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G.R. No.

L-9692 January 6, 1958


COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
BATANGAS TRANSPORTATION COMPANY and LAGUNA-TAYABAS BUS COMPANY, respondents.
Office of the Solicitor General Ambrosio Padilla, Solicitor Conrado T. Limcaoco and Zoilo R. Zandoval for petitioner.
Ozaeta, Lichauco and Picazo for respondents.
MONTEMAYOR, J.:
This is an appeal from the decision of the Court of Tax Appeals (C.T.A.), which reversed the assessment and decision of petitioner Collector
of Internal Revenue, later referred to as Collector, assessing and demanding from the respondents Batangas Transportation Company, later
referred to as Batangas Transportation, and Laguna-Tayabas Bus Company, later referred to as Laguna Bus, the amount of P54,143.54,
supposed to represent the deficiency income tax and compromise for the years 1946 to 1949, inclusive, which amount, pending appeal in the
C.T.A., but before the Collector filed his answer in said court, was increased to P148,890.14.
The following facts are undisputed: Respondent companies are two distinct and separate corporations engaged in the business of land
transportation by means of motor buses, and operating distinct and separate lines. Batangas Transportation was organized in 1918, while
Laguna Bus was organized in 1928. Each company now has a fully paid up capital of Pl,000,000. Before the last war, each company
maintained separate head offices, that of Batangas Transportation in Batangas, Batangas, while the Laguna Bus had its head office in San
Pablo Laguna. Each company also kept and maintained separate books, fleets of buses, management, personnel, maintenance and repair
shops, and other facilities. Joseph Benedict managed the Batangas Transportation, while Martin Olson was the manager of the Laguna Bus.
To show the connection and close relation between the two companies, it should be stated that Max Blouse was the President of both
corporations and owned about 30 per cent of the stock in each company. During the war, the American officials of these two corporations
were interned in Santo Tomas, and said companies ceased operations. They also lost their respective properties and equipment. After
Liberation, sometime in April, 1945, the two companies were able to acquire 56 auto buses from the United States Army, and the two
companies diveded said equipment equally between themselves,registering the same separately in their respective names. In March, 1947,
after the resignation of Martin Olson as Manager of the Laguna Bus, Joseph Benedict, who was then managing the Batangas Transportation,
was appointed Manager of both companies by their respective Board of Directors. The head office of the Laguna Bus in San Pablo City was
made the main office of both corporations. The placing of the two companies under one sole mangement was made by Max Blouse, President
of both companies, by virtue of the authority granted him by resolution of the Board of Directors of the Laguna Bus on August 10, 1945, and
ratified by the Boards of the two companies in their respective resolutions of October 27, 1947.
According to the testimony of joint Manager Joseph Benedict, the purpose of the joint management, which was called, "Joint Emergency
Operation", was to economize in overhead expenses; that by means of said joint operation, both companies had been able to save the
salaries of one manager, one assistant manager, fifteen inspectors, special agents, and one set of office of clerical force, the savings in one
year amounting to about P200,000 or about P100,000 for each company. At the end of each calendar year, all gross receipts and expenses of
both companies were determined and the net profits were divided fifty-fifty, and transferred to the book of accounts of each company, and
each company "then prepared its own income tax return from this fifty per centum of the gross receipts and expenditures, assets and liabilities
thus transferred to it from the `Joint Emergency Operation' and paid the corresponding income taxes thereon separately".
Under the theory that the two companies had pooled their resources in the establishment of the Joint Emergency Operation, thereby forming a
joint venture, the Collector wrote the bus companies that there was due from them the amount of P422,210.89 as deficiency income tax and
compromise for the years 1946 to 1949, inclusive. Since the Collector caused to be restrained, seized, and advertized for sale all the rolling
stock of the two corporations, respondent companies had to file a surety bond in the same amount of P422,210.89 to guarantee the payment
of the income tax assessed by him.
After some exchange of communications between the parties, the Collector, on January 8, 1955, informed the respondents "that after crediting
the overpayment made by them of their alleged income tax liabilities for the aforesaid years, pursuant to the doctrine of equitable recoupment,
the income tax due from the `Joint Emergency Operation' for the years 1946 to 1949, inclusive, is in the total amount of P54,143.54." The
respondent companies appealed from said assessment of P54,143.54 to the Court of Tax Appeals, but before filing his answer, the Collector
set aside his original assessment of P54,143.54 and reassessed the alleged income tax liability of respondents of P148,890.14, claiming that
he had later discovered that said companies had been "erroneously credited in the last assessment with 100 per cent of their income taxes
paid when they should in fact have been credited with only 75 per cent thereof, since under Section 24 of the Tax Code dividends received by
them from the Joint Operation as a domestic corporation are returnable to the extent of 25 per cent". That corrected and increased
reassessment was embodied in the answer filed by the Collector with the Court of Tax Appeals.
The theory of the Collector is the Joint Emergency Operation was a corporation distinct from the two respondent companies, as defined in
section 84 (b), and so liable to income tax under section 24, both of the National Internal Revenue Code. After hearing, the C.T.A. found and
held, citing authorities, that the Joint Emergency Operation or joint management of the two companies "is not a corporation within the
contemplation of section 84 (b) of the National Internal Revenue Code much less a partnership, association or insurance company", and
therefore was not subject to the income tax under the provisions of section 24 of the same Code, separately and independently of respondent
companies; so, it reversed the decision of the Collector assessing and demanding from the two companies the payment of the amount of
P54,143.54 and/or the amount of P148,890.14. The Tax Court did not pass upon the question of whether or not in the appeal taken to it by
respondent companies, the Collector could change his original assessment by increasing the same from P54,143.14 to P148,890.14, to
correct an error committed by him in having credited the Joint Emergency Operation, totally or 100 per cent of the income taxes paid by the
respondent companies for the years 1946 to 1949, inclusive, by reason of the principle of equitable recoupment, instead of only 75 per cent.
The two main and most important questions involved in the present appeal are: (1) whether the two transportation companies herein involved
are liable to the payment of income tax as a corporation on the theory that the Joint Emergency Operation organized and operated by them is
a corporation within the meaning of Section 84 of the Revised Internal Revenue Code, and (2) whether the Collector of Internal Revenue, after
the appeal from his decision has been perfected, and after the Court of Tax Appeals has acquired jurisdiction over the same, but before said
Collector has filed his answer with that court, may still modify his assessment subject of the appeal by increasing the same, on the ground that
he had committed error in good faith in making said appealed assessment.
The first question has already been passed upon and determined by this Tribunal in the case of Eufemia Evangelista et al., vs. Collector of
Internal Revenue et al.,* G.R. No. L-9996, promulgated on October 15, 1957. Considering the views and rulings embodied in our decision in
that case penned by Mr. Justice Roberto Concepcion, we deem it unnecessary to extensively discuss the point. Briefly, the facts in that case
are as follows: The three Evangelista sisters borrowed from their father about P59,000 and adding thereto their own personal funds, bought
real properties, such as a lot with improvements for the sum of P100,000 in 1943, parcels of land with a total area of almost P4,000 square
meters with improvements thereon for P18,000 in 1944, another lot for P108,000 in the same year, and still another lot for P237,000 in the
same year. The relatively large amounts invested may be explained by the fact that purchases were made during the Japanese occupation,
apparently in Japanese military notes. In 1945, the sisters appointed their brother to manage their properties, with full power to lease, to
collect and receive rents, on default of such payment, to bring suits against the defaulting tenants, to sign all letters and contracts, etc. The
properties therein involved were rented to various tenants, and the sisters, through their brother as manager, realized a net rental income of
P5,948 in 1945, P7,498 in 1946, and P12,615 in 1948.
In 1954, the Collector of Internal Revenue demanded of them among other things, payment of income tax on corporations from the year 1945
to 1949, in the total amount of P6,157, including surcharge and compromise. Dissatisfied with the said assessment, the three sisters appealed
to the Court of Tax Appeals, which court decided in favor of the Collector of Internal Revenue. On appeal to us, we affirmed the decision of the
Tax Court. We found and held that considering all the facts and circumstances sorrounding the case, the three sisters had the purpose to
engage in real estate transactions for monetary gain and then divide the same among themselves; that they contributed to a common fund
which they invested in a series of transactions; that the properties bought with this common fund had been under the management of one
person with full power to lease, to collect rents, issue receipts, bring suits, sign letters and contracts, etc., in such a manner that the affairs
relative to said properties have been handled as if the same belonged to a corporation or business enterprise operated for profit; and that the
said sisters had the intention to constitute a partnership within the meaning of the tax law. Said sisters in their appeal insisted that they were
mere co-owners, not co-partners, for the reason that their acts did not create a personality independent of them, and that some of the
characteristics of partnerships were absent, but we held that when the Tax Code includes "partnerships" among the entities subject to the tax
on corporations, it must refer to organizations which are not necessarily partnerships in the technical sense of the term, and that furthermore,
said law defined the term "corporation" as including partnerships no matter how created or organized, thereby indicating that "a joint venture
need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one
could be deemed constituted for purposes of the tax on corporations"; that besides, said section 84 (b) provides that the term "corporation"
includes "joint accounts" (cuentas en participacion) and "associations", none of which has a legal personality independent of that of its
members. The decision cites 7A Merten's Law of Federal Income Taxation.
In the present case, the two companies contributed money to a common fund to pay the sole general manager, the accounts and office
personnel attached to the office of said manager, as well as for the maintenance and operation of a common maintenance and repair shop.
Said common fund was also used to buy spare parts, and equipment for both companies, including tires. Said common fund was also used to
pay all the salaries of the personnel of both companies, such as drivers, conductors, helpers and mechanics, and at the end of each year, the
gross income or receipts of both companies were merged, and after deducting therefrom the gross expenses of the two companies, also
merged, the net income was determined and divided equally between them, wholly and utterly disregarding the expenses incurred in the
maintenance and operation of each company and of the individual income of said companies.
From the standpoint of the income tax law, this procedure and practice of determining the net income of each company was arbitrary and
unwarranted, disregarding as it did the real facts in the case. There can be no question that the receipts and gross expenses of two, distinct
and separate companies operating different lines and in some cases, different territories, and different equipment and personnel at least in
value and in the amount of salaries, can at the end of each year be equal or even approach equality. Those familiar with the operation of the
business of land transportation can readily see that there are many factors that enter into said operation. Much depends upon the number of
lines operated and the length of each line, including the number of trips made each day. Some lines are profitable, others break above even,
while still others are operated at a loss, at least for a time, depending, of course, upon the volume of traffic, both passenger and freight. In
some lines, the operator may enjoy a more or less exclusive exclusive operation, while in others, the competition is intense, sometimes even
what they call "cutthroat competition". Sometimes, the operator is involved in litigation, not only as the result of money claims based on
physical injuries ar deaths occassioned by accidents or collisions, but litigations before the Public Service Commission, initiated by the
operator itself to acquire new lines or additional service and equipment on the lines already existing, or litigations forced upon said operator by
its competitors. Said litigation causes expense to the operator. At other times, operator is denounced by competitors before the Public Service
Commission for violation of its franchise or franchises, for making unauthorized trips, for temporary abandonement of said lines or of
scheduled trips, etc. In view of this, and considering that the Batangas Transportation and the Laguna Bus operated different lines, sometimes
in different provinces or territories, under different franchises, with different equipment and personnel, it cannot possibly be true and correct to
say that the end of each year, the gross receipts and income in the gross expenses of two companies are exactly the same for purposes of
the payment of income tax. What was actually done in this case was that, although no legal personality may have been created by the Joint
Emergency Operation, nevertheless, said Joint Emergency Operation joint venture, or joint management operated the business affairs of the
two companies as though they constituted a single entity, company or partnership, thereby obtaining substantial economy and profits in the
operation.
For the foregoing reasons, and in the light of our ruling in the Evangelista vs. Collector of Internal Revenue case, supra, we believe and hold
that the Joint Emergency Operation or sole management or joint venture in this case falls under the provisions of section 84 (b) of the Internal
Revenue Code, and consequently, it is liable to income tax provided for in section 24 of the same code.
The second important question to determine is whether or not the Collector of Internal Revenue, after appeal from his decision to the Court of
Tax Appeals has been perfected, and after the Tax Court Appeals has acquired jurisdiction over the appeal, but before the Collector has filed
his answer with the court, may still modify his assessment, subject of the appeal, by increasing the same. This legal point, interesting and vital
to the interests of both the Government and the taxpayer, provoked considerable discussion among the members of this Tribunal, a minority of
which the writer of this opinion forms part, maintaining that for the information and guidance of the taxpayer, there should be a definite and
final assessment on which he can base his decision whether or not to appeal; that when the assessment is appealed by the taxpayer to the
Court of Tax Appeals, the collector loses control and jurisdiction over the same, the jurisdiction being transferred automatically to the Tax
Court, which has exclusive appellate jurisdiction over the same; that the jurisdiction of the Tax Court is not revisory but only appellate, and
therefore, it can act only upon the amount of assessment subject of the appeal to determine whether it is valid and correct from the standpoint
of the taxpayer-appellant; that the Tax Court may only correct errors committed by the Collector against the taxpayer, but not those committed
in his favor, unless the Government itself is also an appellant; and that unless this be the rule, the Collector of Internal Revenue and his
agents may not exercise due care, prudence and pay too much attention in making tax assessments, knowing that they can at any time
correct any error committed by them even when due to negligence, carelessness or gross mistake in the interpretation or application of the tax
law, by increasing the assessment, naturally to the prejudice of the taxpayer who would not know when his tax liability has been completely
and definitely met and complied with, this knowledge being necessary for the wise and proper conduct and operation of his business; and that
lastly, while in the United States of America, on appeal from the decision of the Commissioner of Internal Revenue to the Board or Court of
Tax Appeals, the Commissioner may still amend or modify his assessment, even increasing the same the law in that jurisdiction expressly
authorizes the Board or Court of Tax Appeals to redetermine and revise the assessment appealed to it.
The majority, however, holds, not without valid arguments and reasons, that the Government is not bound by the errors committed by its
agents and tax collectors in making tax assessments, specially when due to a misinterpretation or application of the tax laws, more so when
done in good faith; that the tax laws provide for a prescriptive period within which the tax collectors may make assessments and
reassessments in order to collect all the taxes due to the Government, and that if the Collector of Internal Revenue is not allowed to amend his
assessment before the Court of Tax Appeals, and since he may make a subsequent reassessment to collect additional sums within the same
subject of his original assessment, provided it is done within the prescriptive period, that would lead to multiplicity of suits which the law does
not encourage; that since the Collector of Internal Revenue, in modifying his assessment, may not only increase the same, but may also
reduce it, if he finds that he has committed an error against the taxpayer, and may even make refunds of amounts erroneously and illegally
collected, the taxpayer is not prejudiced; that the hearing before the Court of Tax Appeals partakes of a trial de novoand the Tax Court is
authorized to receive evidence, summon witnesses, and give both parties, the Government and the taxpayer, opportunity to present and argue
their sides, so that the true and correct amount of the tax to be collected, may be determined and decided, whether resulting in the increase or
reduction of the assessment appealed to it. The result is that the ruling and doctrine now being laid by this Court is, that pending appeal before
the Court of Tax Appeals, the Collector of Internal Revenue may still amend his appealed assessment, as he has done in the present case.
There is a third question raised in the appeal before the Tax Court and before this Tribunal, namely, the liability of the two respondent
transportation companies for 25 per cent surcharge due to their failure to file an income tax return for the Joint Emergency Operation, which
we hold to be a corporation within the meaning of the Tax Code. We understand that said 25 per cent surcharge is included in the assessment
of P148,890.14. The surcharge is being imposed by the Collector under the provisions of Section 72 of the Tax Code, which read as follows:
The Collector of Internal Revenue shall assess all income taxes. In case of willful neglect to file the return or list within the time
prescribed by law, or in case a false or fraudulent return or list is willfully made the collector of internal revenue shall add to the tax or
to the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud, a
surcharge of fifty per centum of the amount of such tax or deficiency tax. In case of any failure to make and file a return list within the
time prescribed by law or by the Collector or other internal revenue officer, not due to willful neglect, the Collector, shall add to the tax
twenty-five per centum of its amount, except that, when the return is voluntarily and without notice from the Collector or other officer
filed after such time, it is shown that the failure was due to a reasonable cause, no such addition shall be made to the tax. The
amount so added to any tax shall be collected at the same time in the same manner and as part of the tax unless the tax has been
paid before the discovery of the neglect, falsity, or fraud, in which case the amount so added shall be collected in the same manner
as the tax.
We are satisfied that the failure to file an income tax return for the Joint Emergency Operation was due to a reasonable cause, the honest
belief of respondent companies that there was no such corporation within the meaning of the Tax Code, and that their separate income tax
return was sufficient compliance with the law. That this belief was not entirely without foundation and that it was entertained in good faith, is
shown by the fact that the Court of Tax Appeals itself subscribed to the idea that the Joint Emergency Operation was not a corporation, and so
sustained the contention of respondents. Furthermore, there are authorities to the effect that belief in good faith, on advice of reputable tax
accountants and attorneys, that a corporation was not a personal holding company taxable as such constitutes "reasonable cause" for failure
to file holding company surtax returns, and that in such a case, the imposition of penalties for failure to file holding company surtax returns,
and that in such a case, the imposition of penalties for failure to file return is not warranted 1
In view of the foregoing, and with the reversal of the appealed decision of the Court of Tax Appeals, judgment is hereby rendered, holding that
the Joint Emergency Operation involved in the present is a corporation within the meaning of section 84 (b) of the Internal Revenue Code, and
so is liable to incom tax under section 24 of the code; that pending appeal in the Court of Tax Appeals of an assessment made by the
Collector of Internal Revenue, the Collector, pending hearing before said court, may amend his appealed assessment and include the
amendment in his answer before the court, and the latter may on the basis of the evidence presented before it, redetermine the assessment;
that where the failure to file an income tax return for and in behalf of an entity which is later found to be a corporation within the meaning of
section 84 (b) of the Tax Code was due to a reasonable cause, such as an honest belief based on the advice of its attorneys and accountants,
a penalty in the form of a surcharge should not be imposed and collected. The respondents are therefore ordered to pay the amount of the
reassessment made by the Collector of Internal Revenue before the Tax Court, minus the amount of 25 per cent surcharge. No costs.
Bengzon, Paras, C.J., Padilla, Labrador, Concepcion, Reyes, J.B.L., Endencia, and Felix, JJ., concur.
Reyes, A. J., concurs in the result.
G.R. No. L-19342 May 25, 1972
LORENZO T. OA and HEIRS OF JULIA BUALES, namely: RODOLFO B. OA, MARIANO B. OA, LUZ B. OA, VIRGINIA B. OA
and LORENZO B. OA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and Special Attorney Purificacion Ureta for
respondent.

BARREDO, J.:p
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as above, holding that petitioners have
constituted an unregistered partnership and are, therefore, subject to the payment of the deficiency corporate income taxes assessed against
them by respondent Commissioner of Internal Revenue for the years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and
1% monthly interest from December 15, 1958, subject to the provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by
Section 8 of Republic Act No. 2343 and the costs of the suit,1 as well as the resolution of said court denying petitioners' motion for
reconsideration of said decision.
The facts are stated in the decision of the Tax Court as follows:
Julia Buales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oa and her five children. In 1948,
Civil Case No. 4519 was instituted in the Court of First Instance of Manila for the settlement of her estate. Later, Lorenzo T.
Oa the surviving spouse was appointed administrator of the estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.). On
April 14, 1949, the administrator submitted the project of partition, which was approved by the Court on May 16, 1949 (See
Exhibit K). Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all surnamed Oa, were still minors when the
project of partition was approved, Lorenzo T. Oa, their father and administrator of the estate, filed a petition in Civil Case
No. 9637 of the Court of First Instance of Manila for appointment as guardian of said minors. On November 14, 1949, the
Court appointed him guardian of the persons and property of the aforenamed minors (See p. 3, BIR rec.).
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs have undivided one-half (1/2) interest in
ten parcels of land with a total assessed value of P87,860.00, six houses with a total assessed value of P17,590.00 and an
undetermined amount to be collected from the War Damage Commission. Later, they received from said Commission the
amount of P50,000.00, more or less. This amount was not divided among them but was used in the rehabilitation of
properties owned by them in common (t.s.n., p. 46). Of the ten parcels of land aforementioned, two were acquired after the
death of the decedent with money borrowed from the Philippine Trust Company in the amount of P72,173.00 (t.s.n., p. 24;
Exhibit 3, pp. 31-34 BIR rec.).
The project of partition also shows that the estate shares equally with Lorenzo T. Oa, the administrator thereof, in the
obligation of P94,973.00, consisting of loans contracted by the latter with the approval of the Court (see p. 3 of Exhibit K; or
see p. 74, BIR rec.).
Although the project of partition was approved by the Court on May 16, 1949, no attempt was made to divide the properties
therein listed. Instead, the properties remained under the management of Lorenzo T. Oa who used said properties in
business by leasing or selling them and investing the income derived therefrom and the proceeds from the sales thereof in
real properties and securities. As a result, petitioners' properties and investments gradually increased from P105,450.00 in
1949 to P480,005.20 in 1956 as can be gleaned from the following year-end balances:
Year Investment Land Building
Account Account Account
1949 P87,860.00 P17,590.00
1950 P24,657.65 128,566.72 96,076.26
1951 51,301.31 120,349.28 110,605.11
1952 67,927.52 87,065.28 152,674.39
1953 61,258.27 84,925.68 161,463.83
1954 63,623.37 99,001.20 167,962.04
1955 100,786.00 120,249.78 169,262.52
1956 175,028.68 135,714.68 169,262.52
(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)
From said investments and properties petitioners derived such incomes as profits from installment sales of subdivided lots,
profits from sales of stocks, dividends, rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said
incomes are recorded in the books of account kept by Lorenzo T. Oa where the corresponding shares of the petitioners in
the net income for the year are also known. Every year, petitioners returned for income tax purposes their shares in the net
income derived from said properties and securities and/or from transactions involving them (Exhibit 3, supra; t.s.n., pp. 25-
26). However, petitioners did not actually receive their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The
income was always left in the hands of Lorenzo T. Oa who, as heretofore pointed out, invested them in real properties and
securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).
On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided that petitioners formed an
unregistered partnership and therefore, subject to the corporate income tax, pursuant to Section 24, in relation to Section
84(b), of the Tax Code. Accordingly, he assessed against the petitioners the amounts of P8,092.00 and P13,899.00 as
corporate income taxes for 1955 and 1956, respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR rec.).
Petitioners protested against the assessment and asked for reconsideration of the ruling of respondent that they have
formed an unregistered partnership. Finding no merit in petitioners' request, respondent denied it (See Exhibit 17, p. 86, BIR
rec.). (See pp. 1-4, Memorandum for Respondent, June 12, 1961).
The original assessment was as follows:
1955
Net income as per investigation ................ P40,209.89

Income tax due thereon ............................... 8,042.00


25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50
1956
Net income as per investigation ................ P69,245.23
Income tax due thereon ............................... 13,849.00
25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25% surcharge was eliminated in line with the ruling of the Supreme Court
in Collector v. Batangas Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so that the questioned assessment refers solely
to the income tax proper for the years 1955 and 1956 and the "Compromise for non-filing," the latter item obviously referring
to the compromise in lieu of the criminal liability for failure of petitioners to file the corporate income tax returns for said
years. (See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED AN UNREGISTERED
PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE CO-OWNERS OF THE
PROPERTIES INHERITED AND (THE) PROFITS DERIVED FROM TRANSACTIONS THEREFROM (sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE FOR CORPORATE INCOME
TAXES FOR 1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED PARTNERSHIP, THE COURT
OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE AN UNREGISTERED PARTNERSHIP
TO THE EXTENT ONLY THAT THEY INVESTED THE PROFITS FROM THE PROPERTIES OWNED IN COMMON AND
THE LOANS RECEIVED USING THE INHERITED PROPERTIES AS COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS
ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS PAID BY THE PETITIONERS AS INDIVIDUAL INCOME TAX ON
THEIR RESPECTIVE SHARES OF THE PROFITS ACCRUING FROM THE PROPERTIES OWNED IN COMMON, FROM
THE DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP.
In other words, petitioners pose for our resolution the following questions: (1) Under the facts found by the Court of Tax Appeals, should
petitioners be considered as co-owners of the properties inherited by them from the deceased Julia Buales and the profits derived from
transactions involving the same, or, must they be deemed to have formed an unregistered partnership subject to tax under Sections 24 and
84(b) of the National Internal Revenue Code? (2) Assuming they have formed an unregistered partnership, should this not be only in the
sense that they invested as a common fund the profits earned by the properties owned by them in common and the loans granted to them
upon the security of the said properties, with the result that as far as their respective shares in the inheritance are concerned, the total income
thereof should be considered as that of co-owners and not of the unregistered partnership? And (3) assuming again that they are taxable as
an unregistered partnership, should not the various amounts already paid by them for the same years 1955 and 1956 as individual income
taxes on their respective shares of the profits accruing from the properties they owned in common be deducted from the deficiency corporate
taxes, herein involved, assessed against such unregistered partnership by the respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas petitioners' predecessor in interest died way back on
March 23, 1944 and the project of partition of her estate was judicially approved as early as May 16, 1949, and presumably petitioners have
been holding their respective shares in their inheritance since those dates admittedly under the administration or management of the head of
the family, the widower and father Lorenzo T. Oa, the assessment in question refers to the later years 1955 and 1956. We believe this point
to be important because, apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal Revenue did treat
petitioners as co-owners, not liable to corporate tax, and it was only from 1955 that he considered them as having formed an unregistered
partnership. At least, there is nothing in the record indicating that an earlier assessment had already been made. Such being the case, and
We see no reason how it could be otherwise, it is easily understandable why petitioners' position that they are co-owners and not unregistered
co-partners, for the purposes of the impugned assessment, cannot be upheld. Truth to tell, petitioners should find comfort in the fact that they
were not similarly assessed earlier by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased among themselves pursuant to the project of partition
approved in 1949, "the properties remained under the management of Lorenzo T. Oa who used said properties in business by leasing or
selling them and investing the income derived therefrom and the proceed from the sales thereof in real properties and securities," as a result
of which said properties and investments steadily increased yearly from P87,860.00 in "land account" and P17,590.00 in "building account" in
1949 to P175,028.68 in "investment account," P135.714.68 in "land account" and P169,262.52 in "building account" in 1956. And all these
became possible because, admittedly, petitioners never actually received any share of the income or profits from Lorenzo T. Oa and instead,
they allowed him to continue using said shares as part of the common fund for their ventures, even as they paid the corresponding income
taxes on the basis of their respective shares of the profits of their common business as reported by the said Lorenzo T. Oa.
It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves to holding the properties inherited by
them. Indeed, it is admitted that during the material years herein involved, some of the said properties were sold at considerable profit, and
that with said profit, petitioners engaged, thru Lorenzo T. Oa, in the purchase and sale of corporate securities. It is likewise admitted that all
the profits from these ventures were divided among petitioners proportionately in accordance with their respective shares in the inheritance. In
these circumstances, it is Our considered view that from the moment petitioners allowed not only the incomes from their respective shares of
the inheritance but even the inherited properties themselves to be used by Lorenzo T. Oa as a common fund in undertaking several
transactions or in business, with the intention of deriving profit to be shared by them proportionally, such act was tantamonut to actually
contributing such incomes to a common fund and, in effect, they thereby formed an unregistered partnership within the purview of the above-
mentioned provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the heirs can be considered as co-owners rather than unregistered
co-partners within the contemplation of our corporate tax laws aforementioned. Before the partition and distribution of the estate of the
deceased, all the income thereof does belong commonly to all the heirs, obviously, without them becoming thereby unregistered co-partners,
but it does not necessarily follow that such status as co-owners continues until the inheritance is actually and physically distributed among the
heirs, for it is easily conceivable that after knowing their respective shares in the partition, they might decide to continue holding said shares
under the common management of the administrator or executor or of anyone chosen by them and engage in business on that basis. Withal, if
this were to be allowed, it would be the easiest thing for heirs in any inheritance to circumvent and render meaningless Sections 24 and 84(b)
of the National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding the appellants therein to be unregistered
co-partners for tax purposes, that their common fund "was not something they found already in existence" and that "it was not a property
inherited by them pro indiviso," but it is certainly far fetched to argue therefrom, as petitioners are doing here, that ergo, in all instances where
an inheritance is not actually divided, there can be no unregistered co-partnership. As already indicated, for tax purposes, the co-ownership of
inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or the incomes
derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the
inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the
corresponding testate or intestate proceeding. The reason for this is simple. From the moment of such partition, the heirs are entitled already
to their respective definite shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively his own
without the intervention of the other heirs, and, accordingly he becomes liable individually for all taxes in connection therewith. If after such
partition, he allows his share to be held in common with his co-heirs under a single management to be used with the intent of making profit
thereby in proportion to his share, there can be no doubt that, even if no document or instrument were executed for the purpose, for tax
purposes, at least, an unregistered partnership is formed. This is exactly what happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing that: "The sharing of gross returns does not
of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which
the returns are derived," and, for that matter, on any other provision of said code on partnerships is unavailing. In Evangelista, supra, this
Court clearly differentiated the concept of partnerships under the Civil Code from that of unregistered partnerships which are considered as
"corporations" under Sections 24 and 84(b) of the National Internal Revenue Code. Mr. Justice Roberto Concepcion, now Chief Justice,
elucidated on this point thus:
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct and different from
"partnerships". When our Internal Revenue Code includes "partnerships" among the entities subject to the tax on
"corporations", said Code must allude, therefore, to organizations which are not necessarily "partnerships", in the technical
sense of the term. Thus, for instance, section 24 of said Code exempts from the aforementioned tax "duly registered general
partnerships," which constitute precisely one of the most typical forms of partnerships in this jurisdiction. Likewise, as
defined in section 84(b) of said Code, "the term corporation includes partnerships, no matter how created or organized."
This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in
confirmity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for
purposes of the tax on corporation. Again, pursuant to said section 84(b),the term "corporation" includes, among others,
"joint accounts,(cuentas en participacion)" and "associations", none of which has a legal personality of its own, independent
of that of its members. Accordingly, the lawmaker could not have regarded that personality as a condition essential to the
existence of the partnerships therein referred to. In fact, as above stated, "duly registered general co-partnerships" which
are possessed of the aforementioned personality have been expressly excluded by law (sections 24 and 84[b]) from the
connotation of the term "corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own concept of a partnership. Under the term "partnership" it includes not only a
partnership as known in common law but, as well, a syndicate, group, pool, joint venture, or other
unincorporated organization which carries on any business, financial operation, or venture, and which is
not, within the meaning of the Code, a trust, estate, or a corporation. ... . (7A Merten's Law of Federal
Income Taxation, p. 789; emphasis ours.)
The term "partnership" includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is carried on. ... .
(8 Merten's Law of Federal Income Taxation, p. 562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal Revenue Code includes these partnerships with the
exception only of duly registered general copartnerships within the purview of the term "corporation." It is, therefore, clear
to our mind that petitioners herein constitute a partnership, insofar as said Code is concerned, and are subject to the income
tax for corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue, G. R. Nos. L-24020-21, July 29, 1968, 24
SCRA 198, wherein the Court ruled against a theory of co-ownership pursued by appellants therein.
As regards the second question raised by petitioners about the segregation, for the purposes of the corporate taxes in question, of their
inherited properties from those acquired by them subsequently, We consider as justified the following ratiocination of the Tax Court in denying
their motion for reconsideration:
In connection with the second ground, it is alleged that, if there was an unregistered partnership, the holding should be
limited to the business engaged in apart from the properties inherited by petitioners. In other words, the taxable income of
the partnership should be limited to the income derived from the acquisition and sale of real properties and corporate
securities and should not include the income derived from the inherited properties. It is admitted that the inherited properties
and the income derived therefrom were used in the business of buying and selling other real properties and corporate
securities. Accordingly, the partnership income must include not only the income derived from the purchase and sale of
other properties but also the income of the inherited properties.
Besides, as already observed earlier, the income derived from inherited properties may be considered as individual income of the respective
heirs only so long as the inheritance or estate is not distributed or, at least, partitioned, but the moment their respective known shares are
used as part of the common assets of the heirs to be used in making profits, it is but proper that the income of such shares should be
considered as the part of the taxable income of an unregistered partnership. This, We hold, is the clear intent of the law.
Likewise, the third question of petitioners appears to have been adequately resolved by the Tax Court in the aforementioned resolution
denying petitioners' motion for reconsideration of the decision of said court. Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this Honorable Court that the herein petitioners have formed an
unregistered partnership and, therefore, have to be taxed as such, it might be recalled that the petitioners
in their individual income tax returns reported their shares of the profits of the unregistered partnership.
We think it only fair and equitable that the various amounts paid by the individual petitioners as income tax
on their respective shares of the unregistered partnership should be deducted from the deficiency income
tax found by this Honorable Court against the unregistered partnership. (page 7, Memorandum for the
Petitioner in Support of Their Motion for Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that the taxable income of the partnership must be reduced by the amounts of
income tax paid by each petitioner on his share of partnership profits. This is not correct; rather, it should be the other way
around. The partnership profits distributable to the partners (petitioners herein) should be reduced by the amounts of income
tax assessed against the partnership. Consequently, each of the petitioners in his individual capacity overpaid his income
tax for the years in question, but the income tax due from the partnership has been correctly assessed. Since the individual
income tax liabilities of petitioners are not in issue in this proceeding, it is not proper for the Court to pass upon the same.
Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have paid as individual income tax cannot be
credited as part payment of the taxes herein in question. It is argued that to sanction the view of the Tax Court is to oblige petitioners to pay
double income tax on the same income, and, worse, considering the time that has lapsed since they paid their individual income taxes, they
may already be barred by prescription from recovering their overpayments in a separate action. We do not agree. As We see it, the case of
petitioners as regards the point under discussion is simply that of a taxpayer who has paid the wrong tax, assuming that the failure to pay the
corporate taxes in question was not deliberate. Of course, such taxpayer has the right to be reimbursed what he has erroneously paid, but the
law is very clear that the claim and action for such reimbursement are subject to the bar of prescription. And since the period for the recovery
of the excess income taxes in the case of herein petitioners has already lapsed, it would not seem right to virtually disregard prescription
merely upon the ground that the reason for the delay is precisely because the taxpayers failed to make the proper return and payment of the
corporate taxes legally due from them. In principle, it is but proper not to allow any relaxation of the tax laws in favor of persons who are not
exactly above suspicion in their conduct vis-a-vis their tax obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is affirm with costs against petitioners.
Makalintal, Zaldivar, Fernando, Makasiar and Antonio, JJ., concur.
Reyes, J.B.L. and Teehankee, JJ., concur in the result.
Castro, J., took no part.
Concepcion, C.J., is on leave.
G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS, brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
Demosthenes B. Gadioma for petitioners.

AQUINO, J.:
This case is about the income tax liability of four brothers and sisters who sold two parcels of land which they had acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of 1,124 and 963 square meters located
at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children, the petitioners, to enable them to build their
residences. The company sold the two lots to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens
titles issued to them would show that they were co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City Securities Corporation and Olga
Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived from the sale a total profit of P134,341.88 or P33,584 for each of
them. They treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of Internal Revenue required the four
petitioners to pay corporate income tax on the total profit of P134,336 in addition to individual income tax on their shares thereof He assessed
P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable in full (not a mere capital gain of
which is taxable) and required them to pay deficiency income taxes aggregating P56,707.20 including the 50% fraud surcharge and the
accumulated interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on their profit of P134,336, in
addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or joint venture within the meaning of
sections 24(a) and 84(b) of the Tax Code (Collector of Internal Revenue vs. Batangas Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin dissented. Hence, the instant
appeal.
We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the Civil Code simply because they
allegedly contributed P178,708.12 to buy the two lots, resold the same and divided the profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and confirm the dictum that
the power to tax involves the power to destroy. That eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To consider them as partners would
obliterate the distinction between a co-ownership and a partnership. The petitioners were not engaged in any joint venture by reason of that
isolated transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots
because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit
was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. It had to be terminated
sooner or later. Castan Tobeas says:
Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad?
El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen, en que la sociedad presupone
necesariamente la convencion, mentras que la comunidad puede existir y existe ordinariamente sin ela; y por razon del fin
objecto, en que el objeto de la sociedad es obtener lucro, mientras que el de la indivision es solo mantener en su integridad
la cosa comun y favorecer su conservacion.
Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en nuestro Derecho positive se
ofrecen a veces dificultades al tratar de fijar la linea divisoria entre comunidad de bienes y contrato de sociedad, la moderna
orientacion de la doctrina cientifica seala como nota fundamental de diferenciacion aparte del origen de fuente de que
surgen, no siempre uniforme, la finalidad perseguida por los interesados: lucro comun partible en la sociedad, y mera
conservacion y aprovechamiento en la comunidad. (Derecho Civil Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the returns are derived". There must be an
unmistakable intention to form a partnership or joint venture.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons contributed small amounts to
purchase a two-peso sweepstakes ticket with the agreement that they would divide the prize The ticket won the third prize of P50,000. The 15
persons were held liable for income tax as an unregistered partnership.
The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. Thus, in Oa vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.We find that the case at bar is fundamentally similar to the De Leon case.
Thus, like the De Leon heirs, the Longa heirs inherited the 'hacienda' in question pro-indiviso from their deceased parents;
they did not contribute or invest additional ' capital to increase or expand the inherited properties; they merely continued
dedicating the property to the use to which it had been put by their forebears; they individually reported in their tax returns
their corresponding shares in the income and expenses of the 'hacienda', and they continued for many years the status of
co-ownership in order, as conceded by respondent, 'to preserve its (the 'hacienda') value and to continue the existing
contractual relations with the Central Azucarera de Bais for milling purposes. Longa vs. Aranas, CTA Case No. 653, July 31,
1963).
All co-ownerships are not deemed unregistered pratnership.Co-Ownership who own properties which produce income
should not automatically be considered partners of an unregistered partnership, or a corporation, within the purview of the
income tax law. To hold otherwise, would be to subject the income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does not produce an income at
all, it is not subject to any kind of income tax, whether the income tax on individuals or the income tax on corporation. (De
Leon vs. CI R, CTA Case No. 738, September 11, 1961, cited in Araas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp.
77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial settlement the co-heirs used the
inheritance or the incomes derived therefrom as a common fund to produce profits for themselves, it was held that they were taxable as an
unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father and son purchased a lot and building,
entrusted the administration of the building to an administrator and divided equally the net income, and from Evangelista vs. Collector of
Internal Revenue, 102 Phil. 140, where the three Evangelista sisters bought four pieces of real property which they leased to various tenants
and derived rentals therefrom. Clearly, the petitioners in these two cases had formed an unregistered partnership.
In the instant case, what the Commissioner should have investigated was whether the father donated the two lots to the petitioners and
whether he paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging this matter. It might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No costs.
SO ORDERED.
Abad Santos, Escolin, Cuevas and Alampay, JJ., concur.
Concepcion, Jr., is on leave.
G.R. No. 195909 : September 26, 2012
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. ST. LUKE'S MEDICAL CENTER, INC.,Respondent.
G.R. No. 195960
ST. LUKE'S MEDICAL CENTER, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE,Respondent.
DECISION
CARPIO, J.:
The Case
These are consolidated1rll petitions for review on certiorari under Rule Medical Center, Inc. is ORDERED TO PAY the deficiency income
tax in 1998 based on the 10% preferential income tax rate under Section 27(8) of the National Internal Revenue Code. However, it is not liable
for surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National Internal Revenue Code. All other parts
of the Decision and Resolution of the Court of Tax Appeals are AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1, Rule 45 of the Rules of
Court.rllbrr
SO ORDERED.
G.R. No. 203514, February 13, 2017
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. ST. LUKE'S MEDICAL CENTER, INC., Respondent.
DECISION
DEL CASTILLO, J.:
The doctrine of stare decisis dictates that "absent any powerful countervailing considerations, like cases ought to be decided alike." 1

This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the May 9, 2012 Decision 3 and the September 17, 2012
Resolution4 of the Court of Tax Appeals (CTA) in CTA EB Case No. 716.

Factual Antecedents

On December 14, 2007, respondent St. Luke's Medical Center, Inc. (SLIVIC) received from the Large Taxpayers Service-Documents
Processing and Quality Assurance Division of the Bureau of Internal Revenue (BIR) Audit Results/Assessment Notice Nos. QA-07-
0000965 and QA-07-000097,6 assessing respondent SLMC deficiency income tax under Section 27(B)7 of the 1997 National Internal Revenue
Code (NIRC), as amended, for taxable year 2005 in the amount of P78,617,434.54 and for taxable year 2006 in the amount of
P57,119,867.33.

On January 14, 2008, SLMC filed with petitioner Commissioner of Internal Revenue (CIR) an administrative protest 8 assailing the
assessments. SLMC claimed that as a non-stock, non-profit charitable and social welfare organization under Section 30(E) and (G) 9 of the
1997 NIRC, as amended, it is exempt from paying income tax.

On April 25, 2008, SLMC received petitioner CIR's Final Decision on the Disputed Assessment10 dated April 9, 2008 increasing the deficiency
income for the taxable year 2005 tax to P82,419,522.21 and for the taxable year 2006 to P60,259,885.94, computed as
follows:ChanRoblesVirtualawlibrary
For Taxable Year 2005:chanRoblesvirtualLawlibrary
ASSESSMENT NO. QA-07-000096
PARTICULARS AMOUNT
Sales/Revenues/Receipts/Fees P3,623,511,616.00
Less: Cost of Sales/Services 2,643,049,769.00
Gross Income From Operation 980,461,847.00
Add: Non-Operating & Other Income -
Total Gross Income 980,461,847.00
Less: Deductions 481,266,883.00
Net Income Subject to Tax 499,194,964.00
X Tax Rate 10%
Tax Due 49,919,496.40
Less: Tax Credits -
Deficiency Income Tax 49,919,496.40
Add: Increments
25% Surcharge 12,479,874.10
20% Interest Per Annum (4/15/06-4/15/08) 19,995,151.71
Compromise Penalty for Late Payment 25,000.00
Total increments 32,500,025.81
Total Amount Due P82,419,522.21
For Taxable Year 2006:chanRoblesvirtualLawlibrary
ASSESSMENT NO. QA-07-000097
PARTICULARS [AMOUNT]
Sales/Revenues/Receipts/Fees P3,815,922,240.00
Less: Cost of Sales/Service 2,760,518,437.00
Gross Income From Operation 1,055,403,803.00
Add: Non-Operating & Other Income -
Total Gross Income 1,055,403,803.00
Less: Deductions 640,147,719.00
Net Income Subject to Tax 415,256,084.00
X Tax Rate 10%
Tax Due 41,525,608.40
Less: Tax Credits -
Deficiency Income Tax 41,525,608.40
Add: Increments -
25% Surcharge 10,381,402.10
20% Interest Per Annum (4/15/07-4/15/08) 8,327,875.44
Compromise Penalty for Late Payment 25,000.00
Total increments 18,734,277.54
Total Amount Due P60,259,885.9411
Aggrieved, SLMC elevated the matter to the CTA via a Petition for Review,12 docketed as CTA Case No. 7789.

Ruling of the Court of Tax Appeals Division

On August 26, 2010, the CTA Division rendered a Decision 13 finding SLMC not liable for deficiency income tax under Section 27(B) of the
1997 NIRC, as amended, since it is exempt from paying income tax under Section 30(E) and (G) of the same Code.
Thus:ChanRoblesVirtualawlibrary
WHEREFORE, premises considered, the Petition for Review is hereby GRANTED. Accordingly, Audit Results/Assessment Notice Nos. QA-
07-000096 and QA-07-000097, assessing petitioner for alleged deficiency income taxes for the taxable years 2005 and 2006, respectively, are
hereby CANCELLED and SET ASIDE.

SO ORDERED.14chanroblesvirtuallawlibrary
CIR moved for reconsideration but the CTA Division denied the same in its December 28, 2010 Resolution. 15

This prompted CIR to file a Petition for Review16 before the CTA En Banc.

Ruling of the Court of Tax Appeals En Banc


On May 9, 2012, the CTA En Banc affirmed the cancellation and setting aside of the Audit Results/Assessment Notices issued against SLMC.
It sustained the findings of the CTA Division that SLMC complies with all the requisites under Section 30(E) and (G) of the 1997 NIRC and
thus, entitled to the tax exemption provided therein.17

On September 17, 2012, the CTA En Banc denied CIR's Motion for Reconsideration.
Issue

Hence, CIR filed the instant Petition under Rule 45 of the Rules of Court contending that the CTA erred in exempting SLMC from the payment
of income tax.

Meanwhile, on September 26, 2012, the Court rendered a Decision in G.R. Nos. 195909 and 195960, entitled Commissioner of Internal
Revenue v. St. Luke's Medical Center, Inc.,18 finding SLMC not entitled to the tax exemption under Section 30(E) and (G) of the NIRC of 1997
as it does not operate exclusively for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. Thus,
the Court disposed of the case in this manner:ChanRoblesVirtualawlibrary
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY GRANTED. The Decision of the Court of
Tax Appeals En Banc dated 19 November 2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St Luke's
Medical Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential income tax rate under Section
27(B) of the National h1ternal Revenue Code. However, it is not liable for surcharges and interest on such deficiency income tax under
Sections 248 and 249 of the National Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax Appeals are
AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section I, Rule 45 of the Rules of Court.

SO ORDERED.19chanroblesvirtuallawlibrary
Considering the foregoing, SLMC then filed a Manifestation and Motion20 informing the Court that on April 30, 2013, it paid the BIR the amount
of basic taxes due for taxable years 1998, 2000-2002, and 2004-2007, as evidenced by the payment confirmation21 from the BIR, and that it
did not pay any surcharge,

interest, and compromise penalty in accordance with the above-mentioned Decision of the Court. In view of the payment it made, SLMC
moved for the dismissal of the instant case on the ground of mootness.

CIR opposed the motion claiming that the payment confirmation submitted by SLMC is not a competent proof of payment as it is a mere
photocopy and does not even indicate the quarter/s and/or year/s said payment covers. 22

In reply,23 SLMC submitted a copy of the Certification24 issued by the Large Taxpayers Service of the BIR dated May 27, 2013, certifying that,
"[a]s far as the basic deficiency income tax for taxable years 2000, 2001, 2002, 2004, 2005, 2006, 2007 are concerned, this Office considers
the cases closed due to the payment made on April 30, 2013." SLMC likewise submitted a letter25 from the BIR dated November 26, 2013 with
attached Certification of Payment26 and application for abatement,27 which it earlier submitted to the Court in a related case, G.R. No. 200688,
entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.28

Thereafter, the parties submitted their respective memorandum.

CIR's Arguments

CIR argues that under the doctrine of stare decisis SLMC is subject to 10% income tax under Section 27(B) of the 1997 NIRC. 29 It likewise
asserts that SLMC is liable to pay compromise penalty pursuant to Section 248(A) 30 of the 1997 NIRC for failing to file its quarterly income tax
returns.31

As to the alleged payment of the basic tax, CIR contends that this does not render the instant case moot as the payment confirmation
submitted by SLMC is not a competent proof of payment of its tax liabilities. 32

SLMC's Arguments

SLMC, on the other hand, begs the indulgence of the Court to revisit its ruling in G.R. Nos. 195909 and 195960 (Commissioner of Internal
Revenue v. St. Luke's Medical Center, Inc.)33 positing that earning a profit by a charitable, benevolent hospital or educational institution does
not result in the withdrawal of its tax exempt privilege. 34 SLMC further claims that the income it derives from operating a hospital is not income
from "activities conducted for profit."35 Also, it maintains that in accordance with the ruling of the Court in G.R. Nos. 195909 and 195960
(Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.),36 it is not liable for compromise penalties.37

In any case, SLMC insists that the instant case should be dismissed in view of its payment of the basic taxes due for taxable years 1998,
2000-2002, and 2004-2007 to the BIR on April 30, 2013.38
Our Ruling

SLMC is liable for income tax under Section 27(B) of the 1997 NIRC insofar as its revenues from paying patients are concerned.

The issue of whether SLMC is liable for income tax under Section 27(B) of the 1997 NIRC insofar as its revenues from paying patients are
concerned has been settled in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.),39 where
the Court ruled that:ChanRoblesVirtualawlibrary
xxx We hold that Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E)
and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax
exemption. The effect of the introduction of Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-
profit educational institutions and proprietary non-profit hospitals, among the institutions covered by Section 30, to the 10% preferential rate
under Section 27(B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational institutions and (2)
proprietary non-profit hospitals. The only qualifications for hospitals are that they must be proprietary and non-profit. 'Proprietary' means
private, following the definition of a 'proprietary educational institution' as 'any private school maintained and administered by private
individuals or groups' with a government permit. 'Non-profit' means no net income or asset accrues to or benefits any member or specific
person, with all the net income or asset devoted to the institution's purposes and all its activities conducted not for profit.

'Non-profit' does not necessarily mean 'charitable.' In Collector of Internal Revenue v. Club Filipino, Inc. de Cebu, this Court considered as
non-profit a sports club organized for recreation and entertainment of its stockholders and members. The club was primarily funded by
membership fees and dues. If it had profits, they were used for overhead expenses and improving its golf course. The club was non-profit
because of its purpose and there was no evidence that it was engaged in a profit-making enterprise.

The sports club in Club Filipino, Inc. de Cebu may be non-profit, but it was not charitable. The Court defined 'charity' in Lung Center of the
Philippines v. Quezon City as 'a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by
bringing their minds and hearts under the influence of education or religion, by assisting them to establish themselves in life or [by] otherwise
lessening the burden of government.' A non-profit club for the benefit of its members fails this test. An organization may be considered as non-
profit if it does not distribute any part of its income to stockholders or members. However, despite its being a tax exempt institution, any
income such institution earns from activities conducted for profit is taxable, ad expressly provided in the last paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive test of charity in Lung Center. The issue in Lung Center
concerns exemption from real property tax and not income tax. However, it provides for the test of charity in our jurisdiction. Charity is
essentially a gift to an indefinite number of persons which lessens the burden of government. In other words, charitable institutions provide for
free goods and services to the public which would otherwise fall on the shoulders of government. Thus, as a matter of efficiency, the
government forgoes taxes which should have been spent to address public needs, because certain private entities already assume a part of
the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by the government is compensated by its
relief from doing public works which would have been funded by appropriations from the Treasury.

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a tax exemption are specified by the law
granting it. The power of Congress to tax implies the power to exempt from tax. Congress can create tax exemptions, subject to the
constitutional provision that '[n]o law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of
Congress.' The requirements for a tax exemption are strictly construed against tl1e taxpayer because an exemption restricts the collection of
taxes necessary for the existence of the government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution for the purpose of exemption from real
property taxes. This ruling uses the same premise as Hospital de San Juan and Jesus Sacred Heart College which says that receiving income
from paying patients does not destroy the charitable nature of a hospital.
As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives
income from paying patients, whether outpatient, or confined in the hospital, or receives subsidies from the government, so long as the money
received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the
persons managing or operating the institution.
For real property taxes, the incidental generation of income is permissible because the test of exemption is the use of the property. The
Constitution provides that '[c]haritable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation.' The test of exemption is not strictly a requirement on the intrinsic nature or character of the
institution. The test requires that the institution use property in a certain way, i.e., for a charitable purpose. Thus, the Court held that the Lung
Center of the Philippines did not lose its charitable character when it used a portion of its lot for commercial purposes. The effect of failing to
meet the use requirement is simply to remove from the tax exemption that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress decided to extend the exemption to
income taxes. However, the way Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the
Constitution. Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax. On the other hand, Section
28(3), Article VI of the Constitution does not define a charitable institution, but requires that the institution 'actually, directly and exclusively'
use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:chanRoblesvirtualLawlibrary

(1) A non-stock corporation or association;chanrobleslaw

(2) Organized exclusively for charitable purposes;chanrobleslaw

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted 'exclusively' for charitable purposes. The organization
of the institution refers to its corporate form, as shown by its articles of incorporation, by-laws and other constitutive documents. Section 30(E)
of the NIRC specifically requires that the corporation or association be non-stock, which is defined by the Corporation Code as 'one where no
part of its income is distributable as dividends to its members, trustees, or officers' and that any profit 'obtain[ed] as an incident to its
operations shall, whenever necessary or proper, be used tor the furtherance of the purpose or purposes for which the corporation was
organized.' However, under Lung Center, any profit by a charitable institution must not only be plowed back 'whenever necessary or proper,'
but must be 'devoted or used altogether to the charitable object which it is intended to achieve.'
The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the NIRC requires that these operations be
exclusive to charity. There is also a specific requirement that 'no part of [the] net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.' The use of lands, buildings and improvements of the institution is but a part of its
operations.

There is no dispute that St. Luke's is organized as a non-stock and non profit charitable institution. However, this does not automatically
exempt St Luke's from paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable
institution is not ipso facto tax exempt To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a
charitable institution use the property 'actually, directly and exclusively' for charitable purposes. To be exempt from income taxes, Section
30(E) of the NIRC requires that a charitable institution must be 'organized and operated exclusively' for charitable purposes. Likewise, to be
exempt from income taxes, Section 30(G) of the NIRC requires that the institution be 'operated exclusively' for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words 'organized and operated exclusively' by providing
that:ChanRoblesVirtualawlibrary
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from
any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income,
shall be subject to tax imposed under this Code.
In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts 'any' activity for profit, such activity is not
tax exempt even as its not-for-profit activities remain tax exempt. This paragraph qualifies the requirements in Section 30(E) that the [n]on-
stock corporation or association [must be] organized and operated exclusively for . . . charitable . . . purposes . . . It likewise qualifies the
requirement in Section 30(G) that the civic organization must be 'operated exclusively' for the promotion of social welfare.

Thus, even if the charitable institution must be 'organized and operated exclusively' for charitable purposes, it is nevertheless allowed to
engage in 'activities conducted for profit' without losing its tax exempt status for its not for profit activities. The only consequence is that the
'income of whatever kind and character' of a charitable institution 'from any of its activities conducted for profit, regardless of the disposition
made of such income, shall be subject to tax.' Prior to the introduction of Section 27(B), the tax rate on such income from for profit activities
was the ordinary corporate rate under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.

In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying patients. It cannot be disputed that a hospital which receives
approximately P1.73 billion from paying patients is not an institution 'operated exclusively' for charitable purposes. Clearly, revenues from
paying patients are income received from 'activities conducted for profit.' Indeed, St. Luke's admits that it derived profits from its paying
patients. St. Luke's declared P1,730,367,965 as 'Revenues from Services to Patients' in contrast to its 'Free Services' expenditure of
P218,187,498. In its Comment in G.R. No. 195909, St. Luke's showed the following 'calculation' to support its claim that 65.20% of its 'income
after expenses was allocated to free or charitable services' in 1998.
xxxx

In Lung Center, this Court declared:chanRoblesvirtualLawlibrary

'[e]xclusive' is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and 'exclusively' is
defined, 'in a manner to exclude; as enjoying a privilege exclusively.' ... The words 'dominant use' or 'principal use' cannot be substituted for
the words 'used exclusively' without doing violence to the Constitution and the law. Solely is synonymous with exclusively.
The Court cannot expand the meaning of the words 'operated exclusively' without violating the NIRC. Services to paying patients are activities
conducted for profit. They cannot be considered any other way. There is a 'purpose to make profit over and above the cost' of services. The
P1.73 billion total revenues :from paying patients is not even incidental to St. Luke's charity expenditure of P218,187,498 for non-paying
patients.

St Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating income in 1998. However, if a part of the remaining
34.80% of the operating income is reinvested in property, equipment or facilities used for services to paying and non-paying patients, then it
cannot be said that the income is 'devoted or used altogether to the charitable object which it is intended to achieve.' The income is plowed
back to the corporation not entirely for charitable purposes, but for profit as well. In any case, the last paragraph of Section 30 of the NIRC
expressly qualifies that income from activities for profit is taxable 'regardless of the disposition made of such income.'

Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase 'any activity conducted for profit.'
However, it quoted a deposition of Senator Mariano Jesus Cuenco, who was a member of the Committee of Conference for the Senate, which
introduced the phrase 'or from any activity conducted for profit.'
P. Cuando ha hablado de la Universidad de Santo Tomas que tiene un hospital, no cree Vd. que es una actividad esencial dicho hospital para
el funcionamiento del colegio de medicina de medicina de dicha universidad?
xxx xxx xxx

R. Si el hospital se limita a recibir enformos pobres, mi contestacion seria afirmativa; pero considerando que el hospital tiene cuartos de pago,
y a los mismos generalmente van enformos de buena posicion social economica, lo que se paga por estos enformos debe estar sujeto a
'income tax', y es una de las razones que hemos tenido para insertar las palabras o frase 'or from any activity conducted for profit.'
The question was whether having a hospital is essential to an educational institution like the College of Medicine of the University of Santo
Tomas. Senator Cuenco answered that if the hospital has paid rooms generally occupied by people of good economic standing, then it should
be subject to income tax. He said that this was one of the reasons Congress inserted the phrase 'or any activity conducted for profit.'

The question in Jesus Sacred Heart College involves an educational institution. However, it is applicable to charitable institutions because
Senator Cuenco's response shows an intent to focus on the activities of charitable institutions. Activities for profit should not escape the reach
of taxation. Being a non-stock and non-profit corporation does not, by this reason alone, completely exempt an institution from tax. An
institution cannot use its corporate form to prevent its profitable activities from being taxed.
The Court finds that St. Luke's is a corporation that is not 'operated exclusively' for charitable or social welfare purposes insofar as its
revenues from paying patients are C.Qncemed. This ruling is bacred not only on a strict interpretation of a provision granting tax exemption,
but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be 'operated
exclusively' for charitable or social welfare purposes to be completely exempt from income tax. An institution tmder Section 30(E) or (G) does
not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, tmder the last paragraph of
Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential tO% rate pursuant to Section
27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared from sharing in the expenses of
government and yet benefits from them. Tax exemptions for charitable institutions should therefore be limited to institutions beneficial to the
public and those which improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to the detriment of the
government and other taxpayers.

St. Luke's fails to meet the requirements tmder Section 30(E) and (G) of the NlRC to be completely tax exempt from all its income. However, it
remains a proprietary non-profit hospital tmder Section 27(B) of the NIRC as long as it does not distribute any of its profits to its members and
such profits are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax
rate of 10% on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 tmder Section 27(B) of the NIRC. However, St. Luke's has good reasons to rely
on the letter dated 6 June 1990 by the BIR, which opined that St. Luke's is 'a corporation for purely charitable and social welfare purposes' and
thus exempt from income tax. In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that 'good faith and honest
belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to implement the tax law, are
sufficient justification to delete the imposition of surcharges and interest.' 40chanroblesvirtuallawlibrary
A careful review of the pleadings reveals that there is no countervailing consideration for the Court to revisit its aforequoted ruling in G.R. Nos.
195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.). Thus, under the doctrine of stare decisis, which
states that "[o]nce a case has been decided in one way, any other case involving exactly the same point at issue xxx should be decided in the
same manner,"41 the Court finds that SLMC is subject to 10% income tax insofar as its revenues from paying patients are concerned.

To be clear, for an institution to be completely exempt from income tax, Section 30(E) and (G) of the 1997 NIRC requires said institution to
operate exclusively for charitable or social welfare purpose. But in case an exempt institution under Section 30(E) or (G) of the said Code
earns income from its for-profit activities, it will not lose its tax exemption. However, its income from for profit activities will be subject to
income tax at the preferential 10% rate pursuant to Section 27(B) thereof.

SLMC is not liable for Compromise Penalty.

As to whether SLMC is liable for compromise penalty under Section 248(A) of the 1997 NIRC for its alleged failure to file its quarterly income
tax returns, this has also been resolved in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center,
Inc.),42 where the imposition of surcharges and interest under Sections 24843 and 24944 of the 1997 NIRC were deleted on the basis of good
faith and honest belief on the part SLMC that it is not subject to tax. Thus, following the ruling of the Court in the said case, SLMC is not liable
to pay compromise penalty under Section 248(A) of the 1997 NIRC.

The Petition is rendered moot by the payment made by SLMC on April 30, 2013.

However, in view of the payment of the basic taxes made by SLMC on April 30, 2013, the instant Petition has become moot.

While the Court agrees with the CIR that the payment confirmation from the BIR presented by SLMC is not a competent proof of payment as it
does not indicate the specific taxable period the said payment covers, the Court fmds that the Certification issued by the Large Taxpayers
Service of the BIR dated May 27, 2013, and the letter from the BIR dated November 26, 2013 with attached Certification of Payment and
application for abatement are sufficient to prove payment especially since CIR never questioned the authenticity of these documents. In fact,
in a related case, G.R. No. 200688, entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.,45 the Court dismissed the
petition based on a letter issued by CIR confirming SLMC's payment of taxes, which is the same letter submitted by SLMC in the instant case.

In fine, the Court resolves to dismiss the instant Petition as the same has been rendered moot by the payment made by SLMC of the basic
taxes for the taxable years 2005 and 2006, in the amounts of P49,919,496.40 and P41,525,608.40, respectively. 46

WHEREFORE, the Petition is hereby DISMISSED.

SO ORDERED.chanrobles

G.R. No. 196596, November 09, 2016


COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. DE LA SALLE UNIVERSITY, INC., Respondent.

G.R. No. 198841

DE LA SALLE UNIVERSITY INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE,Respondent.

G.R. No. 198941

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. DE LA SALLE UNIVERSITY, INC., Respondent.


DECISION
BRION, J.:
Before the Court are consolidated petitions for review on certiorari:1
1.
G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner) to assail the December 10, 2010 decision and
March 29, 2011 resolution of the Court of Tax Appeals (CTA) in En Banc Case No. 622;2
2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8, 2011 decision and October 4, 2011 resolution in
CTA En Banc Case No. 671;3 and
3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision and October 4, 2011 resolution in CTA En
Banc Case No. 671.4
G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First Division (CTA Division) Case No. 7303. G.R. No. 196596
stemmed from CTA En BancCase No. 622 filed by the Commissioner to challenge CTA Case No. 7303. G.R. No. 198841 and 198941 both
stemmed from CTA En Banc Case No. 671 filed by DLSU to also challenge CTA Case No. 7303.chanroblesvirtuallawlibrary
The Factual Antecedents

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Authority (LOA) No. 2794 authorizing its revenue officers to
examine the latter's books of accounts and other accounting records for all internal revenue taxes for the period Fiscal Year Ending 2003 and
Unverified Prior Years.5

On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6

Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed DLSU the following deficiency taxes: (1) income
tax on rental earnings from restaurants/canteens and bookstores operating within the campus; (2) value-added tax (VAT) on business income;
and (3) documentary stamp tax (DST) on loans and lease contracts. The BIR demanded the payment of P17,303,001.12, inclusive of
surcharge, interest and penalty for taxable years 2001, 2002 and 2003.7

DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU filed on August 3, 2005 a petition for review with
the CTA Division.8

DLSU, a non-stock, non-profit educational institution, principally anchored its petition on Article XIV, Section 4 (3) of the Constitution, which
reads:
chanRoblesvirtualLawlibrary
(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. xxx.
On January 5, 2010, the CTA Division partially granted DLSU's petition for review. The dispositive portion of the decision reads:
chanRoblesvirtualLawlibrary
WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST assessment on the loan transactions of [DLSU] in the amount of
P1,1681,774.00 is hereby CANCELLED. However, [DLSU] is ORDERED TO PAY deficiency income tax, VAT and DST on its lease contracts,
plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the total amount of P18,421,363.53...xxx.

In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total amount due computed from September 30, 2004 until full
payment thereof pursuant to Section 249(C)(3) of the [National Internal Revenue Code]. Further, the compromise penalties imposed by [the
Commissioner] were excluded, there. being no compromise agreement between the parties.

SO ORDERED.9ChanRoblesVirtualawlibrary
Both the Commissioner and DLSU moved for the reconsideration of the January 5, 2010 decision. 10 On April 6, 2010, the CTA Division denied
the Commissioner's motion for reconsideration while it held in abeyance the resolution on DLSU's motion for reconsideration. 11

On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc Case No. 622) arguing that DLSU's use of its revenues
and assets for non-educational or commercial purposes removed these items from the exemption coverage under the Constitution. 12

On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of documentary evidence to prove that its rental income
was used actually, directly and exclusively for educational purposes.13The Commissioner did not promptly object to the formal offer of
supplemental evidence despite notice.14

On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted, reduced the amount of DLSU's tax deficiencies. The
dispositive portion of the amended decision reads:
chanRoblesvirtualLawlibrary
WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY GRANTED. [DLSU] is hereby ORDERED TO PAY for
deficiency income tax, VAT and DST plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the total adjusted amount
of P5,506,456.71...xxx.

In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest on the...basic deficiency taxes...until full payment thereof
pursuant to Section 249(B) of the [National Internal Revenue Code]...xxx.

Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on the deficiency taxes, surcharge and deficiency
interest which have accrued...from September 30, 2004 until fully paid. 15ChanRoblesVirtualawlibrary
Consequently, the Commissioner supplemented its petition with the CTA En Banc and argued that the CTA Division erred in admitting DLSU's
additional evidence.16

Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition for review with the CTA En Banc (CTA En Banc Case
No. 671) on the following grounds: (1) the entire assessment should have been cancelled because it was based on an invalid LOA; (2)
assuming the LOA was valid, the CTA Division should still have cancelled the entire assessment because DLSU submitted evidence similar to
those submitted by Ateneo De Manila University (Ateneo) in a separate case where the CTA cancelled Ateneo's tax assessment;17 and (3) the
CTA Division erred in finding that a portion of DLSU's rental income was not proved to have been used actually, directly and exclusively for
educational purposes.18chanroblesvirtuallawlibrary
The CTA En Banc Rulings

CTA En Banc Case No. 622

The CTA En Banc dismissed the Commissioner's petition for review and sustained the findings of the CTA Division. 19

Tax on rental income

Relying on the findings of the court-commissioned Independent Certified Public Accountant (Independent CPA), the CTA En Banc found that
DLSU was able to prove that a portion of the assessed rental income was used actually, directly and exclusively for educational purposes;
hence, exempt from tax.20 The CTA En Banc was satisfied with DLSU's supporting evidence confirming that part of its rental income had
indeed been used to pay the loan it obtained to build the university's Physical Education - Sports Complex.21

Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its income that was not shown by supporting documents to have
been actually, directly and exclusively used for educational purposes, must be subjected to income tax and VAT. 22

DST on loan and mortgage transactions

Contrary to the Commissioner's contention, DLSU proved its remittance of the DST due on its loan and mortgage documents.23 The CTA En
Banc found that DLSU's DST payments had been remitted to the BIR, evidenced by the stamp on the documents made by a DST imprinting
machine, which is allowed under Section 200 (D) of the National Internal Revenue Code (Tax Code)24 and Section 2 of Revenue Regulations
(RR) No. 15-2001.25cralawred

Admissibility of DLSU's supplemental evidence

The CTA En Banc held that the supplemental pieces of documentary evidence were admissible even if DLSU formally offered them only when
it moved for reconsideration of the CTA Division's original decision. Notably, the law creating the CTA provides that proceedings before it shall
not be governed strictly by the technical rules of evidence.26

The Commissioner moved but failed to obtain a reconsideration of the CTA En Banc's December 10, 2010 decision.27 Thus, she came to this
court for relief through a petition for review on certiorari (G.R. No. 196596).

CTA En Banc Case No. 671

The CTA En Banc partially granted DLSU's petition for review and further reduced its tax liabilities to P2,554,825.47 inclusive of surcharge.28

On the validity of the Letter of Authority

The issue of the LOA's validity was raised during trial; 29 hence, the issue was deemed properly submitted for decision and reviewable on
appeal.

Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable period and that the practice of issuing a LOA covering
audit of unverified prior years is prohibited.30 The prohibition is consistent with Revenue Memorandum Order (RMO) No. 43-90, which
provides that if the audit includes more than one taxable period, the other periods or years shall be specifically indicated in the LOA.31

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior Years. Hence, the assessments for
deficiency income tax, VAT and DST for taxable years 2001 and 2002 are void, but the assessment for taxable year 2003 is valid.32

On the applicability of the Ateneo case

The CTA En Banc held that the Ateneo case is not a valid precedent because it involved different parties, factual settings, bases of
assessments, sets of evidence, and defenses.33

On the CTA Division's appreciation of the evidence

The CTA En Banc affirmed the CTA Division's appreciation of DLSU's evidence. It held that while DLSU successfully proved that a portion of
its rental income was transmitted and used to pay the loan obtained to fund the construction of the Sports Complex, the rental income
from other sources were not shown to have been actually, directly and exclusively used for educational purposes. 34

Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the Commissioner (G.R. No. 198941) came to this Court for
relief.chanroblesvirtuallawlibrary
The Consolidated Petitions

G.R. No. 196596

The Commissioner submits the following arguments:

First, DLSU's rental income is taxable regardless of how such income is derived, used or disposed of. 35 DLSU's operations of canteens and
bookstores within its campus even though exclusively serving the university community do not negate income tax liability. 36
The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be harmonized with Section 30 (H) of the Tax Code, which
states among others, that the income of whatever kind and character of [a non-stock and non-profit educational institution] from any of [its]
properties, real or personal, or from any of (its] activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed by this Code.37

The Commissioner argues that the CTA En Banc misread and misapplied the case of Commissioner of Internal Revenue v. YMCA38 to
support its conclusion that revenues however generated are covered by the constitutional exemption, provided that, the revenues will be used
for educational purposes or will be held in reserve for such purposes.39

On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is exempt only from property tax but not from income tax
on the rentals earned from property.40 Thus, DLSU's income from the leases of its real properties is not exempt from taxation even if the
income would be used for educational purposes. 41

Second, the Commissioner insists that DLSU did not prove the fact of DST payment 42 and that it is not qualified to use the On-Line Electronic
DST Imprinting Machine, which is available only to certain classes of taxpayers under RR No. 9-2000.43

Finally, the Commissioner objects to the admission of DLSU's supplemental offer of evidence. The belated submission of supplemental
evidence reopened the case for trial, and worse, DLSU offered the supplemental evidence only after it received the unfavorable CTA
Division's original decision.44 In any case, DLSU's submission of supplemental documentary evidence was unnecessary since its rental
income was taxable regardless of its disposition. 45

G.R. No. 198841

DLSU argues as that:

First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication of unverified prior years. A LOA issued contrary to RMO No.
43-90 is void, thus, an assessment issued based on such defective LOA must also be void. 46

DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and Unverified Prior Years. On the basis of this defective LOA,
the Commissioner assessed DLSU for deficiency income tax, VAT and DST for taxable years 2001, 2002 and 2003. 47 DLSU objects to the
CTA En Banc's conclusion that the LOA is valid for taxable year 2003. According to DLSU, when RMO No. 43-90 provides that:
chanRoblesvirtualLawlibrary
The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby prohibited.ChanRoblesVirtualawlibrary
it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since the LOA issued to DLSU follows this format, then any
assessment arising from it must be entirely voided.48

Second, DLSU invokes the principle of uniformity in taxation, which mandates that for similarly situated parties, the same set of
evidence should be appreciated and weighed in the same manner. 49 The CTA En Banc erred when it did not similarly appreciate DLSU's
evidence as it did to the pieces of evidence submitted by Ateneo, also a non-stock, non-profit educational institution.50

G.R. No. 198941

The issues and arguments raised by the Commissioner in G.R. No. 198941 petition are exactly the same as those she raised in her: (1)
petition docketed as G.R. No. 196596 and (2) comment on DLSU's petition docketed as G.R. No. 198841.51chanroblesvirtuallawlibrary
Counter-arguments

DLSU's Comment on G.R. No. 196596

First, DLSU questions the defective verification attached to the petition. 52

Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all assets and revenues of non-stock, non-profit
educational institutions used actually, directly and exclusively for educational purposes are exempt from taxes and duties. 53

On this point, DLSU explains that: (1) the tax exemption of nonstock, non-profit educational institutions is novel to the 1987 Constitution and
that Section 30 (H) of the 1997 Tax Code cannot amend the 1987 Constitution;54 (2) Section 30 of the 1997 Tax Code is almost an exact
replica of Section 26 of the 1977 Tax Code - with the addition of non-stock, non-profit educational institutions to the list of tax-exempt entities;
and (3) that the 1977 Tax Code was promulgated when the 1973 Constitution was still in place.

DLSU elaborates that the tax exemption granted to a private educational institution under the 1973 Constitution was only for real property tax.
Back then, the special tax treatment on income of private educational institutions only emanates from statute, i.e., the 1977 Tax Code. Only
under the 1987 Constitution that exemption from tax of all the assets and revenues of non-stock, non-profit educational institutions used
actually, directly and exclusively for educational purposes, was expressly and categorically enshrined. 55

DLSU thus invokes the doctrine of constitutional supremacy, which renders any subsequent law that is contrary to the Constitution void and
without any force and effect.56 Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the income of whatever kind and character of a
nonstock and non-profit educational institution from any of its properties, real or personal, or from any of its activities conducted for
profit regardless of the disposition made of such income, should be declared without force and effect in view of the constitutionally granted tax
exemption on "all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational
purposes."57

DLSU further submits that it complies with the requirements enunciated in the YMCA case, that for an exemption to be granted under Article
XIV, Section 4 (3) of the Constitution, the taxpayer must prove that: (1) it falls under the classification non-stock, non-profit educational
institution; and (2) the income it seeks to be exempted from taxation is used actually, directly and exclusively for educational
purposes.58 Unlike YMCA, which is not an educational institution, DLSU is undisputedly a non-stock, non-profit educational institution. It had
also submitted evidence to prove that it actually, directly and exclusively used its income for educational purposes. 59

DLSU also cites the deliberations of the 1986 Constitutional Commission where they recognized that the tax exemption was granted "to
incentivize private educational institutions to share with the State the responsibility of educating the youth." 60

Third, DLSU highlights that both the CTA En Banc and Division found that the bank that handled DLSU's loan and mortgage transactions had
remitted to the BIR the DST through an imprinting machine, a method allowed under RR No. 15-2001.61 In any case, DLSU argues that it
cannot be held liable for DST owmg to the exemption granted under the Constitution. 62

Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the formal offer of supplemental evidence. Because of the
Commissioner's failure to timely object, she became bound by the results of the submission of such supplemental evidence. 63

The CIR's Comment on G.R. No. 198841

The Commissioner submits that DLSU is estopped from questioning the LOA's validity because it failed to raise this issue in both the
administrative and judicial proceedings.64 That it was asked on crossexamination during the trial does not make it an issue that the CTA could
resolve.65 The Commissioner also maintains that DLSU's rental income is not tax-exempt because an educational institution is only exempt
from property tax but not from tax on the income earned from the property. 66

DLSU's Comment on G.R. No. 198941

DLSU puts forward the same counter-arguments discussed above.67

In addition, DLSU prays that the Court award attorney's fees in its favor because it was constrained to unnecessarily retain the services of
counsel in this separate petition.68chanroblesvirtuallawlibrary
Issues

Although the parties raised a number of issues, the Court shall decide only the pivotal issues, which we summarize as follows:
I. Whether DLSU's income and revenues proved to have been used actually, directly and exclusively for educational purposes are
exempt from duties and taxes;chanrobleslaw
II. Whether the entire assessment should be voided because of the defective LOA;chanrobleslaw
III. Whether the CTA correctly admitted DLSU's supplemental pieces of evidence; and
IV. Whether the CTA's appreciation of the sufficiency ofDLSU's evidence may be disturbed by the Court.
Our Ruling

As we explain in full below, we rule that:


I. The income, revenues and assets of non-stock, non-profit educational institutions proved to have been used actually, directly and
exclusively for educational purposes are exempt from duties and taxes.
II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is valid.
III. The CTA correctly admitted DLSU's formal offer of supplemental evidence; and
IV. The CTA's appreciation of evidence is conclusive unless the CTA is shown to have manifestly overlooked certain relevant facts not
disputed by the parties and which, if properly considered, would justify a different conclusion.

The parties failed to convince the Court that the CTA overlooked or failed to consider relevant facts. We thus sustain the CTA En
Banc's findings that:
a. DLSU proved that a portion of its rental income was used actually, directly and exclusively for educational purposes; and
b. DLSU proved the payment of the DST through its bank's on-line imprinting machine.
I. The revenues and assets of non-stock, non-profit educational institutions proved to have been used actually, directly, and
exclusively for educational purposes are exempt from duties and taxes.

DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:
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(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of
such institutions, their assets shall be disposed of in the manner provided by law. Proprietary educational institutions, including
those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law including
restrictions on dividends and provisions for reinvestment [underscoring and emphasis supplied]
Before fully discussing the merits of the case, we observe that:

First, the constitutional provision refers to two kinds of educational institutions: (1) non-stock, non-profit educational institutions and (2)
proprietary educational institutions.69

Second, DLSU falls under the first category. Even the Commissioner admits the status of DLSU as a non-stock, non-profit educational
institution.70

Third, while DLSU's claim for tax exemption arises from and is based on the Constitution, the Constitution, in the same provision, also
imposes certain conditions to avail of the exemption. We discuss below the import of the constitutional text vis-a-vis the Commissioner's
counter-arguments.
Fourth, there is a marked distinction between the treatment of nonstock, non-profit educational institutions and proprietary educational
institutions. The tax exemption granted to non-stock, non-profit educational institutions is conditioned only on the actual, direct and exclusive
use of their revenues and assets for educational purposes. While tax exemptions may also be granted to proprietary educational institutions,
these exemptions may be subject to limitations imposed by Congress.

As we explain below, the marked distinction between a non-stock, non-profit and a proprietary educational institution is crucial in determining
the nature and extent of the tax exemption granted to non-stock, non-profit educational institutions.

The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30 (H) of the Tax Code. The relevant text reads:
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The following organizations shall not be taxed under this Title [Tax on Income] in respect to income received by them as such:
xxxx

(H) A non-stock and non-profit educational institution


xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from
any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such
income shall be subject to tax imposed under this Code. [underscoring and emphasis supplied]ChanRoblesVirtualawlibrary
The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted to non-stock, non-profit educational institutions such
that the revenues and income they derived from their assets, or from any of their activities conducted for profit, are taxable even if these
revenues and income are used for educational purposes.

Did the 1997 Tax Code qualifY the tax exemption constitutionally-granted to non-stock, non-profit educational institutions?

We answer in the negative.

While the present petition appears to be a case of first impression, 71 the Court in the YMCA case had in fact already analyzed and explained
the meaning of Article XIV, Section 4 (3) of the Constitution. The Court in that case made doctrinal pronouncements that are relevant to the
present case.

The issue in YMCA was whether the income derived from rentals of real property owned by the YMCA, established as a "welfare, educational
and charitable non-profit corporation," was subject to income tax under the Tax Code and the Constitution. 72

The Court denied YMCA's claim for exemption on the ground that as a charitable institution falling under Article VI, Section 28 (3) of the
Constitution,73 the YMCA is not tax-exempt per se; "what is exempted is not the institution itself...those exempted from real estate taxes are
lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes." 74

The Court held that the exemption claimed by the YMCA is expressly disallowed by the last paragraph of then Section 27 (now Section 30) of
the Tax Code, which mandates that the income of exempt organizations from any of their properties, real or personal, are subject to the same
tax imposed by the Tax Code, regardless of how that income is used. The Court ruled that the last paragraph of Section 27 unequivocally
subjects to tax the rent income of the YMCA from its property.75

In short, the YMCA is exempt only from property tax but not from income tax.

As a last ditch effort to avoid paying the taxes on its rental income, the YMCA invoked the tax privilege granted under Article XIV, Section 4 (3)
of the Constitution.

The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the Constitution holding that the term educational institution,
when used in laws granting tax exemptions, refers to the school system (synonymous with formal education); it includes a college or an
educational establishment; it refers to the hierarchically structured and chronologically graded learnings organized and provided by the formal
school system.76

The Court then significantly laid down the requisites for availing the tax exemption under Article XIV, Section 4 (3), namely: (1) the taxpayer
falls under the classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation
is used actually, directly and exclusively for educational purposes.77

We now adopt YMCA as precedent and hold that:


1. The last paragraph of Section 30 of the Tax Code is without force and effect with respect to non-stock, non-profit educational
institutions, provided, that the non-stock, non-profit educational institutions prove that its assets and revenues are used actually,
directly and exclusively for educational purposes.
2. The tax-exemption constitutionally-granted to non-stock, non profit educational institutions, is not subject to limitations imposed by
law.
The tax exemption granted by the Constitution to non-stock, non-profit educational institutions is conditioned only on the actual,
direct and exclusive use of their assets, revenues and income 78for educational purposes.

We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable institutions, churches, parsonages or convents,
mosques, and non-profit cemeteries), which exempts from tax only the assets, i.e., "all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational purposes...," Article XIV, Section 4 (3) categorically states that
"[a]ll revenues and assets... used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties."

The addition and express use of the word revenues in Article XIV, Section 4 (3) of the Constitution is not without significance.
We find that the text demonstrates the policy of the 1987 Constitution, discernible from the records of the 1986 Constitutional Commission79 to
provide broader tax privilege to non-stock, non-profit educational institutions as recognition of their role in assisting the State provide a public
good. The tax exemption was seen as beneficial to students who may otherwise be charged unreasonable tuition fees if not for the tax
exemption extended to all revenues and assets of non-stock, non-profit educational institutions.80

Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does not require that the revenues and income must
have also been sourced from educational activities or activities related to the purposes of an educational institution. The phrase all revenues is
unqualified by any reference to the source of revenues. Thus, so long as the revenues and income are used actually, directly and exclusively
for educational purposes, then said revenues and income shall be exempt from taxes and duties. 81

We find it helpful to discuss at this point the taxation of revenues versus the taxation of assets.

Revenues consist of the amounts earned by a person or entity from the conduct of business operations. 82 It may refer to the sale of goods,
rendition of services, or the return of an investment. Revenue is a component of the tax base in income tax, 83 VAT,84 and local business tax
(LBT).85

Assets, on the other hand, are the tangible and intangible properties owned by a person or entity. 86 It may refer to real estate, cash deposit in
a bank, investment in the stocks of a corporation, inventory of goods, or any property from which the person or entity may derive income or
use to generate the same. In Philippine taxation, the fair market value of real property is a component of the tax base in real property tax
(RPT).87 Also, the landed cost of imported goods is a component of the tax base in VAT on importation88 and tariff duties.89

Thus, when a non-stock, non-profit educational institution proves that it uses its revenues actually, directly, and exclusively for educational
purposes, it shall be exempted from income tax, VAT, and LBT. On the other hand, when it also shows that it uses its assets in the form of
real property for educational purposes, it shall be exempted from RPT.

To be clear, proving the actual use of the taxable item will result in an exemption, but the specific tax from which the entity shall be exempted
from shall depend on whether the item is an item of revenue or asset.

To illustrate, if a university leases a portion of its school building to a bookstore or cafeteria, the leased portion is not actually, directly and
exclusively used for educational purposes, even if the bookstore or canteen caters only to university students, faculty and staff.

The leased portion of the building may be subject to real property tax, as held in Abra Valley College, Inc. v. Aquino.90 We ruled in that case
that the test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. We also held that the exemption
extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes.

In concrete terms, the lease of a portion of a school building for commercial purposes, removes such asset from the property tax exemption
granted under the Constitution.91 There is no exemption because the asset is not used actually, directly and exclusively for educational
purposes. The commercial use of the property is also not incidental to and reasonably necessary for the accomplishment of the main purpose
of a university, which is to educate its students.

However, if the university actually, directly and exclusively uses for educational purposes the revenues earned from the lease of its school
building, such revenues shall be exempt from taxes and duties. The tax exemption no longer hinges on the use of the asset from which the
revenues were earned, but on the actual, direct and exclusive use of the revenues for educational purposes.

Parenthetically, income and revenues of non-stock, non-profit educational institution not used actually, directly and exclusively for educational
purposes are not exempt from duties and taxes. To avail of the exemption, the taxpayer must factually prove that it used actually, directly
and exclusively for educational purposes the revenues or income sought to be exempted.

The crucial point of inquiry then is on the use of the assets or on the use of the revenues. These are two things that must be viewed and
treated separately. But so long as the assets or revenues are used actually, directly and exclusively for educational purposes, they are exempt
from duties and taxes.

The tax exemption granted by the Constitution to non-stock, non-profit educational institutions, unlike the exemption that may be
availed of by proprietary educational institutions, is not subject to limitations imposed by law.

That the Constitution treats non-stock, non-profit educational institutions differently from proprietary educational institutions cannot be
doubted. As discussed, the privilege granted to the former is conditioned only on the actual, direct and exclusive use of their revenues and
assets for educational purposes. In clear contrast, the tax privilege granted to the latter may be subject to limitations imposed by law.

We spell out below the difference in treatment if only to highlight the privileged status of non-stock, non-profit educational institutions
compared with their proprietary counterparts.

While a non-stock, non-profit educational institution is classified as a tax-exempt entity under Section 30 (Exemptions from Tax on
Corporations) of the Tax Code, a proprietary educational institution is covered by Section 27 (Rates of Income Tax on Domestic
Corporations).

To be specific, Section 30 provides that exempt organizations like non-stock, non-profit educational institutions shall not be taxed on income
received by them as such.

Section 27 (B), on the other hand, states that [p]roprietary educational institutions...which are nonprofit shall pay a tax of ten percent (10%) on
their taxable income...Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total
gross income derived by such educational institutions...[the regular corporate income tax of 30%] shall be imposed on the entire taxable
income...92

By the Tax Code's clear terms, a proprietary educational institution is entitled only to the reduced rate of 10% corporate income tax. The
reduced rate is applicable only if: (1) the proprietary educational institution is non profit and (2) its gross income from unrelated trade, business
or activity does not exceed 50% of its total gross income.

Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not apply to non-stock, non-profit educational institutions.

Thus, we declare the last paragraph of Section 30 of the Tax Code without force and effect for being contrary to the Constitution insofar as it
subjects to tax the income and revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for educational
purpose. We make this declaration in the exercise of and consistent with our duty 93 to uphold the primacy of the Constitution.94

Finally, we stress that our holding here pertains only to non-stock, non-profit educational institutions and does not cover the other exempt
organizations under Section 30 of the Tax Code.

For all these reasons, we hold that the income and revenues of DLSU proven to have been used actually, directly and exclusively for
educational purposes are exempt from duties and taxes.

II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is valid.

DLSU objects to the CTA En Banc's conclusion that the LOA is valid for taxable year 2003 and insists that the entire LOA should be voided for
being contrary to RMO No. 43-90, which provides that if tax audit includes more than one taxable period, the other periods or years shall be
specifically indicated in the LOA.

A LOA is the authority given to the appropriate revenue officer to examine the books of account and other accounting records of the taxpayer
in order to determine the taxpayer's correct internal revenue liabilities 95 and for the purpose of collecting the correct amount oftax, 96 in
accordance with Section 5 of the Tax Code, which gives the CIR the power to obtain information, to summon/examine, and take testimony of
persons. The LOA commences the audit process97 and informs the taxpayer that it is under audit for possible deficiency tax assessment.

Given the purposes of a LOA, is there basis to completely nullify the LOA issued to DLSU, and consequently, disregard the BIR and the CTA's
findings of tax deficiency for taxable year 2003?

We answer in the negative.

The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which reads:
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3. A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable year. The practice of issuing [LOAs]
covering audit of unverified prior years is hereby prohibited. If the audit of a taxpayer shall include more than one taxable
period, the other periods or years shall be specifically indicated in the [LOA]. 98
What this provision clearly prohibits is the practice of issuing LOAs covering audit of unverified prior years. RMO 43-90 does not say that a
LOA which contains unverified prior years is void. It merely prescribes that if the audit includes more than one taxable period, the other
periods or years must be specified. The provision read as a whole requires that if a taxpayer is audited for more than one taxable year, the
BIR must specify each taxable year or taxable period on separate LOAs.

Read in this light, the requirement to specify the taxable period covered by the LOA is simply to inform the taxpayer of the extent of the audit
and the scope of the revenue officer's authority. Without this rule, a revenue officer can unduly burden the taxpayer by demanding random
accounting records from random unverified years, which may include documents from as far back as ten years in cases of fraud audit.99

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior Years. The LOA does not strictly comply with
RMO 43-90 because it includes unverified prior years. This does not mean, however, that the entire LOA is void.

As the CTA correctly held, the assessment for taxable year 2003 is valid because this taxable period is specified in the LOA. DLSU was fully
apprised that it was being audited for taxable year 2003. Corollarily, the assessments for taxable years 2001 and 2002 are void for having
been unspecified on separate LOAs as required under RMO No. 43-90.

Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA's validity at the CTA Division, and thus, should not have been
entertained on appeal, is not accurate.

On the contrary, the CTA En Banc found that the issue of the LOA's validity came up during the trial.100 DLSU then raised the issue in
its memorandum and motion for partial reconsideration with the CTA Division. DLSU raised it again on appeal to the CTA En Banc. Thus, the
CTA En Banc could, as it did, pass upon the validity of the LOA.101 Besides, the Commissioner had the opportunity to argue for the validity of
the LOA at the CTA En Banc but she chose not to file her comment and memorandum despite notice. 102

III. The CTA correctly admitted the supplemental evidence formally offered by DLSU.

The Commissioner objects to the CTA Division's admission of DLSU's supplemental pieces of documentary evidence.

To recall, DLSU formally offered its supplemental evidence upon filing its motion for reconsideration with the CTA Division. 103 The CTA
Division admitted the supplemental evidence, which proved that a portion of DLSU's rental income was used actually, directly and exclusively
for educational purposes. Consequently, the CTA Division reduced DLSU's tax liabilities.
We uphold the CTA Division's admission of the supplemental evidence on distinct but mutually reinforcing grounds, to wit: (1) the
Commissioner failed to timely object to the formal offer of supplemental evidence; and (2) the CTA is not governed strictly by the technical
rules of evidence.

First, the failure to object to the offered evidence renders it admissible, and the court cannot, on its own, disregard such evidence.104

The Court has held that if a party desires the court to reject the evidence offered, it must so state in the form of a timely objection and it cannot
raise the objection to the evidence for the first time on appeal. 105

Because of a party's failure to timely object, the evidence offered becomes part of the evidence in the case. As a consequence, all the parties
are considered bound by any outcome arising from the offer of evidence properly presented. 106

As disclosed by DLSU, the Commissioner did not oppose the supplemental formal offer of evidence despite notice.107 The Commissioner
objected to the admission of the supplemental evidence only when the case was on appeal to the CTA En Banc. By the time the
Commissioner raised her objection, it was too late; the formal offer, admission and evaluation of the supplemental evidence were all fait
accompli.

We clarify that while the Commissioner's failure to promptly object had no bearing on the materiality or sufficiency of the supplemental
evidence admitted, she was bound by the outcome of the CTA Division's assessment of the evidence.108

Second, the CTA is not governed strictly by the technical rules of evidence. The CTA Division's admission of the formal offer of supplemental
evidence, without prompt objection from the Commissioner, was thus justified.

Notably, this Court had in the past admitted and considered evidence attached to the taxpayers' motion for reconsideration.

In the case of BPI-Family Savings Bank v. Court of Appeals,109 the tax refund claimant attached to its motion for reconsideration with the CTA
its Final Adjustment Return. The Commissioner, as in the present case, did not oppose the taxpayer's motion for reconsideration and the
admission of the Final Adjustment Return.110 We thus admitted and gave weight to the Final Adjustment Return although it was only submitted
upon motion for reconsideration.

We held that while it is true that strict procedural rules generally frown upon the submission of documents after the trial, the law creating the
CTA specifically provides that proceedings before it shall not be governed strictly by the technical rules of evidence 111 and that the paramount
consideration remains the ascertainment of truth. We ruled that procedural rules should not bar courts from considering undisputed facts to
arrive at a just determination of a controversy.112

We applied the same reasoning in the subsequent cases of Filinvest Development Corporation v. Commissioner of Internal
Revenue113 and Commissioner of Internal Revenue v. PERF Realty Corporation,114 where the taxpayers also submitted the supplemental
supporting document only upon filing their motions for reconsideration.

Although the cited cases involved claims for tax refunds, we also dispense with the strict application of the technical rules of evidence in the
present tax assessmentcase. If anything, the liberal application of the rules assumes greater force and significance in the case of a taxpayer
who claims a constitutionally granted tax exemption. While the taxpayers in the cited cases claimed refund of excess tax payments based on
the Tax Code,115 DLSU is claiming tax exemption based on the Constitution. If liberality is afforded to taxpayers who paid more than they
should have under a statute, then with more reason that we should allow a taxpayer to prove its exemption from tax based on the Constitution.

Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not only because the Commissioner failed to promptly
object, but more so because the strict application of the technical tules of evidence may defeat the intent of the Constitution.

IV. The CTA's appreciation of evidence is generally binding on the Court unless compelling reasons justify otherwise.

It is doctrinal that the Court will not lightly set aside the conclusions reached by the CTA which, by the very nature of its function of being
dedicated exclusively to the resolution of tax problems, has developed an expertise on the subject, unless there has been an abuse or
improvident exercise of authority.116 We thus accord the findings of fact by the CTA with the highest respect. These findings of facts can only
be disturbed on appeal if they are not supported by substantial evidence or there is a showing of gross error or abuse on the part of the CTA.
In the absence of any clear and convincing proof to the contrary, this Court must presume that the CTA rendered a decision which is valid in
every respect.117

We sustain the factual findings of the CTA.

The parties failed to raise credible basis for us to disturb the CTA's findings that DLSU had used actually, directly and exclusively for
educational purposes a portion of its assessed income and that it had remitted the DST payments though an online imprinting machine.
a. DLSU used actually, directly, and exclusively for educational purposes a portion of its assessed income.
To see how the CTA arrived at its factual findings, we review the process undertaken, from which it deduced that DLSU successfully proved
that it used actually, directly and exclusively for educational purposes a portion of its rental income.

The CTA reduced DLSU's deficiency income tax and VAT liabilities in view of the submission of the supplemental evidence, which consisted
of statement of receipts, statement of disbursement and fund balance and statement of fund changes.118

These documents showed that DLSU borrowed P93.86 Million, 119 which was used to build the university's Sports Complex. Based on these
pieces of evidence, the CTA found that DLSU's rental income from its concessionaires were indeed transmitted and used for the payment of
this loan. The CTA held that the degree of preponderance of evidence was sufficiently met to prove actual, direct and exclusive use for
educational purposes.
The CTA also found that DLSU's rental income from other concessionaires, which were allegedly deposited to a fund (CF-CPA
Account),120 intended for the university's capital projects, was not proved to have been used actually, directly and exclusively for
educational purposes. The CTA observed that "[DLSU]...failed to fully account for and substantiate all the disbursements from the [fund]."
Thus, the CTA "cannot ascertain whether rental income from the [other] concessionaires was indeed used for educational purposes."121

To stress, the CTA's factual findings were based on and supported by the report of the Independent CPA who reviewed, audited and
examined the voluminous documents submitted by DLSU.

Under the CTA Revised Rules, an Independent CPA's functions include: (a) examination and verification of receipts, invoices, vouchers and
other long accounts; (b) reproduction of, and comparison of such reproduction with, and certification that the same are faithful copies of
original documents, and pre-marking of documentary exhibits consisting of voluminous documents; (c) preparation of schedules or summaries
containing a chronological listing of the numbers, dates and amounts covered by receipts or invoices or other relevant documents and the
amount(s) of taxes paid; (d) making findings as to compliance with substantiation requirements under pertinent tax laws, regulations
and jurisprudence; (e) submission of a formal report with certification of authenticity and veracity of findings and conclusions in the
performance of the audit; (f) testifying on such formal report; and (g) performing such other functions as the CTA may direct. 122

Based on the Independent CPA's report and on its own appreciation of the evidence, the CTA held that only the portion of the rental income
pertaining to the substantiated disbursements (i.e., proved by receipts, vouchers, etc.) from the CF-CPA Account was considered as used
actually, directly and exclusively for educational purposes. Consequently, the unaccounted and unsubstantiated disbursements must be
subjected to income tax and VAT.123

The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for taxable years 2001 and 2002 due to the defective
LOA.124

The Court finds that the above fact-finding process undertaken by the CTA shows that it based its ruling on the evidence on record, which we
reiterate, were examined and verified by the Independent CPA. Thus, we see no persuasive reason to deviate from these factual findings.

However, while we generally respect the factual findings of the CTA, it does not mean that we are bound by its conclusions. In the present
case, we do not agree with the method used by the CTA to arrive at DLSU's unsubstantiated rental income (i.e., income not proved to have
been actually, directly and exclusively used for educational purposes).

To recall, the CTA found that DLSU earned a rental income of P10,610,379.00 in taxable year 2003.125 DLSU earned this income from leasing
a portion of its premises to: 1) MTO-Sports Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp., 5) Capri International, and 6) MTO
Bookstore.126

To prove that its rental income was used for educational purposes, DLSU identified the transactions where the rental income was
expended, viz.: 1) P4,007,724.00127 used to pay the loan obtained by DLSU to build the Sports Complex; and 2) P6,602,655.00 transferred to
the CF-CPA Account.128

DLSU also submitted documents to the Independent CPA to prove that the P6,602,655.00 transferred to the CF-CPA Account was used
actually, directly and exclusively for educational purposes. According to the Independent CPA' findings, DLSU was able to substantiate
disbursements from the CF-CPA Account amounting to P6,259,078.30.

Contradicting the findings of the Independent CPA, the CTA concluded that out of the P10,610,379.00 rental
income, P4,841,066.65 was unsubstantiated, and thus, subject to income tax and VAT.129

The CTA then concluded that the ratio of substantiated disbursements to the total disbursements from the CF-CPA Account for taxable year
2003 is only 26.68%.130The CTA held as follows:
chanRoblesvirtualLawlibrary
However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp., Capri International and MTO Bookstore, which were
transmitted to the CF-CPA Account, petitioner again failed to fully account for and substantiate all the disbursements from the CF-CPA
Account; thus failing to prove that the rental income derived therein were actually, directly and exclusively used for educational purposes.
Likewise, the findings of the Court-Commissioned Independent CPA show that the disbursements from the CF-CPA Account for fiscal year
2003 amounts to P-6,259,078.30 only. Hence, this portion of the rental income, being the substantiated disbursements of the CF-CPA
Account, was considered by the Special First Division as used actually, directly and exclusively for educational purposes. Since for fiscal year
2003, the total disbursements per voucher is P6,259,078.3 (Exhibit "LL-25-C"), and the total disbursements per subsidiary ledger amounts to
P23,463,543.02 (Exhibit "LL-29-C"), the ratio of substantiated disbursements for fiscal year 2003 is 26.68%
(P6,259,078.30/P23,463,543.02). Thus, the substantiated portion of CF-CPA Disbursements for fiscal year 2003, arrived at by multiplying the
ratio of 26.68% with the total rent income added to and used in the CF-CPA Account in the amount of P6,602,655.00 ts
P1,761,588.35.131 (emphasis supplied)ChanRoblesVirtualawlibrary
For better understanding, we summarize the CTA's computation as follows:
1. The CTA subtracted the rent income used in the construction of the Sports Complex (P4,007,724.00) from the rental income
(P10,610,379.00) earned from the abovementioned concessionaries. The difference (P6,602,655.00) was the portion claimed to have
been deposited to the CF-CPA Account.
2. The CTA then subtracted the supposed substantiated portion of CF-CPA disbursements (P1,761,308.37) from the P6,602,655.00 to
arrive at the supposed unsubstantiated portion of the rental income (P4,841,066.65).132
3. The substantiated portion of CF-CPA disbursements (P1,761,308.37)133 was derived by multiplying the rental income claimed to have
been added to the CF-CPA Account (P6,602,655.00) by 26.68% or the ratio of substantiated disbursements to total
disbursements (P23,463,543.02).
4. The 26.68% ratio134 was the result of dividing the substantiated disbursements from the CF-CPA Account as found by the
Independent CPA (P6,259,078.30) by the total disbursements (P23,463,543.02) from the same account.
We find that this system of calculation is incorrect and does not truly give effect to the constitutional grant of tax exemption to non-stock, non-
profit educational institutions. The CTA's reasoning is flawed because it required DLSU to substantiate an amount that is greater than the
rental income deposited in the CF-CPA Account in 2003.

To reiterate, to be exempt from tax, DLSU has the burden of proving that the proceeds of its rental income (which amounted to a total of
P10.61 million)135 were used for educational purposes. This amount was divided into two parts: (a) the P4.01 million, which was used to pay
the loan obtained for the construction of the Sports Complex; and (b) the P6.60 million, 136 which was transferred to the CF-CPA account.

For year 2003, the total disbursement from the CF-CPA account amounted to P23.46 million.137 These figures, read in light of the
constitutional exemption, raises the question: does DLSU claim that the whole total CF-CPA disbursement of P23.46 million is tax-
exempt so that it is required to prove that all these disbursements had been made for educational purposes?

We answer in the negative.

The records show that DLSU never claimed that the total CF-CPA disbursements of P23.46 million had been for educational purposes and
should thus be tax-exempt; DLSU only claimed P10.61 million for taxexemption and should thus be required to prove that this amount had
been used as claimed.

Of this amount, P4.01 had been proven to have been used for educational purposes, as confirmed by the Independent CPA. The amount in
issue is therefore the balance of P6.60 million which was transferred to the CF-CPA which in turn made disbursements of P23.46 million for
various general purposes, among them the P6.60 million transferred by DLSU.

Significantly, the Independent CPA confirmed that the CF-CPA made disbursements for educational purposes in year 2003 in the amount
P6.26 million. Based on these given figures, the CTA concluded that the expenses for educational purposes that had been coursed through
the CF-CPA should be prorated so that only the portion that P6.26 million bears to the total CF-CPA disbursements should be credited to
DLSU for tax exemption.

This approach, in our view, is flawed given the constitutional requirement that revenues actually and directly used for educational purposes
should be tax-exempt. As already mentioned above, DLSU is not claiming that the whole P23.46 million CF-CPA disbursement had been used
for educational purposes; it only claims that P6.60 million transferred to CF-CPA had been used for educational purposes. This was what
DLSU needed to prove to have actually and directly used for educational purposes.

That this fund had been first deposited into a separate fund (the CF-CPA established to fund capital projects) lends peculiarity to the facts of
this case, but does not detract from the fact that the deposited funds were DLSU revenue funds that had been confirmed and proven to have
been actually and directly used for educational purposes via the CF-CPA. That the CF-CPA might have had other sources of funding is
irrelevant because the assessment in the present case pertains only to the rental income which DLSU indisputably earned as revenue in
2003. That the proven CF-CPA funds used for educational purposes should not be prorated as part of its total CF-CPA disbursements for
purposes of crediting to DLSU is also logical because no claim whatsoever had been made that the totality of the CF-CPA disbursements had
been for educational purposes. No prorating is necessary; to state the obvious, exemption is based on actual and direct use and this DLSU
has indisputably proven.

Based on these considerations, DLSU should therefore be liable only for the difference between what it claimed and what it has proven. In
more concrete terms, DLSU only had to prove that its rental income for taxable year 2003 (P10,610,379.00) was used for educational
purposes. Hence, while the total disbursements from the CF-CPA Account amounted to P23,463,543.02, DLSU only had to substantiate its
P10.6 million rental income, part of which was the P6,602,655.00 transferred to the CF-CPA account. Of this latter amount, P6.259 million was
substantiated to have been used for educational purposes.

To summarize, we thus revise the tax base for deficiency income tax and VAT for taxable year 2003 as follows:
chanRoblesvirtualLawlibrary
CTA Decision138 Revised

Rental income 10,610,379.00 10,610,379.00


Less: Rent income used in construction of the Sports
4,007,724.00 4,007,724.00
Complex

Rental income deposited to the CF-CPA Account 6,602,655.00 6,602.655.00

Less: Substantiated portion of CF-CPA disbursements 1,761,588.35 6,259,078.30

Tax base for deficiency income tax and VAT 4,841,066.65 343,576.70
On DLSU's argument that the CTA should have appreciated its evidence in the same way as it did with the evidence submitted by Ateneo
in another separate case, the CTA explained that the issue in the Ateneo case was not the same as the issue in the present case.

The issue in the Ateneo case was whether or not Ateneo could be held liable to pay income taxes and VAT under certain BIR and Department
of Finance issuances139that required the educational institution to own and operate the canteens, or other commercial enterprises within its
campus, as condition for tax exemption. The CTA held that the Constitution does not require the educational institution to own or operate
these commercial establishments to avail of the exemption. 140

Given the lack of complete identity of the issues involved, the CTA held that it had to evaluate the separate sets of evidence differently. The
CTA likewise stressed that DLSU and Ateneo gave distinct defenses and that its wisdom "cannot be equated on its decision on two different
cases with two different issues."141

DLSU disagrees with the CTA and argues that the entire assessment must be cancelled because it submitted similar, if not stronger sets of
evidence, as Ateneo. We reject DLSU's argument for being non sequitur. Its reliance on the concept of uniformity of taxation is also incorrect.

First, even granting that Ateneo and DLSU submitted similar evidence, the sufficiency and materiality of the evidence supporting their
respective claims for tax exemption would necessarily differ because their attendant issues and facts differ.

To state the obvious, the amount of income received by DLSU and by Ateneo during the taxable years they were assessed varied. The
amount of tax assessment also varied. The amount of income proven to have been used for educational purposes also varied because the
amount substantiated varied.142 Thus, the amount of tax assessment cancelled by the CTA varied.

On the one hand, the BIR assessed DLSU a total tax deficiency of P17,303,001.12 for taxable years 2001, 2002 and 2003. On the other hand,
the BIR assessed Ateneo a total deficiency tax of P8,864,042.35 for the same period. Notably, DLSU was assessed deficiency DST, while
Ateneo was not.143

Thus, although both Ateneo and DLSU claimed that they used their rental income actually, directly and exclusively for educational purposes
by submitting similar evidence, e.g., the testimony of their employees on the use of university revenues, the report of the Independent CPA,
their income summaries, financial statements, vouchers, etc., the fact remains that DLSU failed to prove that a portion of its income and
revenues had indeed been used for educational purposes.

The CTA significantly found that some documents that could have fully supported DLSU's claim were not produced in court. Indeed, the
Independent CPA testified that some disbursements had not been proven to have been used actually, directly and exclusively for educational
purposes.144

The final nail on the question of evidence is DLSU's own admission that the original of these documents had not in fact been produced before
the CTA although it claimed that there was no bad faith on its part.145 To our mind, this admission is a good indicator of how the Ateneo and
the DLSU cases varied, resulting in DLSU's failure to substantiate a portion of its claimed exemption.

Further, DLSU's invocation of Section 5, Rule 130 of the Revised Rules on Evidence, that the contents of the missing supporting documents
were proven by its recital in some other authentic documents on record,146 can no longer be entertained at this late stage of the proceeding.
The CTA did not rule on this particular claim. The CTA also made no finding on DLSU's assertion of lack of bad faith. Besides, it is not our
duty to go over these documents to test the truthfulness of their contents, this Court not being a trier of facts.

Second, DLSU misunderstands the concept of uniformity oftaxation. Equality and uniformity of taxation means that all taxable articles or kinds
of property of the same class shall be taxed at the same rate.147 A tax is uniform when it operates with the same force and effect in every
place where the subject of it is found.148 The concept requires that all subjects of taxation similarly situated should be treated alike and placed
in equal footing.149

In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated them alike because their income proved to have been used
actually, directly and exclusively for educational purposes were exempted from taxes. The CTA equally applied the requirements in
the YMCA case to test if they indeed used their revenues for educational purposes.

DLSU can only assert that the CTA violated the rule on uniformity if it can show that, despite proving that it used actually, directly and
exclusively for educational purposes its income and revenues, the CTA still affirmed the imposition of taxes. That the DLSU secured a
different result happened because it failed to fully prove that it used actually, directly and exclusively for educational purposes its revenues
and income.

On this point, we remind DLSU that the rule on uniformity of taxation does not mean that subjects of taxation similarly situated are treated
in literally the same way in all and every occasion. The fact that the Ateneo and DLSU are both non-stock, non-profit educational institutions,
does not mean that the CTA or this Court would similarly decide every case for (or against) both universities. Success in tax litigation, like in
any other litigation, depends to a large extent on the sufficiency of evidence. DLSU's evidence was wanting, thus, the CTA was correct in not
fully cancelling its tax liabilities.

b. DLSU proved its payment of the DST

The CTA affirmed DLSU's claim that the DST due on its mortgage and loan transactions were paid and remitted through its bank's On-Line
Electronic DST Imprinting Machine. The Commissioner argues that DLSU is not allowed to use this method of payment because an
educational institution is excluded from the class of taxpayers who can use the On-Line Electronic DST Imprinting Machine.

We sustain the findings of the CTA. The Commissioner's argument lacks basis in both the Tax Code and the relevant revenue regulations.

DST on documents, loan agreements, and papers shall be levied, collected and paid for by the person making, signing, issuing, accepting, or
transferring the same.150 The Tax Code provides that whenever one party to the document enjoys exemption from DST, the other party not
exempt from DST shall be directly liable for the tax. Thus, it is clear that DST shall be payable by any party to the document, such that the
payment and compliance by one shall mean the full settlement of the DST due on the document.

In the present case, DLSU entered into mortgage and loan agreements with banks. These agreements are subject to DST. 151 For the purpose
of showing that the DST on the loan agreement has been paid, DLSU presented its agreements bearing the imprint showing that DST on the
document has been paid by the bank, its counterparty. The imprint should be sufficient proof that DST has been paid. Thus, DLSU cannot be
further assessed for deficiency DST on the said documents.

Finally, it is true that educational institutions are not included in the class of taxpayers who can pay and remit DST through the On-Line
Electronic DST Imprinting Machine under RR No. 9-2000. As correctly held by the CTA, this is irrelevant because it was not DLSU who used
the On-Line Electronic DST Imprinting Machine but the bank that handled its mortgage and loan transactions. RR No. 9-2000 expressly
includes banks in the class of taxpayers that can use the On-Line Electronic DST Imprinting Machine.

Thus, the Court sustains the finding of the CTA that DLSU proved the payment of the assessed DST deficiency, except for the unpaid balance
of P13,265.48.152

WHEREFORE, premises considered, we DENY the petition of the Commissioner of Internal Revenue in G.R. No. 196596 and AFFIRM the
December 10, 2010 decision and March 29, 2011 resolution of the Court of Tax Appeals En Banc in CTA En Banc Case No. 622, except for
the total amount of deficiency tax liabilities of De La Salle University, Inc., which had been reduced.

We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841 and the petition of the Commissioner of Internal Revenue in
G.R. No. 198941 and thus AFFIRM the June 8, 2011 decision and October 4, 2011 resolution of the Court of Tax Appeals En Banc in CTA En
Banc Case No. 671, with the MODIFICATIONthat the base for the deficiency income tax and VAT for taxable year 2003 is P343,576.70.

SO ORDERED.cralawlawlibrary

Carpio, (Chairperson), and Del Castillo, JJ., concur.


Mendoza, J., on official leave.
Leonen, J., see Dissenting Opinion.
Endnotes:

1The petitions are filed under Rule 45 of the Rules of Court in relation to Rule 16 of the Revised CTA Rules (A.M. No. 05-11-07). On
November 28, 2011, the Court resolved to consolidate the petitions to avoid conflicting decisions. Rollo, p. 78 (G.R. No. 198941).
2 Id. at 34-70 (G.R. No. 196596).
3 Id. at 14-53 (G.R. No. 198841).
4 Id. at 9-43 (G.R. No. 198941).
5 Id. at 85. The date of the issuance of the LOA is not on record.
6 Id. at 4 (G.R. No. 196596). The PAN was issued by the SIR's Special Large Taxpayers Task Force on educational institutions.
7 Id. at 151-154.
8 Id. at 38 and 268.
9 Id. at 97-128.
10 Id. at 39 and 268-269.
11 Id. at 129-137.
12 Id. at 185-194.
13 Id. at 155-159, filed on May 18, 2010.
14 Id. at 302. DLSU quoted the June 9, 2010 resolution of the CTA Division, viz.:

"For resolution is [DLSU's] 'Supplemental Formal Offer of Evidence in Relation to the [CTA Division's] Resolution Dated 06 April 2010' filed on
April 23, 2010, sans any Comment/Opposition from the [Commissioner] despite notice." [emphasis and underscoring ours]
15 Id. at 149-150.
16 Id. at 40.
17Ateneo de Manila University v. Commissioner of Internal Revenue, CTA Case Nos. 7246 and 7293.
18Rollo, p. 73 (G.R. No. 198841).
19 Id. at 77-96 (G.R. No. 196596), decision dated December 10, 2010.
20 Id. at 82-88.
21 Id. at 86.
22 Id. at 86-87.
23 Id. at 88-90.
24 Section 200 (D) of the Tax Code provides:

(D) Exception. - In lieu of the foregoing provisions of this Section, the tax may be paid either through purchase and actual affixture; or
by imprinting the stamps through a documentary stamp metering machine, on the taxable document, in the manner as may be
prescribed by rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. [emphasis
ours]
25cralawredSection 2.2 of RR No. 15-2001 provides that: "In lieu of constructive stamping, Section 200 (D) of the [Tax Code], however, allows
the payment of DST ... or by imprinting of stamps through a documentary stamp metering machine (... or on line electronic DST
imprinting machine)." [emphasis ours]
26Rollo, pp. 91-94 (G.R. No. 196596).
27 Id. at 72-76.
28 Id. at 88-90 (G.R. No. 198841).
29 Id. at 75-79.
30 Id. at 80, citing Commissioner of Internal v. Sony Philippines, Inc., 649 Phil. 519 (2010).
31 Id. at 80.
32 Id. at 81.
33 Id. at 82.
34 These pertain to rental income from Alerey Inc., Zaide Food Corp., Capri International and MTO Bookstore. Id. at 85.
35 Id. at 43-55 (G.R. No. 196596).
36 Id. at 48.
37 Id. at 50.
38 358 Phil. 562 (1998).
39Rollo, p. 46 (G.R. No. 196596).
40 Id. at 51-55.
41 Id. at 50.
42 Id. at 55-56.
43 The Commissioner cites Section 4 of RR No. 9-2000 which states that the "on-line electronic DST imprinting machine," unless expressly
exempted by the Commissioner, will be used in the payment and remittance of the DST by the following class of taxpayers: a) bank, quasi-
bank or non-bank financial intermediary, finance company, insurance, surety, fidelity, or annuity company; b) the Philippine Stock Exchange
(in the case of shares of stock and other securities traded in the local stock exchange); c) shipping and airline companies; d) pre-need
company (on sale of pre-need plans); and e) other industries as may be required by the Commissioner.
44Rollo, pp. 57-65 (G.R. No. 196596).
45 Id. at 65-66.
46 Id. at 14-16 (G.R. No. 198841).
47 Id. at 24, 30.
48 Id. at 25-26.
49 Id. at 41-48.
50 Id. at 34-48.
51 Id. at 9-43 (G.R. No. 198941).
52 Id. at 272-276 (G.R. No. 196596). DLSU claims that the Commissioner failed to state that the allegations in the petition are true and correct
of her personal knowledge or based on authentic record. The CIR also allegedly failed to state that she caused the preparation of the petition
and that she has read and understood all the allegations. DLSU notes that a pleading required to be verified but lacks proper verification is
treated as an unsigned pleading.
53 Id. at 276-279.
54 Id. at 279-285.
55 Id. at 282.
56 Id. at 286-289.
57 Id. at 287.
58 Id. at 290.
59 Id. at 291.
60 Id. at 283.
61
Id. at 296-301.
62 Id. at 297-298.
63 Id. at 301-302.
64 Id. at 192-197 (G.R. No. 198841).
65 Id. at 192-193.
66 Id. at 197-207.
67 Id. at 82-93 (G.R. No. 198941).
68 Id. at 89-90.
69
In Commissioner v. St. Luke's Medical Center, Inc., 695 Phil. 867, 885 (2012), the Court quoted Section 27 (B) of the Tax Code and
defined proprietary educational institution as "any private school maintained and administered by private individuals or groups" with a
government permit.
70Rollo, p. 37 (G.R. No. 196596).
71Previous cases construing the nature of the exemption of tax-exempt entities under Section 30 (then Section 27) of the Tax Code vis-a-vis
the exemption granted under the Constitution pertain to nonprofit foundations, churches, charitable hospitals or social welfare institutions.
Some cases involved educational institutions but they tackled local or real property taxation. See: YMCA, supra note 37, St. Luke's, supra note
68; Angeles University Foundation v. City of Angeles, 689 Phil. 623 (2012); and Abra Valley College, Inc. v. Aquino, infra note 90.
72Supra note 38.
73Article VI, Section 28 (3) of the Constitution, provides: "Charitable institutions, churches and parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes shall be exempt from taxation."
74Supra note 38, at 579-580.
75 Id. at 575-578.
76 Id. at 581-582.
77 Id. at 580-581.
78For purposes of construing Article XIV, Section 4 (3) of the Constitution, we treat income and revenues as synonyms. Black's Law
Dictionary (Fifth Edition, 1979) defines revenues as "return or yield; profit as that which returns or comes back from investment; the annual or
periodical rents, profits, interest or issues of any species of property or personal..." (p. 1185) and income as "the return in money from one's
business, labor, or capital invested; gains, profits, salary, wages, etc ..." (p. 687).
79See Record of the Constitutional Commission No. 69, Volume IV, August 29, 1986.
80See
IV Record 401, 402, as cited by DLSU, Rollo, p. 283 (G.R. No. 196596). The following comments of the Constitutional Commission
members are illuminating:
MR. GASCON: ... There are many schools which are genuinely non-profit and non-stock but which may have been taxed at the expense of
students. In the long run, these schools oftentimes have to increase tuition fees, which is detrimental to the interest of the students. So when
we encourage non-stock, non-profit institutions be assuring them of tax exemption, we also assure the students of lower tuition fees. That is
the intent.
xxxx

COMM. NOLLEDO: ... So I think, what is important here is the philosophy behind the duty on the part of the State to educate the Filipino
people that duty is being shouldered by private institutions. In order to provide incentive to private institutions to share with the State the
responsibility of educating the youth, I think we should grant tax exemption.
81As the Constitution is not primarily a lawyer's document, its language should be understood in the sense that it may have in common. Its
words should be given their ordinary meaning except where technical terms are employed. See: People v. Derilo, 338 Phil. 350, 383 (1997).
82Black'sLaw Dictionary, Fifth Edition, defines "Revenues" as, "Return or yield, as of land; profit as that which returns or comes back from an
investment; the annual or periodical rents, profits, interest or issues of any species of property, real or personal; income of individual,
corporation, government, etc." (citing Willoughby v. Willoughby, 66 R.I. 430, 19 A.2d 857, 860)
83 Section 32, Tax Code
84 Sections 106 and 108, Tax Code.
85
Section 143 cf. Section 131(n), Local Government Code.
86Black's Law Dictionary, Fifth Edition, defines "Assets" as, "Property of all kinds, real and personal, tangible and intangible, including, inter
alia, for certain purposes, patents and causes of action which belong to any person including a corporation and the estate of a decedent. The
entire property of a rerson, association, corporation, or estate that is applicable or subject to the payment of his or his debts."
87 Section 208 cf. Sections 233 and 235, Local Government Code.
88 Section 107, Tax Code
89 Section 104, PD 1464, otherwise known as the Tariff and Customs Code of the Philippines.
90 245 Phil. 83 (1988).
91 Id. at 91-92.
92
Section 27 (B) further provides that the term unrelated trade, business or other activity means any trade, business or activity, the conduct of
which is not substantially related to the exercise or performance by such educational institution ... of its primary purpose of functions.
93 CONSTITUTION, Article VIII, Section 5 (2).
94In Kida, et al. v. Senate of the Philippines, et al., 675 Phil. 316, 365-366 (2011), we held that the primacy of the Constitution as the supreme
law of the land dictates that where the Constitution has itself made a determination or given its mandate, then the matters so determined or
mandated should be respected until the Constitution itself is changed by amendment or repeal through the applicable constitutional process.
95 Revenue Audit Memorandum Order No. 2-95.
96Rollo, p. 79 (G.R. No. 198841). See Section 13 of the tax Code.
97See the Taxpayers Bill of Rights at http://www.bir.gov.ph/index.P/taxpayer-bill-of-rights.html last accessed on June 1, 2016.
98 Cited in Commissioner of Internal Revenue v. Sony Philippines, Inc., supra note 30, at 531.
99 Section 222, Tax Code.
100Rollo, p. 78 (G.R. No. 198841).
101 Id. at 75-79.
102 Id. at 73-74.
103 Id. at 155-159 (G.R. No. 196596).
104AsianConstruction and Development Corp. v. COMFAC Corp., 535 Phil. 513, 517-518 (2006) citing Tison v. Court of Appeals, G.R. No.
121027, July 31, 1997, 276 SCRA 582, 596-597.
105 Id. citing Arwood Industries, Inc. v. D.M Consunji, Inc., G.R. No. 142277, December 11, 2002, 394 SCRA 11, 18.
106 Id. at 518.
107Rollo, p. 302 (G.R. No. 196596), CTA Division Resolution dated June 9, 2010, quoted by DLSU.
108Supra note 103.
109 386 Phil. 719 (2000).
110 Id. at 726.
111See Section 8, Republic Act No. 1125, published in Official Gazette, S. No. 175 / 50 OG No. 8, 3458 (August, 1954).
112Supra note 91, at 726.
113 556 Phil. 439 (2007).
114 579 Phil. 442 (2008).
115 Section 76 in relation to Section 229 of the Tax Code.
116Commissioner of Internal Revenue v. Asian Transmission Corporation, 655 Phil. 186, 196 (2011).
117Commissioner of Internal Revenue v. Toledo Power, Inc., G.R. No. 183880, January 20, 2014, 714 SCRA 276, 292, citing Barcelon, Roxas
Securities, Inc. v. Commissioner of Internal Revenue, 529 Phil. 785 (2006).
118Rollo, p. 143-144 (G.R. No. 196596).
119 Id. at 144 (G.R. No. 196596), the amount is rounded-off from P93,860,675.40.
120 Id. at 143 (G.R. No. 196596). Capital Fund - Capital Projects Account.
121 Id. at 144 (G.R. No. 196596).
122 Rule 3, Section 2 of the Revised Rules of the CTA, A.M. No. 05-11-07-CTA, November 22, 2005.
123Rollo, pp. 86, 145 (G.R. No. 196596).
124 Id. at 81 (G.R. No. 198841).
125 Id. at 101, page 9 of CTA Division Amended Decision.
126 Id. at 98 (G.R. No. 198841).
127Id. at 87. According to the CTA, the income earned from the lease of premises to MTO-Sports Complex and La Casita amounted to
P2,090,880.00 and P1,916,844.00, respectively (Total of P4,007,724.00). These amounts were specifically identified as part of the proceeds
used by DLSU to pay an outstanding loan obligation that was previously obtained for the purpose of constructing the Sports Complex.
128 Id.
129 Id.
130 Id. at 86.
131 Id. at 85-86.
132The tax base of P4,841,066.65 was computed as follows:
chanRoblesvirtualLawlibrary
Rental income 10,610,379.00
Less: Rent income used in construction of Sports Complex 4,007,724.00
Rental income allegedly added and used in the CF-CPA Account 6,602,655.00
Less: Substantiated portion of CF-CPA disbursements 1,761,588.35
Tax base for deficiency income tax and VAT 4,841,066.65
133The substantiated portion of CF-CPA disbursements amounting to P1,761,308.37 was computed as follows:
chanRoblesvirtualLawlibrary
Rental income allegedly added and used in the CF-CPA Account 6,602,655.00
Multiply by: Ratio of substantiated disbursements (See note 134) 26.68%
Substantiated portion of CF-CPA disbursements 1,761,588.35
134The ratio of 26.68% was computed as follows:
chanRoblesvirtualLawlibrary
Substantiated disbursements of the CF-CPA Account, per
6,259,078.30
Independent CPA
Divide by: Total disbursements made out of the CF-CPA Account 23,463,543.02
Ratio 26.68%
135 For brevity, the exact amount of P10,610,379.00 shall hereinafter be expressed as P10.61 million.
136 For brevity, the exact amount of P6,602,655.00 shall hereinafter be expressed as P6.60 million.
137 For brevity, the exact amount of P23,463,543.02 shall hereinafter be expressed as P23.46 million.
138Supra note 130.
139Rollo,pp. 82-83 (G.R. No. 198841). Ateneo was assessed deficiency income tax and VAT under Section 2.2 of DOF Circular 137-87 and
BIR Ruling No. 173-88.
140 Id. at 83 (G.R. No. 198841).
141 Id. at 83 (G.R. No. 198841).
142 See Ateneo case (CTA Case Nos. 7246 & 7293, March 11, 2010). Id. at 140-154 (G.R. No. 198841).
143 Id. at 145 (G.R. No. 198841).
144 Id. at 85-90 (G.R. No. 198841).
145 Id. at 47 (G.R. No. 198841).
146 Id.
147Churchillv. Concepcion, 34 Phil. 969. 976 (1916); Eastern Theatrical Co. vs. Alfonso, 83 Phil. 852, 862 (1949); Abakada Guro Party List v.
Ermita, 506 Phil. 1, 130-131 (2005).
148British American Tobacco v. Camacho, 603 Phil. 38, 48-49 (2009).
149Commissioner of Internal Revenue v. Court of Appeals, 329 Phil. 987, 1010 (1996).
150 Section 173, Tax Code.
151 Sections 179 and 195, Tax Code.
152Rollo, p. 89 (G.R. No. 198841).

DISSENTING OPINION
LEONEN, J.:

I agree with the ponencia that Article IV, Section 4(3) of the 1987 Constitution grants tax exemption on all assets and all revenues earned by a
non-stock, non-profit educational institution, which are actually, directly, and exclusively used for educational purposes. All revenues, whether
or not sourced from educational activities, are covered by the exemption. The taxpayer needs only to prove that the revenue is actually,
directly, and exclusively used for educational purposes to be exempt from income tax.

I disagree, however, on two (2) points:

First, Letter of Authority No. 2794, which covered the "Fiscal Year Ending 2003 and Unverified Prior Years," is void in its entirety for being in
contravention of Revenue Memorandum Order No. 43-90. Any assessment based on such defective letter of authority must likewise be void.

Second, the Court of Tax Appeals erred in finding that only a portion of the rental income derived by De La Salle University, Inc. (DLSU) from
its concessionaires was used for educational purposes.chanroblesvirtuallawlibrary
I

An audit process to which a particular taxpayer may be subjected begins when a letter of authority is issued by the Commissioner of Internal
Revenue or by the Revenue Regional Director. The letter of authority is an official document that empowers a revenue officer to examine and
scrutinize a taxpayer's books of accounts and other accounting records in order to determine the taxpayer's correct internal revenue tax
liabilities.1
In this regard, Revenue Audit Memorandum Order No. 1-00 provides that a letter of authority authorizes or empowers a designated revenue
officer to examine, verify, and scrutinize a taxpayer's books and records, in relation to internal revenue tax liabilities for a particular period.2

Revenue Membrandum Order No. 43-90, on policy guidelines for the audit/investigation and issuance of letters of authority to audit, provides:
chanRoblesvirtualLawlibrary
C. Other policies for issuance of L/As.
1. All audits/investigations, whether field audit or office audit, should be conducted under a Letter of Authority.
2. The duplicate of each internal revenue tax which is specifically indicated in the L/A shall be attached thereto, unless a return
is not required under the Tax Code to be filed therefor or when the taxpayer has not filed a return or the Assessment Branch
has certified that no return is on file therein or the same cannot be located.
3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The practice of issuing L/As covering
audit of "unverified prior years" is hereby prohibited. If the audit of a taxpayer shall include more than one taxable period, the
other periods or years shall be specifically indicated in the L/A.

....
4. Any re-assignment/transfer of cases to another RO(s), and revalidation of L/As which have already expired, shall require the
issuance of a new L/A, with the corresponding notation thereto, including the previous L/A number and date of issue of said
L/As.

....
D. Preparation and issuance of L/As.
1. All L/As for cases selected and listed pursuant to RMO No. 36-90 to be audited in the revenue regions shall be prepared
and signed by the Regional Director (RD).
2. The Regional Director shall prepare and sign the L/As for returns recommended by the RDO for assignment to the
ROs, indicating therein the name and address of the taxpayer, the name of the RO(s) to whom the L/A is assigned, the
taxable period and kind of tax; after which he shall forward the same to the RDO or Chief, Assessment Branch, who in tum
shall indicate the date of issue of the L/A prior to its issuance.
3. The L/As for investigation of taxpayers by National Office audit offices (including the audit division in the Sector Operations
Service and Excise Tax Service) shall be prepared in accordance with the procedures in the preceding paragraph, by their
respective Assistant Commissioners and signed by the Deputy Commissioner concerned or the Commissioner. The L/As for
investigation of taxpayer by the intelligence and Investigation Office and any other special audit teams formed by the
Commissioner shall be signed by the Commissioner of Internal Revenue.
4. For the proper monitoring and coordination of the issuance of Letter of Authority, the only BIR officials authorized to issue
and sign Letters of Authority are the Regional Directors, the Deputy Commissioners and the Commissioner. For the
exigencies of the service, other officials may be authorized to issue and sign Letters of Authority but only upon prior
authorization by the Commissioner himself. (Emphasis supplied)
Thus, under Revenue Memorandum Order No. 43-90, both the taxable period and the kind of tax must be specifically stated.

A much earlier Revenue Memorandum Order was even more explicit:


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The Letter of Authority must be carefully pr pared and erasures shall be avoided as much as possible, particularly in the name and address of
the taxpayer and the assessment number. A new one should be made if material erasures.appear on any Letter of Authority. The period
covered by the authority must be stated definitely. The use of such phrases as "last five years," "1962 and up," "1962 and previous years" and
all others of similar import shall not be allowed. In the preparation of the Letter of Authority the Revenue District Officer must not put the date,
the same shall be surplied by the Director immediately before the release thereof by his Office. 3 (Emphasis
supplied)ChanRoblesVirtualawlibrary
The revenue officer so authorized must not go beyond the authority given; otherwise, the assessment or examination is a nullity. 4 Corollarily,
the extent to which the authority must be exercised by the revenue officer must be clearly specified.

Here, Letter of Authority No. 2794,5 which was the basis of the Bureau of Internal Revenue to examine DLSU's books of account, stated that
the examination covers the period Fiscal Year Ending 2003 and Unverified Prior Years.

It is my view that the entire Letter of Authority No. 2794 should be struck down as void for being broad, indefinite, and uncertain, and for being
in direct contravention to the policy clearly and explicitly declared in Revenue Memorandum Order No. 43-90 that: (a) a letter of authority
should cover one (1) taxable period; and (b) if it covers more than one taxable period, it must specify all the periods or years covered.

The prescribed procedures under Revenue Memorandum Order No. 43-90, including the requirement of definitely specifying the taxable year
under investigation, were meant to achieve a proper enforcement of tax laws and to minimize, if not eradicate, taxpayers' concerns on
arbitrary assessment, undue harassment from Bureau of Internal Revenue personnel, and unreasonable delay in the investigation and
processing of tax cases.6

Inasmuch as tax investigations entail an intrusion into a taxpayer's private affairs, which are protected and guaranteed by the Constitution, the
provisions of Revenue Memorandum Order No. 43-90 must be strictly followed.

Letter of Authority No. 2794 effectively allowed the revenue officers to examine, verity, and scrutinize DLSU's books of account and other
accounting records without limit as to the covered period. This already constituted an undue intrusion into the affairs of DLSU to its prejudice.
DLSU was at the mercy of the revenue officers with no adequate protection or defense.

As early as 1933, this Court in Sy Jong Chuy v. Reyes7 held that the extraordinary inquisitorial power conferred by law upon collectors of
internal revenue must be strictly construed. The power should be limited to books and papers relevant to the subject of investigation, which
should be mentioned with reasonable certainty. Although the case particularly referred to the use of "subpoena duces tecum" by internal
revenue officers, its discussion is apropos:
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The foregoing discussion will disclose that there are two factors involved in the correct solution of the question before us. The first fact which
must be made to appear by clear and unequivocal proof, as a condition precedent to the right of a court, and, by analogy, an internal revenue
officer, to require a person to deliver up for examination by the court or an internal revenue officer his private books and papers, is their
relevancy; and the second fact which must be established in the same manner is the specification of documents and an indication of them with
as much precision as is fair and feasible[.]

Speaking to the fact of relevancy, there is absolutely no showing of the nature of any official investigation which is being conducted by the
Bureau of Internal Revenue, and this is a prerequisite to the use of the power granted by section 436 of the Administrative Code. Moreover,
when the production under a subpoena duces tecum is contested on the ground of irrelevancy, it is for the movant or the internal revenue
officer to show facts sufficient to enable the court to determine whether the desired documents are material to the issues. And here, all that we
have to justify relevancy is the typewritten part of a mimeographed form reading: "it being necessary to use them (referring to the books) in an
investigation now pending under the Income Tax and Internal Revenue Laws." This is insufficient.

But it is in the second respect that the subpoena is most fatally defective. It will be recalled that it required the production of "all the
commercial books or any other papers on which are recorded your transactions showing income and expenses for the years 1925, 1926,
1927, 1928 inclusive", that these books numbered fifty-three in all, and that they are needed in the business of the corporation. In the parlance
of equity, the subpoena before us savored of a fishing bill, and such bills are to be condemned. That this is so is shown by the phraseology of
the subpoena which is a general command to produce all of the books of account for four years. This, it seems to us, made the subpoena
unreasonably broad in scope. The internal revenue officer had it within his power to examine any or all of the books of the corporation in the
offices of the corporation and then having ascertained what particular books were necessary for an official investigation had it likewise within
his power to issue a subpoena duces tecum sufficiently explicit to be understood and sufficiently reasonable not to interfere with the ordinary
course of business. But this method was not followed. Obviously, if the special deputy could in 1930 call for the production of the books of the
corporation for 1925, 1926, 1927, and 1928, the officer could have called for the production of the books for the year just previous, or 1929,
and for the books of the current year, and if this could be done, the intrusion into private affairs with disastrous paralyzation of business can
easily be visualized.8 (Citations omitted)ChanRoblesVirtualawlibrary
This Court held that the subpoena duces tecum issued by a special deputy of the Collector of Internal Revenue, which commanded a Chinese
merchant to appear at the Internal Revenue Office and produce for investigation all commercial books or papers showing his transactions for
four (4) years (from 1925 to 1928) was "unreasonably broad in scope." This Court further held that the subpoena was not properly issued
because the Collector failed to show the relevance of the Chinese books and to specify the particular books desired, and its sweeping scope
clashed with the constitutional prohibition against unreasonable search and seizure. Thus:
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Generally speaking, there are two readily understandable points of view of the question at issue. The first is the viewpoint of the tax collecting
officials. Taxation is a necessity as all must agree. It is for the officials who have to enforce the revenue laws to see to it that there is no
evasion of those laws and that there is an equal distribution of the tax burden. To accomplish their duty it will often be incumbent upon the
internal revenue officers, for the efficient administration of the service, to inspect the books of merchants and even require the production of
those books in the offices of the inspecting officials. The right of a citizen to his property becomes subservient to the public welfare. All [these]
we are the first to concede. In proper cases, the officers of the Bureau of Internal Revenue should receive the support of the courts when
these officers attempt to perform in a conscientious and lawful manner the duties imposed upon them by law. The trouble is that the particular
subpoena under scrutiny neither shows its relevancy nor specifies with the particularity required by law the books which are to be produced.

The second viewpoint is not that of the government on which is imposed the duty to collect taxes, but is the viewpoint of the merchant. A
citizen goes into business, and in so doing provides himself with the necessary books of account. He cannot have government officials on a
mere whim or a mere suspension taking his books from his offices to the offices of the government for inspection. To permit that would be to
place a weapon in the hands of a miscellaneous number of government employees some of whom might use it improperly and others of whom
might use it improperly. With an understanding of the obligations of the government to protect the citizen, the constitution and the organic law
have done so by throwing around him a wall which makes his home and his private papers his castle. It should be our constant purpose to
keep a subpoena duces tecum from being of such a broad and sweeping character as to clash with the constitutional prohibition against
unreasonable searches and seizures.

Answering the question at issue, we do so without vacillation by holding that the subpoena duces tecum was not properly issued in
accordance with law because the showing of relevancy was not sufficient to justify enforcing the production of the Chinese books; because
the subpoena duces tecum failed to specify the particular books desired, and because a ruling should be avoided which in any manner
appears to sanction an unreasonable search and seizure. In the absence of a showing of materiality, and in the absence of all particularity in
specifying what is wanted by a subpoena duces tecum, the refusal of a merchant to obey a subpoena, commanding him to produce his
commercial books, will be sustained. The courts function to protect the individual citizen of whatever class or nationality against an unjust
inquisition of his books and papers.9ChanRoblesVirtualawlibrary
If we were to uphold the validity of a letter of authority covering a base year plus unverified prior years, we would in essence encourage the
unscrupulous practice of issuing letters of authority even without prior compliance with the procedure that the Commissioner herself
prescribed. This would not help .in curtailing inefficiencies and abuses among revenue officers in the discharge of their tasks. There is nothing
more devious than the scenario where government ignores as much its own rules as the taxpayer's constitutional right against the
unreasonable examination of its books and papers.

In Viduya v. Berdiago:10
It is not for this Court to do less than it can to implement and enforce the mandates of the customs and revenue laws. The evils associated
with tax evasion must be stamped out - without any disregard, it is to be affirmed, of any constitutional right.11 (Emphasis
supplied)ChanRoblesVirtualawlibrary
The inevitability and indispensability of taxation is conceded. Under the law, the Bureau of Internal Revenue has access to all relevant or
material records and data of the taxpayer for the purpose of collecting the correct amount of tax.12 However, this authority must be exercised
reasonably and under the prescribed procedure. 13The Commissioner and revenue officers must strictly comply with the requirements of the
law and its own rules,14 with due regard to taxpayers' constitutional rights. Otherwise, taxpayers are placed in jeopardy of being deprived of
their property without due process of law.

There is nothing in the law-nor do I see any great difficulty-that could have prevented the Commissioner from cancelling Letter of Authority No.
2794 and replacing it with a valid Letter of Authority. Thus, with the nullity of Letter of Authority No. 2794, the assessment against DLSU
should be set aside.chanroblesvirtuallawlibrary
II

DLSU is not liable for deficiency income tax and value-added tax.

The following facts were established:


(1) DLSU derived
its income from
its lease
contracts for
canteen and
bookstore
services with
the following
concessionaires
:

i. Alarey, Inc.
ii. Capri International, Inc.
iii. Zaide Food Corporation
iv. La Casita Roja
v. MTO International Product Mobilizer, Inc.

(2) The rental income from the concessionaires was added to the Depository Fund - PE Sports Complex Fund and to the Physical Plant
Fund (PPF), and, this income was spent on the Current Fund-Capital Projects Account (CF-CPA).

(3) DLSU's rental income from MTO- PE Sports Complex and La Casita, which was transmitted and used for the payment of the loan from
Philippine Trust Company for the construction of the PE Sports Complex, was actually, directly, and exclusively used for educational
purposes.15

(4) DLSU's rental income from Alarey, Inc., Zaide Food Corporation, Capri International, and MTO - Bookstore were transmitted to the CF-
CPA Account.16

These facts were supported by the findings of the Court commissioned independent CPA (ICPA), Atty. Raymund S. Gallardo of Punongbayan
& Araullo:
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From the journal vouchers/official receipts, we have traced that the income received from Alarey, Capri, MTO-Bookstore and Zaide were
temporarily booked under the Revenue account with the following codes: 001000506, 001000507, 001000513 and 001000514. At the end of
the year, said temporary account were closed to PPF account (Exhibits LL-3-A, LL-3-B and LL-3-C).

On the other hand, we have traced that the rental income received from MTO-PE Sports and La Casita [was] temporarily booked under the
Revenue Account code 001000515 and 001000516 upon receipt in the fiscal year May 31, 2001. At the end of fiscal year 2001, the said
temporary accounts were closed to the DF-PE Sports. However, starting fiscal year 2002, the rental income from the said lessees was directly
recorded under the DF-PE Sports account (Exhibits LL-4-A, LL-4-B, and LL-4-C).17 (Emphasis in the original)ChanRoblesVirtualawlibrary
With regard to the disbursements from the CF-CPA Fund, the ICPA examined DLSU's disbursement vouchers as well as subsidiary and
general ledgers. It made the following findings:
Nature of Expenditure 2001 2002 2003

Building Improvement P 9,612,347.74 13,445,828.40 16,763,378.06


Furniture, Fixtures & Equipment 2,329,566.54 1,931,392.20 4,714,171.44
Air conditioner 2,216,797.20 1,748,813.16 1,758,278.00
Computer Equipment - - 227,715.52

Total per subsidiary ledger P 14,158,711.48 P 17,126,033.76 P 23,463,543.02


Building Improvement 3,539,356.37 6,534,658.19 5,660,433.30
Furniture, Fixtures & Equipment 1,654,196.14 767,864.00 71,785.00
Air conditioner 2,111,552.20 1,444,594.21 340,300.00
Computer Equipment - - 186,560.00

Total per disbursement vouchers P 7,305,104.71 P 8,747,116.40 P 6,259,078.30


Difference P 6,853,606.77 P 8,378,917.36 P 17,204,464.72 18

Based on the subsidiary ledger (Exhibits "LL-29-A, LL-29-B and LL-29-C"), total expenses under the CF-CPA amounted to P14,158,711.48 in
2001, P17,126,033.76 in 2002 and P23,463,543.02 in 2003. Of the said amounts, P6,853,606.77, 8,378,917.36, P17,204,464.72 in 2001,
2002 and 2003 respectively, were not validated since the disbursement vouchers were not available. It was represented by the management
that such amounts were strictly spent for renovation. However, due to the migration of accounts to the new accounting software to be used by
the University sometime in 2011, some supporting documents which were used in the migration were inadvertently misplaced. 19

Hence, in its Decision dated January 5, 2010, the Court of Tax Appeals First Division upheld the Commissioner's assessment of deficiency
income tax "for petitioner's failure to fully account for and substantiate all the disbursements from the CF-CPA."20 According to the Court of
Tax Appeals, "it cannot scertain whether rent income from MTO-Bookstore, Alarey, Zaide and Capri were indeed used for educational
purposes."21

DLSU moved for reconsideration. Subsequently, it formally offered to the Court of Tax Appeals First Division, among others, 22 the following
supplemental pieces of documentary evidence:
1) Summary Schedule to Support Misplaced Vouchers for the Period of 3 Years from School Year June 1, 2001 to May 31, 2003 (Exh.
XX);23 and

2) Schedule of Disbursement Vouchers Examined (Unlocate Documents) for the Fiscal Years Ended May 31, 2001 (Exh. YY 24), May
31, 2002 (Exh. ZZ25cralawred) and May 31, 2003 (Exh. AAA26).

These pieces of evidence were admitted by the Court of Tax Appeals in its Resolution dated June 9, 2010. 27

DLSU's controller, Francisco C. De La Cruz, Jr. testified:


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Q9: Please tell us the relevance of Exhibit "XX".
A9: Exhibit "XX" provides an overview of what accounts do those inadvertently misplaced documents pertain to. As will be shown by the
other exhibits, the details of these accounts are all entered, recorded and existing in the accounting software of Petitioner.

Q10: Please tell us the relevance of Exhibits "YY", "ZZ" and "AAA".
A10: These are the details of the accounts pertaining to the inadvertently misplaced documents. Before the documents were
inadvertently misplaced, these have been entered in the accounting software of Petitioner. Details were downloaded from
Petitioner's accounting software.

These details include the Charge Account, the Classification of Expense per Chart Account of the University, the Cost Center per
Chart of Account of the University, the Supplier Name, the Disbursement Voucher Number, the Disbursement Voucher Date, the
Check Number, the Check Date, the Cost, and the Description per Disbursement Voucher.

The specifics which accompany the entries were all taken from the documents before these were inadvertently misplaced.

Exhibit "YY" pertains to the details of the accounts for Fiscal Year 2001, Exhibit "ZZ" for Fiscal Year 2002, and Exhibit "AAA" for
Fiscal Year 2003.28
Samples of the information provided in these pieces of evidence are as follows:

a. For Fiscal Year Ended May 31,2001 (Exhibit YY)


Charge Classification Cost Supplier Disbursement Disbursment Check Check Cost Description
Account of Expense Center Name Voucher No. Voucher No. Date per
per Chart of per Chart Date Disbursement
Account of of Voucher
the Accounts
University of the
University

100-213- Furniture, PFO BARILEA 2001050105 5/30/2001 180403 3-May-01 89,234.04 TABLE, A
940 Fixture and Capital WOOD 1.20 x .6029
Equipment Projects WORKS

b. For Fiscal Year Ended May 31, 2002 (Exhibit ZZ)


Charge Classificatio Cost Supplier Name Disbursemen Disbursmen Check No. Chec Cost Description
Accoun n of Expense Center t Voucher No. t Voucher k per
t per Chart of per Chart Date Date Disbursemen
Account of of t Voucher
the Accounts
University of the
Universit
y

100- Airconditioner PFO RCC 2001081468 15-Aug-01 000018844 16- 63,249.9 AIRCON WIN
213-943 Capital MARKETING 2 Aug- 5 TYPE 3TR
Projects CORPORATIO 01 2HP SPLIT
N TYPE30

c. For Fiscal Year Ended May 31, 2003 (Exhibit AAA)


Charge Classification Cost Supplier Disbursement Disbursment Check Check Cost Description
Account of Expense Center Name Voucher No. Voucher No. Date per
per Chart of per Chart Date Disbursement
Account of of Voucher
the Accounts
University of the
University

100-026- COMPUTER VC SILICON 2002102047 10/18/2002 218124 26-Oct- 12,350.00 PRINTER HP


950 PRINTER Academics VALLEY 2002 DESKJET
COMPUTER 960C31
CENTRE

However, the Court of Tax Appeals First Division was unconvinced. It simply stated that DLSU failed to sufficiently account for the
unsubstantiated disbursements. Although it considered the other additional documentary evidence (Exhibits "VV" and "WW") formally offered
by DLSU, Exhibits "XX," "YY," "ZZ," and "AAA" were brushed aside without citing any reason or discussing the probative value or weight of
these additional pieces of evidence.32 Thus:
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With regard the unsubstantiated disbursements from the CF-CPA, Petitioner alleged that the supporting documents were inadvertently
misplaced due to migration of accounts to its new accounting software used sometime in 2001. In lieu thereof, petitioner submitted
downloaded copies of the Schedule of Disbursement Vouchers from its accounting software.

The Court is not convinced.

According to ICPA's findings, the petitioner was able to show only the disbursements from the CF-CPA amounting to P7,305,104.71,
P8,747,116.40 and P6,259,078.30 for the fiscal years 2001, 2002 and 2003, respectively.33ChanRoblesVirtualawlibrary
The Court of Tax Appeals First Division concluded that only the portion of the rental income pertaining to the substantiated disbursements of
the CF-CPA would be considered as actually, directly, and exclusively used for educational purposes. 34 This portion was computed by
multiplying the ratio of substantiated disbursements to the total disbursements per subsidiary ledgers to the total rental income, thus:
chanRoblesvirtualLawlibrary
Using the amounts determined for the Fiscal Year 2003,
P6,259,078.30
------------------ = 26.68% x P6,602,655.00 = P1,761,588.35
P23,463,543.02
Hence, for 2003, the portion of the rental income that was not sufficiently proven to have been used for educational purposes amounted to
P4,841,066.65. This amount was used as base for computing the deficiency income tax and value-added tax.

On appeal, the Court of Tax Appeals En Banc simply ruled that "petitioner again failed to fully account for and substantiate all the
disbursements from the CF-CPA Account."35 The Court of Tax Appeals En Banc heavily relied on the findings of the ICPA that "the
[substantiated] disbursements from the CF-CPA Account for fiscal year 2003 amounts to P6,259,078.30." 36 However, these findings of the
ICPA were made when Exhibits "XX," "YY," "ZZ," and "AAA" had not yet been submitted. The additional exhibits were offered by DLSU to
address the findings of the ICPA with regard to the unsubstantiated disbursements. Unfortunately, nowhere in the Decision of the Court of Tax
Appeals En Banc was there a discussion on the probative value or weight of these additional exhibits.

As a rule, factual findings of the Court of Tax Appeals are entitled to the highest respect and will not be disturbed on appeal. Some exceptions
that have been recognized by this Court are: (1) when a party shows that the findings are not supported by substantial evidence or there is a
showing of gross error or abuse on the part of the tax court; 37 (2) when the judgment is premised on a misapprehension of facts; 38 or (3) when
the tax court failed to notice certain relevant facts that, if considered, would justify a different conclusion. 39 The third exception applies here.

The Court of Tax Appeals should have considered the additional pieces of evidence, which have been duly admitted and formed part of the
case records. This is a requirement of due process. 40 The right to be heard, which includes the right to present evidence, is meaningless if the
Court of Tax Appeals can simply ignore the evidence.

In Edwards v. McCoy:41
[T]he object of a hearing is as much to have evidence considered as it is to present it. The right to adduce evidence, without the corresponding
duty to consider it, is vain. Such right is conspicuously futile if the person or persons to whom the evidence is presented can thrust it aside
without notice or consideration.42ChanRoblesVirtualawlibrary
In Ang Tibay v. Court of Industrial Relations,43 this Court similarly ruled that "not only must the party be given an opportunity to present his
case and to adduce evidence tending to establish the rights which he asserts but the tribunal must consider the evidence presented."44

The Rules of Court allows the presentation of secondary evidence:


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RULE 130
Rules of Admissibility

....

Section 5. When original document is unavailable. - When the original document has been lost or destroyed, or cannot be produced in court,
the offeror, upon proof of its execution or existence and the cause of its unavailability without bad faith on his part, may prove its contents by a
copy, or by a recital of its contents in some authentic document, or by the testimony of witnesses in the order
stated.ChanRoblesVirtualawlibrary
For secondary evidence to be admissible, there must be satisfactory proof of: (a) the execution and existence of the original; (b) the loss and
destruction of the original or its non-production in court; and (c) the unavailability of the original not being due to bad faith on the part of the
offeror. The admission by the Court of Tax Appeals First Division-which the En Banc affirmed of these pieces of evidence presupposes that all
three prerequisites have been established by DLSU, that is, that DLSU had sufficiently explained its non-production of the disbursement
vouchers, and the cause of unavailability is without bad faith on its part.

There can be no just determination of the present action if we ignore Exhibits "XX," "YY," "ZZ," and "AAA," which were submitted before the
Court of Tax Appeals and which supposedly contained the same information embodied in the unlocated disbursement vouchers. Exhibits
"YY," "ZZ," and "AAA" were the downloaded copies of the Schedule of Disbursement Vouchers from DLSU's accounting software. The
Commissioner did not dispute the veracity or correctness of the detailed entries in these documents. 45 Her objection to the additional pieces of
evidence was based on the ground that "DLSU was indirectly reopening the trial of the case" and the additional exhibits were "not newly
discovered evidence."46 An examination of these exhibits shows that the disbursements from the CF-CPA Account were used for educational
purposes.

These additional pieces of evidence, taken together with the findings of the ICPA, corroborate the findings of the Court of Tax Appeals in its
January 5, 2010 Decision that DLSU uses "fund accounting" to ensure that the utilization of an income (i.e., rental income) is restricted to a
specified purpose (educational purpose):
chanRoblesvirtualLawlibrary
Petitioner's Controller, Mr. Francisco De La Cruz, stated the following in his judicial affidavit:
chanRoblesvirtualLawlibrary
Q: You mentioned that one of your functions as Controller is to ensure that [petitioner]'s utilization of income from all sources is consistent with
existing policies. What are some of [petitioner]'s policies regarding utilization of its income from all sources?

A: Of particular importance are the following:


1. [Petitioner] has a long-standing policy to obtain funding for all disbursements for educational purposes primarily
from rental income earned from its lease contracts, present and future;chanrobleslaw
2. In funding all disbursements for educational purposes, [petitioner] first exhausts its rental income earned from its
lease contracts before it utilizes income from other sources; and
3. [Petitioner] extends regular financial assistance by way of grants, donations, dole-outs, loans and the like to St.
Yon for the latter's pursuit of its purely educational purposes stated in its AOI.
The evaluation of petitioner's audited financial statements for the years 2001, 2002, and 2003 shows that it uses fund accounting. The Notes
to Financial Statements disclose:
chanRoblesvirtualLawlibrary
2.6 Fund Accounting

To ensure observance of limitations and restrictions placed on the use of resources available to the [Petitioner], the accounts of the [Petitioner]
are maintained in accordance with the principle of fund accounting. This is the procedure by which resources for various purposes are
classified for accounting and financial reporting purposes into funds that are in accordance with specified activities and objectives. Separate
accounts are maintained for each fund; however, in the accompanying financial statements, funds that have similar characteristics have been
combined into fund groups. Accordingly, all financial transactions have been recorded and reported by fund
group.47ChanRoblesVirtualawlibrary
ACCORDINGLY, I vote to GRANT the Petition of De La Salle University, Inc. and to SET ASIDE the deficiency assessments issued against it.
PHILIPPINE AMUSEMENT AND GAMING G.R. No. 172087
CORPORATION (PAGCOR),
Petitioner, Present:

CORONA, C.J.,
CARPIO,
CARPIO MORALES,
- versus - VELASCO, JR.,
NACHURA,*
LEONARDO-DE CASTRO,
BRION,*
THE BUREAU OF INTERNAL REVENUE PERALTA,
(BIR), represented herein by HON. JOSE MARIO BUAG, BERSAMIN,
in his official capacity as COMMISSIONER OF INTERNAL DEL CASTILLO,
REVENUE, ABAD,
Public Respondent, VILLARAMA, JR.,
PEREZ,
JOHN DOE and JANE DOE, who are persons acting for, in MENDOZA, and
behalf, or under the authority of Respondent. SERENO, JJ.
Public and Private Respondents.
Promulgated:

March 15, 2011

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

DECISION

PERALTA, J.:

For resolution of this Court is the Petition for Certiorari and Prohibition[1] with prayer for the issuance of a Temporary Restraining Order
and/or Preliminary Injunction, dated April 17, 2006, of petitioner Philippine Amusement and Gaming Corporation (PAGCOR), seeking the
declaration of nullity of Section 1 of Republic Act (R.A.) No. 9337 insofar as it amends Section 27 (c) of the National Internal Revenue Code of
1997, by excluding petitioner from exemption from corporate income tax for being repugnant to Sections 1 and 10 of Article III of the
Constitution. Petitioner further seeks to prohibit the implementation of Bureau of Internal Revenue (BIR) Revenue Regulations No. 16-2005 for
being contrary to law.

The undisputed facts follow.

PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A[2] on January 1, 1977. Simultaneous to its creation, P.D. No.
1067-B[3](supplementing P.D. No. 1067-A) was issued exempting PAGCOR from the payment of any type of tax, except a franchise tax of five
percent (5%) of the gross revenue.[4] Thereafter, on June 2, 1978, P.D. No. 1399 was issued expanding the scope of PAGCOR's exemption. [5]
To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D. No. 1869 [6] was issued. Section 13 thereof reads as
follows:

Sec. 13. Exemptions. x x x

(1) Customs Duties, taxes and other imposts on importations. - All importations of equipment, vehicles, automobiles,
boats, ships, barges, aircraft and such other gambling paraphernalia, including accessories or related facilities, for the sole
and exclusive use of the casinos, the proper and efficient management and administration thereof and such other clubs,
recreation or amusement places to be established under and by virtue of this Franchise shall be exempt from the payment of
duties, taxes and other imposts, including all kinds of fees, levies, or charges of any kind or nature.
Vessels and/or accessory ferry boats imported or to be imported by any corporation having existing contractual
arrangements with the Corporation, for the sole and exclusive use of the casino or to be used to service the operations and
requirements of the casino, shall likewise be totally exempt from the payment of all customs duties, taxes and other imposts,
including all kinds of fees, levies, assessments or charges of any kind or nature, whether National or Local.

(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well
as fees, charges, or levies of whatever nature, whether National or Local, shall be assessed and collected under this
Franchise from the Corporation; nor shall any form of tax or charge attach in any way to the earnings of the
Corporation, except a Franchise Tax of five percent (5%)of the gross revenue or earnings derived by the Corporation
from its operation under this Franchise. Such tax shall be due and payable quarterly to the National Government and
shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied, established,
or collected by any municipal, provincial or national government authority.
(b) Others: The exemption herein granted for earnings derived from the operations conducted under the franchise,
specifically from the payment of any tax, income or otherwise, as well as any form of charges, fees or levies, shall inure to the
benefit of and extend to corporation(s), association(s), agency(ies), or individual(s) with whom the Corporation or operator
has any contractual relationship in connection with the operations of the casino(s) authorized to be conducted under this
Franchise and to those receiving compensation or other remuneration from the Corporation as a result of essential facilities
furnished and/or technical services rendered to the Corporation or operator.

The fee or remuneration of foreign entertainers contracted by the Corporation or operator in pursuance of this
provision shall be free of any tax.

(3) Dividend Income. Notwithstanding any provision of law to the contrary, in the event the Corporation should
declare a cash dividend income corresponding to the participation of the private sector shall, as an incentive to the
beneficiaries, be subject only to a final flat income rate of ten percent (10%) of the regular income tax rates. The dividend
income shall not in such case be considered as part of the beneficiaries' taxable income; provided, however, that such dividend
income shall be totally exempted from income or other form of taxes if invested within six (6) months from the date the dividend
income is received in the following:

(a) operation of the casino(s) or investments in any affiliate activity that will ultimately redound to the benefit
of the Corporation; or any other corporation with whom the Corporation has any existing arrangements in connection
with or related to the operations of the casino(s);
(b) Government bonds, securities, treasury notes, or government debentures; or
(c) BOI-registered or export-oriented corporation(s).[7]

PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was later restored by Letter of Instruction No. 1430,
which was issued in September 1984.
On January 1, 1998, R.A. No. 8424,[8] otherwise known as the National Internal Revenue Code of 1997, took effect. Section
27 (c) of R.A. No. 8424 provides that government-owned and controlled corporations (GOCCs) shall pay corporate income tax, except petitioner
PAGCOR, the Government Service and Insurance Corporation, the Social Security System, the Philippine Health Insurance Corporation, and
the Philippine Charity Sweepstakes Office, thus:
(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of existing special
general laws to the contrary notwithstanding, all corporations, agencies or instrumentalities owned and controlled by the
Government, except the Government Service and Insurance Corporation (GSIS), the Social Security System (SSS),
the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the
Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are
imposed by this Section upon corporations or associations engaged in similar business, industry, or activity. [9]
With the enactment of R.A. No. 9337[10] on May 24, 2005, certain sections of the National Internal Revenue Code of 1997 were
amended. The particular amendment that is at issue in this case is Section 1 of R.A. No. 9337, which amended Section 27 (c) of the National
Internal Revenue Code of 1997 by excluding PAGCOR from the enumeration of GOCCs that are exempt from payment of corporate income
tax, thus:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of existing special
general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned and controlled by the
Government, except the Government Service and Insurance Corporation (GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC), and the Philippine Charity Sweepstakes Office (PCSO), shall pay such
rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in similar
business, industry, or activity.

Different groups came to this Court via petitions for certiorari and prohibition[11] assailing the validity and constitutionality of R.A. No.
9337, in particular:

1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of goods and properties; Section 5, which imposes a 10% VAT on
importation of goods; and Section 6, which imposes a 10% VAT on sale of services and use or lease of properties, all contain a uniform
proviso authorizing the President, upon the recommendation of the Secretary of Finance, to raise the VAT rate to 12%. The said provisions
were alleged to be violative of Section 28 (2), Article VI of the Constitution, which section vests in Congress the exclusive authority to fix the
rate of taxes, and of Section 1, Article III of the Constitution on due process, as well as of Section 26 (2), Article VI of the Constitution, which
section provides for the "no amendment rule" upon the last reading of a bill;

2) Sections 8 and 12 were alleged to be violative of Section 1, Article III of the Constitution, or the guarantee of equal protection of the
laws, and Section 28 (1), Article VI of the Constitution; and

3) other technical aspects of the passage of the law, questioning the manner it was passed.

On September 1, 2005, the Court dismissed all the petitions and upheld the constitutionality of R.A. No. 9337. [12]
On the same date, respondent BIR issued Revenue Regulations (RR) No. 16-2005,[13] specifically identifying PAGCOR as one of the
franchisees subject to 10% VAT imposed under Section 108 of the National Internal Revenue Code of 1997, as amended by R.A. No. 9337. The
said revenue regulation, in part, reads:

Sec. 4. 108-3. Definitions and Specific Rules on Selected Services.


xxxx

(h) x x x

Gross Receipts of all other franchisees, other than those covered by Sec. 119 of the Tax Code, regardless of how
their franchisees may have been granted, shall be subject to the 10% VAT imposed under Sec.108 of the Tax Code. This
includes, among others, the Philippine Amusement and Gaming Corporation (PAGCOR), and its licensees or franchisees.

Hence, the present petition for certiorari.

PAGCOR raises the following issues:

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

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

III
WHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH (H) IS NULL AND VOID AB INITIO FOR BEING
BEYOND THE SCOPE OF THE BASIC LAW, RA 8424, SECTION 108, INSOFAR AS THE SAID REGULATION IMPOSED
VAT ON THE SERVICES OF THE PETITIONER AS WELL AS PETITIONERS LICENSEES OR FRANCHISEES WHEN THE
BASIC LAW, AS INTERPRETED BY APPLICABLE JURISPRUDENCE, DOES NOT IMPOSE VAT ON PETITIONER OR ON
PETITIONERS LICENSEES OR FRANCHISEES.[14]
The BIR, in its Comment[15] dated December 29, 2006, counters:

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

The Office of the Solicitor General (OSG), by way of Manifestation In Lieu of Comment,[16] concurred with the arguments of the
petitioner. It added that although the State is free to select the subjects of taxation and that the inequity resulting from singling out a particular
class for taxation or exemption is not an infringement of the constitutional limitation, a tax law must operate with the same force and effect to all
persons, firms and corporations placed in a similar situation. Furthermore, according to the OSG, public respondent BIR exceeded its statutory
authority when it enacted RR No. 16-2005, because the latter's provisions are contrary to the mandates of P.D. No. 1869 in relation to R.A. No.
9337.

The main issue is whether or not PAGCOR is still exempt from corporate income tax and VAT with the enactment of R.A. No. 9337.

After a careful study of the positions presented by the parties, this Court finds the petition partly meritorious.
Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal Revenue Code of 1977, petitioner is no longer
exempt from corporate income tax as it has been effectively omitted from the list of GOCCs that are exempt from it. Petitioner argues that such
omission is unconstitutional, as it is violative of its right to equal protection of the laws under Section 1, Article III of the Constitution:

Sec. 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be
denied the equal protection of the laws.
.
In City of Manila v. Laguio, Jr.,[17] this Court expounded the meaning and scope of equal protection, thus:

Equal protection requires that all persons or things similarly situated should be treated alike, both as to rights
conferred and responsibilities imposed. Similar subjects, in other words, should not be treated differently, so as to give undue
favor to some and unjustly discriminate against others. The guarantee means that no person or class of persons shall be denied
the same protection of laws which is enjoyed by other persons or other classes in like circumstances. The "equal protection of
the laws is a pledge of the protection of equal laws." It limits governmental discrimination. The equal protection clause extends
to artificial persons but only insofar as their property is concerned.
xxxx
Legislative bodies are allowed to classify the subjects of legislation. If the classification is reasonable, the law may
operate only on some and not all of the people without violating the equal protection clause. The classification must, as an
indispensable requisite, not be arbitrary. To be valid, it must conform to the following requirements:
1) It must be based on substantial distinctions.
2) It must be germane to the purposes of the law.
3) It must not be limited to existing conditions only.
4) It must apply equally to all members of the class.[18]
It is not contested that before the enactment of R.A. No. 9337, petitioner was one of the five GOCCs exempted from payment of
corporate income tax as shown in R.A. No. 8424, Section 27 (c) of which, reads:
(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of existing special
or general laws to the contrary notwithstanding, all corporations, agencies or instrumentalities owned and controlled by the
Government, except the Government Service and Insurance Corporation (GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the Philippine
Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by
this Section upon corporations or associations engaged in similar business, industry, or activity.[19]
A perusal of the legislative records of the Bicameral Conference Meeting of the Committee on Ways on Means dated October 27, 1997
would show that the exemption of PAGCOR from the payment of corporate income tax was due to the acquiescence of the Committee
on Ways on Means to the request of PAGCOR that it be exempt from such tax.[20] The records of the Bicameral Conference Meeting reveal:

HON. R. DIAZ. The other thing, sir, is we --- I noticed we imposed a tax on lotto winnings.
CHAIRMAN ENRILE. Wala na, tinanggal na namin yon.

HON. R. DIAZ. Tinanggal na ba natin yon?

CHAIRMAN ENRILE. Oo.

HON. R. DIAZ. Because I was wondering whether we covered the tax on --- Whether on a universal basis, we
included a tax on cockfighting winnings.

CHAIRMAN ENRILE. No, we removed the ---

HON. R. DIAZ. I . . . (inaudible) natin yong lotto?

CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon request.

CHAIRMAN JAVIER. Yeah, Philippine Insurance Commission.

CHAIRMAN ENRILE. Philippine Insurance --- Health, health ba. Yon ang request ng Chairman, I will
accept. (laughter) Pag-Pag-ibig yon, maliliit na sa tao yon.

HON. ROXAS. Mr. Chairman, I wonder if in the revenue gainers if we factored in an amount that would reflect the
VAT and other sales taxes---

CHAIRMAN ENRILE. No, were talking of this measure only. We will not --- (discontinued)

HON. ROXAS. No, no, no, no, from the --- arising from the exemption. Assuming that when we release the money
into the hands of the public, they will not use that to --- for wallpaper. They will spend that eh, Mr. Chairman. So when they
spend that---

CHAIRMAN ENRILE. Theres a VAT.

HON. ROXAS. There will be a VAT and there will be other sales taxes no. Is there a quantification? Is there an
approximation?

CHAIRMAN JAVIER. Not anything.

HON. ROXAS. So, in effect, we have sterilized that entire seven billion. In effect, it is not circulating in the economy
which is unrealistic.

CHAIRMAN ENRILE. It does, it does, because this is taken and spent by government, somebody receives it in the
form of wages and supplies and other services and other goods. They are not being taken from the public and stored in a
vault.

CHAIRMAN JAVIER. That 7.7 loss because of tax exemption. That will be extra income for the taxpayers.

HON. ROXAS. Precisely, so they will be spending it.[21]

The discussion above bears out that under R.A. No. 8424, the exemption of PAGCOR from paying corporate income tax was not based
on a classification showing substantial distinctions which make for real differences, but to reiterate, the exemption was granted upon the request
of PAGCOR that it be exempt from the payment of corporate income tax.
With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424, PAGCOR has been excluded from the enumeration of
GOCCs that are exempt from paying corporate income tax. The records of the Bicameral Conference Meeting dated April 18, 2005, of the
Committee on the Disagreeing Provisions of Senate Bill No. 1950 and House Bill No. 3555, show that it is the legislative intent that PAGCOR
be subject to the payment of corporate income tax, thus:
THE CHAIRMAN (SEN. RECTO). Yes, Osmea, the proponent of the amendment.

SEN. OSMEA. Yeah. Mr. Chairman, one of the reasons why we're even considering this VAT bill is we want to show the
world who our creditors, that we are increasing official revenues that go to the national budget. Unfortunately today, Pagcor
is unofficial.

Now, in 2003, I took a quick look this morning, Pagcor had a net income of 9.7 billion after paying some small taxes that
they are subjected to. Of the 9.7 billion, they claim they remitted to national government seven billion. Pagkatapos, there
are other specific remittances like to the Philippine Sports Commission, etc., as mandated by various laws, and then about
400 million to the President's Social Fund. But all in all, their net profit today should be about 12 billion. That's why I am
questioning this two billion. Because while essentially they claim that the money goes to government, and I will accept
that just for the sake of argument. It does not pass through the appropriation process. And I think that at least if
we can capture 35 percent or 32 percent through the budgetary process, first, it is reflected in our official income
of government which is applied to the national budget, and secondly, it goes through what is constitutionally
mandated as Congress appropriating and defining where the money is spent and not through a board of directors
that has absolutely no accountability.

REP. PUENTEBELLA. Well, with all due respect, Mr. Chairman, follow up lang.

There is wisdom in the comments of my good friend from Cebu, Senator Osmea.

SEN. OSMEA. And Negros.

REP. PUENTEBELLA. And Negros at the same time ay Kasimanwa. But I would not want to put my friends from the
Department of Finance in a difficult position, but may we know your comments on this knowing that as Senator Osmea just
mentioned, he said, I accept that that a lot of it is going to spending for basic services, you know, going to most, I think,
supposedly a lot or most of it should go to government spending, social services and the like. What is your comment on
this? This is going to affect a lot of services on the government side.

THE CHAIRMAN (REP. LAPUS). Mr. Chair, Mr. Chair.

SEN. OSMEA. It goes from pocket to the other, Monico.

REP. PUENTEBELLA. I know that. But I wanted to ask them, Mr. Senator, because you may have your own pre-judgment
on this and I don't blame you. I don't blame you. And I know you have your own research. But will this not affect a lot, the
disbursements on social services and other?

REP. LOCSIN. Mr. Chairman. Mr. Chairman, if I can add to that question also. Wouldn't it be easier for you to explain to,
say, foreign creditors, how do you explain to them that if there is a fiscal gap some of our richest corporations has [been]
spared [from] taxation by the government which is one rich source of revenues. Now, why do you save, why do you spare
certain government corporations on that, like Pagcor? So, would it be easier for you to make an argument if everything was
exposed to taxation?

REP. TEVES. Mr. Chair, please.

THE CHAIRMAN (REP. LAPUS). Can we ask the DOF to respond to those before we call Congressman Teves?

MR. PURISIMA. Thank you, Mr. Chair.

Yes, from definitely improving the collection, it will help us because it will then enter as an official revenue although
when dividends declare it also goes in as other income. (sic)

xxxx

REP. TEVES. Mr. Chairman.

xxxx

THE CHAIRMAN (REP. LAPUS). Congressman Teves.

REP. TEVES. Yeah. Pagcor is controlled under Section 27, that is on income tax. Now, we are talking here on value-
added tax. Do you mean to say we are going to amend it from income tax to value-added tax, as far as Pagcor is
concerned?

THE CHAIRMAN (SEN. RECTO). No. We are just amending that section with regard to the exemption from income
tax of Pagcor.

xxxx
REP. NOGRALES. Mr. Chairman, Mr. Chairman. Mr. Chairman.

THE CHAIRMAN (REP. LAPUS). Congressman Nograles.

REP. NOGRALES. Just a point of inquiry from the Chair. What exactly are the functions of Pagcor that are VATable? What
will we VAT in Pagcor?

THE CHAIRMAN (REP. LAPUS). This is on own income tax. This is Pagcor income tax.

REP. NOGRALES. No, that's why. Anong i-va-Vat natin sa kanya. Sale of what?

xxxx

REP. VILLAFUERTE. Mr. Chairman, my question is, what are we VATing Pagcor with, is it the . . .

REP. NOGRALES. Mr. Chairman, this is a secret agreement or the way they craft their contract, which basis?

THE CHAIRMAN (SEN. RECTO). Congressman Nograles, the Senate version does not discuss a VAT on Pagcor but
it just takes away their exemption from non-payment of income tax.[22]

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

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

PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative records of the Bicameral Conference
Meeting dated October 27, 1997, of the Committee on Ways and Means, show that PAGCORs exemption from payment of corporate income
tax, as provided in Section 27 (c) of R.A. No. 8424, or the National Internal Revenue Code of 1997, was not made pursuant to a valid
classification based on substantial distinctions and the other requirements of a reasonable classification by legislative bodies, so that the law
may operate only on some, and not all, without violating the equal protection clause. The legislative records show that the basis of the grant of
exemption to PAGCOR from corporate income tax was PAGCORs own request to be exempted.

Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab initio for violating the non-impairment clause of the
Constitution. Petitioner avers that laws form part of, and is read into, the contract even without the parties expressly saying so. Petitioner states
that the private parties/investors transacting with it considered the tax exemptions, which inure to their benefit, as the main consideration and
inducement for their decision to transact/invest with it. Petitioner argues that the withdrawal of its exemption from corporate income tax by R.A.
No. 9337 has the effect of changing the main consideration and inducement for the transactions of private parties with it; thus, the amendatory
provision is violative of the non-impairment clause of the Constitution.

Petitioners contention lacks merit.


The non-impairment clause is contained in Section 10, Article III of the Constitution, which provides that no law impairing the obligation
of contracts shall be passed. The non-impairment clause is limited in application to laws that derogate from prior acts or contracts by enlarging,
abridging or in any manner changing the intention of the parties. [29] There is impairment if a subsequent law changes the terms of a contract
between the parties, imposes new conditions, dispenses with those agreed upon or withdraws remedies for the enforcement of the rights of the
parties.[30]
As regards franchises, Section 11, Article XII of the Constitution[31] provides that no franchise or right shall be granted except under
the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires.[32]

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

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

In this case, PAGCOR was granted a franchise to operate and maintain gambling casinos, clubs and other recreation or amusement
places, sports, gaming pools, i.e., basketball, football, lotteries, etc., whether on land or sea, within the territorial jurisdiction of the Republic of
the Philippines.[36] Under Section 11, Article XII of the Constitution, PAGCORs franchise is subject to amendment, alteration or repeal by
Congress such as the amendment under Section 1 of R.A. No. 9377. Hence, the provision in Section 1 of R.A. No. 9337, amending Section 27
(c) of R.A. No. 8424 by withdrawing the exemption of PAGCOR from corporate income tax, which may affect any benefits to PAGCORs
transactions with private parties, is not violative of the non-impairment clause of the Constitution.
Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to 10% VAT is invalid for being contrary
to R.A. No. 9337.Nowhere in R.A. No. 9337 is it provided that petitioner can be subjected to VAT. R.A. No. 9337 is clear only as to the removal
of petitioner's exemption from the payment of corporate income tax, which was already addressed above by this Court.

As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT pursuant to Section 7 (k) thereof, which reads:

Sec. 7. Section 109 of the same Code, as amended, is hereby further amended to read as follows:
Section 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2) hereof, the
following transactions shall be exempt from the value-added tax:
xxxx

(k) Transactions which are exempt under international agreements to which the Philippines is a
signatory or under special laws, except Presidential Decree No. 529.[37]

Petitioner is exempt from the payment of VAT, because PAGCORs charter, P.D. No. 1869, is a special law that grants petitioner
exemption from taxes.

Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337, which retained Section 108 (B) (3) of R.A.
No. 8424, thus:

[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as amended, is hereby further amended to
read as follows:

SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties.

(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including
the use or lease of properties: x x x
xxxx

(B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate;

xxxx

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

x x x x[38]

As pointed out by petitioner, although R.A. No. 9337 introduced amendments to Section 108 of R.A. No. 8424 by imposing VAT on
other services not previously covered, it did not amend the portion of Section 108 (B) (3) that subjects to zero percent rate services performed
by VAT-registered persons to persons or entities whose exemption under special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to 0% rate.

Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been thoroughly and extensively discussed
in Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation.[39] Acesite was the owner and operator of the Holiday Inn Manila
Pavilion Hotel. It leased a portion of the hotels premises to PAGCOR. It incurred VAT amounting to P30,152,892.02 from its rental income and
sale of food and beverages to PAGCOR from January 1996 to April 1997. Acesite tried to shift the said taxes to PAGCOR by incorporating it in
the amount assessed to PAGCOR. However, PAGCOR refused to pay the taxes because of its tax-exempt status. PAGCOR paid only the
amount due to Acesite minus VAT in the sum of P30,152,892.02. Acesite paid VAT in the amount of P30,152,892.02 to the Commissioner of
Internal Revenue, fearing the legal consequences of its non-payment. In May 1998, Acesite sought the refund of the amount it paid as VAT on
the ground that its transaction with PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. The Court ruled that PAGCOR
and Acesite were both exempt from paying VAT, thus:

xxxx
PAGCOR is exempt from payment of indirect taxes

It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the payment of
taxes. Section 13 of P.D. 1869 pertinently provides:

Sec. 13. Exemptions.

xxxx

(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or otherwise,
as well as fees, charges or levies of whatever nature, whether National or Local, shall be assessed and
collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any way
to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or
earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and
payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or
assessments of any kind, nature or description, levied, established or collected by any municipal, provincial,
or national government authority.

(b) Others: The exemptions herein granted for earnings derived from the operations conducted
under the franchise specifically from the payment of any tax, income or otherwise, as well as any form of
charges, fees or levies, shall inure to the benefit of and extend to corporation(s), association(s), agency(ies),
or individual(s) with whom the Corporation or operator has any contractual relationship in connection with
the operations of the casino(s) authorized to be conducted under this Franchise and to those receiving
compensation or other remuneration from the Corporation or operator as a result of essential facilities
furnished and/or technical services rendered to the Corporation or operator.
Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax liability and not to indirect taxes,
like the VAT.
We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no
distinction on whether the taxes are direct or indirect. We are one with the CA ruling that PAGCOR is also exempt from
indirect taxes, like VAT, as follows:
Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator
refers to PAGCOR. Although the law does not specifically mention PAGCOR's exemption from indirect
taxes, PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes
persons or entities contracting with PAGCOR in casino operations. Although, differently worded, the
provision clearly exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting tax
exempt status to persons dealing with PAGCOR in casino operations. The unmistakable conclusion is
that PAGCOR is not liable for the P30, 152,892.02 VAT and neither is Acesite as the latter is effectively
subject to zero percent rate under Sec. 108 B (3), R.A. 8424. (Emphasis supplied.)

Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature clearly granted
exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in the instant case, can be shifted or
passed to the buyer, transferee, or lessee of the goods, properties, or services subject to VAT. Thus, by extending the tax
exemption to entities or individuals dealing with PAGCOR in casino operations, it is exempting PAGCOR from being
liable to indirect taxes.
The manner of charging VAT does not make PAGCOR liable to said tax.

It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or leased, in which
case it is computed as 1/11 of such value, or charged as an additional 10% to the value. Verily, the seller or lessor has the
option to follow either way in charging its clients and customer. In the instant case, Acesite followed the latter method, that is,
charging an additional 10% of the gross sales and rentals. Be that as it may, the use of either method, and in particular, the
first method, does not denigrate the fact that PAGCOR is exempt from an indirect tax, like VAT.
VAT exemption extends to Acesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not liable for the
payment of it as it is exempt in this particular transaction by operation of law to pay the indirect tax. Such exemption falls within
the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of R.A. 8424), which provides:
Section 102. Value-added tax on sale of services.- (a) Rate and base of tax - There shall be levied,
assessed and collected, a value-added tax equivalent to 10% of gross receipts derived by any person
engaged in the sale of services x x x; Provided, that the following services performed in the Philippines by
VAT registered persons shall be subject to 0%.
xxxx

(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the supply of such
services to zero (0%) rate (emphasis supplied).

The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such exemption to
entities or individuals dealing with PAGCOR in casino operations are best elucidated from the 1987 case of Commissioner of
Internal Revenue v. John Gotamco & Sons, Inc., where the absolute tax exemption of the World Health Organization (WHO)
upon an international agreement was upheld. We held in said case that the exemption of contractee WHO should be
implemented to mean that the entity or person exempt is the contractor itself who constructed the building owned by contractee
WHO, and such does not violate the rule that tax exemptions are personal because the manifest intention of the agreement
is to exempt the contractor so that no contractor's tax may be shifted to the contractee WHO. Thus, the proviso in P.D. 1869,
extending the exemption to entities or individuals dealing with PAGCOR in casino operations, is clearly to proscribe
any indirect tax, like VAT, that may be shifted to PAGCOR.[40]

Although the basis of the exemption of PAGCOR and Acesite from VAT in the case of The Commissioner of Internal Revenue v. Acesite
(Philippines) Hotel Corporation was Section 102 (b) of the 1977 Tax Code, as amended, which section was retained as Section 108 (B) (3) in
R.A. No. 8424,[41] it is still applicable to this case, since the provision relied upon has been retained in R.A. No. 9337. [42]
It is settled rule that in case of discrepancy between the basic law and a rule or regulation issued to implement said law, the basic law
prevails, because the said rule or regulation cannot go beyond the terms and provisions of the basic law. [43] RR No. 16-2005, therefore, cannot
go beyond the provisions of R.A. No. 9337.Since PAGCOR is exempt from VAT under R.A. No. 9337, the BIR exceeded its authority in subjecting
PAGCOR to 10% VAT under RR No. 16-2005; hence, the said regulatory provision is hereby nullified.
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending Section 27 (c) of the National
Internal Revenue Code of 1997, by excluding petitioner Philippine Amusement and Gaming Corporation from the enumeration of government-
owned and controlled corporations exempted from corporate income tax is valid and constitutional, while BIR Revenue Regulations No. 16-2005
insofar as it subjects PAGCOR to 10% VAT is null and void for being contrary to the National Internal Revenue Code of 1997, as amended by
Republic Act No. 9337.

No costs.

SO ORDERED.
G.R. No. 215427 December 10, 2014
PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,
vs.
THE BUREAU OF INTERNAL REVENUE, represented by JOSE MARIO BUNAG, in his capacity as Commissioner of the Bureau of
Internal Revenue, and JOHN DOE and JANE DOE, who are Promulgated: persons acting for, in behalf or under the authority of
respondent, Respondents.
DECISION
PERALTA, J.:
The present petition stems from the Motion for Clarification filed by petitioner Philippine Amusement and Gaming Corporation (PAGCOR) on
September 13, 2013 in the case entitled Philippine Amusement and Gaming Corporation (PAGCOR) v. The Bureau of Internal Revenue, et
al.,1 which was promulgated on March 15, 2011. The Motion for Clarification essentially prays for the clarification of our Decision in the
aforesaid case, as well the issuance of a Temporary Restraining Order and/or Writ of Preliminary Injunction against the Bureau of Internal
Revenue (BIR), their employees, agents and any other persons or entities acting or claiming any right on BIRs behalf, in the implementation
of BIR Revenue Memorandum Circular (RMC) No. 33-2013 dated April 17, 2013.
At the onset, it bears stressing that while the instant motion was denominated as a "Motion for Clarification," in the session of the Court En
Bancheld on November 25, 2014, the members thereof ruled to treat the same as a new petition for certiorari under Rule 65 of the Rules of
Court, given that petitioner essentially alleges grave abuse of discretion on the part of the BIR amounting to lack or excess of jurisdiction in
issuing RMC No. 33-2013. Consequently, a new docket number has been assigned thereto, while petitioner has been ordered to pay the
appropriate docket fees pursuant to the Resolution dated November 25,2014, the pertinent portion of which reads:
G.R. No. 172087 (Philippine Amusement and Gaming Corporation vs. Bureau of Internal Revenue, et al.). The Court Resolved to
(a) TREAT as a new petition the Motion for Clarification with Temporary Restraining Order and/or Preliminary Injunction Application
dated September 6, 2013 filed by PAGCOR;
(b) DIRECT the Judicial Records Office to RE-DOCKET the aforesaid Motion for Clarification, subject to payment of the appropriate
docket fees; and
(c) REQUIRE petitioner PAGCOR to PAY the filing fees for the subject Motion for Clarification within five (5) days from notice hereof.
Brion, J., no part and on leave. Perlas-Bernabe, J., on official leave.
Considering that the parties havefiled their respective pleadings relative to the instant petition, and the appropriate docket fees have been duly
paid by petitioner, this Court considers the instant petition submitted for resolution.
The facts are briefly summarized as follows:
On April 17, 2006, petitioner filed before this Court a Petition for Review on Certiorari and Prohibition (With Prayer for the Issuance of a
Temporary Restraining Order and/or Preliminary Injunction) seeking the declaration of nullity of Section 1 2 of Republic Act (R.A.)No.
93373 insofar as it amends Section 27(C)4 of R.A. No. 8424,5 otherwise known as the National Internal Revenue Code (NIRC) by excluding
petitioner from the enumeration of government-owned or controlled corporations (GOCCs) exempted from liability for corporate income tax.
On March 15, 2011, this Court rendered a Decision 6 granting in part the petition filed by petitioner. Its fallo reads:
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending Section 27(c) of the National Internal
Revenue Code of 1997, by excluding petitioner Philippine Amusement and Gaming Corporation from the enumeration of government-owned
and controlled corporations exempted from corporate income tax is valid and constitutional, while BIR Revenue Regulations No. 16-2005
insofar as it subjects PAGCOR to 10% VAT is null and void for being contrary to the National Internal Revenue Code of 1997, as amended by
Republic Act No. 9337.
No costs.
SO ORDERED.7
Both petitioner and respondent filed their respective motions for partial reconsideration, but the samewere denied by this Court in a
Resolution8 dated May 31, 2011.
Resultantly, respondent issued RMC No. 33-2013 on April 17, 2013 pursuant to the Decision dated March 15, 2011 and the Resolution dated
May 31, 2011, which clarifies the "Income Tax and Franchise Tax Due from the Philippine Amusement and Gaming Corporation (PAGCOR),
its Contractees and Licensees." Relevant portions thereof state:
II. INCOME TAX
Pursuant to Section 1 of R.A.9337, amending Section 27(C) of the NIRC, as amended, PAGCOR is no longer exempt from corporate income
tax as it has been effectively omitted from the list of government-owned or controlled corporations (GOCCs) that are exempt from income tax.
Accordingly, PAGCORs income from its operations and licensing of gambling casinos, gaming clubs and other similar recreation or
amusement places, gaming pools, and other related operations, are subject to corporate income tax under the NIRC, as amended. This
includes, among others:
a) Income from its casino operations;
b) Income from dollar pit operations;
c) Income from regular bingo operations; and
d) Income from mobile bingo operations operated by it, with agents on commission basis. Provided, however, that the agents
commission income shall be subject to regular income tax, and consequently, to withholding tax under existing regulations.
Income from "other related operations" includes, butis not limited to:
a) Income from licensed private casinos covered by authorities to operate issued to private operators;
b) Income from traditional bingo, electronic bingo and other bingo variations covered by authorities to operate issued to private
operators;
c) Income from private internet casino gaming, internet sports betting and private mobile gaming operations;
d) Income from private poker operations;
e) Income from junket operations;
f) Income from SM demo units; and
g) Income from other necessary and related services, shows and entertainment.
PAGCORs other income that is not connected with the foregoing operations are likewise subject to corporate income tax under the NIRC, as
amended.
PAGCORs contractees and licensees are entities duly authorized and licensed by PAGCOR to perform gambling casinos, gaming clubs and
other similar recreation or amusement places, and gaming pools. These contractees and licensees are subject to income tax under the NIRC,
as amended.
III. FRANCHISE TAX
Pursuant to Section 13(2) (a) of P.D. No. 1869,9 PAGCOR is subject to a franchise tax of five percent (5%) of the gross revenue or earnings it
derives from its operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places, gaming pools,
and other related operations as described above.
On May 20, 2011, petitioner wrote the BIR Commissioner requesting for reconsideration of the tax treatment of its income from gaming
operations and other related operations under RMC No. 33-2013. The request was, however, denied by the BIR Commissioner.
On August 4, 2011, the Decision dated March 15, 2011 became final and executory and was, accordingly, recorded in the Book of Entries of
Judgment.10
Consequently, petitioner filed a Motion for Clarification alleging that RMC No. 33-2013 is an erroneous interpretation and application of the
aforesaid Decision, and seeking clarification with respect to the following:
1. Whether PAGCORs tax privilege of paying 5% franchise tax in lieu of all other taxes with respect toits gaming income, pursuant to
its Charter P.D. 1869, as amended by R.A. 9487, is deemed repealed or amended by Section 1 (c) of R.A. 9337.
2. If it is deemed repealed or amended, whether PAGCORs gaming income is subject to both 5% franchise tax and income tax.
3. Whether PAGCORs income from operation of related services is subject to both income tax and 5% franchise tax.
4. Whether PAGCORs tax privilege of paying 5% franchise tax inures to the benefit of third parties with contractual relationship with
PAGCOR in connection with the operation of casinos.11
In our Decision dated March 15, 2011, we have already declared petitioners income tax liability in view of the withdrawal of its tax privilege
under R.A. No. 9337. However, we made no distinction as to which income is subject to corporate income tax, considering that the issue
raised therein was only the constitutionality of Section 1 of R.A. No. 9337, which excluded petitioner from the enumeration of GOCCs
exempted from corporate income tax.
For clarity, it is worthy to note that under P.D. 1869, as amended, PAGCORs income is classified into two: (1) income from its operations
conducted under its Franchise, pursuant to Section 13(2) (b) thereof (income from gaming operations); and (2) income from its operation of
necessary and related services under Section 14(5) thereof (income from other related services). In RMC No. 33-2013, respondent further
classified the aforesaid income as follows:
1. PAGCORs income from its operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places,
gaming pools, includes, among others:
(a) Income from its casino operations;
(b) Income from dollar pit operations;
(c) Income from regular bingo operations; and
(d) Income from mobile bingo operations operated by it, with agents on commission basis. Provided, however, that the
agents commission income shall be subject to regular income tax, and consequently, to withholding tax under existing
regulations.
2. Income from "other related operations"includes, but is not limited to:
(a) Income from licensed private casinos covered by authorities to operate issued to private operators;
(b) Income from traditional bingo, electronic bingo and other bingo variations covered by authorities to operate issued to
private operators;
(c) Income from private internet casino gaming, internet sports betting and private mobile gaming operations;
(d) Income from private poker operations;
(e) Income from junket operations;
(f) Income from SM demo units; and
(g) Income from other necessary and related services, shows and entertainment. 12
After a thorough study of the arguments and points raised by the parties, and in accordance with our Decision dated March 15, 2011, we
sustain petitioners contention that its income from gaming operations is subject only to five percent (5%) franchise tax under P.D. 1869, as
amended, while its income from other related services is subject to corporate income tax pursuant to P.D. 1869, as amended, as well as R.A.
No. 9337. This is demonstrable.
First. Under P.D. 1869, as amended, petitioner is subject to income tax only with respect to its operation of related services. Accordingly, the
income tax exemption ordained under Section 27(c) of R.A. No. 8424 clearly pertains only to petitionersincome from operation of related
services. Such income tax exemption could not have been applicable to petitioners income from gaming operations as it is already exempt
therefrom under P.D. 1869, as amended, to wit: SECTION 13. Exemptions.
xxxx
(2) Income and other taxes. (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges or levies of
whatever nature, whether National or Local, shall be assessed and collected under this Franchise from the Corporation; nor shall any form of
tax or charge attach in any way to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or
earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and payable quarterly to the National
Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied, established or
collected by any municipal, provincial, or national government authority. 13
Indeed, the grant of tax exemption or the withdrawal thereof assumes that the person or entity involved is subject to tax. This is the most
sound and logical interpretation because petitioner could not have been exempted from paying taxes which it was not liable to pay in the first
place. This is clear from the wordings of P.D. 1869, as amended, imposing a franchise tax of five percent (5%) on its gross revenue or
earnings derived by petitioner from its operation under the Franchise in lieuof all taxes of any kind or form, as well as fees, charges or leviesof
whatever nature, which necessarily include corporate income tax.
In other words, there was no need for Congress to grant tax exemption to petitioner with respect to its income from gaming operations as the
same is already exempted from all taxes of any kind or form, income or otherwise, whether national or local, under its Charter, save only for
the five percent (5%) franchise tax. The exemption attached to the income from gaming operations exists independently from the enactment of
R.A. No. 8424. To adopt an assumption otherwise would be downright ridiculous, if not deleterious, since petitioner would be in a worse
position if the exemption was granted (then withdrawn) than when it was not granted at all in the first place.
Moreover, as may be gathered from the legislative records of the Bicameral Conference Meeting of the Committee on Ways and Means dated
October 27, 1997, the exemption of petitioner from the payment of corporate income tax was due to the acquiescence of the Committee on
Ways and Means to the request of petitioner that it be exempt from such tax. Based on the foregoing, it would be absurd for petitioner to seek
exemption from income tax on its gaming operations when under its Charter, it is already exempted from paying the same.
Second. Every effort must be exerted to avoid a conflict between statutes; so that if reasonable construction is possible, the laws must be
reconciled in that manner.14
As we see it, there is no conflict between P.D. 1869, as amended, and R.A. No. 9337. The former lays down the taxes imposable upon
petitioner, as follows: (1) a five percent (5%) franchise tax of the gross revenues or earnings derived from its operations conducted under the
Franchise, which shall be due and payable in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied,
established or collected by any municipal, provincial or national government authority; 15 (2) income tax for income realized from other
necessary and related services, shows and entertainment of petitioner.16 With the enactment of R.A. No. 9337, which withdrew the income tax
exemption under R.A. No. 8424, petitioners tax liability on income from other related services was merely reinstated.
It cannot be gain said, therefore, that the nature of taxes imposable is well defined for each kind of activity oroperation. There is no
inconsistency between the statutes; and in fact, they complement each other.
Third. Even assuming that an inconsistency exists, P.D. 1869, as amended, which expressly provides the tax treatment of petitioners income
prevails over R.A. No. 9337, which is a general law. It is a canon of statutory construction that a special law prevails over a general law
regardless of their dates of passage and the special is to be considered as remaining an exception to the general. 17 The rationale is:
Why a special law prevails over a general law has been put by the Court as follows: x x x x
x x x The Legislature consider and make provision for all the circumstances of the particular case. The Legislature having specially considered
all of the facts and circumstances in the particular case in granting a special charter, it will not be considered that the Legislature, by adopting
a general law containing provisions repugnant to the provisions of the charter, and without making any mention of its intention to amend or
modify the charter, intended to amend, repeal, or modify the special act. (Lewis vs. Cook County, 74 I11. App., 151; Philippine Railway Co. vs.
Nolting 34 Phil., 401.)18
Where a general law is enacted to regulate an industry, it is common for individual franchises subsequently granted to restate the rights and
privileges already mentioned in the general law, or to amend the later law, as may be needed, to conform to the general law. 19 However, if no
provision or amendment is stated in the franchise to effect the provisions of the general law, it cannot be said that the same is the intent of the
lawmakers, for repeal of laws by implication is not favored. 20
In this regard, we agree with petitioner that if the lawmakers had intended to withdraw petitioners tax exemption of its gaming income, then
Section 13(2)(a) of P.D. 1869 should have been amended expressly in R.A. No. 9487, or the same, at the very least, should have been
mentioned in the repealing clause of R.A. No. 9337.21 However, the repealing clause never mentioned petitioners Charter as one of the laws
being repealed. On the other hand, the repeal of other special laws, namely, Section 13 of R.A. No. 6395 as well as Section 6, fifth paragraph
of R.A. No. 9136, is categorically provided under Section 24 (a) (b) of R.A. No. 9337, to wit:
SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby repealed and the persons and/or transactions affected
herein are made subject to the value-added tax subject to the provisions of Title IV of the National Internal Revenue Code of 1997, as
amended:
(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of the National Power Corporation (NPC);
(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the sales of generated power by generation
companies; and
(C) All other laws, acts, decrees, executive orders, issuances and rules and regulations or parts thereof which are contrary to and
inconsistent with any provisions of this Act are hereby repealed, amended or modified accordingly. 22
When petitioners franchise was extended on June 20, 2007 without revoking or withdrawing itstax exemption, it effectively reinstated and
reiterated all of petitioners rights, privileges and authority granted under its Charter. Otherwise, Congress would have painstakingly
enumerated the rights and privileges that it wants to withdraw, given that a franchise is a legislative grant of a special privilege to a person.
Thus, the extension of petitioners franchise under the sameterms and conditions means a continuation of its tax exempt status with respect to
its income from gaming operations. Moreover, all laws, rules and regulations, or parts thereof, which are inconsistent with the provisions
ofP.D. 1869, as amended, a special law, are considered repealed, amended and modified, consistent with Section 2 of R.A. No. 9487, thus:
SECTION 2. Repealing Clause. All laws, decrees, executive orders, proclamations, rules and regulations and other issuances, or parts
thereof, which are inconsistent with the provisions of this Act, are hereby repealed, amended and modified.
It is settled that where a statute is susceptible of more than one interpretation, the court should adopt such reasonable and beneficial
construction which will render the provision thereof operative and effective, as well as harmonious with each other. 23
Given that petitioners Charter is notdeemed repealed or amended by R.A. No. 9337, petitioners income derived from gaming operations is
subject only to the five percent (5%)franchise tax, in accordance with P.D. 1869, as amended. With respect to petitioners income from
operation of other related services, the same is subject to income tax only. The five percent (5%) franchise tax finds no application with
respect to petitioners income from other related services, inview of the express provision of Section 14(5) of P.D. 1869, as amended, to wit:
Section 14. Other Conditions.
xxxx
(5) Operation of related services. The Corporation is authorized to operate such necessary and related services, shows and entertainment.
Any income that may be realized from these related services shall not be included as part of the income of the Corporation for the purpose of
applying the franchise tax, but the same shall be considered as a separate income of the Corporation and shall be subject to income tax.24
Thus, it would be the height of injustice to impose franchise tax upon petitioner for its income from other related services without basis
therefor.
For proper guidance, the first classification of PAGCORs income under RMC No. 33-2013 (i.e., income from its operations and licensing of
gambling casinos, gaming clubs and other similar recreation or amusement places, gambling pools) should be interpreted in relation to
Section 13(2) of P.D. 1869, which pertains to the income derived from issuing and/or granting the license to operate casinos to PAGCORs
contractees and licensees, as well as earnings derived by PAGCOR from its own operations under the Franchise. On the other hand, the
second classification of PAGCORs income under RMC No. 33-2013 (i.e., income from other related operations) should be interpreted in
relation to Section 14(5) of P.D. 1869, which pertains to income received by PAGCOR from its contractees and licensees in the latters
operation of casinos, as well as PAGCORs own income from operating necessary and related services, shows and entertainment.
As to whether petitioners tax privilege of paying five percent (5%) franchise tax inures to the benefit of third parties with contractual
relationship with petitioner in connection with the operation of casinos, we find no reason to rule upon the same. The resolution of the instant
petition is limited to clarifying the tax treatment of petitioners income vis--visour Decision dated March 15, 2011. This Decision is not meant
to expand our original Decision by delving into new issues involving petitioners contractees and licensees. For one, the latter are not parties
to the instant case, and may not therefore stand to benefit or bear the consequences of this resolution. For another, to answer the fourth issue
raised by petitioner relative to its contractees and licensees would be downright premature and iniquitous as the same would effectively
countenance sidesteps to judicial process.
In view of the foregoing disquisition, respondent, therefore, committed grave abuse of discretion amounting to lack of jurisdiction when it
issued RMC No. 33-2013 subjecting both income from gaming operations and other related services to corporate income tax and five percent
(5%) franchise tax.1wphi1 This unduly expands our Decision dated March 15, 2011 without due process since the imposition creates
additional burden upon petitioner. Such act constitutes an overreach on the part of the respondent, which should be immediately struck down,
lest grave injustice results. More, it is settled that in case of discrepancy between the basic law and a rule or regulation issued to implement
said law, the basic law prevails, because the said rule or regulation cannot go beyond the terms and provisions of the basic law.
In fine, we uphold our earlier ruling that Section 1 of R.A. No. 9337, amending Section 27(c) of R.A. No. 8424, by excluding petitioner from the
enumeration of GOCCs exempted from corporate income tax, is valid and constitutional. In addition, we hold that:
1. Petitioners tax privilege of paying five percent (5%) franchise tax in lieu of all other taxes with respect to its income from gaming
operations, pursuant to P.D. 1869, as amended, is not repealed or amended by Section l(c) ofR.A. No. 9337;
2. Petitioner's income from gaming operations is subject to the five percent (5%) franchise tax only; and
3. Petitioner's income from other related services is subject to corporate income tax only.
In view of the above-discussed findings, this Court ORDERS the respondent to cease and desist the implementation of RMC No. 33-2013
insofar as it imposes: (1) corporate income tax on petitioner's income derived from its gaming operations; and (2) franchise tax on petitioner's
income from other related services.
WHEREFORE, the Petition is hereby GRANTED. Accordingly, respondent is ORDERED to cease and desist the implementation of RMC No.
33-2013 insofar as it imposes: (1) corporate income tax on petitioner's income derived from its gaming operations; and (2) franchise tax on
petitioner's income from other related services.
SO ORDERED.
G.R. No. 212530, August 10, 2016
BLOOMBERRY RESORTS AND HOTELS, INC., Petitioner, v. BUREAU OF INTERNAL REVENUE, REPRESENTED BY COMMISSIONER
KIM S. JACINTO-HENARES, Respondent.
DECISION
PEREZ, J.:
This is a Petition for Certiorari and Prohibition under Rule 65 of the Rules on Court seeking: (a) to annul the issuance by the Commissioner of
Internal Revenue (CIR) of an alleged unlawful governmental regulation, specifically the provision of Revenue Memorandum Circular (RMC)
No. 33-20131 dated 17 April 2013 subjectingcontractees and licensees of the Philippine Amusement and Gaming Corporation (PAGCOR) to
income tax under the National Internal Revenue Code (NIRC) of 1997, as amended; and (b) to enjoin respondent CIR from implementing the
assailed provision of RMC No. 33-2013.2chanrobleslaw
The Facts

As narrated in the present petition, the factual antecedents of the case reveal that, on 8 April 2009, PAGCOR granted to petitioner a
provisional license to establish and operate an integrated resort and casino complex at the Entertainment City project site of PAGCOR.
Petitioner and its parent company, Sureste Properties, Inc., own and operate Solaire Resort & Casino. Thus, being one of its licensees,
petitioner only pays PAGCOR license fees, in lieu of all taxes, as contained in its provisional license and consistent with the PAGCOR Charter
or Presidential Decree (PD) No. 1869,3 which provides the exemption from taxes of persons or entities contracting with PAGCOR in casino
operations.

However, when Republic Act (R.A.) No. 9337 took effect4, it amended Section 27(C) of the NIRC of 1997, which excluded PAGCOR from the
enumeration of government-owned or controlled corporations (GOCCs) exempt from paying corporate income tax. The enactment of the law
led to the case of PAGCOR v. The Bureau of Internal Revenue, et al.,5 where PAGCOR questioned the validity or constitutionality of R.A. No.
9337 removing its exemption from paying corporate income tax, and therefore alleging the same to be void for being repugnant to the equal
protection and the non-impairment clauses embodied in the 1987 Philippine Constitution. Subsequently, the Court articulated that Section 1 of
RA No. 9337, amending Section 27(C) of the NIRC of 1997, which removed PAGCOR's exemption from corporate income tax, was indeed
valid and constitutional.

Consequently, in implementing the aforesaid amendments made by R.A. No. 9337, respondent issued RMC No. 33-2013 dated 17 April 2013
declaring that PAGCOR, in addition to the five percent (5%) franchise tax of its gross revenue under Section 13(2)(a) of PD No. 1869, is now
subject to corporate income tax under the NIRC of 1997, as amended. In addition, a provision therein states that PAGCOR's contractees and
licensees, being entities duly authorized and licensed by it to perform gambling casinos, gaming clubs and other similar recreation or
amusement places, and gaming pools, are likewise subject to income tax under the NIRC of 1997, as amended.

Aggrieved, as it is now being considered liable to pay corporate income tax in addition to the 5% franchise tax, petitioner immediately elevated
the matter through a petition for certiorari and prohibition before this Court asserting the following arguments: (i) PD No. 1869, as amended by
R.A. No. 9487, is an existing valid law, and expressly and clearly exempts the contractees and licensees of PAGCOR from the payment of all
kinds of taxes except the 5% franchise tax on its gross gaming revenue; (ii) This clear exemption from taxes of PAGCOR's contracting parties
under Section 13(2)(b) of PD No. 1869, as amended by R.A. No. 9487, was not repealed by the deletion of PAGCOR in the list of tax-exempt
entities under the NIRC; (iii) Respondent CIR acted without or in excess of its jurisdiction, or with grave abuse of discretion amounting to lack
or excess of jurisdiction when she issued the assailed provision in RMC No. 33-2013 which, in effect, repealed or amended PD No. 1869; and
(iv) Respondent CIR, in issuing the assailed provision in RMC No. 33-2013, will adversely affect an industry which seeks to create income for
the government, promote tourism and generate jobs for the Filipino people. 6chanrobleslaw

To rationalize its direct recourse before this Court, petitioner submits the following justification:

chanRoblesvirtualLawlibrary
(a) What is involved is a pure question of law, i.e. whether or not petitioner is exempted from payment of all taxes, national or
local, except the 5% franchise tax by virtue of Section 13(2)(b) of PD No. 1869, as amended;

(b) The rule on exhaustion of administrative remedies is disregarded, among others, when: (i) the administrative action is
patently illegal amounting to lack or excess of jurisdiction; (ii) to require exhaustion of administrative remedies would be
unreasonable; and (iii) it would amount to nullification of a claim;

(c) The gaming business funded by private investors under license by PAGCOR is a new industry which involves national
interest. Hence, the inclusion of the assailed provision in RMC No. 33-2013 which implements income taxes on PAGCOR's
licensees and operators when an exemption for such is specifically provided for by PD No. 1869, as amended, being
unlawful and unwarranted legislation by the respondent, seriously affects national interest as it effectively curtails the basis
for the investments in the industry and resulting tourist interest and jobs generated by the industry; and

(d) The assailed provision of RMC No. 33-2013 affects not only petitioner or other locators and PAGCOR licensees in
Entertainment City, Paraaque City, but also the rest of private casinos licensed by PAGCOR operating in economic zones.
Thus, in order to prevent multiplicity of suits and to avoid a situation when different local courts issue differing opinions on
one question of law, direct recourse to this Court is likewise sought. 7

It is the contention of petitioner that although Section 4 of the NIRC of 1997, as amended, gives respondent CIR the power to interpret the
provisions of tax laws through administrative issuances, she cannot, in the exercise of such power, issue administrative rulings or circulars not
consistent with the law sought to be applied since administrative issuances must not override, supplant or modify the law, but must remain
consistent with the law they intend to carry out. Since the assailed provision in RMC No. 33-2013 subjecting the contractees and licensees of
PAGCOR to income tax under the NIRC of 1997, as amended, contravenes the provision of the PAGCOR Charter granting tax exemptions to
corporations, associations, agencies, or individuals with whom PAGCOR has any contractual relationship in connection with the operations of
the casinos authorized to be conducted under the PAGCOR Charter, it is petitioner's position that the assailed provision was issued by
respondent CIR with grave abuse of discretion amounting to lack or excess of jurisdiction.

Respondent, in her Comment filed on 18 December 2014,8 counters that there was no grave abuse of discretion on her part when she issued
the subject revenue memorandum circular since it did not alter, modify or amend the intent and meaning of Section 13(2)(b) of PD No. 1869,
as amended, insofar as the imposition is concerned, considering that it merely clarified the taxability of PAGCOR and its contractees and
licensees for income tax purposes as well as other franchise grantees similarly situated under prevailing laws; that prohibition will not lie to
restrain a purely administrative act, nor enjoin acts already done, being a preventive remedy; and that tax exemptions are strictly construed
against the taxpayer.
The Issues

Hence, we are now presented with the following issues for our consideration and resolution: (i) whether or not the assailed provision of RMC
No. 33-2013 subjecting the contractees and licensees of PAGCOR to income tax under the NIRC of 1997, as amended, was issued by
respondent CIR with grave abuse of discretion amounting to lack or excess of jurisdiction; and (ii) whether or not said provision is valid or
constitutional considering that Section 13(2)(b) of PD No. 1869, as amended (PAGCOR Charter), grants tax exemptions to such contractees
and licensees.
Our Ruling

At the outset, although it is true that direct recourse before this Court is occasionally allowed in exceptional cases without strict observance of
the rules on hierarchy of courts and on exhaustion of administrative remedies, we find the imperious need to first determine whether or not this
case falls within the said exceptions, before we delve into the merits of the instant petition.

We thus find the need to look back at the dispositions rendered in Asia International Auctioneers, Inc., et al. v. Parayno, Jr., 9 wherein we ruled
that revenue memorandum circulars10 are considered administrative rulings issued from time to time by the CIR. It has been explained that
these are actually rulings or opinions of the CIR issued pursuant to her power under Section 4 11 of the NIRC of 1997, as amended, to make
rulings or opinions in connection with the implementation of the provisions of internal revenue laws, including ruling on the classification of
articles of sales and similar purposes. Therefore, it was held that under R.A. No. 1125,12 which was thereafter amended by RA No.
9282,13 such rulings of the CIR (including revenue memorandum circulars) are appealable to the Court of Tax Appeals (CTA), and not to any
other courts.
In the same case, we further declared that "failure to ask the CIR for a reconsideration of the assailed revenue regulations and RMCs is
another reason why a case directly filed before us should be dismissed. It is settled that the premature invocation of the court's intervention is
fatal to one's cause of action. If a remedy within the administrative machinery can still be resorted to by giving the administrative officer every
opportunity to decide on a matter that comes within his jurisdiction, then such remedy must first be exhausted before the court's power of
judicial review can be sought. The party with an administrative remedy must not only initiate the prescribed administrative procedure to obtain
relief but also to pursue it to its appropriate conclusion before seeking judicial intervention in order to give the administrative agency an
opportunity to decide the matter itself correctly and prevent unnecessary and premature resort to the court." 14chanrobleslaw

Then, in The Philippine American Life and General Insurance Company v. Secretary of Finance, 15 we had the occasion to elucidate that the
CIR's power to interpret the provisions of the Tax Code and other tax laws is subject to the review by the Secretary of Finance; and thereafter,
the latter's ruling may be appealed to the CTA, having the technical knowledge over the subject controversies. Also, the Court held that "the
power of the CTA includes that of determining whether or not there has been grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of the [regional trial court] in issuing an interlocutory order in cases falling within the exclusive appellate jurisdiction of
the tax court. It, thus, follows that the CTA, by constitutional mandate, is vested with jurisdiction to issue writs of certiorari in these
cases."16 Stated differently, the CTA "can now rule not only on the propriety of an assessment or tax treatment of a certain transaction, but
also on the validity of the revenue regulation or revenue memorandum circular on which the said assessment is based." 17 From the foregoing
jurisprudential pronouncements, it would appear that in questioning the validity of the subject revenue memorandum circular, petitioner should
not have resorted directly before this Court considering that it appears to have failed to comply with the doctrine of exhaustion of
administrative remedies and the rule on hierarchy of courts, a clear indication that the case was not yet ripe for judicial remedy. Notably,
however, in addition to the justifiable grounds relied upon by petitioner for its immediate recourse (i.e. pure question of law, patently illegal act
by the BIR, national interest, and prevention of multiplicity of suits), we intend to avail of our jurisdictional prerogative in order not to further
delay the disposition of the issues at hand, and also to promote the vital interest of substantial justice. To add, in recent years, this Court has
consistently acted on direct actions assailing the validity of various revenue regulations, revenue memorandum circulars, and the likes, issued
by the CIR. The position we now take is more in accord with latest jurisprudence. Upon the exercise of this prerogative, we are ushered into
the merits of the case.

The determination of the submissions of petitioner will have to follow the pilot case of PAGCOR v. The Bureau of Internal Revenue, et
al.,18 where this Court clarified its earlier ruling in G.R. No. 172087 19involving the same parties, and expressed that: (i) Section 1 of RA No.
9337, amending Section 27(C) of the NIRC of 1997, as amended, which excluded PAGCOR from the enumeration of GOCCs exempted from
corporate income tax, is valid and constitutional; (ii) PAGCOR's tax privilege of paying five percent (5%) franchise tax in lieu of all other taxes
with respect to its income from gaming operations is not repealed or amended by Section l(c) of R.A. No. 9337; (iii) PAGCOR's income from
gaming operations is subject to the 5% franchise tax only; and (iv) PAGCOR's income from other related services is subject to corporate
income tax only.

The Court sitting En Banc expounded on the matter in this wise:


After a thorough study of the arguments and points raised by the parties, and in accordance with our Decision dated March 15, 2011, we
sustain [PAGCOR's] contention that its income from gaming operations is subject only to five percent (5%) franchise tax under P.D.
No. 1869, as amended, while its income from other related services is subject to corporate income tax pursuant to P.D. No. 1869, as
amended, as well as R.A. No. 9337. This is demonstrable.

First. Under P.D. No. 1869, as amended, [PAGCOR] is subject to income tax only with respect to its operation of related services.
Accordingly, the income tax exemption ordained under Section 27(c) of R.A. No. 8424 clearly pertains only to [PAGCOR's] income from
operation of related services. Such income tax exemption could not have been applicable to [PAGCOR's] income from gaming
operations as it is already exempt therefrom under P.D. No. 1869, as amended, to wit:
SECTION 13. Exemptions.

XXXX

(2) Income and other taxes. (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges or levies
of whatever nature, whether National or Local, shall be assessed and collected under this Franchise from the Corporation; nor shall
any form of tax or charge attach in any way to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the
gross revenue or earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and payable
quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description,
levied, established or collected by any municipal, provincial, or national government authority.
Indeed, the grant of tax exemption or the withdrawal thereof assumes that the person or entity involved is subject to tax. This is the most
sound and logical interpretation because [PAGCOR] could not have been exempted from paying taxes which it was not liable to pay in the first
place. This is clear from the wordings of P.D. No. 1869, as amended, imposing a franchise tax of five percent (5%) on its gross
revenue or earnings derived by [PAGCOR] from its operation under the Franchise in lieu of all taxes of any kind or form, as well as
fees, charges or levies of whatever nature, which necessarily include corporate income tax.

In other words, there was no need for Congress to grant tax exemption to [PAGCOR] with respect to its income from gaming
operations as the same is already exempted from all taxes of any kind or form, income or otherwise, whether national or local,
under its Charter, save only for the five percent (5%) franchise tax. The exemption attached to the income from gaming operations
exists independently from the enactment of R.A. No. 8424. To adopt an assumption otherwise would be downright ridiculous, if not
deleterious, since [PAGCOR] would be in a worse position if the exemption was granted (then withdrawn) than when it was not granted at all
in the first place.20 (Emphasis supplied)
Furthermore,
Second. Every effort must be exerted to avoid a conflict between statutes; so that if reasonable construction is possible, the laws must be
reconciled in the manner.

As we see it, there is no conflict between P.D. No. 1869, as amended, and R.A. No. 9337. The former lays down the taxes imposable
upon [PAGCOR], as follows: (1) a five percent (5%) franchise tax of the gross revenues or earnings derived from its operations conducted
under the Franchise, which shall be due and payable in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or
description, levied, established or collected by any municipal, provincial or national government authority; and (2) income tax for income
realized from other necessary and related services, shows and entertainment of [PAGCOR]. With the enactment of R.A. No. 9337, which
withdrew the income tax exemption under R.A. No. 8424, [PAGCOR's] tax liability on income from other related services was merely
reinstated.

It cannot be gainsaid, therefore, that the nature of taxes imposable is well defined for each kind of activity or operation. There is no
inconsistency between the statutes; and in fact, they complement each other.

Third. Even assuming that an inconsistency exists, P.D. No. 1869, as amended, which expressly provides the tax treatment of [PAGCOR's]
income prevails over R.A. No. 9337, which is a general law. It is a canon of statutory construction that a special law prevails over a
general law regardless of their dates of passage and the special is to be considered as remaining an exception to the
general. x x x

x x x x Where a general law is enacted to regulate an industry, it is common for individual franchises subsequently granted to restate the rights
and privileges already mentioned in the general law, or to amend the later law, as may be needed, to conform to the general law. However, if
no provision or amendment is stated in the franchise to effect the provisions of the general law, it cannot be said that the same is the intent of
the lawmakers, for repeal of laws by implication is not favored.

In this regard, we agree with [PAGCOR] that if the lawmakers had intended to withdraw [PAGCOR's] tax exemption of its gaming
income, then Section 13(2)(a) of P.D. 1869 should have been amended expressly in R.A. No. 9487, or the same, at the very least,
should have been mentioned in the repealing clause of R.A. No. 9337. However, the repealing clause never mentioned [PAGCOR's]
Charter as one of the laws being repealed. On the other hand, the repeal of other special laws, namely, Section 13 of R.A. No. 6395 as well
as Section 6, fifth paragraph of R.A. No. 9136, is categorically provided under Section 24(a) (b) of R.A. No. 9337, x x x.

xxxx

When [PAGCOR's] franchise was extended on June 20, 2007 without revoking or withdrawing its tax exemption, it effectively
reinstated and reiterated all of [PAGCOR's] rights, privileges and authority granted under its Charter. Otherwise, Congress would have
painstakingly enumerated the rights and privileges that it wants to withdraw, given that a franchise is a legislative grant of a special privilege to
a person. Thus, the extension of [PAGCOR's] franchise under the same terms and conditions means a continuation of its tax exempt
status with respect to its income from gaming operations. Moreover, all laws, rules and regulations, or parts thereof, which are
inconsistent with the provisions of P.D. 1869, as amended, a special law, are considered repealed, amended and modified, consistent with
Section 2 of R.A. No. 9487, thus:
SECTION 2. Repealing Clause. All laws, decrees, executive orders, proclamations, rules and regulations and other issuances, or parts
thereof, which are inconsistent with the provisions of this Act, are hereby repealed, amended and modified.
It is settled that where a statute is susceptible of more than one interpretation, the court should adopt such reasonable and beneficial
construction which will render the provision thereof operative and effective, as well as harmonious with each other.

Given that [PAGCOR's] Charter is not deemed repealed or amended by R.A. No. 9337, [PAGCOR's] income derived from gaming
operations is subject only to the five percent (5%) franchise tax, in accordance with P.D. 1869, as amended. With respect to
[PAGCOR's] income from operation of other related services, the same is subject to income tax only. The five percent (5%) franchise tax finds
no application with respect to [PAGCOR's] income from other related services, in view of the express provision of Section 14(5) of P.D. No.
1869, as amended, x x x.21 (Emphasis supplied)
The Court through Justice Diosdado M. Peralta, categorically followed what was simply provided under the PAGCOR Charter (PD No. 1869,
as amended by RA No. 9487), by proclaiming that despite amendments to the NIRC of 1997, the said Charter remains in effect. Thus, income
derived by PAGCOR from its gaming operations such as the operation and licensing of gambling casinos, gaming clubs and other similar
recreation or amusement places, gaming pools and related operations is subject only to 5% franchise tax, in lieu of all other taxes, including
corporate income tax. The Court concluded that the CIR committed grave abuse of discretion amounting to lack or excess of
jurisdiction when it issued RMC No. 33-2013 subjecting both income from gaming operations and other related services to
corporate income tax and 5% franchise tax considering that it unduly expands the Court's Decision dated 15 March 2011 without
due process, which creates additional burden upon PAGCOR.

Noticeably, however, the High Court in the abovementioned case intentionally did not rule on the issue of whether or not PAGCOR's tax
privilege of paying only the 5% franchise tax in lieu of all other taxes inures to the benefit of third parties with contractual relationship with it in
connection with the operation of casinos, such as petitioner herein. The Court sitting En Bane simply stated that:
The resolution of the instant petition is limited to clarifying the tax treatment of [PAGCOR's] income vis-a-vis our Decision dated March 15,
2011. This Decision (dated 10 December 2014) is not meant to expand our original Decision (dated 15 March 2011) by delving into new
issues involving [PAGCOR's] contractees and licensees. For one, the latter are not parties to the instant case, and may not therefore stand to
benefit or bear the consequences if this resolution. For another, to answer the fourth issue raised by [PAGCOR] relative to its contractees and
licensees would be downright premature and iniquitous as the same would effectively countenance sidesteps to judicial process. 22
Bearing in mind the parties involved and the similarities of the issues submitted in the present case, we are now presented with the prospect
of finally resolving the confusion caused by the amendments introduced by RA No. 9337 to the NIRC of 1997, and the subsequent issuance of
RMC No. 33-2013, affecting the tax regime not only of PAGCOR but also its contractees and licensees under the existing laws and prevailing
jurisprudence.

Section 13 of PD No. 1869 evidently states that payment of the 5% franchise tax by PAGCOR and its contractees and licensees exempts
them from payment of any other taxes, including corporate income tax, quoted hereunder for ready reference:
Sec. 13. Exemptions.

xxxx
(2) Income and other taxes. (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges or
levies of whatever nature, whether National or Local, shall be assessed and collected under this Franchise from the Corporation;
nor shall any form of tax or charge attach in any way to the earnings of the Corporation, except a Franchise Tax of five (5%) percent
of the gross revenue or earnings derived by the Corporation from its operationunder this Franchise. Such tax shall be due and
payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or
description, levied, established or collected by any municipal, provincial, or national government authority.

(b) Others: The exemptions herein granted for earnings derived from the operations conducted under the franchise specifically from
the payment of any tax, income or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and extend
to corporation(s), association(s), agency(ies), or individual(s) with whom the Corporation or operator has any contractual
relationship in connection with the operations of the casino(s) authorized to be conducted under this Franchise and to those
receiving compensation or other remuneration from the Corporation or operator as a result of essential facilities furnished and/or
technical services rendered to the Corporation or operator.(Emphasis and underlining supplied)
As previously recognized, the above-quoted provision providing for the said exemption was neither amended nor repealed by any subsequent
laws (i.e. Section 1 of R.A. No. 9337 which amended Section 27(C) of the NIRC of 1997); thus, it is still in effect. Guided by the doctrinal
teachings in resolving the case at bench, it is without a doubt that, like PAGCOR, its contractees and licensees remain exempted from the
payment of corporate income tax and other taxes since the law is clear that said exemption inures to their benefit.

We adhere to the cardinal rule in statutory construction that when the law is clear and free from any doubt or ambiguity, there is no room for
construction or interpretation. As has been our consistent ruling, where the law speaks in clear and categorical language, there is no occasion
for interpretation; there is only room for application.23chanrobleslaw

As the PAGCOR Charter states in unequivocal terms that exemptions granted for earnings derived from the operations conducted under the
franchise specifically from the payment of any tax, income or otherwise, as well as any form of charges, fees or levies, shall inure to the
benefit of and extend tocorporation(s), association(s), agency(ies), or individual(s) with whom the PAGCOR or operator has any contractual
relationship in connection with the operations of the casino(s) authorized to be conducted under this Franchise, so it must be that
all contractees and licensees of PAGCOR, upon payment of the 5% franchise tax, shall likewise be exempted from all other taxes, including
corporate income tax realized from the operation of casinos.

For the same reasons that made us conclude in the 10 December 2014 Decision of the Court sitting En Banc in G.R. No. 215427 that
PAGCOR is subject to corporate income tax for "other related services", we find it logical that its contractees and licensees shall likewise pay
corporate income tax for income derived from such "related services."

Simply then, in this case, we adhere to the principle that since the statute is clear and free from ambiguity, it must be given its literal meaning
and applied without attempted interpretation. This is the plain meaning rule or verba legis, as expressed in the maxim index animi sermo or
speech is the index of intention.24chanrobleslaw

Plainly, too, upon payment of the 5% franchise tax, petitioner's income from its gaming operations of gambling casinos, gaming clubs and
other similar recreation or amusement places, and gaming pools, defined within the purview of the aforesaid section, is not subject to
corporate income tax.

WHEREFORE, the petition is GRANTED. Accordingly, respondent Bureau of Internal Revenue, represented by Commissioner Kim S. Jacinto-
Henares is hereby ORDERED to CEASE AND DESIST from implementing Revenue Memorandum Circular No. 33-2013 insofar as it imposes
corporate income tax on petitioner Bloomberry Resorts and Hotels, Inc.'s income derived from its gaming operations.

SO ORDERED.chanRoblesvirtualLawlibrary

G.R. No. L-65773-74 April 30, 1987


COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents.
Quasha, Asperilla, Ancheta, Pea, Valmonte & Marcos for respondent British Airways.

MELENCIO-HERRERA, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint Decision of the Court of Tax Appeals (CTA) in CTA
Cases Nos. 2373 and 2561, dated 26 January 1983, which set aside petitioner's assessment of deficiency income taxes against respondent
British Overseas Airways Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its Resolution of
18 November, 1983 denying reconsideration.
BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United Kingdom It is engaged in the
international airline business and is a member-signatory of the Interline Air Transport Association (IATA). As such it operates air transportation
service and sells transportation tickets over the routes of the other airline members. During the periods covered by the disputed assessments,
it is admitted that BOAC had no landing rights for traffic purposes in the Philippines, and was not granted a Certificate of public convenience
and necessity to operate in the Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961 and partly in
1962, when it was granted a temporary landing permit by the CAB. Consequently, it did not carry passengers and/or cargo to or from the
Philippines, although during the period covered by the assessments, it maintained a general sales agent in the Philippines Wamer Barnes
and Company, Ltd., and later Qantas Airways which was responsible for selling BOAC tickets covering passengers and cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the aggregate amount of P2,498,358.56 for
deficiency income taxes covering the years 1959 to 1963. This was protested by BOAC. Subsequent investigation resulted in the issuance of
a new assessment, dated 16 January 1970 for the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new assessment under
protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied by the CIR on 16 February 1972.
But before said denial, BOAC had already filed a petition for review with the Tax Court on 27 January 1972, assailing the assessment and
praying for the refund of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal years 1968-1969 to 1970-1971 in
the aggregate amount of P549,327.43, and the additional amounts of P1,000.00 and P1,800.00 as compromise penalties for violation of
Section 46 (requiring the filing of corporation returns) penalized under Section 74 of the National Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In a letter, dated 16 February 1972, however,
the CIR not only denied the BOAC request for refund in the First Case but also re-issued in the Second Case the deficiency income tax
assessment for P534,132.08 for the years 1969 to 1970-71 plus P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's
request for reconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to file the Second Case before the Tax Court
praying that it be absolved of liability for deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.
On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court held that the proceeds of sales of
BOAC passage tickets in the Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways, during the period in question, do
not constitute BOAC income from Philippine sources "since no service of carriage of passengers or freight was performed by BOAC within the
Philippines" and, therefore, said income is not subject to Philippine income tax. The CTA position was that income from transportation is
income from services so that the place where services are rendered determines the source. Thus, in the dispositive portion of its Decision, the
Tax Court ordered petitioner to credit BOAC with the sum of P858,307.79, and to cancel the deficiency income tax assessments against
BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.
Hence, this Petition for Review on certiorari of the Decision of the Tax Court.
The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:
1. Whether or not the revenue derived by private respondent British Overseas Airways Corporation (BOAC) from sales of
tickets in the Philippines for air transportation, while having no landing rights here, constitute income of BOAC from
Philippine sources, and, accordingly, taxable.
2. Whether or not during the fiscal years in question BOAC s a resident foreign corporation doing business in the Philippines
or has an office or place of business in the Philippines.
3. In the alternative that private respondent may not be considered a resident foreign corporation but a non-resident foreign
corporation, then it is liable to Philippine income tax at the rate of thirty-five per cent (35%) of its gross income received from
all sources within the Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident foreign corporation engaged in trade or business within the Philippines or having an office or place of
business therein.
(i) The term "non-resident foreign corporation" applies to a foreign corporation not engaged in trade or business within the
Philippines and not having any office or place of business therein
It is our considered opinion that BOAC is a resident foreign corporation. There is no specific criterion as to what constitutes "doing" or
"engaging in" or "transacting" business. Each case must be judged in the light of its peculiar environmental circumstances. The term implies a
continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of
some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business
organization. 2 "In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and
intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character. 3
BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the Philippines, That general sales
agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips each trip in
the series corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the
various airline companies on the basis of their participation in the services rendered through the mode of interline settlement as prescribed by
Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those activities were in exercise of the functions which are normally incident to,
and are in progressive pursuit of, the purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its
main activity, is the very lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt
then that BOAC was "engaged in" business in the Philippines through a local agent during the period covered by the assessments.
Accordingly, it is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources
within the Philippines. 5
Sec. 24. Rates of tax on corporations. ...
(b) Tax on foreign corporations. ...
(2) Resident corporations. A corporation organized, authorized, or existing under the laws of any foreign country, except
a foreign fife insurance company, engaged in trade or business within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income received in the preceding taxable year from all sources within the
Philippines. (Emphasis supplied)
Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by BOAC in the Philippines constitutes income
from Philippine sources and, accordingly, taxable under our income tax laws.
The Tax Code defines "gross income" thus:
"Gross income" includes gains, profits, and income derived from salaries, wages or compensation for personal service of
whatever kind and in whatever form paid, or from profession, vocations, trades, business, commerce, sales, or dealings in
property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interests,
rents, dividends, securities, or the transactions of any business carried on for gain or profile, or gains, profits, and income
derived from any source whatever (Sec. 29[3]; Emphasis supplied)
The definition is broad and comprehensive to include proceeds from sales of transport documents. "The words 'income from any source
whatever' disclose a legislative policy to include all income not expressly exempted within the class of taxable income under our laws." Income
means "cash received or its equivalent"; it is the amount of money coming to a person within a specific time ...; it means something distinct
from principal or capital. For, while capital is a fund, income is a flow. As used in our income tax law, "income" refers to the flow of wealth. 6
The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71 amounted to P10,428,368 .00. 7
Did such "flow of wealth" come from "sources within the Philippines",
The source of an income is the property, activity or service that produced the income. 8 For the source of income to be considered as coming
from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the
Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in
Philippine currency. The site of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine
territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share
the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract between the ticket-holder
and the carrier. It gives rise to the obligation of the purchaser of the ticket to pay the fare and the corresponding obligation of the carrier to
transport the passenger upon the terms and conditions set forth thereon. The ordinary ticket issued to members of the traveling public in
general embraces within its terms all the elements to constitute it a valid contract, binding upon the parties entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the Philippines, namely: (1) interest, (21)
dividends, (3) service, (4) rentals and royalties, (5) sale of real property, and (6) sale of personal property, does not mention income from the
sale of tickets for international transportation. However, that does not render it less an income from sources within the Philippines. Section 37,
by its language, does not intend the enumeration to be exclusive. It merely directs that the types of income listed therein be treated as income
from sources within the Philippines. A cursory reading of the section will show that it does not state that it is an all-inclusive enumeration, and
that no other kind of income may be so considered. " 10
BOAC, however, would impress upon this Court that income derived from transportation is income for services, with the result that the place
where the services are rendered determines the source; and since BOAC's service of transportation is performed outside the Philippines, the
income derived is from sources without the Philippines and, therefore, not taxable under our income tax laws. The Tax Court upholds that
stand in the joint Decision under review.
The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income taxation.
Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test of taxability is the "source"; and the source of
an income is that activity ... which produced the income. 11 Unquestionably, the passage documentations in these cases were sold in the
Philippines and the revenue therefrom was derived from a activity regularly pursued within the Philippines. business a And even if the BOAC
tickets sold covered the "transport of passengers and cargo to and from foreign cities", 12 it cannot alter the fact that income from the sale of
tickets was derived from the Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income herein is
the Philippines. 13
It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years covered by the questioned deficiency
income tax assessments in these cases, or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree No. 69,
promulgated on 24 November, 1972, international carriers are now taxed as follows:
... Provided, however, That international carriers shall pay a tax of 2- per cent on their cross Philippine billings. (Sec. 24[b]
[21, Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term "gross Philippine billings," thus:
... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in the world by any international carrier
doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or mail
provided the cargo or mail originates from the Philippines. ...
The foregoing provision ensures that international airlines are taxed on their income from Philippine sources. The 2- % tax on gross
Philippine billings is an income tax. If it had been intended as an excise or percentage tax it would have been place under Title V of the Tax
Code covering Taxes on Business.
Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of the appeal in JAL vs. Commissioner of
Internal Revenue (G.R. No. L-30041) on February 3, 1969, is res judicata to the present case. The ruling by the Tax Court in that case was to
the effect that the mere sale of tickets, unaccompanied by the physical act of carriage of transportation, does not render the taxpayer therein
subject to the common carrier's tax. As elucidated by the Tax Court, however, the common carrier's tax is an excise tax, being a tax on the
activity of transporting, conveying or removing passengers and cargo from one place to another. It purports to tax the business of
transportation. 14 Being an excise tax, the same can be levied by the State only when the acts, privileges or businesses are done or
performed within the jurisdiction of the Philippines. The subject matter of the case under consideration is income tax, a direct tax on the
income of persons and other entities "of whatever kind and in whatever form derived from any source." Since the two cases treat of a different
subject matter, the decision in one cannot be res judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private respondent, the British Overseas
Airways Corporation (BOAC), is hereby ordered to pay the amount of P534,132.08 as deficiency income tax for the fiscal years 1968-69 to
1970-71 plus 5% surcharge, and 1% monthly interest from April 16, 1972 for a period not to exceed three (3) years in accordance with the Tax
Code. The BOAC claim for refund in the amount of P858,307.79 is hereby denied. Without costs.
SO ORDERED.
Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.
Fernan, J., took no part.

Separate Opinions

TEEHANKEE, C.J., concurring:


I concur with the Court's majority judgment upholding the assessments of deficiency income taxes against respondent BOAC for the fiscal
years 1959-1969 to 1970-1971 and therefore setting aside the appealed joint decision of respondent Court of Tax Appeals. I just wish to point
out that the conflict between the majority opinion penned by Mr. Justice Feliciano as to the proper characterization of the taxable income
derived by respondent BOAC from the sales in the Philippines of tickets foe BOAC form the issued by its general sales agent in the
Philippines gas become moot after November 24, 1972. Booth opinions state that by amendment through P.D. No.69, promulgated on
November 24, 1972, of section 24(b) (2) of the Tax Code providing dor the rate of income tax on foreign corporations, international carriers
such as respondent BOAC, have since then been taxed at a reduced rate of 2-% on their gross Philippine billings. There is, therefore, no
longer ant source of substantial conflict between the two opinions as to the present 2-% tax on their gross Philippine billings charged against
such international carriers as herein respondent foreign corporation.
FELICIANO, J., dissenting:
With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A. Melencio-Herrera speaking for the majority . In
my opinion, the joint decision of the Court of Tax Appeals in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, is correct and should
be affirmed.
The fundamental issue raised in this petition for review is whether the British Overseas Airways Corporation (BOAC), a foreign airline
company which does not maintain any flight operations to and from the Philippines, is liable for Philippine income taxation in respect of "sales
of air tickets" in the Philippines through a general sales agent, relating to the carriage of passengers and cargo between two points both
outside the Philippines.
1. The Solicitor General has defined as one of the issue in this case the question of:
2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign corporation doing business in the
Philippines or [had] an office or place of business in the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is not determinative of the lialibity of the BOAC to Philippine
income taxation in respect of the income here involved. The liability of BOAC to Philippine income taxation in respect of such income depends,
not on BOAC's status as a "resident foreign corporation" or alternatively, as a "non-resident foreign corporation," but rather on whether or not
such income is derived from "source within the Philippines."
A "resident foreign corporation" or foreign corporation engaged in trade or business in the Philippines or having an office or place of business
in the Philippines is subject to Philippine income taxation only in respect of income derived from sources within the Philippines. Section 24 (b)
(2) of the National Internal Revenue CODE ("Tax Code"), as amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3
August 1969, read as follows:
(2) Resident corporations. A foreign corporation engaged in trade or business with in the Philippines (expect foreign life
insurance companies) shall be taxable as provided in subsection (a) of this section.
Section 24 (a) of the Tax Code in turn provides:
Rate of tax on corporations. (a) Tax on domestic corporations. ... and a like tax shall be livied, collected, and paid
annually upon the total net income received in the preceeding taxable year from all sources within the Philippines by
every corporation organized, authorized, or existing under the laws of any foreign country: ... . (Emphasis supplied)
Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when it amended once more Section 24 (b) (2) of the Tax
Code so as to read as follows:
(2) Resident Corporations. A corporation, organized, authorized or existing under the laws of any foreign counrty, except
foreign life insurance company, engaged in trade or business within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income received in the preceding taxable year from all sources within the
Philippines. (Emphasis supplied)
Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-resident foreign corporations. Section 24 (b) (1) as amended
by Republic Act No. 3825 approved 22 June 1963, read as follows:
(b) Tax on foreign corporations. (1) Non-resident corporations. There shall be levied, collected and paid for each
taxable year, in lieu of the tax imposed by the preceding paragraph upon the amount received by every foreign corporation
not engaged in trade or business within the Philippines, from all sources within the Philippines, as interest, dividends, rents,
salaries, wages, premium, annuities, compensations, remunerations, emoluments, or other fixed or determinative annual or
periodical gains, profits and income a tax equal to thirty per centum of such amount: provided, however, that premiums shall
not include reinsurance premiums. 2
Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a resident foreign corporation, or not doing
business in the Philippines and therefore a non-resident foreign corporation, it is liable to income tax only to the extent that it derives income
from sources within the Philippines. The circumtances that a foreign corporation is resident in the Philippines yields no inference that all or any
part of its income is Philippine source income. Similarly, the non-resident status of a foreign corporation does not imply that it has no
Philippine source income. Conversely, the receipt of Philippine source income creates no presumption that the recipient foreign corporation is
a resident of the Philippines. The critical issue, for present purposes, is therefore whether of not BOAC is deriving income from sources within
the Philippines.
2. For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the physical sourcing of a flow of money
or the physical situs of payment but rather to the "property, activity or service which produced the income." In Howden and Co., Ltd. vs.
Collector of Internal Revenue, 3 the court dealt with the issue of the applicable source rule relating to reinsurance premiums paid by a local
insurance company to a foreign reinsurance company in respect of risks located in the Philippines. The Court said:
The source of an income is the property, activity or services that produced the income. The reinsurance premiums remitted
to appellants by virtue of the reinsurance contract, accordingly, had for their source the undertaking to indemnify
Commonwealth Insurance Co. against liability. Said undertaking is the activity that produced the reinsurance premiums, and
the same took place in the Philippines. [T]he reinsurance, the liabilities insured and the risk originally underwritten by
Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were based, were all situated in the
Philippines. 4
The Court may be seen to be saying that it is the underlying prestation which is properly regarded as the activity giving rise to the income that
is sought to be taxed. In the Howden case, that underlying prestation was theindemnification of the local insurance company. Such
indemnification could take place only in the Philippines where the risks were located and where payment from the foreign reinsurance (in case
the casualty insured against occurs) would be received in Philippine pesos under the reinsurance premiums paid by the local insurance
companies constituted Philippine source income of the foreign reinsurances.
The concept of "source of income" for purposes of income taxation originated in the United States income tax system. The phrase "sources
within the United States" was first introduced into the U.S. tax system in 1916, and was subsequently embodied in the 1939 U.S. Tax Code.
As is commonly known, our Tax Code (Commonwealth Act 466, as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems
useful to refer to a standard U.S. text on federal income taxation:
The Supreme Court has said, in a definition much quoted but often debated, that income may be derived from three
possible sources only: (1) capital and/or (2) labor and/or (3) the sale of capital assets. While the three elements of this
attempt at definition need not be accepted as all-inclusive, they serve as useful guides in any inquiry into whether a
particular item is from "source within the United States" and suggest an investigation into the nature and location of the
activities or property which produce the income. If the income is from labor (services) the place where the labor is
done should be decisive; if it is done in this counrty, the income should be from "source within the United States." If the
income is from capital, the place where the capital is employed should be decisive; if it is employed in this country, the
income should be from "source within the United States". If the income is from the sale of capital assets, the place where
the sale is made should be likewise decisive. Much confusion will be avoided by regarding the term "source" in this
fundamental light. It is not a place; it is an activity or property. As such, it has a situs or location; and if that situs or location
is within the United States the resulting income is taxable to nonresident aliens and foreign corporations. The intention of
Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing nonresident aliens and
foreign corporations and to make the test of taxability the "source", or situs of the activities or property which produce the
income . . . . Thus, if income is to taxed, the recipient thereof must be resident within the jurisdiction, or the property or
activities out of which the income issue or is derived must be situated within the jurisdiction so that the source of the income
may be said to have a situs in this country. The underlying theory is that the consideration for taxation is protection of life
and propertyand that the income rightly to be levied upon to defray the burdens of the United States Government is that
income which is created by activities and property protected by this Government or obtained by persons enjoying that
protection. 5
3. We turn now to the question what is the source of income rule applicable in the instant case. There are two possibly relevant source of
income rules that must be confronted; (a) the source rule applicable in respect of contracts of service; and (b) the source rule applicable in
respect of sales of personal property.
Where a contract for the rendition of service is involved, the applicable source rule may be simply stated as follows: the income is sourced in
the place where the service contracted for is rendered. Section 37 (a) (3) of our Tax Code reads as follows:
Section 37. Income for sources within the Philippines.
(a) Gross income from sources within the Philippines. The following items of gross income shall be treated as gross
income from sources within the Philippines:
xxx xxx xxx
(3) Services. Compensation for labor or personal services performed in the Philippines;... (Emphasis
supplied)
Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources without the Philippines in the following manner:
(c) Gross income from sources without the Philippines. The following items of gross income shall be treated as income
from sources without the Philippines:
(3) Compensation for labor or personal services performed without the Philippines; ... (Emphasis supplied)
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in respect of services rendered by individual natural
persons; they also apply to services rendered by or through the medium of a juridical person. 6 Further, a contract of carriage or of
transportation is assimilated in our Tax Code and Revenue Regulations to a contract for services. Thus, Section 37 (e) of the Tax Code
provides as follows:
(e) Income form sources partly within and partly without the Philippines. Items of gross income, expenses, losses and
deductions, other than those specified in subsections (a) and (c) of this section shall be allocated or apportioned to sources
within or without the Philippines, under the rules and regulations prescribed by the Secretary of Finance. ... Gains, profits,
and income from (1) transportation or other services rendered partly within and partly without the Philippines, or (2) from the
sale of personnel property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or
produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly from
sources within and partly from sources without the Philippines. ... (Emphasis supplied)
It should be noted that the above underscored portion of Section 37 (e) was derived from the 1939 U.S. Tax Code which "was based upon a
recognition that transportation was a service and that the source of the income derived therefrom was to be treated as being the place where
the service of transportation was rendered. 7
Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication that income derived from transportation or other
services rendered entirely outside the Philippines must be treated as derived entirely from sources without the Philippines. This implication is
reinforced by a consideration of certain provisions of Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first
promulgated by the Department of Finance on 10 February 1940. Section 155 of Revenue Regulations No. 2 (implementing Section 37 of the
Tax Code) provides in part as follows:
Section 155. Compensation for labor or personnel services. Gross income from sources within the Philippines includes
compensation for labor or personal services within the Philippines regardless of the residence of the payer, of the place in
which the contract for services was made, or of the place of payment (Emphasis supplied)
Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals with a particular species of foreign transportation
companies i.e., foreign steamship companies deriving income from sources partly within and partly without the Philippines:
Section 163 Foreign steamship companies. The return of foreign steamship companies whose vessels touch parts of the
Philippines should include as gross income, the total receipts of all out-going business whether freight or passengers. With
the gross income thus ascertained, the ratio existing between it and the gross income from all ports, both within and without
the Philippines of all vessels, whether touching of the Philippines or not, should be determined as the basis upon which
allowable deductions may be computed, . (Emphasis supplied)
Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2 (again implementing Section 37 of the
Tax Code) with provides as follows:
Section 164. Telegraph and cable services. A foreign corporation carrying on the business of transmission of telegraph or
cable messages between points in the Philippines and points outside the Philippines derives income partly form source
within and partly from sources without the Philippines.
... (Emphasis supplied)
Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations No. 2 that steamship and telegraph and cable
services rendered between points both outside the Philippines give rise to income wholly from sources outside the Philippines, and therefore
not subject to Philippine income taxation.
We turn to the "source of income" rules relating to the sale of personal property, upon the one hand, and to the purchase and sale of personal
property, upon the other hand.
We consider first sales of personal property. Income from the sale of personal property by the producer or manufacturer of such personal
property will be regarded as sourced entirely within or entirely without the Philippines or as sourced partly within and partly without the
Philippines, depending upon two factors: (a) the place where the sale of such personal property occurs; and (b) the place where such personal
property was produced or manufactured. If the personal property involved was both produced or manufactured and sold outside the
Philippines, the income derived therefrom will be regarded as sourced entirely outside the Philippines, although the personal property had
been produced outside the Philippines, or if the sale of the property takes place outside the Philippines and the personal was produced in the
Philippines, then, the income derived from the sale will be deemed partly as income sourced without the Philippines. In other words, the
income (and the related expenses, losses and deductions) will be allocated between sources within and sources without the Philippines. Thus,
Section 37 (e) of the Tax Code, although already quoted above, may be usefully quoted again:
(e) Income from sources partly within and partly without the Philippines. ... Gains, profits and income from (1) transportation
or other services rendered partly within and partly without the Philippines; or (2) from the sale of personal property produced
(in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer
without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without
the Philippines. ... (Emphasis supplied)
In contrast, income derived from the purchase and sale of personal property i. e., trading is, under the Tax Code, regarded as sourced
wholly in the place where the personal property is sold. Section 37 (e) of the Tax Code provides in part as follows:
(e) Income from sources partly within and partly without the Philippines ... Gains, profits and income derived from
the purchase of personal property within and its sale without the Philippines or from the purchase of personal property
without and its sale within the Philippines, shall be treated as derived entirely from sources within the country in which
sold. (Emphasis supplied)
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
Section 159. Sale of personal property. Income derived from the purchase and sale of personal property shall be treated as
derived entirely from the country in which sold. The word "sold" includes "exchange." The "country" in which "sold" ordinarily
means the place where the property is marketed. This Section does not apply to income from the sale personal property
produced (in whole or in part) by the taxpayer within and sold without the Philippines or produced (in whole or in part) by the
taxpayer without and sold within the Philippines. (See Section 162 of these regulations). (Emphasis supplied)
4. It will be seen that the basic problem is one of characterization of the transactions entered into by BOAC in the Philippines. Those
transactions may be characterized either as sales of personal property (i. e., "sales of airline tickets") or as entering into a lease of services or
a contract of service or carriage. The applicable "source of income" rules differ depending upon which characterization is given to the BOAC
transactions.
The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts of service, i.e., carriage of
passengers or cargo between points located outside the Philippines.
The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be correct as a matter of tax law. The airline
ticket in and of itself has no monetary value, even as scrap paper. The value of the ticket lies wholly in the right acquired by the "purchaser"
the passenger to demand a prestation from BOAC, which prestation consists of the carriage of the "purchaser" or passenger from the one
point to another outside the Philippines. The ticket is really the evidence of the contract of carriage entered into between BOAC and the
passenger. The money paid by the passenger changes hands in the Philippines. But the passenger does not receive undertaken to be
delivered by BOAC. The "purchase price of the airline ticket" is quite different from the purchase price of a physical good or commodity such
as a pair of shoes of a refrigerator or an automobile; it is really the compensation paid for the undertaking of BOAC to transport the passenger
or cargo outside the Philippines.
The characterization of the BOAC transactions either as sales of personal property or as purchases and sales of personal property, appear
entirely inappropriate from other viewpoint. Consider first purchases and sales: is BOAC properly regarded as engaged in trading in the
purchase and sale of personal property? Certainly, BOAC was not purchasing tickets outside the Philippines and selling them in the
Philippines. Consider next sales: can BOAC be regarded as "selling" personal property produced or manufactured by it? In a popular or
journalistic sense, BOAC might be described as "selling" "a product" its service. However, for the technical purposes of the law on income
taxation, BOAC is in fact entering into contracts of service or carriage. The very existance of "source rules" specifically and precisely
applicable to the rendition of services must preclude the application here of "source rules" applying generally to sales, and purchases and
sales, of personal property which can be invoked only by the grace of popular language. On a slighty more abstract level, BOAC's income is
more appropriately characterized as derived from a "service", rather than from an "activity" (a broader term than service and including the
activity of selling) or from the here involved is income taxation, and not a sales tax or an excise or privilege tax.
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the Tax Code, as amended by Presidential Decree No. 69,
promulgated on 24 November 1972 and by Presidential Decree No. 1355, promulgated on 21 April 1978, in the following manner:
(2) Resident corporations. A corporation organized, authorized, or existing under the laws of any foreign country,
engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the
total net income received in the preceeding taxable year from all sources within the Philippines: Provided,
however, That international carriers shall pay a tax of two and one-half per cent on their gross Philippine billings. "Gross
Philippines of passage documents sold therein, whether for passenger, excess baggege or mail, provide the cargo or mail
originates from the Philippines. The gross revenue realized from the said cargo or mail shall include the gross freight charge
up to final destination. Gross revenues from chartered flights originating from the Philippines shall likewise form part of
"gross Philippine billings" regardless of the place of sale or payment of the passage documents. For purposes of
determining the taxability to revenues from chartered flights, the term "originating from the Philippines" shall include flight of
passsengers who stay in the Philippines for more than forty-eight (48) hours prior to embarkation. (Emphasis supplied)
Under the above-quoted proviso international carriers issuing for compensation passage documentation in the Philippines for uplifts from any
point in the world to any other point in the world, are not charged any Philippine income tax on their Philippine billings (i.e., billings in respect
of passenger or cargo originating from the Philippines). Under this new approach, international carriers who service port or points in the
Philippines are treated in exactly the same way as international carriers not serving any port or point in the Philippines. Thus, the source of
income rule applicable, as above discussed, to transportation or other services rendered partly within and partly without the Philippines, or
wholly without the Philippines, has been set aside. in place of Philippine income taxation, the Tax Code now imposes this 2 per cent tax
computed on the basis of billings in respect of passengers and cargo originating from the Philippines regardless of where embarkation and
debarkation would be taking place. This 2- per cent tax is effectively a tax on gross receipts or an excise or privilege tax and not a tax
on income. Thereby, the Government has done away with the difficulties attending the allocation of income and related expenses, losses and
deductions. Because taxes are the very lifeblood of government, the resulting potential "loss" or "gain" in the amount of taxes collectible by the
state is sometimes, with varying degrees of consciousness, considered in choosing from among competing possible characterizations under
or interpretation of tax statutes. It is hence perhaps useful to point out that the determination of the appropriate characterization here that of
contracts of air carriage rather than sales of airline tickets entails no down-the-road loss of income tax revenues to the Government. In lieu
thereof, the Government takes in revenues generated by the 2- per cent tax on the gross Philippine billings or receipts of international
carriers.
I would vote to affirm the decision of the Court of Tax Appeals.
Separate Opinions
TEEHANKEE, C.J., concurring:
I concur with the Court's majority judgment upholding the assessments of deficiency income taxes against respondent BOAC for the fiscal
years 1959-1969 to 1970-1971 and therefore setting aside the appealed joint decision of respondent Court of Tax Appeals. I just wish to point
out that the conflict between the majority opinion penned by Mr. Justice Feliciano as to the proper characterization of the taxable income
derived by respondent BOAC from the sales in the Philippines of tickets foe BOAC form the issued by its general sales agent in the
Philippines gas become moot after November 24, 1972. Booth opinions state that by amendment through P.D. No.69, promulgated on
November 24, 1972, of section 24(b) (2) of the Tax Code providing dor the rate of income tax on foreign corporations, international carriers
such as respondent BOAC, have since then been taxed at a reduced rate of 2-% on their gross Philippine billings. There is, therefore, no
longer ant source of substantial conflict between the two opinions as to the present 2-% tax on their gross Philippine billings charged against
such international carriers as herein respondent foreign corporation.
FELICIANO, J., dissenting:
With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A. Melencio-Herrera speaking for the majority . In
my opinion, the joint decision of the Court of Tax Appeals in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, is correct and should
be affirmed.
The fundamental issue raised in this petition for review is whether the British Overseas Airways Corporation (BOAC), a foreign airline
company which does not maintain any flight operations to and from the Philippines, is liable for Philippine income taxation in respect of "sales
of air tickets" in the Philippines through a general sales agent, relating to the carriage of passengers and cargo between two points both
outside the Philippines.
1. The Solicitor General has defined as one of the issue in this case the question of:
2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign corporation doing business in the
Philippines or [had] an office or place of business in the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is not determinative of the lialibity of the BOAC to Philippine
income taxation in respect of the income here involved. The liability of BOAC to Philippine income taxation in respect of such income depends,
not on BOAC's status as a "resident foreign corporation" or alternatively, as a "non-resident foreign corporation," but rather on whether or not
such income is derived from "source within the Philippines."
A "resident foreign corporation" or foreign corporation engaged in trade or business in the Philippines or having an office or place of business
in the Philippines is subject to Philippine income taxation only in respect of income derived from sources within the Philippines. Section 24 (b)
(2) of the National Internal Revenue CODE ("Tax Code"), as amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3
August 1969, read as follows:
(2) Resident corporations. A foreign corporation engaged in trade or business with in the Philippines (expect foreign life
insurance companies) shall be taxable as provided in subsection (a) of this section.
Section 24 (a) of the Tax Code in turn provides:
Rate of tax on corporations. (a) Tax on domestic corporations. ... and a like tax shall be livied, collected, and paid
annually upon the total net income received in the preceeding taxable year from all sources within the Philippines by
every corporation organized, authorized, or existing under the laws of any foreign country: ... . (Emphasis supplied)
Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when it amended once more Section 24 (b) (2) of the Tax
Code so as to read as follows:
(2) Resident Corporations. A corporation, organized, authorized or existing under the laws of any foreign counrty, except
foreign life insurance company, engaged in trade or business within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income received in the preceding taxable year from all sources within the
Philippines. (Emphasis supplied)
Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-resident foreign corporations. Section 24 (b) (1) as amended
by Republic Act No. 3825 approved 22 June 1963, read as follows:
(b) Tax on foreign corporations. (1) Non-resident corporations. There shall be levied, collected and paid for each
taxable year, in lieu of the tax imposed by the preceding paragraph upon the amount received by every foreign corporation
not engaged in trade or business within the Philippines, from all sources within the Philippines, as interest, dividends, rents,
salaries, wages, premium, annuities, compensations, remunerations, emoluments, or other fixed or determinative annual or
periodical gains, profits and income a tax equal to thirty per centum of such amount: provided, however, that premiums shall
not include reinsurance premiums. 2
Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a resident foreign corporation, or not doing
business in the Philippines and therefore a non-resident foreign corporation, it is liable to income tax only to the extent that it derives income
from sources within the Philippines. The circumtances that a foreign corporation is resident in the Philippines yields no inference that all or any
part of its income is Philippine source income. Similarly, the non-resident status of a foreign corporation does not imply that it has no
Philippine source income. Conversely, the receipt of Philippine source income creates no presumption that the recipient foreign corporation is
a resident of the Philippines. The critical issue, for present purposes, is therefore whether of not BOAC is deriving income from sources within
the Philippines.
2. For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the physical sourcing of a flow of money
or the physical situs of payment but rather to the "property, activity or service which produced the income." In Howden and Co., Ltd. vs.
Collector of Internal Revenue, 3 the court dealt with the issue of the applicable source rule relating to reinsurance premiums paid by a local
insurance company to a foreign reinsurance company in respect of risks located in the Philippines. The Court said:
The source of an income is the property, activity or services that produced the income. The reinsurance premiums remitted
to appellants by virtue of the reinsurance contract, accordingly, had for their source the undertaking to indemnify
Commonwealth Insurance Co. against liability. Said undertaking is the activity that produced the reinsurance premiums, and
the same took place in the Philippines. [T]he reinsurance, the liabilities insured and the risk originally underwritten by
Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were based, were all situated in the
Philippines. 4
The Court may be seen to be saying that it is the underlying prestation which is properly regarded as the activity giving rise to the income that
is sought to be taxed. In the Howden case, that underlying prestation was theindemnification of the local insurance company. Such
indemnification could take place only in the Philippines where the risks were located and where payment from the foreign reinsurance (in case
the casualty insured against occurs) would be received in Philippine pesos under the reinsurance premiums paid by the local insurance
companies constituted Philippine source income of the foreign reinsurances.
The concept of "source of income" for purposes of income taxation originated in the United States income tax system. The phrase "sources
within the United States" was first introduced into the U.S. tax system in 1916, and was subsequently embodied in the 1939 U.S. Tax Code.
As is commonly known, our Tax Code (Commonwealth Act 466, as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems
useful to refer to a standard U.S. text on federal income taxation:
The Supreme Court has said, in a definition much quoted but often debated, that income may be derived from three
possible sources only: (1) capital and/or (2) labor and/or (3) the sale of capital assets. While the three elements of this
attempt at definition need not be accepted as all-inclusive, they serve as useful guides in any inquiry into whether a
particular item is from "source within the United States" and suggest an investigation into the nature and location of the
activities or property which produce the income. If the income is from labor (services) the place where the labor is
done should be decisive; if it is done in this counrty, the income should be from "source within the United States." If the
income is from capital, the place where the capital is employed should be decisive; if it is employed in this country, the
income should be from "source within the United States". If the income is from the sale of capital assets, the place where
the sale is made should be likewise decisive. Much confusion will be avoided by regarding the term "source" in this
fundamental light. It is not a place; it is an activity or property. As such, it has a situs or location; and if that situs or location
is within the United States the resulting income is taxable to nonresident aliens and foreign corporations. The intention of
Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing nonresident aliens and
foreign corporations and to make the test of taxability the "source", or situs of the activities or property which produce the
income . . . . Thus, if income is to taxed, the recipient thereof must be resident within the jurisdiction, or the property or
activities out of which the income issue or is derived must be situated within the jurisdiction so that the source of the income
may be said to have a situs in this country. The underlying theory is that the consideration for taxation is protection of life
and propertyand that the income rightly to be levied upon to defray the burdens of the United States Government is that
income which is created by activities and property protected by this Government or obtained by persons enjoying that
protection. 5
3. We turn now to the question what is the source of income rule applicable in the instant case. There are two possibly relevant source of
income rules that must be confronted; (a) the source rule applicable in respect of contracts of service; and (b) the source rule applicable in
respect of sales of personal property.
Where a contract for the rendition of service is involved, the applicable source rule may be simply stated as follows: the income is sourced in
the place where the service contracted for is rendered. Section 37 (a) (3) of our Tax Code reads as follows:
Section 37. Income for sources within the Philippines.
(a) Gross income from sources within the Philippines. The following items of gross income shall be treated as gross
income from sources within the Philippines:
xxx xxx xxx
(3) Services. Compensation for labor or personal services performed in the Philippines;... (Emphasis
supplied)
Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources without the Philippines in the following manner:
(c) Gross income from sources without the Philippines. The following items of gross income shall be treated as income
from sources without the Philippines:
(3) Compensation for labor or personal services performed without the Philippines; ... (Emphasis supplied)
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in respect of services rendered by individual natural
persons; they also apply to services rendered by or through the medium of a juridical person. 6 Further, a contract of carriage or of
transportation is assimilated in our Tax Code and Revenue Regulations to a contract for services. Thus, Section 37 (e) of the Tax Code
provides as follows:
(e) Income form sources partly within and partly without the Philippines. Items of gross income, expenses, losses and
deductions, other than those specified in subsections (a) and (c) of this section shall be allocated or apportioned to sources
within or without the Philippines, under the rules and regulations prescribed by the Secretary of Finance. ... Gains, profits,
and income from (1) transportation or other services rendered partly within and partly without the Philippines, or (2) from the
sale of personnel property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or
produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly from
sources within and partly from sources without the Philippines. ... (Emphasis supplied)
It should be noted that the above underscored portion of Section 37 (e) was derived from the 1939 U.S. Tax Code which "was based upon a
recognition that transportation was a service and that the source of the income derived therefrom was to be treated as being the place where
the service of transportation was rendered. 7
Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication that income derived from transportation or other
services rendered entirely outside the Philippines must be treated as derived entirely from sources without the Philippines. This implication is
reinforced by a consideration of certain provisions of Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first
promulgated by the Department of Finance on 10 February 1940. Section 155 of Revenue Regulations No. 2 (implementing Section 37 of the
Tax Code) provides in part as follows:
Section 155. Compensation for labor or personnel services. Gross income from sources within the Philippines includes
compensation for labor or personal services within the Philippines regardless of the residence of the payer, of the place in
which the contract for services was made, or of the place of payment (Emphasis supplied)
Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals with a particular species of foreign transportation
companies i.e., foreign steamship companies deriving income from sources partly within and partly without the Philippines:
Section 163 Foreign steamship companies. The return of foreign steamship companies whose vessels touch parts of the
Philippines should include as gross income, the total receipts of all out-going business whether freight or passengers. With
the gross income thus ascertained, the ratio existing between it and the gross income from all ports, both within and without
the Philippines of all vessels, whether touching of the Philippines or not, should be determined as the basis upon which
allowable deductions may be computed, . (Emphasis supplied)
Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2 (again implementing Section 37 of the
Tax Code) with provides as follows:
Section 164. Telegraph and cable services. A foreign corporation carrying on the business of transmission of telegraph or
cable messages between points in the Philippines and points outside the Philippines derives income partly form source
within and partly from sources without the Philippines.
... (Emphasis supplied)
Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations No. 2 that steamship and telegraph and cable
services rendered between points both outside the Philippines give rise to income wholly from sources outside the Philippines, and therefore
not subject to Philippine income taxation.
We turn to the "source of income" rules relating to the sale of personal property, upon the one hand, and to the purchase and sale of personal
property, upon the other hand.
We consider first sales of personal property. Income from the sale of personal property by the producer or manufacturer of such personal
property will be regarded as sourced entirely within or entirely without the Philippines or as sourced partly within and partly without the
Philippines, depending upon two factors: (a) the place where the sale of such personal property occurs; and (b) the place where such personal
property was produced or manufactured. If the personal property involved was both produced or manufactured and sold outside the
Philippines, the income derived therefrom will be regarded as sourced entirely outside the Philippines, although the personal property had
been produced outside the Philippines, or if the sale of the property takes place outside the Philippines and the personal was produced in the
Philippines, then, the income derived from the sale will be deemed partly as income sourced without the Philippines. In other words, the
income (and the related expenses, losses and deductions) will be allocated between sources within and sources without the Philippines. Thus,
Section 37 (e) of the Tax Code, although already quoted above, may be usefully quoted again:
(e) Income from sources partly within and partly without the Philippines. ... Gains, profits and income from (1) transportation
or other services rendered partly within and partly without the Philippines; or (2) from the sale of personal property produced
(in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer
without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without
the Philippines. ... (Emphasis supplied)
In contrast, income derived from the purchase and sale of personal property i. e., trading is, under the Tax Code, regarded as sourced
wholly in the place where the personal property is sold. Section 37 (e) of the Tax Code provides in part as follows:
(e) Income from sources partly within and partly without the Philippines ... Gains, profits and income derived from
the purchase of personal property within and its sale without the Philippines or from the purchase of personal property
without and its sale within the Philippines, shall be treated as derived entirely from sources within the country in which sold.
(Emphasis supplied)
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
Section 159. Sale of personal property. Income derived from the purchase and sale of personal property shall be treated as
derived entirely from the country in which sold. The word "sold" includes "exchange." The "country" in which "sold" ordinarily
means the place where the property is marketed. This Section does not apply to income from the sale personal property
produced (in whole or in part) by the taxpayer within and sold without the Philippines or produced (in whole or in part) by the
taxpayer without and sold within the Philippines. (See Section 162 of these regulations). (Emphasis supplied)
4. It will be seen that the basic problem is one of characterization of the transactions entered into by BOAC in the Philippines. Those
transactions may be characterized either as sales of personal property (i. e., "sales of airline tickets") or as entering into a lease of services or
a contract of service or carriage. The applicable "source of income" rules differ depending upon which characterization is given to the BOAC
transactions.
The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts of service, i.e., carriage of
passengers or cargo between points located outside the Philippines.
The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be correct as a matter of tax law. The airline
ticket in and of itself has no monetary value, even as scrap paper. The value of the ticket lies wholly in the right acquired by the "purchaser"
the passenger to demand a prestation from BOAC, which prestation consists of the carriage of the "purchaser" or passenger from the one
point to another outside the Philippines. The ticket is really the evidence of the contract of carriage entered into between BOAC and the
passenger. The money paid by the passenger changes hands in the Philippines. But the passenger does not receive undertaken to be
delivered by BOAC. The "purchase price of the airline ticket" is quite different from the purchase price of a physical good or commodity such
as a pair of shoes of a refrigerator or an automobile; it is really the compensation paid for the undertaking of BOAC to transport the passenger
or cargo outside the Philippines.
The characterization of the BOAC transactions either as sales of personal property or as purchases and sales of personal property, appear
entirely inappropriate from other viewpoint. Consider first purchases and sales: is BOAC properly regarded as engaged in trading in the
purchase and sale of personal property? Certainly, BOAC was not purchasing tickets outside the Philippines and selling them in the
Philippines. Consider next sales: can BOAC be regarded as "selling" personal property produced or manufactured by it? In a popular or
journalistic sense, BOAC might be described as "selling" "a product" its service. However, for the technical purposes of the law on income
taxation, BOAC is in fact entering into contracts of service or carriage. The very existance of "source rules" specifically and precisely
applicable to the rendition of services must preclude the application here of "source rules" applying generally to sales, and purchases and
sales, of personal property which can be invoked only by the grace of popular language. On a slighty more abstract level, BOAC's income is
more appropriately characterized as derived from a "service", rather than from an "activity" (a broader term than service and including the
activity of selling) or from the here involved is income taxation, and not a sales tax or an excise or privilege tax.
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the Tax Code, as amended by Presidential Decree No. 69,
promulgated on 24 November 1972 and by Presidential Decree No. 1355, promulgated on 21 April 1978, in the following manner:
(2) Resident corporations. A corporation organized, authorized, or existing under the laws of any foreign country,
engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the
total net income received in the preceeding taxable year from all sources within the Philippines: Provided,
however, That international carriers shall pay a tax of two and one-half per cent on their gross Philippine billings. "Gross
Philippines of passage documents sold therein, whether for passenger, excess baggege or mail, provide the cargo or mail
originates from the Philippines. The gross revenue realized from the said cargo or mail shall include the gross freight charge
up to final destination. Gross revenues from chartered flights originating from the Philippines shall likewise form part of
"gross Philippine billings" regardless of the place of sale or payment of the passage documents. For purposes of
determining the taxability to revenues from chartered flights, the term "originating from the Philippines" shall include flight of
passsengers who stay in the Philippines for more than forty-eight (48) hours prior to embarkation. (Emphasis supplied)
Under the above-quoted proviso international carriers issuing for compensation passage documentation in the Philippines for uplifts from any
point in the world to any other point in the world, are not charged any Philippine income tax on their Philippine billings (i.e., billings in respect
of passenger or cargo originating from the Philippines). Under this new approach, international carriers who service port or points in the
Philippines are treated in exactly the same way as international carriers not serving any port or point in the Philippines. Thus, the source of
income rule applicable, as above discussed, to transportation or other services rendered partly within and partly without the Philippines, or
wholly without the Philippines, has been set aside. in place of Philippine income taxation, the Tax Code now imposes this 2 per cent tax
computed on the basis of billings in respect of passengers and cargo originating from the Philippines regardless of where embarkation and
debarkation would be taking place. This 2- per cent tax is effectively a tax on gross receipts or an excise or privilege tax and not a tax
on income. Thereby, the Government has done away with the difficulties attending the allocation of income and related expenses, losses and
deductions. Because taxes are the very lifeblood of government, the resulting potential "loss" or "gain" in the amount of taxes collectible by the
state is sometimes, with varying degrees of consciousness, considered in choosing from among competing possible characterizations under
or interpretation of tax statutes. It is hence perhaps useful to point out that the determination of the appropriate characterization here that of
contracts of air carriage rather than sales of airline tickets entails no down-the-road loss of income tax revenues to the Government. In lieu
thereof, the Government takes in revenues generated by the 2- per cent tax on the gross Philippine billings or receipts of international
carriers.
I would vote to affirm the decision of the Court of Tax Appeals.
Narvasa, Gutierrez, Jr., and Cruz, JJ., dissent.
G.R. No. 169507
AIR CANADA, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONEN, J.:
An offline international air carrier selling passage tickets in the Philippines, through a general sales agent, is a resident foreign corporation
doing business in the Philippines. As such, it is taxable under Section 28(A)(l), and not Section 28(A)(3) of the 1997 National Internal Revenue
Code, subject to any applicable tax treaty to which the Philippines is a signatory. Pursuant to Article 8 of the Republic of the Philippines-
Canada Tax Treaty, Air Canada may only be imposed a maximum tax of 1 % of its gross revenues earned from the sale of its tickets in the
Philippines.
This is a Petition for Review1 appealing the August 26, 2005 Decision2 of the Court of Tax Appeals En Banc, which in turn affirmed the
December 22, 2004 Decision3 and April 8, 2005 Resolution4 of the Court of Tax Appeals First Division denying Air Canadas claim for refund.
Air Canada is a "foreign corporation organized and existing under the laws of Canada[.]" 5 On April 24, 2000, it was granted an authority to
operate as an offline carrier by the Civil Aeronautics Board, subject to certain conditions, which authority would expire on April 24, 2005.6 "As
an off-line carrier, [Air Canada] does not have flights originating from or coming to the Philippines [and does not] operate any airplane [in] the
Philippines[.]"7
On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general sales agent in the Philippines. 8 Aerotel "sells
[Air Canadas] passage documents in the Philippines."9
For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air Canada, through Aerotel, filed quarterly and annual
income tax returns and paid the income tax on Gross Philippine Billings in the total amount of 5,185,676.77, 10 detailed as follows:
1wphi1
Applicable Quarter[/]Year Date Filed/Paid Amount of Tax
3rd Qtr 2000 November 29, 2000 P 395,165.00
Annual ITR 2000 April 16, 2001 381,893.59
1st Qtr 2001 May 30, 2001 522,465.39
2nd Qtr 2001 August 29, 2001 1,033,423.34
3rd Qtr 2001 November 29, 2001 765,021.28
Annual ITR 2001 April 15, 2002 328,193.93
1st Qtr 2002 May 30, 2002 594,850.13
2nd Qtr 2002 August 29, 2002 1,164,664.11
TOTAL P 5,185,676.77 11
On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously paid income taxes amounting to 5,185,676.77
before the Bureau of Internal Revenue,12 Revenue District Office No. 47-East Makati.13It found basis from the revised definition14 of Gross
Philippine Billings under Section 28(A)(3)(a) of the 1997 National Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
....
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and onehalf
percent (2 1/2%) on its Gross Philippine Billings as defined hereunder:
(a) International Air Carrier. - Gross Philippine Billings refers to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document:
Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross
Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight
which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on
another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the
point of transshipment shall form part of Gross Philippine Billings. (Emphasis supplied)
To prevent the running of the prescriptive period, Air Canada filed a Petition for Review before the Court of Tax Appeals on November 29,
2002.15 The case was docketed as C.T.A. Case No. 6572.16
On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision denying the Petition for Review and, hence, the claim
for refund.17 It found that Air Canada was engaged in business in the Philippines through a local agent that sells airline tickets on its behalf. As
such, it should be taxed as a resident foreign corporation at the regular rate of 32%.18 Further, according to the Court of Tax Appeals First
Division, Air Canada was deemed to have established a "permanent establishment"19 in the Philippines under Article V(2)(i) of the Republic of
the Philippines-Canada Tax Treaty20 by the appointment of the local sales agent, "in which [the] petitioner uses its premises as an outlet
where sales of [airline] tickets are made[.]" 21
Air Canada seasonably filed a Motion for Reconsideration, but the Motion was denied in the Court of Tax Appeals First Divisions Resolution
dated April 8, 2005 for lack of merit.22 The First Division held that while Air Canada was not liable for tax on its Gross Philippine Billings under
Section 28(A)(3), it was nevertheless liable to pay the 32% corporate income tax on income derived from the sale of airline tickets within the
Philippines pursuant to Section 28(A)(1).23
On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Banc.24 The appeal was docketed as CTA EB No. 86.25
In the Decision dated August 26, 2005, the Court of Tax Appeals En Banc affirmed the findings of the First Division. 26 The En Banc ruled that
Air Canada is subject to tax as a resident foreign corporation doing business in the Philippines since it sold airline tickets in the
Philippines.27 The Court of Tax Appeals En Banc disposed thus:
WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE, and accordingly, DISMISSED for lack of merit.28
Hence, this Petition for Review29 was filed.
The issues for our consideration are:
First, whether petitioner Air Canada, as an offline international carrier selling passage documents through a general sales agent in the
Philippines, is a resident foreign corporation within the meaning of Section 28(A)(1) of the 1997 National Internal Revenue Code;
Second, whether petitioner Air Canada is subject to the 2% tax on Gross Philippine Billings pursuant to Section 28(A)(3). If not, whether an
offline international carrier selling passage documents through a general sales agent can be subject to the regular corporate income tax of
32%30 on taxable income pursuant to Section 28(A)(1);
Third, whether the Republic of the Philippines-Canada Tax Treaty applies, specifically:
a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;
b. Whether the appointment of a local general sales agent in the Philippines falls under the definition of "permanent establishment"
under Article V(2)(i) of the Republic of the Philippines-Canada Tax Treaty; and
Lastly, whether petitioner Air Canada is entitled to the refund of 5,185,676.77 pertaining allegedly to erroneously paid tax on Gross Philippine
Billings from the third quarter of 2000 to the second quarter of 2002.
Petitioner claims that the general provision imposing the regular corporate income tax on resident foreign corporations provided under Section
28(A)(1) of the 1997 National Internal Revenue Code does not apply to "international carriers," 31 which are especially classified and taxed
under Section 28(A)(3).32 It adds that the fact that it is no longer subject to Gross Philippine Billings tax as ruled in the assailed Court of Tax
Appeals Decision "does not render it ipso facto subject to 32% income tax on taxable income as a resident foreign corporation." 33 Petitioner
argues that to impose the 32% regular corporate income tax on its income would violate the Philippine governments covenant under Article
VIII of the Republic of the Philippines-Canada Tax Treaty not to impose a tax higher than 1% of the carriers gross revenue derived from
sources within the Philippines.34 It would also allegedly result in "inequitable tax treatment of on-line and off-line international air carriers[.]"35
Also, petitioner states that the income it derived from the sale of airline tickets in the Philippines was income from services and not income
from sales of personal property.36 Petitioner cites the deliberations of the Bicameral Conference Committee on House Bill No. 9077 (which
eventually became the 1997 National Internal Revenue Code), particularly Senator Juan Ponce Enriles statement, 37 to reveal the "legislative
intent to treat the revenue derived from air carriage as income from services, and that the carriage of passenger or cargo as the activity that
generates the income."38 Accordingly, applying the principle on the situs of taxation in taxation of services, petitioner claims that its income
derived "from services rendered outside the Philippines [was] not subject to Philippine income taxation." 39
Petitioner further contends that by the appointment of Aerotel as its general sales agent, petitioner cannot be considered to have a "permanent
establishment"40 in the Philippines pursuant to Article V(6) of the Republic of the Philippines-Canada Tax Treaty.41 It points out that Aerotel is
an "independent general sales agent that acts as such for . . . other international airline companies in the ordinary course of its
business."42 Aerotel sells passage tickets on behalf of petitioner and receives a commission for its services. 43 Petitioner states that even the
Bureau of Internal Revenuethrough VAT Ruling No. 003-04 dated February 14, 2004has conceded that an offline international air carrier,
having no flight operations to and from the Philippines, is not deemed engaged in business in the Philippines by merely appointing a general
sales agent.44 Finally, petitioner maintains that its "claim for refund of erroneously paid Gross Philippine Billings cannot be denied on the
ground that [it] is subject to income tax under Section 28 (A) (1)"45 since it has not been assessed at all by the Bureau of Internal Revenue for
any income tax liability.46
On the other hand, respondent maintains that petitioner is subject to the 32% corporate income tax as a resident foreign corporation doing
business in the Philippines. Petitioners total payment of 5,185,676.77 allegedly shows that petitioner was earning a sizable income from the
sale of its plane tickets within the Philippines during the relevant period. 47 Respondent further points out that this court in Commissioner of
Internal Revenue v. American Airlines, Inc.,48 which in turn cited the cases involving the British Overseas Airways Corporation and Air India,
had already settled that "foreign airline companies which sold tickets in the Philippines through their local agents . . . [are] considered resident
foreign corporations engaged in trade or business in the country."49 It also cites Revenue Regulations No. 6-78 dated April 25, 1978, which
defined the phrase "doing business in the Philippines" as including "regular sale of tickets in the Philippines by offline international airlines
either by themselves or through their agents." 50
Respondent further contends that petitioner is not entitled to its claim for refund because the amount of 5,185,676.77 it paid as tax from the
third quarter of 2000 to the second quarter of 2001 was still short of the 32% income tax due for the period. 51 Petitioner cannot allegedly claim
good faith in its failure to pay the right amount of tax since the National Internal Revenue Code became operative on January 1, 1998 and by
2000, petitioner should have already been aware of the implications of Section 28(A)(3) and the decided cases of this courts ruling on the
taxability of offline international carriers selling passage tickets in the Philippines. 52
I
At the outset, we affirm the Court of Tax Appeals ruling that petitioner, as an offline international carrier with no landing rights in the
Philippines, is not liable to tax on Gross Philippine Billings under Section 28(A)(3) of the 1997 National Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign Corporations.
(A) Tax on Resident Foreign Corporations. -
....
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its
Gross Philippine Billings as defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets
revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the
passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the
aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall
form part of Gross Philippine Billings. (Emphasis supplied)
Under the foregoing provision, the tax attaches only when the carriage of persons, excess baggage, cargo, and mail originated from the
Philippines in a continuous and uninterrupted flight, regardless of where the passage documents were sold.
Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross Philippine Billings tax.
II
Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes. Petitioner falls within the definition of resident foreign
corporation under Section 28(A)(1) of the 1997 National Internal Revenue Code, thus, it may be subject to 32% 53 tax on its taxable income:
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any
foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five
percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That
effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three
percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%54). (Emphasis supplied)
The definition of "resident foreign corporation" has not substantially changed throughout the amendments of the National Internal Revenue
Code. All versions refer to "a foreign corporation engaged in trade or business within the Philippines."
Commonwealth Act No. 466, known as the National Internal Revenue Code and approved on June 15, 1939, defined "resident foreign
corporation" as applying to "a foreign corporation engaged in trade or business within the Philippines or having an office or place of business
therein."55
Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic Act No. 6110, approved on August 4, 1969, reads:
Sec. 24. Rates of tax on corporations. . . .
(b) Tax on foreign corporations. . . .
(2) Resident corporations. A corporation organized, authorized, or existing under the laws of any foreign country, except a foreign life
insurance company, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the
total net income received in the preceding taxable year from all sources within the Philippines. 56 (Emphasis supplied)
Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain sections of the 1939 National Internal Revenue Code. Section
24(b)(2) on foreign resident corporations was amended, but it still provides that "[a] corporation organized, authorized, or existing under the
laws of any foreign country, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this section
upon the total net income received in the preceding taxable year from all sources within the Philippines[.]" 57
As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas Airways Corporation 58declared British Overseas Airways
Corporation, an international air carrier with no landing rights in the Philippines, as a resident foreign corporation engaged in business in the
Philippines through its local sales agent that sold and issued tickets for the airline company.59 This court discussed that:
There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of
its peculiar environmental circumstances. The term implies a continuity of commercial dealings and arrangements, and contemplates, to
that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive
prosecution of commercial gain or for the purpose and object of the business organization. "In order that a foreign corporation may be
regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the
appointment of a local agent, and not one of a temporary character.["]
BOAC, during the periods covered by the subject-assessments, maintained a general sales agent in the Philippines. That general sales agent,
from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips each trip in the
series corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various
airline companies on the basis of their participation in the services rendered through the mode of interline settlement as prescribed by Article
VI of the Resolution No. 850 of the IATA Agreement." Those activities were in exercise of the functions which are normally incident to, and are
in progressive pursuit of, the purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its main
activity, is the very lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt then that
BOAC was "engaged in" business in the Philippines through a local agent during the period covered by the assessments. Accordingly, it is a
resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources within the
Philippines.60 (Emphasis supplied, citations omitted)
Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides guidance with its definition of "doing business" with regard to
foreign corporations. Section 3(d) of the law enumerates the activities that constitute doing business:
d. the phrase "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison" offices or
branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or
periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business,
firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements,
and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and
in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That
the phrase "doing business" shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations
duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests
in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and
for its own account[.]61 (Emphasis supplied)
While Section 3(d) above states that "appointing a representative or distributor domiciled in the Philippines which transacts business in its own
name and for its own account" is not considered as "doing business," the Implementing Rules and Regulations of Republic Act No. 7042
clarifies that "doing business" includes "appointing representatives or distributors, operating under full control of the foreign corporation,
domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty (180) days or
more[.]"62
An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics] Board, but who maintains office or who has designated or
appointed agents or employees in the Philippines, who sells or offers for sale any air transportation in behalf of said foreign air carrier and/or
others, or negotiate for, or holds itself out by solicitation, advertisement, or otherwise sells, provides, furnishes, contracts, or arranges for such
transportation."63
"Anyone desiring to engage in the activities of an off-line carrier [must] apply to the [Civil Aeronautics] Board for such authority." 64 Each offline
carrier must file with the Civil Aeronautics Board a monthly report containing information on the tickets sold, such as the origin and destination
of the passengers, carriers involved, and commissions received.65
Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the Philippines.
Aerotel performs acts or works or exercises functions that are incidental and beneficial to the purpose of petitioners business. The activities of
Aerotel bring direct receipts or profits to petitioner.66 There is nothing on record to show that Aerotel solicited orders alone and for its own
account and without interference from, let alone direction of, petitioner. On the contrary, Aerotel cannot "enter into any contract on behalf of
[petitioner Air Canada] without the express written consent of [the latter,]" 67 and it must perform its functions according to the standards
required by petitioner.68 Through Aerotel, petitioner is able to engage in an economic activity in the Philippines.
Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an offline carrier in the Philippines for a period of five
years, or from April 24, 2000 until April 24, 2005.69
Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from sources within the Philippines. Petitioners
income from sale of airline tickets, through Aerotel, is income realized from the pursuit of its business activities in the Philippines.
III
However, the application of the regular 32% tax rate under Section 28(A)(1) of the 1997 National Internal Revenue Code must consider the
existence of an effective tax treaty between the Philippines and the home country of the foreign air carrier.
In the earlier case of South African Airways v. Commissioner of Internal Revenue,70 this court held that Section 28(A)(3)(a) does not
categorically exempt all international air carriers from the coverage of Section 28(A)(1). Thus, if Section 28(A)(3)(a) is applicable to a taxpayer,
then the general rule under Section 28(A)(1) does not apply. If, however, Section 28(A)(3)(a) does not apply, an international air carrier would
be liable for the tax under Section 28(A)(1).71
This court in South African Airways declared that the correct interpretation of these provisions is that: "international air carrier[s] maintain[ing]
flights to and from the Philippines . . . shall be taxed at the rate of 2% of its Gross Philippine Billings[;] while international air carriers that do
not have flights to and from the Philippines but nonetheless earn income from other activities in the country [like sale of airline tickets] will be
taxed at the rate of 32% of such [taxable] income." 72
In this case, there is a tax treaty that must be taken into consideration to determine the proper tax rate.
A tax treaty is an agreement entered into between sovereign states "for purposes of eliminating double taxation on income and capital,
preventing fiscal evasion, promoting mutual trade and investment, and according fair and equitable tax treatment to foreign residents or
nationals."73 Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc.74 explained the purpose of a tax treaty:
The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the
taxpayer avoid simultaneous taxation in two different jurisdictions. More precisely, the tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter and for identical periods.
The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital,
technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. Foreign investments will only
thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating
such a climate.75 (Emphasis in the original, citations omitted)
Observance of any treaty obligation binding upon the government of the Philippines is anchored on the constitutional provision that the
Philippines "adopts the generally accepted principles of international law as part of the law of the land[.]" 76 Pacta sunt servanda is a
fundamental international law principle that requires agreeing parties to comply with their treaty obligations in good faith. 77
Hence, the application of the provisions of the National Internal Revenue Code must be subject to the provisions of tax treaties entered into by
the Philippines with foreign countries.
In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue,78 this court stressed the binding effects of tax treaties. It dealt with
the issue of "whether the failure to strictly comply with [Revenue Memorandum Order] RMO No. 1-200079 will deprive persons or corporations
of the benefit of a tax treaty."80 Upholding the tax treaty over the administrative issuance, this court reasoned thus:
Our Constitution provides for adherence to the general principles of international law as part of the law of the land. The time-honored
international principle of pacta sunt servanda demands the performance in good faith of treaty obligations on the part of the states that enter
into the agreement. Every treaty in force is binding upon the parties, and obligations under the treaty must be performed by them in good faith.
More importantly, treaties have the force and effect of law in this jurisdiction.
Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and, in turn, help the taxpayer avoid
simultaneous taxations in two different jurisdictions." CIR v. S.C. Johnson and Son, Inc. further clarifies that "tax conventions are drafted with
a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject matter and for identical periods. The apparent rationale for doing away with double
taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a fairly predictable and reasonable
international investment climate and the protection against double taxation is crucial in creating such a climate." Simply put, tax treaties are
entered into to minimize, if not eliminate the harshness of international juridical double taxation, which is why they are also known as double
tax treaty or double tax agreements.
"A state that has contracted valid international obligations is bound to make in its legislations those modifications that may be necessary to
ensure the fulfillment of the obligations undertaken." Thus, laws and issuances must ensure that the reliefs granted under tax treaties are
accorded to the parties entitled thereto. The BIR must not impose additional requirements that would negate the availment of the reliefs
provided for under international agreements. More so, when the RPGermany Tax Treaty does not provide for any pre-requisite for the
availment of the benefits under said agreement.
....
Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as required by RMO No. 1-2000
should not operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax
treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the administrative
issuance would impair the value of the tax treaty. At most, the application for a tax treaty relief from the BIR should merely operate to confirm
the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000. Logically, noncompliance with tax
treaties has negative implications on international relations, and unduly discourages foreign investors. While the consequences sought to be
prevented by RMO No. 1-2000 involve an administrative procedure, these may be remedied through other system management
processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those who are entitled to the benefit of a treaty for failure to
strictly comply with an administrative issuance requiring prior application for tax treaty relief. 81 (Emphasis supplied, citations omitted)
On March 11, 1976, the representatives82 for the government of the Republic of the Philippines and for the government of Canada signed the
Convention between the Philippines and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income (Republic of the Philippines-Canada Tax Treaty). This treaty entered into force on December 21, 1977.
Article V83 of the Republic of the Philippines-Canada Tax Treaty defines "permanent establishment" as a "fixed place of business in which the
business of the enterprise is wholly or partly carried on."84
Even though there is no fixed place of business, an enterprise of a Contracting State is deemed to have a permanent establishment in the
other Contracting State if under certain conditions there is a person acting for it.
Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states that "[a] person acting in a Contracting State on behalf of
an enterprise of the other Contracting State (other than an agent of independent status to whom paragraph 6 applies) shall be deemed to be a
permanent establishment in the first-mentioned State if . . . he has and habitually exercises in that State an authority to conclude contracts on
behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for that enterprise[.]" The provision seems to
refer to one who would be considered an agent under Article 1868 85 of the Civil Code of the Philippines.
On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting State shall not be deemed to have a permanent establishment in
the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other
agent of an independent status, where such persons are acting in the ordinary course of their business."
Considering Article XV86 of the same Treaty, which covers dependent personal services, the term "dependent" would imply a relationship
between the principal and the agent that is akin to an employer-employee relationship.
Thus, an agent may be considered to be dependent on the principal where the latter exercises comprehensive control and detailed
instructions over the means and results of the activities of the agent.87
Section 3 of Republic Act No. 776, as amended, also known as The Civil Aeronautics Act of the Philippines, defines a general sales agent as
"a person, not a bonafide employee of an air carrier, who pursuant to an authority from an airline, by itself or through an agent, sells or offers
for sale any air transportation, or negotiates for, or holds himself out by solicitation, advertisement or otherwise as one who sells, provides,
furnishes, contracts or arranges for, such air transportation." 88 General sales agents and their property, property rights, equipment, facilities,
and franchise are subject to the regulation and control of the Civil Aeronautics Board. 89 A permit or authorization issued by the Civil
Aeronautics Board is required before a general sales agent may engage in such an activity. 90
Through the appointment of Aerotel as its local sales agent, petitioner is deemed to have created a "permanent establishment" in the
Philippines as defined under the Republic of the Philippines-Canada Tax Treaty.
Petitioner appointed Aerotel as its passenger general sales agent to perform the sale of transportation on petitioner and handle reservations,
appointment, and supervision of International Air Transport Associationapproved and petitioner-approved sales agents, including the following
services:
ARTICLE 7
GSA SERVICES
The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the following services:
a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit of AC in every matter relating to this Agreement;
....
c) Promotion of passenger transportation on AC;
....
e) Without the need for endorsement by AC, arrange for the reissuance, in the Territory of the GSA [Philippines], of traffic documents issued
by AC outside the said territory of the GSA [Philippines], as required by the passenger(s);
....
h) Distribution among passenger sales agents and display of timetables, fare sheets, tariffs and publicity material provided by AC in
accordance with the reasonable requirements of AC;
....
j) Distribution of official press releases provided by AC to media and reference of any press or public relations inquiries to AC;
....
o) Submission for ACs approval, of an annual written sales plan on or before a date to be determined by AC and in a form acceptable to AC;
....
q) Submission of proposals for ACs approval of passenger sales agent incentive plans at a reasonable time in advance of proposed
implementation.
r) Provision of assistance on request, in its relations with Governmental and other authorities, offices and agencies in the Territory
[Philippines].
....
u) Follow AC guidelines for the handling of baggage claims and customer complaints and, unless otherwise stated in the guidelines, refer all
such claims and complaints to AC.91
Under the terms of the Passenger General Sales Agency Agreement, Aerotel will "provide at its own expense and acceptable to [petitioner Air
Canada], adequate and suitable premises, qualified staff, equipment, documentation, facilities and supervision and in consideration of the
remuneration and expenses payable[,] [will] defray all costs and expenses of and incidental to the Agency." 92 "[I]t is the sole employer of its
employees and . . . is responsible for [their] actions . . . or those of any subcontractor." 93 In remuneration for its services, Aerotel would be paid
by petitioner a commission on sales of transportation plus override commission on flown revenues. 94 Aerotel would also be reimbursed "for all
authorized expenses supported by original supplier invoices."95
Aerotel is required to keep "separate books and records of account, including supporting documents, regarding all transactions at, through or
in any way connected with [petitioner Air Canada] business."96
"If representing more than one carrier, [Aerotel must] represent all carriers in an unbiased way."97 Aerotel cannot "accept additional
appointments as General Sales Agent of any other carrier without the prior written consent of [petitioner Air Canada]."98
The Passenger General Sales Agency Agreement "may be terminated by either party without cause upon [no] less than 60 days prior notice
in writing[.]"99 In case of breach of any provisions of the Agreement, petitioner may require Aerotel "to cure the breach in 30 days failing which
[petitioner Air Canada] may terminate [the] Agreement[.]" 100
The following terms are indicative of Aerotels dependent status:
First, Aerotel must give petitioner written notice "within 7 days of the date [it] acquires or takes control of another entity or merges with or is
acquired or controlled by another person or entity[.]" 101 Except with the written consent of petitioner, Aerotel must not acquire a substantial
interest in the ownership, management, or profits of a passenger sales agent affiliated with the International Air Transport Association or a
non-affiliated passenger sales agent nor shall an affiliated passenger sales agent acquire a substantial interest in Aerotel as to influence its
commercial policy and/or management decisions.102 Aerotel must also provide petitioner "with a report on any interests held by [it], its owners,
directors, officers, employees and their immediate families in companies and other entities in the aviation industry or . . . industries related to
it[.]"103 Petitioner may require that any interest be divested within a set period of time. 104
Second, in carrying out the services, Aerotel cannot enter into any contract on behalf of petitioner without the express written consent of the
latter;105 it must act according to the standards required by petitioner; 106 "follow the terms and provisions of the [petitioner Air Canada] GSA
Manual [and all] written instructions of [petitioner Air Canada;]" 107 and "[i]n the absence of an applicable provision in the Manual or
instructions, [Aerotel must] carry out its functions in accordance with [its own] standard practices and procedures[.]" 108
Third, Aerotel must only "issue traffic documents approved by [petitioner Air Canada] for all transportation over [its] services[.]" 109 All use of
petitioners name, logo, and marks must be with the written consent of petitioner and according to petitioners corporate standards and
guidelines set out in the Manual.110
Fourth, all claims, liabilities, fines, and expenses arising from or in connection with the transportation sold by Aerotel are for the account of
petitioner, except in the case of negligence of Aerotel. 111
Aerotel is a dependent agent of petitioner pursuant to the terms of the Passenger General Sales Agency Agreement executed between the
parties. It has the authority or power to conclude contracts or bind petitioner to contracts entered into in the Philippines. A third-party liability on
contracts of Aerotel is to petitioner as the principal, and not to Aerotel, and liability to such third party is enforceable against petitioner. While
Aerotel maintains a certain independence and its activities may not be devoted wholly to petitioner, nonetheless, when representing petitioner
pursuant to the Agreement, it must carry out its functions solely for the benefit of petitioner and according to the latters Manual and written
instructions. Aerotel is required to submit its annual sales plan for petitioners approval.
In essence, Aerotel extends to the Philippines the transportation business of petitioner. It is a conduit or outlet through which petitioners airline
tickets are sold.112
Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax Treaty, the "business profits" of an enterprise of a
Contracting State is "taxable only in that State[,] unless the enterprise carries on business in the other Contracting State through a permanent
establishment[.]"113 Thus, income attributable to Aerotel or from business activities effected by petitioner through Aerotel may be taxed in the
Philippines. However, pursuant to the last paragraph 114 of Article VII in relation to Article VIII115 (Shipping and Air Transport) of the same
Treaty, the tax imposed on income derived from the operation of ships or aircraft in international traffic should not exceed 1% of gross
revenues derived from Philippine sources.
IV
While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of the 1997 National Internal Revenue Code on its taxable
income116 from sale of airline tickets in the Philippines, it could only be taxed at a maximum of 1% of gross revenues, pursuant to Article VIII
of the Republic of the Philippines-Canada Tax Treaty that applies to petitioner as a "foreign corporation organized and existing under the laws
of Canada[.]"117
Tax treaties form part of the law of the land,118 and jurisprudence has applied the statutory construction principle that specific laws prevail over
general ones.119
The Republic of the Philippines-Canada Tax Treaty was ratified on December 21, 1977 and became valid and effective on that date. On the
other hand, the applicable provisions120 relating to the taxability of resident foreign corporations and the rate of such tax found in the National
Internal Revenue Code became effective on January 1, 1998.121 Ordinarily, the later provision governs over the earlier one. 122 In this case,
however, the provisions of the Republic of the Philippines-Canada Tax Treaty are more specific than the provisions found in the National
Internal Revenue Code.
These rules of interpretation apply even though one of the sources is a treaty and not simply a statute.
Article VII, Section 21 of the Constitution provides:
SECTION 21. No treaty or international agreement shall be valid and effective unless concurred in by at least two-thirds of all the Members of
the Senate.
This provision states the second of two ways through which international obligations become binding. Article II, Section 2 of the Constitution
deals with international obligations that are incorporated, while Article VII, Section 21 deals with international obligations that become binding
through ratification.
"Valid and effective" means that treaty provisions that define rights and duties as well as definite prestations have effects equivalent to a
statute. Thus, these specific treaty provisions may amend statutory provisions. Statutory provisions may also amend these types of treaty
obligations.
We only deal here with bilateral treaty state obligations that are not international obligations erga omnes. We are also not required to rule in
this case on the effect of international customary norms especially those with jus cogens character.
The second paragraph of Article VIII states that "profits from sources within a Contracting State derived by an enterprise of the other
Contracting State from the operation of ships or aircraft in international traffic may be taxed in the first-mentioned State but the tax so
charged shall not exceed the lesser of a) one and one-half per cent of the gross revenues derived from sources in that State; and b) the
lowest rate of Philippine tax imposed on such profits derived by an enterprise of a third State."
The Agreement between the government of the Republic of the Philippines and the government of Canada on Air Transport, entered into on
January 14, 1997, reiterates the effectivity of Article VIII of the Republic of the Philippines-Canada Tax Treaty:
ARTICLE XVI
(Taxation)
The Contracting Parties shall act in accordance with the provisions of Article VIII of the Convention between the Philippines and Canada for
the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed at Manila on March 31,
1976 and entered into force on December 21, 1977, and any amendments thereto, in respect of the operation of aircraft in international
traffic.123
Petitioners income from sale of ticket for international carriage of passenger is income derived from international operation of aircraft. The
sale of tickets is closely related to the international operation of aircraft that it is considered incidental thereto.
"[B]y reason of our bilateral negotiations with [Canada], we have agreed to have our right to tax limited to a certain extent[.]"124 Thus, we are
bound to extend to a Canadian air carrier doing business in the Philippines through a local sales agent the benefit of a lower tax equivalent to
1% on business profits derived from sale of international air transportation.
V
Finally, we reject petitioners contention that the Court of Tax Appeals erred in denying its claim for refund of erroneously paid Gross
Philippine Billings tax on the ground that it is subject to income tax under Section 28(A)(1) of the National Internal Revenue Code because (a)
it has not been assessed at all by the Bureau of Internal Revenue for any income tax liability; 125 and (b) internal revenue taxes cannot be the
subject of set-off or compensation,126citing Republic v. Mambulao Lumber Co., et al.127 and Francia v. Intermediate Appellate Court.128
In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue,129 we have ruled that "[i]n an action for the refund of taxes
allegedly erroneously paid, the Court of Tax Appeals may determine whether there are taxes that should have been paid in lieu of the taxes
paid."130 The determination of the proper category of tax that should have been paid is incidental and necessary to resolve the issue of
whether a refund should be granted.131 Thus:
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6% capital gains tax or other taxes at the first instance. The
Court of Tax Appeals has no power to make an assessment.
As earlier established, the Court of Tax Appeals has no assessment powers. In stating that petitioners transactions are subject to capital
gains tax, however, the Court of Tax Appeals was not making an assessment. It was merely determining the proper category of tax that
petitioner should have paid, in view of its claim that it erroneously imposed upon itself and paid the 5% final tax imposed upon PEZA-
registered enterprises.
The determination of the proper category of tax that petitioner should have paid is an incidental matter necessary for the resolution of the
principal issue, which is whether petitioner was entitled to a refund.
The issue of petitioners claim for tax refund is intertwined with the issue of the proper taxes that are due from petitioner. A claim for tax refund
carries the assumption that the tax returns filed were correct. If the tax return filed was not proper, the correctness of the amount paid and,
therefore, the claim for refund become questionable. In that case, the court must determine if a taxpayer claiming refund of erroneously paid
taxes is more properly liable for taxes other than that paid.
In South African Airways v. Commissioner of Internal Revenue, South African Airways claimed for refund of its erroneously paid 2% taxes on
its gross Philippine billings. This court did not immediately grant South Africans claim for refund. This is because although this court found that
South African Airways was not subject to the 2% tax on its gross Philippine billings, this court also found that it was subject to 32% tax on its
taxable income.
In this case, petitioners claim that it erroneously paid the 5% final tax is an admission that the quarterly tax return it filed in 2000 was
improper. Hence, to determine if petitioner was entitled to the refund being claimed, the Court of Tax Appeals has the duty to determine if
petitioner was indeed not liable for the 5% final tax and, instead, liable for taxes other than the 5% final tax. As in South African
Airways, petitioners request for refund can neither be granted nor denied outright without such determination.
If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the amount of the taxpayers liability should be computed
and deducted from the refundable amount.
Any liability in excess of the refundable amount, however, may not be collected in a case involving solely the issue of the taxpayers
entitlement to refund. The question of tax deficiency is distinct and unrelated to the question of petitioners entitlement to refund. Tax
deficiencies should be subject to assessment procedures and the rules of prescription. The court cannot be expected to perform the BIRs
duties whenever it fails to do so either through neglect or oversight. Neither can court processes be used as a tool to circumvent laws
protecting the rights of taxpayers.132
Hence, the Court of Tax Appeals properly denied petitioners claim for refund of allegedly erroneously paid tax on its Gross Philippine Billings,
on the ground that it was liable instead for the regular 32% tax on its taxable income received from sources within the Philippines. Its
determination of petitioners liability for the 32% regular income tax was made merely for the purpose of ascertaining petitioners entitlement to
a tax refund and not for imposing any deficiency tax.
In this regard, the matter of set-off raised by petitioner is not an issue. Besides, the cases cited are based on different circumstances. In both
cited cases,133 the taxpayer claimed that his (its) tax liability was off-set by his (its) claim against the government.
Specifically, in Republic v. Mambulao Lumber Co., et al., Mambulao Lumber contended that the amounts it paid to the government as
reforestation charges from 1947 to 1956, not having been used in the reforestation of the area covered by its license, may be set off or applied
to the payment of forest charges still due and owing from it.134Rejecting Mambulaos claim of legal compensation, this court ruled:
[A]ppellant and appellee are not mutually creditors and debtors of each other. Consequently, the law on compensation is inapplicable. On this
point, the trial court correctly observed:
Under Article 1278, NCC, compensation should take place when two persons in their own right are creditors and debtors of each other. With
respect to the forest charges which the defendant Mambulao Lumber Company has paid to the government, they are in the coffers of the
government as taxes collected, and the government does not owe anything to defendant Mambulao Lumber Company. So, it is crystal clear
that the Republic of the Philippines and the Mambulao Lumber Company are not creditors and debtors of each other, because compensation
refers to mutual debts. * * *.
And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in question, can not be the subject of set-off
or compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to
the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or transaction
sued on. * * *. (80 C.J.S. 7374.)
The general rule, based on grounds of public policy is well-settled that no set-off is admissible against demands for taxes levied for general or
local governmental purposes. The reason on which the general rule is based, is that taxes are not in the nature of contracts between the party
and party but grow out of a duty to, and are the positive acts of the government, to the making and enforcing of which, the personal consent of
individual taxpayers is not required. * * * If the taxpayer can properly refuse to pay his tax when called upon by the Collector, because he has
a claim against the governmental body which is not included in the tax levy, it is plain that some legitimate and necessary expenditure must be
curtailed. If the taxpayers claim is disputed, the collection of the tax must await and abide the result of a lawsuit, and meanwhile the financial
affairs of the government will be thrown into great confusion. (47 Am. Jur. 766767.)135 (Emphasis supplied)
In Francia, this court did not allow legal compensation since not all requisites of legal compensation provided under Article 1279 were
present.136 In that case, a portion of Francias property in Pasay was expropriated by the national government, 137 which did not immediately
pay Francia. In the meantime, he failed to pay the real property tax due on his remaining property to the local government of Pasay, which
later on would auction the property on account of such delinquency.138 He then moved to set aside the auction sale and argued, among
others, that his real property tax delinquency was extinguished by legal compensation on account of his unpaid claim against the national
government.139 This court ruled against Francia:
There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are reciprocally debtors and
creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by
Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off-setting of taxes against the claims
that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an
amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.
....
There are other factors which compel us to rule against the petitioner. The tax was due to the city government while the expropriation was
effected by the national government. Moreover, the amount of 4,116.00 paid by the national government for the 125 square meter portion of
his lot was deposited with the Philippine National Bank long before the sale at public auction of his remaining property. Notice of the deposit
dated September 28, 1977 was received by the petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about
the 4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw 2,400.00 from the deposit
so that he could pay the tax obligation thus aborting the sale at public auction. 140
The ruling in Francia was applied to the subsequent cases of Caltex Philippines, Inc. v. Commission on Audit141 and Philex Mining Corporation
v. Commissioner of Internal Revenue.142 In Caltex, this court reiterated:
[A] taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation
because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.143 (Citations omitted)
Philex Mining ruled that "[t]here is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity,
while taxes are due to the Government in its sovereign capacity." 144 Rejecting Philex Minings assertion that the imposition of surcharge and
interest was unjustified because it had no obligation to pay the excise tax liabilities within the prescribed period since, after all, it still had
pending claims for VAT input credit/refund with the Bureau of Internal Revenue, this court explained:
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit
against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather
than a matter of bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any tax payer can defer the payment of taxes by
raising the defense that it still has a pending claim for refund or credit, this would adversely affect the government revenue system. A taxpayer
cannot refuse to pay his taxes when they fall due simply because he has a claim against the government or that the collection of the tax is
contingent on the result of the lawsuit it filed against the government. Moreover, Philexs theory that would automatically apply its VAT input
credit/refund against its tax liabilities can easily give rise to confusion and abuse, depriving the government of authority over the manner by
which taxpayers credit and offset their tax liabilities.145 (Citations omitted)
In sum, the rulings in those cases were to the effect that the taxpayer cannot simply refuse to pay tax on the ground that the tax liabilities were
off-set against any alleged claim the taxpayer may have against the government. Such would merely be in keeping with the basic policy on
prompt collection of taxes as the lifeblood of the government.1wphi1
Here, what is involved is a denial of a taxpayers refund claim on account of the Court of Tax Appeals finding of its liability for another tax in
lieu of the Gross Philippine Billings tax that was allegedly erroneously paid.
Squarely applicable is South African Airways where this court rejected similar arguments on the denial of claim for tax refund:
Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of a tax refund with a tax deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioners supplemental motion for reconsideration alleging
bringing to said courts attention the existence of the deficiency income and business tax assessment against Citytrust. The fact of such
deficiency assessment is intimately related to and inextricably intertwined with the right of respondent bank to claim for a tax refund for the
same year. To award such refund despite the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects.
Herein private respondent cannot be entitled to refund and at the same time be liable for a tax deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are true and correct. The
deficiency assessment, although not yet final, created a doubt as to and constitutes a challenge against the truth and accuracy of the facts
stated in said return which, by itself and without unquestionable evidence, cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law when the claim of Citytrust was filed,
provides that "(w)hen an assessment is made in case of any list, statement, or return, which in the opinion of the Commissioner of Internal
Revenue was false or fraudulent or contained any understatement or undervaluation, no tax collected under such assessment shall be
recovered by any suits unless it is proved that the said list, statement, or return was not false nor fraudulent and did not contain any
understatement or undervaluation; but this provision shall not apply to statements or returns made or to be made in good faith regarding
annual depreciation of oil or gas wells and mines."
Moreover, to grant the refund without determination of the proper assessment and the tax due would inevitably result in multiplicity of
proceedings or suits. If the deficiency assessment should subsequently be upheld, the Government will be forced to institute anew a
proceeding for the recovery of erroneously refunded taxes which recourse must be filed within the prescriptive period of ten years after
discovery of the falsity, fraud or omission in the false or fraudulent return involved. This would necessarily require and entail additional efforts
and expenses on the part of the Government, impose a burden on and a drain of government funds, and impede or delay the collection of
much-needed revenue for governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and legally appropriate that the issue
of the deficiency tax assessment against Citytrust be resolved jointly with its claim for tax refund, to determine once and for all in a single
proceeding the true and correct amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just and fair that the taxpayer and the Government alike
be given equal opportunities to avail of remedies under the law to defeat each others claim and to determine all matters of dispute between
them in one single case. It is important to note that in determining whether or not petitioner is entitled to the refund of the amount paid, it would
[be] necessary to determine how much the Government is entitled to collect as taxes. This would necessarily include the determination of the
correct liability of the taxpayer and, certainly, a determination of this case would constitute res judicata on both parties as to all the matters
subject thereof or necessarily involved therein.
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above pronouncements are, therefore, still
applicable today.
Here, petitioner's similar tax refund claim assumes that the tax return that it filed was correct. Given, however, the finding of the CTA that
petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(l), the correctness of the return filed by
petitioner is now put in doubt. As such, we cannot grant the prayer for a refund. 146 (Emphasis supplied, citation omitted)
In the subsequent case of United Airlines, Inc. v. Commissioner of Internal Revenue, 147 this court upheld the denial of the claim for refund
based on the Court of Tax Appeals' finding that the taxpayer had, through erroneous deductions on its gross income, underpaid its Gross
Philippine Billing tax on cargo revenues for 1999, and the amount of underpayment was even greater than the refund sought for erroneously
paid Gross Philippine Billings tax on passenger revenues for the same taxable period. 148
In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was computed at the rate of 1 % of its gross revenues
amounting to P345,711,806.08149 from the third quarter of 2000 to the second quarter of 2002. It is quite apparent that the tax imposable
under Section 28(A)(l) of the 1997 National Internal Revenue Code [32% of t.axable income, that is, gross income less deductions] will exceed
the maximum ceiling of 1 % of gross revenues as decreed in Article VIII of the Republic of the Philippines-Canada Tax Treaty. Hence, no
refund is forthcoming.
WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005 and Resolution dated April 8, 2005 of the Court of Tax Appeals
En Banc are AFFIRMED.
SO ORDERED.
UNITED AIRLINES, INC., G.R. No. 178788
Petitioner, Present:

CARPIO MORALES, J.,


Chairperson,
BRION,
- versus - BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.

Promulgated:
COMMISSIONER OF INTERNAL REVENUE,
Respondent. September 29, 2010
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

VILLARAMA, JR., J.:

Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, of the Decision[1] dated July 5,
2007 of the Court of Tax Appeals En Banc (CTA En Banc) in C.T.A. EB No. 227 denying petitioners claim for tax refund of P5.03 million.
The undisputed facts are as follows:
Petitioner United Airlines, Inc. is a foreign corporation organized and existing under the laws of the State of Delaware, U.S.A., engaged in the
international airline business.
Petitioner used to be an online international carrier of passenger and cargo, i.e., it used to operate passenger and cargo flights originating in the
Philippines. Upon cessation of its passenger flights in and out of the Philippines beginning February 21, 1998, petitioner appointed a sales agent
in the Philippines -- Aerotel Ltd. Corp., an independent general sales agent acting as such for several international airline companies. [2] Petitioner
continued operating cargo flights from the Philippines until January 31, 2001. [3]
On April 12, 2002, petitioner filed with respondent Commissioner a claim for income tax refund, pursuant to Section 28(A)(3)(a)[4] of the National
Internal Revenue Code of 1997 (NIRC) in relation to Article 4(7)[5] of the Convention between the Government of the Republic of the Philippines
and the Government of the United States of America with respect to Income Taxes (RP-US Tax Treaty). Petitioner sought to refund the total
amount of P15,916,680.69 pertaining to income taxes paid on gross passenger and cargo revenues for the taxable years 1999 to 2001, which
included the amount of P5,028,813.23 allegedly representing income taxes paid in 1999 on passenger revenue from tickets sold in the
Philippines, the uplifts of which did not originate in the Philippines. Citing the change in definition of Gross Philippine Billings (GPB) in the NIRC,
petitioner argued that since it no longer operated passenger flights originating from the Philippines beginning February 21, 1998, its passenger
revenue for 1999, 2000 and 2001 cannot be considered as income from sources within the Philippines, and hence should not be subject to
Philippine income tax under Article 9[6] of the RP-US Tax Treaty.[7]
As no resolution on its claim for refund had yet been made by the respondent and in view of the two (2)-year prescriptive period (from the time
of filing the Final Adjustment Return for the taxable year 1999) which was about to expire on April 15, 2002, petitioner filed on said date a petition
for review with the Court of Tax Appeals (CTA).[8]
Petitioner asserted that under the new definition of GPB under the 1997 NIRC and Article 4(7) of the RP-US Tax Treaty, Philippine tax authorities
have jurisdiction to tax only the gross revenue derived by US air and shipping carriers from outgoing traffic in the Philippines. Since the Bureau
of Internal Revenue (BIR) erroneously imposed and collected income tax in 1999 based on petitioners gross passenger revenue, as beginning
1998 petitioner no longer flew passenger flights to and from the Philippines, petitioner is entitled to a refund of such erroneously collected income
tax in the amount of P5,028,813.23.[9]
In its Decision[10] dated May 18, 2006, the CTAs First Division[11] ruled that no excess or erroneously paid tax may be refunded to petitioner
because the income tax on GPB under Section 28(A)(3)(a) of the NIRC applies as well to gross revenue from carriage of cargoes originating from
the Philippines. It agreed that petitioner cannot be taxed on its 1999 passenger revenue from flights originating outside the Philippines. However, in
reporting a cargo revenue of P740.33 million in 1999, it was found that petitioner deducted two (2) items from its gross cargo revenue of P2.84
billion: P141.79 million as commission and P1.98 billion as other incentives of its agent.These deductions were erroneous because the gross
revenue referred to in Section 28(A)(3)(a) of the NIRC was total revenue before any deduction of commission and incentives. Petitioners gross
cargo revenue in 1999, being P2.84 billion, the GPB tax thereon was P42.54 million and not P11.1 million, the amount petitioner paid for the reported
net cargo revenue of P740.33 million. The CTA First Division further noted that petitioner even underpaid its taxes on cargo revenue by P31.43
million, which amount was much higher than the P5.03 million it asked to be refunded.
A motion for reconsideration was filed by petitioner but the First Division denied the same. It held that petitioners claim for tax refund was not
offset with its tax liability; that petitioners tax deficiency was due to erroneous deductions from its gross cargo revenue; that it did not make an
assessment against petitioner; and that it merely determined if petitioner was entitled to a refund based on the undisputed f acts and whether
petitioner had paid the correct amount of tax.[12]
Petitioner elevated the case to the CTA En Banc which affirmed the decision of the First Division.
Hence, this petition anchored on the following grounds:
I. THE CTA EN BANC GROSSLY ERRED IN DENYING THE PETITIONERS CLAIM FOR REFUND OF
ERRONEOUSLY PAID INCOME TAX ON GROSS PHILIPPINE BILLINGS [GPB] BASED ON ITS FINDING THAT
PETITIONERS UNDERPAYMENT OF [P31.43 MILLION] GPB TAX ON CARGO REVENUES IS A LOT HIGHER THAN
THE GPB TAX OF [P5.03 MILLION] ON PASSENGER REVENUES, WHICH IS THE SUBJECT OF THE INSTANT
CLAIM FOR REFUND. THE DENIAL OF PETITIONERS CLAIM ON SUCH GROUND CLEARLY AMOUNTS TO AN
OFF-SETTING OF TAX LIABILITIES, CONTRARY TO WELL-SETTLED JURISPRUDENCE.
II. THE DECISION OF THE CTA EN BANC VIOLATED PETITIONERS RIGHT TO DUE PROCESS.
III. THE CTA EN BANC ACTED IN EXCESS OF ITS JURISDICTION BY DENYING PETITIONERS CLAIM FOR REFUND
OF ERRONEOUSLY PAID INCOME TAX ON GROSS PHILIPPINE BILLINGS BASED ON ITS FINDING THAT
PETITIONER UNDERPAID GPB TAX ON CARGO REVENUES IN THE AMOUNT OF [P31.43 MILLION] FOR THE
TAXABLE YEAR 1999.
IV. THE CTA EN BANC HAS NO AUTHORITY UNDER THE LAW TO MAKE ANY ASSESSMENTS FOR DEFICIENCY
TAXES. THE AUTHORITY TO MAKE ASSESSMENTS FOR DEFICIENCY NATIONAL INTERNAL REVENUE TAXES
IS VESTED BY THE 1997 NIRC UPON RESPONDENT.
V. ANY ASSESSMENT AGAINST PETITIONER FOR DEFICIENCY INCOME TAX FOR THE TAXABLE YEAR 1999 IS
ALREADY BARRED BY PRESCRIPTION.[13]

The main issue to be resolved is whether the petitioner is entitled to a refund of the amount of P5,028,813.23 it paid as income tax on its
passenger revenues in 1999.

Petitioner argues that its claim for refund of erroneously paid GPB tax on off-line passenger revenues cannot be denied based on the finding of
the CTA that petitioner allegedly underpaid the GPB tax on cargo revenues by P31,431,171.09, which underpayment is allegedly higher than
the GPB tax of P5,028,813.23 on passenger revenues, the amount of the instant claim. The denial of petitioners claim for refund on such ground
is tantamount to an offsetting of petitioners claim for refund of erroneously paid GPB against its alleged tax liability. Petitioner thus cites the well-
entrenched rule in taxation cases that internal revenue taxes cannot be the subject of set-off or compensation.[14]
According to petitioner, the offsetting of the liabilities is very clear in the instant case because the amount of petitioners claim for refund
of erroneously paid GPB tax of P5,028,813.23 for the taxable year 1999 is being offset against petitioners alleged deficiency GPB tax liability
on cargo revenues for the same year, which was not even the subject of an investigation nor any valid assessment issued by respondent against
the petitioner. Under Section 228[15] of the NIRC, the taxpayer shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void. This administrative process of issuing an assessment is part of procedural due process
enshrined in the 1987 Constitution. Records do not show that petitioner has been assessed by the BIR for any deficiency GBP tax for 1999, nor
was there any finding or investigation being conducted by respondent of any liability of petitioner for GPB tax for the said taxable period. Clearly,
petitioners right to due process was violated.[16]
Petitioner further argues that the CTA acted in excess of its jurisdiction because the exclusive appellate jurisdiction of the CTA covers only
decisions or inactions of the respondent in cases involving disputed assessments. The CTA has effectively assessed petitioner with a P31.43
million tax deficiency when it concluded that petitioner underpaid its GPB tax on cargo revenue. Since respondent did not issue an assessment
for any deficiency tax, the alleged deficiency tax on its cargo revenue in 1999 cannot be considered a disputed assessment that may be passed
upon by the CTA. Petitioner stresses that the authority to issue an assessment for deficiency internal revenue taxes is vested by law on
respondent, not with the CTA.[17]
Lastly, petitioner argues that any assessment against it for deficiency income tax for taxable year 1999 is barred by prescription. Petitioner
claims that the prescriptive period within which an assessment for deficiency income tax may be made has prescribed on April 17, 2003, three
(3) years after it filed its 1999 tax return.[18]
Respondent Commissioner maintains that the CTA acted within its jurisdiction in denying petitioners claim for tax refund. It points out that the
objective of the CTAs determination of whether petitioner correctly paid its GPB tax for the taxable year 1999 was to ascertain the latters
entitlement to the claimed refund and not for the purpose of imposing any deficiency tax. Hence, petitioners arguments regarding the propriety
of the CTAs determination of its deficiency tax on its GPB for gross cargo revenues for 1999 are clearly misplaced. [19]
The petition has no merit.
As correctly pointed out by petitioner, inasmuch as it ceased operating passenger flights to or from the Philippines in 1998, it is not
taxable under Section 28(A)(3)(a) of the NIRC for gross passenger revenues. This much was also found by the CTA. In South African Airways
v. Commissioner of Internal Revenue,[20] we ruled that the correct interpretation of the said provisions is that, if an international air carrier
maintains flights to and from the Philippines, it shall be taxed at the rate of 2% of its GPB, while international air carriers that do not have flights
to and from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate of 32% of such income.
Here, the subject of claim for tax refund is the tax paid on passenger revenue for taxable year 1999 at the time when petitioner was still operating
cargo flights originating from the Philippines although it had ceased passenger flight operations. The CTA found that petitioner had underpaid
its GPB tax for 1999 because petitioner had made deductions from its gross cargo revenues in the income tax return it filed for the taxable year
1999, the amount of underpayment even greater than the refund sought for erroneously paid GPB tax on passenger revenues for the same
taxable period. Hence, the CTA ruled petitioner is not entitled to a tax refund.
Petitioners arguments regarding the propriety of such determination by the CTA are misplaced.
Under Section 72 of the NIRC, the CTA can make a valid finding that petitioner made erroneous deductions on its gross cargo revenue;
that because of the erroneous deductions, petitioner reported a lower cargo revenue and paid a lower income tax thereon; and that petitioner's
underpayment of the income tax on cargo revenue is even higher than the income tax it paid on passenger revenue subject of the claim for refund,
such that the refund cannot be granted.
Section 72 of the NIRC reads:
SEC. 72. Suit to Recover Tax Based on False or Fraudulent Returns. - When an assessment is made in case of
any list, statement or return, which in the opinion of the Commissioner was false or fraudulent or contained any understatement
or undervaluation, no tax collected under such assessment shall be recovered by any suit, unless it is proved that the said
list, statement or return was not false nor fraudulent and did not contain any understatement or undervaluation; but this
provision shall not apply to statements or returns made or to be made in good faith regarding annual depreciation of oil or gas
wells and mines.
In the afore-cited case of South African Airways, this Court rejected similar arguments on the denial of claim for tax refund, as follows:
Precisely, petitioner questions the offsetting of its payment of the tax under Sec. 28(A)(3)(a) with their liability
under Sec. 28(A)(1), considering that there has not yet been any assessment of their obligation under the latter
provision. Petitioner argues that such offsetting is in the nature of legal compensation, which cannot be applied under the
circumstances present in this case.
Article 1279 of the Civil Code contains the elements of legal compensation, to wit:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of
the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind,
and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue, thus:
In several instances prior to the instant case, we have already made the pronouncement that taxes cannot
be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors
of each other. There is a material distinction between a tax and debt. Debts are due to the Government in its corporate
capacity, while taxes are due to the Government in its sovereign capacity. We find no cogent reason to deviate from
the aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, we categorically held that taxes
cannot be subject to set-off or compensation, thus:
We have consistently ruled that there can be no off-setting of taxes against the claims that the
taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax being collected. The collection of a tax
cannot await the results of a lawsuit against the government.
The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on
Audit, which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have against the government.
Taxes cannot be the subject of compensation because the government and taxpayer are not mutually
creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment
as is allowed to be set-off.
Verily, petitioners argument is correct that the offsetting of its tax refund with its alleged tax deficiency is unavailing
under Art. 1279 of the Civil Code.
Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of a tax refund
with a tax deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioners supplemental
motion for reconsideration alleging bringing to said courts attention the existence of the deficiency income and
business tax assessment against Citytrust. The fact of such deficiency assessment is intimately related to and
inextricably intertwined with the right of respondent bank to claim for a tax refund for the same year. To award such
refund despite the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects. Herein
private respondent cannot be entitled to refund and at the same time be liable for a tax deficiency assessment for
the same year.
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts
stated therein are true and correct. The deficiency assessment, although not yet final, created a doubt as to
and constitutes a challenge against the truth and accuracy of the facts stated in said return which, by itself
and without unquestionable evidence, cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law
when the claim of Citytrust was filed, provides that (w)hen an assessment is made in case of any list, statement, or
return, which in the opinion of the Commissioner of Internal Revenue was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such assessment shall be recovered by any suits unless
it is proved that the said list, statement, or return was not false nor fraudulent and did not contain any understatement
or undervaluation; but this provision shall not apply to statements or returns made or to be made in good faith
regarding annual depreciation of oil or gas wells and mines.
Moreover, to grant the refund without determination of the proper assessment and the tax due would
inevitably result in multiplicity of proceedings or suits. If the deficiency assessment should subsequently be
upheld, the Government will be forced to institute anew a proceeding for the recovery of erroneously refunded taxes
which recourse must be filed within the prescriptive period of ten years after discovery of the falsity, fraud or omission
in the false or fraudulent return involved. This would necessarily require and entail additional efforts and expenses
on the part of the Government, impose a burden on and a drain of government funds, and impede or delay the
collection of much-needed revenue for governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically
necessary and legally appropriate that the issue of the deficiency tax assessment against Citytrust be
resolved jointly with its claim for tax refund, to determine once and for all in a single proceeding the true
and correct amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just and fair that the
taxpayer and the Government alike be given equal opportunities to avail of remedies under the law to defeat each
others claim and to determine all matters of dispute between them in one single case. It is important to note that in
determining whether or not petitioner is entitled to the refund of the amount paid, it would [be] necessary to determine
how much the Government is entitled to collect as taxes. This would necessarily include the determination of the
correct liability of the taxpayer and, certainly, a determination of this case would constitute res judicata on both parties
as to all the matters subject thereof or necessarily involved therein. (Emphasis supplied.)
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above pronouncements
are, therefore, still applicable today.
Here, petitioners similar tax refund claim assumes that the tax return that it filed was correct. Given, however,
the finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec.
28(A)(1), the correctness of the return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for
a refund.[21] (Additional emphasis supplied.)
In the case at bar, the CTA explained that it merely determined whether petitioner is entitled to a refund based on the facts. On the assumption
that petitioner filed a correct return, it had the right to file a claim for refund of GPB tax on passenger revenues it paid in 1999 when it was not
operating passenger flights to and from the Philippines. However, upon examination by the CTA, petitioners return was found erroneous as it
understated its gross cargo revenue for the same taxable year due to deductions of two (2) items consisting of commission and other incentives
of its agent. Having underpaid the GPB tax due on its cargo revenues for 1999, petitioner is not entitled to a refund of its GPB tax on its passenger
revenue, the amount of the former being even much higher (P31.43 million) than the tax refund sought (P5.2 million). The CTA therefore correctly
denied the claim for tax refund after determining the proper assessment and the tax due. Obviously, the matter of prescription raised by petitioner
is a non-issue. The prescriptive periods under Sections 203[22] and 222[23] of the NIRC find no application in this case.
We must emphasize that tax refunds, like tax exemptions, are construed strictly against the taxpayer and liberally in favor of the taxing
authority.[24] In any event, petitioner has not discharged its burden of proof in establishing the factual basis for its claim for a refund and we find
no reason to disturb the ruling of the CTA. It has been a long-standing policy and practice of the Court to respect the conclusions of quasi-
judicial agencies such as the CTA, a highly specialized body specifically created for the purpose of reviewing tax cases.[25]
WHEREFORE, we DENY the petition for lack of merit and AFFIRM the Decision dated July 5, 2007 of the Court of Tax Appeals En Banc in
C.T.A. EB No. 227.
With costs against the petitioner.
SO ORDERED.

SOUTH AFRICAN AIRWAYS, G.R. No. 180356


Petitioner,
Present:

CORONA, J., Chairperson,


- versus - VELASCO, JR.,
LEONARDO-DE CASTRO,*
PERALTA, and
MENDOZA, JJ.
COMMISSIONER OF INTERNAL REVENUE,
Respondent. Promulgated:
February 16, 2010

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

DECISION

VELASCO, JR., J.:

The Case

This Petition for Review on Certiorari under Rule 45 seeks the reversal of the July 19, 2007 Decision [1] and October 30, 2007
Resolution[2] of the Court of Tax Appeals (CTA) En Banc in CTA E.B. Case No. 210, entitled South African Airways v. Commissioner of Internal
Revenue. The assailed decision affirmed the Decision dated May 10, 2006 [3] and Resolution dated August 11, 2006[4] rendered by the CTA First
Division.

The Facts

Petitioner South African Airways is a foreign corporation organized and existing under and by virtue of the laws of the Republic of South Africa.
Its principal office is located at Airways Park, Jones Road, Johannesburg International Airport, South Africa. In the Philippines, it is an internal
air carrier having no landing rights in the country. Petitioner has a general sales agent in the Philippines, Aerotel Limited Corporation (Aerotel).
Aerotel sells passage documents for compensation or commission for petitioners off-line flights for the carriage of passengers and cargo between
ports or points outside the territorial jurisdiction of the Philippines. Petitioner is not registered with the Securities and Exchange Commission as
a corporation, branch office, or partnership. It is not licensed to do business in the Philippines.

For the taxable year 2000, petitioner filed separate quarterly and annual income tax returns for its off-line flights, summarized as follows:

2.5% Gross
Period Date Filed Phil. Billings
For Passenger 1st Quarter May 30, 2000 PhP 222,531.25
2nd Quarter August 29, 2000 424,046.95
3rd Quarter November 29, 2000 422,466.00
4th Quarter April 16, 2000 453,182.91

Sub-total PhP 1,522,227.11


For Cargo 1st Quarter May 30, 2000 PhP 81,531.00
2nd Quarter August 29, 2000 50,169.65
3rd Quarter November 29, 2000 36,383.74
4th Quarter April 16, 2000 37,454.88
Sub-total PhP 205,539.27
TOTAL 1,727,766.38

Thereafter, on February 5, 2003, petitioner filed with the Bureau of Internal Revenue, Revenue District Office No. 47, a claim for the refund of
the amount of PhP 1,727,766.38 as erroneously paid tax on Gross Philippine Billings (GPB) for the taxable year 2000. Such claim was unheeded.
Thus, on April 14, 2003, petitioner filed a Petition for Review with the CTA for the refund of the abovementioned amount. The case was docketed
as CTA Case No. 6656.

On May 10, 2006, the CTA First Division issued a Decision denying the petition for lack of merit. The CTA ruled that petitioner is a resident
foreign corporation engaged in trade or business in the Philippines. It further ruled that petitioner was not liable to pay tax on its GPB under
Section 28(A)(3)(a) of the National Internal Revenue Code (NIRC) of 1997. The CTA, however, stated that petitioner is liable to pay a tax of
32% on its income derived from the sales of passage documents in the Philippines. On this ground, the CTA denied petitioners claim for a
refund.

Petitioners Motion for Reconsideration of the above decision was denied by the CTA First Division in a Resolution dated August 11, 2006.

Thus, petitioner filed a Petition for Review before the CTA En Banc, reiterating its claim for a refund of its tax payment on its GPB. This was
denied by the CTA in its assailed decision. A subsequent Motion for Reconsideration by petitioner was also denied in the assailed resolution of
the CTA En Banc.

Hence, petitioner went to us.

The Issues

Whether or not petitioner, as an off-line international carrier selling passage documents through an independent
sales agent in the Philippines, is engaged in trade or business in the Philippines subject to the 32% income tax imposed by
Section 28 (A)(1) of the 1997 NIRC.

Whether or not the income derived by petitioner from the sale of passage documents covering petitioners off-line
flights is Philippine-source income subject to Philippine income tax.

Whether or not petitioner is entitled to a refund or a tax credit of erroneously paid tax on Gross Philippine Billings for
the taxable year 2000 in the amount of P1,727,766.38.[5]

The Courts Ruling

This petition must be denied.

Petitioner Is Subject to Income Tax


at the Rate of 32% of Its Taxable Income

Preliminarily, we emphasize that petitioner is claiming that it is exempted from being taxed for its sale of passage documents in
the Philippines. Petitioner, however, failed to sufficiently prove such contention.

In Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation,[6] we held, Since an action for a tax refund partakes
of the nature of an exemption, which cannot be allowed unless granted in the most explicit and categorical language, it is strictly construed
against the claimant who must discharge such burden convincingly.

Petitioner has failed to overcome such burden.

In essence, petitioner calls upon this Court to determine the legal implication of the amendment to Sec. 28(A)(3)(a) of the 1997
NIRC defining GPB. It is petitioners contention that, with the new definition of GPB, it is no longer liable under Sec. 28(A)(3)(a). Further, petitioner
argues that because the 2 1/2% tax on GPB is inapplicable to it, it is thereby excluded from the imposition of any income tax.

Sec. 28(b)(2) of the 1939 NIRC provided:


(2) Resident Corporations. A corporation organized, authorized, or existing under the laws of a foreign country,
engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the
total net income received in the preceding taxable year from all sources within the Philippines: Provided, however, that
international carriers shall pay a tax of two and one-half percent on their gross Philippine billings.
This provision was later amended by Sec. 24(B)(2) of the 1977 NIRC, which defined GPB as follows:

Gross Philippine billings include gross revenue realized from uplifts anywhere in the world by any international carrier doing
business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or mail, provided the
cargo or mail originates from the Philippines.

In the 1986 and 1993 NIRCs, the definition of GPB was further changed to read:

Gross Philippine Billings means gross revenue realized from uplifts of passengers anywhere in the world and excess baggage,
cargo and mail originating from the Philippines, covered by passage documents sold in the Philippines.

Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere in the world, provided that the passage documents
were sold in the Philippines. Legislature departed from such concept in the 1997 NIRC where GPB is now defined under Sec. 28(A)(3)(a):

Gross Philippine Billings refers to the amount of gross revenue derived from carriage of persons, excess baggage,
cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or
issue and the place of payment of the ticket or passage document.

Now, it is the place of sale that is irrelevant; as long as the uplifts of passengers and cargo occur to or from the Philippines, income is
included in GPB.

As correctly pointed out by petitioner, inasmuch as it does not maintain flights to or from the Philippines, it is not taxable under Sec.
28(A)(3)(a) of the 1997 NIRC. This much was also found by the CTA. But petitioner further posits the view that due to the non-applicability of
Sec. 28(A)(3)(a) to it, it is precluded from paying any other income tax for its sale of passage documents in the Philippines.

Such position is untenable.

In Commissioner of Internal Revenue v. British Overseas Airways Corporation (British Overseas Airways),[7] which was decided under
similar factual circumstances, this Court ruled that off-line air carriers having general sales agents in the Philippines are engaged in or doing
business in the Philippines and that their income from sales of passage documents here is income from within the Philippines. Thus, in that
case, we held the off-line air carrier liable for the 32% tax on its taxable income.

Petitioner argues, however, that because British Overseas Airways was decided under the 1939 NIRC, it does not apply to the instant
case, which must be decided under the 1997 NIRC. Petitioner alleges that the 1939 NIRC taxes resident foreign corporations, such as itself, on
all income from sources within the Philippines. Petitioners interpretation of Sec. 28(A)(3)(a) of the 1997 NIRC is that, since it is an international
carrier that does not maintain flights to or from the Philippines, thereby having no GPB as defined, it is exempt from paying any income tax at
all. In other words, the existence of Sec. 28(A)(3)(a) according to petitioner precludes the application of Sec. 28(A)(1) to it.

Its argument has no merit.


First, the difference cited by petitioner between the 1939 and 1997 NIRCs with regard to the taxation of off-line air carriers is more
apparent than real.

We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical term, exempt all international air carriers from the
coverage of Sec. 28(A)(1) of the 1997 NIRC. Certainly, had legislatures intentions been to completely exclude all international air carriers from
the application of the general rule under Sec. 28(A)(1), it would have used the appropriate language to do so; but the legislature did not. Thus,
the logical interpretation of such provisions is that, if Sec. 28(A)(3)(a) is applicable to a taxpayer, then the general rule under Sec. 28(A)(1) would
not apply. If, however, Sec. 28(A)(3)(a) does not apply, a resident foreign corporation, whether an international air carrier or not, would be liable
for the tax under Sec. 28(A)(1).

Clearly, no difference exists between British Overseas Airways and the instant case, wherein petitioner claims that the former case
does not apply. Thus, British Overseas Airways applies to the instant case. The findings therein that an off-line air carrier is doing business in
the Philippines and that income from the sale of passage documents here is Philippine-source income must be upheld.

Petitioner further reiterates its argument that the intention of Congress in amending the definition of GPB is to exempt off-line air carriers
from income tax by citing the pronouncements made by Senator Juan Ponce Enrile during the deliberations on the provisions of the 1997 NIRC.
Such pronouncements, however, are not controlling on this Court. We said in Espino v. Cleofe:[8]

A cardinal rule in the interpretation of statutes is that the meaning and intention of the law-making body must be
sought, first of all, in the words of the statute itself, read and considered in their natural, ordinary, commonly-accepted and
most obvious significations, according to good and approved usage and without resorting to forced or subtle construction.
Courts, therefore, as a rule, cannot presume that the law-making body does not know the meaning of words and rules of
grammar. Consequently, the grammatical reading of a statute must be presumed to yield its correct sense. x x x It is also a
well-settled doctrine in this jurisdiction that statements made by individual members of Congress in the
consideration of a bill do not necessarily reflect the sense of that body and are, consequently, not controlling in the
interpretation of law. (Emphasis supplied.)

Moreover, an examination of the subject provisions of the law would show that petitioners interpretation of those provisions is erroneous.

Sec. 28(A)(1) and (A)(3)(a) provides:

SEC. 28. Rates of Income Tax on Foreign Corporations. -


(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under
the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax
equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the
Philippines: provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective
January 1, 1999, the rate shall be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate shall be
thirty-two percent (32%).

xxxx

(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-
half percent (2 1/2%) on its Gross Philippine Billings as defined hereunder:
(a) International Air Carrier. Gross Philippine Billings refers to the amount of gross revenue derived from
carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage
document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of
the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further,
That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside
the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from
the Philippines to the point of transshipment shall form part of Gross Philippine Billings.

Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign corporations are liable for 32% tax on all income from sources
within the Philippines.Sec. 28(A)(3) is an exception to this general rule.

An exception is defined as that which would otherwise be included in the provision from which it is excepted. It is a clause which
exempts something from the operation of a statue by express words.[9] Further, an exception need not be introduced by the words except or
unless. An exception will be construed as such if it removes something from the operation of a provision of law. [10]

In the instant case, the general rule is that resident foreign corporations shall be liable for a 32% income tax on their income from within
the Philippines, except for resident foreign corporations that are international carriers that derive income from carriage of persons, excess
baggage, cargo and mail originating from the Philippines which shall be taxed at 2 1/2% of their Gross Philippine Billings. Petitioner, being an
international carrier with no flights originating from the Philippines, does not fall under the exception. As such, petitioner must fall under the
general rule. This principle is embodied in the Latin maxim, exception firmat regulam in casibus non exceptis, which means, a thing not being
excepted must be regarded as coming within the purview of the general rule. [11]

To reiterate, the correct interpretation of the above provisions is that, if an international air carrier maintains flights to and from the
Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while international air carriers that do not have flights to and
from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate of 32% of such income.

As to the denial of petitioners claim for refund, the CTA denied the claim on the basis that petitioner is liable for income tax under Sec.
28(A)(1) of the 1997 NIRC. Thus, petitioner raises the issue of whether the existence of such liability would preclude their claim for a refund of
tax paid on the basis of Sec. 28(A)(3)(a). In answer to petitioners motion for reconsideration, the CTA First Division ruled in its Resolution dated
August 11, 2006, thus:

On the fourth argument, petitioner avers that a deficiency tax assessment does not, in any way, disqualify a taxpayer
from claiming a tax refund since a refund claim can proceed independently of a tax assessment and that the assessment
cannot be offset by its claim for refund.

Petitioners argument is erroneous. Petitioner premises its argument on the existence of an assessment. In the
assailed Decision, this Court did not, in any way, assess petitioner of any deficiency corporate income tax. The power to make
assessments against taxpayers is lodged with the respondent. For an assessment to be made, respondent must observe the
formalities provided in Revenue Regulations No. 12-99. This Court merely pointed out that petitioner is liable for the regular
corporate income tax by virtue of Section 28(A)(3) of the Tax Code. Thus, there is no assessment to speak of. [12]

Precisely, petitioner questions the offsetting of its payment of the tax under Sec. 28(A)(3)(a) with their liability under Sec. 28(A)(1),
considering that there has not yet been any assessment of their obligation under the latter provision. Petitioner argues that such offsetting is in
the nature of legal compensation, which cannot be applied under the circumstances present in this case.

Article 1279 of the Civil Code contains the elements of legal compensation, to wit:

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor
of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue,[13] thus:

In several instances prior to the instant case, we have already made the pronouncement that taxes cannot be subject
to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other.
There is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes
are due to the Government in its sovereign capacity. We find no cogent reason to deviate from the aforementioned distinction.

Prescinding from this premise, in Francia v. Intermediate Appellate Court, we categorically held that taxes cannot be
subject to set-off or compensation, thus:

We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer
may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him
an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit
against the government.

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

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

Verily, petitioners argument is correct that the offsetting of its tax refund with its alleged tax deficiency is unavailing under Art. 1279 of
the Civil Code.

Commissioner of Internal Revenue v. Court of Tax Appeals,[14] however, granted the offsetting of a tax refund with a tax deficiency in
this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioners supplemental motion for
reconsideration alleging bringing to said courts attention the existence of the deficiency income and business tax assessment
against Citytrust. The fact of such deficiency assessment is intimately related to and inextricably intertwined with the right of
respondent bank to claim for a tax refund for the same year. To award such refund despite the existence of that deficiency
assessment is an absurdity and a polarity in conceptual effects. Herein private respondent cannot be entitled to refund and at
the same time be liable for a tax deficiency assessment for the same year.

The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein
are true and correct. The deficiency assessment, although not yet final, created a doubt as to and constitutes a
challenge against the truth and accuracy of the facts stated in said return which, by itself and without unquestionable
evidence, cannot be the basis for the grant of the refund.

Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law when the claim
of Citytrust was filed, provides that (w)hen an assessment is made in case of any list, statement, or return, which in the opinion
of the Commissioner of Internal Revenue was false or fraudulent or contained any understatement or undervaluation, no tax
collected under such assessment shall be recovered by any suits unless it is proved that the said list, statement, or return was
not false nor fraudulent and did not contain any understatement or undervaluation; but this provision shall not apply to
statements or returns made or to be made in good faith regarding annual depreciation of oil or gas wells and mines.

Moreover, to grant the refund without determination of the proper assessment and the tax due would inevitably result
in multiplicity of proceedings or suits. If the deficiency assessment should subsequently be upheld, the Government will be
forced to institute anew a proceeding for the recovery of erroneously refunded taxes which recourse must be filed within the
prescriptive period of ten years after discovery of the falsity, fraud or omission in the false or fraudulent return involved. This
would necessarily require and entail additional efforts and expenses on the part of the Government, impose a burden on and
a drain of government funds, and impede or delay the collection of much-needed revenue for governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and legally
appropriate that the issue of the deficiency tax assessment against Citytrust be resolved jointly with its claim for tax refund, to
determine once and for all in a single proceeding the true and correct amount of tax due or refundable.

In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just and fair that the taxpayer
and the Government alike be given equal opportunities to avail of remedies under the law to defeat each others claim and to
determine all matters of dispute between them in one single case. It is important to note that in determining whether or not
petitioner is entitled to the refund of the amount paid, it would [be] necessary to determine how much the Government is
entitled to collect as taxes. This would necessarily include the determination of the correct liability of the taxpayer and,
certainly, a determination of this case would constitute res judicata on both parties as to all the matters subject thereof or
necessarily involved therein. (Emphasis supplied.)

Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above pronouncements are, therefore,
still applicable today.

Here, petitioners similar tax refund claim assumes that the tax return that it filed was correct. Given, however, the finding of the CTA
that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the correctness of the return filed by
petitioner is now put in doubt. As such, we cannot grant the prayer for a refund.
Be that as it may, this Court is unable to affirm the assailed decision and resolution of the CTA En Banc on the outright denial of
petitioners claim for a refund. Even though petitioner is not entitled to a refund due to the question on the propriety of petitioners tax return
subject of the instant controversy, it would not be proper to deny such claim without making a determination of petitioners liability under Sec.
28(A)(1).

It must be remembered that the tax under Sec. 28(A)(3)(a) is based on GPB, while Sec. 28(A)(1) is based on taxable income, that is,
gross income less deductions and exemptions, if any. It cannot be assumed that petitioners liabilities under the two provisions would be the
same. There is a need to make a determination of petitioners liability under Sec. 28(A)(1) to establish whether a tax refund is forthcoming or
that a tax deficiency exists. The assailed decision fails to mention having computed for the tax due under Sec. 28(A)(1) and the records are
bereft of any evidence sufficient to establish petitioners taxable income. There is a necessity to receive evidence to establish such amount vis-
-vis the claim for refund. It is only after such amount is established that a tax refund or deficiency may be correctly pronounced.

WHEREFORE, the assailed July 19, 2007 Decision and October 30, 2007 Resolution of the CTA En Banc in CTA E.B. Case No. 210
are SET ASIDE. The instant case is REMANDED to the CTA En Banc for further proceedings and appropriate action, more particularly, the
reception of evidence for both parties and the corresponding disposition of CTA E.B. Case No. 210 not otherwise inconsistent with our judgment
in this Decision.

SO ORDERED.

[G. R. No. 119775. October 24, 2003]


JOHN HAY PEOPLES ALTERNATIVE COALITION, MATEO CARIO FOUNDATION INC., CENTER FOR ALTERNATIVE SYSTEMS
FOUNDATION INC., REGINA VICTORIA A. BENAFIN REPRESENTED AND JOINED BY HER MOTHER MRS. ELISA BENAFIN,
IZABEL M. LUYK REPRESENTED AND JOINED BY HER MOTHER MRS. REBECCA MOLINA LUYK, KATHERINE PE
REPRESENTED AND JOINED BY HER MOTHER ROSEMARIE G. PE, SOLEDAD S. CAMILO, ALICIA C. PACALSO ALIAS
KEVAB, BETTY I. STRASSER, RUBY C. GIRON, URSULA C. PEREZ ALIAS BA-YAY, EDILBERTO T. CLARAVALL, CARMEN
CAROMINA, LILIA G. YARANON, DIANE MONDOC, petitioners, vs. VICTOR LIM, PRESIDENT, BASES CONVERSION
DEVELOPMENT AUTHORITY; JOHN HAY PORO POINT DEVELOPMENT CORPORATION, CITY OF BAGUIO, TUNTEX (B.V.I.)
CO. LTD., ASIAWORLD INTERNATIONALE GROUP, INC., DEPARTMENT OF ENVIRONMENT AND NATURAL
RESOURCES, respondents.
DECISION
CARPIO MORALES, J.:
By the present petition for prohibition, mandamus and declaratory relief with prayer for a temporary restraining order (TRO) and/or writ of
preliminary injunction, petitioners assail, in the main, the constitutionality of Presidential Proclamation No. 420, Series of 1994, CREATING AND
DESIGNATING A PORTION OF THE AREA COVERED BY THE FORMER CAMP JOHN [HAY] AS THE JOHN HAY SPECIAL ECONOMIC
ZONE PURSUANT TO REPUBLIC ACT NO. 7227.
Republic Act No. 7227, AN ACT ACCELERATING THE CONVERSION OF MILITARY RESERVATIONS INTO OTHER PRODUCTIVE
USES, CREATING THE BASES CONVERSION AND DEVELOPMENT AUTHORITY FOR THIS PURPOSE, PROVIDING FUNDS THEREFOR
AND FOR OTHER PURPOSES, otherwise known as the Bases Conversion and Development Act of 1992, which was enacted on March 13,
1992, set out the policy of the government to accelerate the sound and balanced conversion into alternative productive uses of the former
military bases under the 1947 Philippines-United States of America Military Bases Agreement, namely, the Clark and Subic military reservations
as well as their extensions including the John Hay Station (Camp John Hay or the camp) in the City of Baguio.[1]
As noted in its title, R.A. No. 7227 created public respondent Bases Conversion and Development Authority [2] (BCDA), vesting it with
powers pertaining to the multifarious aspects of carrying out the ultimate objective of utilizing the base areas in accordance with the declared
government policy.
R.A. No. 7227 likewise created the Subic Special Economic [and Free Port] Zone (Subic SEZ) the metes and bounds of which were to be
delineated in a proclamation to be issued by the President of the Philippines. [3]
R.A. No. 7227 granted the Subic SEZ incentives ranging from tax and duty-free importations, exemption of businesses therein from local
and national taxes, to other hallmarks of a liberalized financial and business climate.[4]
And R.A. No. 7227 expressly gave authority to the President to create through executive proclamation, subject to the concurrence of the
local government units directly affected, other Special Economic Zones (SEZ) in the areas covered respectively by the Clark military reservation,
the Wallace Air Station in San Fernando, La Union, and Camp John Hay. [5]
On August 16, 1993, BCDA entered into a Memorandum of Agreement and Escrow Agreement with private respondents Tuntex (B.V.I.)
Co., Ltd (TUNTEX) and Asiaworld Internationale Group, Inc. (ASIAWORLD), private corporations registered under the laws of the British Virgin
Islands, preparatory to the formation of a joint venture for the development of Poro Point in La Union and Camp John Hay as premier tourist
destinations and recreation centers. Four months later or on December 16, 1993, BCDA, TUNTEX and ASIAWORD executed a Joint Venture
Agreement[6] whereby they bound themselves to put up a joint venture company known as the Baguio International Development and
Management Corporation which would lease areas within Camp John Hay and Poro Point for the purpose of turning such places into principal
tourist and recreation spots, as originally envisioned by the parties under their Memorandum of Agreement.
The Baguio City government meanwhile passed a number of resolutions in response to the actions taken by BCDA as owner and
administrator of Camp John Hay.
By Resolution[7] of September 29, 1993, the Sangguniang Panlungsod of Baguio City (the sanggunian) officially asked BCDA to exclude
all the barangays partly or totally located within Camp John Hay from the reach or coverage of any plan or program for its development.
By a subsequent Resolution[8] dated January 19, 1994, the sanggunian sought from BCDA an abdication, waiver or quitclaim of its
ownership over the home lots being occupied by residents of nine (9) barangays surrounding the military reservation.
Still by another resolution passed on February 21, 1994, the sanggunian adopted and submitted to BCDA a 15-point concept for the
development of Camp John Hay.[9] The sanggunians vision expressed, among other things, a kind of development that affords protection to the
environment, the making of a family-oriented type of tourist destination, priority in employment opportunities for Baguio residents and free access
to the base area, guaranteed participation of the city government in the management and operation of the camp, exclusion of the previously
named nine barangays from the area for development, and liability for local taxes of businesses to be established within the camp.[10]
BCDA, TUNTEX and ASIAWORLD agreed to some, but rejected or modified the other proposals of the sanggunian.[11] They stressed the
need to declare Camp John Hay a SEZ as a condition precedent to its full development in accordance with the mandate of R.A. No. 7227. [12]
On May 11, 1994, the sanggunian passed a resolution requesting the Mayor to order the determination of realty taxes which may otherwise
be collected from real properties of Camp John Hay. [13] The resolution was intended to intelligently guide the sanggunian in determining its
position on whether Camp John Hay be declared a SEZ, it (the sanggunian) being of the view that such declaration would exempt the camps
property and the economic activity therein from local or national taxation.
More than a month later, however, the sanggunian passed Resolution No. 255, (Series of 1994),[14] seeking and supporting, subject to its
concurrence, the issuance by then President Ramos of a presidential proclamation declaring an area of 288.1 hectares of the camp as a SEZ
in accordance with the provisions of R.A. No. 7227. Together with this resolution was submitted a draft of the proposed proclamation for
consideration by the President.[15]
On July 5, 1994 then President Ramos issued Proclamation No. 420, [16] the title of which was earlier indicated, which established a SEZ
on a portion of Camp John Hay and which reads as follows:
xxx
Pursuant to the powers vested in me by the law and the resolution of concurrence by the City Council of Baguio, I, FIDEL V. RAMOS,
President of the Philippines, do hereby create and designate a portion of the area covered by the former John Hay reservation as embraced,
covered, and defined by the 1947 Military Bases Agreement between the Philippines and the United States of America, as amended, as the
John Hay Special Economic Zone, and accordingly order:
SECTION 1. Coverage of John Hay Special Economic Zone. The John Hay Special Economic Zone shall cover the area consisting of Two
Hundred Eighty Eight and one/tenth (288.1) hectares, more or less, of the total of Six Hundred Seventy-Seven (677) hectares of the John Hay
Reservation, more or less, which have been surveyed and verified by the Department of Environment and Natural Resources (DENR) as
defined by the following technical description:
A parcel of land, situated in the City of Baguio, Province of Benguet, Island of Luzon, and particularly described in survey plans Psd-131102-
002639 and Ccs-131102-000030 as approved 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 upon turnover 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 Section 15 of Republic Act No. 7227, the Bases Conversion and
Development Authority is hereby established 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 to private 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 Point Development Corporation, which is its implementing arm for its economic development
and optimum utilization.
Sec. 3. Investment Climate in John Hay Special Economic Zone. Pursuant to Section 5(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 the zone, including
investment incentives, in consultation with pertinent government departments. Among others, the zone shall have all the applicable incentives
of the Special Economic Zone under Section 12 of Republic Act No. 7227 and those applicable incentives 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. All Heads of departments, bureaus, offices, agencies, and
instrumentalities of the government are hereby directed to give full support to Bases Conversion and Development Authority and/or its
implementing subsidiary or joint venture to facilitate the necessary approvals to expedite the implementation of various projects of the
conversion program.
Sec. 5. Local Authority. Except as herein provided, the affected local government units shall retain their basic autonomy and identity.
Sec. 6. Repealing Clause. All orders, rules, and regulations, or parts thereof, which are inconsistent 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 hundred and 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 private respondents TUNTEX and ASIAWORLD.
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 A POWER GRANTED ONLY TO THE
LEGISLATURE.
II. PRESIDENTIAL PROCLAMATION NO. 420, IN SO FAR AS IT LIMITS THE POWERS AND INTERFERES WITH THE
AUTONOMY OF THE CITY OF BAGUIO IS INVALID, ILLEGAL AND UNCONSTITUTIONAL.
III. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1994 IS UNCONSTITUTIONAL IN THAT IT VIOLATES THE RULE
THAT ALL TAXES SHOULD BE UNIFORM AND EQUITABLE.
IV. THE MEMORANDUM OF AGREEMENT ENTERED INTO BY AND BETWEEN PRIVATE AND PUBLIC RESPONDENTS BASES
CONVERSION DEVELOPMENT AUTHORITY HAVING BEEN ENTERED INTO ONLY BY DIRECT NEGOTIATION IS ILLEGAL.
V. THE TERMS AND CONDITIONS OF THE MEMORANDUM OF AGREEMENT ENTERED INTO BY AND BETWEEN PRIVATE
AND PUBLIC RESPONDENT BASES CONVERSION DEVELOPMENT AUTHORITY IS (sic) ILLEGAL.
VI. THE CONCEPTUAL DEVELOPMENT PLAN OF RESPONDENTS NOT HAVING UNDERGONE ENVIRONMENTAL IMPACT
ASSESSMENT IS BEING ILLEGALLY CONSIDERED WITHOUT A VALID ENVIRONMENTAL IMPACT ASSESSMENT.
A temporary restraining order and/or writ of preliminary injunction was prayed for to enjoin BCDA, John Hay Poro Point Development
Corporation and the city government from implementing Proclamation No. 420, and TUNTEX and ASIAWORLD from proceeding with their plan
respecting Camp John Hays development pursuant to their Joint Venture Agreement with BCDA.[18]
Public respondents, by their separate Comments, allege as moot and academic the issues raised by the petition, the questioned
Memorandum of Agreement and Joint Venture Agreement having already been deemed abandoned by the inaction of the parties thereto prior
to the filing of the petition as in fact, by letter of November 21, 1995, BCDA formally notified TUNTEX and ASIAWORLD of the revocation of
their said agreements.[19]
In maintaining the validity of Proclamation No. 420, respondents contend that by extending to the John Hay SEZ economic incentives
similar to those enjoyed by the Subic SEZ which was established under R.A. No. 7227, the proclamation is merely implementing 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 governments
policy of bases conversion can not be achieved without extending the same tax exemptions granted by R.A. No. 7227 to Subic SEZ to other
SEZs.
Denying that Proclamation No. 420 is in derogation of the local autonomy of Baguio City or that it is violative of the constitutional guarantee
of equal protection, respondents assail petitioners lack of standing to bring the present suit even as taxpayers and in the absence of any actual
case or controversy to warrant this Courts exercise of its power of judicial review over the proclamation.
Finally, respondents seek the outright dismissal of the petition for having been filed in disregard of the hierarchy of courts and of the
doctrine of exhaustion of administrative remedies.
Replying,[20] petitioners aver that the doctrine of exhaustion of administrative remedies finds no application herein since they are invoking
the exclusive authority of this Court 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 doctrine obtain in the present petition; and that they possess the standing to bring the
petition which is a taxpayers 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 preliminary procedural questions confronting the petition.
The judicial policy is and has always been that this Court will not entertain direct resort to it except when the redress sought cannot be
obtained in the proper courts, or when exceptional and compelling circumstances warrant availment of a remedy within and calling for the
exercise of this Courts primary jurisdiction. [22] Neither will it entertain an action for declaratory relief, which is partly the nature of this petition,
over which it has no original 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 US military reservations, the issuance of which injunction petitioners pray for, petitioners direct filing of the present
petition with it is allowed. Over and above this procedural objection to the present suit, this Court retains full discretionary power to take
cognizance of a petition filed 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 SEZ is not simply a re-classification of an area, a mere
ascription of a status to a place. It involves turning the former US military reservation into a focal point for investments by both local and foreign
entities. It is to be made a site of vigorous business activity, ultimately serving as a spur to the countrys long awaited economic growth. For, as
R.A. No. 7227 unequivocally declares, it is the governments policy to enhance the benefits to be derived from the base areas in order to promote
the economic and social development of Central Luzon in particular and the country in general. [25] Like the Subic SEZ, the John Hay SEZ should
also be turned into a self-sustaining, industrial, commercial, financial and investment center.[26]
More than the economic interests at stake, the development of Camp John Hay as well as of the other base areas unquestionably has
critical links to a host of environmental and 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 the communities where the bases are located, and ultimately the nation in
general.
Underscoring the fragility of Baguio Citys ecology with its problem on the scarcity of its water supply, petitioners point out that the local and
national government are faced with the challenge of how to provide for an ecologically sustainable, environmentally sound, equitable transition
for the city in the wake of Camp John Hays reversion to the mass of government property.[27] But that is why R.A. No. 7227 emphasizes the
sound and balanced conversion of the Clark and Subic military reservations and their extensions consistent with ecological and environmental
standards.[28] It cannot thus be gainsaid that the matter of conversion of the US bases into SEZs, in this case Camp John Hay, 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
thereon by petitioners have indeed been rendered moot and academic by the revocation of such agreements. 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 said supervening
event upon application of the rules for the judicial scrutiny of constitutional cases. The issues boil down to:
(1) Whether the present petition complies with the requirements for this Courts exercise of jurisdiction over constitutional issues;
(2) Whether Proclamation No. 420 is constitutional by providing for national and local tax exemption within and granting other
economic incentives to the John Hay Special Economic Zone; and
(3) Whether Proclamation No. 420 is constitutional for limiting or interfering with 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) the existence 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 the earliest 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 is appropriate or ripe for determination, not conjectural or
anticipatory.[30] The controversy needs to be definite and concrete, bearing upon the legal relations of parties who are pitted against each other
due to their adverse legal interests.[31] There is in the present case a real clash of interests and rights between petitioners and respondents
arising from the issuance of a presidential proclamation that converts a portion of the area covered by Camp John Hay into a SEZ, the former
insisting that such proclamation contains unconstitutional 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 the law on local government units of the right of concurrence on the bases conversion is equivalent to vesting a
legal standing on them, for it is in effect a recognition of the real interests that communities nearby or surrounding a particular base area have
in its utilization. Thus, the interest of petitioners, being inhabitants of Baguio, in assailing the legality of Proclamation No. 420, is personal and
substantial such that they have sustained or will sustain direct injury as a result of the government act being challenged.[33]Theirs is a material
interest, an interest in issue affected by the proclamation and not merely an interest in the question involved or an incidental interest,[34] for what
is at stake in the enforcement of Proclamation No. 420 is the very economic and social existence of the people 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
Investments[35] where this Court characterized 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 elected councilors of Baguio at the time, engaged in the local
governance of Baguio City and whose 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 Hay as a SEZ. Certainly then, petitioners Claravall and Yaranon, as city officials who
voted against[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 present petition.
That there is herein a dispute on legal rights and interests is thus beyond doubt. The mootness of the issues concerning the questioned
agreements between public and private respondents 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 overt act. Indeed, even a singular violation of the Constitution and/or the law is enough to awaken judicial
duty.[37]
As to the third and fourth requisites of a judicial inquiry, there is likewise no question that they have been complied with in the case at bar.
This is an action filed purposely to bring forth constitutional issues, ruling on which this Court must take up. Besides, respondents never raised
issues with respect to these requisites, hence, they are deemed waived.
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 Proclamation No. 420 of a regime of tax exemption within the John
Hay SEZ. Petitioners argue that nowhere in R. A. No. 7227 is there a grant of tax exemption to SEZs yet to be established 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 to the John Hay SEZ, petitioners conclude, thus contravenes Article VI, Section 28 (4) of the Constitution which provides that No law
granting any tax exemption shall be passed without 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 Section 5(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 the zone, including
investment incentives, in consultation with pertinent government departments. Among others, the zone shall have all the applicable
incentives of the Special Economic Zone under Section 12 of Republic Act No. 7227 and those applicable incentives 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. (Emphasis and underscoring supplied)
Upon the other hand, Section 12 of R.A. No. 7227 provides:
xxx
(a) Within the framework and subject to the mandate and limitations of the Constitution and the pertinent provisions of the Local Government
Code, the Subic Special Economic Zone shall be developed into a self-sustaining, industrial, commercial, financial and investment center to
generate employment opportunities in and around the zone and to attract and promote productive foreign investments;
b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of
goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as tax and duty free
importations of raw materials, capital and equipment. However, exportation or removal of goods from the territory of the Subic Special
Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code
and other relevant tax laws of the Philippines;
(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 businesses and enterprises
within the Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government units
affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a
development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone
to be utilized for the Municipality of Subic, and other municipalities contiguous to be base areas. In case of conflict between national and local
laws with respect to tax exemption privileges in the Subic Special Economic Zone, the same shall be resolved in favor of the latter;
(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 Special Economic Zone;
(e) The Central Bank, through the Monetary Board, shall supervise and regulate the operations of banks and other financial institutions within
the Subic Special Economic Zone;
(f) Banking and Finance shall be liberalized with the establishment of foreign currency depository units of local commercial banks and offshore
banking units of foreign banks with minimum Central Bank regulation;
(g) Any investor within the Subic Special Economic Zone whose continuing investment 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 granted permanent resident status
within the Subic Special Economic Zone. They shall have freedom of ingress and egress to and from the Subic Special Economic Zone
without any need 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 working visas renewable every two (2) years to foreign executives and other aliens possessing highly-
technical skills which no Filipino within the Subic Special Economic Zone possesses, as certified by the Department of Labor and
Employment. The names of aliens granted 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 was granted by Congress with tax exemption, investment
incentives and the like. There is no express extension of the aforesaid benefits to other SEZs still to be created at the time via 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 with respect to the investment
policies that would govern Subic SEZ which are now embodied in the aforesaid Section 12 thereof:
xxx
Senator Maceda: This is what I was talking about. We get into problems here because all of these following policies are centered around the
concept of free port. And in the main paragraph above, we have declared both Clark and Subic as special economic zones, subject to these
policies which are, in effect, a free-port arrangement.
Senator Angara: The Gentleman is absolutely correct, Mr. President. So we must confine these policies only to Subic.
May I withdraw then my amendment, and instead provide that THE SPECIAL ECONOMIC ZONE OF SUBIC SHALL BE ESTABLISHED IN
ACCORDANCE WITH THE FOLLOWING POLICIES. Subject to style, Mr. President.
Thus, it is very clear that these principles and policies are applicable only to Subic as a free port.
Senator Paterno: Mr. President.
The President: Senator Paterno is recognized.
Senator Paterno: I take it that the amendment suggested by Senator Angara would then prevent the establishment of other special economic
zones observing these policies.
Senator Angara: No, Mr. President, because during our short caucus, Senator Laurel raised the point that if we give this delegation to the
President to establish other economic zones, that may be an unwarranted delegation.
So we agreed that we will simply limit the definition of powers and description of the zone to Subic, but that does not exclude the possibility of
creating other economic zones within the baselands.
Senator Paterno: But if that amendment is followed, no other special economic zone may be created under authority of this particular bill. Is
that correct, Mr. President?
Senator Angara: Under this specific provision, yes, Mr. President. This provision now will be 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 given to Subic SEZ consist principally of exemption from
tariff or customs duties, national and local 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 capital equipment and raw materials free from taxes, duties and other restrictions; [39] tax
and duty exemptions, tax holiday, tax credit, and other incentives under the Omnibus Investments Code of 1987; [40] and the applicability to the
subject zone of rules governing foreign investments in the Philippines. [41]
While the grant of economic incentives may be essential to the creation and success of SEZs, free trade zones and the like, the grant
thereof to the John Hay SEZ cannot be 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 laws specified under Section 3 of Proclamation No. 420, which laws were already extant before the 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 tax exemption. It is the legislature, unless limited by a provision of
the state constitution, that has full power to exempt any person or corporation or class of property from taxation, its power to exempt being as
broad as its power to tax.[42] Other than Congress, the Constitution may itself provide for specific tax exemptions, [43] or local governments may
pass ordinances on exemption only from local taxes.[44]
The challenged grant of tax exemption would circumvent the Constitutions imposition that a law granting any tax exemption must have the
concurrence of a majority of all the members of Congress. [45] In the same vein, the other kinds of privileges extended to the John Hay SEZ are
by tradition and usage for Congress to legislate upon.
Contrary to public respondents suggestions, the claimed statutory exemption of the John Hay SEZ from taxation should be manifest and
unmistakable from the language of the law on which it is based; it must be expressly granted in a statute stated in a language too clear to be
mistaken.[46] Tax exemption cannot be implied as it must be categorically and unmistakably expressed. [47]
If it were the intent of the legislature to grant to the John Hay SEZ the same tax exemption and incentives given to the Subic SEZ, it would
have so expressly provided in the R.A. No. 7227.
This Court no doubt can void an act or policy of the political departments of the government on either of two groundsinfringement 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 violates the equal protection
guarantee.
With respect to the final issue raised by petitioners that Proclamation No. 420 is unconstitutional for being in derogation of Baguio Citys
local autonomy, objection is specifically mounted against Section 2 thereof in which BCDA is set up as the governing body of the John Hay
SEZ.[49]
Petitioners argue that there is no authority of the President to subject the John Hay SEZ to the governance of BCDA which has just
oversight functions over SEZ; and that to do so is to diminish the city governments power over an area within its jurisdiction, hence, Proclamation
No. 420 unlawfully gives the President power of control over the local government instead of just mere supervision.
Petitioners arguments are bereft of merit. Under R.A. No. 7227, the BCDA is entrusted with, among other things, the following purpose:[50]
xxx
(a) To own, hold and/or administer the military reservations of John Hay Air Station, Wallace Air Station, ODonnell Transmitter Station, San
Miguel Naval Communications Station, Mt. Sta. Rita Station (Hermosa, Bataan) and those portions of Metro Manila Camps 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 John Hay, 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 merely emphasizes or
reiterates the statutory role or functions it has been granted.
The unconstitutionality of the grant of tax immunity and financial incentives as contained in the second sentence of Section 3 of
Proclamation No. 420 notwithstanding, the entire assailed proclamation cannot be declared unconstitutional, the other parts thereof 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 by the Baguio City government to
such proclamation appears to have been given in the form of a duly enacted resolution by the sanggunian. The other provisions of the
proclamation had 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 is valid, the valid portion, if separable from the invalid,
may stand and be enforced.[52] This Court finds that the other provisions in Proclamation No. 420 converting a delineated portion of Camp John
Hay into the John Hay SEZ are separable from the invalid second sentence 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. Public respondents are hereby enjoined from implementing the aforesaid void provision.
Proclamation No. 420, without the invalidated portion, remains valid and effective.
SO ORDERED.
[G.R. No. 132527. July 29, 2005]
COCONUT OIL REFINERS ASSOCIATION, INC. represented by its President, JESUS L. ARRANZA, PHILIPPINE ASSOCIATION OF
MEAT PROCESSORS, INC. (PAMPI), represented by its Secretary, ROMEO G. HIDALGO, FEDERATION OF FREE FARMERS
(FFF), represented by its President, JEREMIAS U. MONTEMAYOR, and BUKLURAN NG MANGGAGAWANG PILIPINO (BMP),
represented by its Chairperson, FELIMON C. LAGMAN, petitioners, vs. HON. RUBEN TORRES, in his capacity as Executive
Secretary; BASES CONVERSION AND DEVELOPMENT AUTHORITY, CLARK DEVELOPMENT CORPORATION, SUBIC BAY
METROPOLITAN AUTHORITY, 88 MART DUTY FREE, FREEPORT TRADERS, PX CLUB, AMERICAN HARDWARE, ROYAL
DUTY FREE SHOPS, INC., DFS SPORTS, ASIA PACIFIC, MCI DUTY FREE DISTRIBUTOR CORP. (formerly MCI RESOURCES,
CORP.), PARK & SHOP, DUTY FREE COMMODITIES, L. FURNISHING, SHAMBURGH, SUBIC DFS, ARGAN TRADING CORP.,
ASIPINE CORP., BEST BUY, INC., PX CLUB, CLARK TRADING, DEMAGUS TRADING CORP., D.F.S. SPORTS UNLIMITED, INC.,
DUTY FREE FIRST SUPERSTORE, INC., FREEPORT, JC MALL DUTY FREE INC. (formerly 88 Mart [Clark] Duty Free Corp.),
LILLY HILL CORP., MARSHALL, PUREGOLD DUTY FREE, INC., ROYAL DFS and ZAXXON PHILIPPINES, INC., respondents.
DECISION
AZCUNA, J.:
This is a Petition for Prohibition and Injunction seeking to enjoin and prohibit the Executive Branch, through the public respondents Ruben
Torres in his capacity as Executive Secretary, the Bases Conversion Development Authority (BCDA), the Clark Development Corporation (CDC)
and the Subic Bay Metropolitan Authority (SBMA), from allowing, and the private respondents from continuing with, the operation of tax and
duty-free shops located at the Subic Special Economic Zone (SSEZ) and the Clark Special Economic Zone (CSEZ), and to declare the following
issuances as unconstitutional, illegal, and void:
1. Section 5 of Executive Order No. 80,[1] dated April 3, 1993, regarding the CSEZ.
2. Executive Order No. 97-A, dated June 19, 1993, pertaining to the SSEZ.
3. Section 4 of BCDA Board Resolution No. 93-05-034,[2] dated May 18, 1993, pertaining to the CSEZ.
Petitioners contend that the aforecited issuances are unconstitutional and void as they constitute executive lawmaking, and that they are
contrary to Republic Act No. 7227[3] and in violation of the Constitution, particularly Section 1, Article III (equal protection clause), Section 19,
Article XII (prohibition of unfair competition and combinations in restraint of trade), and Section 12, Article XII (preferential use of Filipino labor,
domestic materials and locally produced goods).
The facts are as follows:
On March 13, 1992, Republic Act No. 7227 was enacted, providing for, among other things, the sound and balanced conversion of the
Clark and Subic military reservations and their extensions into alternative productive uses in the form of special economic zones in order to
promote the economic and social development of Central Luzon in particular and the country in general. Among the salient provisions are as
follows:
SECTION 12. Subic Special Economic Zone.
...
The abovementioned zone shall be subject to the following policies:
(a) Within the framework and subject to the mandate and limitations of the Constitution and the pertinent provisions of the Local Government
Code, the Subic Special Economic Zone shall be developed into a self-sustaining, industrial, commercial, financial and investment center to
generate employment opportunities in and around the zone and to attract and promote productive foreign investments;
(b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of
goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as tax and duty-free
importations of raw materials, capital and equipment. However, exportation or removal of goods from the territory of the Subic Special
Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code
and other relevant tax laws of the Philippines;[4]
(c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed within
the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises
within the Subic Special Ecoomic Zone shall be remitted to the National Government, one percent (1%) each to the local government units
affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a
development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone
to be utilized for the development of municipalities outside the City of Olangapo and the Municipality of Subic, and other municipalities
contiguous to the base areas.
...
SECTION 15. Clark and Other Special Economic Zones. Subject to the concurrence by resolution of the local government units directly
affected, the President is hereby authorized to create by executive proclamation a Special Economic Zone covering the lands occupied by the
Clark military reservations and its contiguous extensions as embraced, covered and defined by the 1947 Military Bases Agreement between
the Philippines and the United States of America, as amended, located within the territorial jurisdiction of Angeles City, Municipalities of
Mabalacat and Porac, Province of Pampanga and the Municipality of Capas, Province of Tarlac, in accordance with the policies as herein
provided insofar as applicable to the Clark military reservations.
The governing body of the Clark Special Economic Zone shall likewise be established by executive proclamation with such powers and
functions exercised by the Export Processing Zone Authority pursuant to Presidential Decree No. 66 as amended.
The policies to govern and regulate the Clark Special Economic Zone shall be determined upon consultation with the inhabitants of the local
government units directly affected which shall be conducted within six (6) months upon approval of this Act.
Similarly, subject to the concurrence by resolution of the local government units directly affected, the President shall create other Special
Economic Zones, in the base areas of Wallace Air Station in San Fernando, La Union (excluding areas designated for communications,
advance warning and radar requirements of the Philippine Air Force to be determined by the Conversion Authority) and Camp John Hay in the
City of Baguio.
Upon recommendation of the Conversion Authority, the President is likewise authorized to create Special Economic Zones covering the
Municipalities of Morong, Hermosa, Dinalupihan, Castillejos and San Marcelino.
On April 3, 1993, President Fidel V. Ramos issued Executive Order No. 80, which declared, among others, that Clark shall have all the
applicable incentives granted to the Subic Special Economic and Free Port Zone under Republic Act No. 7227. The pertinent provision assailed
therein is as follows:
SECTION 5. Investments Climate in the CSEZ. Pursuant to Section 5(m) and Section 15 of RA 7227, the BCDA shall promulgate all
necessary policies, rules and regulations governing the CSEZ, including investment incentives, in consultation with the local government units
and pertinent government departments for implementation by the CDC.
Among others, the CSEZ shall have all the applicable incentives in the Subic Special Economic and Free Port Zone under RA 7227 and those
applicable incentives granted in the Export Processing Zones, the Omnibus Investments Code of 1987, the Foreign Investments Act of 1991
and new investments laws which may hereinafter be enacted.
The CSEZ Main Zone covering the Clark Air Base proper shall have all the aforecited investment incentives, while the CSEZ Sub-Zone
covering the rest of the CSEZ shall have limited incentives. The full incentives in the Clark SEZ Main Zone and the limited incentives in the
Clark SEZ Sub-Zone shall be determined by the BCDA.
Pursuant to the directive under Executive Order No. 80, the BCDA passed Board Resolution No. 93-05-034 on May 18, 1993, allowing the
tax and duty-free sale at retail of consumer goods imported via Clark for consumption outside the CSEZ. The assailed provisions of said
resolution read, as follows:
Section 4. SPECIFIC INCENTIVES IN THE CSEZ MAIN ZONE. The CSEZ-registered enterprises/businesses shall be entitled to all the
incentives available under R.A. No. 7227, E.O. No. 226 and R.A. No. 7042 which shall include, but not limited to, the following:
I. As in Subic Economic and Free Port Zone:
A. Customs:
...
4. Tax and duty-free purchase and consumption of goods/articles (duty free shopping) within the CSEZ Main Zone.
5. For individuals, duty-free consumer goods may be brought out of the CSEZ Main Zone into the Philippine Customs territory
but not to exceed US$200.00 per month per CDC-registered person, similar to the limits imposed in the Subic SEZ. This
privilege shall be enjoyed only once a month. Any excess shall be levied taxes and duties by the Bureau of Customs.
On June 10, 1993, the President issued Executive Order No. 97, Clarifying the Tax and Duty Free Incentive Within the Subic Special
Economic Zone Pursuant to R.A. No. 7227. Said issuance in part states, thus:
SECTION 1. On Import Taxes and Duties Tax and duty-free importations shall apply only to raw materials, capital goods and equipment
brought in by business enterprises into the SSEZ. Except for these items, importations of other goods into the SSEZ, whether by business
enterprises or resident individuals, are subject to taxes and duties under relevant Philippine laws.
The exportation or removal of tax and duty-free goods from the territory of the SSEZ to other parts of the Philippine territory shall be subject to
duties and taxes under relevant Philippine laws.
Nine days after, on June 19, 1993, Executive Order No. 97-A was issued, Further Clarifying the Tax and Duty-Free Privilege Within the
Subic Special Economic and Free Port Zone. The relevant provisions read, as follows:
SECTION 1. The following guidelines shall govern the tax and duty-free privilege within the Secured Area of the Subic Special Economic and
Free Port Zone:
1.1 The Secured Area consisting of the presently fenced-in former Subic Naval Base shall be the only completely tax and duty-free area in the
SSEFPZ. Business enterprises and individuals (Filipinos and foreigners) residing within the Secured Area are free to import raw materials,
capital goods, equipment, and consumer items tax and duty-free. Consumption items, however, must be consumed within the Secured Area.
Removal of raw materials, capital goods, equipment and consumer items out of the Secured Area for sale to non-SSEFPZ registered
enterprises shall be subject to the usual taxes and duties, except as may be provided herein.
1.2. Residents of the SSEFPZ living outside the Secured Area can enter the Secured Area and consume any quantity of consumption items in
hotels and restaurants within the Secured Area. However, these residents can purchase and bring out of the Secured Area to other parts of
the Philippine territory consumer items worth not exceeding US$100 per month per person. Only residents age 15 and over are entitled to this
privilege.
1.3. Filipinos not residing within the SSEFPZ can enter the Secured Area and consume any quantity of consumption items in hotels and
restaurants within the Secured Area. However, they can purchase and bring out [of] the Secured Area to other parts of the Philippine territory
consumer items worth not exceeding US$200 per year per person. Only Filipinos age 15 and over are entitled to this privilege.
Petitioners assail the $100 monthly and $200 yearly tax-free shopping privileges granted by the aforecited provisions respectively to SSEZ
residents living outside the Secured Area of the SSEZ and to Filipinos aged 15 and over residing outside the SSEZ.
On February 23, 1998, petitioners thus filed the instant petition, seeking the declaration of nullity of the assailed issuances on the following
grounds:
I.
EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND SECTION 4 OF BCDA BOARD RESOLUTION NO. 93-
05-034 ARE NULL AND VOID [FOR] BEING AN EXERCISE OF EXECUTIVE LAWMAKING.
II.
EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND SECTION 4 OF BCDA BOARD RESOLUTION NO. 93-
05-034 ARE UNCONSTITUTIONAL FOR BEING VIOLATIVE OF THE EQUAL PROTECTION CLAUSE AND THE PROHIBITION AGAINST
UNFAIR COMPETITION AND PRACTICES IN RESTRAINT OF TRADE.
III.
EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND SECTION 4 OF BCDA BOARD RESOLUTION NO. 93-
05-034 ARE NULL AND VOID [FOR] BEING VIOLATIVE OF REPUBLIC ACT NO. 7227.
IV.
THE CONTINUED IMPLEMENTATION OF THE CHALLENGED ISSUANCES IF NOT RESTRAINED WILL CONTINUE TO CAUSE
PETITIONERS TO SUFFER GRAVE AND IRREPARABLE INJURY.[5]
In their Comments, respondents point out procedural issues, alleging lack of petitioners legal standing, the unreasonable delay in the filing
of the petition, laches, and the propriety of the remedy of prohibition.
Anent the claim on lack of legal standing, respondents argue that petitioners, being mere suppliers of the local retailers operating outside
the special economic zones, do not stand to suffer direct injury in the enforcement of the issuances being assailed herein. Assuming this is true,
this Court has nevertheless held that in cases of paramount importance where serious constitutional questions are involved, the standing
requirements may be relaxed and a suit may be allowed to prosper even where there is no direct injury to the party claiming the right of judicial
review.[6]
In the same vein, with respect to the other alleged procedural flaws, even assuming the existence of such defects, this Court, in the exercise
of its discretion, brushes aside these technicalities and takes cognizance of the petition considering the importance to the public of the present
case and in keeping with the duty to determine whether the other branches of the government have kept themselves within the limits of the
Constitution.[7]
Now, on the constitutional arguments raised:
As this Court enters upon the task of passing on the validity of an act of a co-equal and coordinate branch of the Government, it bears
emphasis that deeply ingrained in our jurisprudence is the time-honored principle that a statute is presumed to be valid.[8] This presumption is
rooted in the doctrine of separation of powers which enjoins upon the three coordinate departments of the Government a becoming courtesy for
each others acts.[9] Hence, to doubt is to sustain. The theory is that before the act was done or the law was enacted, earnest studies were made
by Congress, or the President, or both, to insure that the Constitution would not be breached. [10] This Court, however, may declare a law, or
portions thereof, unconstitutional where a petitioner has shown a clear and unequivocal breach of the Constitution, not merely a doubtful or
argumentative one.[11] In other words, before a statute or a portion thereof may be declared unconstitutional, it must be shown that the statute
or issuance violates the Constitution clearly, palpably and plainly, and in such a manner as to leave no doubt or hesitation in the mind of the
Court.[12]
The Issue on Executive Legislation
Petitioners claim that the assailed issuances (Executive Order No. 97-A; Section 5 of Executive Order No. 80; and Section 4 of BCDA
Board Resolution No. 93-05-034) constitute executive legislation, in violation of the rule on separation of powers. Petitioners argue that the
Executive Department, by allowing through the questioned issuances the setting up of tax and duty-free shops and the removal of consumer
goods and items from the zones without payment of corresponding duties and taxes, arbitrarily provided additional exemptions to the limitations
imposed by Republic Act No. 7227, which limitations petitioners identify as follows:
(1) [Republic Act No. 7227] allowed only tax and duty-free importation of raw materials, capital and equipment.
(2) It provides that any exportation or removal of goods from the territory of the Subic Special Economic Zone to other parts of the
Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws
of the Philippines.
Anent the first alleged limitation, petitioners contend that the wording of Republic Act No. 7227 clearly limits the grant of tax incentives to
the importation of raw materials, capital and equipment only. Hence, they claim that the assailed issuances constitute executive legislation for
invalidly granting tax incentives in the importation of consumer goods such as those being sold in the duty-free shops, in violation of the letter
and intent of Republic Act No. 7227.
A careful reading of Section 12 of Republic Act No. 7227, which pertains to the SSEZ, would show that it does not restrict the duty-free
importation only to raw materials, capital and equipment. Section 12 of the cited law is partly reproduced, as follows:
SECTION 12. Subic Special Economic Zone.
...
The abovementioned zone shall be subject to the following policies:
...
(b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement
of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as
tax and duty-free importations of raw materials, capital and equipment. However, exportation or removal of goods from the
territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and
taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines.[13]
While it is true that Section 12 (b) of Republic Act No. 7227 mentions only raw materials, capital and equipment, this does not necessarily
mean that the tax and duty-free buying privilege is limited to these types of articles to the exclusion of consumer goods. It must be remembered
that in construing statutes, the proper course is to start out and follow the true intent of the Legislature and to adopt that sense which harmonizes
best with the context and promotes in the fullest manner the policy and objects of the Legislature. [14]
In the present case, there appears to be no logic in following the narrow interpretation petitioners urge. To limit the tax-free importation
privilege of enterprises located inside the special economic zone only to raw materials, capital and equipment clearly runs counter to the intention
of the Legislature to create a free port where the free flow of goods or capital within, into, and out of the zones is insured.
The phrase tax and duty-free importations of raw materials, capital and equipment was merely cited as an example of incentives that may
be given to entities operating within the zone. Public respondent SBMA correctly argued that the maxim expressio unius est exclusio alterius, on
which petitioners impliedly rely to support their restrictive interpretation, does not apply when words are mentioned by way of example. [15] It is
obvious from the wording of Republic Act No. 7227, particularly the use of the phrase such as, that the enumeration only meant to illustrate
incentives that the SSEZ is authorized to grant, in line with its being a free port zone.
Furthermore, said legal maxim should be applied only as a means of discovering legislative intent which is not otherwise manifest, and
should not be permitted to defeat the plainly indicated purpose of the Legislature. [16]
The records of the Senate containing the discussion of the concept of special economic zone in Section 12 (a) of Republic Act No. 7227
show the legislative intent that consumer goods entering the SSEZ which satisfy the needs of the zone and are consumed there are not
subject to duties and taxes in accordance with Philippine laws, thus:
Senator Guingona. . . . The concept of Special Economic Zone is one that really includes the concept of a free port, but it is broader. While a
free port is necessarily included in the Special Economic Zone, the reverse is not true that a free port would include a special economic zone.
Special Economic Zone, Mr. President, would include not only the incoming and outgoing of vessels, duty-free and tax-free, but it would
involve also tourism, servicing, financing and all the appurtenances of an investment center. So, that is the concept, Mr. President. It is
broader. It includes the free port concept and would cater to the greater needs of Olangapo City, Subic Bay and the surrounding
municipalities.
Senator Enrile. May I know then if a factory located within the jurisdiction of Morong, Bataan that was originally a part of the Subic Naval
reservation, be entitled to a free port treatment or just a special economic zone treatment?
Senator Guingona. As far as the goods required for manufacture is concerned, Mr. President, it would have privileges of duty-free and tax-
free. But in addition, the Special Economic Zone could embrace the needs of tourism, could embrace the needs of servicing, could embrace
the needs of financing and other investment aspects.
Senator Enrile. When a hotel is constructed, Mr. President, in this geographical unit which we call a special economic zone, will the goods
entering to be consumed by the customers or guests of the hotel be subject to duties?
Senator Guingona. That is the concept that we are crafting, Mr. President.
Senator Enrile. No. I am asking whether those goods will be duty-free, because it is constructed within a free port.
Senator Guingona. For as long as it services the needs of the Special Economic Zone, yes.
Senator Enrile. For as long as the goods remain within the zone, whether we call it an economic zone or a free port, for as long as we say in
this law that all goods entering this particular territory will be duty-free and tax-free, for as long as they remain there, consumed there or
reexported or destroyed in that place, then they are not subject to the duties and taxes in accordance with the laws of the Philippines?
Senator Guingona. Yes.[17]
Petitioners rely on Committee Report No. 1206 submitted by the Ad Hoc Oversight Committee on Bases Conversion on June 26, 199 5.
Petitioners put emphasis on the reports finding that the setting up of duty-free stores never figured in the minds of the authors of Republic Act
No. 7227 in attracting foreign investors to the former military baselands. They maintain that said law aimed to attract manufacturing and service
enterprises that will employ the dislocated former military base workers, but not investors who would buy consumer goods from duty-free stores.
The Court is not persuaded. Indeed, it is well-established that opinions expressed in the debates and proceedings of the Legislature, steps
taken in the enactment of a law, or the history of the passage of the law through the Legislature, may be resorted to as aids in the interpretation
of a statute with a doubtful meaning.[18] Petitioners posture, however, overlooks the fact that the 1995 Committee Report they are referring to
came into being well after the enactment of Republic Act No. 7227 in 1993. Hence, as pointed out by respondent Executive Secretary Torres,
the aforementioned report cannot be said to form part of Republic Act No. 7227s legislative history.
Section 12 of Republic Act No. 7227, provides in part, thus:
SEC. 12. Subic Special Economic Zone. -- . . .
The abovementioned zone shall be subject to the following policies:
(a) Within the framework and subject to the mandate and limitations of the Constitution and the pertinent provisions of the Local Government
Code, the Subic Special Economic Zone shall be developed into a self-sustaining, industrial, commercial, financial and investment center to
generate employment opportunities in and around the zone and to attract and promote productive foreign investments. [19]
The aforecited policy was mentioned as a basis for the issuance of Executive Order No. 97-A, thus:
WHEREAS, Republic Act No. 7227 provides that within the framework and subject to the mandate and limitations of the Constitution and the
pertinent provisions of the Local Government Code, the Subic Special Economic and Free Port Zone (SSEFPZ) shall be developed into a self-
sustaining industrial, commercial, financial and investment center to generate employment opportunities in and around the zone and to attract
and promote productive foreign investments; and
WHEREAS, a special tax and duty-free privilege within a Secured Area in the SSEFPZ subject, to existing laws has been determined
necessary to attract local and foreign visitors to the zone.
Executive Order No. 97-A provides guidelines to govern the tax and duty-free privileges within the Secured Area of the Subic Special
Economic and Free Port Zone. Paragraph 1.6 thereof states that (t)he sale of tax and duty-free consumer items in the Secured Area shall only
be allowed in duly authorized duty-free shops.
The Court finds that the setting up of such commercial establishments which are the only ones duly authorized to sell consumer items tax
and duty-free is still well within the policy enunciated in Section 12 of Republic Act No. 7227 that . . .the Subic Special Economic Zone shall
be developed into a self-sustaining, industrial, commercial,financial and investment center to generate employment opportunities in
and around the zone and to attract and promote productive foreign investments. (Emphasis supplied.)
However, the Court reiterates that the second sentences of paragraphs 1.2 and 1.3 of Executive Order No. 97-A, allowing tax and
duty-free removal of goods to certain individuals, even in a limited amount, from the Secured Area of the SSEZ, are null and void for being
contrary to Section 12 of Republic Act No. 7227. Said Section clearly provides that exportation or removal of goods from the territory of the
Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and
Tariff Code and other relevant tax laws of the Philippines.
On the other hand, insofar as the CSEZ is concerned, the case for an invalid exercise of executive legislation is tenable.
In John Hay Peoples Alternative Coalition, et al. v. Victor Lim, et al.,[20] this Court resolved an issue, very much like the one herein,
concerning the legality of the tax exemption benefits given to the John Hay Economic Zone under Presidential Proclamation No. 420, Series of
1994, CREATING AND DESIGNATING A PORTION OF THE AREA COVERED BY THE FORMER CAMP JOHN AS THE JOHN HAY SPECIAL
ECONOMIC ZONE PURSUANT TO REPUBLIC ACT NO. 7227.
In that case, among the arguments raised was that the granting of tax exemptions to John Hay was an invalid and illegal exercise by the
President of the powers granted only to the Legislature. Petitioners therein argued that Republic Act No. 7227 expressly granted tax exemption
only to Subic and not to the other economic zones yet to be established. Thus, the grant of tax exemption to John Hay by Presidential
Proclamation contravenes the constitutional mandate that [n]o law granting any tax exemption shall be passed without the concurrence of a
majority of all the members of Congress.[21]
This Court sustained the argument and ruled that the incentives under Republic Act No. 7227 are exclusive only to the SSEZ. The
President, therefore, had no authority to extend their application to John Hay. To quote from the Decision:
More importantly, the nature of most of the assailed privileges is one of tax exemption. It is the legislature, unless limited by a provision of a
state constitution, that has full power to exempt any person or corporation or class of property from taxation, its power to exempt being as
broad as its power to tax. Other than Congress, the Constitution may itself provide for specific tax exemptions, or local governments may pass
ordinances on exemption only from local taxes.
The challenged grant of tax exemption would circumvent the Constitutions imposition that a law granting any tax exemption must have the
concurrence of a majority of all the members of Congress. In the same vein, the other kinds of privileges extended to the John Hay SEZ are
by tradition and usage for Congress to legislate upon.
Contrary to public respondents suggestions, the claimed statutory exemption of the John Hay SEZ from taxation should be manifest and
unmistakable from the language of the law on which it is based; it must be expressly granted in a statute stated in a language too clear to be
mistaken. Tax exemption cannot be implied as it must be categorically and unmistakably expressed.
If it were the intent of the legislature to grant to John Hay SEZ the same tax exemption and incentives given to the Subic SEZ, it would have
so expressly provided in R.A. No. 7227.[22]
In the present case, while Section 12 of Republic Act No. 7227 expressly provides for the grant of incentives to the SSEZ, it fails to make
any similar grant in favor of other economic zones, including the CSEZ. Tax and duty-free incentives being in the nature of tax exemptions, the
basis thereof should be categorically and unmistakably expressed from the language of the statute. Consequently, in the absence of any express
grant of tax and duty-free privileges to the CSEZ in Republic Act No. 7227, there would be no legal basis to uphold the questioned portions of
two issuances: Section 5 of Executive Order No. 80 and Section 4 of BCDA Board Resolution No. 93-05-034, which both pertain to the CSEZ.
Petitioners also contend that the questioned issuances constitute executive legislation for allowing the removal of consumer goods and
items from the zones without payment of corresponding duties and taxes in violation of Republic Act No. 7227 as Section 12 thereof provides
for the taxation of goods that are exported or removed from the SSEZ to other parts of the Philippine territory.
On September 26, 1997, Executive Order No. 444 was issued, curtailing the duty-free shopping privileges in the SSEZ and the CSEZ to
prevent abuse of duty-free privilege and to protect local industries from unfair competition. The pertinent provisions of said issuance state, as
follows:
SECTION 3. Special Shopping Privileges Granted During the Year-round Centennial Anniversary Celebration in 1998. Upon effectivity of this
Order and up to the Centennial Year 1998, in addition to the permanent residents, locators and employees of the fenced-in areas of the Subic
Special Economic and Freeport Zone and the Clark Special Economic Zone who are allowed unlimited duty free purchases, provided these
are consumed within said fenced-in areas of the Zones, the residents of the municipalities adjacent to Subic and Clark as respectively
provided in R.A. 7227 (1992) and E.O. 97-A s. 1993 shall continue to be allowed One Hundred US Dollars (US$100) monthly shopping
privilege until 31 December 1998. Domestic tourists visiting Subic and Clark shall be allowed a shopping privilege of US$25 for consumable
goods which shall be consumed only in the fenced-in area during their visit therein.
SECTION 4. Grant of Duty Free Shopping Privileges Limited Only To Individuals Allowed by Law. Starting 1 January 1999, only the following
persons shall continue to be eligible to shop in duty free shops/outlets with their corresponding purchase limits:
a. Tourists and Filipinos traveling to or returning from foreign destinations under E.O. 97-A s. 1993 One Thousand US Dollars (US$1,000) but not to
exceed Ten Thousand US Dollars (US$10,000) in any given year;
b. Overseas Filipino Workers (OFWs) and Balikbayans defined under R.A. 6768 dated 3 November 1989 Two Thousand US Dollars (US$2,000);
c. Residents, eighteen (18) years old and above, of the fenced-in areas of the freeports under R.A. 7227 (1992) and E.O. 97-A s. 1993 Unlimited
purchase as long as these are for consumption within these freeports.
The term "Residents" mentioned in item c above shall refer to individuals who, by virtue of domicile or employment, reside on permanent basis
within the freeport area. The term excludes (1) non-residents who have entered into short- or long-term property lease inside the freeport, (2)
outsiders engaged in doing business within the freeport, and (3) members of private clubs (e.g., yacht and golf clubs) based or located within
the freeport. In this regard, duty free privileges granted to any of the above individuals (e.g., unlimited shopping privilege, tax-free importation
of cars, etc.) are hereby revoked.[23]
A perusal of the above provisions indicates that effective January 1, 1999, the grant of duty-free shopping privileges to domestic tourists
and to residents living adjacent to SSEZ and the CSEZ had been revoked. Residents of the fenced-in area of the free port are still allowed
unlimited purchase of consumer goods, as long as these are for consumption within these freeports. Hence, the only individuals allowed by law
to shop in the duty-free outlets and remove consumer goods out of the free ports tax-free are tourists and Filipinos traveling to or returning from
foreign destinations, and Overseas Filipino Workers and Balikbayans as defined under Republic Act No. 6768.[24]
Subsequently, on October 20, 2000, Executive Order No. 303 was issued, amending Executive Order No. 444. Pursuant to the limited
duration of the privileges granted under the preceding issuance, Section 2 of Executive Order No. 303 declared that [a]ll special shopping
privileges as granted under Section 3 of Executive Order 444, s. 1997, are hereby deemed terminated. The grant of duty free shopping privileges
shall be restricted to qualified individuals as provided by law.
It bears noting at this point that the shopping privileges currently being enjoyed by Overseas Filipino Workers, Balikbayans, and tourists
traveling to and from foreign destinations, draw authority not from the issuances being assailed herein, but from Executive Order No. 46 [25] and
Republic Act No. 6768, both enacted prior to the promulgation of Republic Act No. 7227.
From the foregoing, it appears that petitioners objection to the allowance of tax-free removal of goods from the special economic zones as
previously authorized by the questioned issuances has become moot and academic.
In any event, Republic Act No. 7227, specifically Section 12 (b) thereof, clearly provides that exportation or removal of goods from the
territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the
Customs and Tariff Code and other relevant tax laws of the Philippines.
Thus, the removal of goods from the SSEZ to other parts of the Philippine territory without payment of said customs duties and taxes is
not authorized by the Act. Consequently, the following italicized provisions found in the second sentences of paragraphs 1.2 and 1.3, Section 1
of Executive Order No. 97-A are null and void:
1.2 Residents of the SSEFPZ living outside the Secured Area can enter and consume any quantity of consumption items in hotels and
restaurants within the Secured Area. However, these residents can purchase and bring out of the Secured Area to other parts of
the Philippine territory consumer items worth not exceeding US $100 per month per person. Only residents age 15 and over are
entitled to this privilege.
1.3 Filipinos not residing within the SSEFPZ can enter the Secured Area and consume any quantity of consumption items in hotels and
restaurants within the Secured Area. However, they can purchase and bring out of the Secured Area to other parts of the
Philippine territory consumer items worth not exceeding US $200 per year per person. Only Filipinos age 15 and over are entitled
to this privilege.[26]
A similar provision found in paragraph 5, Section 4(A) of BCDA Board Resolution No. 93-05-034 is also null and void. Said Resolution
applied the incentives given to the SSEZ under Republic Act No. 7227 to the CSEZ, which, as aforestated, is without legal basis.
Having concluded earlier that the CSEZ is excluded from the tax and duty-free incentives provided under Republic Act No. 7227, this Court
will resolve the remaining arguments only with regard to the operations of the SSEZ. Thus, the assailed issuance that will be discussed is solely
Executive Order No. 97-A, since it is the only one among the three questioned issuances which pertains to the SSEZ.
Equal Protection of the Laws
Petitioners argue that the assailed issuance (Executive Order No. 97-A) is violative of their right to equal protection of the laws, as enshrined
in Section 1, Article III of the Constitution. To support this argument, they assert that private respondents operating inside the SSEZ are not
different from the retail establishments located outside, the products sold being essentially the same. The only distinction, they claim, lies in the
products variety and source, and the fact that private respondents import their items tax-free, to the prejudice of the retailers and manufacturers
located outside the zone.
Petitioners contention cannot be sustained. It is an established principle of constitutional law that the guaranty of the equal protection of
the laws is not violated by a legislation based on a reasonable classification.[27] Classification, to be valid, must (1) rest on substantial distinction,
(2) be germane to the purpose of the law, (3) not be limited to existing conditions only, and (4) apply equally to all members of the same class. [28]
Applying the foregoing test to the present case, this Court finds no violation of the right to equal protection of the laws. First, contrary to
petitioners claim, substantial distinctions lie between the establishments inside and outside the zone, justifying the difference in their treatment.
In Tiu v. Court of Appeals,[29] the constitutionality of Executive Order No. 97-A was challenged for being violative of the equal protection clause.
In that case, petitioners claimed that Executive Order No. 97-A was discriminatory in confining the application of Republic Act No. 7227 within
a secured area of the SSEZ, to the exclusion of those outside but are, nevertheless, still within the economic zone.
Upholding the constitutionality of Executive Order No. 97-A, this Court therein found substantial differences between the retailers inside
and outside the secured area, thereby justifying a valid and reasonable classification:
Certainly, there are substantial differences between the big investors who are being lured to establish and operate their industries in the so-
called secured area and the present business operators outside the area. On the one hand, we are talking of billion-peso investments and
thousands of new jobs. On the other hand, definitely none of such magnitude. In the first, the economic impact will be national; in the second,
only local. Even more important, at this time the business activities outside the secured area are not likely to have any impact in achieving the
purpose of the law, which is to turn the former military base to productive use for the benefit of the Philippine economy. There is, then, hardly
any reasonable basis to extend to them the benefits and incentives accorded in R.A. 7227. Additionally, as the Court of Appeals pointed out, it
will be easier to manage and monitor the activities within the secured area, which is already fenced off, to prevent fraudulent importation of
merchandise or smuggling.
It is well-settled that the equal-protection guarantee does not require territorial uniformity of laws. As long as there are actual and material
differences between territories, there is no violation of the constitutional clause. And of course, anyone, including the petitioners, possessing
the requisite investment capital can always avail of the same benefits by channeling his or her resources or business operations into the
fenced-off free port zone.[30]
The Court in Tiu found real and substantial distinctions between residents within the secured area and those living within the economic
zone but outside the fenced-off area. Similarly, real and substantial differences exist between the establishments herein involved. A significant
distinction between the two groups is that enterprises outside the zones maintain their businesses within Philippine customs territory, while
private respondents and the other duly-registered zone enterprises operate within the so-called separate customs territory. To grant the same
tax incentives given to enterprises within the zones to businesses operating outside the zones, as petitioners insist, would clearly defeat the
statutes intent to carve a territory out of the military reservations in Subic Bay where free flow of goods and capital is maintained.
The classification is germane to the purpose of Republic Act No. 7227. As held in Tiu, the real concern of Republic Act No. 7227 is to
convert the lands formerly occupied by the US military bases into economic or industrial areas. In furtherance of such objective, Congress
deemed it necessary to extend economic incentives to the establishments within the zone to attract and encourage foreign and local investors.
This is the very rationale behind Republic Act No. 7227 and other similar special economic zone laws which grant a complete package of tax
incentives and other benefits.
The classification, moreover, is not limited to the existing conditions when the law was promulgated, but to future conditions as well,
inasmuch as the law envisioned the former military reservation to ultimately develop into a self-sustaining investment center.
And, lastly, the classification applies equally to all retailers found within the secured area. As ruled in Tiu, the individuals and businesses
within the secured area, being in like circumstances or contributing directly to the achievement of the end purpose of the law, are not categorized
further. They are all similarly treated, both in privileges granted and in obligations required.
With all the four requisites for a reasonable classification present, there is no ground to invalidate Executive Order No. 97-A for being
violative of the equal protection clause.
Prohibition against Unfair Competition
and Practices in Restraint of Trade
Petitioners next argue that the grant of special tax exemptions and privileges gave the private respondents undue advantage over local
enterprises which do not operate inside the SSEZ, thereby creating unfair competition in violation of the constitutional prohibition against unfair
competition and practices in restraint of trade.
The argument is without merit. Just how the assailed issuance is violative of the prohibition against unfair competition and practices in
restraint of trade is not clearly explained in the petition. Republic Act No. 7227, and consequently Executive Order No. 97-A, cannot be said to
be distinctively arbitrary against the welfare of businesses outside the zones. The mere fact that incentives and privileges are granted to certain
enterprises to the exclusion of others does not render the issuance unconstitutional for espousing unfair competition. Said constitutional
prohibition cannot hinder the Legislature from using tax incentives as a tool to pursue its policies.
Suffice it to say that Congress had justifiable reasons in granting incentives to the private respondents, in accordance with Republic Act
No. 7227s policy of developing the SSEZ into a self-sustaining entity that will generate employment and attract foreign and local investment. If
petitioners had wanted to avoid any alleged unfavorable consequences on their profits, they should upgrade their standards of quality so as to
effectively compete in the market. In the alternative, if petitioners really wanted the preferential treatment accorded to the private respondents,
they could have opted to register with SSEZ in order to operate within the special economic zone.
Preferential Use of Filipino Labor, Domestic Materials
and Locally Produced Goods
Lastly, petitioners claim that the questioned issuance (Executive Order No. 97-A) openly violated the State policy of promoting the
preferential use of Filipino labor, domestic materials and locally produced goods and adopting measures to help make them competitive.
Again, the argument lacks merit. This Court notes that petitioners failed to substantiate their sweeping conclusion that the issuance has
violated the State policy of giving preference to Filipino goods and labor. The mere fact that said issuance authorizes the importation and trade
of foreign goods does not suffice to declare it unconstitutional on this ground.
Petitioners cite Manila Prince Hotel v. GSIS[31] which, however, does not apply. That case dealt with the policy enunciated under the second
paragraph of Section 10, Article XII of the Constitution, [32] applicable to the grant of rights, privileges, and concessions covering the national
economy and patrimony, which is different from the policy invoked in this petition, specifically that of giving preference to Filipino materials and
labor found under Section 12 of the same Article of the Constitution. (Emphasis supplied).
In Taada v. Angara,[33] this Court elaborated on the meaning of Section 12, Article XII of the Constitution in this wise:
[W]hile the Constitution indeed mandates a bias in favor of Filipino goods, services, labor and enterprises, at the same time, it recognizes the
need for business exchange with the rest of the world on the bases of equality and reciprocity and limits protection of Filipino enterprises only
against foreign competition and trade practices that are unfair. In other words, the Constitution did not intend to pursue an isolationist policy. It
did not shut out foreign investments, goods and services in the development of the Philippine economy. While the Constitution does not
encourage the unlimited entry of foreign goods, services and investments into the country, it does not prohibit them either. In fact, it allows an
exchange on the basis of equality and reciprocity, frowning only on foreign competition that is unfair.[34]
This Court notes that the Executive Department, with its subsequent issuance of Executive Order Nos. 444 and 303, has provided certain
measures to prevent unfair competition. In particular, Executive Order Nos. 444 and 303 have restricted the special shopping privileges to
certain individuals.[35] Executive Order No. 303 has limited the range of items that may be sold in the duty-free outlets,[36] and imposed sanctions
to curb abuses of duty-free privileges.[37] With these measures, this Court finds no reason to strike down Executive Order No. 97-A for allegedly
being prejudicial to Filipino labor, domestic materials and locally produced goods.
WHEREFORE, the petition is PARTLY GRANTED. Section 5 of Executive Order No. 80 and Section 4 of BCDA Board Resolution No. 93-
05-034 are hereby declared NULL and VOID and are accordingly declared of no legal force and effect. Respondents are hereby enjoined from
implementing the aforesaid void provisions. All portions of Executive Order No. 97-A are valid and effective, except the second sentences in
paragraphs 1.2 and 1.3 of said Executive Order, which are hereby declared INVALID.
No costs.
SO ORDERED.
G.R. No. L-66838 April 15, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION & THE COURT OF TAX APPEALS, respondents.
PARAS, J.:
This is a petition for review on certiorari filed by the herein petitioner, Commissioner of Internal Revenue, seeking the reversal of the decision
of the Court of Tax Appeals dated January 31, 1984 in CTA Case No. 2883 entitled "Procter and Gamble Philippine Manufacturing
Corporation vs. Bureau of Internal Revenue," which declared petitioner therein, Procter and Gamble Philippine Manufacturing Corporation to
be entitled to the sought refund or tax credit in the amount of P4,832,989.00 representing the alleged overpaid withholding tax at source and
ordering payment thereof.
The antecedent facts that precipitated the instant petition are as follows:
Private respondent, Procter and Gamble Philippine Manufacturing Corporation (hereinafter referred to as PMC-Phil.), a corporation duly
organized and existing under and by virtue of the Philippine laws, is engaged in business in the Philippines and is a wholly owned subsidiary
of Procter and Gamble, U.S.A. herein referred to as PMC-USA), a non-resident foreign corporation in the Philippines, not engaged in trade
and business therein. As such PMC-U.S.A. is the sole shareholder or stockholder of PMC Phil., as PMC-U.S.A. owns wholly or by 100% the
voting stock of PMC Phil. and is entitled to receive income from PMC-Phil. in the form of dividends, if not rents or royalties. In addition, PMC-
Phil has a legal personality separate and distinct from PMC-U.S.A. (Rollo, pp. 122-123).
For the taxable year ending June 30, 1974 PMC-Phil. realized a taxable net income of P56,500,332.00 and accordingly paid the
corresponding income tax thereon equivalent to P25%-35% or P19,765,116.00 as provided for under Section 24(a) of the Philippine Tax
Code, the pertinent portion of which reads:
SEC. 24. Rates of tax on corporation. a) Tax on domestic corporations. A tax is hereby imposed upon the taxable net
income received during each taxable year from all sources by every corporation organized in, or geting under the laws of the
Philippines, and partnerships, no matter how created or organized, but not including general professional partnerships, in
accordance with the following:
Twenty-five per cent upon the amount by which the taxable net income does not exceed one hundred thousand pesos; and
Thirty-five per cent upon the amount by which the taxable net income exceeds one hundred thousand pesos.
After taxation its net profit was P36,735,216.00. Out of said amount it declared a dividend in favor of its sole corporate stockholder and parent
corporation PMC-U.S.A. in the total sum of P17,707,460.00 which latter amount was subjected to Philippine taxation of 35% or P6,197,611.23
as provided for in Section 24(b) of the Philippine Tax Code which reads in full:
SECTION 1. The first paragraph of subsection (b) of Section 24 of the National Bureau Internal Revenue Code, as
amended, is hereby further amended to read as follows:
(b) Tax on foreign corporations. 41) Non-resident corporation. A foreign corporation not engaged in
trade or business in the Philippines, including a foreign life insurance company not engaged in the life
insurance business in the Philippines, shall pay a tax equal to 35% of the gross income received during its
taxable year from all sources within the Philippines, as interest (except interest on foreign loans which
shall be subject to 15% tax), dividends, rents, royalties, salaries, wages, premiums, annuities,
compensations, remunerations for technical services or otherwise, emoluments or other fixed or
determinable, annual, periodical or casual gains, profits, and income, and capital gains: Provided,
however, That premiums shall not include re-insurance premium Provided, further, That cinematograpy
film owners, lessors, or distributors, shall pay a tax of 15% on their gross income from sources within the
Philippines: Provided, still further That on dividends received from a domestic corporation hable to tax
under this Chapter, the tax shall be 15% of the dividends received, which shall be collected and paid as
provided in Section 53(d) of this Code, subject to the condition that the country in which the non-resident
foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign
corporation, taxes deemed to have been paid in the Philippines equivalent to 20% which represents the
difference between the regular tax (35%) on corporations and the tax (15%) on dividends as provided in
this section: Provided, finally That regional or area headquarters established in the Philippines by
multinational corporations and which headquarters do not earn or derive income from the Philippines and
which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region shall not be subject to tax.
For the taxable year ending June 30, 1975 PMC-Phil. realized a taxable net income of P8,735,125.00 which was subjected to Philippine
taxation at the rate of 25%-35% or P2,952,159.00, thereafter leaving a net profit of P5,782,966.00. As in the 2nd quarter of 1975, PMC-Phil.
again declared a dividend in favor of PMC-U.S.A. at the tax rate of 35% or P6,457,485.00.
In July, 1977 PMC-Phil., invoking the tax-sparing credit provision in Section 24(b) as aforequoted, as the withholding agent of the Philippine
government, with respect to the dividend taxes paid by PMC-U.S.A., filed a claim with the herein petitioner, Commissioner of Internal
Revenue, for the refund of the 20 percentage-point portion of the 35 percentage-point whole tax paid, arising allegedly from the alleged
"overpaid withholding tax at source or overpaid withholding tax in the amount of P4,832,989.00," computed as follows:
Dividend Tax 15% tax Alleged of
Income withheld under
PMC-U.S.A. at source tax sparing over
at
35% proviso payment
P17,707,460 P6,196,611 P2,656,119 P3,541,492
6,457,485 2,260,119 968,622 1,291,497
P24,164,946 P8,457,731 P3,624,941 P4,832,989
There being no immediate action by the BIR on PMC-Phils' letter-claim the latter sought the intervention of the CTA when on July 13, 1977 it
filed with herein respondent court a petition for review docketed as CTA No. 2883 entitled "Procter and Gamble Philippine Manufacturing
Corporation vs. The Commissioner of Internal Revenue," praying that it be declared entitled to the refund or tax credit claimed and ordering
respondent therein to refund to it the amount of P4,832,989.00, or to issue tax credit in its favor in lieu of tax refund. (Rollo, p. 41)
On the other hand therein respondent, Commissioner of qqqInterlaal Revenue, in his answer, prayed for the dismissal of said Petition and for
the denial of the claim for refund. (Rollo, p. 48)
On January 31, 1974 the Court of Tax Appeals in its decision (Rollo, p. 63) ruled in favor of the herein petitioner, the dispositive portion of the
same reading as follows:
Accordingly, petitioner is entitled to the sought refund or tax credit of the amount representing the overpaid withholding tax
at source and the payment therefor by the respondent hereby ordered. No costs.
SO ORDERED.
Hence this petition.
The Second Division of the Court without giving due course to said petition resolved to require the respondents to comment (Rollo, p. 74).
Said comment was filed on November 8, 1984 (Rollo, pp. 83-90). Thereupon this Court by resolution dated December 17, 1984 resolved to
give due course to the petition and to consider respondents' comulent on the petition as Answer. (Rollo, p. 93)
Petitioner was required to file brief on January 21, 1985 (Rollo, p. 96). Petitioner filed his brief on May 13, 1985 (Rollo, p. 107), while private
respondent PMC Phil filed its brief on August 22, 1985.
Petitioner raised the following assignments of errors:
I
THE COURT OF TAX APPEALS ERRED IN HOLDING WITHOUT ANY BASIS IN FACT AND IN LAW, THAT THE HEREIN RESPONDENT
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION (PMC-PHIL. FOR SHORT)IS ENTITLED TO THE SOUGHT
REFUND OR TAX CREDIT OF P4,832,989.00, REPRESENTING ALLEGEDLY THE DIVIDED TAX OVER WITHHELD BY PMC-PHIL. UPON
REMITTANCE OF DIVIDEND INCOME IN THE TOTAL SUM OF P24,164,946.00 TO PROCTER & GAMBLE, USA (PMC-USA FOR SHORT).
II
THE COURT OF TAX APPEALS ERRED IN HOLDING, WITHOUT ANY BASIS IN FACT AND IN LAW, THAT PMC-USA, A NON-RESIDENT
FOREIGN CORPORATION UNDER SECTION 24(b) (1) OF THE PHILIPPINE TAX CODE AND A DOMESTIC CORPORATION DOMICILED
IN THE UNITED STATES, IS ENTITLED UNDER THE U.S. TAX CODE AGAINST ITS U.S. FEDERAL TAXES TO A UNITED STATES
FOREIGN TAX CREDIT EQUIVALENT TO AT LEAST THE 20 PERCENTAGE-POINT PORTION (OF THE 35 PERCENT DIVIDEND TAX)
SPARED OR WAIVED OR OTHERWISE CONSIDERED OR DEEMED PAID BY THE PHILIPPINE GOVERNMENT.
The sole issue in this case is whether or not private respondent is entitled to the preferential 15% tax rate on dividends declared and remitted
to its parent corporation.
From this issue two questions are posed by the petitioner Commissioner of Internal Revenue, and they are (1) Whether or not PMC-Phil. is the
proper party to claim the refund and (2) Whether or not the U. S. allows as tax credit the "deemed paid" 20% Philippine Tax on such
dividends?
The petitioner maintains that it is the PMC-U.S.A., the tax payer and not PMC-Phil. the remitter or payor of the dividend income, and a mere
withholding agent for and in behalf of the Philippine Government, which should be legally entitled to receive the refund if any. (Rollo, p. 129)
It will be observed at the outset that petitioner raised this issue for the first time in the Supreme Court. He did not raise it at the administrative
level, nor at the Court of Tax Appeals. As clearly ruled by Us "To allow a litigant to assume a different posture when he comes before the court
and challenges the position he had accepted at the administrative level," would be to sanction a procedure whereby the Court-which is
supposed to review administrative determinations would not review, but determine and decide for the first time, a question not raised at the
administrative forum." Thus it is well settled that under the same underlying principle of prior exhaustion of administrative remedies, on the
judicial level, issues not raised in the lower court cannot generally be raised for the first time on appeal. (Pampanga Sugar Dev. Co., Inc. v.
CIR, 114 SCRA 725 [1982]; Garcia v. C.A., 102 SCRA 597 [1981]; Matialonzo v. Servidad, 107 SCRA 726 [1981]),
Nonetheless it is axiomatic that the State can never be in estoppel, and this is particularly true in matters involving taxation. The errors of
certain administrative officers should never be allowed to jeopardize the government's financial position.
The submission of the Commissioner of Internal Revenue that PMC-Phil. is but a withholding agent of the government and therefore cannot
claim reimbursement of the alleged over paid taxes, is completely meritorious. The real party in interest being the mother corporation in the
United States, it follows that American entity is the real party in interest, and should have been the claimant in this case.
Closely intertwined with the first assignment of error is the issue of whether or not PMC-U.S.A. a non-resident foreign corporation under
Section 24(b)(1) of the Tax Code (the subsidiary of an American) a domestic corporation domiciled in the United States, is entitled under the
U.S. Tax Code to a United States Foreign Tax Credit equivalent to at least the 20 percentage paid portion (of the 35% dividend tax) spared or
waived as otherwise considered or deemed paid by the government. The law pertinent to the issue is Section 902 of the U.S. Internal
Revenue Code, as amended by Public Law 87-834, the law governing tax credits granted to U.S. corporations on dividends received from
foreign corporations, which to the extent applicable reads:
SEC. 902 - CREDIT FOR CORPORATE STOCKHOLDERS IN FOREIGN CORPORATION.
(a) Treatment of Taxes Paid by Foreign Corporation - For purposes of this subject, a domestic corporation which owns at
least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall-
(1) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as
defined in subsection (c) (1) (a)] of a year for which such foreign corporation is not a less developed
country corporation, be deemed to have paid the same proportion of any income, war profits, or excess
profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any
possession of the United States on or with respect to such accumulated profits, which the amount of such
dividends (determined without regard to Section 78) bears to the amount of such accumulated profits in
excess of such income, war profits, and excess profits taxes (other than those deemed paid); and
(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as
defined in subsection (c) (1) (b)] of a year for which such foreign corporation is a less-developed country
corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits
taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession
of the United States on or with respect to such accumulated profits, which the amount of such dividends
bears to the amount of such accumulated profits.
xxx xxx xxx
(c) Applicable Rules
(1) Accumulated profits defined - For purpose of this section, the term 'accumulated profits' means with respect to any
foreign corporation.
(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed
without reduction by the amount of the income, war profits, and excess profits taxes imposed on or with
respect to such profits or income by any foreign country.... ; and
(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of
the income, was profits, and excess profits taxes imposed on or with respect to such profits or income.
The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years such
dividends were paid, treating dividends paid in the first 20 days of any year as having been paid from the accumulated
profits of the preceding year or years (unless to his satisfaction shows otherwise), and in other respects treating dividends
as having been paid from the most recently accumulated gains, profits, or earnings. .. (Rollo, pp. 55-56)
To Our mind there is nothing in the aforecited provision that would justify tax return of the disputed 15% to the private respondent.
Furthermore, as ably argued by the petitioner, the private respondent failed to meet certain conditions necessary in order that the dividends
received by the non-resident parent company in the United States may be subject to the preferential 15% tax instead of 35%. Among other
things, the private respondent failed: (1) to show the actual amount credited by the U.S. government against the income tax due from PMC-
U.S.A. on the dividends received from private respondent; (2) to present the income tax return of its mother company for 1975 when the
dividends were received; and (3) to submit any duly authenticated document showing that the U.S. government credited the 20% tax deemed
paid in the Philippines.
PREMISES CONSIDERED, the petition is GRANTED and the decision appealed from, is REVERSED and SET ASIDE.
SO ORDERED.
G.R. No. L-66838 December 2, 1991
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX APPEALS,respondents.
T.A. Tejada & C.N. Lim for private respondent.

RESOLUTION

FELICIANO, J.:
For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975, private respondent Procter and Gamble
Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends payable to its parent company and sole stockholder, Procter and
Gamble Co., Inc. (USA) ("P&G-USA"), amounting to P24,164,946.30, from which dividends the amount of P8,457,731.21 representing the
thirty-five percent (35%) withholding tax at source was deducted.
On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue a claim for refund or tax credit in the
amount of P4,832,989.26 claiming, among other things, that pursuant to Section 24 (b) (1) of the National Internal Revenue Code
("NITC"), 1 as amended by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only fifteen
percent (15%) (and not thirty-five percent [35%]) of the dividends.
There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed a petition for review with public
respondent Court of Tax Appeals ("CTA") docketed as CTA Case No. 2883. On 31 January 1984, the CTA rendered a decision ordering
petitioner Commissioner to refund or grant the tax credit in the amount of P4,832,989.00.
On appeal by the Commissioner, the Court through its Second Division reversed the decision of the CTA and held that:
(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the refund or tax credit here involved;
(b) there is nothing in Section 902 or other provisions of the US Tax Code that allows a credit against the US tax due from P&G-USA
of taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) which represents the difference between
the regular tax of thirty-five percent (35%) on corporations and the tax of fifteen percent (15%) on dividends; and
(c) private respondent P&G-Phil. failed to meet certain conditions necessary in order that "the dividends received by its non-resident
parent company in the US (P&G-USA) may be subject to the preferential tax rate of 15% instead of 35%."
These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will deal with them seriatim in this Resolution resolving
that Motion.
I
1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the present claim for refund or tax credit, which
need to be examined. This question was raised for the first time on appeal, i.e., in the proceedings before this Court on the Petition for Review
filed by the Commissioner of Internal Revenue. The question was not raised by the Commissioner on the administrative level, and neither was
it raised by him before the CTA.
We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise valid claim for refund by raising this
question of alleged incapacity for the first time on appeal before this Court. This is clearly a matter of procedure. Petitioner does not pretend
that P&G-Phil., should it succeed in the claim for refund, is likely to run away, as it were, with the refund instead of transmitting such refund or
tax credit to its parent and sole stockholder. It is commonplace that in the absence of explicit statutory provisions to the contrary, the
government must follow the same rules of procedure which bind private parties. It is, for instance, clear that the government is held to
compliance with the provisions of Circular No. 1-88 of this Court in exactly the same way that private litigants are held to such compliance,
save only in respect of the matter of filing fees from which the Republic of the Philippines is exempt by the Rules of Court.
More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be allowed to raise for the first time on
appeal questions which had not been litigated either in the lower court or on the administrative level. For, if petitioner had at the earliest
possible opportunity, i.e., at the administrative level, demanded that P&G-Phil. produce an express authorization from its parent corporation to
bring the claim for refund, then P&G-Phil. would have been able forthwith to secure and produce such authorization before filing the action in
the instant case. The action here was commenced just before expiration of the two (2)-year prescriptive period.
2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions as well which, as will be seen below,
also ultimately relate to fairness.
Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of Internal Revenue is essential for maintenance of
a suit for recovery of taxes allegedly erroneously or illegally assessed or collected:
Sec. 306. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be maintained in any court for the recovery
of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue; but such suit or proceeding
may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or
proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment: . . . (Emphasis supplied)
Section 309 (3) of the NIRC, in turn, provides:
Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.The Commissioner may:
xxx xxx xxx
(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of taxes or penalties shall be allowed unless the taxpayer
files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty. (As amended by
P.D. No. 69) (Emphasis supplied)
Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil. a "taxpayer" under Section 309 (3) of the NIRC?
The term "taxpayer" is defined in our NIRC as referring to "any person subject to taximposed by the Title [on Tax on Income]." 2 It thus
becomes important to note that under Section 53 (c) of the NIRC, the withholding agent who is "required to deduct and withhold any tax" is
made " personally liable for such tax" and indeed is indemnified against any claims and demands which the stockholder might wish to make in
questioning the amount of payments effected by the withholding agent in accordance with the provisions of the NIRC. The withholding agent,
P&G-Phil., is directly and independently liable 3 for the correct amount of the tax that should be withheld from the dividend remittances. The
withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax
withheld be finally found to be less than the amount that should have been withheld under law.
A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." 4 The terms liable for tax" and
"subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to consider a person who
is statutorily made "liable for tax" as not "subject to tax." By any reasonable standard, such a person should be regarded as a party in interest,
or as a person having sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court pointed out that a withholding agent is in fact the
agent both of the government and of the taxpayer, and that the withholding agent is not an ordinary government agent:
The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the withholding agent to
withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is
concentrated upon the person over whom the Government has jurisdiction. Thus, the withholding agent is constituted the agent of
both the Government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the Government's agent. In
regard to the filing of the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer.
The withholding agent, therefore, is no ordinary government agent especially because under Section 53 (c) he is held personally
liable for the tax he is duty bound to withhold; whereas the Commissioner and his deputies are not made liable by law. 6 (Emphasis
supplied)

If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the dividends with respect to the filing of the necessary income tax return and with respect to actual payment
of the tax to the government, such authority may reasonably be held to include the authority to file a claim for refund and to bring an action for recovery of such claim. This implied authority is especially warranted
where, is in the instant case, the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the effective control of such parent-stockholder. In the circumstances of
this case, it seems particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and to commence an action for such refund.
We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some written or telexed confirmation by P&G-USA of the subsidiary's authority to claim the refund or tax credit and
to remit the proceeds of the refund., or to apply the tax credit to some Philippine tax obligation of, P&G-USA, before actual payment of the refund or issuance of a tax credit certificate. What appears to be vitiated by
basic unfairness is petitioner's position that, although P&G-Phil. is directly and personally liable to the Government for the taxes and any deficiency assessments to be collected, the Government is not legally liable
for a refund simply because it did not demand a written confirmation of P&G-Phil.'s implied authority from the very beginning. A sovereign government should act honorably and fairly at all times, even vis-a-
vis taxpayers.
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer" within the meaning of Section 309, NIRC, and as impliedly authorized to file the claim for refund
and the suit to recover such claim.
II
1. We turn to the principal substantive question before us: the applicability to the dividend remittances by P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate provided for in the following portion of Section
24 (b) (1) of the NIRC:
(b) Tax on foreign corporations.
(1) Non-resident corporation. A foreign corporation not engaged in trade and business in the Philippines, . . ., shall pay a tax equal to 35% of the gross income receipt during its taxable year from all
sources within the Philippines, as . . . dividends . . . Provided, still further, that on dividends received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends,
which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the condition that the country in which the non-resident foreign corporation, is domiciled shall allow a credit
against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on
corporations and the tax (15%) on dividends as provided in this Section . . .
The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country of domicile of
the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country by the foreign
stockholder corporation. In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the
Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to twenty (20)
percentage points which represents the difference between the regular thirty-five percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate.
It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in making applicable the
preferred divided tax rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the parent-corporation to have paid the twenty (20) percentage points of dividend tax
waived by the Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty (20) percentage points waived by the Philippines.
2. The question arises: Did the US law comply with the above requirement? The relevant provisions of the US Intemal Revenue Code ("Tax Code") are the following:
Sec. 901 Taxes of foreign countries and possessions of United States.

(a) Allowance of credit. If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the applicable limitation of section 904, be credited with the
amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902 and 960. Such choice for any taxable year
may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not
be allowed against the tax imposed by section 531 (relating to the tax on accumulated earnings), against the additional tax imposed for the taxable year under section 1333 (relating to war loss
recoveries) or under section 1351 (relating to recoveries of foreign expropriation losses), or against the personal holding company tax imposed by section 541.
(b) Amount allowed. Subject to the applicable limitation of section 904, the following amounts shall be allowed as the credit under subsection (a):
(a) Citizens and domestic corporations. In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war profits, and excess profits taxes paid
or accrued during the taxable year to any foreign country or to any possession of the United States; and
xxx xxx xxx
Sec. 902. Credit for corporate stockholders in foreign corporation.
(A) Treatment of Taxes Paid by Foreign Corporation. For purposes of this subject, a domestic corporation which owns at least 10 percent of the voting stock of a foreign corporation
from which itreceives dividends in any taxable year shall
xxx xxx xxx
(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (b)] of a year for which such foreign corporation is a less
developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to
any foreign country or to any possession of the United States on or with respect to such accumulated profits, which the amount of such dividends bears to the amount of such
accumulated profits.
xxx xxx xxx
(c) Applicable Rules
(1) Accumulated profits defined. For purposes of this section, the term "accumulated profits" means with respect to any foreign corporation,
(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed without reduction by the amount of the income, war profits, and
excess profits taxes imposed on or with respect to such profits or income by any foreign country. . . .; and
(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of the income, war profits, and excess profits taxes imposed on or
with respect to suchprofits or income.
The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years such dividends were paid, treating dividends paid in the first 20 days of
any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shows otherwise), and in other respects treating dividends as having
been paid from the most recently accumulated gains, profits, or earning. . . . (Emphasis supplied)

Close examination of the above quoted provisions of the US Tax Code 7


shows the following:
a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of the dividend tax actually paid
(i.e., withheld) from the dividend remittances to P&G-USA;
b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax credit 8 for a proportionate part of the corporate income tax
actually paid to the Philippines by P&G-Phil.

The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income taxalthough that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA.
This "deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax was in fact paid and deducted from revenues earned in the Philippines, thus reducing the
amount remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a part of the economic
cost of carrying on business operations in the Philippines through the medium of P&G-Phil. and here earning profits. What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but
instead Philippine corporate income taxes actually paid here by P&G-Phil., which are very real indeed.

It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G Phil. but "deemed
paid" by P&G-USA, are tax credits available or applicable against the US corporate income tax of P&G-USA. These tax credits are allowed because of the US congressional desire to avoid or reduce
double taxation of the same income stream. 9

In order to determine whether US tax law complies with the requirements for applicability of the reduced or preferential fifteen percent (15%) dividend tax rate under Section 24 (b) (1), NIRC, it is
necessary:
a. to determine the amount of the 20 percentage points dividend tax waived by the Philippine government under Section 24 (b) (1), NIRC, and which hence goes to P&G-USA;
b. to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&G-USA; and
c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal to the amount of the dividend tax waived by the Philippine Government.
Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically determined in the following manner:
P100.00 Pretax net corporate income earned by P&G-Phil.
x 35% Regular Philippine corporate income tax rate

P35.00 Paid to the BIR by P&G-Phil. as Philippine
corporate income tax.
P100.00
-35.00

P65.00 Available for remittance as dividends to P&G-USA
P65.00 Dividends remittable to P&G-USA
x 35% Regular Philippine dividend tax rate under Section 24
(b) (1), NIRC
P22.75 Regular dividend tax
P65.00 Dividends remittable to P&G-USA
x 15% Reduced dividend tax rate under Section 24 (b) (1), NIRC

P9.75 Reduced dividend tax
P22.75 Regular dividend tax under Section 24 (b) (1), NIRC
-9.75 Reduced dividend tax under Section 24 (b) (1), NIRC

P13.00 Amount of dividend tax waived by Philippine
===== government under Section 24 (b) (1), NIRC.
Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount (a) is also the minimum amount of the "deemed paid" tax credit that US tax law shall allow if
P&G-USA is to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC.
Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under Section 902, Tax Code, may be computed arithmetically as follows:

P65.00 Dividends remittable to P&G-USA


- 9.75 Dividend tax withheld at the reduced (15%) rate

P55.25 Dividends actually remitted to P&G-USA
P35.00 Philippine corporate income tax paid by P&G-Phil.
to the BIR

Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
= x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. to its US parent P&G-USA, a tax credit of P29.75 is allowed by Section 902 US Tax Code for
Philippine corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned subsidiary.
Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government), Section 902, US Tax Code, specifically and clearly complies with the requirements of
Section 24 (b) (1), NIRC.
3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of Sections 901 and 902 of the US Tax Code is identical
with the reading of the BIR of Sections 901 and 902 as shown by administrative rulings issued by the BIR.
The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner of Intemal Revenue Efren I. Plana, later Associate Justice of this Court, the relevant portion of
which stated:
However, after a restudy of the decision in the American Chicle Company case and the provisions of Section 901 and 902 of the U.S. Internal Revenue Code, we find merit in your
contention that our computation of the credit which the U.S. tax law allows in such cases is erroneous as the amount of tax "deemed paid" to the Philippine government for purposes of
credit against the U.S. tax by the recipient of dividends includes a portion of the amount of income tax paid by the corporation declaring the dividend in addition to the tax withheld from
the dividend remitted. In other words, the U.S. government will allow a credit to the U.S. corporation or recipient of the dividend, in addition to the amount of tax actually withheld, a portion
of the income tax paid by the corporation declaring the dividend. Thus, if a Philippine corporation wholly owned by a U.S. corporation has a net income of P100,000, it will pay P25,000
Philippine income tax thereon in accordance with Section 24(a) of the Tax Code. The net income, after income tax, which is P75,000, will then be declared as dividend to the U.S.
corporation at 15% tax, or P11,250, will be withheld therefrom. Under the aforementioned sections of the U.S. Internal Revenue Code, U.S. corporation receiving the dividend can utilize
as credit against its U.S. tax payable on said dividends the amount of P30,000 composed of:
(1) The tax "deemed paid" or indirectly paid on the dividend arrived at as follows:
P75,000 x P25,000 = P18,750

100,000 **
(2) The amount of 15% of
P75,000 withheld = 11,250

P30,000
The amount of P18,750 deemed paid and to be credited against the U.S. tax on the dividends received by the U.S. corporation from a Philippine subsidiary is clearly more than 20%
requirement ofPresidential Decree No. 369 as 20% of P75,000.00 the dividends to be remitted under the above example, amounts to P15,000.00 only.
In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in the sense that the dividends to be remitted by your client to its parent company shall
be subject to the withholding tax at the rate of 15% only.
This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S. Federal Tax Code, which are the bases of the ruling, are not revoked, amended and
modified, the effect of which will reduce the percentage of tax deemed paid and creditable against the U.S. tax on dividends remitted by a foreign corporation to a U.S. corporation.
(Emphasis supplied)
The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods Corporation and BIR Ruling dated 20 October 1987 addressed to Castillo, Laman, Tan and
Associates. In other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the case at bar was pending before the CTA and this Court.
4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in Section 902, US Tax Code, is exactly the same "deemed paid" tax credit found in our NIRC and
which Philippine tax law allows to Philippine corporations which have operations abroad (say, in the United States) and which, therefore, pay income taxes to the US government.
Section 30 (c) (3) and (8), NIRC, provides:
(d) Sec. 30. Deductions from Gross Income.In computing net income, there shall be allowed as deductions . . .
(c) Taxes. . . .
xxx xxx xxx
(3) Credits against tax for taxes of foreign countries. If the taxpayer signifies in his return his desire to have the benefits of this paragraphs, the tax imposed by this Title shall be
credited with . . .
(a) Citizen and Domestic Corporation. In the case of a citizen of the Philippines and of domestic corporation, the amount of net income, war profits or excess profits, taxes paid or
accrued during the taxable year to any foreign country. (Emphasis supplied)
Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for taxes actually paid by it to the US governmente.g., for taxes collected by the US government
on dividend remittances to the Philippine corporation. This Section of the NIRC is the equivalent of Section 901 of the US Tax Code.
Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as follows:
(8) Taxes of foreign subsidiary. For the purposes of this subsection a domestic corporation which owns a majority of the voting stock of a foreign corporation from which it receives
dividends in any taxable year shall be deemed to have paid the same proportion of any income, war-profits, or excess-profits taxes paid by such foreign corporation to any foreign country,
upon or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which the amount of such dividends bears to the amount of such
accumulated profits: Provided, That the amount of tax deemed to have been paid under this subsection shall in no case exceed the same proportion of the tax against which credit is
taken which the amount of such dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are included. The term"accumulated profits"
when used in this subsection reference to a foreign corporation, means the amount of its gains, profits, or income in excess of the income, war-profits, and excess-profits taxes imposed
upon or with respect to such profits or income; and the Commissioner of Internal Revenue shall have full power to determine from the accumulated profits of what year or years such
dividends were paid; treating dividends paid in the first sixty days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction
shown otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earnings. In the case of a foreign corporation, the
income, war-profits, and excess-profits taxes of which are determined on the basis of an accounting period of less than one year, the word "year" as used in this subsection shall be
construed to mean such accounting period. (Emphasis supplied)
Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid to the US by the US
subsidiary of a Philippine-parent corporation. The Philippine parent or corporate stockholder is "deemed" under our NIRC to have paid a proportionate part of the US corporate income tax paid by its
US subsidiary, although such US tax was actually paid by the subsidiary and not by the Philippine parent.
Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law to P&G-USA, is the same "deemed paid" tax credit that Philippine law allows to a Philippine corporation with
a wholly- or majority-owned subsidiary in (for instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax Code, is no more a credit for "phantom taxes" than is the "deemed paid" tax credit
granted in Section 30 (c) (8), NIRC.
III
1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case was the regular thirty-five percent (35%) rate rather than the reduced rate of fifteen percent (15%), held that
P&G-Phil. had failed to prove that its parent, P&G-USA, had in fact been given by the US tax authorities a "deemed paid" tax credit in the amount required by Section 24 (b) (1), NIRC.
We believe, in the first place, that we must distinguish between the legal question before this Court from questions of administrative implementation arising after the legal question has been answered. The basic
legal issue is of course, this: which is the applicable dividend tax rate in the instant case: the regular thirty-five percent (35%) rate or the reduced fifteen percent (15%) rate? The question of whether or not P&G-
USA is in fact given by the US tax authorities a "deemed paid" tax credit in the required amount, relates to the administrative implementation of the applicable reduced tax rate.
In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have actually been granted before the applicable dividend tax rate goes down from thirty-five percent
(35%) to fifteen percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that the USA "shall allow a credit against the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither statutory provision nor revenue regulation issued by the Secretary of Finance requiring the actual grant of the
"deemed paid" tax credit by the US Internal Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend rate becomes applicable. Section 24 (b) (1), NIRC, does not create a tax exemption
nor does it provide a tax credit; it is a provision which specifies when a particular (reduced) tax rate is legally applicable.

In the third place, the position originally taken by the Second Division results in a severe practical problem of administrative circularity. The Second Division in effect held that the reduced dividend tax rate is not
applicable until the US tax credit for "deemed paid" taxes is actually given in the required minimum amount by the US Internal Revenue Service to P&G-USA. But, the US "deemed paid" tax credit cannot be given
by the US tax authorities unless dividends have actually been remitted to the US, which means that the Philippine dividend tax, at the rate here applicable, was actually imposed and collected. 11
It is this
practical or operating circularity that is in fact avoided by our BIR when it issues rulings that the tax laws of particular foreign jurisdictions (e.g.,
Republic of Vanuatu 12Hongkong, 13 Denmark, 14 etc.) comply with the requirements set out in Section 24 (b) (1), NIRC, for applicability of the
fifteen percent (15%) tax rate. Once such a ruling is rendered, the Philippine subsidiary begins to withhold at the reduced dividend tax rate.
A requirement relating to administrative implementation is not properly imposed as a condition for the applicability, as a matter of law, of a
particular tax rate. Upon the other hand, upon the determination or recognition of the applicability of the reduced tax rate, there is nothing to
prevent the BIR from issuing implementing regulations that would require P&G Phil., or any Philippine corporation similarly situated, to certify
to the BIR the amount of the "deemed paid" tax credit actually subsequently granted by the US tax authorities to P&G-USA or a US parent
corporation for the taxable year involved. Since the US tax laws can and do change, such implementing regulations could also provide that
failure of P&G-Phil. to submit such certification within a certain period of time, would result in the imposition of a deficiency assessment for the
twenty (20) percentage points differential. The task of this Court is to settle which tax rate is applicable, considering the state of US law at a
given time. We should leave details relating to administrative implementation where they properly belong with the BIR.
2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason alone, necessarily the correct
reading of the statute. There are many tax statutes or provisions which are designed, not to trigger off an instant surge of revenues, but rather
to achieve longer-term and broader-gauge fiscal and economic objectives. The task of our Court is to give effect to the legislative design and
objectives as they are written into the statute even if, as in the case at bar, some revenues have to be foregone in that process.
The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-five percent (35%) dividend rate to fifteen
percent (15%) are set out in the preambular clauses of P.D. No. 369 which amended Section 24 (b) (1), NIRC, into its present form:
WHEREAS, it is imperative to adopt measures responsive to the requirements of a developing economyforemost of which is
the financing of economic development programs;
WHEREAS, nonresident foreign corporations with investments in the Philippines are taxed on their earnings from dividends at the
rate of 35%;
WHEREAS, in order to encourage more capital investment for large projects an appropriate tax need be imposed on dividends
received by non-resident foreign corporations in the same manner as the tax imposed on interest on foreign loans;
xxx xxx xxx
(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment in the Philippines by reducing the tax cost
of earning profits here and thereby increasing the net dividends remittable to the investor. The foreign investor, however, would not benefit
from the reduction of the Philippine dividend tax rate unless its home country gives it some relief from double taxation (i.e., second-tier
taxation) (the home country would simply have more "post-R.P. tax" income to subject to its own taxing power) by allowing the investor
additional tax credits which would be applicable against the tax payable to such home country. Accordingly, Section 24 (b) (1), NIRC, requires
the home or domiciliary country to give the investor corporation a "deemed paid" tax credit at least equal in amount to the twenty (20)
percentage points of dividend tax foregone by the Philippines, in the assumption that a positive incentive effect would thereby be felt by the
investor.
The net effect upon the foreign investor may be shown arithmetically in the following manner:
P65.00 Dividends remittable to P&G-USA (please
see page 392 above
- 9.75 Reduced R.P. dividend tax withheld by P&G-Phil.

P55.25 Dividends actually remitted to P&G-USA
P55.25
x 46% Maximum US corporate income tax rate

P25.415US corporate tax payable by P&G-USA
without tax credits
P25.415
- 9.75 US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)

P15.66 US corporate income tax payable after Section 901
tax credit.
P55.25
- 15.66

P39.59 Amount received by P&G-USA net of R.P. and U.S.
===== taxes without "deemed paid" tax credit.
P25.415
- 29.75 "Deemed paid" tax credit under Section 902 US
Tax Code (please see page 18 above)
- 0 - US corporate income tax payable on dividends
====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.
P55.25 Amount received by P&G-USA net of RP and US
====== taxes after Section 902 tax credit.
It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the US corporate income tax payable on
the dividends remitted by P&G-Phil. The result, in fine, could be that P&G-USA would after US tax credits, still wind up with P55.25, the full
amount of the dividends remitted to P&G-USA net of Philippine taxes. In the calculation of the Philippine Government, this should encourage
additional investment or re-investment in the Philippines by P&G-USA.
3. It remains only to note that under the Philippines-United States Convention "With Respect to Taxes on Income," 15the Philippines, by a
treaty commitment, reduced the regular rate of dividend tax to a maximum of twenty percent (20%) of the gross amount of dividends paid to
US parent corporations:
Art 11. Dividends
xxx xxx xxx
(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a
resident of the other Contracting State shall not exceed
(a) 25 percent of the gross amount of the dividend; or
(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation's
taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10
percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation.
xxx xxx xxx
(Emphasis supplied)
The Tax Convention, at the same time, established a treaty obligation on the part of the United States that it "shall allow" to a US parent
corporation receiving dividends from its Philippine subsidiary "a [tax] credit for the appropriate amount of taxes paid or accrued to the
Philippines by the Philippine [subsidiary] . 16 This is, of course, precisely the "deemed paid" tax credit provided for in Section 902, US Tax
Code, discussed above. Clearly, there is here on the part of the Philippines a deliberate undertaking to reduce the regular dividend tax rate of
twenty percent (20%) is a maximum rate, there is still a differential or additional reduction of five (5) percentage points which compliance of US
law (Section 902) with the requirements of Section 24 (b) (1), NIRC, makes available in respect of dividends from a Philippine subsidiary.
We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it seeks.
WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for Reconsideration dated 11 May 1988, to
SET ASIDE the Decision of the and Division of the Court promulgated on 15 April 1988, and in lieu thereof, to REINSTATE and AFFIRM the
Decision of the Court of Tax Appeals in CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for Review for lack of merit. No
pronouncement as to costs.
Narvasa, Gutierrez, Jr., Grio-Aquino, Medialdea and Romero, JJ., concur.
Fernan, C.J., is on leave.

Separate Opinions

CRUZ, J., concurring:


I join Mr. Justice Feliciano in his excellent analysis of the difficult issues we are now asked to resolve.
As I understand it, the intention of Section 24 (b) of our Tax Code is to attract foreign investors to this country by reducing their 35% dividend
tax rate to 15% if their own state allows them a deemed paid tax credit at least equal in amount to the 20% waived by the Philippines. This tax
credit would offset the tax payable by them on their profits to their home state. In effect, both the Philippines and the home state of the foreign
investors reduce their respective tax "take" of those profits and the investors wind up with more left in their pockets. Under this arrangement,
the total taxes to be paid by the foreign investors may be confined to the 35% corporate income tax and 15% dividend tax only, both payable
to the Philippines, with the US tax liability being offset wholly or substantially by the US "deemed paid" tax credits.
Without this arrangement, the foreign investors will have to pay to the local state (in addition to the 35% corporate income tax) a 35% dividend
tax and another 35% or more to their home state or a total of 70% or more on the same amount of dividends. In this circumstance, it is not
likely that many such foreign investors, given the onerous burden of the two-tier system, i.e., local state plus home state, will be encouraged to
do business in the local state.
It is conceded that the law will "not trigger off an instant surge of revenue," as indeed the tax collectible by the Republic from the foreign
investor is considerably reduced. This may appear unacceptable to the superficial viewer. But this reduction is in fact the price we have to
offer to persuade the foreign company to invest in our country and contribute to our economic development. The benefit to us may not be
immediately available in instant revenues but it will be realized later, and in greater measure, in terms of a more stable and robust economy.

BIDIN, J., concurring:


I agree with the opinion of my esteemed brother, Mr. Justice Florentino P. Feliciano. However, I wish to add some observations of my own,
since I happen to be the ponente in Commissioner of Internal Revenue v. Wander Philippines, Inc. (160 SCRA 573 [1988]), a case which
reached a conclusion that is diametrically opposite to that sought to be reached in the instant Motion for Reconsideration.
1. In page 5 of his dissenting opinion, Mr. Justice Edgardo L. Paras argues that the failure of petitioner Commissioner of Internal Revenue to
raise before the Court of Tax Appeals the issue of who should be the real party in interest in claiming a refund cannot prejudice the
government, as such failure is merely a procedural defect; and that moreover, the government can never be in estoppel, especially in matters
involving taxes. In a word, the dissenting opinion insists that errors of its agents should not jeopardize the government's position.
The above rule should not be taken absolutely and literally; if it were, the government would never lose any litigation which is clearly not true.
The issue involved here is not merely one of procedure; it is also one of fairness: whether the government should be subject to the same
stringent conditions applicable to an ordinary litigant. As the Court had declared in Wander:
. . . To allow a litigant to assume a different posture when he comes before the court and challenge the position he had accepted at
the administrative level, would be to sanction a procedure whereby the
Court which is supposed to review administrative determinations would not review, but determine and decide for the first time, a
question not raised at the administrative forum. . . . (160 SCRA at 566-577)
Had petitioner been forthright earlier and required from private respondent proof of authority from its parent corporation, Procter and Gamble
USA, to prosecute the claim for refund, private respondent would doubtless have been able to show proof of such authority. By any account, it
would be rank injustice not at this stage to require petitioner to submit such proof.
2. In page 8 of his dissenting opinion, Paras, J., stressed that private respondent had failed: (1) to show the actual amount credited by the US
government against the income tax due from P & G USA on the dividends received from private respondent; (2) to present the 1975 income
tax return of P & G USA when the dividends were received; and (3) to submit any duly authenticated document showing that the US
government credited the 20% tax deemed paid in the Philippines.
I agree with the main opinion of my colleague, Feliciano J., specifically in page 23 et seq. thereof, which, as I understand it, explains that the
US tax authorities are unable to determine the amount of the "deemed paid" credit to be given P & G USA so long as the numerator of the
fraction, i.e., dividends actually remitted by P & G-Phil. to P & G USA, is still unknown. Stated in other words, until dividends have actually
been remitted to the US (which presupposes an actual imposition and collection of the applicable Philippine dividend tax rate), the US tax
authorities cannot determine the "deemed paid" portion of the tax credit sought by P & G USA. To require private respondent to show
documentary proof of its parent corporation having actually received the "deemed paid" tax credit from the proper tax authorities, would be like
putting the cart before the horse. The only way of cutting through this (what Feliciano, J., termed) "circularity" is for our BIR to issue rulings (as
they have been doing) to the effect that the tax laws of particular foreign jurisdictions, e.g., USA, comply with the requirements in our tax code
for applicability of the reduced 15% dividend tax rate. Thereafter, the taxpayer can be required to submit, within a reasonable period, proof of
the amount of "deemed paid" tax credit actually granted by the foreign tax authority. Imposing such a resolutory condition should resolve the
knotty problem of circularity.
3. Page 8 of the dissenting opinion of Paras, J., further declares that tax refunds, being in the nature of tax exemptions, are to be
construed strictissimi juris against the person or entity claiming the exemption; and that refunds cannot be permitted to exist upon "vague
implications."
Notwithstanding the foregoing canon of construction, the fundamental rule is still that a judge must ascertain and give effect to the legislative
intent embodied in a particular provision of law. If a statute (including a tax statute reducing a certain tax rate) is clear, plain and free from
ambiguity, it must be given its ordinary meaning and applied without interpretation. In the instant case, the dissenting opinion of Paras, J.,
itself concedes that the basic purpose of Pres. Decree No. 369, when it was promulgated in 1975 to amend Section 24(b), [11 of the National
Internal Revenue Code, was "to decrease the tax liability" of the foreign capital investor and thereby to promote more inward foreign
investment. The same dissenting opinion hastens to add, however, that the granting of a reduced dividend tax rate "is premised on
reciprocity."
4. Nowhere in the provisions of P.D. No. 369 or in the National Internal Revenue Code itself would one find reciprocity specified as a condition
for the granting of the reduced dividend tax rate in Section 24 (b), [1], NIRC. Upon the other hand, where the law-making authority intended to
impose a requirement of reciprocity as a condition for grant of a privilege, the legislature does so expressly and clearly. For example, the
gross estate of non-citizens and non-residents of the Philippines normally includes intangible personal property situated in the Philippines, for
purposes of application of the estate tax and donor's tax. However, under Section 98 of the NIRC (as amended by P.D. 1457), no taxes will be
collected by the Philippines in respect of such intangible personal property if the law or the foreign country of which the decedent was a citizen
and resident at the time of his death allows a similar exemption from transfer or death taxes in respect of intangible personal property located
in such foreign country and owned by Philippine citizens not residing in that foreign country.
There is no statutory requirement of reciprocity imposed as a condition for grant of the reduced dividend tax rate of 15% Moreover, for the
Court to impose such a requirement of reciprocity would be to contradict the basic policy underlying P.D. 369 which amended Section 24(b),
[1], NIRC, P.D. 369 was promulgated in the effort to promote the inflow of foreign investment capital into the Philippines. A requirement of
reciprocity, i.e., a requirement that the U.S. grant a similar reduction of U.S. dividend taxes on remittances by the U.S. subsidiaries of
Philippine corporations, would assume a desire on the part of the U.S. and of the Philippines to attract the flow of Philippine capital into the
U.S.. But the Philippines precisely is a capital importing, and not a capital exporting country. If the Philippines had surplus capital to export, it
would not need to import foreign capital into the Philippines. In other words, to require dividend tax reciprocity from a foreign jurisdiction would
be to actively encourage Philippine corporations to invest outside the Philippines, which would be inconsistent with the notion of attracting
foreign capital into the Philippines in the first place.
5. Finally, in page 15 of his dissenting opinion, Paras, J., brings up the fact that:
Wander cited as authority a BIR ruling dated May 19, 1977, which requires a remittance tax of only 15%. The mere fact that in this
Procter and Gamble case, the BIR desires to charge 35% indicates that the BIR ruling cited in Wander has been obviously discarded
today by the BIR. Clearly, there has been a change of mind on the part of the BIR.
As pointed out by Feliciano, J., in his main opinion, even while the instant case was pending before the Court of Tax Appeals and this Court,
the administrative rulings issued by the BIR from 1976 until as late as 1987, recognized the "deemed paid" credit referred to in Section 902 of
the U.S. Tax Code. To date, no contrary ruling has been issued by the BIR.
For all the foregoing reasons, private respondent's Motion for Reconsideration should be granted and I vote accordingly.

PARAS, J., dissenting:


I dissent.
The decision of the Second Division of this Court in the case of "Commissioner of Internal Revenue vs. Procter & Gamble Philippine
Manufacturing Corporation, et al.," G.R. No. 66838, promulgated on April 15, 1988 is sought to be reviewed in the Motion for Reconsideration
filed by private respondent. Procter & Gamble Philippines (PMC-Phils., for brevity) assails the Court's findings that:
(a) private respondent (PMC-Phils.) is not a proper party to claim the refund/tax credit;
(b) there is nothing in Section 902 or other provision of the US Tax Code that allows a credit against the U.S. tax due from PMC-
U.S.A. of taxes deemed to have been paid in the Phils. equivalent to 20% which represents the difference between the regular tax of
35% on corporations and the tax of 15% on dividends;
(c) private respondent failed to meet certain conditions necessary in order that the dividends received by the non-resident parent
company in the U.S. may be subject to the preferential 15% tax instead of 35%. (pp. 200-201, Motion for Reconsideration)
Private respondent's position is based principally on the decision rendered by the Third Division of this Court in the case of "Commissioner of
Internal Revenue vs. Wander Philippines, Inc. and the Court of Tax Appeals," G.R. No. 68375, promulgated likewise on April 15, 1988 which
bears the same issues as in the case at bar, but held an apparent contrary view. Private respondent advances the theory that since the
Wander decision had already become final and executory it should be a precedent in deciding similar issues as in this case at hand.
Yet, it must be noted that the Wander decision had become final and executory only by reason of the failure of the petitioner therein to file its
motion for reconsideration in due time. Petitioner received the notice of judgment on April 22, 1988 but filed a Motion for Reconsideration only
on June 6, 1988, or after the decision had already become final and executory on May 9, 1988. Considering that entry of final judgment had
already been made on May 9, 1988, the Third Division resolved to note without action the said Motion. Apparently therefore, the merits of the
motion for reconsideration were not passed upon by the Court.
The 1987 Constitution provides that a doctrine or principle of law previously laid down either en banc or in Division may be modified or
reversed by the court en banc. The case is now before this Court en banc and the decision that will be handed down will put to rest the
present controversy.
It is true that private respondent, as withholding agent, is obliged by law to withhold and to pay over to the Philippine government the tax on
the income of the taxpayer, PMC-U.S.A. (parent company). However, such fact does not necessarily connote that private respondent is the
real party in interest to claim reimbursement of the tax alleged to have been overpaid. Payment of tax is an obligation physically passed off by
law on the withholding agent, if any, but the act of claiming tax refund is a right that, in a strict sense, belongs to the taxpayer which is private
respondent's parent company. The role or function of PMC-Phils., as the remitter or payor of the dividend income, is merely to insure the
collection of the dividend income taxes due to the Philippine government from the taxpayer, "PMC-U.S.A.," the non-resident foreign
corporation not engaged in trade or business in the Philippines, as "PMC-U.S.A." is subject to tax equivalent to thirty five percent (35%) of the
gross income received from "PMC-Phils." in the Philippines "as . . . dividends . . ." (Sec. 24 [b], Phil. Tax Code). Being a mere withholding
agent of the government and the real party in interest being the parent company in the United States, private respondent cannot claim refund
of the alleged overpaid taxes. Such right properly belongs to PMC-U.S.A. It is therefore clear that as held by the Supreme Court in a series of
cases, the action in the Court of Tax Appeals as well as in this Court should have been brought in the name of the parent company as
petitioner and not in the name of the withholding agent. This is because the action should be brought under the name of the real party in
interest. (See Salonga v. Warner Barnes, & Co., Ltd., 88 Phil. 125; Sutherland, Code Pleading, Practice, & Forms, p. 11; Ngo The Hua v.
Chung Kiat Hua, L-17091, Sept. 30, 1963, 9 SCRA 113; Gabutas v. Castellanes, L-17323, June 23, 1965, 14 SCRA 376; Rep. v. PNB, L-
16485, January 30, 1945).
Rule 3, Sec. 2 of the Rules of Court provides:
Sec. 2. Parties in interest. Every action must be prosecuted and defended in the name of the real party in interest. All persons
having an interest in the subject of the action and in obtaining the relief demanded shall be joined as plaintiffs. All persons who claim
an interest in the controversy or the subject thereof adverse to the plaintiff, or who are necessary to a complete determination or
settlement of the questions involved therein shall be joined as defendants.
It is true that under the Internal Revenue Code the withholding agent may be sued by itself if no remittance tax is paid, or if what was paid is
less than what is due. From this, Justice Feliciano claims that in case of an overpayment(or claim for refund) the agent must be given the right
to sue the Commissioner by itself (that is, the agent here is also a real party in interest). He further claims that to deny this right would
be unfair. This is not so. While payment of the tax due is an OBLIGATION of the agent the obtaining of a refund is a RIGHT. While every
obligation has a corresponding right (and vice-versa), the obligation to pay the complete tax has the corresponding right of the government to
demand the deficiency; and the right of the agent to demand a refund corresponds to the government's duty to refund. Certainly,
the obligation of the withholding agent to pay in full does not correspond to its right to claim for the refund. It is evident therefore that the real
party in interest in this claim for reimbursement is the principal (the mother corporation) and NOT the agent.
This suit therefore for refund must be DISMSSED.
In like manner, petitioner Commissioner of Internal Revenue's failure to raise before the Court of Tax Appeals the issue relating to the real
party in interest to claim the refund cannot, and should not, prejudice the government. Such is merely a procedural defect. It is axiomatic that
the government can never be in estoppel, particularly in matters involving taxes. Thus, for example, the payment by the tax-payer of income
taxes, pursuant to a BIR assessment does not preclude the government from making further assessments. The errors or omissions of certain
administrative officers should never be allowed to jeopardize the government's financial position. (See: Phil. Long Distance Tel. Co. v. Coll. of
Internal Revenue, 90 Phil. 674; Lewin v. Galang, L-15253, Oct. 31, 1960; Coll. of Internal Revenue v. Ellen Wood McGrath, L-12710, L-12721,
Feb. 28, 1961; Perez v. Perez, L-14874, Sept, 30, 1960; Republic v. Caballero, 79 SCRA 179; Favis v. Municipality of Sabongan, L-26522,
Feb. 27, 1963).
As regards the issue of whether PMC-U.S.A. is entitled under the U.S. Tax Code to a United States Foreign Tax Credit equivalent to at least
20 percentage paid portion spared or waived as otherwise deemed waived by the government, We reiterate our ruling that while apparently, a
tax-credit is given, there is actually nothing in Section 902 of the U.S. Internal Revenue Code, as amended by Public Law-87-834 that would
justify tax return of the disputed 15% to the private respondent. This is because the amount of tax credit purportedly being allowed is not fixed
or ascertained, hence we do not know whether or not the tax credit contemplated is within the limits set forth in the law. While the
mathematical computations in Justice Feliciano's separate opinion appear to be correct, the computations suffer from a basic defect, that is we
have no way of knowing or checking the figure used as premises. In view of the ambiguity of Sec. 902 itself, we can conclude that no real tax
credit was really intended. In the interpretation of tax statutes, it is axiomatic that as between the interest of multinational corporations and the
interest of our own government, it would be far better, in the absence of definitive guidelines, to favor the national interest. As correctly pointed
out by the Solicitor General:
. . . the tax-sparing credit operates on dummy, fictional or phantom taxes, being considered as if paid by the foreign taxing authority,
the host country.
In the context of the case at bar, therefore, the thirty five (35%) percent on the dividend income of PMC-U.S.A. would be reduced to
fifteen (15%) percent if & only if reciprocally PMC-U.S.A's home country, the United States, not only would allow against PMC-
U.SA.'s U.S. income tax liability a foreign tax credit for the fifteen (15%) percentage-point portion of the thirty five (35%) percent Phil.
dividend tax actually paid or accrued but also would allow a foreign tax "sparing" credit for the twenty (20%)' percentage-point portion
spared, waived, forgiven or otherwise deemed as if paid by the Phil. govt. by virtue of the "tax credit sparing" proviso of Sec. 24(b),
Phil. Tax Code." (Reply Brief, pp. 23-24; Rollo, pp. 239-240).
Evidently, the U.S. foreign tax credit system operates only on foreign taxes actually paid by U.S. corporate taxpayers, whether directly or
indirectly. Nowhere under a statute or under a tax treaty, does the U.S. government recognize much less permit any foreign tax credit for
spared or ghost taxes, as in reality the U.S. foreign-tax credit mechanism under Sections 901-905 of the U.S. Intemal Revenue Code does not
apply to phantom dividend taxes in the form of dividend taxes waived, spared or otherwise considered "as if" paid by any foreign taxing
authority, including that of the Philippine government.
Beyond, that, the private respondent failed: (1) to show the actual amount credited by the U.S. government against the income tax due from
PMC-U.S.A. on the dividends received from private respondent; (2) to present the income tax return of its parent company for 1975 when the
dividends were received; and (3) to submit any duly authenticated document showing that the U.S. government credited the 20% tax deemed
paid in the Philippines.
Tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of sovereign authority and to be
construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in
his favor and he must be able to justify his claim by the clearest grant of organic or statute law . . . and cannot be permitted to exist upon
vague implications. (Asiatic Petroleum Co. v. Llanes, 49 Phil. 466; Northern Phil Tobacco Corp. v. Mun. of Agoo, La Union, 31 SCRA 304;
Rogan v. Commissioner, 30 SCRA 968; Asturias Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co.
Inc. v. Commissioner of Custom, 44 SCRA 122). Thus, when tax exemption is claimed, it must be shown indubitably to exist, for every
presumption is against it, and a well founded doubt is fatal to the claim (Farrington v. Tennessee & Country Shelby, 95 U.S. 679, 686; Manila
Electric Co. v. Vera, L-29987, Oct. 22, 1975; Manila Electric Co. v. Tabios, L-23847, Oct. 22, 1975, 67 SCRA 451).
It will be remembered that the tax credit appertaining to remittances abroad of dividend earned here in the Philippines was amplified in
Presidential Decree No. 369 promulgated in 1975, the purpose of which was to "encourage more capital investment for large projects." And its
ultimate purpose is to decrease the tax liability of the corporation concerned. But this granting of a preferential right is premised on reciprocity,
without which there is clearly a derogation of our country's financial sovereignty. No such reciprocity has been proved, nor does it actually
exist. At this juncture, it would be useful to bear in mind the following observations:
The continuing and ever-increasing transnational movement of goods and services, the emergence of multinational corporations and the rise
in foreign investments has brought about tremendous pressures on the tax system to strengthen its competence and capability to deal
effectively with issues arising from the foregoing phenomena.
International taxation refers to the operationalization of the tax system on an international level. As it is, international taxation deals with the
tax treatment of goods and services transferred on a global basis, multinational corporations and foreign investments.
Since the guiding philosophy behind international trade is free flow of goods and services, it goes without saying that the principal objective
of international taxation is to see through this ideal by way of feasible taxation arrangements which recognize each country's sovereignty in the
matter of taxation, the need for revenue and the attainment of certain policy objectives.
The institution of feasible taxation arrangements, however, is hard to come by. To begin with, international tax subjects are obviously more
complicated than their domestic counter-parts. Hence, the devise of taxation arrangements to deal with such complications requires a welter
of information and data build-up which generally are not readily obtainable and available. Also, caution must be exercised so that whatever
taxation arrangements are set up, the same do not get in the way of free flow of goods and services, exchange of technology, movement of
capital and investment initiatives.
A cardinal principle adhered to in international taxation is the avoidance of double taxation. The phenomenon of double taxation (i.e., taxing an
item more than once) arises because of global movement of goods and services. Double taxation also occurs because of overlaps in tax
jurisdictions resulting in the taxation of taxable items by the country of source or location (source or situs rule) and the taxation of the same
items by the country of residence or nationality of the taxpayer (domiciliary or nationality principle).
An item may, therefore, be taxed in full in the country of source because it originated there, and in another country because the recipient is a
resident or citizen of that country. If the taxes in both countries are substantial and no tax relief is offered, the resulting double taxation would
serve as a discouragement to the activity that gives rise to the taxable item.
As a way out of double taxation, countries enter into tax treaties. A tax treaty 1 is a bilateral convention (but may be made multilateral) entered
into between sovereign states for purposes of eliminating double taxation on income and capital, preventing fiscal evasion, promoting mutual
trade and investment, and according fair and equitable tax treatment to foreign residents or nationals. 2
A more general way of mitigating the impact of double taxation is to recognize the foreign tax either as a tax credit or an item of deduction.
Whether the recipient resorts to tax credit or deduction is dependent on the tax advantage or savings that would be derived therefrom.
A principal defect of the tax credit system is when low tax rates or special tax concessions are granted in a country for the obvious reason of encouraging foreign investments. For instance, if the usual tax rate is 35
percent but a concession rate accrues to the country of the investor rather than to the investor himself To obviate this, a tax sparing provision may be stipulated. With tax sparing, taxes exempted or reduced are
considered as having been fully paid.
To illustrate:
"X" Foreign Corporation income 100
Tax rate (35%) 35
RP income 100
Tax rate (general, 35%
concession rate, 15%) 15
1. "X" Foreign Corp. Tax Liability without Tax Sparing
"X" Foreign Corporation income 100
RP income 100
Total Income 200
"X" tax payable 70
Less: RP tax 15
Net "X" tax payable 55
2. "X" Foreign Corp. Tax Liability with Tax Sparing
"X" Foreign Corp. income 100
RP income 100
Total income 200
"X" Foreign Corp. tax payable 70
Less: RP tax (35% of 100, the
difference of 20% between 35% and 15%,
deemed paid to RP)
Net "X" Foreign Corp.
tax payable 35
By way of resume, We may say that the Wander decision of the Third Division cannot, and should not result in the reversal of the Procter & Gamble decision for the following reasons:
1) The Wander decision cannot serve as a precedent under the doctrine of stare decisis. It was promulgated on the same day the decision of the Second Division was promulgated, and while Wander has attained
finality this is simply because no motion for reconsideration thereof was filed within a reasonable period. Thus, said Motion for Reconsideration was theoretically never taken into account by said Third Division.
2) Assuming that stare decisis can apply, We reiterate what a former noted jurist Mr. Justice Sabino Padilla aptly said: "More pregnant than anything else is that the court shall be right." We hereby cite settled
doctrines from a treatise on Civil Law:
We adhere in our country to the doctrine of stare decisis (let it stand, et non quieta movere) for reasons of stability in the law. The doctrine, which is really "adherence to precedents," states that once a
case has been decided one way, then another case, involving exactly the same point at issue, should be decided in the same manner.
Of course, when a case has been decided erroneously such an error must not be perpetuated by blind obedience to the doctrine of stare decisis. No matter how sound a doctrine may be, and no
matter how long it has been followed thru the years, still if found to be contrary to law, it must be abandoned. The principle of stare decisis does not and should not apply when there is a conflict
between the precedent and the law (Tan Chong v. Sec. of Labor, 79 Phil. 249).
While stability in the law is eminently to be desired, idolatrous reverence for precedent, simply, as precedent, no longer rules. More pregnant than anything else is that the court shall be right (Phil.
Trust Co. v. Mitchell, 59 Phil. 30).
3) Wander deals with tax relations between the Philippines and Switzerland, a country with which we have a pending tax treaty; our Procter & Gamble case deals with relations between the Philippines and the
United States, a country with which we had no tax treaty, at the time the taxes herein were collected.
4) Wander cited as authority a BIR Ruling dated May 19, 1977, which requires a remittance tax of only 15%. The mere fact that in this Procter and Gamble case the B.I.R. desires to charge 35% indicates that the
B.I.R. Ruling cited in Wander has been obviously discarded today by the B.I.R. Clearly, there has been a change of mind on the part of the B.I.R.
5) Wander imposes a tax of 15% without stating whether or not reciprocity on the part of Switzerland exists. It is evident that without reciprocity the desired consequences of the tax credit under P.D. No. 369 would
be rendered unattainable.
6) In the instant case, the amount of the tax credit deductible and other pertinent financial data have not been presented, and therefore even were we inclined to grant the tax credit claimed, we find ourselves
unable to compute the proper amount thereof.
7) And finally, as stated at the very outset, Procter & Gamble Philippines or P.M.C. (Phils.) is not the proper party to bring up the case.
ACCORDINGLY, the decision of the Court of Tax Appeals should be REVERSED and the motion for reconsideration of our own decision should be DENIED.
Melencio-Herrera, Padilla, Regalado and Davide, Jr., JJ., concur.

# Separate Opinions
CRUZ, J., concurring:
I join Mr. Justice Feliciano in his excellent analysis of the difficult issues we are now asked to resolve.
As I understand it, the intention of Section 24(b) of our Tax Code is to attract foreign investors to this country by reducing their 35% dividend tax rate to 15% if their own state allows them a deemed paid tax credit at
least equal in amount to the 20% waived by the Philippines. This tax credit would offset the tax payable by them on their profits to their home state. In effect, both the Philippines and the home state of the foreign
investors reduce their respective tax "take" of those profits and the investors wind up with more left in their pockets. Under this arrangement, the total taxes to be paid by the foreign investors may be confined to the
35% corporate income tax and 15% dividend tax only, both payable to the Philippines, with the US tax hability being offset wholly or substantially by the Us "deemed paid' tax credits.
Without this arrangement, the foreign investors will have to pay to the local state (in addition to the 35% corporate income tax) a 35% dividend tax and another 35% or more to their home state or a total of 70% or
more on the same amount of dividends. In this circumstance, it is not likely that many such foreign investors, given the onerous burden of the two-tier system, i.e., local state plus home state, will be encouraged to
do business in the local state.
It is conceded that the law will "not trigger off an instant surge of revenue," as indeed the tax collectible by the Republic from the foreign investor is considerably reduced. This may appear unacceptable to the
superficial viewer. But this reduction is in fact the price we have to offer to persuade the foreign company to invest in our country and contribute to our economic development. The benefit to us may not be
immediately available in instant revenues but it will be realized later, and in greater measure, in terms of a more stable and robust economy.

BIDIN, J., concurring:


I agree with the opinion of my esteemed brother, Mr. Justice Florentino P. Feliciano. However, I wish to add some observations of my own, since I happen to be the ponente in Commissioner of Internal Revenue v.
Wander Philippines, Inc. (160 SCRA 573 [1988]), a case which reached a conclusion that is diametrically opposite to that sought to be reached in the instant Motion for Reconsideration.
1. In page 5 of his dissenting opinion, Mr. Justice Edgardo L. Paras argues that the failure of petitioner Commissioner of Internal Revenue to raise before the Court of Tax Appeals the issue of who should be the
real party in interest in claiming a refund cannot prejudice the government, as such failure is merely a procedural defect; and that moreover, the government can never i n estoppel, especially in matters involving
taxes. In a word, the dissenting opinion insists that errors of its agents should not jeopardize the government's position.
The above rule should not be taken absolutely and literally; if it were, the government would never lose any litigation which is clearly not true. The issue involved here is not merely one of procedure; it is also one of
fairness: whether the government should be subject to the same stringent conditions applicable to an ordinary litigant. As the Court had declared in Wander:
. . . To allow a litigant to assume a different posture when he comes before the court and challenge the position he had accepted at the administrative level, would be to sanction a procedure whereby
the Court which is supposed to review administrative determinations would not review, but determine and decide for the first time, a question not raised at the administrative forum. ... (160 SCRA
at 566-577)
Had petitioner been forthright earlier and required from private respondent proof of authority from its parent corporation, Procter and Gamble USA, to prosecute the claim for refund, private respondent would
doubtless have been able to show proof of such authority. By any account, it would be rank injustice not at this stage to require petitioner to submit such proof.
2. In page 8 of his dissenting opinion, Paras, J., stressed that private respondent had failed: (1) to show the actual amount credited by the US government against the income tax due from P & G USA on the
dividends received from private respondent; (2) to present the 1975 income tax return of P & G USA when the dividends were received; and (3) to submit any duly authenticated document showing that the US
government credited the 20% tax deemed paid in the Philippines.
I agree with the main opinion of my colleagues, Feliciano J., specifically in page 23 et seq. thereof, which, as I understand it, explains that the US tax authorities are unable to determine the amount of the "deemed
paid" credit to be given P & G USA so long as the numerator of the fraction, i.e., dividends actually remitted by P & G-Phil. to P & G USA, is still unknown. Stated in other words, until dividends have actually been
remitted to the US (which presupposes an actual imposition and collection of the applicable Philippine dividend tax rate), the US tax authorities cannot determine the "deemed paid" portion of the tax credit sought
by P & G USA. To require private respondent to show documentary proof of its parent corporation having actually received the "deemed paid" tax credit from the proper tax authorities, would be like putting the cart
before the horse. The only way of cutting through this (what Feliciano, J., termed) "circularity" is for our BIR to issue rulings (as they have been doing) to the effect that the tax laws of particular foreign jurisdictions,
e.g., USA, comply with the requirements in our tax code for applicability of the reduced 15% dividend tax rate. Thereafter, the taxpayer can be required to submit, within a reasonable period, proof of the amount of
"deemed paid" tax credit actually granted by the foreign tax authority. Imposing such a resolutory condition should resolve the knotty problem of circularity.
3. Page 8 of the dissenting opinion of Paras, J., further declares that tax refunds, being in the nature of tax exemptions, are to be construed strictissimi juris against the person or entity claiming the exemption; and
that refunds cannot be permitted to exist upon "vague implications."
Notwithstanding the foregoing canon of construction, the fundamental rule is still that a judge must ascertain and give effect to the legislative intent embodied in a particular provision of law. If a statute (including a
tax statute reducing a certain tax rate) is clear, plain and free from ambiguity, it must be given its ordinary meaning and applied without interpretation. In the instant case, the dissenting opinion of Paras, J., itself
concedes that the basic purpose of Pres. Decree No. 369, when it was promulgated in 1975 to amend Section 24(b), [11 of the National Internal Revenue Code, was "to decrease the tax liability" of the foreign
capital investor and thereby to promote more inward foreign investment. The same dissenting opinion hastens to add, however, that the granting of a reduced dividend tax rate "is premised on reciprocity."
4. Nowhere in the provisions of P.D. No. 369 or in the National Internal Revenue Code itself would one find reciprocity specified as a condition for the granting of the reduced dividend tax rate in Section 24 (b), [1],
NIRC. Upon the other hand. where the law-making authority intended to impose a requirement of reciprocity as a condition for grant of a privilege, the legislature does so expressly and clearly. For example, the
gross estate of non-citizens and non-residents of the Philippines normally includes intangible personal property situated in the Philippines, for purposes of application of the estate tax and donor's tax. However,
under Section 98 of the NIRC (as amended by P.D. 1457), no taxes will be collected by the Philippines in respect of such intangible personal property if the law or the foreign country of which the decedent was a
citizen and resident at the time of his death allows a similar exemption from transfer or death taxes in respect of intangible personal property located in such foreign country and owned by Philippine citizens not
residing in that foreign country.
There is no statutory requirement of reciprocity imposed as condition for grant of the reduced dividend tax rate of 15% Moreover, for the Court to impose such a requirement of reciprocity would be to contradict the
basic policy underlying P.D. 369 which amended Section 24(b), [1], NIRC, P.D. 369 was promulgated in the effort to promote the inflow of foreign investment capital into the Philippines. A requirement of reciprocity,
i.e., a requirement that the U.S. grant a similar reduction of U.S. dividend taxes on remittances by the U.S. subsidiary of Philippine corporations, would assume a desire on the part of the U.S. and of the Philippines
to attract the flow of Philippine capital into the U.S.. But the Philippines precisely is a capital importing, and not a capital exporting country. If the Philippines had surplus capital to export, it would not need to import
foreign capital into the Philippines. In other words, to require dividend tax reciprocity from a foreign jurisdiction would be to actively encourage Philippine corporations to invest outside the Philippines, which would
be inconsistent with the notion of attracting foreign capital into the Philippines in the first place.
5. Finally, in page 15 of his dissenting opinion, Paras, J., brings up the fact that:
Wander cited as authority a BIR ruling dated May 19, 1977, which requires a remittance tax of only 15%. The mere fact that in this Procter and Gamble case, the BIR desires to charge 35% indicates
that the BIR ruling cited in Wander has been obviously discarded today by the BIR. Clearly, there has been a change of mind on the part of the BIR.
As pointed out by Feliciano, J., in his main opinion, even while the instant case was pending before the Court of Tax Appeals and this Court, the administrative rulings issued by the BIR from 1976 until as late as
1987, recognized the "deemed paid" credit referred to in Section 902 of the U.S. Tax Code. To date, no contrary ruling has been issued by the BIR.
For all the foregoing reasons, private respondent's Motion for Reconsideration should be granted and I vote accordingly.

PARAS, J., dissenting:


I dissent.
The decision of the Second Division of this Court in the case of "Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corporation, et al.," G.R. No. 66838, promulgated on April
15,1988 is sought to be reviewed in the Motion for Reconsideration filed by private respondent. Procter & Gamble Philippines (PMC-Phils., for brevity) assails the Court's findings that:
(a) private respondent (PMC-Phils.) is not a proper party to claim the refund/tax aredit;
(b) there is nothing in Section 902 or other provision of the US Tax Code that allows a credit against the U.S. tax due from PMC-U.S.A. of taxes deemed to have been paid in the Phils. equivalent to
20% which represents the difference between the regular tax of 35% on corporations and the tax of 15% on dividends;
(c) private respondent failed to meet certain conditions necessary in order that the dividends received by the non-resident parent company in the U.S. may be subject to the preferential 15% tax
instead of 35%. (pp, 200-201, Motion for Reconsideration)
Private respondent's position is based principally on the decision rendered by the Third Division of this Court in the case of "Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of Tax
Appeals," G.R. No. 68375, promulgated likewise on April 15, 1988 which bears the same issues as in the case at bar, but held an apparent contrary view. Private respondent advances the theory that since the
Wander decision had already become final and executory it should be a precedent in deciding similar issues as in this case at hand.
Yet, it must be noted that the Wander decision had become final and executory only by reason of the failure of the petitioner therein to file its motion for reconsideration in due time. Petitioner received the notice of
judgment on April 22, 1988 but filed a Motion for Reconsideration only on June 6, 1988, or after the decision had already become final and executory on May 9, 1988. Considering that entry of final judgment had
already been made on May 9, 1988, the Third Division resolved to note without action the said Motion. Apparently therefore, the merits of the motion for reconsideration were not passed upon by the Court.
The 1987 Constitution provides that a doctrine or principle of law previously laid down either en banc or in Division may be modified or reversed by the court en banc. The case is now before this Court en banc and
the decision that will be handed down will put to rest the present controversy.
It is true that private respondent, as withholding agent, is obliged by law to withhold and to pay over to the Philippine government the tax on the income of the taxpayer, PMC-U.S.A. (parent company). However,
such fact does not necessarily connote that private respondent is the real party in interest to claim reimbursement of the tax alleged to have been overpaid. Payment of tax is an obligation physically passed off by
law on the withholding agent, if any, but the act of claiming tax refund is a right that, in a strict sense, belongs to the taxpayer which is private respondent's parent company. The role or function of PMC-Phils., as the
remitter or payor of the dividend income, is merely to insure the collection of the dividend income taxes due to the Philippine government from the taxpayer, "PMC-U.S.A.," the non-resident foreign corporation not
engaged in trade or business in the Philippines, as "PMC-U.S.A." is subject to tax equivalent to thirty five percent (35%) of the gross income received from "PMC-Phils." in the Philippines "as ... dividends ..."(Sec.
24[b],Phil. Tax Code). Being a mere withholding agent of the government and the real party in interest being the parent company in the United States, private respondent cannot claim refund of the alleged overpaid
taxes. Such right properly belongs to PMC-U.S.A. It is therefore clear that as held by the Supreme Court in a series of cases, the action in the Court of Tax Appeals as well as in this Court should have been brought
in the name of the parent company as petitioner and not in the name of the withholding agent. This is because the action should be brought under the name of the real party in interest. (See Salonga v. Warner
Barnes, & Co., Ltd., 88 Phil. 125; Sutherland, Code Pleading, Practice, & Forms, p. 11; Ngo The Hua v. Chung Kiat Hua, L-17091, Sept. 30, 1963, 9 SCRA 113; Gabutas v. Castellanes, L-17323, June 23, 1965, 14
SCRA 376; Rep. v. PNB, I, 16485, January 30, 1945).
Rule 3, Sec. 2 of the Rules of Court provides:
Sec. 2. Parties in interest. Every action must be prosecuted and defended in the name of the real party in interest. All persons having an interest in the subject of the action and in obtaining the relief
demanded shall be joined as plaintiffs. All persons who claim an interest in the controversy or the subject thereof adverse to the plaintiff, or who are necessary to a complete determination or
settlement of the questions involved therein shall be joined as defendants.
It is true that under the Internal Revenue Code the withholding agent may be sued by itself if no remittance tax is paid, or if what was paid is less than what is due. From this, Justice Feliciano claims that in case of
an overpayment(or claim for refund) the agent must be given the right to sue the Commissioner by itself (that is, the agent here is also a real party in interest). He further claims that to deny this right would be unfair.
This is not so. While payment of the tax due is an OBLIGATION of the agent, the obtaining of a refund la a RIGHT. While every obligation has a corresponding right (and vice-versa), the obligation to pay the
complete tax has the corresponding right of the government to demand the deficiency; and the right of the agent to demand a refund corresponds to the government's duty to refund. Certainly, the obligation of the
withholding agent to pay in full does not correspond to its right to claim for the refund. It is evident therefore that the real party in interest in this claim for reimbursement is the principal (the mother corporation) and
NOT the agent.
This suit therefore for refund must be DISMSSED.
In like manner, petitioner Commissioner of Internal Revenue's failure to raise before the Court of Tax Appeals the issue relating to the real party in interest to claim the refund cannot, and should not, prejudice the
government. Such is merely a procedural defect. It is axiomatic that the government can never be in estoppel, particularly in matters involving taxes. Thus, for example, the payment by the tax-payer of income
taxes, pursuant to a BIR assessment does not preclude the government from making further assessments. The errors or omissions of certain administrative officers should never be allowed to jeopardize the
government's financial position. (See: Phil. Long Distance Tel. Co. v. Con. of Internal Revenue, 9(, Phil. 674; Lewin v. Galang, L-15253, Oct. 31, 1960; Coll. of Internal Revenue v. Ellen Wood McGrath, L-12710, L-
12721, Feb. 28,1961; Perez v. Perez, L-14874, Sept. 30,1960; Republic v. Caballero, 79 SCRA 179; Favis v. Municipality of Sabongan, L-26522, Feb. 27,1963).
As regards the issue of whether PMC-U.S.A. is entitled under the U.S. Tax Code to a United States Foreign Tax Credit equivalent to at least 20 percentage paid portion spared or waived as otherwise deemed
waived by the government, We reiterate our ruling that while apparently, a tax-credit is given, there is actually nothing in Section 902 of the U.S. Internal Revenue Code, as amended by Public Law-87-834 that
would justify tax return of the disputed 15% to the private respondent. This is because the amount of tax credit purportedly being allowed is not fixed or ascertained, hence we do not know whether or not the tax
credit contemplated is within the limits set forth in the law. While the mathematical computations in Justice Feliciano's separate opinion appear to be correct, the computations suffer from a basic defect, that is we
have no way of knowing or checking the figure used as premises. In view of the ambiguity of Sec. 902 itself, we can conclude that no real tax credit was really intended. In the interpretation of tax statutes, it is
axiomatic that as between the interest of multinational corporations and the interest of our own government, it would be far better, in the absence of definitive guidelines, to favor the national interest. As correctly
pointed out by the Solicitor General:
. . . the tax-sparing credit operates on dummy, fictional or phantom taxes, being considered as if paid by the foreign taxing authority, the host country.
In the context of the case at bar, therefore, the thirty five (35%) percent on the dividend income of PMC-U.S.A. would be reduced to fifteen (15%) percent if & only if reciprocally PMC-U.S.A's home
country, the United States, not only would allow against PMC-U.SA.'s U.S. income tax liability a foreign tax credit for the fifteen (15%) percentage-point portion of the thirty five (35%) percent Phil.
dividend tax actually paid or accrued but also would allow a foreign tax 'sparing' credit for the twenty (20%)' percentage-point portion spared, waived, forgiven or otherwise deemed as if paid by the
Phil. govt. by virtue of . he "tax credit sparing" proviso of Sec. 24(b), Phil. Tax Code." (Reply Brief, pp. 23-24; Rollo, pp. 239-240).
Evidently, the U.S. foreign tax credit system operates only on foreign taxes actually paid by U.S. corporate taxpayers, whether directly or indirectly. Nowhere under a statute or under a tax treaty, does the U.S.
government recognize much less permit any foreign tax credit for spared or ghost taxes, as in reality the U.S. foreign-tax credit mechanism under Sections 901-905 of the U.S. Internal Revenue Code does not
apply to phantom dividend taxes in the form of dividend taxes waived, spared or otherwise considered "as if' paid by any foreign taxing authority, including that of the Philippine government.
Beyond, that, the private respondent failed: (1) to show the actual amount credited by the U.S. government against the income tax due from PMC-U.S.A. on the dividends received from private respondent; (2) to
present the income tax return of its parent company for 1975 when the dividends were received; and (3) to submit any duly authenticated document showing that the U.S. government credited the 20% tax deemed
paid in the Philippines.
Tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. The
burden of proof is upon him who claims the exemption in his favor and he must be able to justify, his claim by the clearest grant of organic or statute law... and cannot be permitted to exist upon vague implications
(Asiatic Petroleum Co. v. Llanes. 49 Phil. 466; Northern Phil Tobacco Corp. v. Mun. of Agoo, La Union, 31 SCRA 304; Rogan v. Commissioner, 30 SCRA 968; Asturias Sugar Central, Inc. v. Commissioner of
Customs, 29 SCRA 617; Davao Light and Power Co. Inc. v. Commissioner of Custom, 44 SCRA 122' Thus, when tax exemption is claimed. it must be shown indubitably to exist, for every presumption is against it,
and a well founded doubt is fatal to the claim (Farrington v. Tennessee & Country Shelby, 95 U.S. 679, 686; Manila Electric Co. v. Vera. L-29987. Oct. 22. 1975: Manila Electric Co. v. Vera, L-29987, Oct. 22, 1975;
Manila Electric Co. v. Tabios, L-23847, Oct. 22, 1975, 67 SCRA 451).
It will be remembered that the tax credit appertaining to remittances abroad of dividend earned here in the Philippines was amplified in Presidential Decree 4 No. 369 promulgated in 1975, the purpose of which was
to "encourage more capital investment for large projects." And its ultimate purpose it to decrease the tax liability of the corporation concerned. But this granting of a preferential right is premised on reciprocity,
without which there is clearly a derogation of our country's financial sovereignty. No such reciprocity has been proved, nor does it actually exist. At this juncture, it would be useful to bear in mind the following
observations:
The continuing and ever-increasing transnational movement of goods and services, the emergence of multinational corporations and the rise in foreign investments has brought about tremendous pressures on the
tax system to strengthen its competence and capability to deal effectively with issues arising from the foregoing phenomena.
International taxation refers to the operationalization of the tax system on an international level. As it is, international taxation deals with the tax treatment of goods and services transferred on a global basis,
multinational corporations and foreign investments.
Since the guiding philosophy behind international trade is free flow of goods and services, it goes without saying that the principal objective of international taxation is to see through this ideal by way of feasible
taxation arrangements which recognize each country's sovereignty in the matter of taxation, the need for revenue and the attainment of certain policy objectives.
The institution of feasible taxation arrangements, however, is hard to come by. To begin with, international tax subjects are obviously more complicated than their domestic counter-parts. Hence, the devise of
taxation arrangements to deal with such complications requires a welter of information and data buildup which generally are not readily obtainable and available. Also, caution must be exercised so that whatever
taxation arrangements are set up, the same do not get in the way of free flow of goods and services, exchange of technology, movement of capital and investment initiatives.
A cardinal principle adhered to in international taxation is the avoidance of double taxation. The phenomenon of double taxation (i.e., taxing an item more than once) arises because of global movement of goods
and services. Double taxation also occurs because of overlaps in tax jurisdictions resulting in the taxation of taxable items by the country of source or location (source or situs rule) and the taxation of the same
items by the country of residence or nationality of the taxpayer (domiciliary or nationality principle).
An item may, therefore, be taxed in full in the country of source because it originated there, and in another country because the recipient is a resident or citizen of that country. If the taxes in both countries are
substantial and no tax relief is offered, the resulting double taxation would serve as a discouragement to the activity that gives rise to the taxable item.

As a way out of double taxation, countries enter into tax treaties. A tax treaty 1
is a bilateral convention (but may be made multilateral) entered into between sovereign
states for purposes of eliminating double taxation on income and capital, preventing fiscal evasion, promoting mutual trade and investment,
and according fair and equitable tax treatment to foreign residents or nationals. 2
A more general way of mitigating the impact of double taxation is to recognize the foreign tax either as a tax credit or an item of deduction.
Whether the recipient resorts to tax credit or deduction is dependent on the tax advantage or savings that would be derived therefrom.
A principal defect of the tax credit system is when low tax rates or special tax concessions are granted in a country for the obvious reason of encouraging foreign investments. For instance, if the usual tax rate is 35
percent but a concession rate accrues to the country of the investor rather than to the investor himself To obviate this, a tax sparing provision may be stipulated. With tax sparing, taxes exempted or reduced are
considered as having been frilly paid.
To illustrate:
"X" Foreign Corporation income 100
Tax rate (35%) 35
RP income 100
Tax rate (general, 35%
concession rate, 15%) 15
1. "X" Foreign Corp. Tax Liability without Tax Sparing
"X" Foreign Corporation income 100
RP income 100
Total Income 200
"X" tax payable 70
Less: RP tax 15
Net "X" tax payable 55
2. "X" Foreign Corp. Tax Liability with Tax Sparing
"X" Foreign Corp. income 100
RP income 100
Total income 200
"X" Foreign Corp. tax payable 70
Less: RP tax (35% of 100, the
difference of 20% between 35% and 15%,
deemed paid to RP)
Net "X" Foreign Corp.
tax payable 35
By way of resume, We may say that the Wander decision of the Third Division cannot, and should not result in the reversal of the Procter & Gamble decision for the following reasons:
1) The Wander decision cannot serve as a precedent under the doctrine of stare decisis. It was promulgated on the same day the decision of the Second Division was promulgated, and while Wander has attained
finality this is simply because no motion for reconsideration thereof was filed within a reasonable period. Thus, said Motion for Reconsideration was theoretically never taken into account by said Third Division.
2) Assuming that stare decisis can apply, We reiterate what a former noted jurist Mr. Justice Sabino Padilla aptly said: "More pregnant than anything else is that the court shall be right." We hereby cite settled
doctrines from a treatise on Civil Law:
We adhere in our country to the doctrine of stare decisis (let it stand, et non quieta movere) for reasons of stability in the law. The doctrine, which is really 'adherence to precedents,' states that once a
case has been decided one way, then another case, involving exactly the same point at issue, should be decided in the same manner.
Of course, when a case has been decided erroneously such an error must not be perpetuated by blind obedience to the doctrine of stare decisis. No matter how sound a doctrine may be, and no
matter how long it has been followed thru the years, still if found to be contrary to law, it must be abandoned. The principle of stare decisis does not and should not apply when there is a conflict
between the precedent and the law (Tan Chong v. Sec. of Labor, 79 Phil. 249).
While stability in the law is eminently to be desired, idolatrous reverence for precedent, simply, as precedent, no longer rules. More pregnant than anything else is that the court shall be right (Phil.
Trust Co. v. Mitchell, 69 Phil. 30).
3) Wander deals with tax relations between the Philippines and Switzerland, a country with which we have a pending tax treaty; our Procter & Gamble case deals with relations between the Philippines and the
United States, a country with which we had no tax treaty, at the time the taxes herein were collected.
4) Wander cited as authority a BIR Ruling dated May 19, 1977, which requires a remittance tax of only 15%. The mere fact that in this Procter and Gamble case the B.I.R. desires; to charge 35% indicates that the
B.I.R. Ruling cited in Wander has been obviously discarded today by the B.I.R. Clearly, there has been a change of mind on the part of the B.I.R.
5) Wander imposes a tax of 15% without stating whether or not reciprocity on the part of Switzerland exists. It is evident that without reciprocity the desired consequences of the tax credit under P.D. No. 369 would
be rendered unattainable.
6) In the instant case, the amount of the tax credit deductible and other pertinent financial data have not been presented, and therefore even were we inclined to grant the tax credit claimed, we find ourselves
unable to compute the proper amount thereof.
7) And finally, as stated at the very outset, Procter & Gamble Philippines or P.M.C. (Phils.) is not the proper party to bring up the case.
ACCORDINGLY, the decision of the Court of Tax Appeals should be REVERSED and the motion for reconsideration of our own decision should be DENIED.
Melencio-Herrera, Padilla, Regalado and Davide, Jr., JJ., concur.

Footnotes
1 We refer here (unless otherwise expressly indicated) to the provisions of the NIRC as they existed during the relevant taxable years and at the time the claim for refund was made. We shall hereafter
refer simply to the NIRC.
2 Section 20 (n), NIRC (as renumbered and re-arranged by Executive Order No. 273, 1 January 1988).
3 E.g., Section 51 (e), NIRC:
Sec. 51. Returns and payment of taxes withheld at source.. . .
xxx xxx xxx
(e) Surcharge and interest for failure to deduct and withhold.If the withholding agent, in violation of the provisions of the preceding section and implementing regulations thereunder, fails to deduct
and withhold the amount of tax required under said section and regulations, he shall be liable to pay in addition to the tax required to be deducted and withheld, a surcharge of fifty per centum if the
failure is due to willful neglect or with intent to defraud the Government, or twenty-five per centum if the failure is not due to such causes, plus interest at the rate of fourteen per centum per annum from
the time the tax is required to be withheld until the date of assessment.
xxx xxx xxx
Section 251 (Id.):
Sec. 251. Failure of a withholding agent to collect and remit tax. Any person required to collect, account for, and remit any tax imposed by this Code who willfully fails to collect such tax, or account
for and remit such tax, or willfully assists in any manner to evade any such tax or the payment thereof, shall, in addition to other penalties provided for under this Chapter, be liable to a penalty equal to
the total amount of the tax not collected, or not accounted for and remitted. (Emphasis supplied)
4 Houston Street Corporation v. Commissioner of Internal Revenue, 84 F. 2nd. 821 (1936); Bank of America v. Anglim, 138 F. 2nd. 7 (1943).
5 15 SCRA 1 (1965).
6 15 SCRA at 4.
7 The following detailed examination of the tenor and import of Sections 901 and 902 of the US Tax Code is, regrettably, made necessary by the fact that the original decision of the Second Division
overlooked those Sections in their entirety. In the original opinion in 160 SCRA 560 (1988), immediately after Section 902, US Tax Code is quoted, the following appears: "To Our mind, there is nothing
in the aforecited provision that would justify tax return of the disputed 15% to the private respondent" (160 SCRA at 567). No further discussion of Section 902 was offered.
8 Sometimes also called a "derivative" tax credit or an "indirect" tax credit; Bittker and Ebb, United States Taxation of Foreign Income and Foreign Persons, 319 (2nd Ed., 1968).
9 American Chicle Co. v. U.S. 316 US 450, 86 L. ed. 1591 (1942); W.K. Buckley, Inc. v. C.I.R., 158 F. 2d. 158 (1946).
10 In his dissenting opinion, Paras, J. writes that "the amount of the tax credit purportedly being allowed is not fixed or ascertained, hence we do not know whether or not the tax credit contemplated is
within the limits set forth in the law" (Dissent, p. 6) Section 902 US Tax Code does not specify particular fixed amounts or percentages as tax credits; what it does specify in Section 902(A) (2) and (C)
(1) (B) is a proportionexpressed in the fraction:
dividends actually remitted by P&G-Phil. to P&G-USA
amount of accumulated profits earned by P&G-Phil. in
excess of income tax
The actual or absolute amount of the tax credit allowed by Section 902 will obviously depend on the actual values of the numerator and the denominator used in the fraction specified. The point is that
the establishment of the proportion or fraction in Section 902 renders the tax credit there allowed determinate and determinable.
** The denominator used by Com. Plana is the total pre-tax income of the Philippine subsidiary. Under Section 902 (c) (1) (B), US Tax Code, quoted earlier, the denominator should be the amount of
income of the subsidiary in excess of [Philippine] income tax.
11 The US tax authorities cannot determine the amount of the "deemed paid" credit to be given because the correct proportion cannot be determined: the numerator of the fraction is unknown, until
remittance of the dividends by P&G-Phil. is in fact effected. Please see computation, supra, p. 17.
12 BIR Ruling dated 21 March 1983, addressed to the Tax Division, Sycip, Gorres, Velayo and Company.
13 BIR Ruling dated 13 October 1981, addressed to Mr. A.R. Sarvino, Manager-Securities, Hongkong and Shanghai Banking Corporation.
14 BIR Ruling dated 31 January 1983, addressed to the Tax Division, Sycip, Gorres, Velayo and Company.
15 Text in 7 Philippine Treaty Series 523; signed on 1 October 1976 and effective on 16 October 1982 upon ratification by both Governments and exchange of instruments of ratification.
16 Art. 23 (1), Tax Convention; the same treaty imposes a similar obligation upon the Philippines to give to the Philippine parent of a US subsidiary a tax credit for the appropriate amount of US taxes
paid by the US subsidiary. (Art. 23[2], id) Thus, Sec. 902 US Tax Code and Sec. 30(c) (8), NIRC, have been in effect been converted into treaty commitments of the United States and the Philippines,
respectively, in respect of US and Philippine corporations.
PARAS, J., dissenting:
1 There are two types of credit systems. The first, is the underlying credit system which requires the other contracting state to credit not only the 15% Philippine tax into company dividends but also the
35% Philippine tax on corporations in respect of profits out of which such dividends were paid. The Philippine corporation is assured of sufficient creditable taxes to cover their total tax liabilities in their
home country and in effect will no longer pay taxes therein. The other type provides that if any tax relief is given by the Philippines pursuant to its own development program, the other contracting state
will grant credit for the amount of the Philippine tax which would have been payable but for such relief.
2 The Philippines, for one, has entered into a number of tax treaties in pursuit of the foregoing objectives. The extent of tax treaties entered into by the Philippines may be seen from the following
tabulation:
Table 1 RP Tax Treaties

RP-West Germany Ratified on Jan. 1, 1985


RP-Malaysia Ratified on Jan. 1, 1985
RP-Nigeria, Concluded in September,
Netherlands and October and November, 1985,
Spain respectively (documents ready for
signature)
RP-Yugoslavia Negotiated in Belgrade,
Sept. 30-Oct. 4,1985
Pending Ratification Signed Ratified
RP-Italy Dec. 5, 1980 Nov. 28, 1983
RP-Brazil Sept. 29, 1983
RP-East Germany Feb. 17, 1984
RP-Korea Feb. 21, 1984
Pending Signature Negotiations conluded on
RP Sweden (renegotiated) May 11, 1978
RP Romania Feb. 1, 1983
RP Sri Lanka 30,477.00
RP Norway Nov. 11, 1983
RP India 30,771.00
RP Nigeria Sept. 27, 1985
RP Netherlands Oct. 8, 1985
RP Spain Nov. 22, 1985.

G.R. No. L-68375 April 15, 1988


COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
WANDER PHILIPPINES, INC. AND THE COURT OF TAX APPEALS, respondents.
The Solicitor General for petitioner.
Felicisimo R. Quiogue and Cirilo P. Noel for respondents.

BIDIN, J.:
This is a petition for review on certiorari of the January 19, 1984 Decision of the Court of Tax Appeals * in C.T.A. Case No.2884, entitled
Wander Philippines, Inc. vs. Commissioner of Internal Revenue, holding that Wander Philippines, Inc. is entitled to the preferential rate of 15%
withholding tax on the dividends remitted to its foreign parent company, the Glaro S.A. Ltd. of Switzerland, a non-resident foreign corporation.
Herein private respondent, Wander Philippines, Inc. (Wander, for short), is a domestic corporation organized under Philippine laws. It is
wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro for short), a Swiss corporation not engaged in trade or business in the Philippines.
On July 18, 1975, Wander filed its withholding tax return for the second quarter ending June 30, 1975 and remitted to its parent company,
Glaro dividends in the amount of P222,000.00, on which 35% withholding tax thereof in the amount of P77,700.00 was withheld and paid to
the Bureau of Internal Revenue.
Again, on July 14, 1976, Wander filed a withholding tax return for the second quarter ending June 30, 1976 on the dividends it remitted to
Glaro amounting to P355,200.00, on wich 35% tax in the amount of P124,320.00 was withheld and paid to the Bureau of Internal Revenue.
On July 5, 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for refund and/or tax credit in the amount of
P115,400.00, contending that it is liable only to 15% withholding tax in accordance with Section 24 (b) (1) of the Tax Code, as amended by
Presidential Decree Nos. 369 and 778, and not on the basis of 35% which was withheld and paid to and collected by the government.
Petitioner herein, having failed to act on the above-said claim for refund, on July 15, 1977, Wander filed a petition with respondent Court of
Tax Appeals.
On October 6, 1977, petitioner file his Answer.
On January 19, 1984, respondent Court of Tax Appeals rendered a Decision, the decretal portion of which reads:
WHEREFORE, respondent is hereby ordered to grant a refund and/or tax credit to petitioner in the amount of P115,440.00
representing overpaid withholding tax on dividends remitted by it to the Glaro S.A. Ltd. of Switzerland during the second
quarter of the years 1975 and 1976.
On March 7, 1984, petitioner filed a Motion for Reconsideration but the same was denied in a Resolution dated August 13, 1984. Hence, the
instant petition.
Petitioner raised two (2) assignment of errors, to wit:
I
ASSUMING THAT THE TAX REFUND IN THE CASE AT BAR IS ALLOWABLE AT ALL, THE COURT OF TAX APPEALS ERRED
INHOLDING THAT THE HEREIN RESPONDENT WANDER PHILIPPINES, INC. IS ENTITLED TO THE SAID REFUND.
II
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT SWITZERLAND, THE HOME COUNTRY OF GLARO S.A. LTD. (THE PARENT
COMPANY OF THE HEREIN RESPONDENT WANDER PHILIPPINES, INC.), GRANTS TO SAID GLARO S.A. LTD. AGAINST ITS SWISS
INCOME TAX LIABILITY A TAX CREDIT EQUIVALENT TO THE 20 PERCENTAGE-POINT PORTION (OF THE 35 PERCENT PHILIPPINE
DIVIDEND TAX) SPARED OR WAIVED OR OTHERWISE DEEMED AS IF PAID IN THE PHILIPPINES UNDER SECTION 24 (b) (1) OF THE
PHILIPPINE TAX CODE.
The sole issue in this case is whether or not private respondent Wander is entitled to the preferential rate of 15% withholding tax on dividends
declared and remitted to its parent corporation, Glaro.
From this issue, two questions were posed by petitioner: (1) Whether or not Wander is the proper party to claim the refund; and (2) Whether or
not Switzerland allows as tax credit the "deemed paid" 20% Philippine Tax on such dividends.
Petitioner maintains and argues that it is Glaro the tax payer, and not Wander, the remitter or payor of the dividend income and a mere
withholding agent for and in behalf of the Philippine Government, which should be legally entitled to receive the refund if any.
It will be noted, however, that Petitioner's above-entitled argument is being raised for the first time in this Court. It was never raised at the
administrative level, or at the Court of Tax Appeals. To allow a litigant to assume a different posture when he comes before the court and
challenge the position he had accepted at the administrative level, would be to sanction a procedure whereby the Courtwhich is supposed to
review administrative determinationswould not review, but determine and decide for the first time, a question not raised at the administrative
forum. Thus, it is well settled that under the same underlying principle of prior exhaustion of administrative remedies, on the judicial level,
issues not raised in the lower court cannot be raised for the first time on appeal (Aguinaldo Industries Corporation vs. Commissioner of
Internal Revenue, 112 SCRA 136; Pampanga Sugar Dev. Co., Inc. vs. CIR, 114 SCRA 725; Garcia vs. Court of Appeals, 102 SCRA 597;
Matialonzo vs. Servidad, 107 SCRA 726,
In any event, the submission of petitioner that Wander is but a withholding agent of the government and therefore cannot claim reimbursement
of the alleged overpaid taxes, is untenable. It will be recalled, that said corporation is first and foremost a wholly owned subsidiary of Glaro.
The fact that it became a withholding agent of the government which was not by choice but by compulsion under Section 53 (b) of the Tax
Code, cannot by any stretch of the imagination be considered as an abdication of its responsibility to its mother company. Thus, this Court
construing Section 53 (b) of the Internal Revenue Code held that "the obligation imposed thereunder upon the withholding agent is
compulsory." It is a device to insure the collection by the Philippine Government of taxes on incomes, derived from sources in the Philippines,
by aliens who are outside the taxing jurisdiction of this Court (Commissioner of Internal Revenue vs. Malayan Insurance Co., Inc., 21 SCRA
944). In fact, Wander may be assessed for deficiency withholding tax at source, plus penalties consisting of surcharge and interest (Section
54, NLRC). Therefore, as the Philippine counterpart, Wander is the proper entity who should for the refund or credit of overpaid withholding
tax on dividends paid or remitted by Glaro.
Closely intertwined with the first assignment of error is the issue of whether or not Switzerland, the foreign country where Glaro is domiciled,
grants to Glaro a tax credit against the tax due it, equivalent to 20%, or the difference between the regular 35% rate of the preferential 15%
rate. The dispute in this issue lies on the fact that Switzerland does not impose any income tax on dividends received by Swiss corporation
from corporations domiciled in foreign countries.
Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the law involved in this case, reads:
Sec. 1. The first paragraph of subsection (b) of Section 24 of the National Internal Revenue Code, as amended, is hereby
further amended to read as follows:
(b) Tax on foreign corporations. 1) Non-resident corporation. A foreign corporation not engaged in
trade or business in the Philippines, including a foreign life insurance company not engaged in the life
insurance business in the Philippines, shall pay a tax equal to 35% of the gross income received during its
taxable year from all sources within the Philippines, as interest (except interest on foreign loans which
shall be subject to 15% tax), dividends, premiums, annuities, compensations, remuneration for technical
services or otherwise, emoluments or other fixed or determinable, annual, periodical or casual gains,
profits, and income, and capital gains: ... Provided, still further That on dividends received from a domestic
corporation liable to tax under this Chapter, the tax shall be 15% of the dividends received, which shall be
collected and paid as provided in Section 53 (d) of this Code, subject to the condition that the country in
which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the
non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20%
which represents the difference between the regular tax (35%) on corporations and the tax (15%)
dividends as provided in this section: ...
From the above-quoted provision, the dividends received from a domestic corporation liable to tax, the tax shall be 15% of the dividends
received, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax
due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the
difference between the regular tax (35%) on corporations and the tax (15%) dividends.
In the instant case, Switzerland did not impose any tax on the dividends received by Glaro. Accordingly, Wander claims that full credit is
granted and not merely credit equivalent to 20%. Petitioner, on the other hand, avers the tax sparing credit is applicable only if the country of
the parent corporation allows a foreign tax credit not only for the 15 percentage-point portion actually paid but also for the equivalent twenty
percentage point portion spared, waived or otherwise deemed as if paid in the Philippines; that private respondent does not cite anywhere a
Swiss law to the effect that in case where a foreign tax, such as the Philippine 35% dividend tax, is spared waived or otherwise considered as
if paid in whole or in part by the foreign country, a Swiss foreign-tax credit would be allowed for the whole or for the part, as the case may be,
of the foreign tax so spared or waived or considered as if paid by the foreign country.
While it may be true that claims for refund are construed strictly against the claimant, nevertheless, the fact that Switzerland did not impose
any tax or the dividends received by Glaro from the Philippines should be considered as a full satisfaction of the given condition. For, as aptly
stated by respondent Court, to deny private respondent the privilege to withhold only 15% tax provided for under Presidential Decree No. 369,
amending Section 24 (b) (1) of the Tax Code, would run counter to the very spirit and intent of said law and definitely will adversely affect
foreign corporations" interest here and discourage them from investing capital in our country.
Besides, it is significant to note that the conclusion reached by respondent Court is but a confirmation of the May 19, 1977 ruling of petitioner
that "since the Swiss Government does not impose any tax on the dividends to be received by the said parent corporation in the Philippines,
the condition imposed under the above-mentioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed."
Moreover, as a matter of principle, this Court will not set aside the conclusion reached by an agency such as the Court of Tax Appeals which
is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an
expertise on the subject unless there has been an abuse or improvident exercise of authority (Reyes vs. Commissioner of Internal Revenue,
24 SCRA 198, which is not present in the instant case.
WHEREFORE, the petition filed is DISMISSED for lack of merit.
SO ORDERED.
Fernan (Chairman), Gutierrez, Jr., Feliciano and Cortes, JJ., concur.
[CTA CASE: GH PROP v COMM 2015 PDF]

G.R. No. 108067 January 20, 2000


CYANAMID PHILIPPINES, INC., petitioner,
vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE,respondent.
QUISUMBING, J.:
Petitioner disputes the decision1 of the Court of Appeals which affirmed the decision2 of the Court of Tax Appeals, ordering petitioner to pay
respondent Commissioner of Internal Revenue the amount of three million, seven hundred seventy-four thousand, eight hundred sixty seven
pesos and fifty centavos (P3,774,867.50) as 25% surtax on improper accumulation of profits for 1981, plus 10% surcharge and 20% annual
interest from January 30, 1985 to January 30, 1987, under Sec. 25 of the National Internal Revenue Code.1wphi1.nt
The Court of Tax Appeals made the following factual findings:
Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine laws, is a wholly owned subsidiary of American Cyanamid Co.
based in Maine, USA. It is engaged in the manufacture of pharmaceutical products and chemicals, a wholesaler of imported finished goods,
and an importer/indentor.
On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the payment of deficiency income tax of one hundred
nineteen thousand eight hundred seventeen (P119,817.00) pesos for taxable year 1981, as follows:
Net income disclosed by the return as audited 14,575,210.00
Add: Discrepancies:
Professional fees/yr. 17018 261,877.00
per investigation 110,399.37
Total Adjustment 152,477.00
Net income per Investigation 14,727,687.00
Less: Personal and additional exemptions
Amount subject to tax 14,727,687.00
Income tax due thereon . . . 25% Surtax 2,385,231.50 3,237,495.00
Less: Amount already assessed 5,161,788.00
BALANCE 75,709.00
monthly interest from 1,389,639.00 44,108.00

Compromise penalties

TOTAL AMOUNT DUE 3,774,867.50 119,817.003


On March 4, 1985, petitioner protested the assessments particularly, (1) the 25% Surtax Assessment of P3,774,867.50; (2) 1981 Deficiency
Income Assessment of P119,817.00; and 1981 Deficiency Percentage Assessment of P8,846.72. 4 Petitioner, through its external accountant,
Sycip, Gorres, Velayo & Co., claimed, among others, that the surtax for the undue accumulation of earnings was not proper because the said
profits were retained to increase petitioner's working capital and it would be used for reasonable business needs of the company. Petitioner
contended that it availed of the tax amnesty under Executive Order No. 41, hence enjoyed amnesty from civil and criminal prosecution granted
by the law.
On October 20, 1987, the CIR in a letter addressed to SGV & Co., refused to allow the cancellation of the assessment notices and rendered
its resolution, as follows:
It appears that your client availed of Executive Order No. 41 under File No. 32A-F-000455-41B as certified and confirmed by our Tax
Amnesty Implementation Office on October 6, 1987.
In reply thereto, I have the honor to inform you that the availment of the tax amnesty under Executive Order No. 41, as amended is
sufficient basis, in appropriate cases, for the cancellation of the assessment issued after August 21, 1986. (Revenue Memorandum
Order No. 4-87) Said availment does not, therefore, result in cancellation of assessments issued before August 21, 1986. as in the
instant case. In other words, the assessments in this case issued on January 30, 1985 despite your client's availment of the tax
amnesty under Executive Order No. 41, as amended still subsist.
Such being the case, you are therefore, requested to urge your client to pay this Office the aforementioned deficiency income tax and
surtax on undue accumulation of surplus in the respective amounts of P119,817.00 and P3,774,867.50 inclusive of interest thereon
for the year 1981, within thirty (30) days from receipt hereof, otherwise this office will be constrained to enforce collection thereof thru
summary remedies prescribed by law.
This constitutes the final decision of this Office on this matter.5
Petitioner appealed to the Court of Tax Appeals. During the pendency of the case, however, both parties agreed to compromise the 1981
deficiency income tax assessment of P119,817.00. Petitioner paid a reduced amount twenty-six thousand, five hundred seventy-seven
pesos (P26,577.00) as compromise settlement. However, the surtax on improperly accumulated profits remained unresolved.
Petitioner claimed that CIR's assessment representing the 25% surtax on its accumulated earnings for the year 1981 had no legal basis for
the following reasons: (a) petitioner accumulated its earnings and profits for reasonable business requirements to meet working capital needs
and retirement of indebtedness; (b) petitioner is a wholly owned subsidiary of American Cyanamid Company, a corporation organized under
the laws of the State of Maine, in the United States of America, whose shares of stock are listed and traded in New York Stock Exchange.
This being the case, no individual shareholder income taxes by petitioner's accumulation of earnings and profits, instead of distribution of the
same.
In denying the petition, the Court of Tax Appeals made the following pronouncements:
Petitioner contends that it did not declare dividends for the year 1981 in order to use the accumulated earnings as working capital
reserve to meet its "reasonable business needs". The law permits a stock corporation to set aside a portion of its retained earnings
for specified purposes (citing Section 43, paragraph 2 of the Corporation Code of the Philippines). In the case at bar, however,
petitioner's purpose for accumulating its earnings does not fall within the ambit of any of these specified purposes.
More compelling is the finding that there was no need for petitioner to set aside a portion of its retained earnings as working capital
reserve as it claims since it had considerable liquid funds. A thorough review of petitioner's financial statement (particularly the
Balance Sheet, p. 127, BIR Records) reveals that the corporation had considerable liquid funds consisting of cash accounts
receivable, inventory and even its sales for the period is adequate to meet the normal needs of the business. This can be determined
by computing the current asset to liability ratio of the company:
current ratio = current assets/ current liabilities
= P 47,052,535.00 / P21,275,544.00
= 2.21: 1
========
The significance of this ratio is to serve as a primary test of a company's solvency to meet current obligations from current assets as
a going concern or a measure of adequacy of working capital.
xxx xxx xxx
We further reject petitioner's argument that "the accumulated earnings tax does not apply to a publicly-held corporation" citing
American jurisprudence to support its position. The reference finds no application in the case at bar because under Section 25 of the
NIRC as amended by Section 5 of P.D. No. 1379 [1739] (dated September 17, 1980), the exceptions to the accumulated earnings
tax are expressly enumerated, to wit: Bank, non-bank financial intermediaries, corporations organized primarily, and authorized by
the Central Bank of the Philippines to hold shares of stock of banks, insurance companies, or personal holding companies, whether
domestic or foreign. The law on the matter is clear and specific. Hence, there is no need to resort to applicable cases decided by the
American Federal Courts for guidance and enlightenment as to whether the provision of Section 25 of the NIRC should apply to
petitioner.
Equally clear and specific are the provisions of E.O. 41 particularly with respect to its effectivity and coverage . . .
. . . Said availment does not result in cancellation of assessments issued before August 21, 1986 as petitioner seeks to do in the
case at bar. Therefore, the assessments in this case, issued on January 30, 1985 despite petitioner's availment of the tax amnesty
under E.O. 41 as amended, still subsist.
xxx xxx xxx
WHEREFORE, petitioner Cyanamid Philippines, Inc., is ordered to pay respondent Commissioner of Internal Revenue the sum of
P3,774,867.50 representing 25% surtax on improper accumulation of profits for 1981, plus 10% surcharge and 20% annual interest
from January 30, 1985 to January 30, 1987.6
Petitioner appealed the Court of Tax Appeal's decision to the Court of Appeals. Affirming the CTA decision, the appellate court said:
In reviewing the instant petition and the arguments raised herein, We find no compelling reason to reverse the findings of the
respondent Court. The respondent Court's decision is supported by evidence, such as petitioner corporation's financial statement and
balance sheets (p. 127, BIR Records). On the other hand the petitioner corporation could only come up with an alternative formula
lifted from a decision rendered by a foreign court (Bardahl Mfg. Corp. vs. Commissioner, 24 T.C.M. [CCH] 1030). Applying said
formula to its particular financial position, the petitioner corporation attempts to justify its accumulated surplus earnings. To Our mind,
the petitioner corporation's alternative formula cannot overturn the persuasive findings and conclusion of the respondent Court
based, as it is, on the applicable laws and jurisprudence, as well as standards in the computation of taxes and penalties practiced in
this jurisdiction.
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED and the decision of the Court of Tax Appeals dated
August 6, 1992 in C.T.A. Case No. 4250 is AFFIRMED in toto.7
Hence, petitioner now comes before us and assigns as sole issue:
WHETHER THE RESPONDENT COURT ERRED IN HOLDING THAT THE PETITIONER IS LIABLE FOR THE ACCUMULATED
EARNINGS TAX FOR THE YEAR 1981.8
9
Sec. 25 of the old National Internal Revenue Code of 1977 states:
Sec. 25. Additional tax on corporation improperly accumulating profits or surplus
(a) Imposition of tax. If any corporation is formed or availed of for the purpose of preventing the imposition of the tax upon its
shareholders or members or the shareholders or members of another corporation, through the medium of permitting its gains and
profits to accumulate instead of being divided or distributed, there is levied and assessed against such corporation, for each taxable
year, a tax equal to twenty-five per-centum of the undistributed portion of its accumulated profits or surplus which shall be in addition
to the tax imposed by section twenty-four, and shall be computed, collected and paid in the same manner and subject to the same
provisions of law, including penalties, as that tax.
(b) Prima facie evidence. The fact that any corporation is mere holding company shall be prima facieevidence of a purpose to
avoid the tax upon its shareholders or members. Similar presumption will lie in the case of an investment company where at any time
during the taxable year more than fifty per centum in value of its outstanding stock is owned, directly or indirectly, by one person.
(c) Evidence determinative of purpose. The fact that the earnings or profits of a corporation are permitted to accumulate beyond
the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members
unless the corporation, by clear preponderance of evidence, shall prove the contrary.
(d) Exception. The provisions of this sections shall not apply to banks, non-bank financial intermediaries, corporation organized
primarily, and authorized by the Central Bank of the Philippines to hold shares of stock of banks, insurance companies, whether
domestic or foreign.
The provision discouraged tax avoidance through corporate surplus accumulation. When corporations do not declare dividends, income taxes
are not paid on the undeclared dividends received by the shareholders. The tax on improper accumulation of surplus is essentially a penalty
tax designed to compel corporations to distribute earnings so that the said earnings by shareholders could, in turn, be taxed.
Relying on decisions of the American Federal Courts, petitioner stresses that the accumulated earnings tax does not apply to Cyanamid, a
wholly owned subsidiary of a publicly owned company.10 Specifically, petitioner cites Golconda Mining Corp. vs. Commissioner, 507 F.2d 594,
whereby the U.S. Ninth Circuit Court of Appeals had taken the position that the accumulated earnings tax could only apply to a closely held
corporation.
A review of American taxation history on accumulated earnings tax will show that the application of the accumulated earnings tax to publicly
held corporations has been problematic. Initially, the Tax Court and the Court of Claims held that the accumulated earnings tax applies to
publicly held corporations. Then, the Ninth Circuit Court of Appeals ruled in Golconda that the accumulated earnings tax could only apply to
closely held corporations. Despite Golconda, the Internal Revenue Service asserted that the tax could be imposed on widely held corporations
including those not controlled by a few shareholders or groups of shareholders. The Service indicated it would not follow the Ninth Circuit
regarding publicly held corporations.11 In 1984, American legislation nullified the Ninth Circuit's Golconda ruling and made it clear that the
accumulated earnings tax is not limited to closely held corporations. 12 Clearly, Golconda is no longer a reliable precedent.
The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739, enumerated the corporations exempt from the imposition of
improperly accumulated tax: (a) banks; (b) non-bank financial intermediaries; (c) insurance companies; and (d) corporations organized
primarily and authorized by the Central Bank of the Philippines to hold shares of stocks of banks. Petitioner does not fall among those exempt
classes. Besides, the rule on enumeration is that the express mention of one person, thing, act, or consequence is construed to exclude all
others.13 Laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing
power.14 Taxation is the rule and exemption is the exception. 15 The burden of proof rests upon the party claiming exemption to prove that it is,
in fact, covered by the exemption so claimed,16 a burden which petitioner here has failed to discharge.
Another point raised by the petitioner in objecting to the assessment, is that increase of working capital by a corporation justifies accumulating
income. Petitioner asserts that respondent court erred in concluding that Cyanamid need not infuse additional working capital reserve because
it had considerable liquid funds based on the 2.21:1 ratio of current assets to current liabilities. Petitioner relies on the so-called "Bardahl"
formula, which allowed retention, as working capital reserve, sufficient amounts of liquid assets to carry the company through one operating
cycle. The "Bardahl"17 formula was developed to measure corporate liquidity. The formula requires an examination of whether the taxpayer
has sufficient liquid assets to pay all of its current liabilities and any extraordinary expenses reasonably anticipated, plus enough to operate
the business during one operating cycle. Operating cycle is the period of time it takes to convert cash into raw materials, raw materials into
inventory, and inventory into sales, including the time it takes to collect payment for the
sales.18
Using this formula, petitioner contends, Cyanamid needed at least P33,763,624.00 pesos as working capital. As of 1981, its liquid asset was
only P25,776,991.00. Thus, petitioner asserts that Cyanamid had a working capital deficit of P7,986,633.00.19 Therefore, the P9,540,926.00
accumulated income as of 1981 may be validly accumulated to increase the petitioner's working capital for the succeeding year.
We note, however, that the companies where the "Bardahl" formula was applied, had operating cycles much shorter than that of petitioner.
In Atlas Tool Co., Inc, vs. CIR,20 the company's operating cycle was only 3.33 months or 27.75% of the year. In Cataphote Corp. of Mississippi
vs. United States,21 the corporation's operating cycle was only 56.87 days, or 15.58% of the year. In the case of Cyanamid, the operating cycle
was 288.35 days, or 78.55% of a year, reflecting that petitioner will need sufficient liquid funds, of at least three quarters of the year, to cover
the operating costs of the business. There are variations in the application of the "Bardahl" formula, such as average operating cycle or peak
operating cycle. In times when there is no recurrence of a business cycle, the working capital needs cannot be predicted with accuracy. As
stressed by American authorities, although the "Bardahl" formula is well-established and routinely applied by the courts, it is not a precise rule.
It is used only for administrative convenience.22 Petitioner's application of the "Bardahl" formula merely creates a false illusion of exactitude.
Other formulas are also used, e.g. the ratio of current assets to current liabilities and the adoption of the industry standard. 23 The ratio of
current assets to current liabilities is used to determine the sufficiency of working capital. Ideally, the working capital should equal the current
liabilities and there must be 2 units of current assets for every unit of current liability, hence the so-called "2 to 1" rule.24
As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than twice its current liabilities. That current ratio of Cyanamid,
therefore, projects adequacy in working capital. Said working capital was expected to increase further when more funds were generated from
the succeeding year's sales. Available income covered expenses or indebtedness for that year, and there appeared no reason to expect an
impending "working capital deficit" which could have necessitated an increase in working capital, as rationalized by petitioner.
In Basilan Estates, Inc. vs. Commissioner of Internal Revenue,25 we held that:
. . . [T]here is no need to have such a large amount at the beginning of the following year because during the year, current assets are
converted into cash and with the income realized from the business as the year goes, these expenses may well be taken care of.
[citation omitted]. Thus, it is erroneous to say that the taxpayer is entitled to retain enough liquid net assets in amounts approximately
equal to current operating needs for the year to cover "cost of goods sold and operating expenses:" for "it excludes proper
consideration of funds generated by the collection of notes receivable as trade accounts during the course of the year." 26
If the CIR determined that the corporation avoided the tax on shareholders by permitting earnings or profits to accumulate, and the taxpayer
contested such a determination, the burden of proving the determination wrong, together with the corresponding burden of first going forward
with evidence, is on the taxpayer. This applies even if the corporation is not a mere holding or investment company and does not have an
unreasonable accumulation of earnings or profits. 27
In order to determine whether profits are accumulated for the reasonable needs to avoid the surtax upon shareholders, it must be shown that
the controlling intention of the taxpayer is manifest at the time of accumulation, not intentions declared subsequently, which are mere
afterthoughts.28 Furthermore, the accumulated profits must be used within a reasonable time after the close of the taxable year. In the instant
case, petitioner did not establish, by clear and convincing evidence, that such accumulation of profit was for the immediate needs of the
business.
In Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue,29 we ruled:
To determine the "reasonable needs" of the business in order to justify an accumulation of earnings, the Courts of the United States
have invented the so-called "Immediacy Test" which construed the words "reasonable needs of the business" to mean the immediate
needs of the business, and it was generally held that if the corporation did not prove an immediate need for the accumulation of the
earnings and profits, the accumulation was not for the reasonable needs of the business, and the penalty tax would apply. (Mertens.
Law of Federal Income Taxation, Vol. 7, Chapter 39, p, 103). 30
In the present case, the Tax Court opted to determine the working capital sufficiency by using the ratio between current assets to current
liabilities. The working capital needs of a business depend upon nature of the business, its credit policies, the amount of inventories, the rate
of the turnover, the amount of accounts receivable, the collection rate, the availability of credit to the business, and similar factors. Petitioner,
by adhering to the "Bardahl" formula, failed to impress the tax court with the required definiteness envisioned by the statute. We agree with the
tax court that the burden of proof to establish that the profits accumulated were not beyond the reasonable needs of the company, remained
on the taxpayer. This Court will not set aside lightly the conclusion reached by the Court of Tax Appeals which, by the very nature of its
function, is dedicated exclusively to the consideration of tax problems and has necessarily developed an expertise on the subject, unless there
has been an abuse or improvident exercise of authority.31 Unless rebutted, all presumptions generally are indulged in favor of the correctness
of the CIR's assessment against the taxpayer. With petitioner's failure to prove the CIR incorrect, clearly and conclusively, this Court is
constrained to uphold the correctness of tax court's ruling as affirmed by the Court of Appeals.
WHEREFORE, the instant petition is DENIED, and the decision of the Court of Appeals, sustaining that of the Court of Tax Appeals, is hereby
AFFIRMED. Costs against petitioner.1wphi1.nt
SO ORDERED.
Bellosillo, Mendoza, Buena and De Leon, Jr., JJ., concur.