G.R. No. L-29059 December 15, 1987 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.

CEBU PORTLAND CEMENT COMPANY and COURT OF TAX APPEALS, respondents. CRUZ, J.: By virtue of a decision of the Court of Tax Appeals rendered on June 21, 1961, as modified on appeal by the Supreme Court on February 27, 1965, the Commissioner of Internal Revenue was ordered to refund to the Cebu Portland Cement Company the amount of P 359,408.98, representing overpayments of ad valorem taxes on cement produced and sold by it after October 1957. 1 On March 28, 1968, following denial of motions for reconsideration filed by both the petitioner and the private respondent, the latter moved for a writ of execution to enforce the said judgment .2 The motion was opposed by the petitioner on the ground that the private respondent had an outstanding sales tax liability to which the judgment debt had already been credited. In fact, it was stressed, there was still a balance owing on the sales taxes in the amount of P 4,789,279.85 plus 28% surcharge. 3 On April 22, 1968, the Court of Tax Appeals * granted the motion, holding that the alleged sales tax liability of the private respondent was still being questioned and therefore could not be set-off against the refund. 4 In his petition to review the said resolution, the Commissioner of Internal Revenue claims that the refund should be charged against the tax deficiency of the private respondent on the sales of cement under Section 186 of the Tax Code. His position is that cement is a manufactured and not a mineral product and therefore not exempt from sales taxes. He adds that enforcement of the said tax deficiency was properly effected through his power of distraint of personal property under Sections 316 and 318 5 of the said Code and, moreover, the collection of any national internal revenue tax may not be enjoined under Section 305, 6 subject only to the exception prescribed in Rep. Act No. 1125. 7 This is not applicable to the instant case. The petitioner also denies that the sales tax assessments have already prescribed because the prescriptive period should be counted from the filing of the sales tax returns, which had not yet been done by the private respondent. For its part, the private respondent disclaims liability for the sales taxes, on the ground that cement is not a manufactured product but a mineral product. 8 As such, it was exempted from sales taxes under Section 188 of the Tax Code after the effectivity of Rep. Act No. 1299 on June 16, 1955, in accordance with Cebu Portland Cement Co. v. Collector of Internal Revenue, 9 decided in 1968. Here Justice Eugenio Angeles declared that "before the effectivity of Rep. Act No. 1299, amending Section 246 of the National Internal Revenue Code, cement was taxable as a manufactured product under Section 186, in connection with Section 194(4) of the said Code," thereby implying that it was not considered a manufactured product afterwards. Also, the alleged sales tax deficiency could not as yet be enforced against it because the tax assessment was not yet final, the same being still under protest and still to be definitely resolved on the merits. Besides, the assessment had already prescribed, not having been made within the reglementary five-year period from the filing of the tax returns. 10 Our ruling is that the sales tax was properly imposed upon the private respondent for the reason that cement has always been considered a manufactured product and not a mineral product. This matter was extensively discussed and categorically resolved in Commissioner of Internal Revenue v. Republic Cement Corporation, 11 decided on August 10, 1983, where Justice Efren L. Plana, after an exhaustive review of the pertinent cases, declared for a unanimous Court:

From all the foregoing cases, it is clear that cement qua cement was never considered as a mineral product within the meaning of Section 246 of the Tax Code, notwithstanding that at least 80% of its components are minerals, for the simple reason that cement is the product of a manufacturingprocess and is no longer the mineral product contemplated in the Tax Code (i.e.; minerals subjected to simple treatments) for the purpose of imposing the ad valorem tax. What has apparently encouraged the herein respondents to maintain their present posture is the case of Cebu Portland Cement Co. v. Collector of Internal Revenue, L-20563, Oct. 29, 1968 (28 SCRA 789) penned by Justice Eugenio Angeles. For some portions of that decision give the impression that Republic Act No. 1299, which amended Section 246, reclassified cement as a mineral product that was not subject to sales tax. ... xxx xxx xxx After a careful study of the foregoing, we conclude that reliance on the decision penned by Justice Angeles is misplaced. The said decision is no authority for the proposition that after the enactment of Republic Act No. 1299 in 1955 (defining mineral product as things with at least 80% mineral content), cement became a 'mineral product," as distinguished from a "manufactured product," and therefore ceased to be subject to sales tax. It was not necessary for the Court to so rule. It was enough for the Court to say in effect that even assuming Republic Act No. 1299 had reclassified cement was a mineral product, the reclassification could not be given retrospective application (so as to justify the refund of sales taxes paid before Republic Act 1299 was adopted) because laws operate prospectively only, unless the legislative intent to the contrary is manifest, which was not so in the case of Republic Act 1266. [The situation would have been different if the Court instead had ruled in favor of refund, in which case it would have been absolutely necessary (1) to make an unconditional ruling that Republic Act 1299 re-classified cement as a mineral product (not subject to sales tax), and (2) to declare the law retroactive, as a basis for granting refund of sales tax paid before Republic Act 1299.] In any event, we overrule the CEPOC decision of October 29, 1968 (G.R. No. L-20563) insofar as its pronouncements or any implication therefrom conflict with the instant decision. The above views were reiterated in the resolution 12 denying reconsideration of the said decision, thus: The nature of cement as a "manufactured product" (rather than a "mineral product") is wellsettled. The issue has repeatedly presented itself as a threshold question for determining the basis for computing the ad valorem mining tax to be paid by cement Companies. No pronouncement was made in these cases that as a "manufactured product" cement is subject to sales tax because this was not at issue. The decision sought to be reconsidered here referred to the legislative history of Republic Act No. 1299 which introduced a definition of the terms "mineral" and "mineral products" in Sec. 246 of the Tax Code. Given the legislative intent, the holding in the CEPOC case (G.R. No. L20563) that cement was subject to sales tax prior to the effectivity f Republic Act No. 1299 cannot be construed to mean that, after the law took effect, cement ceased to be so subject to the tax. To erase any and all misconceptions that may have been spawned by reliance on the case of Cebu Portland Cement Co. v. Collector of Internal Revenue, L-20563, October 29, 1968 (28 SCRA 789) penned by Justice Eugenio Angeles, the Court has expressly overruled it insofar as it may conflict with the decision of August 10, 1983, now subject of these motions for reconsideration.

On the question of prescription, the private respondent claims that the five-year reglementary period for the assessment of its tax liability started from the time it filed its gross sales returns on June 30, 1962. Hence, the assessment for sales taxes made on January 16, 1968 and March 4, 1968, were already out of time. We disagree. This contention must fail for what CEPOC filed was not the sales returns required in Section 183(n) but the ad valorem tax returns required under Section 245 of the Tax Code. As Justice Irene R. Cortes emphasized in the aforestated resolution: In order to avail itself of the benefits of the five-year prescription period under Section 331 of the Tax Code, the taxpayer should have filed the required return for the tax involved, that is, a sales tax return. (Butuan Sawmill, Inc. v. CTA, et al., G.R. No. L-21516, April 29, 1966, 16 SCRA 277). Thus CEPOC should have filed sales tax returns of its gross sales for the subject periods. Both parties admit that returns were made for the ad valorem mining tax. CEPOC argues that said returns contain the information necessary for the assessment of the sales tax. The Commissioner does not consider such returns as compliance with the requirement for the filing of tax returns so as to start the running of the five-year prescriptive period. We agree with the Commissioner. It has been held in Butuan Sawmill Inc. v. CTA, supra, that the filing of an income tax return cannot be considered as substantial compliance with the requirement of filing sales tax returns, in the same way that an income tax return cannot be considered as a return for compensating tax for the purpose of computing the period of prescription under Sec. 331. (Citing Bisaya Land Transportation Co., Inc. v. Collector of Internal Revenue, G.R. Nos. L-12100 and L-11812, May 29, 1959). There being no sales tax returns filed by CEPOC, the statute of stations in Sec. 331 did not begin to run against the government. The assessment made by the Commissioner in 1968 on CEPOC's cement sales during the period from July 1, 1959 to December 31, 1960 is not barred by the five-year prescriptive period. Absent a return or when the return is false or fraudulent, the applicable period is ten (10) days from the discovery of the fraud, falsity or omission. The question in this case is: When was CEPOC's omission to file tha return deemed discovered by the government, so as to start the running of said period? 13 The argument that the assessment cannot as yet be enforced because it is still being contested loses sight of the urgency of the need to collect taxes as "the lifeblood of the government." If the payment of taxes could be postponed by simply questioning their validity, the machinery of the state would grind to a halt and all government functions would be paralyzed. That is the reason why, save for the exception already noted, the Tax Code provides: Sec. 291. Injunction not available to restrain collection of tax. No court shall have authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by this Code. It goes without saying that this injunction is available not only when the assessment is already being questioned in a court of justice but more so if, as in the instant case, the challenge to the assessment is still-and only-on the administrative level. There is all the more reason to apply the rule here because it appears that even after crediting of the refund against the tax deficiency, a balance of more than P 4 million is still due from the private respondent. To require the petitioner to actually refund to the private respondent the amount of the judgment debt, which he will later have the right to distrain for payment of its sales tax liability is in our view an Idle ritual. We hold that the respondent Court of Tax Appeals erred in ordering such a charade. WHEREFORE, the petition is GRANTED. The resolution dated April 22, 1968, in CTA Case No. 786 is SET ASIDE, without any pronouncement as to costs.

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

G.R. Nos. 89898-99 October 1, 1990 MUNICIPALITY OF MAKATI, petitioner, vs. THE HONORABLE COURT OF APPEALS, HON. SALVADOR P. DE GUZMAN, JR., as Judge RTC of Makati, Branch CXLII ADMIRAL FINANCE CREDITORS CONSORTIUM, INC., and SHERIFF SILVINO R. PASTRANA,respondents. Defante & Elegado for petitioner. Roberto B. Lugue for private respondent Admiral Finance Creditors' Consortium, Inc. RESOLUTION CORTS, J.: The present petition for review is an off-shoot of expropriation proceedings initiated by petitioner Municipality of Makati against private respondent Admiral Finance Creditors Consortium, Inc., Home Building System & Realty Corporation and one Arceli P. Jo, involving a parcel of land and improvements thereon located at Mayapis St., San Antonio Village, Makati and registered in the name of Arceli P. Jo under TCT No. S-5499. It appears that the action for eminent domain was filed on May 20, 1986, docketed as Civil Case No. 13699. Attached to petitioner's complaint was a certification that a bank account (Account No. S/A 265-537154-3) had been opened with the PNB Buendia Branch under petitioner's name containing the sum of P417,510.00, made pursuant to the provisions of Pres. Decree No. 42. After due hearing where the parties presented their respective appraisal reports regarding the value of the property, respondent RTC judge rendered a decision on June 4, 1987, fixing the appraised value of the property at P5,291,666.00, and ordering petitioner to pay this amount minus the advanced payment of P338,160.00 which was earlier released to private respondent. After this decision became final and executory, private respondent moved for the issuance of a writ of execution. This motion was granted by respondent RTC judge. After issuance of the writ of execution, a Notice of Garnishment dated January 14, 1988 was served by respondent sheriff Silvino R. Pastrana upon the manager of the PNB Buendia Branch. However, respondent sheriff was informed that a "hold code" was placed on the account of petitioner. As a result of this, private respondent filed a motion dated January 27, 1988 praying that an order be issued directing the bank to deliver to respondent sheriff the amount equivalent to the unpaid balance due under the RTC decision dated June 4, 1987. Petitioner filed a motion to lift the garnishment, on the ground that the manner of payment of the expropriation amount should be done in installments which the respondent RTC judge failed to state in his decision. Private respondent filed its opposition to the motion. Pending resolution of the above motions, petitioner filed on July 20, 1988 a "Manifestation" informing the court that private respondent was no longer the true and lawful owner of the subject property because a new title over the property had been registered in the name of Philippine Savings Bank, Inc. (PSB) Respondent RTC judge issued an order requiring PSB to make available the documents pertaining to its transactions over the subject property, and the PNB Buendia Branch to reveal the amount in petitioner's account which was garnished by respondent sheriff. In compliance with this order, PSB filed a manifestation informing the court that it had consolidated its ownership over the property as mortgagee/purchaser at an extrajudicial foreclosure sale held on April 20, 1987. After several conferences, PSB and private respondent entered into a compromise agreement whereby they agreed to divide between themselves the compensation due from the expropriation proceedings. Respondent trial judge subsequently issued an order dated September 8, 1988 which: (1) approved the compromise agreement; (2) ordered PNB Buendia Branch to immediately release to PSB the sum of P4,953,506.45 which corresponds to the balance of the appraised value of the subject property under the RTC decision dated June 4, 1987, from the garnished account of petitioner; and, (3) ordered PSB and private respondent to execute the necessary deed of

conveyance over the subject property in favor of petitioner. Petitioner's motion to lift the garnishment was denied. Petitioner filed a motion for reconsideration, which was duly opposed by private respondent. On the other hand, for failure of the manager of the PNB Buendia Branch to comply with the order dated September 8, 1988, private respondent filed two succeeding motions to require the bank manager to show cause why he should not be held in contempt of court. During the hearings conducted for the above motions, the general manager of the PNB Buendia Branch, a Mr. Antonio Bautista, informed the court that he was still waiting for proper authorization from the PNB head office enabling him to make a disbursement for the amount so ordered. For its part, petitioner contended that its funds at the PNB Buendia Branch could neither be garnished nor levied upon execution, for to do so would result in the disbursement of public funds without the proper appropriation required under the law, citing the case of Republic of the Philippines v. Palacio [G.R. No. L-20322, May 29, 1968, 23 SCRA 899]. Respondent trial judge issued an order dated December 21, 1988 denying petitioner's motion for reconsideration on the ground that the doctrine enunciated in Republic v. Palacio did not apply to the case because petitioner's PNB Account No. S/A 265-537154-3 was an account specifically opened for the expropriation proceedings of the subject property pursuant to Pres. Decree No. 42. Respondent RTC judge likewise declared Mr. Antonio Bautista guilty of contempt of court for his inexcusable refusal to obey the order dated September 8, 1988, and thus ordered his arrest and detention until his compliance with the said order. Petitioner and the bank manager of PNB Buendia Branch then filed separate petitions for certiorari with the Court of Appeals, which were eventually consolidated. In a decision promulgated on June 28, 1989, the Court of Appeals dismissed both petitions for lack of merit, sustained the jurisdiction of respondent RTC judge over the funds contained in petitioner's PNB Account No. 265-537154-3, and affirmed his authority to levy on such funds. Its motion for reconsideration having been denied by the Court of Appeals, petitioner now files the present petition for review with prayer for preliminary injunction. On November 20, 1989, the Court resolved to issue a temporary restraining order enjoining respondent RTC judge, respondent sheriff, and their representatives, from enforcing and/or carrying out the RTC order dated December 21, 1988 and the writ of garnishment issued pursuant thereto. Private respondent then filed its comment to the petition, while petitioner filed its reply. Petitioner not only reiterates the arguments adduced in its petition before the Court of Appeals, but also alleges for the first time that it has actually two accounts with the PNB Buendia Branch, to wit: xxx xxx xxx (1) Account No. S/A 265-537154-3 exclusively for the expropriation of the subject property, with an outstanding balance of P99,743.94. (2) Account No. S/A 263-530850-7 for statutory obligations and other purposes of the municipal government, with a balance of P170,098,421.72, as of July 12, 1989. xxx xxx xxx

[Petition, pp. 6-7; Rollo, pp. 11-12.] Because the petitioner has belatedly alleged only in this Court the existence of two bank accounts, it may fairly be asked whether the second account was opened only for the purpose of undermining the legal basis of the assailed orders of respondent RTC judge and the decision of the Court of Appeals, and strengthening its reliance on the doctrine that public funds are exempted from garnishment or execution as enunciated in Republic v. Palacio[supra.] At any rate, the Court will give petitioner the benefit of the doubt, and proceed to resolve the principal issues presented based on the factual circumstances thus alleged by petitioner. Admitting that its PNB Account No. S/A 265-537154-3 was specifically opened for expropriation proceedings it had initiated over the subject property, petitioner poses no objection to the garnishment or the levy under execution of the funds deposited therein amounting to P99,743.94. However, it is petitioner's main contention that inasmuch as the assailed orders of respondent RTC judge involved the net amount of P4,965,506.45, the funds garnished by respondent sheriff in excess of P99,743.94, which are public funds earmarked for the municipal government's other statutory obligations, are exempted from execution without the proper appropriation required under the law. There is merit in this contention. The funds deposited in the second PNB Account No. S/A 263530850-7 are public funds of the municipal government. In this jurisdiction, well-settled is the rule that public funds are not subject to levy and execution, unless otherwise provided for by statute [Republic v. Palacio, supra.; The Commissioner of Public Highways v. San Diego, G.R. No. L-30098, February 18, 1970, 31 SCRA 616]. More particularly, the properties of a municipality, whether real or personal, which are necessary for public use cannot be attached and sold at execution sale to satisfy a money judgment against the municipality. Municipal revenues derived from taxes, licenses and market fees, and which are intended primarily and exclusively for the purpose of financing the governmental activities and functions of the municipality, are exempt from execution [See Viuda De Tan Toco v. The Municipal Council of Iloilo, 49 Phil. 52 (1926): The Municipality of Paoay, Ilocos Norte v. Manaois, 86 Phil. 629 (1950); Municipality of San Miguel, Bulacan v. Fernandez, G.R. No. 61744, June 25, 1984, 130 SCRA 56]. The foregoing rule finds application in the case at bar. Absent a showing that the municipal council of Makati has passed an ordinance appropriating from its public funds an amount corresponding to the balance due under the RTC decision dated June 4, 1987, less the sum of P99,743.94 deposited in Account No. S/A 265-537154-3, no levy under execution may be validly effected on the public funds of petitioner deposited in Account No. S/A 263-530850-7. Nevertheless, this is not to say that private respondent and PSB are left with no legal recourse. Where a municipality fails or refuses, without justifiable reason, to effect payment of a final money judgment rendered against it, the claimant may avail of the remedy of mandamus in order to compel the enactment and approval of the necessary appropriation ordinance, and the corresponding disbursement of municipal funds therefor [SeeViuda De Tan Toco v. The Municipal Council of Iloilo, supra; Baldivia v. Lota, 107 Phil. 1099 (1960); Yuviengco v. Gonzales, 108 Phil. 247 (1960)]. In the case at bar, the validity of the RTC decision dated June 4, 1987 is not disputed by petitioner. No appeal was taken therefrom. For three years now, petitioner has enjoyed possession and use of the subject property notwithstanding its inexcusable failure to comply with its legal obligation to pay just compensation. Petitioner has benefited from its possession of the property since the same has been the site of Makati West High School since the school year 1986-1987. This Court will not condone petitioner's blatant refusal to settle its legal obligation arising from expropriation proceedings it had in fact initiated. It cannot be over-emphasized that, within the context of the State's inherent power of eminent domain,

. . . [j]ust compensation means not only the correct determination of the amount to be paid to the owner of the land but also the payment of the land within a reasonable time from its taking. Without prompt payment, compensation cannot be considered "just" for the property owner is made to suffer the consequence of being immediately deprived of his land while being made to wait for a decade or more before actually receiving the amount necessary to cope with his loss [Cosculluela v. The Honorable Court of Appeals, G.R. No. 77765, August 15, 1988, 164 SCRA 393, 400. See also Provincial Government of Sorsogon v. Vda. de Villaroya, G.R. No. 64037, August 27, 1987, 153 SCRA 291]. The State's power of eminent domain should be exercised within the bounds of fair play and justice. In the case at bar, considering that valuable property has been taken, the compensation to be paid fixed and the municipality is in full possession and utilizing the property for public purpose, for three (3) years, the Court finds that the municipality has had more than reasonable time to pay full compensation. WHEREFORE, the Court Resolved to ORDER petitioner Municipality of Makati to immediately pay Philippine Savings Bank, Inc. and private respondent the amount of P4,953,506.45. Petitioner is hereby required to submit to this Court a report of its compliance with the foregoing order within a non-extendible period of SIXTY (60) DAYS from the date of receipt of this resolution. The order of respondent RTC judge dated December 21, 1988, which was rendered in Civil Case No. 13699, is SET ASIDE and the temporary restraining order issued by the Court on November 20, 1989 is MADE PERMANENT. SO ORDERED. Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.

G.R. No. L-28896 February 17, 1988 COMMISSIONER OF INTERNAL vs. ALGUE, INC., and THE COURT OF TAX APPEALS, respondents. CRUZ, J.:

REVENUE, petitioner,

protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary period had been consumed. Now for the substantive question. The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the private respondent for actual services rendered. The payment was in the form of promotional fees. These were collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development Company. Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be personal holding company income 12 but later conformed to the decision of the respondent court rejecting this assertion. 13 In fact, as the said court found, the amount was earned through the joint efforts of the persons among whom it was distributed It has been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the promotion of the said persons, this new corporation purchased the PSEDC properties. 15 For this sale, Algue received as agent a commission of P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to the aforenamed individuals. 16 There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid the corresponding taxes thereon. 17 The Court of Tax Appeals also found, after examining the evidence, that no distribution of dividends was involved. 18 The petitioner claims that these payments are fictitious because most of the payees are members of the same family in control of Algue. It is argued that no indication was made as to how such payments were made, whether by check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction. We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but periodically and in different amounts as each payee's need arose. 19 It should be remembered that this was a family corporation where strict business procedures were not applied and immediate issuance of receipts was not required. Even so, at the end of the year, when the books were to be closed, each payee made an accounting of all of the fees received by him or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was understandable, however, in view of the close relationship among the persons in the family corporation. We agree with the respondent court that the amount of the promotional fees was not excessive. The total commission paid by the Philippine Sugar Estate Development Co. to the private respondent was P125,000.00. 21After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering that it was the payees who did practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. This finding of the respondent court is in accord with the following provision of the Tax Code:

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The corollary issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal Revenue was made on time and in accordance with law. We deal first with the procedural question. The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in engineering, construction and other allied activities, received a letter from the petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959. 1 On January 18, 1965, Algue flied a letter of protest or request for reconsideration, which letter was stamp received on the same day in the office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the pending protest. 3 A search of the protest in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was not taking any action on the protest and it was only then that he accepted the warrant of distraint and levy earlier sought to be served. 5 Sixteen days later, on April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. 6 The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal may be made within thirty days after receipt of the decision or ruling challenged. 7 It is true that as a rule the warrant of distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a request for reconsideration," 9 being "tantamount to an outright denial thereof and makes the said request deemed rejected."10 But there is a special circumstance in the case at bar that prevents application of this accepted doctrine. The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed its letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued; indeed, such protest could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant was premature and could therefore not be served. As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and was based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed, the reglementary period which started on the date the assessment was received, viz., January 14, 1965. The period started running again only on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the said

SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as deductions (a) Expenses: (1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; ... 22 and Revenue Regulations No. 2, Section 70 (1), reading as follows:

We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by the petitioner. ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs. SO ORDERED. Teehankee, C.J., Narvasa, Gancayco and Grio-Aquino, JJ., concur.

SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and its practical application may be further stated and illustrated as follows: Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on stock. This is likely to occur in the case of a corporation having few stockholders, Practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond or bear a close relationship to the stockholdings of the officers of employees, it would seem likely that the salaries are not paid wholly for services rendered, but the excessive payments are a distribution of earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.) It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its controlling stockholders. 23 The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed. It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed.

G.R. No. 122480 April 12, 2000 BPI-FAMILY SAVINGS BANK, Inc., petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS and the COMMISSIONER OF INTERNAL REVENUE,respondents. PANGANIBAN, J.: If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same standard against itself in refunding excess payments. When it is undisputed that a taxpayer is entitled to a refund, the State should not invoke technicalities to keep money not belonging to it. No one, not even the State, should enrich oneself at the expense of another. The Case Before us is a Petition for Review assailing the March 31, 1995 Decision of the Court of Appeals1 (CA) in CA-GR SP No. 34240, which affirmed the December 24, 1993 Decision 2 of the Court of Tax Appeals (CTA). The CA disposed as follows: WHEREFORE, foregoing premises considered, the petition is hereby DISMISSED for lack of merit.3 On the other hand, the dispositive portion of the CTA Decision affirmed by the CA reads as follows: WHEREFORE, in [view of] all the foregoing, Petitioner's claim for refund is hereby DENIED and this Petition for Review is DISMISSED for lack of merit. 4 Also assailed is the November 8, 1995 CA Resolution5 denying reconsideration. The Facts The facts of this case were summarized by the CA in this wise: This case involves a claim for tax refund in the amount of P112,491.00 representing petitioner's tax withheld for the year 1989. In its Corporate Annual Income Tax Return for the year 1989, the following items are reflected: Income P1,017,931,831.00 Deductions P1,026,218,791.00 Net Income (Loss) (P8,286,960.00) Taxable Income (Loss) (P8,286,960.00) Less: 1988 Tax Credit P185,001.00 1989 Tax Credit P112,491.00 TOTAL AMOUNT P297,492.00 REFUNDABLE It appears from the foregoing 1989 Income Tax Return that petitioner had a total refundable amount of P297,492 inclusive of the P112,491.00 being claimed as tax refund in the present case. However, petitioner declared in

the same 1989 Income Tax Return that the said total refundable amount of P297,492.00 will be applied as tax credit to the succeeding taxable year. On October 11, 1990, petitioner filed a written claim for refund in the amount of P112,491.00 with the respondent Commissioner of Internal Revenue alleging that it did not apply the 1989 refundable amount of P297,492.00 (including P112,491.00) to its 1990 Annual Income Tax Return or other tax liabilities due to the alleged business losses it incurred for the same year. Without waiting for respondent Commissioner of Internal Revenue to act on the claim for refund, petitioner filed a petition for review with respondent Court of Tax Appeals, seeking the refund of the amount of P112,491.00. The respondent Court of Tax Appeals dismissed petitioner's petition on the ground that petitioner failed to present as evidence its corporate Annual Income Tax Return for 1990 to establish the fact that petitioner had not yet credited the amount of P297,492.00 (inclusive of the amount P112,491.00 which is the subject of the present controversy) to its 1990 income tax liability. Petitioner filed a motion for reconsideration, however, the same was denied by respondent court in its Resolution dated May 6, 1994.6 As earlier noted, the CA affirmed the CTA. Hence, this Petition.7 Ruling of the Court of Appeals In affirming the CTA, the Court of Appeals ruled as follows: It is incumbent upon the petitioner to show proof that it has not credited to its 1990 Annual income Tax Return, the amount of P297,492.00 (including P112,491.00), so as to refute its previous declaration in the 1989 Income Tax Return that the said amount will be applied as a tax credit in the succeeding year of 1990. Having failed to submit such requirement, there is no basis to grant the claim for refund. . . . Tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. In other words, the burden of proof rests upon the taxpayer to establish by sufficient and competent evidence its entitlement to the claim for refund.8 Issue In their Memorandum, respondents identify the issue in this wise: The sole issue to be resolved is whether or not petitioner is entitled to the refund of P112,491.90, representing excess creditable withholding tax paid for the taxable year 1989.9 The Court's Ruling

The Petition is meritorious. Main Issue: Petitioner Entitled to Refund It is undisputed that petitioner had excess withholding taxes for the year 1989 and was thus entitled to a refund amounting to P112,491. Pursuant to Section 69 10 of the 1986 Tax Code which states that a corporation entitled to a refund may opt either (1) to obtain such refund or (2) to credit said amount for the succeeding taxable year, petitioner indicated in its 1989 Income Tax Return that it would apply the said amount as a tax credit for the succeeding taxable year, 1990. Subsequently, petitioner informed the Bureau of Internal Revenue (BIR) that it would claim the amount as a tax refund, instead of applying it as a tax credit. When no action from the BIR was forthcoming, petitioner filed its claim with the Court of Tax Appeals. The CTA and the CA, however, denied the claim for tax refund. Since petitioner declared in its 1989 Income Tax Return that it would apply the excess withholding tax as a tax credit for the following year, the Tax Court held that petitioner was presumed to have done so. The CTA and the CA ruled that petitioner failed to overcome this presumption because it did not present its 1990 Return, which would have shown that the amount in dispute was not applied as a tax credit. Hence, the CA concluded that petitioner was not entitled to a tax refund. We disagree with the Court of Appeals. As a rule, the factual findings of the appellate court are binding on this Court. This rule, however, does not apply where, inter alia, the judgment is premised on a misapprehension of facts, or when the appellate court failed to notice certain relevant facts which if considered would justify a different conclusion. 11 This case is one such exception. In the first place, petitioner presented evidence to prove its claim that it did not apply the amount as a tax credit. During the trial before the CTA, Ms. Yolanda Esmundo, the manager of petitioner's accounting department, testified to this fact. It likewise presented its claim for refund and a certification issued by Mr. Gil Lopez, petitioner's vice-president, stating that the amount of P112,491 "has not been and/or will not be automatically credited/offset against any succeeding quarters' income tax liabilities for the rest of the calendar year ending December 31, 1990." Also presented were the quarterly returns for the first two quarters of 1990. The Bureau of Internal Revenue, for its part, failed to controvert petitioner's claim. In fact, it presented no evidence at all. Because it ought to know the tax records of all taxpayers, the CIR could have easily disproved petitioner's claim. To repeat, it did not do so. More important, a copy of the Final Adjustment Return for 1990 was attached to petitioner's Motion for Reconsideration filed before the CTA. 12 A final adjustment return shows whether a corporation incurred a loss or gained a profit during the taxable year. In this case, that Return clearly showed that petitioner incurred P52,480,173 as net loss in 1990. Clearly, it could not have applied the amount in dispute as a tax credit. Again, the BIR did not controvert the veracity of the said return. It did not even file an opposition to petitioner's Motion and the 1990 Final Adjustment Return attached thereto. In denying the Motion for Reconsideration, however, the CTA ignored the said Return. In the same vein, the CA did not pass upon that significant document. True, strict procedural rules generally frown upon the submission of the Return after the trial.1wphi1 The law creating the Court of Tax Appeals, however, specifically provides that

proceedings before it "shall not be governed strictly by the technical rules of evidence." 13 The paramount consideration remains the ascertainment of truth. Verily, the quest for orderly presentation of issues is not an absolute. It should not bar courts from considering undisputed facts to arrive at a just determination of a controversy. In the present case, the Return attached to the Motion for Reconsideration clearly showed that petitioner suffered a net loss in 1990. Contrary to the holding of the CA and the CTA, petitioner could not have applied the amount as a tax credit. In failing to consider the said Return, as well as the other documentary evidence presented during the trial, the appellate court committed a reversible error. It should be stressed that the rationale of the rules of procedure is to secure a just determination of every action. They are tools designed to facilitate the attainment of justice. 14 But there can be no just determination of the present action if we ignore, on grounds of strict technicality, the Return submitted before the CTA and even before this Court. 15 To repeat, the undisputed fact is that petitioner suffered a net loss in 1990; accordingly, it incurred no tax liability to which the tax credit could be applied. Consequently, there is no reason for the BIR and this Court to withhold the tax refund which rightfully belongs to the petitioner. Public respondents maintain that what was attached to petitioner's Motion for Reconsideration was not the final adjustment Return, but petitioner's first two quarterly returns for 1990. 16 This allegation is wrong. An examination of the records shows that the 1990 Final Adjustment Return was attached to the Motion for Reconsideration. On the other hand, the two quarterly returns for 1990 mentioned by respondent were in fact attached to the Petition for Review filed before the CTA. Indeed, to rebut respondents' specific contention, petitioner submitted before us its Surrejoinder, to which was attached the Motion for Reconsideration and Exhibit "A" thereof, the Final Adjustment Return for 1990. 17 CTA Case No. 4897 Petitioner also calls the attention of this Court, as it had done before the CTA, to a Decision rendered by the Tax Court in CTA Case No. 4897, involving its claim for refund for the year 1990. In that case, the Tax Court held that "petitioner suffered a net loss for the taxable year 1990 . . . ." 18 Respondent, however, urges this Court not to take judicial notice of the said case. 19 As a rule, "courts are not authorized to take judicial notice of the contents of the records of other cases, even when such cases have been tried or are pending in the same court, and notwithstanding the fact that both cases may have been heard or are actually pending before the same judge." 20 Be that as it may, Section 2, Rule 129 provides that courts may take judicial notice of matters ought to be known to judges because of their judicial functions. In this case, the Court notes that a copy of the Decision in CTA Case No. 4897 was attached to the Petition for Review filed before this Court. Significantly, respondents do not claim at all that the said Decision was fraudulent or nonexistent. Indeed, they do not even dispute the contents of the said Decision, claiming merely that the Court cannot take judicial notice thereof. To our mind, respondents' reasoning underscores the weakness of their case. For if they had really believed that petitioner is not entitled to a tax refund, they could have easily proved that it did not suffer any loss in 1990. Indeed, it is noteworthy that respondents opted not to assail the fact appearing therein that petitioner suffered a net loss in 1990 in the same way that it refused to controvert the same fact established by petitioner's other documentary exhibits.

In any event, the Decision in CTA Case No. 4897 is not the sole basis of petitioner's case. It is merely one more bit of information showing the stark truth: petitioner did not use its 1989 refund to pay its taxes for 1990. Finally, respondents argue that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the claimant. Under the facts of this case, we hold that petitioner has established its claim. Petitioner may have failed to strictly comply with the rules of procedure; it may have even been negligent. These circumstances, however, should not compel the Court to disregard this cold, undisputed fact: that petitioner suffered a net loss in 1990, and that it could not have applied the amount claimed as tax credits. Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms, however exalted, should not be misused by the government to keep money not belonging to it and thereby enrich itself at the expense of its law-abiding citizens. If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same standard against itself in refunding excess payments of such taxes. Indeed, the State must lead by its own example of honor, dignity and uprightness. WHEREFORE, the Petition is hereby GRANTED and the assailed Decision and Resolution of the Court of Appeals REVERSED and SET ASIDE. The Commissioner of Internal Revenue is ordered to refund to petitioner the amount of P112,491 as excess creditable taxes paid in 1989. No costs.1wphi1.nt SO ORDERED. Melo, Purisima and Vitug, J., abroad on official business. Gonzaga-Reyes, JJ., concur.

G.R. No. L-68252 May 26, 1995 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOKYO SHIPPING CO. LTD., represented by SORIAMONT STEAMSHIP AGENCIES INC., and COURT OF TAX APPEALS, respondents. PUNO, J.: For resolution is whether or not private respondent Tokyo Shipping Co. Ltd., is entitled to a refund or tax credit for amounts representing pre-payment of income and common carrier's taxes under the National Internal Revenue Code, section 24 (b) (2), as amended. 1 Private respondent is a foreign corporation represented in the Philippines by Soriamont Steamship Agencies, Incorporated. It owns and operates tramper vessel M/V Gardenia. In December 1980, NASUTRA 2 chartered M/V Gardenia to load 16,500 metric tons of raw sugar in the Philippines. 3 On December 23, 1980, Mr. Edilberto Lising, the operations supervisor of Soriamont Agency, 4 paid the required income and common carrier's taxes in the respective sums of FIFTY-NINE THOUSAND FIVE HUNDRED TWENTY-THREE PESOS and SEVENTYFIVE CENTAVOS (P59,523.75) and FORTY-SEVEN THOUSAND SIX HUNDRED NINETEEN PESOS (P47,619.00), or a total of ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS (P107,142.75) based on the expected gross receipts of the vessel. 5 Upon arriving, however, at Guimaras Port of Iloilo, the vessel found no sugar for loading. On January 10, 1981, NASUTRA and private respondent's agent mutually agreed to have the vessel sail for Japan without any cargo. Claiming the pre-payment of income and common carrier's taxes as erroneous since no receipt was realized from the charter agreement, private respondent instituted a claim for tax credit or refund of the sum ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS (P107,142.75) before petitioner Commissioner of Internal Revenue on March 23, 1981. Petitioner failed to act promptly on the claim, hence, on May 14, 1981, private respondent filed a petition for review 6 before public respondent Court of Tax Appeals. Petitioner contested the petition. As special and affirmative defenses, it alleged the following: that taxes are presumed to have been collected in accordance with law; that in an action for refund, the burden of proof is upon the taxpayer to show that taxes are erroneously or illegally collected, and the taxpayer's failure to sustain said burden is fatal to the action for refund; and that claims for refund are construed strictly against tax claimants. 7 After trial, respondent tax court decided in favor of the private respondent. It held: It has been shown in this case that 1) the petitioner has complied with the mentioned statutory requirement by having filed a written claim for refund within the two-year period from date of payment; 2) the respondent has not issued any deficiency assessment nor disputed the correctness of the tax returns and the corresponding amounts of prepaid income and percentage taxes; and 3) the chartered vessel sailed out of the Philippine port with absolutely no cargo laden on board as cleared and certified by the Customs authorities; nonetheless 4) respondent's apparent bit of reluctance in validating the legal merit of the claim, by and large, is tacked upon the "examiner who is investigating petitioner's claim for refund which is the subject matter of this case has not yet submitted his report. Whether or not respondent will present his evidence will depend on the said report of the examiner." (Respondent's Manifestation and Motion dated September 7, 1982). Be that as it may the case was submitted for decision by respondent on the basis of the pleadings and records and by petitioner on the evidence presented by counsel sans the respective memorandum.

An examination of the records satisfies us that the case presents no dispute as to relatively simple material facts. The circumstances obtaining amply justify petitioner's righteous indignation to a more expeditious action. Respondent has offered no reason nor made effort to submit any controverting documents to bash that patina of legitimacy over the claim. But as might well be, towards the end of some two and a half years of seeming impotent anguish over the pendency, the respondent Commissioner of Internal Revenue would furnish the satisfaction of ultimate solution by manifesting that "it is now his turn to present evidence, however, the Appellate Division of the BIR has already recommended the approval of petitioner's claim for refund subject matter of this petition. The examiner who examined this case has also recommended the refund of petitioner's claim. Without prejudice to withdrawing this case after the final approval of petitioner's claim, the Court ordered the resetting to September 7, 1983." (Minutes of June 9, 1983 Session of the Court) We need not fashion any further issue into an apparently settled legal situation as far be it from a comedy of errors it would be too much of a stretch to hold and deny the refund of the amount of prepaid income and common carrier's taxes for which petitioner could no longer be made accountable. On August 3, 1984, respondent court denied petitioner's motion for reconsideration, hence, this petition for review on certiorari. Petitioner now contends: (1) private respondent has the burden of proof to support its claim of refund; (2) it failed to prove that it did not realize any receipt from its charter agreement; and (3) it suppressed evidence when it did not present its charter agreement. We find no merit in the petition. There is no dispute about the applicable law. It is section 24 (b) (2) of the National Internal Revenue Code which at that time provides as follows: A corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income derived in the preceding taxable year from all sources within the Philippines: Provided, however, That international carriers shall pay a tax of two and one-half per cent (2 1/2%) on their gross Philippine billings: "Gross Philippine Billings" include gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or mail, provided the cargo or mail originates from the Philippines. The gross revenue realized from the said cargo or mail include the gross freight charge up to final destination. Gross revenue from chartered flights originating from the Philippines shall likewise form part of "Gross Philippine Billings" regardless of the place or payment of the passage documents . . . . . Pursuant to this provision, a resident foreign corporation engaged in the transport of cargo is liable for taxes depending on the amount of income it derives from sources within the Philippines. Thus, before such a tax liability can be enforced the taxpayer must be shown to have earned income sourced from the Philippines. We agree with petitioner that a claim for refund is in the nature of a claim for exemption 8 and should be construed in strictissimi juris against the taxpayer. 9 Likewise, there can be no disagreement with petitioner's stance that private respondent has the burden of proof to establish the factual basis of its claim for tax refund. The pivotal issue involves a question of fact whether or not the private respondent was able to prove that it derived no receipts from its charter agreement, and hence is entitled to a refund of the taxes it pre-paid to the government.

The respondent court held that sufficient evidence has been adduced by the private respondent proving that it derived no receipt from its charter agreement with NASUTRA. This finding of fact rests on a rational basis, and hence must be sustained. Exhibits "E", "F," and "G" positively show that the tramper vessel M/V "Gardenia" arrived in Iloilo on January 10, 1981 but found no raw sugar to load and returned to Japan without any cargo laden on board. Exhibit "E" is the Clearance Vessel to a Foreign Port issued by the District Collector of Customs, Port of Iloilo while Exhibit "F" is the Certification by the Officer-in-Charge, Export Division of the Bureau of Customs Iloilo. The correctness of the contents of these documents regularly issued by officials of the Bureau of Customs cannot be doubted as indeed, they have not been contested by the petitioner. The records also reveal that in the course of the proceedings in the court a quo, petitioner hedged and hawed when its turn came to present evidence. At one point, its counsel manifested that the BIR examiner and the appellate division of the BIR have both recommended the approval of private respondent's claim for refund. The same counsel even represented that the government would withdraw its opposition to the petition after final approval of private respondents' claim. The case dragged on but petitioner never withdrew its opposition to the petition even if it did not present evidence at all. The insincerity of petitioner's stance drew the sharp rebuke of respondent court in its Decision and for good reason. Taxpayers owe honesty to government just as government owes fairness to taxpayers. In its last effort to retain the money erroneously prepaid by the private respondent, petitioner contends that private respondent suppressed evidence when it did not present its charter agreement with NASUTRA. The contention cannot succeed. It presupposes without any basis that the charter agreement is prejudicial evidence against the private respondent. 10 Allegedly, it will show that private respondent earned a charter fee with or without transporting its supposed cargo from Iloilo to Japan. The allegation simply remained an allegation and no court of justice will regard it as truth. Moreover, the charter agreement could have been presented by petitioner itself thru the proper use of a subpoena duces tecum. It never did either because of neglect or because it knew it would be of no help to bolster its position. 11 For whatever reason, the petitioner cannot take to task the private respondent for not presenting what it mistakenly calls "suppressed evidence." We cannot but bewail the unyielding stance taken by the government in refusing to refund the sum of ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY TWO PESOS AND SEVENTY FIVE CENTAVOS (P107,142.75) erroneously prepaid by private respondent. The tax was paid way back in 1980 and despite the clear showing that it was erroneously paid, the government succeeded in delaying its refund for fifteen (15) years. After fifteen (15) long years and the expenses of litigation, the money that will be finally refunded to the private respondent is just worth a damaged nickel. This is not, however, the kind of success the government, especially the BIR, needs to increase its collection of taxes. Fair deal is expected by our taxpayers from the BIR and the duty demands that BIR should refund without any unreasonable delay what it has erroneously collected. Our ruling inRoxas v. Court of Tax Appeals 12 is apropos to recall: The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously. IN VIEW HEREOF, the assailed decision of respondent Court of Tax Appeals, dated September 15, 1983, is AFFIRMED in toto. No costs. SO ORDERED. Narvasa, C.J., Regalado and Mendoza, JJ., concur.

G.R. No. L-54908 January 22, 1990 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS, respondents. G.R. No. 80041 January 22, 1990 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS, respondents. Gadioma Law Offices for respondents. REGALADO, J.: These cases, involving the same issue being contested by the same parties and having originated from the same factual antecedents generating the claims for tax credit of private respondents, the same were consolidated by resolution of this Court dated May 31, 1989 and are jointly decided herein. The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development Corporation (hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation (Mitsubishi, for brevity), a Japanese corporation licensed to engage in business in the Philippines, for purposes of the projected expansion of the productive capacity of the former's mines in Toledo, Cebu. Under said contract, Mitsubishi agreed to extend a loan to Atlas 'in the amount of $20,000,000.00, United States currency, for the installation of a new concentrator for copper production. Atlas, in turn undertook to sell to Mitsubishi all the copper concentrates produced from said machine for a period of fifteen (15) years. It was contemplated that $9,000,000.00 of said loan was to be used for the purchase of the concentrator machinery from Japan. 1 Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for short) obviously for purposes of its obligation under said contract. Its loan application was approved on May 26, 1970 in the sum of4,320,000,000.00, at about the same time as the approval of its loan for 2,880,000,000.00 from a consortium of Japanese banks. The total amount of both loans is equivalent to $20,000,000.00 in United States currency at the then prevailing exchange rate. The records in the Bureau of Internal Revenue show that the approval of the loan by Eximbank to Mitsubishi was subject to the condition that Mitsubishi would use the amount as a loan to Atlas and as a consideration for importing copper concentrates from Atlas, and that Mitsubishi had to pay back the total amount of loan by September 30, 1981. 2 Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in the amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the National Internal Revenue Code, as amended by Presidential Decree No. 131, and duly remitted to the Government. 3 On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of P1,971,595.01 be applied against their existing and future tax liabilities. Parenthetically, it was later noted by respondent Court of Tax Appeals in its decision that on August 27, 1976, Mitsubishi executed a waiver and disclaimer of its interest in the claim for tax credit in favor of Atlas. 4 The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents filed a petition for review with respondent court, docketed therein as CTA Case No. 2801. 5 The petition was grounded on the claim that Mitsubishi was a mere agent of Eximbank, which is a financing institution owned, controlled and financed by the Japanese Government. Such governmental status of Eximbank, if it may be so called, is the basis for private repondents'

claim for exemption from paying the tax on the interest payments on the loan as earlier stated. It was further claimed that the interest payments on the loan from the consortium of Japanese banks were likewise exempt because said loan supposedly came from or were financed by Eximbank. The provision of the National Internal Revenue Code relied upon is Section 29 (b) (7) (A), 6 which excludes from gross income: (A) Income received from their investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on their deposits in banks in the Philippines by (1) foreign governments, (2) financing institutions owned, controlled, or enjoying refinancing from them, and (3) international or regional financing institutions established by governments. Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 6, 1977 but was later reset upon manifestation of petitioner that the claim for tax credit of the alleged erroneous payment was still being reviewed by the Appellate Division of the Bureau of Internal Revenue. The records show that on November 16, 1976, the said division recommended to petitioner the approval of private respondent's claim. However, before action could be taken thereon, respondent court scheduled the case for hearing on September 30, 1977, during which trial private respondents presented their evidence while petitioner submitted his case on the basis of the records of the Bureau of Internal Revenue and the pleadings. 7 On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax credit in favor of Atlas in the amount of P1,971,595.01. Interestingly, the tax court held that petitioner admitted the material averments of private respondents when he supposedly prayed "for judgment on the pleadings without off-spring proof as to the truth of his allegations." 8 Furthermore, the court declared that all papers and documents pertaining to the loan of 4,320,000,000.00 obtained by Mitsubishi from Eximbank show that this was the same amount given to Atlas. It also observed that the money for the loans from the consortium of private Japanese banks in the sum of 2,880,000,000.00 "originated" from Eximbank. From these, respondent court concluded that the ultimate creditor of Atlas was Eximbank with Mitsubishi acting as a mere "arranger or conduit through which the loans flowed from the creditor Export-Import Bank of Japan to the debtor Atlas Consolidated Mining & Development Corporation." 9 A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an appeal to this Court, docketed herein as G.R. No. 54908. While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on the amount of P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and 1978 was withheld and remitted to the Government. Atlas again filed a claim for tax credit with the petitioner, repeating the same basis for exemption. On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals docketed as CTA Case No. 3015. Petitioner filed his answer thereto on August 14, 1979, and, in a letter to private respondents dated November 12, 1979, denied said claim for tax credit for lack of factual or legal basis. 10 On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court rendered judgment ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for reconsideration, filed on March 10, 1981, was denied by respondent court in a resolution dated September 7, 1987. A notice of appeal was filed on September 22, 1987 by petitioner with respondent court and a petition for review was filed with this Court on December 19, 1987. Said later case is now before us as G.R. No. 80041 and is consolidated with G.R. No. 54908.

The principal issue in both petitions is whether or not the interest income from the loans extended to Atlas by Mitsubishi is excludible from gross income taxation pursuant to Section 29 b) (7) (A) of the tax code and, therefore, exempt from withholding tax. Apropos thereto, the focal question is whether or not Mitsubishi is a mere conduit of Eximbank which will then be considered as the creditor whose investments in the Philippines on loans are exempt from taxes under the code. Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that petitioner should be deemed to have admitted the allegations of the private respondents when it submitted the case on the basis of the pleadings and records of the bureau. There is nothing to indicate such admission on the part of petitioner nor can we accept respondent court's pronouncement that petitioner did not offer to prove the truth of its allegations. The records of the Bureau of Internal Revenue relevant to the case were duly submitted and admitted as petitioner's supporting evidence. Additionally, a hearing was conducted, with presentation of evidence, and the findings of respondent court were based not only on the pleadings but on the evidence adduced by the parties. There could, therefore, not have been a judgment on the pleadings, with the theorized admissions imputed to petitioner, as mistakenly held by respondent court. Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled to the highest respect and can only be disturbed on appeal if they are not supported by substantial evidence or if there is a showing of gross error or abuse on the part of the tax court. 11 Thus, ordinarily, we could give due consideration to the holding of respondent court that Mitsubishi is a mere agent of Eximbank. Compelling circumstances obtaining and proven in these cases, however, warrant a departure from said general rule since we are convinced that there is a misapprehension of facts on the part of the tax court to the extent that its conclusions are speculative in nature. The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the contract of loan and Atlas as the seller of the copper concentrates. From the categorical language used in the document, one prestation was in consideration of the other. The specific terms and the reciprocal nature of their obligations make it implausible, if not vacuous to give credit to the cavalier assertion that Mitsubishi was a mere agent in said transaction. Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi stated in its loan application with the former was that the amount being procured would be used as a loan to and in consideration for importing copper concentrates from Atlas. 12 Such an innocuous statement of purpose could not have been intended for, nor could it legally constitute, a contract of agency. If that had been the purpose as respondent court believes, said corporations would have specifically so stated, especially considering their experience and expertise in financial transactions, not to speak of the amount involved and its purchasing value in 1970. A thorough analysis of the factual and legal ambience of these cases impels us to give weight to the following arguments of petitioner: The nature of the above contract shows that the same is not just a simple contract of loan. It is not a mere creditor-debtor relationship. It is more of a reciprocal obligation between ATLAS and MITSUBISHI where the latter shall provide the funds in the installation of a new concentrator at the former's Toledo mines in Cebu, while ATLAS in consideration of which, shall sell to MITSUBISHI, for a term of 15 years, the entire copper concentrate that will be produced by the installed concentrator.

Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the specified term was the consideration of the granting of the amount of $20 million to ATLAS. MITSUBISHI, in order to fulfill its part of the contract, had to obtain funds. Hence, it had to secure a loan or loans from other sources. And from what sources, it is immaterial as far as ATLAS in concerned. In this case, MITSUBISHI obtained the $20 million from the EXIMBANK, of Japan and the consortium of Japanese banks financed through the EXIMBANK, of Japan. When MITSUBISHI therefore secured such loans, it was in its own independent capacity as a private entity and not as a conduit of the consortium of Japanese banks or the EXIMBANK of Japan. While the loans were secured by MITSUBISHI primarily "as a loan to and in consideration for importing copper concentrates from ATLAS," the fact remains that it was a loan by EXIMBANK of Japan to MITSUBISHI and not to ATLAS. Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct and separate contract from that entered into by MITSUBISHI and ATLAS. Surely, in the latter contract, it is not EXIMBANK, that was intended to be benefited. It is MITSUBISHI which stood to profit. Besides, the Loan and Sales Contract cannot be any clearer. The only signatories to the same were MITSUBISHI and ATLAS. Nowhere in the contract can it be inferred that MITSUBISHI acted for and in behalf of EXIMBANK, of Japan nor of any entity, private or public, for that matter. Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule that when a contract of loan is completed, the money ceases to be the property of the former owner and becomes the sole property of the obligor (Tolentino and Manio vs. Gonzales Sy, 50 Phil. 558). In the case at bar, when MITSUBISHI obtained the loan of $20 million from EXIMBANK, of Japan, said amount ceased to be the property of the bank and became the property of MITSUBISHI. The conclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is the sole creditor of ATLAS, the former being the owner of the $20 million upon completion of its loan contract with EXIMBANK of Japan. The interest income of the loan paid by ATLAS to MITSUBISHI is therefore entirely different from the interest income paid by MITSUBISHI to EXIMBANK, of Japan. What was the subject of the 15% withholding tax is not the interest income paid by MITSUBISHI to EXIMBANK, but the interest income earned by MITSUBISHI from the loan to ATLAS. . . . 13 To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in itself, does not appear to be suppletory or collateral to another contract and is, therefore, not to be distorted by other considerations aliunde. The application for the loan was approved on May 20, 1970, or more than a month after the contract between Mitsubishi and Atlas was entered into on April 17, 1970. It is true that under the contract of loan with Eximbank, Mitsubishi agreed to use the amount as a loan to and in consideration for importing copper concentrates from Atlas, but all that this proves is the justification for the loan as represented by Mitsubishi, a standard banking practice for evaluating the prospects of due repayment. There is nothing wrong with such stipulation as the parties in a contract are free to agree on such lawful terms and conditions as they see fit. Limiting the disbursement of the amount borrowed to a certain person or to a certain purpose is not unusual, especially in the case of Eximbank which, aside from protecting

its financial exposure, must see to it that the same are in line with the provisions and objectives of its charter. Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it from making loans except to Japanese individuals and corporations. We are not impressed. Not only is there a failure to establish such submission by adequate evidence but it posits the unfair and unexplained imputation that, for reasons subject only of surmise, said financing institution would deliberately circumvent its own charter to accommodate an alien borrower through a manipulated subterfuge, but with it as a principal and the real obligee. The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank, assuming the truth thereof, is too tenuous and conjectural to support the proposition that Mitsubishi is a mere conduit. Furthermore, the remittance of the interest payments may also be logically viewed as an arrangement in paying Mitsubishi's obligation to Eximbank. Whatever arrangement was agreed upon by Eximbank and Mitsubishi as to the manner or procedure for the payment of the latter's obligation is their own concern. It should also be noted that Eximbank's loan to Mitsubishi imposes interest at the rate of 75% per annum, while Mitsubishis contract with Atlas merely states that the "interest on the amount of the loan shall be the actual cost beginning from and including other dates of releases against loan." 14 It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed, which onus petitioners have failed to discharge. Significantly, private respondents are not even among the entities which, under Section 29 (b) (7) (A) of the tax code, are entitled to exemption and which should indispensably be the party in interest in this case. Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad, pragmatic analysis" alone without substantial supportive evidence, lest governmental operations suffer due to diminution of much needed funds. Nor can we close this discussion without taking cognizance of petitioner's warning, of pervasive relevance at this time, that while international comity is invoked in this case on the nebulous representation that the funds involved in the loans are those of a foreign government, scrupulous care must be taken to avoid opening the floodgates to the violation of our tax laws. Otherwise, the mere expedient of having a Philippine corporation enter into a contract for loans or other domestic securities with private foreign entities, which in turn will negotiate independently with their governments, could be availed of to take advantage of the tax exemption law under discussion. WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015, dated April 18, 1980 and January 15, 1981, respectively, are hereby REVERSED and SET ASIDE. SO ORDERED. Melencio-Herrera, Paras, Padilla and Sarmiento, JJ., concur.

G.R. No. 112024 January 28, 1999 PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OF APPEALS, respondent. QUISUMBING, J.: This petition for review assails the Resolution 1 of the Court of Appeals dated September 22, 1993 affirming the Decision 2 and a Resolution 3 of the Court Of Tax Appeals which denied the claims of the petitioner for tax refund and tax credits, and disposing as follows: IN VIEW OF ALL, THE FOREGOING, the instant petition for review, is DENIED due course. The Decision of the Court of Tax Appeals dated May 20, 1993 and its resolution dated July 20, 1993, are hereby AFFIRMED in toto. SO ORDERED. 4 The Court of Tax Appeals earlier ruled as follows: WHEREFORE, Petitioner's claim for refund/tax credits of overpaid income tax for 1985 in the amount of P5,299,749.95 is hereby denied for having been filed beyond the reglementary period. The 1986 claim for refund amounting to P234,077.69 is likewise denied since petitioner has opted and in all likelihood automatically credited the same to the succeeding year. The petition for review is dismissed for lack of merit. SO ORDERED. 5 The facts on record show the antecedent circumstances pertinent to this case. Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized under Philippine laws, filed its quarterly income tax returns for the first and second quarters of 1985, reported profits, and paid the total income tax of P5,016,954.00. The taxes due were settled by applying PBCom's tax credit memos and accordingly, the Bureau of Internal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00 and P1,615,253.00, respectively. Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the year-ended December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax payable for the year. But during these two years, PBCom earned rental income from leased properties. The lessees withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986. On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985. Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.

Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA). The petition was docketed as CTA Case No. 4309 entitled: "Philippine Bank of Communications vs. Commissioner of Internal Revenue." The losses petitioner incurred as per the summary of petitioner's claims for refund and tax credit for 1985 and 1986, filed before the Court of Tax Appeals, are as follows: 1985 1986 Net Income (Loss) (P25,317,288.00) (P14,129,602.00) Tax Due NIL NIL Quarterly tax. Payments Made 5,016,954.00 Tax Withheld at Source 282,795.50 234,077.69 Excess Tax Payments P5,299,749.50* P234,077.69 =============== ============= * CTA's decision reflects PBCom's 1985 tax claim as P5,299,749.95. A forty five centavo difference was noted. On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed beyond the two-year reglementary period provided for by law. The petitioner's claim for refund in 1986 amounting to P234,077.69 was likewise denied on the assumption that it was automatically credited by PBCom against its tax payment in the succeeding year. On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTA's decision but the same was denied due course for lack of merit. 6 Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with the Court of Appeals. However on September 22, 1993, the Court of Appeals affirmed in toto the CTA's resolution dated July 20, 1993. Hence this petition now before us. The issues raised by the petitioner are: I. Whether taxpayer PBCom which relied in good faith on the formal assurances of BIR in RMC No. 7-85 and did not immediately file with the CTA a petition for review asking for the refund/tax credit of its 1985-86 excess quarterly income tax payments can be prejudiced by the subsequent BIR rejection, applied retroactivity, of its assurances in RMC No. 7-85 that the prescriptive period for the refund/tax credit of excess quarterly income tax payments is not two years but ten (10). 7 II. Whether the Court of Appeals seriously erred in affirming the CTA decision which denied PBCom's claim for the refund of P234,077.69 income tax overpaid in 1986 on the mere speculation, without proof, that there were taxes due in 1987 and that PBCom availed of taxcrediting that year. 8 Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the plea for tax refund or tax credits on the ground of prescription, despite petitioner's reliance on RMC No. 7-85, changing the prescriptive period of two years to ten years?

Petitioner argues that its claims for refund and tax credits are not yet barred by prescription relying on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The circular states that overpaid income taxes are not covered by the two-year prescriptive period under the tax Code and that taxpayers may claim refund or tax credits for the excess quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil Code. The pertinent portions of the circular reads: REVENUE MEMORANDUM CIRCULAR NO. 7-85 SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS CORPORATE INCOME TAX RESULTING FROM THE FILING OF THE FINAL ADJUSTMENT RETURN. TO: All Internal Revenue Officers and Others Concerned. Sec. 85 And 86 Of the National Internal Revenue Code provide: xxx xxx xxx The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos. 10-77 which provide; xxx xxx xxx It has been observed, however, that because of the excess tax payments, corporations file claims for recovery of overpaid income tax with the Court of Tax Appeals within the two-year period from the date of payment, in accordance with sections 292 and 295 of the National Internal Revenue Code. It is obvious that the filing of the case in court is to preserve the judicial right of the corporation to claim the refund or tax credit. It should he noted, however, that this is not a case of erroneously or illegally paid tax under the provisions of Sections 292 and 295 of the Tax Code. In the above provision of the Regulations the corporation may request for the refund of the overpaid income tax or claim for automatic tax credit. To insure prompt action on corporate annual income tax returns showing refundable amounts arising from overpaid quarterly income taxes, this Office has promulgated Revenue Memorandum Order No. 32-76 dated June 11, 1976, containing the procedure in processing said returns. Under these procedures, the returns are merely pre-audited which consist mainly of checking mathematical accuracy of the figures of the return. After which, the refund or tax credit is granted, and, this procedure was adopted to facilitate immediate action on cases like this. In this regard, therefore, there is no need to file petitions for review in the Court of Tax Appeals in order to preserve the right to claim refund or tax credit the two year period. As already stated, actions hereon by the Bureau are immediate after only a cursory pre-audit of the income tax returns. Moreover, a taxpayer may recover from the Bureau of Internal Revenue excess income tax paid under the provisions of Section 86 of the Tax Code within 10 years from the date of payment considering that it is an obligation created by law (Article 1144 of the Civil Code). 9 (Emphasis supplied.) Petitioner argues that the government is barred from asserting a position contrary to its declared circular if it would result to injustice to taxpayers. Citing ABS CBN Broadcasting Corporation vs. Court of Tax Appeals 10 petitioner claims that rulings or circulars promulgated by the

Commissioner of Internal Revenue have no retroactive effect if it would be prejudicial to taxpayers, In ABS-CBN case, the Court held that the government is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom or where there has been a misrepresentation to the taxpayer. Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for this rules as follows: Sec. 246 Non-retroactivity of rulings Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers except in the following cases: a). where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; b). where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; c). where the taxpayer acted in bad faith. Respondent Commissioner of Internal Revenue, through Solicitor General, argues that the twoyear prescriptive period for filing tax cases in court concerning income tax payments of Corporations is reckoned from the date of filing the Final Adjusted Income Tax Return, which is generally done on April 15 following the close of the calendar year. As precedents, respondent Commissioner cited cases which adhered to this principle, to wit ACCRA Investments Corp. vs. Court of Appeals, et al., 11 and Commissioner of Internal Revenue vs. TMX Sales, Inc., et al.. 12 Respondent Commissioner also states that since the Final Adjusted Income Tax Return of the petitioner for the taxable year 1985 was supposed to be filed on April 15, 1986, the latter had only until April 15, 1988 to seek relief from the court. Further, respondent Commissioner stresses that when the petitioner filed the case before the CTA on November 18, 1988, the same was filed beyond the time fixed by law, and such failure is fatal to petitioner's cause of action. After a careful study of the records and applicable jurisprudence on the matter, we find that, contrary to the petitioner's contention, the relaxation of revenue regulations by RMC 7-85 is not warranted as it disregards the two-year prescriptive period set by law. Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal. 13 Due process of law under the Constitution does not require judicial proceedings in tax cases. This must necessarily be so because it is upon taxation that the government chiefly relies to obtain the means to carry on its operations and it is of utmost importance that the modes adopted to enforce the collection of taxes levied should be summary and interfered with as little as possible. 14 From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law because the BIR being an administrative body enforced to collect taxes, its functions should not be unduly delayed or hampered by incidental matters. Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides for the prescriptive period for filing a court proceeding for the recovery of tax erroneously or illegally collected, viz.:

Sec. 230. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceedings shall begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment;Provided however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. (Emphasis supplied) The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal Revenue, within two (2) years after payment of tax, before any suit in CTA is commenced. The two-year prescriptive period provided, should be computed from the time of filing the Adjustment Return and final payment of the tax for the year. In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co., 15 this Court explained the application of Sec. 230 of 1977 NIRC, as follows: Clearly, the prescriptive period of two years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished. In the present case, this date is April 16, 1984, and two years from this date would be April 16, 1986. . . . As we have earlier said in the TMX Sales case, Sections 68. 16 69, 17 and 70 18 on Quarterly Corporate Income Tax Payment and Section 321 should be considered in conjunction with it 19 When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress. It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be erroneous. 20 Thus, courts will not countenance administrative issuances that override, instead of remaining consistent and in harmony with the law they seek to apply and implement. 21 In the case of People vs. Lim, 22 it was held that rules and regulations issued by administrative officials to implement a law cannot go beyond the terms and provisions of the latter. Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only inconsistent with but is contrary to the provisions and spirit of Act. No 4003 as amended, because whereas the prohibition prescribed in said Fisheries Act was for any single period of time not exceeding five years duration, FAO No 37-1 fixed no period, that is to say, it establishes an absolute ban for all time. This discrepancy between Act No. 4003 and FAO No. 37-1 was probably due to an oversight on the part of Secretary of Agriculture and Natural Resources. Of course, in case of discrepancy, the basic Act prevails, for the reason that the regulation or rule issued to

implement a law cannot go beyond the terms and provisions of the latter. . . . In this connection, the attention of the technical men in the offices of Department Heads who draft rules and regulation is called to the importance and necessity of closely following the terms and provisions of the law which they intended to implement, this to avoid any possible misunderstanding or confusion as in the present case. 23 Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its officials or agents. 24 As pointed out by the respondent courts, the nullification of RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative interpretation which is not in harmony with Sec. 230 of 1977 NIRC. for being contrary to the express provision of a statute. Hence, his interpretation could not be given weight for to do so would, in effect, amend the statute. It is likewise argued that the Commissioner of Internal Revenue, after promulgating RMC No. 7-85, is estopped by the principle of non-retroactively of BIR rulings. Again We do not agree. The Memorandum Circular, stating that a taxpayer may recover the excess income tax paid within 10 years from date of payment because this is an obligation created by law, was issued by the Acting Commissioner of Internal Revenue. On the other hand, the decision, stating that the taxpayer should still file a claim for a refund or tax credit and corresponding petition fro review within the two-year prescription period, and that the lengthening of the period of limitation on refund from two to ten years would be adverse to public policy and run counter to the positive mandate of Sec. 230, NIRC, - was the ruling and judicial interpretation of the Court of Tax Appeals. Estoppel has no application in the case at bar because it was not the Commissioner of Internal Revenue who denied petitioner's claim of refund or tax credit. Rather, it was the Court of Tax Appeals who denied (albeit correctly) the claim and in effect, ruled that the RMC No. 785 issued by the Commissioner of Internal Revenue is an administrative interpretation which is out of harmony with or contrary to the express provision of a statute (specifically Sec. 230, NIRC), hence, cannot be given weight for to do so would in effect amend the statute. 25 Art. 8 of the Civil Code 26 recognizes judicial decisions, applying or interpreting statutes as part of the legal system of the country. But administrative decisions do not enjoy that level of recognition. A memorandum-circular of a bureau head could not operate to vest a taxpayer with shield against judicial action. For there are no vested rights to speak of respecting a wrong construction of the law by the administrative officials and such wrong interpretation could not place the Government in estoppel to correct or overrule the same. 27 Moreover, the nonretroactivity of rulings by the Commissioner of Internal Revenue is not applicable in this case because the nullity of RMC No. 7-85 was declared by respondent courts and not by the Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held by this Court, a claim for refund is in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer. 28 On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming CTA's decision denying its claim for refund of P234,077.69 (tax overpaid in 1986), based on mere speculation, without proof, that PBCom availed of the automatic tax credit in 1987. Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides that any excess of the total quarterly payments over the actual income tax computed in the adjustment or final corporate income tax return, shall either(a) be refunded to the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable year. The corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention, whether to request for a refund or claim for an

automatic tax credit for the succeeding taxable year. To ease the administration of tax collection, these remedies are in the alternative, and the choice of one precludes the other. As stated by respondent Court of Appeals: Finally, as to the claimed refund of income tax over-paid in 1986 the Court of Tax Appeals, after examining the adjusted final corporate annual income tax return for taxable year 1986, found out that petitioner opted to apply for automatic tax credit. This was the basis used (visavis the fact that the 1987 annual corporate tax return was not offered by the petitioner as evidence) by the CTA in concluding that petitioner had indeed availed of and applied the automatic tax credit to the succeeding year, hence it can no longer ask for refund, as to [sic] the two remedies of refund and tax credit are alternative. 30 That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977 NIRC, as specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which we must respect. Moreover, the 1987 annual corporate tax return of the petitioner was not offered as evidence to contovert said fact. Thus, we are bound by the findings of fact by respondent courts, there being no showing of gross error or abuse on their part to disturb our reliance thereon. 31 WHEREFORE, the, petition is hereby DENIED, The decision of the Court of Appeals appealed from is AFFIRMED, with COSTS against the petitioner.1wphi1.nt SO ORDERED. Bellosillo, Puno, Mendoza, and Buena, JJ., concur.

G.R. No. L-59431 July 25, 1984 ANTERO M. SISON, JR., petitioner, vs. RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA, Deputy Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau of Internal Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and CESAR E. A. VIRATA, Minister of Finance, respondents. Antero Sison for petitioner and for his own behalf. The Solicitor General for respondents. FERNANDO, C.J.: The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1 on the validity of Section I of Batas Pambansa Blg. 135 depends upon a showing of its constitutional infirmity. The assailed provision further amends Section 21 of the National Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a) taxable compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual partner in the net profits of taxable partnership, (f) adjusted gross income. 2 Petitioner 3 as taxpayer alleges that by virtue thereof, "he would be unduly discriminated against by the imposition of higher rates of tax upon his income arising from the exercise of his profession vis-a-vis those which are imposed upon fixed income or salaried individual taxpayers. 4 He characterizes the above sction as arbitrary amounting to class legislation, oppressive and capricious in character 5For petitioner, therefore, there is a transgression of both the equal protection and due process clauses 6 of the Constitution as well as of the rule requiring uniformity in taxation. 7 The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10 days from notice. Such an answer, after two extensions were granted the Office of the Solicitor General, was filed on May 28, 1982.8 The facts as alleged were admitted but not the allegations which to their mind are "mere arguments, opinions or conclusions on the part of the petitioner, the truth [for them] being those stated [in their] Special and Affirmative Defenses." 9 The answer then affirmed: "Batas Pambansa Big. 135 is a valid exercise of the State's power to tax. The authorities and cases cited while correctly quoted or paraghraph do not support petitioner's stand." 10 The prayer is for the dismissal of the petition for lack of merit. This Court finds such a plea more than justified. The petition must be dismissed. 1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so clearly set forth by retired Chief Justice Makalintal thus: "The areas which used to be left to private enterprise and initiative and which the government was called upon to enter optionally, and only 'because it was better equipped to administer for the public welfare than is any private individual or group of individuals,' continue to lose their well-defined boundaries and to be absorbed within activities that the government must undertake in its sovereign capacity if it is to meet the increasing social challenges of the times." 11 Hence the need for more revenues. The power to tax, an inherent prerogative, has to be availed of to assure the performance of vital state functions. It is the source of the bulk of public funds. To praphrase a recent decision, taxes being the lifeblood of the government, their prompt and certain availability is of the essence. 12 2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the strongest of all the powers of of government." 13 It is, of course, to be admitted that for all its plenitude 'the power to tax is not unconfined. There are restrictions. The Constitution sets forth such limits . Adversely affecting as it does properly rights, both the due process and equal protection clauses inay properly be invoked, all petitioner does, to invalidate in appropriate cases a revenue measure. if it were otherwise, there would -be truth to the 1803 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." 14 In a separate opinion

in Graves v. New York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized it as "a flourish of rhetoric [attributable to] the intellectual fashion of the times following] a free use of absolutes." 16 This is merely to emphasize that it is riot and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The power to tax is not the power to destroy while this Court sits." 17 So it is in the Philippines. 3. This Court then is left with no choice. The Constitution as the fundamental law overrides any legislative or executive, act that runs counter to it. In any case therefore where it can be demonstrated that the challenged statutory provision as petitioner here alleges fails to abide by its command, then this Court must so declare and adjudge it null. The injury thus is centered on the question of whether the imposition of a higher tax rate on taxable net income derived from business or profession than on compensation is constitutionally infirm. 4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as here. does not suffice. There must be a factual foundation of such unconstitutional taint. Considering that petitioner here would condemn such a provision as void or its face, he has not made out a case. This is merely to adhere to the authoritative doctrine that were the due process and equal protection clauses are invoked, considering that they arc not fixed rules but rather broad standards, there is a need for of such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail. 18 5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown to amount to the confiscation of property. That would be a clear abuse of power. It then becomes the duty of this Court to say that such an arbitrary act amounted to the exercise of an authority not conferred. That properly calls for the application of the Holmes dictum. It has also been held that where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process grounds. 19 6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this constitutional mandate whether the assailed act is in the exercise of the lice power or the power of eminent domain is to demonstrated that the governmental act assailed, far from being inspired by the attainment of the common weal was prompted by the spirit of hostility, or at the very least, discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different, both in the privileges conferred and the liabilities imposed. Favoritism and undue preference cannot be allowed. For the principle is that equal protection and security shall be given to every person under circumtances which if not Identical are analogous. If law be looked upon in terms of burden or charges, those that fall within a class should be treated in the same fashion, whatever restrictions cast on some in the group equally binding on the rest." 20 That same formulation applies as well to taxation measures. The equal protection clause is, of course, inspired by the noble concept of approximating the Ideal of the laws benefits being available to all and the affairs of men being governed by that serene and impartial uniformity, which is of the very essence of the Idea of law. There is, however, wisdom, as well as realism in these words of Justice Frankfurter: "The equality at which the 'equal protection' clause aims is not a disembodied equality. The Fourteenth Amendment enjoins 'the equal protection of the laws,' and laws are not abstract propositions. They do not relate to abstract units A, B and C, but are expressions of policy arising out of specific difficulties, address to the attainment of specific ends by the use of specific remedies. The Constitution does not require things which are different in fact or opinion to be treated in law as though they were the same." 21Hence the constant reiteration of the view that classification if rational in character is allowable. As a matter of fact, in a leading case of Lutz V. Araneta, 22 this Court, through Justice J.B.L. Reyes, went so far as to hold "at any rate, it is

inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that 'inequalities which result from a singling out of one particular class for taxation, or exemption infringe no constitutional limitation.'" 23 7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The rule of taxation shag be uniform and equitable." 24 This requirement is met according to Justice Laurel in Philippine Trust Company v. Yatco, 25 decided in 1940, when the tax "operates with the same force and effect in every place where the subject may be found. " 26 He likewise added: "The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly attainable." 27 The problem of classification did not present itself in that case. It did not arise until nine years later, when the Supreme Court held: "Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation, ... . 28 As clarified by Justice Tuason, where "the differentiation" complained of "conforms to the practical dictates of justice and equity" it "is not discriminatory within the meaning of this clause and is therefore uniform." 29 There is quite a similarity then to the standard of equal protection for all that is required is that the tax "applies equally to all persons, firms and corporations placed in similar situation." 30 8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the distinction between a tax rate and a tax base. There is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the same time reducing the applicable tax rate. Taxpayers may be classified into different categories. To repeat, it. is enough that the classification must rest upon substantial distinctions that make real differences. In the case of the gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of classification is the susceptibility of the income to the application of generalized rules removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of them. Taxpayers who are recipients of compensation income are set apart as a class. As there is practically no overhead expense, these taxpayers are e not entitled to make deductions for income tax purposes because they are in the same situation more or less. On the other hand, in the case of professionals in the practice of their calling and businessmen, there is no uniformity in the costs or expenses necessary to produce their income. It would not be just then to disregard the disparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the basis of gross income. There is ample justification then for the Batasang Pambansa to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income. 9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of factual foundation to show the arbitrary character of the assailed provision; 31 (2) the force of controlling doctrines on due process, equal protection, and uniformity in taxation and (3) the reasonableness of the distinction between compensation and taxable net income of professionals and businessman certainly not a suspect classification, WHEREFORE, the petition is dismissed. Costs against petitioner. Makasiar, Concepcion, Jr., Guerero, Melencio-Herrera, Escolin, Relova, Gutierrez, Jr., De la Fuente and Cuevas, JJ., concur. Teehankee, J., concurs in the result. Plana, J., took no part.

Separate Opinions

AQUINO, J., concurring: I concur in the result. The petitioner has no cause of action for prohibition. ABAD SANTOS, J., dissenting: This is a frivolous suit. While the tax rates for compensation income are lower than those for net income such circumtance does not necessarily result in lower tax payments for these receiving compensation income. In fact, the reverse will most likely be the case; those who file returns on the basis of net income will pay less taxes because they claim all sort of deduction justified or not I vote for dismissal.

G.R. No. 115455 October 30, 1995 ARTURO M. TOLENTINO, petitioner, vs. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, respondents. G.R. No. 115525 October 30, 1995 JUAN T. DAVID, petitioner, vs. TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO, as Secretary of Finance; LIWAYWAY VINZONS-CHATO, as Commissioner of Internal Revenue; and their AUTHORIZED AGENTS OR REPRESENTATIVES, respondents. G.R. No. 115543 October 30, 1995 RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners, vs. THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS OF THE BUREAU OF INTERNAL REVENUE AND BUREAU OF CUSTOMS, respondents. G.R. No. 115544 October 30, 1995 PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; KAMAHALAN PUBLISHING CORPORATION; PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA; and OFELIA L. DIMALANTA, petitioners, vs. HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal Revenue; HON. TEOFISTO T. GUINGONA, JR., in his capacity as Executive Secretary; and HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary of Finance, respondents. G.R. No. 115754 October 30, 1995 CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., (CREBA), petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE, respondent. G.R. No. 115781 October 30, 1995 KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO C. CAPULONG, JR., JOSE T. APOLO, EPHRAIM TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G. FERNANDO, RAOUL V. VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF ATTORNEYS FOR BROTHERHOOD, INTEGRITY AND NATIONALISM, INC. ("MABINI"), FREEDOM FROM DEBT COALITION, INC., and PHILIPPINE BIBLE SOCIETY, INC. and WIGBERTO TAADA,petitioners, vs. THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE COMMISSIONER OF INTERNAL REVENUE and THE COMMISSIONER OF CUSTOMS, respondents. G.R. No. 115852 October 30, 1995 PHILIPPINE AIRLINES, INC., petitioner, vs. THE SECRETARY OF FINANCE and COMMISSIONER OF INTERNAL REVENUE, respondents. G.R. No. 115873 October 30, 1995 COOPERATIVE UNION OF THE PHILIPPINES, petitioner, vs. HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal Revenue, HON. TEOFISTO T. GUINGONA, JR., in his capacity as Executive Secretary, and HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary of Finance, respondents. G.R. No. 115931 October 30, 1995 PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and ASSOCIATION OF PHILIPPINE BOOK SELLERS, petitioners, vs. HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY V. CHATO, as the Commissioner of Internal Revenue; and HON. GUILLERMO PARAYNO, JR., in his capacity as the Commissioner of Customs, respondents. RESOLUTION

MENDOZA, J.: These are motions seeking reconsideration of our decision dismissing the petitions filed in these cases for the declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded Value-Added Tax Law. The motions, of which there are 10 in all, have been filed by the several petitioners in these cases, with the exception of the Philippine Educational Publishers Association, Inc. and the Association of Philippine Booksellers, petitioners in G.R. No. 115931. The Solicitor General, representing the respondents, filed a consolidated comment, to which the Philippine Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine Press Institute, Inc., petitioner in G.R. No. 115544, and Juan T. David, petitioner in G.R. No. 115525, each filed a reply. In turn the Solicitor General filed on June 1, 1995 a rejoinder to the PPI's reply. On June 27, 1995 the matter was submitted for resolution. I. Power of the Senate to propose amendments to revenue bills . Some of the petitioners (Tolentino, Kilosbayan, Inc., Philippine Airlines (PAL), Roco, and Chamber of Real Estate and Builders Association (CREBA)) reiterate previous claims made by them that R.A. No. 7716 did not "originate exclusively" in the House of Representatives as required by Art. VI, 24 of the Constitution. Although they admit that H. No. 11197 was filed in the House of Representatives where it passed three readings and that afterward it was sent to the Senate where after first reading it was referred to the Senate Ways and Means Committee, they complain that the Senate did not pass it on second and third readings. Instead what the Senate did was to pass its own version (S. No. 1630) which it approved on May 24, 1994. Petitioner Tolentino adds that what the Senate committee should have done was to amend H. No. 11197 by striking out the text of the bill and substituting it with the text of S. No. 1630. That way, it is said, "the bill remains a House bill and the Senate version just becomes the text (only the text) of the House bill." The contention has no merit. The enactment of S. No. 1630 is not the only instance in which the Senate proposed an amendment to a House revenue bill by enacting its own version of a revenue bill. On at least two occasions during the Eighth Congress, the Senate passed its own version of revenue bills, which, in consolidation with House bills earlier passed, became the enrolled bills. These were: R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987 BY EXTENDING FROM FIVE (5) YEARS TO TEN YEARS THE PERIOD FOR TAX AND DUTY EXEMPTION AND TAX CREDIT ON CAPITAL EQUIPMENT) which was approved by the President on April 10, 1992. This Act is actually a consolidation of H. No. 34254, which was approved by the House on January 29, 1992, and S. No. 1920, which was approved by the Senate on February 3, 1992. R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE REWARD TO ANY FILIPINO ATHLETE WINNING A MEDAL IN OLYMPIC GAMES) which was approved by the President on May 22, 1992. This Act is a consolidation of H. No. 22232, which was approved by the House of Representatives on August 2, 1989, and S. No. 807, which was approved by the Senate on October 21, 1991. On the other hand, the Ninth Congress passed revenue laws which were also the result of the consolidation of House and Senate bills. These are the following, with indications of the dates on which the laws were approved by the President and dates the separate bills of the two chambers of Congress were respectively passed:

1. R.A. NO. 7642 AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDING FOR THIS PURPOSE THE PERTINENT SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE (December 28, 1992). House Bill No. 2165, October 5, 1992

AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS TO DECLARE DIVIDENDS UNDER CERTAIN CONDITIONS TO THE NATIONAL GOVERNMENT, AND FOR OTHER PURPOSES (November 9, 1993) House Bill No. 11024, November 3, 1993 Senate Bill No. 1168, November 3, 1993

Senate Bill No. 32, December 7, 1992 6. R.A. NO. 7660 2. R.A. NO. 7643 AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUE TO REQUIRE THE PAYMENT OF THE VALUE-ADDED TAX EVERY MONTH AND TO ALLOW LOCAL GOVERNMENT UNITS TO SHARE IN VAT REVENUE, AMENDING FOR THIS PURPOSE CERTAIN SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE (December 28, 1992) House Bill No. 1503, September 3, 1992 Senate Bill No. 968, December 7, 1992 3. R.A. NO. 7646 AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE TO PRESCRIBE THE PLACE FOR PAYMENT OF INTERNAL REVENUE TAXES BY LARGE TAXPAYERS, AMENDING FOR THIS PURPOSE CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED (February 24, 1993) House Bill No. 1470, October 20, 1992 Senate Bill No. 35, November 19, 1992 4. R.A. NO. 7649 AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL SUBDIVISIONS, INSTRUMENTALITIES OR AGENCIES INCLUDING GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS (GOCCS) TO DEDUCT AND WITHHOLD THE VALUE-ADDED TAX DUE AT THE RATE OF THREE PERCENT (3%) ON GROSS PAYMENT FOR THE PURCHASE OF GOODS AND SIX PERCENT (6%) ON GROSS RECEIPTS FOR SERVICES RENDERED BY CONTRACTORS (April 6, 1993) House Bill No. 5260, January 26, 1993 Senate Bill No. 1141, March 30, 1993 5. R.A. NO. 7656 AN ACT RATIONALIZING FURTHER THE STRUCTURE AND ADMINISTRATION OF THE DOCUMENTARY STAMP TAX, AMENDING FOR THE PURPOSE CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, ALLOCATING FUNDS FOR SPECIFIC PROGRAMS, AND FOR OTHER PURPOSES (December 23, 1993) House Bill No. 7789, May 31, 1993 Senate Bill No. 1330, November 18, 1993 7. R.A. NO. 7717 AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OF SHARES OF STOCK LISTED AND TRADED THROUGH THE LOCAL STOCK EXCHANGE OR THROUGH INITIAL PUBLIC OFFERING, AMENDING FOR THE PURPOSE THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, BY INSERTING A NEW SECTION AND REPEALING CERTAIN SUBSECTIONS THEREOF (May 5, 1994) House Bill No. 9187, November 3, 1993 Senate Bill No. 1127, March 23, 1994 Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the exercise of its power to propose amendments to bills required to originate in the House, passed its own version of a House revenue measure. It is noteworthy that, in the particular case of S. No. 1630, petitioners Tolentino and Roco, as members of the Senate, voted to approve it on second and third readings. On the other hand, amendment by substitution, in the manner urged by petitioner Tolentino, concerns a mere matter of form. Petitioner has not shown what substantial difference it would make if, as the Senate actually did in this case, a separate bill like S. No. 1630 is instead enacted as a substitute measure, "taking into Consideration . . . H.B. 11197." Indeed, so far as pertinent, the Rules of the Senate only provide: RULE XXIX

AMENDMENTS xxx xxx xxx 68. Not more than one amendment to the original amendment shall be considered. No amendment by substitution shall be entertained unless the text thereof is submitted in writing. Any of said amendments may be withdrawn before a vote is taken thereon. 69. No amendment which seeks the inclusion of a legislative provision foreign to the subject matter of a bill (rider) shall be entertained. xxx xxx xxx 70-A. A bill or resolution shall not be amended by substituting it with another which covers a subject distinct from that proposed in the original bill or resolution. (emphasis added). Nor is there merit in petitioners' contention that, with regard to revenue bills, the Philippine Senate possesses less power than the U.S. Senate because of textual differences between constitutional provisions giving them the power to propose or concur with amendments. Art. I, 7, cl. 1 of the U.S. Constitution reads: All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills. Art. VI, 24 of our Constitution reads: All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments. The addition of the word "exclusively" in the Philippine Constitution and the decision to drop the phrase "as on other Bills" in the American version, according to petitioners, shows the intention of the framers of our Constitution to restrict the Senate's power to propose amendments to revenue bills. Petitioner Tolentino contends that the word "exclusively" was inserted to modify "originate" and "the words 'as in any other bills' (sic) were eliminated so as to show that these bills were not to be like other bills but must be treated as a special kind." The history of this provision does not support this contention. The supposed indicia of constitutional intent are nothing but the relics of an unsuccessful attempt to limit the power of the Senate. It will be recalled that the 1935 Constitution originally provided for a unicameral National Assembly. When it was decided in 1939 to change to a bicameral legislature, it became necessary to provide for the procedure for lawmaking by the Senate and the House of Representatives. The work of proposing amendments to the Constitution was done by the National Assembly, acting as a constituent assembly, some of whose members, jealous of

preserving the Assembly's lawmaking powers, sought to curtail the powers of the proposed Senate. Accordingly they proposed the following provision: All bills appropriating public funds, revenue or tariff bills, bills of local application, and private bills shall originate exclusively in the Assembly, but the Senate may propose or concur with amendments. In case of disapproval by the Senate of any such bills, the Assembly may repass the same by a two-thirds vote of all its members, and thereupon, the bill so repassed shall be deemed enacted and may be submitted to the President for corresponding action. In the event that the Senate should fail to finally act on any such bills, the Assembly may, after thirty days from the opening of the next regular session of the same legislative term, reapprove the same with a vote of two-thirds of all the members of the Assembly. And upon such reapproval, the bill shall be deemed enacted and may be submitted to the President for corresponding action. The special committee on the revision of laws of the Second National Assembly vetoed the proposal. It deleted everything after the first sentence. As rewritten, the proposal was approved by the National Assembly and embodied in Resolution No. 38, as amended by Resolution No. 73. (J. ARUEGO, KNOW YOUR CONSTITUTION 65-66 (1950)). The proposed amendment was submitted to the people and ratified by them in the elections held on June 18, 1940. This is the history of Art. VI, 18 (2) of the 1935 Constitution, from which Art. VI, 24 of the present Constitution was derived. It explains why the word "exclusively" was added to the American text from which the framers of the Philippine Constitution borrowed and why the phrase "as on other Bills" was not copied. Considering the defeat of the proposal, the power of the Senate to propose amendments must be understood to be full, plenary and complete "as on other Bills." Thus, because revenue bills are required to originate exclusively in the House of Representatives, the Senate cannot enact revenue measures of its own without such bills. After a revenue bill is passed and sent over to it by the House, however, the Senate certainly can pass its own version on the same subject matter. This follows from the coequality of the two chambers of Congress. That this is also the understanding of book authors of the scope of the Senate's power to concur is clear from the following commentaries: The power of the Senate to propose or concur with amendments is apparently without restriction. It would seem that by virtue of this power, the Senate can practically re-write a bill required to come from the House and leave only a trace of the original bill. For example, a general revenue bill passed by the lower house of the United States Congress contained provisions for the imposition of an inheritance tax . This was changed by the Senate into a corporation tax. The amending authority of the Senate was declared by the United States Supreme Court to be sufficiently broad to enable it to make the alteration. [Flint v. Stone Tracy Company, 220 U.S. 107, 55 L. ed. 389]. (L. TAADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES 247 (1961)) The above-mentioned bills are supposed to be initiated by the House of Representatives because it is more numerous in membership and therefore also more representative of the people. Moreover, its members are presumed to be more familiar with the needs of the country in regard to the enactment of the legislation involved. The Senate is, however, allowed much leeway in the exercise of its power to propose or concur with amendments to the bills initiated by the House of Representatives. Thus, in one case, a bill introduced in the U.S. House of Representatives was changed by the Senate to make a proposed inheritance tax a corporation tax. It is also accepted practice for the Senate

to introduce what is known as an amendment by substitution, which may entirely replace the bill initiated in the House of Representatives. (I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)). In sum, while Art. VI, 24 provides that all appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills must "originate exclusively in the House of Representatives," it also adds, "but the Senate may propose or concur with amendments." In the exercise of this power, the Senate may propose an entirely new bill as a substitute measure. As petitioner Tolentino states in a high school text, a committee to which a bill is referred may do any of the following: (1) to endorse the bill without changes; (2) to make changes in the bill omitting or adding sections or altering its language; (3) to make and endorse an entirely new bill as a substitute, in which case it will be known as a committee bill; or (4) to make no report at all. (A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 (1950))

MR. DURAN. Therefore, I raise this question of order as to procedure: If a House bill is passed by the House but not passed by the Senate, and a Senate bill of a similar nature is passed in the Senate but never passed in the House, can the two bills be the subject of a conference, and can a law be enacted from these two bills ? I understand that the Senate bill in this particular instance does not refer to investments in government securities, whereas the bill in the House, which was introduced by the Speaker, covers two subject matters: not only investigation of deposits in banks but also investigation of investments in government securities. Now, since the two bills differ in their subject matter, I believe that no law can be enacted. Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said: THE SPEAKER. The report of the conference committee is in order. It is precisely in cases like this where a conference should be had. If the House bill had been approved by the Senate, there would have been no need of a conference; but precisely because the Senate passed another bill on the same subject matter, the conference committee had to be created, and we are now considering the report of that committee. (2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))

To except from this procedure the amendment of bills which are required to originate in the House by prescribing that the number of the House bill and its other parts up to the enacting clause must be preserved although the text of the Senate amendment may be incorporated in place of the original body of the bill is to insist on a mere technicality. At any rate there is no rule prescribing this form. S. No. 1630, as a substitute measure, is therefore as much an amendment of H. No. 11197 as any which the Senate could have made. II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they assume that S. No. 1630 is an independent and distinct bill. Hence their repeated references to its certification that it was passed by the Senate "in substitution of S.B. No. 1129, taking into consideration P.S. Res. No. 734 and H.B. No. 11197," implying that there is something substantially different between the reference to S. No. 1129 and the reference to H. No. 11197. From this premise, they conclude that R.A. No. 7716 originated both in the House and in the Senate and that it is the product of two "half-baked bills because neither H. No. 11197 nor S. No. 1630 was passed by both houses of Congress." In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be mere amendments of the corresponding provisions of H. No. 11197. The very tabular comparison of the provisions of H. No. 11197 and S. No. 1630 attached as Supplement A to the basic petition of petitioner Tolentino, while showing differences between the two bills, at the same time indicates that the provisions of the Senate bill were precisely intended to be amendments to the House bill. Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the Senate bill was a mere amendment of the House bill, H. No. 11197 in its original form did not have to pass the Senate on second and three readings. It was enough that after it was passed on first reading it was referred to the Senate Committee on Ways and Means. Neither was it required that S. No. 1630 be passed by the House of Representatives before the two bills could be referred to the Conference Committee. There is legislative precedent for what was done in the case of H. No. 11197 and S. No. 1630. When the House bill and Senate bill, which became R.A. No. 1405 (Act prohibiting the disclosure of bank deposits), were referred to a conference committee, the question was raised whether the two bills could be the subject of such conference, considering that the bill from one house had not been passed by the other and vice versa. As Congressman Duran put the question:

III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No. 1630 are distinct and unrelated measures also accounts for the petitioners' (Kilosbayan's and PAL's) contention that because the President separately certified to the need for the immediate enactment of these measures, his certification was ineffectual and void. The certification had to be made of the version of the same revenue bill which at the momentwas being considered. Otherwise, to follow petitioners' theory, it would be necessary for the President to certify as many bills as are presented in a house of Congress even though the bills are merely versions of the bill he has already certified. It is enough that he certifies the bill which, at the time he makes the certification, is under consideration. Since on March 22, 1994 the Senate was considering S. No. 1630, it was that bill which had to be certified. For that matter on June 1, 1993 the President had earlier certified H. No. 9210 for immediate enactment because it was the one which at that time was being considered by the House. This bill was later substituted, together with other bills, by H. No. 11197. As to what Presidential certification can accomplish, we have already explained in the main decision that the phrase "except when the President certifies to the necessity of its immediate enactment, etc." in Art. VI, 26 (2) qualifies not only the requirement that "printed copies [of a bill] in its final form [must be] distributed to the members three days before its passage" but also the requirement that before a bill can become a law it must have passed "three readings on separate days." There is not only textual support for such construction but historical basis as well. Art. VI, 21 (2) of the 1935 Constitution originally provided: (2) No bill shall be passed by either House unless it shall have been printed and copies thereof in its final form furnished its Members at least three calendar days prior to its passage, except when the President shall have certified to the necessity of its immediate enactment. Upon the last reading of a bill, no amendment thereof shall be allowed and the question upon its passage shall be taken immediately thereafter, and the yeas and nays entered on the Journal. When the 1973 Constitution was adopted, it was provided in Art. VIII, 19 (2):

(2) No bill shall become a law unless it has passed three readings on separate days, and printed copies thereof in its final form have been distributed to the Members three days before its passage, except when the Prime Minister certifies to the necessity of its immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and the yeas and nays entered in the Journal. This provision of the 1973 document, with slight modification, was adopted in Art. VI, 26 (2) of the present Constitution, thus: (2) No bill passed by either House shall become a law unless it has passed three readings on separate days, and printed copies thereof in its final form have been distributed to its Members three days before its passage, except when the President certifies to the necessity of its immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and the yeasand nays entered in the Journal. The exception is based on the prudential consideration that if in all cases three readings on separate days are required and a bill has to be printed in final form before it can be passed, the need for a law may be rendered academic by the occurrence of the very emergency or public calamity which it is meant to address. Petitioners further contend that a "growing budget deficit" is not an emergency, especially in a country like the Philippines where budget deficit is a chronic condition. Even if this were the case, an enormous budget deficit does not make the need for R.A. No. 7716 any less urgent or the situation calling for its enactment any less an emergency. Apparently, the members of the Senate (including some of the petitioners in these cases) believed that there was an urgent need for consideration of S. No. 1630, because they responded to the call of the President by voting on the bill on second and third readings on the same day. While the judicial department is not bound by the Senate's acceptance of the President's certification, the respect due coequal departments of the government in matters committed to them by the Constitution and the absence of a clear showing of grave abuse of discretion caution a stay of the judicial hand. At any rate, we are satisfied that S. No. 1630 received thorough consideration in the Senate where it was discussed for six days. Only its distribution in advance in its final printed form was actually dispensed with by holding the voting on second and third readings on the same day (March 24, 1994). Otherwise, sufficient time between the submission of the bill on February 8, 1994 on second reading and its approval on March 24, 1994 elapsed before it was finally voted on by the Senate on third reading. The purpose for which three readings on separate days is required is said to be two-fold: (1) to inform the members of Congress of what they must vote on and (2) to give them notice that a measure is progressing through the enacting process, thus enabling them and others interested in the measure to prepare their positions with reference to it. (1 J. G. SUTHERLAND, STATUTES AND STATUTORY CONSTRUCTION 10.04, p. 282 (1972)). These purposes were substantially achieved in the case of R.A. No. 7716. IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and the Movement of Attorneys for Brotherhood, Integrity and Nationalism, Inc. (MABINI)) that in violation of the constitutional policy of full public disclosure and the people's right to know (Art. II, 28 and Art. III, 7) the Conference Committee met for two days in executive session with only the conferees present.

As pointed out in our main decision, even in the United States it was customary to hold such sessions with only the conferees and their staffs in attendance and it was only in 1975 when a new rule was adopted requiring open sessions. Unlike its American counterpart, the Philippine Congress has not adopted a rule prescribing open hearings for conference committees. It is nevertheless claimed that in the United States, before the adoption of the rule in 1975, at least staff members were present. These were staff members of the Senators and Congressmen, however, who may be presumed to be their confidential men, not stenographers as in this case who on the last two days of the conference were excluded. There is no showing that the conferees themselves did not take notes of their proceedings so as to give petitioner Kilosbayan basis for claiming that even in secret diplomatic negotiations involving state interests, conferees keep notes of their meetings. Above all, the public's right to know was fully served because the Conference Committee in this case submitted a report showing the changes made on the differing versions of the House and the Senate. Petitioners cite the rules of both houses which provide that conference committee reports must contain "a detailed, sufficiently explicit statement of the changes in or other amendments." These changes are shown in the bill attached to the Conference Committee Report. The members of both houses could thus ascertain what changes had been made in the original bills without the need of a statement detailing the changes. The same question now presented was raised when the bill which became R.A. No. 1400 (Land Reform Act of 1955) was reported by the Conference Committee. Congressman Bengzon raised a point of order. He said: MR. BENGZON. My point of order is that it is out of order to consider the report of the conference committee regarding House Bill No. 2557 by reason of the provision of Section 11, Article XII, of the Rules of this House which provides specifically that the conference report must be accompanied by a detailed statement of the effects of the amendment on the bill of the House. This conference committee report is not accompanied by that detailed statement, Mr. Speaker. Therefore it is out of order to consider it. Petitioner Tolentino, then the Majority Floor Leader, answered: MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in connection with the point of order raised by the gentleman from Pangasinan. There is no question about the provision of the Rule cited by the gentleman from Pangasinan, but this provision applies to those cases where only portions of the bill have been amended. In this case before us an entire bill is presented; therefore, it can be easily seen from the reading of the bill what the provisions are. Besides, this procedure has been an established practice. After some interruption, he continued: MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into the reason for the provisions of the Rules, and the reason for the requirement in the provision cited by the gentleman from Pangasinan is when there are only certain words or phrases inserted in or deleted from the provisions of the bill included in the conference report, and we cannot understand what those words and phrases mean and their relation to the bill. In that case, it is necessary to make a detailed statement on how those words and phrases will affect the bill as a whole; but when the entire bill itself is copied verbatim in the conference report, that is not necessary. So when the reason for the Rule does not exist, the Rule does not exist.

(2 CONG. REC. NO. 2, p. 4056. (emphasis added)) Congressman Tolentino was sustained by the chair. The record shows that when the ruling was appealed, it was upheld by viva voce and when a division of the House was called, it was sustained by a vote of 48 to 5. (Id., p. 4058) Nor is there any doubt about the power of a conference committee to insert new provisions as long as these are germane to the subject of the conference. As this Court held in Philippine Judges Association v. Prado, 227 SCRA 703 (1993), in an opinion written by then Justice Cruz, the jurisdiction of the conference committee is not limited to resolving differences between the Senate and the House. It may propose an entirely new provision. What is important is that its report is subsequently approved by the respective houses of Congress. This Court ruled that it would not entertain allegations that, because new provisions had been added by the conference committee, there was thereby a violation of the constitutional injunction that "upon the last reading of a bill, no amendment thereto shall be allowed." Applying these principles, we shall decline to look into the petitioners' charges that an amendment was made upon the last reading of the bill that eventually became R.A. No. 7354 and that copiesthereof in its final form were not distributed among the members of each House. Both the enrolled bill and the legislative journals certify that the measure was duly enacted i.e., in accordance with Article VI, Sec. 26 (2) of the Constitution. We are bound by such official assurances from a coordinate department of the government, to which we owe, at the very least, a becoming courtesy. (Id. at 710. (emphasis added))

only one subject which shall be expressed in the title thereof." PAL contends that the amendment of its franchise by the withdrawal of its exemption from the VAT is not expressed in the title of the law. Pursuant to 13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue "in lieu of all other taxes, duties, royalties, registration, license and other fees and charges of any kind, nature, or description, imposed, levied, established, assessed or collected by any municipal, city, provincial or national authority or government agency, now or in the future." PAL was exempted from the payment of the VAT along with other entities by 103 of the National Internal Revenue Code, which provides as follows: 103. Exempt transactions. The following shall be exempt from the value-added tax: xxx xxx xxx (q) Transactions which are exempt under special laws or international agreements to which the Philippines is a signatory. R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by amending 103, as follows: 103. Exempt transactions. The following shall be exempt from the value-added tax: xxx xxx xxx

It is interesting to note the following description of conference committees in the Philippines in a 1979 study: Conference committees may be of two types: free or instructed. These committees may be given instructions by their parent bodies or they may be left without instructions. Normally the conference committees are without instructions, and this is why they are often critically referred to as "the little legislatures." Once bills have been sent to them, the conferees have almost unlimited authority to change the clauses of the bills and in fact sometimes introduce new measures that were not in the original legislation. No minutes are kept, and members' activities on conference committees are difficult to determine. One congressman known for his idealism put it this way: "I killed a bill on export incentives for my interest group [copra] in the conference committee but I could not have done so anywhere else." The conference committee submits a report to both houses, and usually it is accepted. If the report is not accepted, then the committee is discharged and new members are appointed. (R. Jackson, Committees in the Philippine Congress, in COMMITTEES AND LEGISLATURES: A COMPARATIVE ANALYSIS 163 (J. D. LEES AND M. SHAW, eds.)). In citing this study, we pass no judgment on the methods of conference committees. We cite it only to say that conference committees here are no different from their counterparts in the United States whose vast powers we noted in Philippine Judges Association v. Prado, supra. At all events, under Art. VI, 16(3) each house has the power "to determine the rules of its proceedings," including those of its committees. Any meaningful change in the method and procedures of Congress or its committees must therefore be sought in that body itself. V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716 violates Art. VI, 26 (1) of the Constitution which provides that "Every bill passed by Congress shall embrace

(q) Transactions which are exempt under special laws, except those granted under Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . . The amendment of 103 is expressed in the title of R.A. No. 7716 which reads: AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES. By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX (VAT) SYSTEM [BY] WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED AND FOR OTHER PURPOSES," Congress thereby clearly expresses its intention to amend any provision of the NIRC which stands in the way of accomplishing the purpose of the law. PAL asserts that the amendment of its franchise must be reflected in the title of the law by specific reference to P.D. No. 1590. It is unnecessary to do this in order to comply with the constitutional requirement, since it is already stated in the title that the law seeks to amend the pertinent provisions of the NIRC, among which is 103(q), in order to widen the base of the VAT. Actually, it is the bill which becomes a law that is required to express in its title the subject of legislation. The titles of H. No. 11197 and S. No. 1630 in fact specifically referred to 103 of the NIRC as among the provisions sought to be amended. We are satisfied that sufficient notice had been given of the pendency of these bills in Congress before they were enacted into what is now

R.A. No. 7716. In Philippine Judges Association v. Prado, supra, a similar argument as that now made by PAL was rejected. R.A. No. 7354 is entitled AN ACT CREATING THE PHILIPPINE POSTAL CORPORATION, DEFINING ITS POWERS, FUNCTIONS AND RESPONSIBILITIES, PROVIDING FOR REGULATION OF THE INDUSTRY AND FOR OTHER PURPOSES CONNECTED THEREWITH. It contained a provision repealing all franking privileges. It was contended that the withdrawal of franking privileges was not expressed in the title of the law. In holding that there was sufficient description of the subject of the law in its title, including the repeal of franking privileges, this Court held: To require every end and means necessary for the accomplishment of the general objectives of the statute to be expressed in its title would not only be unreasonable but would actually render legislation impossible. [Cooley, Constitutional Limitations, 8th Ed., p. 297] As has been correctly explained: The details of a legislative act need not be specifically stated in its title, but matter germane to the subject as expressed in the title, and adopted to the accomplishment of the object in view, may properly be included in the act. Thus, it is proper to create in the same act the machinery by which the act is to be enforced, to prescribe the penalties for its infraction, and to remove obstacles in the way of its execution. If such matters are properly connected with the subject as expressed in the title, it is unnecessary that they should also have special mention in the title. (Southern Pac. Co. v. Bartine, 170 Fed. 725) (227 SCRA at 707-708) VI. Claims of press freedom and religious liberty. We have held that, as a general proposition, the press is not exempt from the taxing power of the State and that what the constitutional guarantee of free press prohibits are laws which single out the press or target a group belonging to the press for special treatment or which in any way discriminate against the press on the basis of the content of the publication, and R.A. No. 7716 is none of these. Now it is contended by the PPI that by removing the exemption of the press from the VAT while maintaining those granted to others, the law discriminates against the press. At any rate, it is averred, "even nondiscriminatory taxation of constitutionally guaranteed freedom is unconstitutional." With respect to the first contention, it would suffice to say that since the law granted the press a privilege, the law could take back the privilege anytime without offense to the Constitution. The reason is simple: by granting exemptions, the State does not forever waive the exercise of its sovereign prerogative. Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to which other businesses have long ago been subject. It is thus different from the tax involved in the cases invoked by the PPI. The license tax in Grosjean v. American Press Co., 297 U.S. 233, 80 L. Ed. 660 (1936) was found to be discriminatory because it was laid on the gross advertising receipts only of newspapers whose weekly circulation was over 20,000, with the result that the tax applied only to 13 out of 124 publishers in Louisiana. These large papers were critical of Senator Huey Long who controlled the state legislature which enacted the license tax. The censorial motivation for the law was thus evident. On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460 U.S. 575, 75 L. Ed. 2d 295 (1983), the tax was found to be discriminatory because although it

could have been made liable for the sales tax or, in lieu thereof, for the use tax on the privilege of using, storing or consuming tangible goods, the press was not. Instead, the press was exempted from both taxes. It was, however, later made to pay a special use tax on the cost of paper and ink which made these items "the only items subject to the use tax that were component of goods to be sold at retail." The U.S. Supreme Court held that the differential treatment of the press "suggests that the goal of regulation is not related to suppression of expression, and such goal is presumptively unconstitutional." It would therefore appear that even a law that favors the press is constitutionally suspect. (See the dissent of Rehnquist, J. in that case) Nor is it true that only two exemptions previously granted by E.O. No. 273 are withdrawn "absolutely and unqualifiedly" by R.A. No. 7716. Other exemptions from the VAT, such as those previously granted to PAL, petroleum concessionaires, enterprises registered with the Export Processing Zone Authority, and many more are likewise totally withdrawn, in addition to exemptions which are partially withdrawn, in an effort to broaden the base of the tax. The PPI says that the discriminatory treatment of the press is highlighted by the fact that transactions, which are profit oriented, continue to enjoy exemption under R.A. No. 7716. An enumeration of some of these transactions will suffice to show that by and large this is not so and that the exemptions are granted for a purpose. As the Solicitor General says, such exemptions are granted, in some cases, to encourage agricultural production and, in other cases, for the personal benefit of the end-user rather than for profit. The exempt transactions are: (a) Goods for consumption or use which are in their original state (agricultural, marine and forest products, cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn livestock and poultry feeds) and goods or services to enhance agriculture (milling of palay, corn, sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used for the manufacture of feeds). (b) Goods used for personal consumption or use (household and personal effects of citizens returning to the Philippines) or for professional use, like professional instruments and implements, by persons coming to the Philippines to settle here. (c) Goods subject to excise tax such as petroleum products or to be used for manufacture of petroleum products subject to excise tax and services subject to percentage tax. (d) Educational services, medical, dental, hospital and veterinary services, and services rendered under employer-employee relationship. (e) Works of art and similar creations sold by the artist himself. (f) Transactions exempted under special laws, or international agreements. (g) Export-sales by persons not VAT-registered. (h) Goods or services with gross annual sale or receipt not exceeding P500,000.00. (Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60) The PPI asserts that it does not really matter that the law does not discriminate against the press because "even nondiscriminatory taxation on constitutionally guaranteed freedom is

unconstitutional." PPI cites in support of this assertion the following statement in Murdock v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943): The fact that the ordinance is "nondiscriminatory" is immaterial. The protection afforded by the First Amendment is not so restricted. A license tax certainly does not acquire constitutional validity because it classifies the privileges protected by the First Amendment along with the wares and merchandise of hucksters and peddlers and treats them all alike. Such equality in treatment does not save the ordinance. Freedom of press, freedom of speech, freedom of religion are in preferred position. The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly for regulation. Its imposition on the press is unconstitutional because it lays a prior restraint on the exercise of its right. Hence, although its application to others, such those selling goods, is valid, its application to the press or to religious groups, such as the Jehovah's Witnesses, in connection with the latter's sale of religious books and pamphlets, is unconstitutional. As the U.S. Supreme Court put it, "it is one thing to impose a tax on income or property of a preacher. It is quite another thing to exact a tax on him for delivering a sermon." A similar ruling was made by this Court in American Bible Society v. City of Manila, 101 Phil. 386 (1957) which invalidated a city ordinance requiring a business license fee on those engaged in the sale of general merchandise. It was held that the tax could not be imposed on the sale of bibles by the American Bible Society without restraining the free exercise of its right to propagate. The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a privilege, much less a constitutional right. It is imposed on the sale, barter, lease or exchange of goods or properties or the sale or exchange of services and the lease of properties purely for revenue purposes. To subject the press to its payment is not to burden the exercise of its right any more than to make the press pay income tax or subject it to general regulation is not to violate its freedom under the Constitution. Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds derived from the sales are used to subsidize the cost of printing copies which are given free to those who cannot afford to pay so that to tax the sales would be to increase the price, while reducing the volume of sale. Granting that to be the case, the resulting burden on the exercise of religious freedom is so incidental as to make it difficult to differentiate it from any other economic imposition that might make the right to disseminate religious doctrines costly. Otherwise, to follow the petitioner's argument, to increase the tax on the sale of vestments would be to lay an impermissible burden on the right of the preacher to make a sermon. On the other hand the registration fee of P1,000.00 imposed by 107 of the NIRC, as amended by 7 of R.A. No. 7716, although fixed in amount, is really just to pay for the expenses of registration and enforcement of provisions such as those relating to accounting in 108 of the NIRC. That the PBS distributes free bibles and therefore is not liable to pay the VAT does not excuse it from the payment of this fee because it also sells some copies. At any rate whether the PBS is liable for the VAT must be decided in concrete cases, in the event it is assessed this tax by the Commissioner of Internal Revenue. VII. Alleged violations of the due process, equal protection and contract clauses and the rule on taxation. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies transactions as covered or exempt without reasonable basis and (3) violates the rule that taxes should be uniform and equitable and that Congress shall "evolve a progressive system of taxation."

With respect to the first contention, it is claimed that the application of the tax to existing contracts of the sale of real property by installment or on deferred payment basis would result in substantial increases in the monthly amortizations to be paid because of the 10% VAT. The additional amount, it is pointed out, is something that the buyer did not anticipate at the time he entered into the contract. The short answer to this is the one given by this Court in an early case: "Authorities from numerous sources are cited by the plaintiffs, but none of them show that a lawful tax on a new subject, or an increased tax on an old one, interferes with a contract or impairs its obligation, within the meaning of the Constitution. Even though such taxation may affect particular contracts, as it may increase the debt of one person and lessen the security of another, or may impose additional burdens upon one class and release the burdens of another, still the tax must be paid unless prohibited by the Constitution, nor can it be said that it impairs the obligation of any existing contract in its true legal sense." (La Insular v. Machuca Go-Tauco and Nubla CoSiong, 39 Phil. 567, 574 (1919)). Indeed not only existing laws but also "the reservation of the essential attributes of sovereignty, is . . . read into contracts as a postulate of the legal order." (Philippine-American Life Ins. Co. v. Auditor General, 22 SCRA 135, 147 (1968)) Contracts must be understood as having been made in reference to the possible exercise of the rightful authority of the government and no obligation of contract can extend to the defeat of that authority. (Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885 (1935)). It is next pointed out that while 4 of R.A. No. 7716 exempts such transactions as the sale of agricultural products, food items, petroleum, and medical and veterinary services, it grants no exemption on the sale of real property which is equally essential. The sale of real property for socialized and low-cost housing is exempted from the tax, but CREBA claims that real estate transactions of "the less poor," i.e., the middle class, who are equally homeless, should likewise be exempted. The sale of food items, petroleum, medical and veterinary services, etc., which are essential goods and services was already exempt under 103, pars. (b) (d) (1) of the NIRC before the enactment of R.A. No. 7716. Petitioner is in error in claiming that R.A. No. 7716 granted exemption to these transactions, while subjecting those of petitioner to the payment of the VAT. Moreover, there is a difference between the "homeless poor" and the "homeless less poor" in the example given by petitioner, because the second group or middle class can afford to rent houses in the meantime that they cannot yet buy their own homes. The two social classes are thus differently situated in life. "It is inherent in the power to tax that the State be free to select the subjects of taxation, and it has been repeatedly held that 'inequalities which result from a singling out of one particular class for taxation, or exemption infringe no constitutional limitation.'" (Lutz v. Araneta, 98 Phil. 148, 153 (1955). Accord, City of Baguio v. De Leon, 134 Phil. 912 (1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984); Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)). Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI, 28(1) which provides that "The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation." Equality and uniformity of taxation means that all taxable articles or kinds of property of the same class be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. To satisfy this requirement it is enough that the statute or ordinance applies equally to all persons, forms and corporations placed in similar situation. (City of Baguio v. De Leon, supra; Sison, Jr. v. Ancheta, supra) Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was enacted. R.A. No. 7716 merely expands the base of the tax. The validity of the original VAT Law was questioned in Kapatiran ng Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 383

(1988) on grounds similar to those made in these cases, namely, that the law was "oppressive, discriminatory, unjust and regressive in violation of Art. VI, 28(1) of the Constitution." (At 382) Rejecting the challenge to the law, this Court held: As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. . . . The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the public, which are not exempt, at the constant rate of 0% or 10%. The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engaged in business with an aggregate gross annual sales exceeding P200,000.00. Small corner sari-sari stores are consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine products, so that the costs of basic food and other necessities, spared as they are from the incidence of the VAT, are expected to be relatively lower and within the reach of the general public. (At 382-383) The CREBA claims that the VAT is regressive. A similar claim is made by the Cooperative Union of the Philippines, Inc. (CUP), while petitioner Juan T. David argues that the law contravenes the mandate of Congress to provide for a progressive system of taxation because the law imposes a flat rate of 10% and thus places the tax burden on all taxpayers without regard to their ability to pay. The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What it simply provides is that Congress shall " evolve a progressive system of taxation." The constitutional provision has been interpreted to mean simply that "direct taxes are . . . to be preferred [and] as much as possible, indirect taxes should be minimized." (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. (1977)). Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes, would have been prohibited with the proclamation of Art. VIII, 17(1) of the 1973 Constitution from which the present Art. VI, 28(1) was taken. Sales taxes are also regressive. Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero rating of certain transactions (R.A. No. 7716, 3, amending 102 (b) of the NIRC), while granting exemptions to other transactions. (R.A. No. 7716, 4, amending 103 of the NIRC). Thus, the following transactions involving basic and essential goods and services are exempted from the VAT: (a) Goods for consumption or use which are in their original state (agricultural, marine and forest products, cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn livestock and poultry feeds) and goods or services to enhance agriculture (milling of palay, corn sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used for the manufacture of feeds). (b) Goods used for personal consumption or use (household and personal effects of citizens returning to the Philippines) and or professional use, like professional instruments and implements, by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used for manufacture of petroleum products subject to excise tax and services subject to percentage tax. (d) Educational services, medical, dental, hospital and veterinary services, and services rendered under employer-employee relationship. (e) Works of art and similar creations sold by the artist himself. (f) Transactions exempted under special laws, or international agreements. (g) Export-sales by persons not VAT-registered. (h) Goods or services with gross annual sale or receipt not exceeding P500,000.00. (Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60) On the other hand, the transactions which are subject to the VAT are those which involve goods and services which are used or availed of mainly by higher income groups. These include real properties held primarily for sale to customers or for lease in the ordinary course of trade or business, the right or privilege to use patent, copyright, and other similar property or right, the right or privilege to use industrial, commercial or scientific equipment, motion picture films, tapes and discs, radio, television, satellite transmission and cable television time, hotels, restaurants and similar places, securities, lending investments, taxicabs, utility cars for rent, tourist buses, and other common carriers, services of franchise grantees of telephone and telegraph. The problem with CREBA's petition is that it presents broad claims of constitutional violations by tendering issues not at retail but at wholesale and in the abstract. There is no fully developed record which can impart to adjudication the impact of actuality. There is no factual foundation to show in the concrete the application of the law to actual contracts and exemplify its effect on property rights. For the fact is that petitioner's members have not even been assessed the VAT. Petitioner's case is not made concrete by a series of hypothetical questions asked which are no different from those dealt with in advisory opinions. The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as here, does not suffice. There must be a factual foundation of such unconstitutional taint. Considering that petitioner here would condemn such a provision as void on its face, he has not made out a case. This is merely to adhere to the authoritative doctrine that where the due process and equal protection clauses are invoked, considering that they are not fixed rules but rather broad standards, there is a need for proof of such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail. (Sison, Jr. v. Ancheta, 130 SCRA at 661) Adjudication of these broad claims must await the development of a concrete case. It may be that postponement of adjudication would result in a multiplicity of suits. This need not be the case, however. Enforcement of the law may give rise to such a case. A test case, provided it is an actual case and not an abstract or hypothetical one, may thus be presented. Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract issues. Otherwise, adjudication would be no different from the giving of advisory opinion that does not really settle legal issues.

We are told that it is our duty under Art. VIII, 1, 2 to decide whenever a claim is made that "there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the government." This duty can only arise if an actual case or controversy is before us. Under Art . VIII, 5 our jurisdiction is defined in terms of "cases" and all that Art. VIII, 1, 2 can plausibly mean is that in the exercise of that jurisdiction we have the judicial power to determine questions of grave abuse of discretion by any branch or instrumentality of the government. Put in another way, what is granted in Art. VIII, 1, 2 is "judicial power," which is "the power of a court to hear and decide cases pending between parties who have the right to sue and be sued in the courts of law and equity" (Lamb v. Phipps, 22 Phil. 456, 559 (1912)), as distinguished from legislative and executive power. This power cannot be directly appropriated until it is apportioned among several courts either by the Constitution, as in the case of Art. VIII, 5, or by statute, as in the case of the Judiciary Act of 1948 (R.A. No. 296) and the Judiciary Reorganization Act of 1980 (B.P. Blg. 129). The power thus apportioned constitutes the court's "jurisdiction," defined as "the power conferred by law upon a court or judge to take cognizance of a case, to the exclusion of all others." (United States v. Arceo, 6 Phil. 29 (1906)) Without an actual case coming within its jurisdiction, this Court cannot inquire into any allegation of grave abuse of discretion by the other departments of the government. VIII. Alleged violation of policy towards cooperatives. On the other hand, the Cooperative Union of the Philippines (CUP), after briefly surveying the course of legislation, argues that it was to adopt a definite policy of granting tax exemption to cooperatives that the present Constitution embodies provisions on cooperatives. To subject cooperatives to the VAT would therefore be to infringe a constitutional policy. Petitioner claims that in 1973, P.D. No. 175 was promulgated exempting cooperatives from the payment of income taxes and sales taxes but in 1984, because of the crisis which menaced the national economy, this exemption was withdrawn by P.D. No. 1955; that in 1986, P.D. No. 2008 again granted cooperatives exemption from income and sales taxes until December 31, 1991, but, in the same year, E.O. No. 93 revoked the exemption; and that finally in 1987 the framers of the Constitution "repudiated the previous actions of the government adverse to the interests of the cooperatives, that is, the repeated revocation of the tax exemption to cooperatives and instead upheld the policy of strengthening the cooperatives by way of the grant of tax exemptions," by providing the following in Art. XII: 1. The goals of the national economy are a more equitable distribution of opportunities, income, and wealth; a sustained increase in the amount of goods and services produced by the nation for the benefit of the people; and an expanding productivity as the key to raising the quality of life for all, especially the underprivileged. The State shall promote industrialization and full employment based on sound agricultural development and agrarian reform, through industries that make full and efficient use of human and natural resources, and which are competitive in both domestic and foreign markets. However, the State shall protect Filipino enterprises against unfair foreign competition and trade practices. In the pursuit of these goals, all sectors of the economy and all regions of the country shall be given optimum opportunity to develop. Private enterprises, including corporations, cooperatives, and similar collective organizations, shall be encouraged to broaden the base of their ownership. 15. The Congress shall create an agency to promote the viability and growth of cooperatives as instruments for social justice and economic development. Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955 singled out cooperatives by withdrawing their exemption from income and sales taxes under P.D. No. 175,

5. What P.D. No. 1955, 1 did was to withdraw the exemptions and preferential treatments theretofore granted to private business enterprises in general, in view of the economic crisis which then beset the nation. It is true that after P.D. No. 2008, 2 had restored the tax exemptions of cooperatives in 1986, the exemption was again repealed by E.O. No. 93, 1, but then again cooperatives were not the only ones whose exemptions were withdrawn. The withdrawal of tax incentives applied to all, including government and private entities . In the second place, the Constitution does not really require that cooperatives be granted tax exemptions in order to promote their growth and viability. Hence, there is no basis for petitioner's assertion that the government's policy toward cooperatives had been one of vacillation, as far as the grant of tax privileges was concerned, and that it was to put an end to this indecision that the constitutional provisions cited were adopted. Perhaps as a matter of policy cooperatives should be granted tax exemptions, but that is left to the discretion of Congress. If Congress does not grant exemption and there is no discrimination to cooperatives, no violation of any constitutional policy can be charged. Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives are exempt from taxation. Such theory is contrary to the Constitution under which only the following are exempt from taxation: charitable institutions, churches and parsonages, by reason of Art. VI, 28 (3), and non-stock, non-profit educational institutions by reason of Art. XIV, 4 (3). CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies cooperatives the equal protection of the law because electric cooperatives are exempted from the VAT. The classification between electric and other cooperatives (farmers cooperatives, producers cooperatives, marketing cooperatives, etc.) apparently rests on a congressional determination that there is greater need to provide cheaper electric power to as many people as possible, especially those living in the rural areas, than there is to provide them with other necessities in life. We cannot say that such classification is unreasonable. We have carefully read the various arguments raised against the constitutional validity of R.A. No. 7716. We have in fact taken the extraordinary step of enjoining its enforcement pending resolution of these cases. We have now come to the conclusion that the law suffers from none of the infirmities attributed to it by petitioners and that its enactment by the other branches of the government does not constitute a grave abuse of discretion. Any question as to its necessity, desirability or expediency must be addressed to Congress as the body which is electorally responsible, remembering that, as Justice Holmes has said, "legislators are the ultimate guardians of the liberties and welfare of the people in quite as great a degree as are the courts." (Missouri, Kansas & Texas Ry. Co. v. May, 194 U.S. 267, 270, 48 L. Ed. 971, 973 (1904)). It is not right, as petitioner in G.R. No. 115543 does in arguing that we should enforce the public accountability of legislators, that those who took part in passing the law in question by voting for it in Congress should later thrust to the courts the burden of reviewing measures in the flush of enactment. This Court does not sit as a third branch of the legislature, much less exercise a veto power over legislation. WHEREFORE, the motions for reconsideration are denied with finality and the temporary restraining order previously issued is hereby lifted. SO ORDERED. Narvasa, C.J., Feliciano, Melo, Kapunan, Francisco and Hermosisima, Jr., JJ., concur. Padilla and Vitug, JJ., maintained their separate opinion. Regalado, Davide, Jr., Romero, Bellosillo and Puno, JJ, maintained their dissenting opinion. Panganiban, J., took no part.

G.R. Nos. L-28508-9 July 7, 1989 ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil Company), petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE, respondent. Padilla Law Office for petitioner. CRUZ, J.:

legally deductible, there was still an overpayment by P39,787.94 for 1960, representing excess interest. After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959 and P434,234.92 for 1960 but sustained its claim for P39,787.94 as excess interest. This portion of the decision was appealed by the CIR but was affirmed by this Court in Commissioner of Internal Revenue v. ESSO, G.R. No. L-28502- 03, promulgated on April 18, 1989. ESSO for its part appealed the CTA decision denying its claims for the refund of the margin fees P102,246.00 for 1959 and P434,234.92 for 1960. That is the issue now before us. II

On appeal before us is the decision of the Court of Tax Appeals 1 denying petitioner's claims for refund of overpaid income taxes of P102,246.00 for 1959 and P434,234.93 for 1960 in CTA Cases No. 1251 and 1558 respectively. I In CTA Case No. 1251, petitioner ESSO deducted from its gross income for 1959, as part of its ordinary and necessary business expenses, the amount it had spent for drilling and exploration of its petroleum concessions. This claim was disallowed by the respondent Commissioner of Internal Revenue on the ground that the expenses should be capitalized and might be written off as a loss only when a "dry hole" should result. ESSO then filed an amended return where it asked for the refund of P323,279.00 by reason of its abandonment as dry holes of several of its oil wells. Also claimed as ordinary and necessary expenses in the same return was the amount of P340,822.04, representing margin fees it had paid to the Central Bank on its profit remittances to its New York head office. On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed deduction for the margin fees paid. In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year 1960, in the amount of P367,994.00, plus 18% interest thereon of P66,238.92 for the period from April 18,1961 to April 18, 1964, for a total of P434,232.92. The deficiency arose from the disallowance of the margin fees of Pl,226,647.72 paid by ESSO to the Central Bank on its profit remittances to its New York head office. ESSO settled this deficiency assessment on August 10, 1964, by applying the tax credit of P221,033.00 representing its overpayment on its income tax for 1959 and paying under protest the additional amount of P213,201.92. On August 13, 1964, it claimed the refund of P39,787.94 as overpayment on the interest on its deficiency income tax. It argued that the 18% interest should have been imposed not on the total deficiency of P367,944.00 but only on the amount of P146,961.00, the difference between the total deficiency and its tax credit of P221,033.00. This claim was denied by the CIR, who insisted on charging the 18% interest on the entire amount of the deficiency tax. On May 4,1965, the CIR also denied the claims of ESSO for refund of the overpayment of its 1959 and 1960 income taxes, holding that the margin fees paid to the Central Bank could not be considered taxes or allowed as deductible business expenses. ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959, contending that the margin fees were deductible from gross income either as a tax or as an ordinary and necessary business expense. It also claimed an overpayment of its tax by P434,232.92 in 1960, for the same reason. Additionally, ESSO argued that even if the amount paid as margin fees were not

The first question we must settle is whether R.A. 2009, entitled An Act to Authorize the Central Bank of the Philippines to Establish a Margin Over Banks' Selling Rates of Foreign Exchange, is a police measure or a revenue measure. If it is a revenue measure, the margin fees paid by the petitioner to the Central Bank on its profit remittances to its New York head office should be deductible from ESSO's gross income under Sec. 30(c) of the National Internal Revenue Code. This provides that all taxes paid or accrued during or within the taxable year and which are related to the taxpayer's trade, business or profession are deductible from gross income. The petitioner maintains that margin fees are taxes and cites the background and legislative history of the Margin Fee Law showing that R.A. 2609 was nothing less than a revival of the 17% excise tax on foreign exchange imposed by R.A. 601. This was a revenue measure formally proposed by President Carlos P. Garcia to Congress as part of, and in order to balance, the budget for 1959-1960. It was enacted by Congress as such and, significantly, properly originated in the House of Representatives. During its two and a half years of existence, the measure was one of the major sources of revenue used to finance the ordinary operating expenditures of the government. It was, moreover, payable out of the General Fund. On the claimed legislative intent, the Court of Tax Appeals, quoting established principles, pointed out that We are not unmindful of the rule that opinions expressed in debates, actual proceedings of the legislature, steps taken in the enactment of a law, or the history of the passage of the law through the legislature, may be resorted to as an aid in the interpretation of a statute which is ambiguous or of doubtful meaning. The courts may take into consideration the facts leading up to, coincident with, and in any way connected with, the passage of the act, in order that they may properly interpret the legislative intent. But it is also well-settled jurisprudence that only in extremely doubtful matters of interpretation does the legislative history of an act of Congress become important. As a matter of fact, there may be no resort to the legislative history of the enactment of a statute, the language of which is plain and unambiguous, since such legislative history may only be resorted to for the purpose of solving doubt, not for the purpose of creating it. [50 Am. Jur. 328.] Apart from the above consideration, there are at least two cases where we have held that a margin fee is not a tax but an exaction designed to curb the excessive demands upon our international reserve. In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court stated through Justice Jose P. Bengzon: A margin levy on foreign exchange is a form of exchange control or restriction designed to discourage imports and encourage exports, and ultimately, 'curtail any excessive demand upon the international reserve' in order to stabilize the currency. Originally adopted to cope

with balance of payment pressures, exchange restrictions have come to serve various purposes, such as limiting non-essential imports, protecting domestic industry and when combined with the use of multiple currency rates providing a source of revenue to the government, and are in many developing countries regarded as a more or less inevitable concomitant of their economic development programs. The different measures of exchange control or restriction cover different phases of foreign exchange transactions, i.e., in quantitative restriction, the control is on the amount of foreign exchange allowable. In the case of the margin levy, the immediate impact is on the rate of foreign exchange; in fact, its main function is to control the exchange rate without changing the par value of the peso as fixed in the Bretton Woods Agreement Act. For a member nation is not supposed to alter its exchange rate (at par value) to correct a merely temporary disequilibrium in its balance of payments. By its nature, the margin levy is part of the rate of exchange as fixed by the government. As to the contention that the margin levy is a tax on the purchase of foreign exchange and hence should not form part of the exchange rate, suffice it to state that We have already held the contrary for the reason that a tax is levied to provide revenue for government operations, while the proceeds of the margin fee are applied to strengthen our country's international reserves. Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v. Central Bank, 3 the same idea was expressed, though in connection with a different levy, through Justice J.B.L. Reyes: Neither do we find merit in the argument that the 20% retention of exporter's foreign exchange constitutes an export tax. A tax is a levy for the purpose of providing revenue for government operations, while the proceeds of the 20% retention, as we have seen, are applied to strengthen the Central Bank's international reserve. We conclude then that the margin fee was imposed by the State in the exercise of its police power and not the power of taxation. Alternatively, ESSO prays that if margin fees are not taxes, they should nevertheless be considered necessary and ordinary business expenses and therefore still deductible from its gross income. The fees were paid for the remittance by ESSO as part of the profits to the head office in the Unites States. Such remittance was an expenditure necessary and proper for the conduct of its corporate affairs. The applicable provision is Section 30(a) of the National Internal Revenue Code reading as follows: SEC. 30. Deductions from gross income in computing net income there shall be allowed as deductions (a) Expenses: (1) In general. All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for the purpose of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.

(2) Expenses allowable to non-resident alien individuals and foreign corporations . In the case of a non-resident alien individual or a foreign corporation, the expenses deductible are the necessary expenses paid or incurred in carrying on any business or trade conducted within the Philippines exclusively. In the case of Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue, 4 the Court laid down the rules on the deductibility of business expenses, thus: The principle is recognized that when a taxpayer claims a deduction, he must point to some specific provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows. As previously adverted to, the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30(a) (1) of the National Internal Revenue which allows a deduction of 'all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.' An item of expenditure, in order to be deductible under this section of the statute, must fall squarely within its language. We come, then, to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense, three conditions are imposed, namely: (1) the expense must be ordinary and necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying on a trade or business. In addition, not only must the taxpayer meet the business test, he must substantially prove by evidence or records the deductions claimed under the law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction. While it is true that there is a number of decisions in the United States delving on the interpretation of the terms 'ordinary and necessary' as used in the federal tax laws, no adequate or satisfactory definition of those terms is possible. Similarly, this Court has never attempted to define with precision the terms 'ordinary and necessary.' There are however, certain guiding principles worthy of serious consideration in the proper adjudication of conflicting claims. Ordinarily, an expense will be considered 'necessary' where the expenditure is appropriate and helpful in the development of the taxpayer's business. It is 'ordinary' when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. The term 'ordinary' does not require that the payments be habitual or normal in the sense that the same taxpayer will have to make them often; the payment may be unique or non-recurring to the particular taxpayer affected. There is thus no hard and fast rule on the matter. The right to a deduction depends in each case on the particular facts and the relation of the payment to the type of business in which the taxpayer is engaged. The intention of the taxpayer often may be the controlling fact in making the determination. Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer's business, the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself, which in turn depends on the extent and permanency of the work accomplished by the expenditure. In the light of the above explanation, we hold that the Court of Tax Appeals did not err when it held on this issue as follows: Considering the foregoing test of what constitutes an ordinary and necessary deductible expense, it may be asked: Were the margin fees paid by petitioner on its profit remittance to its Head Office in New York appropriate and helpful in the taxpayer's business in the Philippines? Were the margin fees incurred for purposes proper to the conduct of the affairs of petitioner's branch in the Philippines? Or were the margin fees incurred for the purpose of realizing a profit or of minimizing a loss in the Philippines? Obviously not. As stated in the

Lopez case, the margin fees are not expenses in connection with the production or earning of petitioner's incomes in the Philippines. They were expenses incurred in the disposition of said incomes; expenses for the remittance of funds after they have already been earned by petitioner's branch in the Philippines for the disposal of its Head Office in New York which is already another distinct and separate income taxpayer. xxx Since the margin fees in question were incurred for the remittance of funds to petitioner's Head Office in New York, which is a separate and distinct income taxpayer from the branch in the Philippines, for its disposal abroad, it can never be said therefore that the margin fees were appropriate and helpful in the development of petitioner's business in the Philippines exclusively or were incurred for purposes proper to the conduct of the affairs of petitioner's branch in the Philippines exclusively or for the purpose of realizing a profit or of minimizing a loss in the Philippines exclusively. If at all, the margin fees were incurred for purposes proper to the conduct of the corporate affairs of Standard Vacuum Oil Company in New York, but certainly not in the Philippines. ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. The petitioner merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires. This is error. The public respondent is correct when it asserts that "the paramount rule is that claims for deductions are a matter of legislative grace and do not turn on mere equitable considerations ... . The taxpayer in every instance has the burden of justifying the allowance of any deduction claimed." 5 It is clear that ESSO, having assumed an expense properly attributable to its head office, cannot now claim this as an ordinary and necessary expense paid or incurred in carrying on its own trade or business. WHEREFORE, the decision of the Court of Tax Appeals denying the petitioner's claims for refund of P102,246.00 for 1959 and P434,234.92 for 1960, is AFFIRMED, with costs against the petitioner. SO ORDERED. Narvasa (Chairman), Gancayco, Grio-Aquino and Medialdea, JJ., concur.

G.R. No. 73705 August 27, 1987 VICTORIAS MILLING CO., INC., petitioner, vs. OFFICE OF THE PRESIDENTIAL ASSISTANT FOR LEGAL AFFAIRS and PHILIPPINE PORTS AUTHORITY,respondents. PARAS, J.: This is a petition for review on certiorari of the July 27, 1984 Decision of the Office of the Presidential Assistant For Legal Affairs dismissing the appeal from the adverse ruling of the Philippine Ports Authority on the sole ground that the same was filed beyond the reglementary period. On April 28, 1981, the Iloilo Port Manager of respondent Philippine Ports Authority (PPA for short) wrote petitioner Victorias Milling Co., requiring it to have its tugboats and barges undergo harbor formalities and pay entrance/clearance fees as well as berthing fees effective May 1, 1981. PPA, likewise, requiring petitioner to secure a permit for cargo handling operations at its Da-an Banua wharf and remit 10% of its gross income for said operations as the government's share. To these demands, petitioner sent two (2) letters, both dated June 2, 1981, wherein it maintained that it is exempt from paying PPA any fee or charge because: (1) the wharf and an its facilities were built and installed in its land; (2) repair and maintenance thereof were and solely paid by it; (3) even the dredging and maintenance of the Malijao River Channel from Guimaras Strait up to said private wharf are being done by petitioner's equipment and personnel; and (4) at no time has the government ever spent a single centavo for such activities. Petitioner further added that the wharf was being used mainly to handle sugar purchased from district planters pursuant to existing milling agreements. In reply, on November 3, 1981, PPA Iloilo sent petitioner a memorandum of PPA's Executive Officer, Maximo Dumlao, which justified the PPA's demands. Further request for reconsideration was denied on January 14, 1982. On March 29, 1982, petitioner served notice to PPA that it is appealing the case to the Court of Tax Appeals; and accordingly, on March 31, 1982, petitioner filed a Petition for Review with the said Court, entitled "Victorias Milling Co., Inc. v. Philippine Ports Authority," and docketed therein as CTA Case No. 3466. On January 10, 1984, the Court of Tax Appeals dismissed petitioner's action on the ground that it has no jurisdiction. It recommended that the appeal be addressed to the Office of the President. On January 23, 1984, petitioner filed a Petition for Review with this Court, docketed as G.R. No. 66381, but the same was denied in a Resolution dated February 29, 1984. On April 2, 1984, petitioner filed an appeal with the Office of the President, but in a Decision dated July 27, 1984 (Record, p. 22), the same was denied on the sole ground that it was filed beyond the reglementary period. A motion for Reconsideration was filed, but in an Order dated December 16, 1985, the same was denied (ibid., pp. 3-21): Hence, the instant petition. The Second Division of this Court, in a Resolution dated June 2, 1986, resolved to require the respondents to comment (ibid., p. 45); and in compliance therewith, the Solicitor General filed his Comment on June 4, 1986 (Ibid., pp. 50-59).

In a Resolution of July 2, 1986, petitioner was required to file a reply (Ibid., p. 61) but before receipt of said resolution, the latter filed a motion on July 1, 1986 praying that it be granted leave to file a reply to respondents' Comment, and an extension of time up to June 30, 1986 within which to file the same. (Ibid., p. 62). On July 18, 1986, petitioner filed its reply to respondents' Comment (Ibid., pp. 68-76). The Second Division of this Court, in a Resolution dated August 25, 1986, resolved to give due course to the petition and to require the parties to file their respective simultaneous memoranda (Ibid., p. 78). On October 8, 1986, the Solicitor General filed a Manifestation and Rejoinder, stating, among others, that respondents are adopting in toto their Comment of June 3, 1986 as their memorandum; with the clarification that the assailed PPA Administrative Order No. 13-77 was duly published in full in the nationwide circulated newspaper, "The Times Journal", on November 9,1977 (ibid., pp. 79-81). The sole legal issue raised by the petitioner is WHETHER OR NOT THE 30-DAY PERIOD FOR APPEAL UNIDER SECTION 131 OF PPA ADMINISTRATIVE ORDER NO. 13-77 WAS TOLLED BY THE PENDENCY OF THE PETITIONS FILED FIRST WITH THE COURT OF TAX APPEALS, AND THEN WITH THIS HONORABLE TRIBUNAL. The instant petition is devoid of merit. Petitioner, in holding that the recourse first to the Court of Tax Appeals and then to this Court tolled the period to appeal, submits that it was guided, in good faith, by considerations which lead to the assumption that procedural rules of appeal then enforced still hold true. It contends that when Republic Act No. 1125 (creating the Court of Tax Appeals) was passed in 1955, PPA was not yet in existence; and under the said law, the Court of Tax Appeals had exclusive appellate jurisdiction over appeals from decisions of the Commissioner of Customs regarding, among others, customs duties, fees and other money charges imposed by the Bureau under the Tariff and Customs Code. On the other hand, neither in Presidential Decree No. 505, creating the PPA on July 11, 1974 nor in Presidential Decree No. 857, revising its charter (said decrees, among others, merely transferred to the PPA the powers of the Bureau of Customs to impose and collect customs duties, fees and other money charges concerning the use of ports and facilities thereat) is there any provision governing appeals from decisions of the PPA on such matters, so that it is but reasonable to seek recourse with the Court of Tax Appeals. Petitioner, likewise, contends that an analysis of Presidential Decree No. 857, shows that the PPA is vested merely with corporate powers and duties (Sec. 6), which do not and can not include the power to legislate on procedural matters, much less to effectively take away from the Court of Tax Appeals the latter's appellate jurisdiction. These contentions are untenable for while it is true that neither Presidential Decree No. 505 nor Presidential Decree No. 857 provides for the remedy of appeal to the Office of the President, nevertheless, Presidential Decree No. 857 empowers the PPA to promulgate such rules as would aid it in accomplishing its purpose. Section 6 of the said Decree provides Sec. 6. Corporate Powers and Duties a. The corporate duties of the Authority shall be:

xxx xxx xxx (III) To prescribe rules and regulations, procedures, and guidelines governing the establishment, construction, maintenance, and operation of all other ports, including private ports in the country. xxx xxx xxx Pursuant to the aforequoted provision, PPA enacted Administrative Order No. 13-77 precisely to govern, among others, appeals from PPA decisions. It is now finally settled that administrative rules and regulations issued in accordance with law, like PPA Administrative Order No. 13-77, have the force and effect of law (Valerio vs. Secretary of Agriculture and Natural Resources, 7 SCRA 719; Antique Sawmills, Inc. vs. Zayco, et al., 17 SCRA 316; and Macailing vs. Andrada, 31 SCRA 126), and are binding on all persons dealing with that body. As to petitioner's contention that Administrative Order No. 13-77, specifically its Section 131, only provides for appeal when the decision is adverse to the government, worth mentioning is the observation of the Solicitor General that petitioner misleads the Court. Said Section 131 provides Sec. 131. Supervisory Authority of General Manager and PPA Board. If in any case involving assessment of port charges, the Port Manager/OIC renders a decision adverse to the government, such decision shall automatically be elevated to, and reviewed by, the General Manager of the authority; and if the Port Manager's decision would be affirmed by the General Manager, such decision shall be subject to further affirmation by the PPA Board before it shall become effective; Provided, however, that if within thirty (30) days from receipt of the record of the case by the General Manager, no decision is rendered, the decision under review shall become final and executory;Provided further, that any party aggrieved by the decision of the General Manager as affirmed by the PPA Board may appeal said decision to the Office of the President within thirty (30) days from receipt of a copy thereof. (Emphasis supplied). From a cursory reading of the aforequoted provision, it is evident that the above contention has no basis. As to petitioner's allegation that to its recollection there had been no prior publication of said PPA Administrative Order No. 13-77, the Solicitor General correctly pointed out that said Administrative Order was duly published in full in the nationwide newspaper, "The Times Journal", on November 9,1977. Moreover, it must be stated that as correctly observed by the Solicitor General, the facts of this case show that petitioner's failure to appeal to the Office of the President on time stems entirely from its own negligence and not from a purported ignorance of the proper procedural steps to take. Petitioner had been aware of the rules governing PPA procedures. In fact, as embodied in the December 16, 1985 Order of the Office of the President, petitioner even assailed the PPA's rule making powers at the hearing before the Court of Tax Appeals. It is axiomatic that the right to appeal is merely a statutory privilege and may be exercised only in the manner and in accordance with the provision of law (United CMC Textile Workers Union vs. Clave, 137 SCRA 346, citing the cases of Bello vs. Fernando, 4 SCRA 138; Aguila vs. Navarro, 55 Phil. 898; and Santiago vs. Valenzuela, 78 Phil. 397).

Furthermore, even if petitioner's appeal were to be given due course, the result would still be the same as it does not present a substantially meritorious case against the PPA. Petitioner maintains and submits that there is no basis for the PPA to assess and impose the dues and charges it is collecting since the wharf is private, constructed and maintained at no expense to the government, and that it exists primarily so that its tugboats and barges may ferry the sugarcane of its Panay planters. As correctly stated by the Solicitor General, the fees and charges PPA collects are not for the use of the wharf that petitioner owns but for the privilege of navigating in public waters, of entering and leaving public harbors and berthing on public streams or waters. (Rollo, pp. 056057). In Compaia General de Tabacos de Filipinas vs. Actg. Commissioner of Customs (23 SCRA 600), this Court laid down the rule that berthing charges against a vessel are collectible regardless of the fact that mooring or berthing is made from a private pier or wharf. This is because the government maintains bodies of water in navigable condition and it is to support its operations in this regard that dues and charges are imposed for the use of piers and wharves regardless of their ownership. As to the requirement to remit 10% of the handling charges, Section 6B-(ix) of the Presidential Decree No. 857 authorized the PPA "To levy dues, rates, or charges for the use of the premises, works, appliances, facilities, or for services provided by or belonging to the Authority, or any organization concerned with port operations." This 10% government share of earnings of arrastre and stevedoring operators is in the nature of contractual compensation to which a person desiring to operate arrastre service must agree as a condition to the grant of the permit to operate. PREMISES CONSIDERED, the instant petition is hereby DISMISSED. SO ORDERED. Teehankee, C.J., Narvasa and Gancayco, JJ., concur. Cruz, J., concur in the result.

G.R. No. 115349 April 18, 1997 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE MANILA UNIVERSITY,respondents. PANGANIBAN, J.: In conducting researches and studies of social organizations and cultural values thru its Institute of Philippine Culture, is the Ateneo de Manila University performing the work of an independent contractor and thus taxable within the purview of then Section 205 of the National Internal Revenue Code levying a three percent contractor's tax? This question is answer by the Court in the negative as it resolves this petition assailing the Decision 1 of the Respondent Court of Appeals 2 in CA-G.R. SP No. 31790 promulgated on April 27, 1994 affirming that of the Court of Tax Appeals. 3 The Antecedent Facts The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same being largely undisputed by the parties. Private respondent is a non-stock, non-profit educational institution with auxiliary units and branches all over the Philippines. One such auxiliary unit is the Institute of Philippine Culture (IPC), which has no legal personality separate and distinct from that of private respondent. The IPC is a Philippine unit engaged in social science studies of Philippine society and culture. Occasionally, it accepts sponsorships for its research activities from international organizations, private foundations and government agencies. On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue a demand letter dated June 3, 1983, assessing private respondent the sum of P174,043.97 for alleged deficiency contractor's tax, and an assessment dated June 27, 1983 in the sum of P1,141,837 for alleged deficiency income tax, both for the fiscal year ended March 31, 1978. Denying said tax liabilities, private respondent sent petitioner a letter-protest and subsequently filed with the latter a memorandum contesting the validity of the assessments. On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for deficiency income tax but modifying the assessment for deficiency contractor's tax by increasing the amount due to P193,475.55. Unsatisfied, private respondent requested for a reconsideration or reinvestigation of the modified assessment. At the same time, it filed in the respondent court a petition for review of the said letter-decision of the petitioner. While the petition was pending before the respondent court, petitioner issued a final decision dated August 3, 1988 reducing the assessment for deficiency contractor's tax from P193,475.55 to P46,516.41, exclusive of surcharge and interest. On July 12, 1993, the respondent court rendered the questioned decision which dispositively reads: WHEREFORE, in view of the foregoing, respondent's decision is SET ASIDE. The deficiency contractor's tax assessment in the amount of P46,516.41 exclusive of surcharge and interest for the fiscal year ended March 31, 1978 is hereby CANCELED. No pronouncement as to cost. SO ORDERED.

Not in accord with said decision, petitioner has come to this Court via the present petition for review raising the following issues: 1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE PURVIEW OF INDEPENDENT CONTRACTOR PURSUANT TO SECTION 205 OF THE TAX CODE; and 2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3% CONTRACTOR'S TAX UNDER SECTION 205 OF THE TAX CODE. The pertinent portions of Section 205 of the National Internal Revenue Code, as amended, provide: Sec. 205. Contractor, proprietors or operators of dockyards, and others. A contractor's tax of threeper centum of the gross receipts is hereby imposed on the following: xxx xxx xxx (16) Business agents and other independent contractors except persons, associations and corporations under contract for embroidery and apparel for export, as well as their agents and contractors and except gross receipts of or from a pioneer industry registered with the Board of Investments under Republic Act No. 5186: xxx xxx xxx The term "independent contractors" include persons (juridical or natural) not enumerated above (but not including individuals subject to the occupation tax under Section 12 of the Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees. xxx xxx xxx Petitioner contends that the respondent court erred in holding that private respondent is not an "independent contractor" within the purview of Section 205 of the Tax Code. To petitioner, the term "independent contractor", as defined by the Code, encompasses all kinds of services rendered for a fee and that the only exceptions are the following: a. Persons, association and corporations under contract for embroidery and apparel for export and gross receipts of or from pioneer industry registered with the Board of Investment under R.A. No. 5186; b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old Section 182 [b] of the Tax Code); and c. Regional or area headquarters established in the Philippines by multinational corporations, including their alien executives, and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communication and coordinating centers for

their affiliates, subsidiaries or branches in the Asia Pacific Region (Section 205 of the Tax Code). Petitioner thus submits that since private respondent falls under the definition of an "independent contractor" and is not among the aforementioned exceptions, private respondent is therefore subject to the 3% contractor's tax imposed under the same Code. 4 The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and affirmed the assailed decision of the Court of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA through this petition for review. The Issues Petitioner submits before us the following issues: 1) Whether or not private respondent falls under the purview of independent contractor pursuant to Section 205 of the Tax Code. 2) Whether or not private respondent is subject to 3% contractor's tax under Section 205 of the Tax Code. 5 In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its auxiliary unit or branch the Institute of Philippine Culture performing the work of an independent contractor and, thus, subject to the three percent contractor's tax levied by then Section 205 of the National Internal Revenue Code? The Court's Ruling The petition is unmeritorious. Interpretation of Tax Laws The parts of then Section 205 of the National Internal Revenue Code germane to the case before us read: Sec. 205. Contractors, proprietors or operators of dockyards, and others . A contractor's tax of three per centum of the gross receipts is hereby imposed on the following: xxx xxx xxx (16) Business agents and other independent contractors, except persons, associations and corporations under contract for embroidery and apparel for export, as well as their agents and contractors, and except gross receipts of or from a pioneer industry registered with the Board of Investments under the provisions of Republic Act No. 5186; xxx xxx xxx The term "independent contractors" include persons (juridical or natural) not enumerated above (but not including individuals subject to the occupation tax under Section 12 of the Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee

regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees. The term "independent contractor" shall not include regional or area headquarters established in the Philippines by multinational corporations, including their alien executives, and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region. The term "gross receipts" means all amounts received by the prime or principal contractor as the total contract price, undiminished by amount paid to the subcontractor, shall be excluded from the taxable gross receipts of the subcontractor. Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila University "falls within the definition" of an independent contractor and "is not one of those mentioned as excepted"; hence, it is properly a subject of the three percent contractor's tax levied by the foregoing provision of law. 6 Petitioner states that the "term 'independent contractor' is not specifically defined so as to delimit the scope thereof, so much so that any person who . . . renders physical and mental service for a fee, is now indubitably considered an independent contractor liable to 3% contractor's tax." 7 According to petitioner, Ateneo has the burden of proof to show its exemption from the coverage of the law. We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and impractical to determine who are exempted without first determining who are covered by the aforesaid provision. The Commissioner should have determined first if private respondent was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo to prove its exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws that "(a) statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously . . . (A) tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication." 8 Parenthetically, in answering the question of who is subject to tax statutes, it is basic that "in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import." 9 To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the independent contractor be engaged in the business of selling its services. Hence, to impose the three percent contractor's tax on Ateneo's Institute of Philippine Culture, it should be sufficiently proven that the private respondent is indeed selling its services for a fee in pursuit of an independent business. And it is only after private respondent has been found clearly to be subject to the provisions of Sec. 205 that the question of exemption therefrom would arise. Only after such coverage is shown does the rule of construction that tax exemptions are to be strictly construed against the taxpayer come into play, contrary to petitioner's position. This is the main line of reasoning of the Court of Tax Appeals in its decision, 10 which was affirmed by the CA. The Ateneo de Manila University Did for the Sale of the Service of its Institute of Philippine Culture Not Contract

After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine Culture ever sold its services for a fee to anyone or was ever engaged in a business apart from and independently of the academic purposes of the university. Stressing that "it is not the Ateneo de Manila University per se which is being taxed," Petitioner Commissioner of Internal Revenue contends that "the tax is due on its activity of conducting researches for a fee. The tax is due on the gross receipts made in favor of IPC pursuant to the contracts the latter entered to conduct researches for the benefit primarily of its clients. The tax is imposed on the exercise of a taxable activity. . . . [T]he sale of services of private respondent is made under a contract and the various contracts entered into between private respondent and its clients are almost of the same terms, showing, among others, the compensation and terms of payment." 11(Emphasis supplied.) In theory, the Commissioner of Internal Revenue may be correct. However, the records do not show that Ateneo's IPC in fact contracted to sell its research services for a fee. Clearly then, as found by the Court of Appeals and the Court of Tax Appeals, petitioner's theory is inapplicable to the established factual milieu obtaining in the instant case. In the first place, the petitioner has presented no evidence to prove its bare contention that, indeed, contracts for sale of services were ever entered into by the private respondent. As appropriately pointed out by the latter: An examination of the Commissioner's Written Formal Offer of Evidence in the Court of Tax Appeals shows that only the following documentary evidence was presented: Exhibit 1 BIR letter of authority no. 331844 2 Examiner's Field Audit Report 3 Adjustments to Sales/Receipts 4 Letter-decision of BIR Commissioner Bienvenido A. Tan Jr. None of the foregoing evidence even comes close to purport to be contracts between private respondent and third parties. 12 Moreover, the Court of Tax Appeals accurately and correctly declared that the " funds received by the Ateneo de Manila University are technically not a fee. They may however fall as gifts or donations which are tax-exempt" as shown by private respondent's compliance with the requirement of Section 123 of the National Internal Revenue Code providing for the exemption of such gifts to an educational institution. 13 Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals: To our mind, private respondent hardly fits into the definition of an "independent contractor". For one, the established facts show that IPC, as a unit of the private respondent, is not engaged in business. Undisputedly, private respondent is mandated by law to undertake

research activities to maintain its university status. In fact, the research activities being carried out by the IPC is focused not on business or profit but on social sciences studies of Philippine society and culture. Since it can only finance a limited number of IPC's research projects, private respondent occasionally accepts sponsorship for unfunded IPC research projects from international organizations, private foundations and governmental agencies . However, such sponsorships are subject to private respondent's terms and conditions, among which are, that the research is confined to topics consistent with the private respondent's academic agenda; that no proprietary or commercial purpose research is done ; and that private respondent retains not only the absolute right to publish but also the ownership of the results of the research conducted by the IPC. Quite clearly, the aforementioned terms and conditions belie the allegation that private respondent is a contractor or is engaged in business . For another, it bears stressing that private respondent is a non-stock, non-profit educational corporation. The fact that it accepted sponsorship for IPC's unfunded projects is merely incidental. For, the main function of the IPC is to undertake research projects under the academic agenda of the private respondent. Moreover the records do not show that in accepting sponsorship of research work, IPC realized profits from such work. On the contrary, the evidence shows that for about 30 years, IPC had continuously operated at a loss, which means that sponsored funds are less than actual expenses for its research projects. That IPC has been operating at a loss loudly bespeaks of the fact that education and not profit is the motive for undertaking the research projects. Then, too, granting arguendo that IPC made profits from the sponsored research projects, the fact still remains that there is no proof that part of such earnings or profits was ever distributed as dividends to any stockholder, as in fact none was so distributed because they accrued to the benefit of the private respondent which is a non-profit educational institution. 14 Therefore, it is clear that the funds received by Ateneo's Institute of Philippine Culture are not given in the concept of a fee or price in exchange for the performance of a service or delivery of an object. Rather, the amounts are in the nature of an endowment or donation given by IPC's benefactors solely for the purpose of sponsoring or funding the research with no strings attached. As found by the two courts below, such sponsorships are subject to IPC's terms and conditions. No proprietary or commercial research is done, and IPC retains the ownership of the results of the research, including the absolute right to publish the same. The copyrights over the results of the research are owned by Ateneo and, consequently, no portion thereof may be reproduced without its permission. 15 The amounts given to IPC, therefore, may not be deemed, it bears stressing as fees or gross receipts that can be subjected to the three percent contractor's tax. It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture cannot be deemed either as a contract of sale or a contract of a piece of work. "By the contract of sale, one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent." 16 By its very nature, a contract of sale requires a transfer of ownership. Thus, Article 1458 of the Civil Code "expressly makes the obligation to transfer ownership as an essential element of the contract of sale, following modern codes, such as the German and the Swiss. Even in the absence of this express requirement, however, most writers, including Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and Capitant, have considered such transfer of ownership as the primary purpose of sale. Perez and Alguer follow the same view, stating that the delivery of the thing does not mean a mere physical transfer, but is a means of transmitting ownership. Transfer of title or an agreement to transfer it for a price paid or promised to be paid is the essence of sale." 17 In the case of a contract for a piece of work, "the contractor binds himself to execute a piece of work for the employer, in consideration of a certain price or compensation. . . . If the contractor agrees to produce the work from materials furnished by him, he shall deliver the thing produced to the employer and transfer dominion over the thing, . . ." 18 Ineludably, whether the contract be one of sale or one for a piece of work, a transfer of

ownership is involved and a party necessarily walks away with an object. 19 In the case at bench, it is clear from the evidence on record that there was no sale either of objects or services because, as adverted to earlier, there was no transfer of ownership over the research data obtained or the results of research projects undertaken by the Institute of Philippine Culture. Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done in pursuance of maintaining Ateneo's university status and not in the course of an independent business of selling such research with profit in mind. This is clear from a reading of the regulations governing universities: 31. In addition to the legal requisites an institution must meet, among others, the following requirements before an application for university status shall be considered: xxx xxx xxx (e) The institution must undertake research and operate with a competent qualified staff at least three graduate departments in accordance with the rules and standards for graduate education. One of the departments shall be science and technology. The competence of the staff shall be judged by their effective teaching, scholarly publications and research activities published in its school journal as well as their leadership activities in the profession. (f) The institution must show evidence of adequate and stable financial resources and support, a reasonable portion of which should be devoted to institutional development and research. (emphasis supplied) xxx xxx xxx 32. University status may be withdrawn, after due notice and hearing, for failure to maintain satisfactorily the standards and requirements therefor. 20 Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and not the Ateneo is patently erroneous because the former is not an independent juridical entity that is separate and distinct form the latter. Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the Court of Appeals Generally Conclusive In addition, we reiterate that the "Court of Tax Appeals is a highly specialized body specifically created for the purpose of reviewing tax cases. Through its expertise, it is undeniably competent to determine the issue of whether" 21 Ateneo de Manila University may be deemed a subject of the three percent contractor's tax "through the evidence presented before it." Consequently, "as a matter of principle, this Court will not set aside the conclusion reached by . . . the Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject unless there has been an abuse or improvident exercise of authority . . ." 22 This point becomes more evident in the case before us where the findings and conclusions of both the Court of Tax Appeals and the Court of Appeals appear untainted by any abuse of authority, much less grave abuse of discretion. Thus, we find the decision of the latter affirming that of the former free from any palpable error. Public Service, Not Profit, is the Motive

The records show that the Institute of Philippine Culture conducted its research activities at a huge deficit of P1,624,014.00 as shown in its statements of fund and disbursements for the period 1972 to 1985. 23 In fact, it was Ateneo de Manila University itself that had funded the research projects of the institute, and it was only when Ateneo could no longer produce the needed funds that the institute sought funding from outside. The testimony of Ateneo's Director for Accounting Services, Ms. Leonor Wijangco, provides significant insight on the academic and nonprofit nature of the institute's research activities done in furtherance of the university's purposes, as follows: Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the Institute of Philippine Culture) that as far as grants from sponsored research it is possible that the grant sometimes is less than the actual cost. Will you please tell us in this case when the actual cost is a lot less than the grant who shoulders the additional cost? A The University. Q Now, why is this done by the University? A Because of our faculty development program as a university, because a university has to have its own research institute. 24 So, why is it that Ateneo continues to operate and conduct researches through its Institute of Philippine Culture when it undisputedly loses not an insignificant amount in the process? The plain and simple answer is that private respondent is not a contractor selling its services for a fee but an academic institution conducting these researches pursuant to its commitments to education and, ultimately, to public service. For the institute to have tenaciously continued operating for so long despite its accumulation of significant losses, we can only agree with both the Court of Tax Appeals and the Court of Appeals that "education and not profit is [IPC's] motive for undertaking the research projects." 25 WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court of Appeals is hereby AFFIRMED in full. SO ORDERED. Narvasa, C.J., Davide, Jr., Melo and Francisco JJ., concur.

G.R. No. 153205 January 22, 2007 COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC., Respondent. DECISION CARPIO, J.: The Case This petition for review1 seeks to set aside the 16 April 2002 Decision2 of the Court of Appeals in CA-G.R. SP No. 66341 affirming the 8 August 2001 Decision3 of the Court of Tax Appeals (CTA). The CTA ordered the Commissioner of Internal Revenue (petitioner) to issue a tax credit certificate for P6,994,659.67 in favor of Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (respondent). The Antecedents The CTA summarized the facts, which the Court of Appeals adopted, as follows: [Respondent] is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines with principal address located at Daruma Building, Jose P. Laurel Avenue, Lanang, Davao City. It is represented that a foreign consortium composed of Burmeister and Wain Scandinavian Contractor A/S (BWSC-Denmark), Mitsui Engineering and Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a contract with the National Power Corporation (NAPOCOR) for the operation and maintenance of [NAPOCORs] two power barges. The Consortium appointed BWSC Denmark as its coordination manager. BWSC-Denmark established [respondent] which subcontracted the actual operation and maintenance of NAPOCORs two power barges as well as the performance of other duties and acts which necessarily have to be done in the Philippines. NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies (Mark, Yen, and Peso). The freely convertible non-Peso component is deposited directly to the Consortiums bank accounts in Denmark and Japan, while the Peso -denominated component is deposited in a separate and special designated bank account in the Philippines. On the other hand, the Consortium pays [respondent] in foreign currency inwardly remitted to the Philippines through the banking system. In order to ascertain the tax implications of the above transactions, [respondent] sought a ruling from the BIR which responded with BIR Ruling No. 023-95 dated February 14, 1995, declaring therein that if [respondent] chooses to register as a VAT person and the consideration for its services is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to VAT at zero-rate. [Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the Certificate of Registration bearing RDO Control No. 95-113-007556 was issued in favor of [respondent] by the Revenue District Office No. 113 of Davao City. For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax Returns reflecting, among others, a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14, detailed as follows:

Qtr.

Exh.

Date Filed

Zero-Rated Sales

VAT Input Tax

1st 2nd 3rd 4th

E F G H

04-18-96 07-16-96 10-14-96 01-20-97 Totals

P 33,019,651.07 37,108,863.33 34,196,372.35 42,992,302.87 P147,317,189.62

P608,953.48 756,802.66 930,279.14 1,065,138.86 P3,361,174.14

On December 29, 1997, [respondent] availed of the Voluntary Assessment Program (VAP) of the BIR. It allegedly misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable to its case. Revenue Regulations No. 5-96 provides in part thus: SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby amended to read as follows: Section 4.102-2(b)(2) "Services other than processing, manufacturing or repacking for other persons doing business outside the Philippines for goods which are subsequently exported, as well as services by a resident to a non-resident foreign client such as project studies, information services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP." x x x x x x x x x x. In [conformity] with the aforecited Revenue Regulations, [respondent] subjected its sale of services to the Consortium to the 10% VAT in the total amount of P103,558,338.11 representing April to December 1996 sales since said Revenue Regulations No. 5-96 became effective only on April 1996. The sum of P43,893,951.07, representing January to March 1996 sales was subjected to zero rate. Consequently, [respondent] filed its 1996 amended VAT return consolidating therein the VAT output and input taxes for the four calendar quarters of 1996. It paid the amount of P6,994,659.67 through BIRs collecting agent, PCIBank, as its output tax liability for the year 1996, computed as follows: Amount subject to 10% VAT P103,558,338.11 Multiply by 10% VAT Output Tax P 10,355,833.81 Less: 1996 Input VAT P 3,361,174.14 VAT Output Tax Payable P 6,994,659.67

On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99 from the VAT Review Committee which reconfirmed BIR Ruling No. 023-95 "insofar as it held that the services being rendered by BWSCMI is subject to VAT at zero percent (0%)." On the strength of the aforementioned rulings, [respondent] on April 22,1999, filed a claim for the issuance of a tax credit certificate with Revenue District No. 113 of the BIR. [Respondent] believed that it erroneously paid the output VAT for 1996 due to its availment of the Voluntary Assessment Program (VAP) of the BIR.4 On 27 December 1999, respondent filed a petition for review with the CTA in order to toll the running of the two-year prescriptive period under the Tax Code. The Ruling of the Court of Tax Appeals In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit certificate for P6,994,659.67 in favor of respondent. The CTAs ruling stated: [Respondents] sale of services to the Consortium [was] paid for in acceptable foreign currency inwardly remitted to the Philippines and accounted for in accordance with the rules and regulations of Bangko Sentral ng Pilipinas. These were established by various BPI Credit Memos showing remittances in Danish Kroner (DKK) and US dollars (US$) as payments for the specific invoices billed by [respondent] to the consortium. These remittances were further certified by the Branch Manager x x x of BPI-Davao Lanang Branch to represent payments for sub-contract fees that came from Den Danske Aktieselskab Bank-Denmark for the account of [respondent]. Clearly, [respondents] sale of services to the Consortium is subject to VAT at 0% pursuant to Section 108(B)(2) of the Tax Code. xxxx The zero-rating of [respondents] sale of services to the Consortium was even confirmed by the [petitioner] in BIR Ruling No. 023-95 dated February 15, 1995, and later by VAT Ruling No. 00399 dated January 7,1999, x x x. Since it is apparent that the payments for the services rendered by [respondent] were indeed subject to VAT at zero percent, it follows that it mistakenly availed of the Voluntary Assessment Program by paying output tax for its sale of services. x x x x x x Considering the principle of solutio indebiti which requires the return of what has been delivered by mistake, the [petitioner] is obligated to issue the tax credit certificate prayed for by [respondent]. x x x5 Petitioner filed a petition for review with the Court of Appeals, which dismissed the petition for lack of merit and affirmed the CTA decision.6 Hence, this petition. The Court of Appeals Ruling In affirming the CTA, the Court of Appeals rejected petitioners view that since respondents services are not destined for consumption abroad, they are not of the same nature as project studies, information services, engineering and architectural designs, and other similar services

mentioned in Section 4.102-2(b)(2) of Revenue Regulations No. 5-967 as subject to 0% VAT. Thus, according to petitioner, respondents services cannot legally qualify for 0% VAT but are subject to the regular 10% VAT.8 The Court of Appeals found untenable petitioners contention that under VAT Ruling No. 040 -98, respondents services should be destined for consumption abroad to enjoy zero -rating. Contrary to petitioners interpretation, there are two kinds of transactions or services subject to zero percent VAT under VAT Ruling No. 040-98. These are (a) services other than repacking goods for other persons doing business outside the Philippines which goods are subsequently exported; and (b) services by a resident to a non-resident foreign client, such as project studies, information services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of theBangko Sentral ng Pilipinas (BSP).9 The Court of Appeals stated that "only the first classification is required by the provision to be consumed abroad in order to be taxed at zero rate. In x x x the absence of such express or implied stipulation in the statute, the second classification need not be consumed abroad." 10 The Court of Appeals further held that assuming petitioners interpretation of Section 4.102 2(b)(2) of Revenue Regulations No. 5-96 is correct, such administrative provision is void being an amendment to the Tax Code. Petitioner went beyond merely providing the implementing details by adding another requirement to zero-rating. "This is indicated by the additional phrase as well as services by a resident to a non-resident foreign client, such as project studies, information services and engineering and architectural designs and other similar services. In effect, this phrase adds not just one but two requisites: (a) services must be rendered by a resident to a non-resident; and (b) these must be in the nature of project studies, information services, etc."11 The Court of Appeals explained that under Section 108(b)(2) of the Tax Code, 12 for services which were performed in the Philippines to enjoy zero-rating, these must comply only with two requisites, to wit: (1) payment in acceptable foreign currency and (2) accounted for in accordance with the rules of the BSP. Section 108(b)(2) of the Tax Code does not provide that services must be "destined for consumption abroad" in order to be VAT zero-rated.13 The Court of Appeals disagreed with petitioners argument that our VAT law generally follows the destination principle (i.e., exports exempt, imports taxable). 14 The Court of Appeals stated that "if indeed the destination principle underlies and is the basis of the VAT laws, then petitioners proper remedy would be to recommend an amendment of Section 108(b)(2 ) to Congress. Without such amendment, however, petitioner should apply the terms of the basic law. Petitioner could not resort to administrative legislation, as what [he] had done in this case." 15 The Issue The lone issue for resolution is whether respondent is entitled to the refund of P6,994,659.67 as erroneously paid output VAT for the year 1996.16 The Ruling of the Court We deny the petition. At the outset, the Court declares that the denial of the instant petition is not on the ground that respondents services are subject to 0% VAT. Rather, it is based on the non-retroactivity of the prejudicial revocation of BIR Ruling No. 023-9517 and VAT Ruling No. 003-99,18 which held that

respondents services are subject to 0% VAT and which respondent invoked in applying for refund of the output VAT. Section 102(b) of the Tax Code,19 the applicable provision in 1996 when respondent rendered the services and paid the VAT in question, enumerates which services are zero-rated, thus: (b) Transactions subject to zero-rate. The following services performed in the Philippines by VAT-registered persons shall be subject to 0%: (1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas(BSP); (2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero rate; (4) Services rendered to vessels engaged exclusively in international shipping; and (5) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production. (Emphasis supplied) In insisting that its services should be zero-rated, respondent claims that it complied with the requirements of the Tax Code for zero rating under the second paragraph of Section 102(b). Respondent asserts that (1) the payment of its service fees was in acceptable foreign currency, (2) there was inward remittance of the foreign currency into the Philippines, and (3) accounting of such remittance was in accordance with BSP rules. Moreover, respondent contends that its services which "constitute the actual operation and management of two (2) power barges in Mindanao" are not "even remotely similar to project studies, information services and engineering and architectural designs under Section 4.102-2(b)(2) of Revenue Regulations No. 5-96." As such, respondents services need not be "destined to be consumed abroad in order to be VAT zero-rated." Respondent is mistaken. The Tax Code not only requires that the services be other than "processing, manufacturing or repacking of goods" and that payment for such services be in acceptable foreign currency accounted for in accordance with BSP rules. Another essential condition for qualification to zerorating under Section 102(b)(2) is that the recipient of such services is doing business outside the Philippines. While this requirement is not expressly stated in the second paragraph of Section 102(b), this is clearly provided in the first paragraph of Section 102(b) where the listed services must be "for other persons doing business outside the Philippines." The phrase "for other persons doing business outside the Philippines" not only refers to the services enumerated in the first paragraph of Section 102(b), but also pertains to the general term "services" appearing in the second paragraph of Section 102(b). In short, services other than processing, manufacturing, or repacking of goods must likewise be performed for persons doing business outside the Philippines.

This can only be the logical interpretation of Section 102(b)(2). If the provider and recipient of the "other services" are both doing business in the Philippines, the payment of foreign currency is irrelevant. Otherwise, those subject to the regular VAT under Section 102(a) can avoid paying the VAT by simply stipulating payment in foreign currency inwardly remitted by the recipient of services. To interpret Section 102(b)(2) to apply to a payer-recipient of services doing business in the Philippines is to make the payment of the regular VAT under Section 102(a) dependent on the generosity of the taxpayer. The provider of services can choose to pay the regular VAT or avoid it by stipulating payment in foreign currency inwardly remitted by the payer-recipient. Such interpretation removes Section 102(a) as a tax measure in the Tax Code, an interpretation this Court cannot sanction. A tax is a mandatory exaction, not a voluntary contribution. When Section 102(b)(2) stipulates payment in "acceptable foreign currency" under BSP rules, the law clearly envisions the payer-recipient of services to be doing business outside the Philippines. Only those not doing business in the Philippines can be required under BSP rules20 to pay in acceptable foreign currency for their purchase of goods or services from the Philippines. In a domestic transaction, where the provider and recipient of services are both doing business in the Philippines, the BSP cannot require any party to make payment in foreign currency. Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the payerrecipient of services is doing business outside the Philippines. Under BSP rules, 21 the proceeds of export sales must be reported to the Bangko Sentral ng Pilipinas. Thus, there is reason to require the provider of services under Section 102(b) (1) and (2) to account for the foreign currency proceeds to the BSP. The same rationale does not apply if the provider and recipient of the services are both doing business in the Philippines since their transaction is not in the nature of an export sale even if payment is denominated in foreign currency. Further, when the provider and recipient of services are both doing business in the Philippines, their transaction falls squarely under Section 102(a) governing domestic sale or exchange of services. Indeed, this is a purely local sale or exchange of services subject to the regular VAT, unless of course the transaction falls under the other provisions of Section 102(b). Thus, when Section 102(b)(2) speaks of "[s]ervices other than those mentioned in the preceding subparagraph," the legislative intent is that only the services are different between subparagraphs 1 and 2. The requirements for zero-rating, including the essential condition that the recipient of services is doing business outside the Philippines, remain the same under both subparagraphs. Significantly, the amended Section 108(b)22 [previously Section 102(b)] of the present Tax Code clarifies this legislative intent. Expressly included among the transactions subject to 0% VAT are "[s]ervices other than those mentioned in the [first] paragraph [of Section 108(b)] rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP." In this case, the payer-recipient of respondents services is the Consortium which is a joint venture doing business in the Philippines. While the Consortiums principal members are non resident foreign corporations, the Consortium itself is doing business in the Philippines. This is shown clearly in BIR Ruling No. 023-95 which states that the contract between the Consortium and NAPOCOR is for a 15-year term, thus: This refers to your letter dated January 14, 1994 requesting for a clarification of the tax implications of a contract between a consortium composed of Burmeister & Wain Scandinavian Contractor A/S ("BWSC"), Mitsui Engineering & Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd.

("MITSUI"), all referred to hereinafter as the "Consortium", and the National Power Corporation ("NAPOCOR") for the operation and maintenance of two 100-Megawatt power barges ("Power Barges") acquired by NAPOCOR for a 15-year term.23 (Emphasis supplied) Considering this length of time, the Consortiums operation and maintenance of NAPOCORs power barges cannot be classified as a single or isolated transaction. The Consortium does not fall under Section 102(b)(2) which requires that the recipient of the services must be a person doing business outside the Philippines. Therefore, respondents services to the Consortium, not being supplied to a person doing business outside the Philippines, cannot legally qualify for 0% VAT. Respondent, as subcontractor of the Consortium, operates and maintains NAPOCORs power barges in the Philippines. NAPOCOR pays the Consortium, through its non-resident partners, partly in foreign currency outwardly remitted. In turn, the Consortium pays respondent also in foreign currency inwardly remitted and accounted for in accordance with BSP rules. This payment scheme does not entitle respondent to 0% VAT. As the Court held in Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch), 24 the place of payment is immaterial, much less is the place where the output of the service is ultimately used. An essential condition for entitlement to 0% VAT under Section 102(b)(1) and (2) is that the recipient of the services is a person doing business outside the Philippines. In this case, the recipient of the services is the Consortium, which is doing business not outside, but within the Philippines because it has a 15-year contract to operate and maintain NAPOCORs two 100megawatt power barges in Mindanao. The Court recognizes the rule that the VAT system generally follows the "destination principle" (exports are zero-rated whereas imports are taxed). However, as the Court stated in American Express, there is an exception to this rule.25 This exception refers to the 0% VAT on services enumerated in Section 102 and performed in the Philippines. For services covered by Section 102(b)(1) and (2), the recipient of the services must be a person doing business outside the Philippines. Thus, to be exempt from the destination principle under Section 102(b)(1) and (2), the services must be (a) performed in the Philippines; (b) for a person doing business outside the Philippines; and (c) paid in acceptable foreign currency accounted for in accordance with BSP rules. Respondents reliance on the ruling in American Express 26 is misplaced. That case involved a recipient of services, specifically American Express International, Inc. (Hongkong Branch), doing business outside the Philippines. There, the Court stated: Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-registered person that facilitates the collection and payment of receivables belonging to its non-resident foreign client [American Express International, Inc. (Hongkong Branch)], for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in accordance with BSP rules and regulations. x x x x27 (Emphasis supplied) In contrast, this case involves a recipient of services the Consortium which is doing business in the Philippines. Hence, American Express services were su bject to 0% VAT, while respondents services should be subject to 10% VAT. Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT Ruling No. 003-99,28 which reconfirmed BIR Ruling No. 023-9529 "insofar as it held that the services being rendered by BWSCMI is subject to VAT at zero percent (0%)." Respondents reliance on these BIR rulings binds petitioner.

Petitioners filing of his Answer before the CTA challenging respondents claim for refund effectively serves as a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95. However, such revocation cannot be given retroactive effect since it will prejudice respondent. Changing respondents status will deprive respondent of a refund of a substantial amount representing excess output tax.30 Section 246 of the Tax Code provides that any revocation of a ruling by the Commissioner of Internal Revenue shall not be given retroactive application if the revocation will prejudice the taxpayer. Further, there is no showing of the existence of any of the exceptions enumerated in Section 246 of the Tax Code for the retroactive application of such revocation. However, upon the filing of petitioners Answer dated 2 March 2000 before the CTA contesting respondents claim for refund, respondents services shall be subject to the regular 10% VAT.31 Such filing is deemed a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95. WHEREFORE, the Court DENIES the petition. SO ORDERED. ANTONIO Associate Justice T. CARPIO

G.R. Nos. L-33665-68 February 27, 1987 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. VICENTE A. RUFINO and REMEDIOS S. RUFINO, ERNESTO D. RUFINO and ELVIRA B. RUFINO, RAFAEL R. RUFINO and JULIETA A. RUFINO, MANUEL S. GALVEZ and ESTER R. GALVEZ, and COURT OF TAX APPEALS, respondents. Leonardo Abola for respondents. CRUZ, J.: Petition for review on certiorari of the decision of the Court of Tax Appeals absolving the private respondents from liability for capital gains tax on the stocks received by them from the Eastern Theatrical Inc. These were originally four cages involving appeals from the decision of the Commissioner of Internal Revenue dated July 11, 1966, holding the said respondents, Vicente A. Rufino and Remedies S. Rufino, Ernesto D. Rufino and Elvira B. Rufino, Rafael R. Rufino and Julieta A. Rufino, and Manuel S. Galvez and Ester R. Galvez, liable for deficiency income tax, surcharge and interest in the sums of P44,294.88, P27,229.44, P58,082.60 and P58,074.24, respectively, for the year 1959. The facts, as narrated by the Court of Tax Appeals, are as follows: The private respondents were the majority stockholders of the defunct Eastern Theatrical Co., Inc., a corporation organized in 1934, for a period of twenty-five years terminating on January 25, 1959. It had an original capital stock of P500,000.00, which was increased in 1949 to P2,000,000.00, divided into 200,000 shares at P10.00 per share, and was organized to engage in the business of operating theaters, opera houses, places of amusement and other related business enterprises, more particularly the Lyric and Capitol Theaters in Manila. The President of this corporation (hereinafter referred to as the Old Corporation) during the year in question was Ernesto D. Rufino. The private respondents are also the majority and controlling stockholders of another corporation, the Eastern Theatrical Co Inc., which was organized on December 8, 1958, for a term of 50 years, with an authorized capital stock of P200,000.00, each share having a par value of P10.00. This corporation is engaged in the same kind of business as the Old Corporation. The General-Manager of this corporation (hereinafter referred to as the New Corporation) at the time was Vicente A. Rufino. In a special meeting of stockholders of the Old Corporation on December 17, 1958, to provide for the continuation of its business after the end of its corporate life, and upon the recommendation of its board of directors, a resolution was passed authorizing the Old Corporation to merge with the New Corporation by transferring its business, assets, goodwill, and liabilities to the latter, which in exchange would issue and distribute to the shareholders of the Old Corporation one share for each share held by them in the said Corporation. It was expressly declared that the merger of the Old Corporation with the New Corporation was necessary to continue the exhibition of moving pictures at the Lyric and Capitol Theaters even after the expiration of the corporate existence of the former, in view of its pending booking contracts, not to mention its collective bargaining agreements with its employees. Pursuant to the said resolution, the Old Corporation, represented by Ernesto D. Rufino as President, and the New Corporation, represented by Vicente A. Rufino as General Manager, signed on January 9, 1959, a Deed of Assignment providing for the conveyance and transfer of all the business, property, assets and goodwill of the Old Corporation to the New Corporation in exchange for the latter's shares of stock to be distributed among the shareholders on the basis of one stock for each stock held in the Old Corporation except that no new and unissued shares would be issued to the shareholders of the Old Corporation; the delivery by the New Corporation

to the Old Corporation of 125,005-3/4 shares to be distributed to the shareholders of the Old Corporation as their corresponding shares of stock in the New Corporation; the assumption by the New Corporation of all obligations and liabilities of the Old Corporation under its bargaining agreement with the Cinema Stage & Radio Entertainment Free Workers (FFW) which included the retention of all personnel in the latter's employ; and the increase of the capitalization of the New Corporation in compliance with their agreement. This agreement was made retroactive to January 1, 1959. The aforesaid transfer was eventually made by the Old Corporation to the New Corporation, which continued the operation of the Lyric and Capitol Theaters and assumed all the obligations and liabilities of the Old Corporation beginning January 1, 1959. The resolution of the Old Corporation of December 17, 1958, and the Deed of Assignment of January 9, 1959, were approved in a resolution by the stockholders of the New Corporation in their special meeting on January 12, 1959. In the same meeting, the increased capitalization of the New Corporation to P2,000,000.00 was also divided into 200,000 shares at P10.00 par value each share, and the said increase was registered on March 5, 1959, with the Securities and Exchange Commission, which approved the same on August 20,1959. As agreed, and in exchange for the properties, and other assets of the Old Corporation, the New Corporation issued to the stockholders of the former stocks in the New Corporation equal to the stocks each one held in the Old Corporation, as follows: Mr. & Mrs. Vicente A. Rufino............... 17,083 shares Mr. & Mrs. Rafael R. Rufino ................. 16,881 shares Mr. & Mrs. Ernesto D. Rufino .............. 18,347 shares Mr. & Mrs. Manuel S. Galvez ............... 16,882 shares It was this above-narrated series of transactions that the Bureau of Internal Revenue examined later, resulting in the petitioner declaring that the merger of the aforesaid corporations was not undertaken for a bona fide business purpose but merely to avoid liability for the capital gains tax on the exchange of the old for the new shares of stock. Accordingly, he imposed the deficiency assessments against the private respondents for the amounts already mentioned. The private respondents' request for reconsideration having been denied, they elevated the matter to the Court of Tax Appeals, which reversed the petitioner. We have given due course to the instant petition questioning the decision of the said court holding that there was a valid merger between the Old Corporation and the New Corporation and declaring that: It is well established that where stocks for stocks were exchanged, and distributed to the stockholders of the corporations, parties to the merger or consolidation, pursuant to a plan of reorganization, such exchange is exempt from capital gains tax . . . In view of the foregoing, we are of the opinion and so hold that no taxable gain was derived by petitioners from the exchange of their old stocks solely for stocks of the New Corporation pursuant to Section 35(c) (2), in relation to (c) (5), of the National Internal Revenue Code, as amended by Republic Act 1921. 1

The above-cited Section 35 of the Tax Code, on the proper interpretation and application of which the resolution of this case depends, provides in material part as follows: Sec. 35. Determination of gain or loss from the sale or other disposition of property. The gain derived or loss sustained from the sale or other disposition of property, real, personal or mixed, shall be determined in accordance with the following schedule: xxx xxx xxx (c) Exchange of property(1) General Rule. Except as herein provided upon the sale or exchange of property, the entire amount of the gain or loss, as the case may be, shall be recognized. (2) Exceptions. No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation (a) a corporation which is a party to a merger or consolidation, exchanges property solely for stock in a corporation which is a party to the merger or consolidation, (b) a shareholder exchanges stock in a corporation which is a party to the merger or consolidation solely for the stock of another corporation, also a party to the merger or consolidation, or (c) a security holder of a corporation which is a party to the merger or consolidation exchanges his securities in such corporation solely for stock or securities in another corporation, a party to the merger or consolidation. xxx xxx xxx (5) Definitions.-(a) x x x (b) The term "merger" or "consolidation," when used in this section, shall be understood to mean: (1) The ordinary merger or consolidation, or (2) the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock; Provided, That for a transaction to be regarded as a merger or consolidation within the purview of this section, it must be undertaken for a bona fidebusiness purpose and not solely for the purpose of escaping the burden of taxation; Provided further, That in determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit: ... In support of its position that the Deed of Assignment was concluded by the private respondents merely to evade the burden of taxation, the petitioner points to the fact that the New Corporation did not actually issue stocks in exchange for the properties of the Old Corporation at the time of the supposed merger on January 9, 1959. The exchange, he says, was only on paper. The increase in capitalization of the New Corporation was registered with the Securities and Exchange Commission only on March 5, 1959, or 37 days after the Old Corporation expired on January 25, 1959. Prior to such registration, it was not possible for the New Corporation to effect the exchange provided for in the said agreement because it was capitalized only at P200,000.00 as against the capitalization of the Old Corporation at P2,000,000.00. Consequently, as there was no merger, the automatic dissolution of the Old Corporation on its expiry date resulted in its liquidation, for which the respondents are now liable in taxes on their capital gains. For their part, the private respondents insist that there was a genuine merger between the Old Corporation and the New Corporation pursuant to a plan aimed at enabling the latter to continue the business of the former in the operation of places of amusement, specifically the Capitol and Lyric Theaters. The plan was evolved through the series of transactions above narrated, all of which could be treated as a single unit in accordance with the requirements of Section 35. Obviously, all these steps did not have to be completed at the time of the merger, as there were some of them, such as the increase and distribution of the stock of the New Corporation, which

necessarily had to come afterwards. Moreover, the Old Corporation was dissolved on January 1, 1959, pursuant to the Deed of Assignment, and not on January 25, 1959, its original expiry date. As the properties of the Old Corporation were transferred to the New Corporation before that expiry date, there could not have been any distribution of liquidating dividends by the Old Corporation for which the private respondents should be held liable in taxes. We sustain the Court of Tax Appeals. We hold that it did not err in finding that no taxable gain was derived by the private respondents from the questioned transaction. Contrary to the claim of the petitioner, there was a valid merger although the actual transfer of the properties subject of the Deed of Assignment was not made on the date of the merger. In the nature of things, this was not possible. Obviously, it was necessary for the Old Corporation to surrender its net assets first to the New Corporation before the latter could issue its own stock to the shareholders of the Old Corporation because the New Corporation had to increase its capitalization for this purpose. This required the adoption of the resolution to this effect at the special stockholders meeting of the New Corporation on January 12, 1959, the registration of such issuance with the SEC on March 5, 1959, and its approval by that body on August 20, 1959. All these took place after the date of the merger but they were deemed part and parcel of, and indispensable to the validity and enforceability of, the Deed of Assignment. The Court finds no impediment to the exchange of property for stock between the two corporations being considered to have been effected on the date of the merger. That, in fact, was the intention, and the reason why the Deed of Assignment was made retroactive to January 1, 1959. Such retroaction provided in effect that all transactions set forth in the merger agreement shall be deemed to be taking place simultaneously on January 1, 1959, when the Deed of Assignment became operative. The certificates of stock subsequently delivered by the New Corporation to the private respondents were only evidence of the ownership of such stocks. Although these certificates could be issued to them only after the approval by the SEC of the increase in capitalization of the New Corporation, the title thereto, legally speaking, was transferred to them on the date the merger took effect, in accordance with the Deed of Assignment. The basic consideration, of course, is the purpose of the merger, as this would determine whether the exchange of properties involved therein shall be subject or not to the capital gains tax. The criterion laid down by the law is that the merger" must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation." We must therefore seek and ascertain the intention of the parties in the light of their conduct contemporaneously with, and especially after, the questioned merger pursuant to the Deed of Assignment of January 9, 1959. It has been suggested that one certain indication of a scheme to evade the capital gains tax is the subsequent dissolution of the new corporation after the transfer to it of the properties of the old corporation and the liquidation of the former soon thereafter. This highly suspect development is likely to be a mere subterfuge aimed at circumventing the requirements of Section 35 of the Tax Code while seeming to be a valid corporate combination. Speaking of such a device, Justice Sutherland declared for the United States Supreme Court in Helvering v. Gregory: When subdivision (b) speaks of a transfer of assets by one corporation to another, it means a transfer made 'in pursuance of a plan of reorganization' (Section 112[g]) of corporate business; and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of proceeding by what actually occurred, what do we find? Simply an operation having no business or

corporate purpose a mere devise which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. No doubt, a new and valid corporation was created. But that corporation was nothing more than a contrivance to the end last described. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function. When that limited function had been exercised, it immediately was put to death. In these circumstances, the facts speak for themselves and are susceptible of but one interpretation. The whole undertaking, though conducted according to the terms of subdivision (b), was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization and nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because the transaction upon its face lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose. 2 We see no such furtive intention in the instant case. It is clear, in fact, that the purpose of the merger was to continue the business of the Old Corporation, whose corporate life was about to expire, through the New Corporation to which all the assets and obligations of the former had been transferred. What argues strongly, indeed, for the New Corporation is that it was not dissolved after the merger agreement in 1959. On the contrary, it continued to operate the places of amusement originally owned by the Old Corporation and transfered to the New Corporation, particularly the Capitol and Lyric Theaters, in accordance with the Deed of Assignment. The New Corporation, in fact, continues to do so today after taking over the business of the Old Corporation twenty-seven years ago. It may be recalled at this point that under the original provisions of the old Corporation Law, which was in effect when the merger agreement was concluded in 1959, it was not possible for a corporation, by mere amendment of its charter, to extend its life beyond the time fixed in the original articles; in fact, this was specifically prohibited by Section 18, which provided that "any corporation may amend its articles of incorporation by a majority vote of its board of directors or trustees and the vote or written assent of two-thirds of its members, if it be a non-stock corporation, or if it be a stock corporation, by the vote or written assent of the stockholders representing at least two-thirds of the subscribed capital stock of the corporation ... : Provided, however, That the life of said corporation shall not be extended by said amendment beyond the fixed in the original articles ... " This prohibition, which incidentally has since been deleted, made it necessary for the Old and New Corporations to enter into the questioned merger, to enable the former to continue its unfinished business through the latter. The procedure for such merger was prescribed in Section 28 1/2 of the old Corporation Law which, although not expressly authorizing a merger by name (as the new Corporation Code now does in its Section 77), provided that "a corporation may, by action taken at any meeting of its board of directors, sell, lease, exchange, or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such considerations, which may be money, stocks, bond, or other instruments for the payment of money or other property or other considerations, as its board of directors deem expedient." The transaction contemplated in the old law covered the second type of merger defined by Section 35 of the Tax Code as "the acquisition by one corporation of all or substantially all of the properties of another corporation solely for stock," which is precisely what happened in the present case.

What is also worth noting is that, as in the case of the Old Corporation when it was dissolved on December 31, 1958, there has been no distribution of the assets of the New Corporation since then and up to now, as far as the record discloses. To date, the private respondents have not derived any benefit from the merger of the Old Corporation and the New Corporation almost three decades earlier that will make them subject to the capital gains tax under Section 35. They are no more liable now than they were when the merger took effect in 1959, as the merger, being genuine, exempted them under the law from such tax. By this decision, the government is, of course, not left entirely without recourse, at least in the future. The fact is that the merger had merely deferred the claim for taxes, which may be asserted by the government later, when gains are realized and benefits are distributed among the stockholders as a result of the merger. In other words, the corresponding taxes are not forever foreclosed or forfeited but may at the proper time and without prejudice to the government still be imposed upon the private respondents, in accordance with Section 35(c) (4) of the Tax Code. Then, in assessing the tax, "the basis of the property transferred in the hands of the transferee shall be the same as it would be in the hands of the transferor, increased by the amount of gain recognized to the transferor on the transfer." The only inhibition now is that time has not yet come. The reason for this conclusion is traceable to the purpose of the legislature in adopting the provision of law in question. The basic Idea was to correct the Tax Code which, by imposing taxes on corporate combinations and expansions, discouraged the same to the detriment of economic progress, particularly the promotion of local industry. Speaking of this problem, HB No. 7233, which was subsequently enacted into R.A. No. 1921 embodying Section 35 as now worded, declared in the Explanatory Note: The exemption from the tax of the gain derived from exchanges of stock solely for stock of another corporation resulting from corporate mergers or consolidations under the above provisions, as amended, was intended to encourage corporations in pooling, combining or expanding their resources conducive to the economic development of the country. 3 Our ruling then is that the merger in question involved a pooling of resources aimed at the continuation and expansion of business and so came under the letter and intendment of the National Internal Revenue Code, as amended by the abovecited law, exempting from the capital gains tax exchanges of property effected under lawful corporate combinations. WHEREFORE, the decision of the Court of Tax Appeals is affirmed in full, without any pronouncement as to costs. SO ORDERED. Yap (Chairman), Narvasa, Melencio-Herrera, Feliciano, Gancayco and sarmiento, JJ., concur.