖ You advise that ―The Governor -General, in forwarding the papers to the Bureau, advises that theInsular Auditor has been authorized to suspend action on the warrants in question until anauthoritative decision on the points raised can be secured from the Treasury Department.‖ From the correspondence it appears that Gregorio Araneta, married and living with his wife, hadan income of an amount sufficient to require the imposition of the net income was properlycomputed and then both income and deductions and the specific exemption were divided in half and two returns made, one return for each half in the names respectively of the husband andwife, so that under the returns as filed there would be an escape from the additional tax; that

Araneta claims the returns are correct on the ground under the Philippine law his wife is entitledto half of his earnings; that Araneta has dominion over the income and under the Philippine law,

the right to determine its use and disposition; that in this case the wife has no ―separate estate‖within the contemplation of the Act of October 3, 1913, levying an income tax.It appears further from the correspondence that upon the foregoing explanation, tax wasassessed against the entire net income against Gregorio Araneta; that the tax was paid and anapplication for refund made, and that the application for refund was rejected, whereupon thematter was submitted to the Attorney-General of the Islands who holds that the returns werecorrectly rendered, and that the refund should be allowed; and thereupon the question at issueis submitted through the Governor-General of the Islands and Bureau of Insular Affairs for theadvisory opinion of this office.By paragraph M of the statute, its provisions are extended to the Philippine Islands, to beadministered as in the United States but by the appropriate internal-revenue officers of thePhilippine Government. You are therefore advised that upon the facts as stated, this office holdsthat for the Federal Income Tax (Act of October 3, 1913), the entire net income in this case wastaxable to Gregorio Araneta, both for the normal and additional tax, and that the application for refund was properly rejected.

which belongs to her solely and separate and apart from her husband, and over which her husband has no right in equity. It may consist of lands or chattels.The statute and the regulations promulgated in accordance therewith provide that each personof lawful age (not excused from so doing) having a net income of $3,000 or over for the taxableyear shall make a return showing the facts; that from the net income so shown there shall bededucted $3,000 where the person making the return is a single person, or married and notliving with consort, and $1,000 additional where the person making the return is married andliving with consort; but that where the husband and wife both make returns (they living together),the amount of deduction from the aggregate of their several incomes shall not exceed $4,000.The only occasion for a wife making a return is where she has income from a sole and separateestate in excess of $3,000, but together they have an income in excess of $4,000, in which the

latter event either the husband or wife may make the return but not both. In all instances theincome of husband and wife whether from separate estates or not, is taken as a whole for thepurpose of the normal tax. Where the wife has income from a separate estate makes returnmade by her husband, while the incomes are added together for the purpose of the normal taxthey are taken separately for the purpose of the additional tax. In this case, however, the wifehas no separate income within the contemplation of the Income Tax Law.Respectfully,DAVID A. GATES.

Acting Commissioner.In connection with the decision above quoted, it is well to recall a few basic ideas. The IncomeTax Law was drafted by the Congress of the United States and has been by the Congressextended to the Philippine Islands. Being thus a law of American origin and being peculiarlyintricate in its provisions, the authoritative decision of the official who is charged with enforcing ithas peculiar force for the Philippines. It has come to be a well-settled rule that great weightshould be given to the construction placed upon a revenue law, whose meaning is doubtful, by

the department charged with its execution. (U.S. vs. Cerecedo Hermanos y Cia. [1907], 209U.S., 338; In re Allen [1903], 2 Phil., 630; Government of the Philippine Islands vs. Municipalityof Binalonan, and Roman Catholic Bishop of Nueva Segovia [1915], 32 Phil., 634.) We concludethat the judgment should be as it is hereby affirmed with costs against appellants. So ordered.Torres, Johnson, Carson, Street and Fisher, JJ., concur.

G.R. No. 185568 March 21, 2012 COMMISSIONER OF INTERNAL REVENUE P titi

d. Some of the items included in the ‗assessment‘ are already pending litigation andbj t f th titl d ‗C i i f I t l R P t

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COMMISSIONER OF INTERNAL REVENUE, Petitioner,vs.PETRON CORPORATION, Respondent.D E C I S I O NSERENO, J. : This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedurefiled by the Commissioner of Internal Revenue (CIR) assailing the Decision1 dated 03 December 2008 of the Court of Tax Appeals En Banc (CTA En Banc) in CTA EB No. 311. The assailedDecision reversed and set aside the Decision2dated 04 May 2007 of the Court of Tax AppealsSecond Division (CTA Second Division) in CTA Case No. 6423, which ordered respondentPetron Corporation (Petron) to pay deficiency excise taxes for the taxable years 1995 to 1998,

together with surcharges and delinquency interests imposed thereon.Respondent Petron is a corporation engaged in the production of petroleum products and is aBoard of Investment (BOI) – registered enterprise in accordance with the provisions of theOmnibus Investments Code of 1987 (E.O. 226) under Certificate of Registration Nos. 89-1037and D95-136.3 The FactsThe CTA En Banc in CTA EB Case No. 311 adopted the findings of fact by the CTA SecondDivision in CTA Case No. 6423. Considering that there are no factual issues in this case, welikewise adopt the findings of fact by the CTA En Banc, as follows:

As culled from the records and as agreed upon by the parties in their Joint Stipulation of Factsand Issues, these are the facts of the case.During the period covering the taxable years 1995 to 1998, petitioner (herein respondent Petron)had been an assignee of several Tax Credit Certificates (TCCs) from various BOI-registeredentities for which petitioner utilized in the payment of its excise tax liabilities for the taxable years1995 to 1998. The transfers and assignments of the said TCCs were approved by the

Department of Finance‘s One Stop Shop Inter -Agency Tax Credit and Duty Drawback Center (DOF Center), composed of representatives from the appropriate government agencies, namely,the Department of Finance (DOF), the Board of Investments (BOI), the Bureau of Customs(BOC) and the Bureau of Internal Revenue (BIR).Taking ground on a BOI letter issued on 15 May 1998 which states that ‗hydraulic oil,penetrating oil, diesel fuels and industrial gases are classified as supplies and considered thesuppliers thereof as qualified transferees of tax credit,‘ petitioner acknowledged and acceptedthe transfers of the TCCs from the various BOI-registered entities.Petitioner‘s acceptance and use of the TCCs as payment of its excise tax liabilities for thetaxable years 1995 to 1998, had been continuously approved by the DOF as well as the BIR‘sCollection Program Division through its surrender and subsequent issuance by the AssistantCommissioner of the Collection Service of the BIR of the Tax Debit Memos (TDMs).On January 30, 2002, respondent [herein petitioner CIR] issued the assailed Assessmentagainst petitioner for deficiency excise taxes for the taxable years 1995 to 1998, in the totalamount of P 739,003,036.32, inclusive of surcharges and interests, based on the ground that the

TCCs utilized by petitioner in its payment of excise taxes have been cancelled by the DOF for having been fraudulently issued and transferred, pursuant to its EXCOM Resolution No. 03-05-99. Thus, petitioner, through letters dated August 31, 1999 and September 1, 1999, wasrequired by the DOF Center to submit copies of its sales invoices and delivery receipts showingthe consummation of the sale transaction to certain TCC transferors.Instead of submitting the documents required by the respondent, on February 27, 2002,petitioner filed its protest letter to the ‗Assessment‘ o n the grounds, among others, that:

a. The BIR did not comply with the requirements of Revenue Regulations 12-99 inissuing the "assessment" letter dated January 30, 2002, hence, the assessment madeagainst it is void;b. The assignment/transfer of the TCCs to petitioner by the TCC holders wassubmitted to, examined and approved by the concerned government agencies whichprocessed the assignment in accordance with law and revenue regulations;c. There is no basis for the imposition of the 50% surcharge in the amountof P 159,460,900.00 and interest penalties in the amount of P 260,620,335.32 against

it;

are subject of the case entitled ‗Commissioner of Internal Revenue vs. Pe tronCorporation,‘ C.A. GR SP No. 55330 (CTA Case No. 5657) and hence, should nolonger be included in the ‗assessment‘; and e. The assessment and collection of alleged excise tax deficiencies sought to becollected by the BIR against petitioner through the January 30, 2002 letter are alreadybarred by prescription under Section 203 of the National Internal Revenue Code.

On 27 March 2002, respondent, through Assistant Commissioner Edwin R. Abella served aWarrant of Distraint and/or Levy on petitioner to enforce payment of the P 739,003,036.32 taxdeficiencies.Respondent allegedly served the Warrant of Distraint and/or Levy against petitioner without firstacting on its letter-protest. Thus, construing the Warrant of Distraint and/or Levy as the final

adverse decision of the BIR on its protest of the assessment, petitioner filed the instant petitionbefore this Honorable Court [referring to the CTA Second Division] on April 2, 2002.On April 30, 2002, respondent filed his Answer, raising the following as his Special AffirmativeDefenses:

6. In a post-audit conducted by the One-Stop Inter-Agency Tax Credit and DutyDrawback Center (Center) of the Department of Finance (DOF), pursuant to theCenter‘s Excom Resolution No. 03-05-99, it was found that TCCs issued to AllianceThread Co., Inc., Allstar Spinning, Inc., Diamond Knitting Corp., Fiber TechnologyCorp., Filstar Textile Industrial Corp., FLB International Fiber Corp., JantexPhilippines, Inc., Jibtex Industrial Corp., Master Colour System Corp. and SpintexInternational, Inc. were fraudulently obtained and were fraudulently transferred topetitioner. As a result of said findings, the TCCs and the Tax Debit Memos (TDMs)issued by the Center to petitioner against said TCCs were cancelled by the DOF;7. Prior to the cancellation of the aforesaid TCCs and TDMs, petitioner had utilized thesame in the payment of its excise tax liabilities. W ith such cancellation, the TCCs and

TDMs have no value in money or money‘s worth and, therefore, the excise taxes for which they were used as payment are now deemed unpaid;8. The cancellation by the DOF of the aforesaid TCCs and TDMs has the presumptionof regularity upon which respondent may validly rely;9. Petitioner was informed by the DOF of the post-audit conducted on the TCCs andwas given the opportunity to submit documents showing that the TCCs weretransferred to it in payment of petroleum products allegedly delivered by it to the TCCtransferors upon which the TCC transfers were approved, with the admonition thatfailure to submit the required documents would result in the cancellation of thetransfers. Petitioner was also informed of the cancellation of the TCCs and TDMs andthe reason for their cancellation;10. Since petitioner is deemed not to have paid its excise tax liabilities, a pre-assessment notice is not required under Section 228 of the Tax Code;11. The letter dated January 20, 2002 (should be January 30, 2002), demandingpayment of petitioner‘s excise tax liabilities explicitly states the basis for said demand,

i.e., the cancellation of the TCCs and TDMs;12. The government is never estopped from collecting legitimate taxes due to the error committed by its agents (Visayas Cebu Terminal Inc., vs. Commissioner of InternalRevenue, 13 SCRA 257; Atlas Consolidated Mining and Development Corporation vs.Commissioner of Internal Revenue, 102 SCRA 246). The acceptance by the Bureau of Internal Revenue of the TCCs fraudulently obtained and fraudulently transferred topetitioner as payment of its excise tax liabilities turned out to be a mistake after thepost-audit was conducted. Hence, said payments were void and the excise taxes maybe validly collected from petitioner.13. As found in the post-audit, petitioner and the TCC transferors committed fraud inthe transfer of the TCCs when they made appear (sic) that the transfers were inconsideration for the delivery of petroleum products by petitioner to the TCCstransferors, for which reason said transfers were approved by the Center, when in factthere were no such deliveries;14. Petitioner used the TCCs fraudulently obtained and fraudulently transferred in the

payment of excise taxes declared in its excise tax returns with intent to evade tax to

the extent of the value represented by the TCCs, thereby rendering the returnsf d l t

Total P 253,900,547.00

P 126,950,273.50

P 340,072,404.24

P 720,923,224.74

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fraudulent;15. Since petitioner wilfully filed fraudulent returns, it is liable for the 50% surchargeand 20% annual interest imposed under Sections 248 and 249 of the Tax Code;16. Since petitioner wilfully filed fraudulent returns with intent to evade tax, theprescriptive period to collect the tax is ten (10) years from the discovery of the fraudpursuant to Section 222 of the Tax Code; and17. The case pending in the Court of Appeals (CA-G.R. Sp. No. 55330 [CTA Case No.5657]), and the case at bar have distinct causes of action. The former involves theinvalid transfers of the TCCs to petitioner on the theory that it is not a qualifiedtransferee thereof, while the latter involves the fraudulent procurement of said TCCsand the fraudulent transfers thereof to petitioner.

However, on November 12, 2002, respondent filed a Manifestation informing this Court that onMay 29, 2002, it had reduced the amount of deficiency excise taxes to P 720,923,224.74 as aresult of its verification that some of the TCCs which formed part of the original "Assessment"were already included in a case previously filed with this Court. In effect, the amount of deficiency excise taxes is recomputed as follows:

Transferor Basic Tax Surcharge Interest Total

AllianceThread Co.Inc.

P 12,078,823.00 P 6,039,411.50 P 16,147,293.21 P 34,265,527.21

Allstar Spinning,Inc.

37,265,310.00 18,632,655.00 49,781,486.95 105,679,451.95

DiamondKnittingCorporation

36,764,587.00 18,382,293.50 49,264,758.35 104,411,638.85

Fiber TechnologyCorp.

25,300,911.00 12,650,455.50 34,295,655.90 72,247,022.40

Filstar TextileCorp.

40,767,783.00 20,383,891.50 54,802,550.16 115,954,224.66

FLBInternationalFiber Corp.

25,934,695.00 12,967,347.50 34,977,257.14 73,879,299.64

JantexPhilippines,Inc.

12,036,192.00 6,018,096.00 15,812,547.24 33,866,835.24

JibtexIndustrialCorp.

15,506,302.00 7,753,151.00 20,610,319.52 43,869,772.52

Master Colour systemCorp.

33,333,536.00 16,666,768.00 44,822,167.06 94,822,471.06

SpintexInternationalInc.

14,912,408.00 7,456,204.00 19,558,368.71 41,926,980.71

, , , , , , , ,

During the pendency of the case, but after respondent had already submitted his Formal Offer of Evidence for this Court‘s consideration, he filed an ‗Urgent Motion to Reopen Case‘ on August24, 2004 on the ground that additional evidence consisting of documents presented to theCenter in support of the TCC transferor‘s claims for tax credit as well as documen t supportingthe applications for approval of the transfer of the TCCs to petitioner, must be presented toprove the fraudulent issuance and transfer of the subject TCCs. Respondent submits that it isimperative on his part to do so considering that, without necessarily admitting that the evidencepresented in the case of Pilipinas Shell Petroleum Corporation vs. Commissioner of InternalRevenue, to prove fraud is not clear and convincing, he may suffer the same fate that hadbefallen upon therein respondent when this Court held, among others, that ‗there is no clear and

convincing evidence that the Tax Credit Certificates (TCCs) transferred to Shell (for brevity) andused by it in the payment of excise taxes, were fraudulently issued to the TCC transferors andwere fraudulently transferred to Shell.‘

An ‗Opposition to Urgent Motion to Reopen Case‘ was filed by petitioner on September 3, 2004contending that to sustain respondent‘s motion would ‗smack of procedural disorder and spawna reversion of the proceedings. While litigation is not a game of technicalities, it is a truism thatevery case must be presented in accordance with the prescribed procedure to insure an orderlyadministration of justice.‘ On October 4, 2004, this Court resolved to grant respondent‘s Motion and allowed respondent topresent additional evidence in support of his arguments, but deferred the resolution of respondent‘s original Formal Offer of Evidence until after the respondent has terminated hispresentation of evidence. Subsequent to this Court‘s Resolution, respondent then filed onOctober 20, 2004, a Request for the Issuance of Subpoena Duces Tecum to the ExecutiveDirector of the Center or his duly authorized representative, and on October 21, 2004, aSubpoena Ad Testificandum to Ms. Elizabeth R. Cruz, also of the Center.

Petitioner filed a ‗Motion for Reconsideration (Re: Resolution dated October 4, 2004)‘ onOctober 27, 2004, with respondent filing his ‗Opposition‘ on November 4, 2004, and petitioner subsequently filing its ‗Reply to Opposition‘ on December 20, 2004. Petitioner‘s motion wasdenied by this Court in a Resolution dated February 28, 2005 for lack of merit.On March 18, 2005, petitioner filed an ‗Urgent Motion to Revert Case to the First Division‘ withrespondent‘s ‗Manifestation‘ filed on April 6, 2005 stating that ‗the question of which Division of this Honorable Court shall hear the instant case is an internal matter which is better left to thesound discretion of this Honorable Court without interference by a party litigant‘. On April 28,

2005, this Court denied the Motion of petitioner for lack of merit.On November 7, 2005, the Court finally resolved respondent‘s ‗Formal Offer of Evidence‘ filed onMay 7, 2004 and ‗Supplemental Formal Offer of Evidence‘ filed on A ugust 25, 2005. OnNovember 22, 2005, respondent filed a ‗Motion for Partial Reconsideration‘ of the Court‘sResolution to admit Exhibits 31 and 31-A on the ground that he already submitted and offeredcertified true copies of said exhibits, which the Court granted in its Resolution on January 19,2006.

However, on February 10, 2006, respondent filed a ‗Motion to Amend Formal Offer of Evidence‘praying that he be allowed to amend his formal offer since some exhibits although attachedthereto were inadvertently not mentioned in the Formal Offer of Evidence. Petitioner‘s‗Opposition‘ was filed on March 14, 2006. This Court granted respondent‘s motion in theResolution dated April 24, 2006 and considering that the parties already filed their respectiveMemoranda, this case was then considered submitted for decision.On May 16, 2006, however, respondent filed an ‗Omnibus Motion‘ praying that this Court take

judicial notice of the fact that the TCCs issued by the Center, including the TCCs in this instantcase, contained the standard ‗Liability Clause‘ and that the case be consolidated with CTA CaseNo. 6136, on the ground that both cases involve the same parties and common questions of lawor fact. An ‗Opposition/Comment on Omnibus Motion‘ was filed by petitioner on June 26, 2006,and ‗Reply to Opposition/Comment‘ was filed by respondent on July 17, 2006. In a Resolution promulgated on September 1, 2006, this Court granted respondent‘s motion onlyinsofar as taking judicial notice of the fact that each of the dorsal side of the TCCs contains thesubject ‗liability clause‘, but denied respondent‘s motion to consolidate considering that C.T.A.

Case No. 6136 was already submitted for decision on April 24, 2006.

4

The Ruling of the Court of Tax Appeals –Second Division(CTA Case No 6423)

tax liabilities had the ef fect of nonpayment of the latter‘s excise taxes. These taxescorresponded to the value of the TCCs Petron used for payment The CTA Second Division





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(CTA Case No. 6423)On 04 May 2007, the CTA Second Division promulgated a Decision in CTA Case No. 6423, thedispositive portion of which reads:WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED for lackof merit. Accordingly, petitioner is ORDERED TO PAY the respondent the reduced amount of SIX HUNDRED MILLION SEVEN HUNDRED SIXTY NINE THOUSAND THREE HUNDREDFIFTY THREE AND 95/100 PESOS (P600,769,353.95), representing petitioner‘s deficiencyexcise taxes for the taxable years 1995 to 1998, recomputed as follows:

Transferor Basic Tax 25% Surcharge 20% Interest Total

AllianceThread Co.Inc.

P 12,078,823.00 P 3,019,705.75 P 13,456,077.68 P 28,554,606.43

Allstar Spinning,Inc.

37,265,310.00 9,316,327.50 41,484,572.46 88,066,209.96

DiamondKnittingCorporation

36,764,587.00 9,191,146.75 41,053,965.29 87,009,699.04

Fiber TechnologyCorp.

25,300,911.00 6,325,227.75 28,579,713.25 60,205,852.00

Filstar TextileCorp.

40,767,783.00 10,191,945.75 45,668,791.80 96,628,520.55

FLBInternationalFiber Corp.

25,934,695.00 6,483,673.75 29,147,714.28 61,566,083.03

JantexPhilippines,Inc.

12,036,192.00 3,009,048.00 13,177,122.70 28,222,362.70

JibtexIndustrialCorp.

15,506,302.00 3,876,575.50 17,175,266.27 36,558,143.77

Master Colour system Corp.

33,333,536.00 8,333,384.00 37,351,805.88 79,018,725.88

SpintexInternationalInc.

14,912,408.00 3,728,102.00 16,298,640.59 34,939,150.59

Total P 253,900,547.00 P 63,475,136.75 P 283,393,670.20 P 600,769,353.95

In addition, petitioner is ORDERED TO PAY the respondent TWENTY FIVE PERCENT (25%)LATE PAYMENT SURCHARGE AND TWENTY PERCENT (20%) DELIQUENCY INTERESTper annum on the amount of SIX HUNDRED MILLION SEVEN HUNDRED SIXTY NINETHOUSAND THREE HUNDRED FIFTY THREE & 95/100 PESOS (P 600,769,353.95),computed from June 27, 2002 until the amount is fully paid.SO ORDERED.5 The CTA Second Division held Petron liable for deficiency excise taxes on the ground that thecancellation by the DOF of the TCCs previously issued to and utilized by respondent to settle its

corresponded to the value of the TCCs Petron used for payment. The CTA Second Divisionruled that payment can only occur if the instrument used to discharge an obligation representsits stated value.

6 It further ruled that Petron‘s acceptance of the TCCs was considered a contract

entered into by respondent with the CIR and subject to post-audit ,7 which was considered asuspensive condition governed by Article 1181 of the Civil Code.8 Further, the CTA Second Division found that the circumstances pertaining to the issuance of thesubject TCCs and their transfer to Petron "brim with fraud."9 Hence, the said court concludedthat since the TCCs used by Petron were found to be spurious, respondent was deemed to havenot paid its excise taxes and ought to be liable to the CIR in the amount of P 600,769,353.95plus 25% interests and 20% surcharges.

10

Petron filed a Motion for Reconsideration11

of the Decision of the CTA Second Division, which

denied the motion in a Resolution dated 14 August 2007.12 The court reiterated its conclusionthat the TCCs utilized by Petron to pay the latter‘s excise tax liabilities did not result in paymentafter these TCCs were found to be fraudulent in the post-audit by the DOF. The CTA SecondDivision also affirmed its ruling that Petron was liable for a 25% late payment surcharge and20% surcharges under Section 24813 of the National Internal Revenue Code (NIRC) of 1997.14

Aggrieved, Petron appealed the Decision to the CTA En Banc through a Petition for Review,which was docketed as CTA EB No. 311. In its Petition, Petron alleged that the Second Divisionerred in holding respondent liable to pay the amount of P 600,769,353.95 in deficiency excisetaxes with penalties and interests covering the taxable years 1995-1998. Petron prayed that thesaid Decision be reversed and set aside, and that CIR be enjoined from collecting the contestedexcise tax deficiency assessment.15 The CTA En Banc summed up into one issue the grounds relied upon by Petron in its Petition for Review, as follows:Whether or not the Second Division erred in holding petitioner liable for the amountof P 600,769,353.95 as deficiency excise taxes for the years 1995-1998, including surcharges

and interest, plus 25% surcharge and 20% delinquency interest per annum from June 27, 2002until the amount is fully paid.16 The Ruling of the Court of Tax Appeals En Banc(CTA EB Case No. 311)On 03 December 2008, the CTA En Banc promulgated a Decision, which reversed and set asidethe CTA Second Division on 04 May 2007. The former absolved Petron from any deficiencyexcise tax liability for taxable years 1995 to 1998. Its ruling in favor of Petron was anchored onthis Court‘s pronouncements in Pilipinas Shell Petroleum Corp. v. Commissioner of InternalRevenue (Shell),17 which found that the factual background and legal issues therein were similar to those in the present case.In resolving the issues, the CTA En Banc adopted the main points in Shell, which it quoted atlength as basis for deciding the appeal in favor of Petron. The gist of the main points of Shellcited by the said court is as follows:

a) The issued TCCs are immediately valid and effective and are not subject to a post-audit as a suspensive condition

18

b) A TCC is subject only to the following conditions:i) Post-audit in the event of a computational discrepancyii) A reduction for any outstanding account with the BIR and/or BOCiii) A revalidation of the TCC if not utilized within one year from issuance or date of utilization19

c) A transferee of a TCC should only be a BOI-registered firm under the ImplementingRules and Regulations of Executive Order (E.O.) No. 226.

20

d) The liability clause in the TCCs provides only for the solidary liability of thetransferee relative to its transfer in the event it is a party to the fraud.21 e) A transferee can rely on the Center‘s approval of the TCCs‘ transfer andsubsequent acceptance as payment of the transferee‘s excise tax liability.22 f) A TCC cannot be cancelled by the Center, as it was already cancelled after thetransferee had applied it as payment for the latter‘s excise tax liabilities.23

The CTA En Banc also found that Petron had no participation in or knowledge of the fraudulentissuance and transfer of the subject TCCs. In fact, the parties made a joint stipulation on this

matter in CTA Case No. 6423 before the CTA Second Division.24

In resolving the issue of whether the government is estopped from collecting taxes due to thefault of its agents the CTA En Banc quoted Shell as follows:

after consultation with the Department of Finance. The tax credit certificate shall be used to paytaxes duties charges and fees due to the National Government; Provided That the tax credits

















































































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fault of its agents, the CTA En Banc quoted Shell as follows:While we agree with respondent that the State in the performance of government function is notestopped by the neglect or omission of its agents, and nowhere is this truer than in the field of taxation, yet this principle cannot be applied to work injustice against an innocentparty.25 (Emphasis supplied.)Finally, the CTA En Banc ruled that Petron was considered an innocent transferee of the subjectTCCs and may not be prejudiced by a re-assessment of excise tax liabilities that respondent hasalready settled, when due, with the use of the TCCs.26 Petron is thus considered to have notfraudulently filed its excise tax returns. Consequently, the assessment issued by the CIR againstit had no legal basis.

27 The dispositive portion of the assailed 03 December 2008 Decision of the

CTA En Banc reads:

WHEREFORE, the instant petition for Review is hereby GRANTED. Accordingly, the May 4,2007 Decision and August 14, 2007 Resolution of the CTA Second Division in CTA Case No.6423 entitled, "Petron Corporation, petitioner vs. Commissioner of Internal Revenue,respondent", are hereby REVERSED and SET ASIDE. In addition, the demand and collection of the deficiency excise taxes of PETRON in the amount of P 600,769,353.95 excluding penaltiesand interest covering the taxable years 1995 to 1998 are hereby CANCELLED and SET ASIDE,and respondent-Commissioner of Internal Revenue is hereby ENJOINED from collecting thesaid amount from PETRON.SO ORDERED.28 The CIR moved for the reconsideration of the CTA En Banc Decision, but the motion was deniedin a Resolution dated 14 August 2007.29 The IssuesThe CIR appealed the Decision of the CTA En Banc by filing a Petition for Review on Certiorariunder Rule 45 of the Rules of Court.

30 Petitioner assails the Decision by raising the following

issues:

The court of tax appeals committed reversible error in holding that respondent petron is notliable for its excise tax liabilities from 1995 to 1998.

ArgumentsIThe cta en banc erred in finding that respondent petron was not shown to haveparticipated in the fraudulent acts. The finding of the cta second division that the taxcredit certificates were fraudulently transferred by the transferor-companies torespondent is supported by substantial evidence. Respondent was involved in theperpetration of fraud in the tccs‘ transfer and utilization. IIRespondent cannot validly claim the right of innocent transferee for value. Asassignee/transferee of the tccs, respondent merely succeeded to the rights of the tccassignors/transferors. Accordingly, if the tccs assigned to respondent were void, it didnot acquire any valid title over the tccs.III

The government is not Estopped from collecting taxes due to the mistakes of itsagents.IVRespondent is liable for 25% surcharge and 20% interest per annum pursuant to theprovisions of sections 248 and 249 of the NIRC. Moreover , since respondent‘s returnswere false, the assessment prescribes in ten (10) years from the discovery of thefalsity thereof pursuant to section 22 of the same code.

31

The Court‘s Ruling We DENY the CIR‘s Petition for lack of merit.

Article 21 of E.O. 226 defines a tax credit as follows: ARTICLE 21. "Tax c redit" shall mean any of the c redits against taxes and/or duties equal tothose actually paid or would have been paid to evidence which a tax credit certificate shall beissued by the Secretary of Finance or his representative, or the Board, if so delegated by theSecretary of Finance. The tax credit certificates including those issued by the Board pursuant tolaws repealed by this Code but without in any way diminishing the scope of negotiability under

their laws of issue are transferable under such conditions as may be determined by the Board

taxes, duties, charges and fees due to the National Government; Provided, That the tax creditsissued under this Code shall not form part of the gross income of the grantee/transferee for income tax purposes under Section 29 of the National Internal Revenue Code and are thereforenot taxable: Provided, further, That such tax credits shall be valid only for a period of ten (10)years from date of issuance.Under Article 39 (j) of the Omnibus Investment Code of 1987,32 tax credits are granted to entitiesregistered with the Bureau of Investment (BOI) and are given for taxes and duties paid on rawmaterials used for the manufacture of their export products.

A TCC is defined under Section 1 of Revenue Regulation (RR) No. 5-2000, issued by the BIR on15 August 2000, as follows:B. Tax Credit Certificate — means a certification, duly issued to the taxpayer named therein, by

the Commissioner or his duly authorized representative, reduced in a BIR Accountable Form inaccordance with the prescribed formalities, acknowledging that the grantee-taxpayer namedtherein is legally entitled a tax credit, the money value of which may be used in payment or insatisfaction of any of his internal revenue tax liability (except those excluded), or may beconverted as a cash refund, or may otherwise be disposed of in the manner and in accordancewith the limitations, if any, as may be prescribed by the provisions of these Regulations.RR 5-2000 prescribes the regulations governing the manner of issuance of TCCs and theconditions for their use, revalidation and transfer. Under the said regulation, a TCC may be usedby the grantee or its assignee in the payment of its direct internal revenue tax liability .33 It maybe transferred in favor of an assignee subject to the following conditions: 1) the TCC transfer must be with prior approval of the Commissioner or the duly authorized representative; 2) thetransfer of a TCC should be limited to one transfer only; and 3) the transferee shall strictly usethe TCC for the payment of the assignee‘s direct internal revenue tax l iability and shall not beconvertible to cash.

34 A TCC is valid only for 10 years subject to the following rules: (1) it must

be utilized within five (5) years from the date of issue; and (2) it must be revalidated thereafter or

be otherwise considered invalid.35

The processing of a TCC is entrusted to a specialized agency called the "One-Stop-Shop Inter-

Agency Tax Credit and Duty Drawback Center" ("Center"), created on 07 February 1992 under Administrative Order (A.O.) No. 226. Its purpose is to expedite the processing and approval of tax credits and duty drawbacks.36 The Center is composed of a representative from the DOF asits chairperson; and the members thereof are representatives of the Bureau of Investment (BOI),Bureau of Customs (BOC) and Bureau of Internal Revenue (BIR), who are tasked to process theTCC and approve its application as payment of an assignee‘s tax liability.

37

A TCC may be assigned through a Deed of Assignment, which the assignee submits to theCenter for its approval. Upon approval of the deed, the Center will issue a DOF Tax Debit Memo(DOF-TDM),38 which will be utilized by the assignee to pay the latter‘s tax liabilities for aspecified period. Upon surrender of the TCC and the DOF-TDM, the corresponding Authority to

Accept Payment of Excise Taxes (ATAPET) will be issued by the BIR Collection ProgramDivision and will be submitted to the issuing office of the BIR for acceptance by the AssistantCommissioner of Collection Service. This act of the BIR signifies its acceptance of the TCC as

payment of the assignee‘s excise taxes. Thus, it is apparent that a TCC undergoes a stringent process of verification by variousspecialized government agencies before it is accepted as payment of an assignee‘s tax liability. In the case at bar, the CIR disputes the ruling of the CTA En Banc, which found Petron to havehad no participation in the fraudulent procurement and transfer of the TCCs. Petitioner believesthat there was substantial evidence to support its allegation of a fraudulent transfer of the TCCsto Petron.

39 The CIR further contends that respondent was not a qualified transferee of the

TCCs, because the latter did not supply petroleum products to the companies that were theassignors of the subject TCCs.40 The CIR bases its contentions on the DOF‘s post -audit findings stating that, for the periodscovering 1995 to 1998, Petron did not deliver fuel and other petroleum products to thecompanies (the transferor companies) that had assigned the subject TCCs to respondent.Petitioner further alleges that the findings indicate that the transferor companies could not havehad such a high volume of export sales declared to the Center and made the basis for theissuance of the TCCs assigned to Petron.41 Thus, the CIR impugns the CTA En Banc ruling that

respondent was a transferee in good faith and for value of the subject TCCs.42

Not finding merit in the CIR‘s contention, we affirm the ruling of th e CTA En Banc finding thatPetron is a transferee in good faith and for value of the subject TCCs

Liability Clause in the TCCs makes Petron and the transferor companies or the original granteesolidarily liable for any fraudulent act or violation of the pertinent laws relating to the transfers of









































































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Petron is a transferee in good faith and for value of the subject TCCs.From the records, we observe that the CIR had no allegation that there was a deviation from theprocess for the approval of the TCCs, which Petron used as payment to settle its excise taxliabilities for the years 1995 to 1998.The CIR quotes the CTA Second Division and urges us to affirm the latter‘s Decision, whichfound Petron to have participated in the fraudulent issuance and transfer of the TCCs. However,any merit in the position of petitioner on this issue is negated by the Joint Stipulation it enteredinto with Petron in the proceedings before the said Division. As correctly noted by the CTA EnBanc, herein parties jointly stipulated before the Second Division in CTA Case No. 6423 asfollows:13. That petitioner (Petron) did not participate in the procurement and issuance of the TCCs,

which TCCs were transferred to Petron and later utilized by Petron in payment of its excisetaxes.43 This stipulation of fact by the CIR amounts to an admission and, having been made by theparties in a stipulation of facts at pretrial, is treated as a judicial admission. Under Section 4,Rule 129 of the Rules of Court, a judicial admission requires no proof .44 The Court cannot lightlyset it aside, especially when the opposing party relies upon it and accordingly dispenses withfurther proof of the fact already admitted. The exception provided in Rule 129, Section 4 is thatan admission may be contradicted only by a showing that it was made through a palpablemistake, or that no such admission was made. In this case, however, exception to the rule doesnot exist.We agree with the pronouncement of the CTA En Banc that Petron has not been shown or proven to have participated in the alleged fraudulent acts involved in the transfer and utilizationof the subject TCCs. Petron had the right to rely on the joint stipulation that absolved it from anyparticipation in the alleged fraud pertaining to the issuance and procurement of the subjectTCCs. The joint stipulation made by the parties consequently obviated the opportunity of the CIR

to present evidence on this matter, as no proof is required for an admission made by a party inthe course of the proceedings.45 Thus, the CIR cannot now be allowed to change its stand andrenege on that admission.Moreover, a close examination of the arguments proffered by the CIR in their Petition calls for areevaluation of the sufficiency of evidence in the case. The CIR seeks to persuade this Court tobelieve that there is substantial evidence to prove that Petron committed a misrepresentation,because the petroleum products were delivered not to the transferor but to other companies.

46 Thus, the TCCs assigned by the transferor companies to Petron were fraudulent.

Clearly, a recalibration of the sufficiency of evidence presented by the CIR is needed for adifferent conclusion to be reached.The fundamental rule is that the scope of our judicial review under Rule 45 of the Rules of Courtis confined only to errors of law and does not extend to questions of fact.47 It is basic that whereit is the sufficiency of evidence that is being questioned, there is a question of fact .48 Evidently,the CIR does not point out any specific provision of law that was wrongly interpreted by the CTAEn Banc in the latter‘s assailed Decision. Petitioner anchors it contention on the alleged

existence of the sufficiency of evidence it had proffered to prove that Petron was involved in theperpetration of fraud in the transfer and utilization of the subject TCCs, an allegation that theCTA En Banc failed to consider. We have consistently held that it is not the function of this Courtto analyze or weigh the evidence all over again, unless there is a showing that the findings of thelower court are totally devoid of support or are glaringly erroneous as to constitute palpable error or grave abuse of discretion.49 Such an exception does not obtain in the circumstances of thiscase.The CIR claims that Petron was not an innocent transferee for value, because the TCCsassigned to respondent were void. Petitioner based its allegations on the post-audit report of theDOF, which declared that the subject TCCs were obtained through fraud and, thus, had nomonetary value.50 The CIR adds that the TCCs were subject to a post-audit by the Center tocomplete the payment of the excise tax liability to which they were applied. Petitioner further contends that the Liability Clause of the TCCs makes the transferee or assignee solidarily li ablewith the original grantee for any fraudulent act pertinent to their procurement and transfer. TheCIR assails the contrary ruling of the CTA En Banc, which confined the solidary liability only to

the original grantee of the TCCs. Thus, petitioner believes that the correct interpretation of the

solidarily liable for any fraudulent act or violation of the pertinent laws relating to the transfers of the TCCs. 51 We are not persuaded by the CIR‘s position on this matter. The Liability Clause of the TCCs reads:Both the TRANSFEROR and the TRANSFEREE shall be jointly and severally liable for anyfraudulent act or violation of the pertinent laws, rules and regulations relating to the transfer of this TAX CREDIT CERTIFICATE.The scope of this solidary liability, as stated in the TCCs, was clarified by this Court in Shell, asfollows:The above clause to our mind clearly provides only for the solidary liability relative to the transfer of the TCCs from the original grantee to a transferee. There is nothing in the above clause that

provides for the liability of the transferee in the event that the validity of the TCC issued to theoriginal grantee by the Center is impugned or where the TCC is declared to have beenfraudulently procured by the said original grantee. Thus, the solidary liability, if any, applies onlyto the sale of the TCC to the transferee by the original grantee. Any fraud or breach of law or rule relating to the issuance of the TCC by the Center to the transferor or the original grantee isthe latter's responsibility and liability. The transferee in good faith and for value may not beunjustly prejudiced by the fraud committed by the claimant or transferor in the procurement or issuance of the TCC from the Center. It is not only unjust but well-nigh violative of theconstitutional right not to be deprived of one's property without due process of law. Thus, a re-assessment of tax liabilities previously paid through TCCs by a transferee in good faith and for value is utterly confiscatory, more so when surcharges and interests are li kewise assessed.

A transferee in good faith and for value of a TCC who has relied on the Center's representationof the genuineness and validity of the TCC transferred to it may not be legally required to payagain the tax covered by the TCC which has been belatedly declared null and void, that is, after the TCCs have been fully utilized through settlement of internal revenue tax liabilities.

Conversely, when the transferee is party to the fraud as when it did not obtain the TCC for valueor was a party to or has knowledge of its fraudulent issuance, said transferee is liable for thetaxes and for the fraud committed as provided for by law.52 (Emphasis supplied.)We also find that the post-audit report, on which the CIR based its allegations, does not have theeffect of a suspensive condition that would determine the validity of the TCCs.We held in Petron v. CIR (Petron),53 which is on all fours with the instant case, that TCCs arevalid and effective from their issuance and are not subject to a post-audit as a suspensivecondition for their validity. Our ruling in Petron finds guidance from our earlier ruling in Shell,which categorically states that a TCC is valid and effective upon its issuance and is not subjectto a post-audit. The implication on the instant case of the said earlier ruling is that Petron has theright to rely on the validity and effectivity of the TCCs that were assigned to it. In finallydetermining their effectivity in the settlement of respondent‘s excise tax liabilities, the validity of those TCCs should not depend on the results of the DOF‘s post -audit findings. We held thus inPetron:

As correctly pointed out by Petron, however, the issue about the immediate validity of TCCs and

the use thereof in payment of tax liabilities and duties are not matters of first impression for thisCourt. Taking into consideration the definition and nature of tax credits and TCCs, this Court'sSecond Division definitively ruled in the aforesaid Pilipinas Shell case that the post audit is not asuspensive condition for the validity of TCCs, thus:

Art. 1181 tells us that the condition is suspensive when the acquisition of rights or demandabilityof the obligation must await the occurrence of the condition. However, Art. 1181 does not applyto the present case since the parties did NOT agree to a suspensive condition. Rather, specificlaws, rules, and regulations govern the subject TCCs, not the general provisions of the CivilCode. Among the applicable laws that cover the TCCs are EO 226 or the Omnibus InvestmentsCode, Letter of Instructions No. 1355, EO 765, RP-US Military Agreement, Sec. 106 (c) of theTariff and Customs Code, Sec. 106 of the NIRC, BIR Revenue Regulations (RRs), and others.Nowhere in the aforementioned laws does the post-audit become necessary for the validity or effectivity of the TCCs. Nowhere in the aforementioned laws is it provided that a TCC is issuedsubject to a suspensive condition.x x x x x x x x x

. . . (T)he TCCs are immediately valid and effective after their issuance. As aptly pointed out inthe dissent of Justice Lovell Bautista in CTA EB No 64 this is clear from the Guidelines and

Code. The CIR explains that respondent‘s assessment on 30 January 2002 of respondent‘sdeficiency excise tax for the years 1995 to 1998 was well within the ten-year prescription













































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the dissent of Justice Lovell Bautista in CTA EB No. 64, this is clear from the Guidelines andinstructions found at the back of each TCC, which provide:

1. This Tax Credit Certificate (TCC) shall entitle the grantee to apply the tax creditagainst taxes and duties until the amount is fully utilized, in accordance with thepertinent tax and customs laws, rules and regulations.x x x x x x x x x4. To acknowledge application of payment, the One-Stop-Shop Tax Credit Center shall issue the corresponding Tax Debit Memo (TDM) to the grantee.

The authorized Revenue Officer/Customs Collector to which payment/utilization was made shallaccomplish the Application of Tax Credit at the back of the certificate and affix his signature onthe column provided."

The foregoing guidelines cannot be clearer on the validity and effectivity of the TCC to pay or settle tax liabilities of the grantee or transferee, as they do not make the effectivity and validity of the TCC dependent on the outcome of a post-audit. In fact, if we are to sustain the appellate taxcourt, it would be absurd to make the effectivity of the payment of a TCC dependent on a post-audit since there is no contemplation of the situation wherein there is no post-audit. Does thepayment made become effective if no post-audit is conducted? Or does the so-calledsuspensive condition still apply as no law, rule, or regulation specifies a period when a post-auditshould or could be conducted with a prescriptive period? Clearly, a tax payment through a TCCcannot be both effective when made and dependent on a future event for its effectivity. Our system of laws and procedures abhors ambiguity.Moreover, if the TCCs are considered to be subject to post-audit as a suspensive condition, thevery purpose of the TCC would be defeated as there would be no guarantee that the TCC wouldbe honored by the government as payment for taxes. No investor would take the risk of utilizingTCCs if these were subject to a post-audit that may invalidate them, without prescribed groundsor limits as to the exercise of said post-audit.

The inescapable conclusion is that the TCCs are not subject to post-audit as a suspensivecondition, and are thus valid and effective from their issuance.54 In addition, Shell and Petron recognized an exception that holds the transferee/assignee liable if proven to have been a party to the fraud or to have had knowledge of the fraudulent issuance of the subject TCCs. As earlier mentioned, the parties entered into a joint s tipulation of facts statingthat Petron did not participate in the procurement or issuance of those TCCs. Thus, we affirmthe CTA En Banc‘s ruling that respondent was an innocent transferee for value thereof. On the issue of estoppel, petitioner contends that the TCCs, which the Center had continuallyapproved as payment for respondent‘s excise tax liabilities, were subsequently found to be void.Thus, the CIR insists that the government is not estopped from collecting from Petron the excisetax liabilities that had accrued to the latter as a result of the voidance of these TCCs. Petitioner argues that the State should not be prejudiced by the neglect or omission of governmentemployees entrusted with the collection of taxes.55 We are not persuaded by the CIR‘s argument. We recognize the well-entrenched principle that estoppel does not apply to the government,

especially on matters of taxation.1âwphi1 Taxes are the nation‘s lifeblood through whichgovernment agencies continue to operate and with which the State discharges its functions for the welfare of its constituents.

56 As an exception, however, this general rule cannot be applied if

it would work injustice against an innocent party.57 Petron, in this case, was not proven to have had any participation in or knowledge of the CIR‘sallegation of the fraudulent transfer and utilization of the subject TCCs. Respondent‘s status as a

transferee in good faith and for value of these TCCs has been established and even stipulatedupon by petitioner .

58 Respondent was thereby provided ample protection from the adverse

findings subsequently made by the Center .59 Given the circumstances, the CIR‘s invocation of the non-applicability of estoppel in this case is misplaced.On the final issue it raised, the CIR contends that a 25% surcharge and a 20% interest per annum must be imposed upon Petron for respondent‘s excise tax liabilities as mandated under Sections 248 and 249 of the National Internal Revenue Code (NIRC).60 Petitioner considers thetax returns filed by respondent for the years 1995 to 1998 as fraudulent on the basis of the post-audit finding that the TCCs were void. It argues that the prescriptive period within which to

lawfully assess Petron for its tax liabilities has not prescribed under Section 222 (a)

61

of the Tax

deficiency excise tax for the years 1995 to 1998 was well within the ten year prescriptionperiod.62 In the light of the main ruling in this case, we affirm the CTA En Banc Decision finding Petron tobe an innocent transferee for value of the subject TCCs. Consequently, the Tax Returns it filedfor the years 1995 to 1998 are not considered fraudulent. Hence, the CIR had no legal basis toassess the excise taxes or any penalty surcharge or interest thereon, as respondent had alreadypaid the appropriate excise taxes using the subject TCCs.WHEREFORE, the CIR‘s Petition is DENIED for lack of merit. The CTA En Banc Decision dated03 December 2008 in CTA EB No. 311 is hereby AFFIRMED in toto. No pronouncement as tocosts.SO ORDERED.

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

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





































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COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administratorsLorna Kapunan and Mario Luza Bautista, respondents.D E C I S I O NDAVIDE, JR., C.J.: This Court is called upon to determine in this case whether the tax planning scheme adopted bya 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 inCA-G.R. SP No. 57799 affirming the 3 January 2000 Decision

2of 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 amountof P79,099,999.22 for the year 1989, and ordered the cancellation and setting aside of theassessment issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9January 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-storeycommercial 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 itsissued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land onwhich 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 dayby 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 ofP254,497.00, it paid P26,341,2078 for its net taxable incomeof P75,987,725.On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5million, as evidenced by a Deed of Sale of Shares of Stocks.

9Three and a half years later, or on

16 January 1994, Toda died.On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice 10 anddemand letter to the CIC for deficiency income tax for the year 1989 in the amountof P79,099,999.22.The new CIC asked for a reconsideration, asserting that the assessment should be directedagainst 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 theCIC 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

12dated 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 butwere substituted with individualcapital gains(P200M – 100M)

100,000,000.00

Total Net Taxable Income per investigat ion P175,987,725.00

Less: Payment alreadymade

1. Per return P26,595,704.00

2. Thru Capital Gains Taxmade

by R.A. Altonaga 10,000,000.00 36,595,704.00Balance of tax due

P 24,999,999.75

Add: 50%Surcharge

12,499,999.88

25% Surcharge 6,249,999.94

Total P 43,749,999.57

Add: Interest20% 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 afraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled byToda by covering up the additional gain of P100 million, which resulted in the change in theincome structure of the proceeds of the sale of the two parcels of land and the building thereonto an individual capital gains, thus evading the higher corporate income tax rate of 35%.On 15 February 1996, the Estate filed a petition for review15 with the CTA alleging that theCommissioner 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 theCommissioner to assess CIC had already prescribed.In his Answer 16 and Amended Answer,17 the Commissioner argued that the two transactionsactually 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 thefirst simulated sale for P100 million) realized by CIC was taxed at the rate of only 5% purportedlyas 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 thusfalse 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 bySection 223 (a) of the National Internal Revenue Code of 1986, which provides that tax may beassessed within ten years from the discovery of the falsity or fraud. With the sale being taintedwith fraud, the separate corporate personality of CIC should be disregarded. Toda, being theregistered owner of the 99.991% shares of stock of CIC and the beneficial owner of theremaining 0.009% shares registered in the name of the individual directors of CIC, should beheld liable for the deficiency income tax, especially because the gains realized from the salewere withdrawn by him as cash advances or paid to him as cash dividends. Since he is alreadydead, 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 nottax evasion. There being no proof of fraudulent transaction, the applicable period for the BIR to

other hand, is a scheme used outside of those lawful means and when availed of, it usuallysubjects the taxpayer to further or additional civil or criminal liabilities.23

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g p , pp passess CIC is that prescribed in Section 203 of the NIRC of 1986, which is three years after thelast day prescribed by law for the filing of the return. Thus, the government‘s right to assess CICprescribed on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, nolonger valid. The CTA also ruled that the mere ownership by Toda of 99.991% of the capitalstock 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 taxof P79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by theCommissioner on 9 January 1995.In its motion for reconsideration,

19the 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, havingheld 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 themotion for reconsideration, prompting the Commissioner to file a petition for review 21 with theCourt of Appeals.In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of theCTA, reasoning that the CTA, being more advantageously situated and having the necessaryexpertise in matters of taxation, is "better situated to determine the correctness, propriety, andlegality 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 petitioninvoking the following grounds:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENTCOMMITTED NO FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OFTHE 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 OFPETITIONER TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FORTHE YEAR 1989 HAD PRESCRIBED.

The Commissioner reiterates her arguments in her previous pleadings and insists that the saleby CIC of the Cibeles property was in connivance with its dummy Rafael Altonaga, who wasfinancially incapable of purchasing it. She further points out that the documents themselvesprove 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 byRMI in its trial balance as of 30 June 1989 as investment in Cibeles Building. The substantialportion 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 taxreturn of Altonaga to prove that the latter is financially incapable of purchasing the Cibelesproperty.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 1989prescribed? and3. Can respondent Estate be held liable for the deficiency income tax of CIC for theyear 1989, if any?

We shall discuss these questions in seriatim.Is this a case of tax evasion or tax avoidance?Tax avoidance and t ax evasion are the two most common ways used by taxpayers in escapingfrom taxation. Tax avoidance is the tax saving device within the means sanctioned by law. Thismethod should be used by the taxpayer in good faith and at arms length. Tax evasion, on the

j p yTax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., thepayment of less than that known by the taxpayer to be legally due, or the non-payment of taxwhen it is shown that a tax is due; (2) an accompanying state of mind which is described asbeing "evil," in "bad faith," "willfull," or "deliberate and not accidental"; and (3) a course of actionor 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 May1989, 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 byRMI and reflected in its trial balance

26as "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 associateand 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 didnot testify on this matter, hence, that information remains to be hearsay and is thus inadmissiblein evidence. It was not verified either, since the letter-request for investigation of Altonaga wasunserved,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 thesale 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 s tructure" of the proceeds of sale. Admitted one hundred percent. But isn‘t this precisely the definition o f tax planning?

Change the structure of the funds and pay a lower tax. Precisely, Sec. 40 (2) of theTax 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, changingthe structure of a transaction to achieve a lower tax is not against the law. It isabsolutely allowed.Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surelypetitioner [sic ] cannot be faulted for wanting to reduce the tax from 35% to5%.29 [Underscoring supplied].

The scheme resorted to by CIC in making it appear that there were two sales of the subjectproperties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered alegitimate tax planning. Such scheme is tainted with fraud.Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including allacts, 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 andunconscionable 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 tobe 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 taxshelter. Altonaga never controlled the property and did not enjoy the normal benefits andburdens of ownership. The sale to him was merely a tax ploy, a sham, and without businesspurpose and economic substance. Doubtless, the execution of the two sales was calculated tomislead 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 moreon the mitigation of tax liabilities than for legitimate business purposes constitutes one of taxevasion.31 Generally, a sale or exchange of assets will have an income tax incidence only when it isconsummated. 32 The incidence of taxation depends upon the substance of a transaction. Thetax consequences arising from gains from a sale of property are not finally to be determinedsolely by the means employed to transfer legal title. Rather, the transaction must be viewed as awhole, and each step from the commencement of negotiations to the consummation of the saleis 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, wouldseriously impair the effective administration of the tax policies of Congress.33

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;

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y p p gTo 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 acircumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for income taxpurposes.34 The two sale transactions should be treated as a single direct sale by CIC to RMI.

Accordingly, the tax l iability of CIC is governed by then Section 24 of the NIRC of 1986, asamended (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 ishereby imposed upon the taxable net income received during each taxable year fromall sources by every corporation organized in, or existing under the laws of thePhilippines, 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 doesnot exceed one hundred thousand pesos; andThirty-five percent upon the amount by which the taxable net incomeexceeds 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 1986

35(now 6% under

Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for thedeficiency 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 filea return, the tax may be assessed, or a proceeding in court after the collection of suchtax 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 hasbecome final and executory, the fact of fraud shall be judicially taken cognizance of inthe 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 thefraud, 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 Opinionof the BIR on the tax consequence of the two sale transactions.

36Thus, the BIR was amply

informed of the transactions even prior to the execution of the necessary documents to effect thetransfer. Subsequently, the two sales were openly made with the execution of public documentsand the declaration of taxes for 1989. However, these circumstances do not negate theexistence of fraud. As earlier discussed those two transactions were tainted with fraud. And evenassuming 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 theCibeles 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 tenyears from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsitythereof was claimed to have been discovered only on 8 March 1991.

37The assessment for the

1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of thecorrect 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 toanswer for the liabilities of a corporation and vice versa. There are, however, certain instances inwhich 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 mayvalidly attach when:

1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or grossnegligence in directing its affairs, or (c) conflict of interest, resulting in damages to thecorporation its stockholders or other persons;

p y j ;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 corporateaction.38

It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, heknowingly and voluntarily held himself personally liable for all the tax liabilities of CIC and thebuyer for the years 1987, 1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocksspecifically provides:

g. Except for transactions occurring in the ordinary course of business, Cibeles has noliabilities 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. Thebusiness of Cibeles has at all times been conducted in full compliance with allapplicable laws, rules and regulations. SELLER undertakes and agrees to hold theBUYER and Cibeles free from any and all income tax liabilities of Cibeles for thefiscal years 1987, 1988 and 1989.39 [Underscoring Supplied].

When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any allincome tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarilyheld 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 theCourt 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. topay 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.

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